National Union Fire Ins. Co. of Pittsburgh, Pa. v. Turtur
| Citation | 892 F.2d 199 |
| Decision Date | 18 December 1989 |
| Docket Number | Nos. 1040,1041,D,s. 1040 |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
| Parties | Fed. Sec. L. Rep. P 94,847 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff-Appellee, v. Chris M. TURTUR and Stephen P. Turtur, d/b/a C & S Joint Venture, Defendants-Appellants. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff-Appellee, v. Mario TURTUR, Jr., Defendant-Appellant. ockets 88-9105, 88-9107. |
Neil Schwarzfeld, New York City (Gregory Bitterman, Schwarzfeld, Ganfer & Shore, New York City), for defendants-appellants.
Richard F. Russell, New York City (Denis Collins, D'Amato & Lynch, New York City), for plaintiff-appellee.
David A. Leipziger and Samuel H. Greenbaum, Cox, Castle & Nicholson, Los Angeles, Cal., submitted a brief in support of plaintiff-appellee, for amicus curiae Admiral Ins. Co.
Before LUMBARD, ALTIMARI and MAHONEY, Circuit Judges.
Defendants-appellants Mario Turtur, Jr. and his sons, Chris M. Turtur and Stephen P. Turtur d/b/a C & S Joint Ventures (the "Turturs"), 1 appeal from summary judgments entered in the United States District Court for the Southern District of New York, Louis L. Stanton, Judge, in favor of plaintiff-appellee National Union Fire Insurance Company ("National Union").
National Union brought this diversity action, governed by New York law, 2 to enforce certain indemnity agreements between National Union and the Turturs, or alternatively to enforce its rights as an asserted subrogee of certain promissory notes issued by the Turturs. On December 30, 1982, the Turturs invested as limited partners in a tax sheltered limited partnership, American National Associates 367 ("ANA"), formed to acquire and lease computer equipment. They made cash down payments for their interests, and issued a series of promissory notes payable March 15, 1983-1987 in the total amount of $457,600 (the "Notes") for the balance.
In connection with this investment, the Turturs each entered into an "Indemnification and Pledge Agreement" with National Union (the "Indemnification Agreements") whereby, to induce National Union to guarantee payment of the Notes to ANA, the Turturs undertook to indemnify National Union for any payments it might make on the Notes pursuant to its guarantee. National Union issued its guarantee of the Notes on March 24, 1983.
The Turturs thereafter defaulted on the Notes payable March 15, 1985, claiming to have learned that ANA was a fraudulent enterprise. National Union then paid these Notes, and sued the Turturs for reimbursement, both pursuant to the Indemnification Agreements and as an asserted subrogee of these Notes. The Turturs denied any liability; they also counterclaimed for a judgment declaring that any future payments on the Notes by National Union would be "at its own risk," and enjoining any such payments.
National Union moved for, and was granted, summary judgment. The district court held that material issues of fact existed concerning National Union's claim to be a subrogee of the Notes, but that National Union was entitled to reimbursement from the Turturs under the Indemnification Agreements as a matter of law. Final judgments were entered in favor of National Union after National Union's motions for summary judgment against the Turturs were granted, and the Turturs' motion for reargument was denied.
On appeal, the Turturs contend that the district court erred in granting summary judgment because material issues of fact exist concerning their claims that (1) the Indemnification Agreements are unenforceable because they are part of overall contracts procured by fraud, and (2) National Union rendered substantial and knowing assistance to a fraudulent scheme for the promotion of ANA, thereby aiding and abetting a violation of federal securities law. Agreeing with the Turturs' first, but not second, contention, and concluding that the district court properly denied summary judgment to National Union as claimed subrogee of the Notes, we reverse the summary judgments entered in behalf of National Union and remand.
The "Financial Guarantee Bond for Limited Partnerships" (the "Guarantee") issued by National Union on March 24, 1983 guaranteed principal payments both on the Notes and on other note obligations of purchasers of limited partnership interests in ANA in a total amount of $1,086,800. The premium for the Guarantee, paid from the moneys provided to ANA by the limited partners, was $53,744.92. The Guarantee designated LaSalle National Bank (the "Bank") as a "permitted assignee." ANA assigned the Notes to the Bank to effect an immediate realization of the Note proceeds. Accordingly, after default by the Turturs, National Union paid the Notes due March 15, 1985 to the Bank, and subsequent Notes are also payable to the Bank.
