Vereins-Und Westbank, AG v. Carter

• Decision Date: 14 July 1988
• Docket Number: No. 86 Civ. 930 (WK).,86 Civ. 930 (WK).
• Citation: 691 F. Supp. 704
• Parties: VEREINS-UND WESTBANK, AG and Rockwood Insurance Company, Plaintiffs, v. Jeffrey E. CARTER, J.E. Carter Energy & Development Corporation, Pettet Energy Corporation, Pettet 1984 Acquisition and Development Program, a Texas Limited Partnership, W. Austin Barsalou, Barsalou and Associates, P.C., and Interdiscount, Ltd., Defendants.
• Court: U.S. District Court — Southern District of New York

691 F. Supp. 704

VEREINS-UND WESTBANK, AG and Rockwood Insurance Company, Plaintiffs, v. Jeffrey E. CARTER, J.E. Carter Energy & Development Corporation, Pettet Energy Corporation, Pettet 1984 Acquisition and Development Program, a Texas Limited Partnership, W. Austin Barsalou, Barsalou and Associates, P.C., and Interdiscount, Ltd., Defendants.

No. 86 Civ. 930 (WK).

United States District Court, S.D. New York.

July 14, 1988.

Ronald H. Alenstein, Richard E. Haftel, Barbara B. Slott, Shea & Gould, New York City, for plaintiff Vereins-Und Westbank.

Richard DiSalle, Roger Curran, Vivian Murphy, Rose, Schmidt, Hasley & DiSalle, Pittsburgh, Pa., Jeffrey L. Braun, Rosenman & Colin, New York City, for plaintiff Rockwood Insurance Co.

Thomas G. Rohback, Jay G. Safer, Ellen August, LeBoeuf, Lamb, Leiby & MacRae, New York City, for defendants Barsalou and Barsalou and Associates.

MEMORANDUM & ORDER

WHITMAN KNAPP, District Judge.

Defendants W. Austin Barsalou ("Barsalou") and his law firm, Barsalou and Associates, P.C., (collectively, "defendants") move for partial summary judgment dismissing plaintiffs' first cause of action for negligent misrepresentation. The question presented is whether plaintiffs Verines-Und Westbank, AG ("Vereins") and Rockwood Insurance Company ("Rockwood"), although not clients of defendants, may nonetheless recover against them for allegedly negligent misrepresentations contained in opinion letters sent to Rockwood, and another set of opinion letters upon which Vereins was specifically invited to rely. Because we conclude that a New York court would sustain the Amended Complaints,¹ the motion is denied.

FACTS

This litigation involves four oil and gas limited partnerships formed in 1984 by defendants Jeffrey Carter and his corporation, J.E. Carter Energy and Development Corporation. The partnerships are known as Arriola 1984 Acquisition and Development Program ("Arriola"), Splendora 1984 Acquisition and Development Program ("Splendora"), Hardin 1984 Acquisition and Development Program ("Hardin") and Pettet 1984 Acquisition and Development Program ("Pettet"). Barsalou and his law firm served as special counsel to the limited partnerships, the corporate general partners, and the promoter, Jeffrey Carter. Vereins extended funds to the four limited partnerships through the purchase of notes executed by the partnerships in favor of another bank, defendant Interdiscount Ltd. ("IDL"). Rockwood issued surety bonds guaranteeing the payment obligations of the individual limited partners of three of the partnerships.²

Each partnership's private placement memorandum and partnership agreement required the limited partners to pay their respective capital contributions in the form of a 20% cash down payment, with the remaining 80% being paid in the form of a promissory note executed to the partnership. The private placement memoranda further provided that the general partner of each limited partnership would then use these promissory notes as collateral security to obtain a bank loan, the proceeds of which would be used to acquire and develop interests in oil and gas wells.

A. Vereins

In December 1984 and January 1985, IDL made loans to each partnership, evidenced by the execution of a partnership note. Each partnership also executed a Note Pledge Agreement, drafted by Barsalou, whereby the partnership pledged the promissory notes to IDL as collateral security. Vereins subsequently purchased the partnership notes from IDL by means of Note Purchase Agreements, and IDL, by means of another document entitled Note Pledge Assignment, assigned all its rights in the partnerships' Note Pledge Agreements to Vereins.

