National Union Fire Ins. Co. v. Landry
| Decision Date | 18 December 1987 |
| Docket Number | No. 87 Civ. 4286 (LLS)-87 Civ. 4290 (LLS).,87 Civ. 4286 (LLS)-87 Civ. 4290 (LLS). |
| Citation | 677 F. Supp. 704 |
| Parties | NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Larry W. LANDRY and Judy L. Landry, Defendants. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Mike J. LAVOI, Defendant. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Robert J. LAVOI and Deborah L. Lavoi, Defendants. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. James R. BOURQUE and Marilyn C. Bourque, Defendants. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Sidney Anthony LAVOI, Jr. and Deborah D. Lavoi, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Brown & Wood, New York City, Roger J. Hawke, Scott T. Tross, of counsel, for plaintiff.
Richards O'Neil & Allegaert, New York City, Thomas I. Sheridan, III, Terri D. Austin, of counsel, Mangham, Hardy, Rolfs, Bailey and Abadie, Lafayette, La., Louis R. Davis, Dawn M. Fuqua, of counsel, for defendants.
These are five cases, of over 350 currently before this Court, in which plaintiff National Union Fire Insurance Company of Pittsburgh ("National Union"), an issuer of financial guarantee bonds, is suing to enforce indemnity agreements between itself and nine limited partners in one of scores of tax shelter partnerships in various parts of the country, and also to enforce its rights as subrogee of promissory notes which it honored on their behalf. National Union had guaranteed, to those who advanced funds to the partnership enterprise, that the limited partners would make all of their capital contributions represented by their promissory notes to the partnership. When, for any of a variety of reasons, the limited partners stopped making their required contributions, National Union made them on their behalf. Now it sues the limited partners for reimbursement, under indemnity agreements they gave National Union at the time it guaranteed their payments, and as subrogee on the unpaid notes.
The defendant limited partners, here Larry W. Landry, Judy L. Landry, Mike J. Lavoi, Robert J. Lavoi, Deborah L. Lavoi, James R. Bourque, Marilyn C. Bourque, Sidney Anthony Lavoi, Jr. and Deborah D. Lavoi, move to consolidate the actions pursuant to Fed.R.Civ.P. 42 and to transfer them to the United States District Court for the Western District of Louisiana pursuant to 28 U.S.C. § 1404(a). National Union cross-moves for summary judgment pursuant to Fed.R.Civ.P. 56 and to dismiss or stay defendants' counterclaims. Defendants' motion to transfer is granted. Their motion to consolidate is denied without prejudice. Plaintiff's motion for summary judgment is denied. Plaintiff's motion to dismiss or stay the counterclaims is denied without prejudice.
National Union is a Pennsylvania corporation with its principal place of business in New York City. The defendants are all Louisiana residents.
In or about August 1985, the defendants purchased limited partnership interests in Forest Vale Associates, L.P. ("Forest Vale") for $100,000 each. In connection with these purchases, each defendant gave Forest Vale a promissory note for $92,400 payable in semiannual installments until February 1, 1990. Each defendant also executed an indemnification and pledge agreement ("indemnity agreement") in favor of National Union.
Under the indemnity agreement, the limited partner (1) agreed to indemnify National Union against any liability, loss, or expenses, including attorneys' fees, resulting from payments made by National Union under the bond, (2) agreed to reimburse National Union for amounts paid by it, plus interest, in the event of a default by the limited partner, and (3) pledged his interest in Forest Vale as security for his obligations under the indemnity agreement.
The indemnity agreement included a choice-of-law clause and a permissive forum-selection clause:
The Undersigned hereby agrees that the Application and this Indemnification and Pledge Agreement shall be deemed to have been executed in the State of New York, and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of New York. Any action or proceeding of any kind against the undersigned arising out of or by reason of this Indemnification and Pledge Agreement may be brought in any state or federal court of competent jurisdiction in any County in the State of New York, in addition to any other court in which such action might properly be brought.
