reasonable relation to this state and also to another state or
nation the parties may agree that the law either of this state
or of such other state or nation shall govern their rights and
duties." Here, although Oregon arguably has few contacts with
the transaction at issue, it was the site of the property and
timber that the limited partnership was created to exploit.
Further, because Oregon, New York and Pennsylvania all have
adopted the Uniform Commercial Code, it is unlikely that either
New York or Pennsylvania would have a policy that would
override the choice of law provision.
Although both New York and Oregon have adopted the U.C.C.,
"states may provide varying interpretations of uniform
statutes." Lund's Inc. v. Chemical Bank, 870 F.2d 840, 845 (2d
Cir. 1989). Therefore, when possible, this opinion must be
based upon interpretations of Article 3 of the U.C.C. as
explicated by Oregon courts. See ORS ch. 73. Inasmuch as Oregon
has been the site for few reported disputes over the
interpretation of the U.C.C.'s holder in due course provisions,
I have found it necessary to refer to New York courts'
interpretations of the U.C.C. to fill several gaps.
Under Fed.R.Civ.P. 56(c), a trial judge must grant summary
judgment if the evidence demonstrates that "there is no genuine
issue as to any material fact and [that] the moving party is
entitled to a judgment as a matter of law." Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91
L.Ed.2d 202 (1986). In determining whether a genuine issue of
material fact has been raised, a court must resolve all
ambiguities and draw all reasonable inferences against the
moving party. United States v. Diebold, Inc., 369 U.S. 654,
655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962) (per curiam),
cited in Donahue v. Windsor Locks Bd. of Fire Comm'rs.,
834 F.2d 54, 57 (2d Cir. 1987). Nonetheless, in order to defeat a
motion for summary judgment, the non-movant "must do more than
simply show that there is some metaphysical doubt as to the
material facts. . . . Where the record taken as a whole could
not lead a rational trier of fact to find for the non-moving
party, there is no 'genuine issue for trial.'" Matsushita Elec.
Ind. Co. v. Zenith Radio, 475 U.S. 574, 586-87, 106 S.Ct. 1348,
1356, 89 L.Ed.2d 538 (1986).
Defendants here concede that they signed the promissory notes
and that they defaulted on payments due under the notes. Thus
Fidelity, as a holder of the signed instruments, is entitled to
recover on them unless defendants establish a defense. U.C.C.
§ 3-307(2) (ORS 73.3070(2)) Defendants assert as their defense
fraud in the limited partnership transaction. As discussed
below, some of these defendants present evidence of fraudulent
inducement sufficient to create a genuine issue as to this
defense, and thus to defeat this summary judgment motion
insofar as Fidelity asserts only the rights of a holder.
If a party establishes defenses, the burden then shifts to
the holder to prove that it is not merely a holder but a holder
in due course. U.C.C. § 3-307(3) (ORS § 73.3070(3)). See
Community Bank v. Ell, 278 Or. 417, 564 P.2d 685, 688 (1977).
If Fidelity is a holder in due course, it may collect on the
notes regardless of defendants' fraud defense; under the
U.C.C., a holder in due course acquires a negotiable instrument
free of all claims by any person, and all defenses of any party
to the instrument with whom the holder has not dealt, except
for five statutory exceptions not implicated in this case.*fn3
U.C.C. § 3-305 (ORS § 73.3020-73.3050). See Hobgood v.
Sylvester, 242 Or. 162, 408 P.2d 925, 927 (1965).
As set forth below, defendants have presented evidence from
which a rational trier of fact could conclude that there was
fraud in the inducement; thus, Fidelity must show that it is a
holder in due course not subject to this defense in order to
prevail on its summary judgment motion as to defendants allowed
to use this defense. Because there is a material issue as to
Fidelity's holder-in-due-course status, however, this action
must go to trial as to those defendants who may assert the
Defendants allege that the limited partnership units for
which the investor-defendants executed the promissory notes at
issue were sold and proposed through "a variety of fraudulent
means." (Def.Mem. at 22) As discussed below, the PPM said that
all financing for the transaction had been obtained, while in
fact the financing was not finally assured until months after
the PPM was issued.
