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GEORGE KOVIAN, HIBJAY CORP. v. FULTON CTY. NATL. B

July 13, 1994

GEORGE KOVIAN, HIBJAY CORP., KELLY LUMBER COMPANY, INC., through its Trustees in Bankruptcy, RICHARD H. WEINER, STEPHEN BARKER, ALFRED CHENEY, GAMRAY TECHNOLOGY, INC., COLUMBIA RENTALS OF GLOVERSVILLE, INC., NAGAHO CONSTRUCTION CORP., PETER GAMALDI, and PATRICIA GAMALDI, Plaintiffs,
v.
THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY, CHARLES MOYSES, JOHN VALERIUS, VINCENT SALLUZZO, ROBERT SALLUZZO, GLEASON AND SALLUZZO, ADIRONDACK HOMESITES, INC., CAPITAL MEDICAL LEASING CORPORATION, HOYE & HOYE, THEODORE E. HOYE, JR., and CHARLES PRATT, Defendants.


MUNSON


The opinion of the court was delivered by: HOWARD G. MUNSON

MEMORANDUM-DECISION & ORDER

 Before the court is a motion by defendant Charles Pratt for summary judgment pursuant to Federal Rule of Civil Procedure 56, dismissing as against him the claims of plaintiffs Hibjay Corporation, Stephen Barker, Alfred Cheney, and Kelly Lumber Company. Defendant Pratt further moves for costs and attorney's fees. Plaintiffs cross-move for sanctions pursuant to Federal Rule of Civil Procedure 11.

 I. BACKGROUND

 Plaintiffs' second amended complaint ("complaint") alleges four claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968. The complaint alleges illegal lending activities by defendant Fulton County National Bank and Trust Company ("the Bank"), as demonstrated by three distinct schemes to defraud plaintiffs. Defendant Pratt was President of the Bank, and defendant Moyses was Vice-President, at the time of the alleged schemes. Both are purportedly tied to the Bank's unlawful activities

 Defendant Pratt's involvement in the alleged wrongs is limited to the "Hibjay scheme," one of the three schemes described by plaintiffs. *fn1" That scheme relates to plaintiffs Stephen Barker and Alfred Cheney and their plaintiff companies, Hibjay Corporation ("Hibjay") and Kelly Lumber Company ("Kelly Lumber"). Because the facts underlying the Hibjay scheme and the case in general are well documented elsewhere, the court presumes familiarity with the background of this action. See Kovian v. Fulton County Nat'l Bank & Trust Co., 647 F. Supp. 830 (N.D.N.Y. 1986) ("Kovian I"); Memorandum-Decision and Order, filed March 28, 1990, Document ("Doc.") 59 ("Kovian II"). Therefore only those facts directly relevant to the pending motions will be set forth in this Memorandum-Decision and Order.

 As alleged in the complaint, Hibjay was founded by plaintiffs Barker and Cheney in February 1982, for the purpose of undertaking the rehabilitation and renovation of low income properties. According to plaintiffs Barker and Cheney, the idea to initiate the business originated with defendant Moyses. Plaintiffs had encountered Moyses while obtaining financing from the Bank for the expansion of plaintiff Kelly Lumber. Moyses encouraged Barker and Cheney to found Hibjay by promising to locate a purchaser for their first renovation project, known as the "Hibbard Street building."

 The alleged conspiracy began during the construction of the Hibbard Street building. Moyses secured signed, blank promissory notes from plaintiffs, which he filled in when either plaintiff sought a construction draw. Often Moyses would enter Pratt's office prior to completing the form, and would return to his own desk to fill in an amount in excess of that which Barker and Cheney requested. Barker and Cheney claim they did not realize at the time that these excess amounts represented kickbacks, as they now allege.

 This same procedure was followed in Hibjay's second project, the renovation of the Masonic Temple building in Gloversville, New York (the "Temple project"). Hibjay borrowed approximately $ 428,213.00 from the Bank in order to finish the Temple project. The Temple Building was owned by an individual named Kenneth Keith, who had purchased the property with money borrowed from the Bank. The Bank maintained a mortgage on the property to secure the Keith loan. Although plaintiffs Barker and Cheney knew that Keith had reached his lending limit on loans from the Bank, they continued to borrow money to finance the Temple Project. In so doing they relied on representations by Moyses and Pratt, who assured them that the Bank would locate someone to purchase the structure from Keith.

 The Temple Building was purchased from Keith by Temple Associates in June 1983. Subsequently, Temple Associates evicted Hibjay from the premises, whereupon Hibjay filed a mechanics lien against Temple Associates for the amount of $ 615,703.45. According to plaintiffs, Moyses and Pratt then attempted to coerce Barker and Cheney into assigning the lien to the Bank by making a variety of promises and threats. They promised to cancel the debt Hibjay incurred in renovating the Temple Building, to return to Hibjay any money in excess of that amount, to finance the "Brower Block project", which was another renovation project initiated by Hibjay, and to help obtain the support of the Bank in the recovery of the financially ailing Kelly Lumber, which was owned by Barker and Cheney. Further, plaintiffs allege that defendants Pratt and Moyses threatened to withhold future loans and to call in all existing loans if Hibjay refused to assign the lien. In response to the promises and threats of defendants Pratt and Moyses, Hibjay, through Barker and Cheney, agreed to assign the mechanics lien to the Bank.

