Tew v. Chase Manhattan Bank, NA

• Decision Date: 22 January 1990
• Docket Number: No. 88-6728-CIV-JAG.,88-6728-CIV-JAG.
• Parties: Thomas TEW, as Trustee for the Estate of E.S.M. Government Securities, Inc., Plaintiff, v. The CHASE MANHATTAN BANK, N.A., Defendant.
• Court: U.S. District Court — Southern District of Florida

728 F. Supp. 1551

Thomas TEW, as Trustee for the Estate of E.S.M. Government Securities, Inc., Plaintiff, v. The CHASE MANHATTAN BANK, N.A., Defendant.

No. 88-6728-CIV-JAG.

United States District Court, S.D. Florida, Fort Lauderdale Division.

January 22, 1990.

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Jose Garcia-Pedrosa and Kathy Gibbs, Tew Jorden and Schulte, Miami, Fla., for trustee.

Russell Brooks, Milbank, Tweed, Hadley & McCloy, New York City, and George H. Bailey, Jones, Foster, Johnson & Stubbs, P.A., West Palm Beach, Fla., for defendant.

ORDER

GONZALEZ, District Judge.

THIS CAUSE has come before the court upon the cross-motions for summary judgment filed by the parties. Pursuant to Federal Rule 56, the plaintiff Thomas Tew ("Tew" or "the trustee") moves for entry of judgment in his favor on the defendant Chase Manhattan Bank's two counterclaims and affirmative defenses three through eleven. Chase Manhattan Bank ("Chase" or "the bank") also moves for summary judgment on each count of the complaint. The parties have fully briefed the motions and they are ripe for decision.

This court can only enter summary judgment on a claim or defense if there is no genuine issue of fact outstanding and the movant is entitled to judgment as a matter of law. The nonmovant may avoid summary judgment only by meeting this standard and coming forward with admissible evidence as to each and every element of the claim or defense at issue. All evidence is to be viewed in the light most favorable to the nonmovant, resolving all conflicting inferences against the movant. If reasonable jurors could differ as to the evidence and the inferences to be drawn therefrom, the court should allow the parties to proceed to trial.

Reliance on mere allegations and conclusory statements in the pleadings is insufficient. The movant has the initial burden of demonstrating what elements of the opposing party's case are deficient by presenting evidence in the form of affidavits, depositions, or other discovery. If the movant is not in the best position to have evidence on a particular issue, an element may be negated by circumstantial evidence negating the claim or defense. The opposing party, with better access to such evidence, is then expected to produce the direct evidence showing a genuine issue of fact. See Avirgan v. Hull, 691 F.Supp. 1357, 1369 (S.D.Fla.1988); Fontenot v. Upjohn Co., 780 F.2d 1190, 1195 (5th Cir. 1986). Once the movant comes forward with evidence, the nonmovant must also produce sufficient proof of its claim, rather than merely resting on general denials in a pleading.

Certain issues such as fraud, intent, and knowledge lend themselves to trial, rather than summary judgment. These matters can often only be proved by reliance upon circumstantial evidence except in the rare case where there is uncontraverted proof of a "smoking gun". Viewing all the circumstances, a reasonable fact finder will have to hear all the evidence, weigh it and draw all reasonable inferences therefrom, and judge a witness' credibility prior to determining such issues.

The trustee, in his capacity as representative of the bankrupt estate of E.S.M. Government Securities, Inc., is suing the defendant bank here for its alleged misconduct in relation to the E.S.M. fraud. This fraud was committed by E.S.M.'s officers and directors against its customers and outside creditors. These managers were selling government securities to investors subject to repurchase agreements and then using these same securities to collateralize loans through clearing banks. Chase was one of three banks which cleared securities for E.S.M. The complaint alleges claims for fraud, civil conspiracy to defraud, aiding and abetting fraud, breach of fiduciary duty and breach of contract. Chase counters with affirmative defenses and two counterclaims. Chase's defenses numbered three through eleven seek to hold the trustee responsible for the misconduct of E.S.M.'s former officers and directors who committed a massive fraud against E.S.M. customers and creditors. The two counterclaims are rooted in theories of breach of contract and fraud. For damages under these claims, Chase seeks to recover its attorneys' fees and costs associated with defending this case and certain litigation brought against the bank by Fidata Corporation in the United States District Court for the Southern District of New York. See Chase Manhattan Bank, N.A. v. Fidata Corp., 700 F.Supp. 1252 (S.D.N.Y.1988) (Leval, J.).

