The opinion of the court was delivered by: Sweet, District Judge.
The plaintiff Joint Venture Asset Acquisition ("JVAA"),
assignee of the promissory notes at issue (the "Notes"),
executed by the individual defendants (the "Defendants") in
favor of First City Federal Savings Bank (the "Bank"), seeks
judgment for the full amount of the Notes, all accrued
interest, and legal fees and disbursements. Upon the following
findings and conclusions reached after a non-jury trial,
judgment will be entered granting the relief sought.
First City National Bank and Trust Company, formerly known
as First City Federal Savings Bank, was a National Banking
Association with offices in New York City. On or about
December 20, 1989, the Comptroller of the Currency declared
the Bank insolvent, and appointed the Federal Deposit
Insurance Corporation (the "FDIC") as receiver.
JVAA is a joint venture formed by the founder, former
president and a major shareholder in the Bank, Richard
Greenberg, along with his brother Frederick Greenberg. The
interests in JVAA are held in proportion to the owners' shares
in the Bank. In 1988 JVAA acquired the rights to monies due or
to become due on the Defendants' Notes, although the Bank
continued to hold the Notes. Immediately prior to the
declaration of insolvency of the Bank, the Bank assigned the
Notes to JVAA.
The Defendants are individuals residing in Michigan, New
Jersey, Florida and Illinois who obtained loans from the Bank
in 1986 in order to invest in various tax-advantaged limited
partnerships sponsored by Forum Companies, Inc. ("Forum").
Twelve of the Defendants invested in Boston Place Associates,
Ltd. ("Boston Place"), a real estate syndication of an office
building in Tulsa, Oklahoma. Defendants Linval Fleetwood
("Fleetwood"), Robert Ross ("Ross"), Henry Tazzia ("Tazzia"),
and Shrabonnie Ghosh ("Ghosh") invested in other limited
partnerships sponsored by Forum.
In July 1987, the Bank commenced individual actions against
the twelve Defendants who had been investors in Boston Place
(the "Boston Place litigation"), all of whom had defaulted on
their loans, and in the latter part of 1987 and early 1988
instituted suits against Ross, Ghosh, Fleetwood and Tazzia,
who also had defaulted on their loans. In all of the actions,
the Bank sought to recover unpaid principal and accrued
interest on the Notes, as well as the costs of collection.
In November 1987 the Bank moved for summary judgment in the
Boston Place litigation. This motion was denied by an opinion
of March 31, 1988, on the grounds that while the Bank had
established a prima facie claim on the Notes, a genuine issue
of fact existed as to whether payments to National Capital
Corporation ("NCC"), a loan broker, of 10% of the loan proceeds
constituted an undisclosed increase in the interest rate
charged by the Bank to Defendants, because of an alleged
relationship between the Bank and NCC. First City Federal
Savings Bank v. Bhogaonker, 684 F. Supp. 793 (S.D.N.Y. 1988)
("the 1988 Opinion").
In November 1988 the Boston Place defendants and defendant
Ross moved for partial summary judgment, alleging that because
the Notes provided for interest at the Bank's reference rate,
the Notes were non-negotiable and the Bank could not be a
holder in due course. The Bank cross-moved for summary
judgment. By opinion and order dated May 26, 1989, the
Defendants' motion for partial summary judgment was denied on
the grounds that the Notes were negotiable under the Uniform
Commercial Code, and the Bank's cross-motion was denied, on
the grounds that while the Defendants had failed to establish
a material issue of fact as to whether the fee received by NCC
constituted additional and undisclosed interest, they had
raised an issue of fact as to whether the Bank was aware of
Forum's financial difficulties and cash flow problems in the
fall of 1986. First City Federal Savings Bank v. Bhogaonker,
715 F. Supp. 1216 (S.D.N.Y. 1989) ("the 1989 Opinion").
The Boston Place litigation was consolidated with the Ross,
Tazzia, Fleetwood and Ghosh actions for trial. The non-jury
trial commenced on October 17, 1989 and was adjourned from
time to time to permit additional defense testimony.
On December 20, 1989, prior to the Bank's rebuttal case, the
Bank was declared insolvent, and the FDIC was appointed as
Receiver. Immediately prior to the declaration of insolvency,
Defendants' Notes were assigned to JVAA.
Thereafter, the FDIC obtained an order from the Honorable
Vincent L. Broderick dated December 22, 1989 staying all
actions in this district involving the Bank. The stay
subsequently expired, and in May 1990 JVAA moved to intervene
in these actions as a co-plaintiff. By order dated August 27,
1990, the FDIC was substituted as plaintiff and the
Defendants' counterclaims were dismissed with prejudice, and
JVAA was permitted to intervene, whereupon FDIC was dismissed
from the action.
The trial resumed on December 5, 1990 and again was
adjourned to permit an application to be made to open the
record for the testimony of certain of the Defendants. Final
briefs were submitted by JVAA on February 6, 1991, and ...