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KAUFMAN v. CHASE MANHATTAN BANK

February 15, 1984

RICHARD KAUFMAN and COVE CAPITAL CORP., Plaintiffs, against THE CHASE MANHATTAN BANK, N.A., Defendant.


The opinion of the court was delivered by: SWEET

SWEET, D.J.

Defendant Chase Manhattan Bank, N.A. ("Chase") has moved pursuant to Rules 12 (b)(6) and 56 of the Fed. R. Civ. P. to dismiss various claims of plaintiffs Richard Kaufman ("Kaufman") and Cove Capital Corp. ("Cove") for failure to state a claim upon which relief can be granted or alternatively to grant partial summary judgment. Kaufman and Cove have moved pursuant to Rule 15(a) of the Fed. R. Civ. P. for leave to file a second amended complaint. Kaufman's motion for leave to amend will be granted. For the facts and conclusions set forth below, Chase's motion will be granted in part and denied in part.

 FACTS

 The facts as set forth by the plaintiffs will be accepted as true for purposes of the Chase motion for partial summary judgment. In the fall of 1979, Kaufman was offered an opportunity to invest in Aero Ground Support Equipment, Inc. ("Aero"), a New York corporation which was primarily in the business of supplying ground support equipment to airlines. All outstanding Aero stock was owned by Charles Bertelle ("Bertelle") and by A.B.C. Material Handling Corp. ("ABC"), a corporation wholly owned by Bertelle.

 During his investigation of Aero as a potential investment, Kaufman learned that Aero was a cross-corporate guarantor of a $550,000 loan to ABC, made by Chase and obtained through the United States Small Business Administration ("SBA") who co-guaranteed 90% of the loan. To secure performance of the guaranty, Chase held a security interest in Aero's assets. In his preliminary discussions with the principals of Aero, Kaufmann stated that he would not invest in their company without a release from Chase of both its security interest in Aero's assets and Aero's cross-corporate guaranty ("guaranty") of ABC's indebtedness to Chase.

 On November 9, 1979, Kaufman attended a meeting at Chase with two bank officers, James Magee ("Magee") and John Nolan ("Nolan"), where Kaufman reiterated that he would not invest in Aero unless Chase agreed in writing to release Aero from both the guaranty and the security interst. Magee and Nolan orally assured Kaufman that Chase would do so and that they would seek the SBA's approval as well.

 In a letter signed by Michael P. Maher ("Maher") dated November 19, 1979, Chase asked the SBA to approve the bank's release of Aero's guaranty. Kaufman was sent a copy of that correspondence. The SBA agreed to the release of Aero's guaranty on the following conditions: (a) that Bertelle and his son-in-law, Eugene Sackman ("Sackman"), who was an officer of ABC, deliver second mortgages on their homes as substitute security for the $550,000 loan, (b) that ABC pay its back tax liability and all future taxes and (c) that Kaufman invest a minimum of $450,000 in Aero. Bertelle and Sackman agreed to the conditions set forty by Chase and the SBA in a letter to Nolan dated December 20, 1979. On December 21, 1979, Maher wrote to Bertelle on behalf of Chase agreeing to release Aero as guarantor "as per agreement between Chase Manhattan Bank, ABC Material Handling Corp and the Small Business Administration." The letter went on to state that Chase was in the process of filing a UCC-3 Termination Agreement releasing their security interest in the assets of Aero, which was, in fact, filed with Kings County on December 28, 1979 and with New York State on January 23, 1980. Bertelle forwarded a copy of the Maher letter to Kaufman's attorney, who subsequently gave it to Kaufman.

 At roughly the same time, Chase agreed, by letter dated December 19, 1979, to terminate its factoring relationship with Aero and to release its security interest in Aero's assets which Chase had obtained in July 1979 purusant to the factoring arrangement.Chase failed to file UCC-3 termination statements, however, with respect to that security interest.

 Kaufman invested a total of $330,000 in Aero receiving a series of four notes including a convertible debenture, dated January 15, January 22, February 7 and March 26, 1980. Pursuant to these investments, Kaufman and Aero signed a Purchase Agreement ("Agreement") dated January 1, 1980, which set forth the following specific condition:

 [Aero] shall have obtained from [Chase] and the United States Small Business Administration a release of all the properties and assets of the Company from the lien of a note dated on or about August 15, 1979 in the principal amount of $550,000 made by (ABC), Metropolitan Lift Parts, Inc., Metropolitan Lift Parts of New Jersey, Inc., and [Aero] to [Chase] and shall provide the Purchaser and his counsel with evidence of such release in form satisfactory to the Purchaser and his counsel. (Plaintiff's Exhibit G, p. 12.)

 Kaufman accepted the December 21 Maher letter as proof of the release.

 In June 1980, Kaufman exchanged the initial $100,000 convertible debenture for 51% of Aero's stock. Shortly thereafter Kaufman, Bertelle and a third party formed Cove as a holding company for all but an insignificant fraction of shares in Aero stock, all of ABC's stock, and all but 10% of the stock in Metropolitan Lift Parts, Inc., a New York corporation also previously owned by Bertelle.

 Beginning in March 1980 and periodically thereafter, Kaufman obtained a series of commercial loans from Chase to meet Aero's short-term cash flow needs. On each occasion, Chase required Kaufman's personal guaranty of repayment prior to making the loans to Aero. By written instruments dated March 27, 1980, May 18, 1981 and June 25, 1981, Kaufman personally guaranteed repayment of Aero's past and future indebtedness to Chase. In addition, on March 17, 1981, Chase agreed to convert the $101,000 outstanding balance which ABC owed to Chase pursuant to a factoring agreement -- which predated Kaufman's involvement with ABC -- into a new three-year term loan (the "new loan"), again with Kaufman's personal guaranty and additionally, with Cove's corporate guaranty.

 Despite Kaufman investments and Chase's loans, Aero was not able to operate profitably. After an unsuccessful attempt to sell Aero and believing its assets sufficient to pay off the Chase loans he had guaranteed, Kaufman decided to liquidate Aero in December, 1981. At that time, it was agreed that Chase would apply the proceeds of the liquidation of Aero against the outstanding balance on the short-term loans owed to Chase. Kaufman spent $21,198.50 of his personal funds to assist Chase in marshalling Aero's assets. In late February 1982 after the liquidation of Aero's assets, Chase advised Kaufman, presumably for the first time, of the conditions precedent to Aero's release from both the guaranty and the security interest and the fact that the conditions had not been fulfilled. After conferring with the SBA, however, Chase agreed that, if Bertelle and Sackman then gave Chase second mortgages on their homes, Chase would still release the guaranty and security interest in Aero. When Bertelle and Sackman refused, Chase applied the $260,000 proceeds from the sale of Aero's assets toward the indebtedness of ABC and demanded that Kaufman honor his guarantee of Chase's loans to Aero which totalled $365,000 plus interest.

 In August 1982, ABC defaulted on the $550,000 loan. The SBA honored its 90% guarantee of the loan -- paying Chase $355,838.50 -- and then liquidated ABC. Chase demanded that Kaufman and Cove honor their guarantees of ...


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