No National Union representative had direct contact with the Turturs prior to their investments in ANA. In making their investments, the Turturs relied upon a private placement memorandum ("PPM") prepared by ANA and given to prospective ANA investors by representatives of Rothschild Reserve International, Inc. ("Rothschild"), the general partner of ANA. Both Rothschild and ANA were allegedly among a number of vehicles utilized by Barry M. Trupin to market tax sheltered limited partnerships engaged in the leasing of computer equipment. The PPM included the following statement:
Of the limited partnerships formed [by the Trupin organization] during the years 1977 through 1981, 24 are under audit by the IRS. Two of such partnerships have received a report of the engineering section of the IRS recommending that the depreciation deductions claimed by said partnerships be disallowed, alleging that said transactions lacked economic substance. The examining agents have indicated that similar issues may be raised with respect to other partnerships under examination. It is believed that such transactions are substantially dissimilar to the transaction contemplated hereby.
The Turturs contend that this statement was misleading because the transactions described in the foregoing quotation were not "substantially dissimilar" to those contemplated by the ANA program. They claim that the contemplated ANA transaction also "lacked economic substance," and was therefore virtually certain to result in disallowance of the income tax depreciation deductions which substantially motivated limited partnership investments in ANA.
The PPM included as one of its numerous attachments the Indemnification Agreement. According to an affidavit of Mario Turtur, Jr., "[t]he Indemnification Agreement is one of a package of documents which we were required to sign in order to invest in ANA." The Turturs represented and warranted in the Indemnification Agreement that they "ha[d] knowledge and experience in financial and business matters (or ha[d] qualified and sophisticated counsel) and accordingly, [were] capable of evaluating and ha[d] evaluated the merits and risks of investing in [ANA] and [were] able to bear the economic risk of such investment."
The Turturs paid the Notes which became due on March 15, 1983 and 1984, but not the Notes which became due on March 15, 1985. They claim that in early 1985, John Prowant, a former Rothschild executive with whom the Turturs had principally dealt in making their investments in ANA, informed Mario Turtur, Jr. that the ANA deal was a "sham" because "it was over valued for the tax benefits, and we don't even know whether they placed the equipment in service." This conversation allegedly confirmed information that Turtur had previously received from Kent Klineman, a New York City attorney and syndicator of computer equipment leasing partnerships, that the ANA equipment was overvalued. In a subsequent audit of the investment of Mario Turtur, Jr. in ANA, the Internal Revenue Service took the position that the investment was "lacking in economic substance because the property purchased by the partnership was grossly overvalued in an attempt to exaggerate tax benefits."
In May, 1985, Mario Turtur, Jr. telephoned the Bank to discuss the overdue Notes payable March 15, 1985, and was referred to National Union; Turtur then advised a National Union representative that the Turturs would not pay the remaining Notes because the ANA transaction was fraudulent. In accordance with the terms of the Guarantee, National Union thereupon paid the Bank $147,766.43 on behalf of the Turturs, representing the principal and interest due on the Notes payable March 15, 1985.
National Union then initiated the instant actions seeking reimbursement for this payment. National Union claimed its right to reimbursement from the Turturs on two theories. First, National Union sought reimbursement as an asserted subrogee of the Notes which ANA assigned to the Bank. It claimed that the Turturs had no valid defense to the Notes against the Bank as a holder in due course, and that National Union had the rights of a holder in due course as the Bank's transferee. Second, National Union claimed reimbursement pursuant to the terms of the Indemnification Agreements.
In the course of ensuing discovery, it was established that National Union reviewed the PPM and related documents prior to its involvement in the ANA transaction. It was further established that Irving V. Goldstein, a vice president of National Union responsible for computer equipment leasing bonds, attended a seminar on equipment leasing limited partnerships conducted by European American Bank on March 22, 1983, two days prior to issuance of the Guarantee, at which Goldstein received a memorandum which stated that another such Trupin partnership presented "a very aggressive structure with attendant risks." The Turturs also rely on the fact that Goldstein sent sample PPMs for several equipment leasing partnerships, including one organized by Trupin, to Coopers and Lybrand for review...
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