Defendants assert also that the surety company's mortgage on
all the Deep Creek properties was not disclosed in the PPM.
Further, defendants assert that Spolyar could not get the
minimum number of investors he needed to preserve the offering,
and therefore arranged for nearly half the units to be
purchased by insiders, including two well-respected brokers
whose units he personally guaranteed and whose names he then
used to endorse the deal without disclosing the risk-free
nature of their investment.
Still further, the partnership offering supposedly was exempt
from the requirements of the Securities Act of 1933 under §
4(2), which exempts "non-public" offerings, and pursuant to
Regulation D, which provides certain criteria for exempt
offerings.*fn4 Defendants contend that some of the investors
who participated in this offering were not "accredited
investors" under Regulation D, thus rendering the entire
transaction voidable. Defendants are vague, however, about the
basis for the last of these claims, as Rule 506 under
Regulation D does not require that all investors be accredited,
but rather permits up to 35 non-accredited investors to
participate. On pages 15 and 16 of the PPM, potential investors
are advised that they must meet the requirements of Regulation
D, either by showing that they are accredited investors or that
they have the requisite "knowledge and experience." (PX C)
Assumably, defendants are alleging that more than 35 investors
were unaccredited, or that the issuer knew that the
unaccredited investors were not sophisticated. Defendants,
however, present no evidence to support this defense.
In order to establish fraudulent inducement, defendants must
show: (1) a representation of a material fact; (2) falsity; (3)
intent to deceive or knowledge by the party making the
representation that it is false, or reckless disregard as to
whether the representation is true or false; (4) justifiable
reliance by the person to whom the representation is made; and
(5) damages. See Riley Hill Gen. Contr. v. Tandy Corp., 303 Or. 390,
737 P.2d 595, 604-5 (1987). See also Mallis v. Bankers
Trust Co., 615 F.2d 68, 80 (2d Cir. 1980), cert. denied,
449 U.S. 1123, 101 S.Ct. 938, 67
L.Ed.2d 109 (1981). Under Liberty Lobby, 477 U.S. at 254, 106
S.Ct. at 2513, the court must consider the evidence on a
summary judgment motion "through the prism of the substantive
evidentiary burden," which on a fraud claim is proof by clear
and convincing evidence.*fn5 Riley Hill Gen. Contr., 737 P.2d
at 604. See also Rudman v. Cowles, 30 N.Y.2d 1, 9, 330 N.Y.S.2d
33, 39, 280 N.E.2d 867, 871 (1972).
Three of the defendants have submitted affidavits describing
circumstances of the limited partnership offering which, when
read in the light most favorable to nonmovants, strongly
suggest that the Deep Creek partnership offering was permeated
by fraud. George Parry, a broker/dealer at Rooney Pace, Inc.,
explained in his affidavit that Spolyar told him that two
well-respected brokers — Norman Pessin and Carl Doerge — had
purchased units of the partnership, but did not inform him
either that Spolyar himself had guaranteed these interests or
that most of the units of the partnership were bought by
"I was not aware at the time, that so many people
affiliated or related to the Private Placement
Memorandum had in fact purchased same, and had I
been aware, I certainly would have been much more
reticent [sic] to enter into this transaction. I
also would not have touted same to my clients and
customers, nor would I have represented to them
that some very sophisticated and knowledgeable Wall
Street people had purchased same in their own
right. I was misled by Mr. Spolyar and deceived by
him into believing that these limited partners who
were already 'on board' purchased same out of a
sense of enthusiasm, rather than out of a sense of
no risk or pecuniary gain on their part."
(Parry Aff. at ¶ 3) Parry listed in his affidavit 13 investors,
now defendants, to whom he personally sold partnership
interests as a result of his misconceptions about the offering.