mortgage documents (the "January 19 letter"). The modification removed Section 2.17, which had granted MNB the right to approve the terms of the offering plans submitted by the Marceca borrowers. Between January and November 1989, BAII received monthly status reports from MNB. None of these, however, revealed that MNB had knowledge of the co-sponsorship issue prior to execution of the Participation Agreement.
C. The Loan Default
By the end of 1989, as a consequence of the delay caused by the co-sponsorship issue, none of the Marceca properties were converted to cooperative ownership, and the Marceca borrowers were in default on their obligations under the loan documents. The interest reserves had been exhausted and BAII received its last interest payment on December 1, 1989. During December 1989 and January 1990, MNB apprised the participants of Marceca's deteriorating financial status and began considering ways to work out the loan. Simultaneously, BAII vice president, William Waller ("Waller"), conducted a review of the Marceca transaction and requested permission to visit MNB's offices. Waller and an attorney visited BAII's offices at the end of February 1990, where they reviewed the Marceca file and discovered Diffenderfer's September 12 memo.
On March 26, 1990, MNB and Marceca executed a settlement agreement (the "Consensual Foreclosure Agreement"). It provided, among other things, that while the Marceca properties would be surrendered to MNB, the bank would make payments to the Marceca borrowers and would release Marceca from liability on his personal guarantee. MNB eventually made payments to the Marceca borrowers and charged BAII for its pro rata share of these payments. In April 1990, MNB brought an action to foreclose the mortgages securing the Marceca II loan. A Judgment of Foreclosure and Sale was entered in favor of MNB and against the Marceca II borrowers directing that the mortgaged properties be sold to satisfy the mortgage indebtedness plus interest, costs, and disbursements.
In May 1991, the Marceca II properties were sold at a public auction at which MNB was the successful bidder. MNB then entered into an agreement with a real estate investor who purchased the Marceca II properties at the closing of the foreclosure sale in June 1991. The proceeds of this sale totalled $ 11,337,500 in the aggregate, before payment of tax and other liens entitled to priority, and costs. In July 1991, Banque Arabe received $ 1,843,140 from MNB as its share of the net foreclosure sale proceeds. Banque Arabe also received $ 176,697 from MNB as its pro rata share of the net rental income collected from the Marceca II properties during the pendency of the foreclosure action. Marceca filed a petition under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court, Southern District of New York, in August 1990. On May 29, 1991, Banque Arabe filed a claim in Marceca's Chapter 7 case for $ 10,000,000.
D. The Assignment
In the early part of 1990, Banque Arabe, BAII's French parent company, decided to sell the American subsidiary and dissolve it as an entity.
At that time, Waller conferred with the bank's attorneys and explained that BAII sought to dispose of the vast majority of its assets by transferring them to Banque Arabe. In a memorandum dated April 27, 1990 (the "April 27 memo"), Waller identified the Marceca transaction as one of three real estate loans he would transfer first as part of his overall task of "transferring all loans and letters of credit off the books in New York and onto the books of Banque Arabe in Paris." Defendant's Ex. AA. Waller conferred with BAII's attorneys and directed them to draft an assignment for the purpose of carrying out the instructions referenced in the memorandum. On May 31, 1990, BAII executed an assignment in which it "assigned, transferred, and conveyed . . . all . . . rights, title and interest" in the Participation Agreement and BAII's participation in the Marceca II loan (the "Assignment"). Plaintiff's Ex. 81.
In the middle of 1990, Waller engaged in settlement discussions with MNB. Although the other participants accepted MNB's offer to be bought out at thirty cents on the dollar, Banque Arabe determined that this offer and other settlement offers were unacceptable. On October 4, 1990, in an effort to try and recover its loss on the Marceca II loan, Banque Arabe instituted this action against MNB.
Before addressing the substantive fraud allegations, the Court must first consider whether Banque Arabe is a real party in interest and has standing to assert its claims against MNB. Banque Arabe I noted that, while the Assignment unquestionably transferred contract claims from BAII to Banque Arabe, it was unclear whether tort claims were transferred as well. Because the parties offered differing readings of the Assignment, the Court reserved judgment on the standing question until it received extrinsic evidence at trial concerning whether BAII intended to transfer the fraud claims to Banque Arabe.
MNB has the burden to prove Banque Arabe's lack of standing by a preponderance of the evidence. Brignoli v. Balch, Hardy & Scheinman, Inc., 178 A.D.2d 290, 577 N.Y.S.2d 375 (App. Div. 1991); Hansen v. Cauldwell-Wingate Co., 25 Misc. 2d 857, 201 N.Y.S.2d 827, 831 (Sup. Ct. 1960).