On or about September 13, 1985, National Union issued Financial Guarantee Bond No. 117 75 31 (the "Bond") in favor of Forest Vale, as obligee, and Whitestone Savings, F.A. (the "Bank"), as permitted assignee of the defendants' promissory notes. The Bond obligates National Union to make payment under the notes in the event of a default. It further provides that National Union is subrogated to the rights of Forest Vale or the Bank against the defendants to the extent that it makes payment under the Bond. At or about the time National Union issued the Bond, Forest Vale assigned the notes to the Bank.
Each of the defendants failed to make his or her payment of $9,300 due August 1, 1986. National Union made payment under the Bond and brought suit to recover the payments. Those cases were dismissed without prejudice when the principal arrearages were repaid to National Union. The defendants then failed to make the payments of $9,800 each that were due on February 1, 1987. National Union made payment and brought suit on June 18, 1987 for breach of the indemnity agreements and as subrogee under the Bond to recover the payments it made in connection with the February 1, 1987 defaults. In this action, National Union also claims that the defendants owe interest and attorneys' fees in connection with the August 1, 1986 default.
On August 13, 1987 the defendants filed a complaint in the Western District of Louisiana, Lake Charles Division, against National Union, Forest Vale, Jaques-Miller Associates, individually and as general partner of Forest Vale, Jaques-Miller, Inc., individually and as general managing partner of Forest Vale, Mark E. Lumpkin, FSC Securities Corporation and LFP Advisory Corporation. They allege that Mr. Lumpkin acted as the agent of National Union and the other defendants in soliciting their investments in Forest Vale. They seek damages for breach of contract and violations of state and federal securities laws.
They claim that Mr. Lumpkin prepared all of the financial statements for them and asked that they sign the documents before they were completely filled in. They state that they understood that the investment required them to sign promissory notes to guarantee payment of their limited partnership contributions. However, they claim that they did not know that they were signing surety bond applications and that they would not be able to invest in the partnership without doing so. They claim that Mr. Lumpkin induced them to sign the documents by promising to resell their partnership interests if they ever had difficulty making payments on the promissory notes, which he assured them he could do easily and without delay. They state that Mr. Lumpkin did not inform them that he did not have the approval of the General Partner to sell their partnership interests. Finally, they claim that they would not have signed the documents without Mr. Lumpkin's assurances that the partnership interests could be easily resold.
National Union moves for summary judgment on the notes and the indemnity agreements, claiming that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). On a motion for summary judgment, the court must resolve all ambiguities and draw all reasonable inferences in favor of the nonmoving party. Eastway Const. Corp. v. City of New York, 762 F.2d 243, 249 (2d Cir.1985). The defendants contend that Mr. Lumpkin acted as National Union's agent, and that he fraudulently induced them to sign the notes and indemnity agreements that are the subject of National Union's claims by promising that he would resell their interests if they could not make payment on the notes. The defendants raise this issue in their answer and counterclaims, and support it with affidavits detailing the alleged misrepresentations made by Lumpkin, and stating that they would not have signed the documents without this promise. This presents material issues of fact which preclude summary judgment. Heyman v. Commerce and Industry Insurance Co., 524 F.2d 1317, 1320 (2d Cir.1975).
National Union argues that the defendants have not raised a material issue of fact with regard to their claim as the Bank's subrogee on the notes, because the defense of fraudulent inducement is not available against a holder in due course. The notes are governed by Delaware law. Delaware has enacted the Uniform Commercial Code ("UCC"). Section 3-305 of the UCC provides:
To the extent that a holder is a holder in due course he takes the instrument free from ... (2) all defenses of any party to the instrument with whom the holder has not dealt except ... (c) such misrepresentation as has induced the party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms ...
National Union claims that the defendants may not raise any "personal defenses" against it because it is subrogated to the rights of the Bank, which is a holder in due course of the notes. However, UCC § 3-201(1) provides:
Transfer of an instrument vests in the transferee such rights as the transferor has therein, except that a transferee who has himself been a party to any fraud or illegality affecting the instrument or who as a prior holder had notice of a defense...
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