Preliminarily, it should be noted that all of the employees of Chase involved with Government deny any knowledge of either the double hypothecation of the securities or of Government's insolvency. The bank points out that many of these employees are no longer working for Chase and therefore, have no interest in this litigation. For the reasons given below, this court finds Chase's reliance on these conclusory affidavits to be unavailing. First, a reasonable jury could disbelieve these individuals. As for their alleged disinterest, a reasonable inference would be that no person would admit that he was fooled by the E.S.M. principals. The jury could also find that the witnesses have an interest in being less than candid in that any admission as to knowledge of the fraud or improper banking practices could damage the witness' credibility in their present profession. While this court draws no such inferences, these comments merely demonstrate that Chase's reliance of these affidavits requires an examination of credibility. Based on the procedural posture of a Rule 56 motion, it is improper to weigh the evidence by judging the credibility of witnesses. If a reasonable jury could believe either party's version of the facts and the inferences to be drawn therefrom, the case must be tried.

As true with any good story, there is more than one version of the facts in this case.

On or about May 21, 1981, E.S.M. Government Securities, Inc. (Government) entered a relationship with Chase as its clearing bank. Chase was to clear GNMA securities, subject to reverse repurchase agreements, through Government's account. The bank processed the securities based on oral instructions over the telephone relayed by Government and followed up with written confirmation tickets. The securities were pledged by Government as collateral for a line of credit, even though they, in fact, belonged to Government's customers, not itself. Chase gave Government an initial loan limit of $25 million dollars which was increased to $50 million dollars in 1982.

At this point, the parties' agreement as to the facts ends. Chase alleges that it believed the securities in Government's account were legally proper collateral. Tew alleges that the bank knew that the securities were double hypothecated. A former clerk of the bank, Carolyn Denmark, testifies that she was told by Government representatives on several occasions between May 1982 and June 1983 to "hold" certain securities for the benefit of Government customers. She marked the confirmation tickets for these securities with a "hold" designation. Chase asserts that this cannot be true based on the testimony of a former Government employee responsible for clearing securities with Chase, Stan Wolfe, who states that he never told Chase that it was holding customer securities and that he believed all securities being sent to Chase were legally proper collateral. However, there is no proof that Wolfe was the exclusive representative for Government in its dealings with Chase. Moreover, based on Denmark's testimony, a reasonable jury could conclude that someone must have told Denmark about the customer securities, even if it was not Wolfe.

The securities of Government's customers were not placed in a segregated account as neither Chase or Government set up such an account. Each party asserts it was the other's obligation to establish a segregated account to hold customer securities not available as collateral for the loans. Chase alleges that there is no evidence that the customer securities were placed in Government's account and thereby, used as collateral for loans by Chase. However, it is undisputed that Chase did receive these securities and held them somewhere. Denmark testified that they were placed in Government's account. Even without this evidence, Chase is in the best position to know what happened to them. The bank's failure to present this proof is at least prima facie evidence that the securities were commingled in Government's account. Whether the GNMAs were segregated or commingled is a question of fact for the jury.

Government told several of its customers that their securities were being held in a segregated account at Chase. Chase denies any knowledge as to these representations and there is no evidence that any Government customer directly contacted Chase and was told of a segregated account.

Tew alleges that Chase was "sensitized" to the risks of doing business with "little known and thinly-capitalized" government securities dealers no later than December 15, 1982. Chase does not deny knowledge of fraudulent incidents involving the securities dealers of Drysdale, Comark, and Lombard-Wall. Indeed, Chase suffered significant losses as a result of dealing with these parties. However, it points out that the clearing industry, not just itself, took notice of these financial debacles. Moreover, Chase argues that this sensitivity was inapplicable to Government since the bank believed its customer was worth over $25 million dollars, based on reviews of Government's unaudited financial statements.

Tew contends that Chase actually knew of the E.S.M. fraud by 1983. In that year, Joseph Hanley took over and reviewed Government's account for Chase. The trustee contends that Hanley discovered how the fraud was being perpetrated. Government was just one of several E.S.M. companies. Hanley knew of the existence of at least two of these, E.S.M. Government...