A. New York Law Concerning the Assignment of Fraud Claims
Banque Arabe I explained that in New York, "an assignment of the right to assert contract claims does not automatically carry with it an assignment of the right to assert tort claims relating to the transaction which established the contract. The assignor must also transfer the cause of action for tort claims to the assignee." Banque Arabe I, 819 F. Supp. at 1289 (citing Nearpark Realty Corp. v. City Investing Co., 112 N.Y.S.2d 816 (Sup. Ct. 1952)). The Court qualified, however, that "it is not necessary for an assignment to contain specific 'boilerplate' language in order to transfer a cause of action. 'Any act or words are sufficient which "show an intention of transferring the chose in action to the assignee . . . . "'" Id. (quoting Miller v. Wells Fargo Bank Int'l Corp., 540 F.2d 548 (2d Cir. 1976) (quoting Advance Trading Corp. v. Nydegger & Co., 127 N.Y.S.2d 800, 801 (Sup. Ct. 1953))).
At trial, MNB characterized the explicit assignment of fraud claims as a well-established principle of New York law that dates back to Fox v. Hirschfeld, 157 A.D. 364, 142 N.Y.S. 261 (App. Div. 1913). In Fox, an assignment transferring "all my right, title, and interest in and to the within contract" was held not to cover a claim for fraudulent misrepresentation because "the language employed in the assignment of the contract was not appropriate to assign a cause of action arising, not under the contract, but for the fraudulent representations of the defendant." Id. at 263. As analyzed by later New York case law, Fox stands for the principle that when an assignment of a contract does not explicitly assign a cause of action based upon fraud, "only the plaintiff's assignor may rescind or sue for damages for fraud and deceit; the representations were made to it and it alone had the right to rely upon them." Nearpark Realty Corp. v. City Investing Co., 112 N.Y.S.2d at 117. When the Court questioned defendant's counsel at trial whether there was any more recent precedent for this principle, he cited Fund of Funds v. King, No. 74 Civ. 1981, Fed. Sec. L. Rep. (CCH) P95,640 (S.D.N.Y. June 29, 1976) in which an assignment of "any and all interests" was held not to have transferred a fraud claim on account of lack of specificity.
In response, plaintiff's counsel questioned whether this principle is still good law. He asserted that it appeared to have been overruled by N.Y. Gen. Oblig. Law § 13-107, which reads in pertinent part:
Unless expressly reserved in writing, a transfer of any bond shall vest in the transferee all claims or demands of the transferrer [sic], whether or not such claims or demands are known to exist, (a) for damages or rescission against the obligor on such bond . . . .
Id. (emphasis added). Claiming that the statute literally covered the Participation Agreement, plaintiff argued that, the Court would have to find that the Assignment included tort claims and dismiss defendant's affirmative defense of lack of standing.
During the defense's summation, however, defendant's counsel correctly pointed out that the Participation Agreement is not covered by § 13-107 for two reasons. First, because the participation Agreement is not a "bond" as defined by the statute. Section 13-107(2) reads: "As used in this section, 'bond' shall mean and include any and all shares and interests in an issue of bonds, notes, debentures and other evidences of indebtedness . . . ." Second, because under the provision, rescission claims must exist against the obligor, and on the Marceca loan that would be the Marceca borrowers and not MNB.
B. Judge Sofaer's Approach: Freely Assignable Fraud Claims
In a post-trial submission, plaintiff reasserted its statutory argument by referring to Judge Sofaer's decision in ACLI Intern. Commodity Servs., Inc. v. Banque Populaire Suisse, 609 F. Supp. 434 (S.D.N.Y. 1984). According to Judge Sofaer, because "the law has moved away from the limitations on free assignability . . . New York law now permits the assignment of most types of claims, including claims of fraud, and . . . the assignee of a claim should be deemed to have received the right to enforce any claim assigned." Id. at 441-42. As a result, ACLI held that even where § 13-107 could not be relied on as actual authority that any claim can be assigned, it could be used as guiding authority inasmuch as "the statute reflects the legislature's willingness to presume the assignment of all claims in order to enhance felt commercial needs." Id. at 444. On the facts in ACLI, Judge Sofaer reasoned that even though "accounts receivable" were not bonds and even though the defendant bank was not an obligor, the fraud claim could be assignable under § 13-107 because "the statute should be seen to teach by example, rather than to exclude by implication." Id. at 443.
ACLI acknowledged that, while it was reading § 13-107 broadly, the statute was enacted in order to overrule New York case law involving the assignment of bonds and other forms of commercial paper. Judge Sofaer wrote:
The change made in New York law by § 13-107 was designed to enable the assignee of a bond or other similar instrument to take all the assignor's rights in the paper assigned, and to sue the obligor directly. The operative paragraph of § 13-107 refers specifically to "bonds," not to "evidences of indebtedness." . . . The legislature apparently concluded that assignees of bonds, notes and other forms of commercial paper should be entitled to protect the value of such forms of paper by being entitled, absent an express limitation, to sue the debtor, obligor, trustee, or depository on any theory available to the assignor. The statutory rule thereby simplified the assignee's task of collection and protected the value of certain forms of highly negotiable commercial paper.