Prior to the closings of each of the four loan transactions, Carter instructed Barsalou to prepare an opinion letter for IDL, explaining that counsel for IDL had requested such a letter (Barsalou Dep. 396). IDL provided Barsalou with a form for the letter (Barsalou Dep. 600). That opinion letter,³ addressed to IDL, stated that Barsalou had examined various documents in rendering his opinion, including "the Note Pledge Assignment ... by IDL to a lender." The letter represented that "the Partnership is a limited partnership duly organized, validly existing, and in good standing under the laws of the State of Texas." Most important for purposes of this motion, Barsalou stated in the letter:

This opinion may be relied upon by IDL and its assignee under the Note Purchase Agreement. (emphasis supplied)

Vereins contends that Barsalou understood that IDL would serve primarily as an arranger of financing, and that a lender bank would subsequently assume IDL's position in the transaction. Such understanding is said to be evidenced in the first above quoted statement by the phrase "by IDL to a lender." Vereins further contends that the last quoted statement from the opinion letter demonstrates that Barsalou expected and intended that IDL's assignee, Vereins,⁴ would rely upon the representations in the letter. As the Amended Complaint sets forth, Vereins relied upon Barsalou's representation that the partnerships were "duly organized, validly existing, and in good standing under the laws of the State of Texas." It is alleged that this representation carried with it the connotation that the 20% cash capital contributions had been made as required by the private placement memoranda,⁵ when in fact — as in the exercise of due care Barsalou should have known — they had not been made, and never were.

B. Rockwood

Rockwood alleges that it relied upon opinion letters sent directly to it by Barsalou. Alternatively, Rockwood alleges that it relied upon the opinion letters sent to IDL, and contends that defendants contemplated Rockwood's reliance because the documentation Barsalou prepared and/or reviewed establishes that he knew both that the transaction contemplated a surety and that Rockwood would be that surety.

In support of the first contention, Rockwood has submitted an affidavit of Robert W. Gerulat, an insurance broker whom the Carter defendants had requested to find an insurer to issue the bonds. Gerulat subsequently contacted Robert E. Eckis, chairman of Payment Plans, Inc., which serves as Rockwood's Managing General Agent. Gerulat avers that at one or more meetings which took place between November 1984 and January 1985, he personally asked Barsalou, on behalf of Rockwood, to provide Rockwood with opinion letters with respect to the three programs which Rockwood bonded (¶¶ 3, 5).

Also before us are three opinion letters addressed to "Rockwood Insurance Company, c/o Mr. Robert B. Eckis, Jr." The first of these (Ex. B to DiSalle Aff.), written on the letterhead of Barsalou and Associates, P.C., contains the designation "Re: Splendora Acquisition and Development Program." It bears the date of December 1984, with a blank space for the day of the month, and is unsigned. Barsalou testified at his deposition that he believed this opinion letter "was prepared because Mr. Carter requested that it be — that we prepare it." (Barsalou Dep., March 29, 1988 at 282) When asked why the letter was unsigned, Barsalou responded, "I presume that it was never released" (Id.). The second and third letters (Ex. C and D to DiSalle Aff.), concerning the Hardin and Arriola programs, are signed by Barsalou but are not written on the firm's letterhead. In all other respects, they are identical to the first opinion letter. Mr. Eckis has given conflicting testimony concerning receipt of these letters. Although Eckis states in an affidavit dated May 3, 1986 that Barsalou provided him with opinion letters prior to the closings of the bonds, he testified at his deposition that he could not remember whether or not he ever received an opinion letter from Mr. Barsalou (Eckis Dep. 32).

The letters addressed to Rockwood are lengthier than the ones addressed to IDL, but contain the same representation that the partnership in question is duly organized and validly existing under Texas law. Eckis testified at his deposition that he also relied upon another statement in the letter to the effect that "the actual offering to the Limited Partners has been completed substantially in the manner described in the Offering Memorandum," which to him meant that the 20% cash component of the limited partners' capital contributions had been paid (Eckis Dep. 56-57).

Alternatively, Rockwood has submitted evidence tending to establish that defendants contemplated Rockwood's participation in the transactions and understood that Rockwood would rely upon the IDL opinion letters. At his deposition, Barsalou testified as to his understanding of the transactions (at 522):

I understood that there would be a general partner, some limited partners, a lender and a bonding company.

The Note Pledge Assignment from IDL to Vereins, which Barsalou states he examined in formulating his opinion, mentions Rockwood in Paragraph 1: "The undersigned ... assigns ... to the Bank Vereins ... the Surety Bond issued by Rockwood Insurance Company." Other documents which Barsalou states he examined in preparation for his opinion letter refer to the surety and the bonds, although without specific reference to Rockwood. For example, the Note Pledge Agreement between IDL and each limited partner recites, "The Bond has been duly and validly issued by the Surety." In addition, the private placement memoranda contain numerous references to the surety and bonds. See e.g., Sections 2.19, 2.27, 2.52, 3.01(b) and 5.01(c). In addition, Gerulat relates in his affidavit that he and Barsalou participated in numerous conversations specifically dealing with Rockwood's financial capacity to act as surety for the Carter oil and gas limited partnership programs, and that he sent Barsalou numerous documents concerning the Rockwood bonds (¶ 4).

DISCUSSION

The threshold question to be considered in deciding this motion is the appropriate choice of law.⁶ Vereins, a German bank with a state...