 The Bank then instituted an action in state court to foreclose on the Temple Building mortgage and to collect on the lien. Although the Bank thereby received funds in excess of the amount owed by Hibjay, it failed to refund any money to Hibjay. Further, the Bank reneged on its promises to finance future Hibjay projects and to assist in the financial recovery of Kelly Lumber, which subsequently filed for bankruptcy. The Bank also refused to allow the lien to cancel the Hibjay debt unless Barker and Cheney agreed to sign a release and covenant not to sue (jointly referred to as "the release"), pursuant to which they waived all claims which Barker, Cheney or Hibjay might have against the Bank with relation to the Temple project. On October 2, 1984 Barker and Cheney signed such a release, and it is that release which forms the basis of defendant Pratt's motion for summary judgment against Hibjay, Barker and Cheney.

 II. DISCUSSION

 Before turning to the specific arguments raised by the parties, the court will recount the familiar standards to be applied to a motion for summary judgment.

  Under Federal Rule of Civil Procedure 56 summary judgment shall enter if, when viewing the evidence in the light most favorable to the nonmovant, the court determines that there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56; Eastman Kodak Co. v. Image Technical Servs., Inc., U.S. , , 112 S. Ct. 2072, 2077 (1992); Commander Oil v. Advance Food Serv. Equip., 991 F.2d 49, 51 (2d Cir. 1993). Where the moving party does not bear the ultimate burden of proof on an issue, that party satisfies its summary judgment burden by pointing to the absence of evidence to support an essential element of the non-moving party's claim. Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 572 (2d Cir. 1993). Where the movant does shoulder the burden of proof, it must establish that there is no genuine issue of material fact to be decided regarding any element of that party's claim. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). In either case, if the movant satisfies its initial summary judgment burden, then the burden shifts to the nonmovant to proffer evidence demonstrating that a trial is required because a disputed issue of material fact exists. Weg v. Macchiarola, 995 F.2d 15, 18 (2d Cir. 1993). To survive the motion for summary judgment the nonmovant must do more than present evidence that is merely colorable, conclusory, or speculative, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986), and furthermore must show more than "some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). In other words, the nonmovant must demonstrate that there are issues of fact that must be decided by a factfinder, because "they may reasonably be decided in favor of either party." Thompson v. Gjivoje, 896 F.2d 716, 720 (2d Cir. 1990).

 With these fundamental precepts in mind, the court turns to the substance of the motions at bar. The court first will address defendant Pratt's motion for summary judgment as it relates to plaintiffs Hibjay, Barker and Cheney.

 A. Summary Judgment against Hibjay Barker and Cheney

 The October 2, 1984 release signed by Barker and Cheney on behalf of Hibjay is the basis for defendant Pratt's motion for summary judgment against plaintiffs Barker, Cheney and Hibjay. Under the release plaintiffs agreed to waive any and all claims against the Bank and its officers and agents arising out of the Temple project "from the beginning of the world" until October 2, 1984. Release, Exhibit ("Exh.") 2A attached to Wood Affidavit, Doc. 102. In return the Bank released Hibjay from all liability as maker of the Notes, released Barker and Cheney from the terms of the Guaranty of the Notes, and waived its right to sue Barker and Cheney for any liability arising out of the Guaranty. Id.

 In their complaint, plaintiffs allege that the release is void as a matter of law. First, plaintiffs aver that defendants fraudulently induced plaintiffs into assigning the mechanics lien to the Bank. At the time of the assignment, plaintiffs allege, defendants had no intention of financing the Brower Block project or assisting in the financial recovery of Kelly Lumber. Second Amended Complaint, Doc. 41, at PP 176-77. Nor did the bank intend to honor its prior agreement to apply the proceeds from its foreclosure on the lien to Hibjay's debt with the Bank. Id. at P 182. Plaintiffs next allege that defendants exploited the fraudulently procured assignment of the lien by forcing plaintiffs Hibjay, Barker and Cheney to enter into the release. According to plaintiffs, defendants' prior fraud left plaintiffs in no position to decline to sign the release, because defendants refused to cancel plaintiffs' bank debt unless they did so. Id. at P 187. Plaintiffs were advised by their attorney, defendant Theodore E. Hoye, Jr. of the defendant law firm Hoye & Hoye, that they must sign the release if they wanted Hibjay's debt to be cancelled by the Bank. Id. at P 188. It was only because of defendants' improper actions, plaintiffs assert, that the release was executed. Plaintiffs charge that the fraudulently induced assignment and the duress-induced release were part of a scheme by defendants to force plaintiffs to turn over to the Bank the mechanics lien, which enabled the Bank to use the mechanics lien for its own benefit.

 In his motion for summary judgment dismissing the claims of Hibjay, Barker and Cheney, defendant Pratt argues that there is no genuine issue of material fact concerning the validity of the October 2, 1984 release, because there is no question but that the release was not obtained through any duress other than that caused by plaintiffs' economic weakness. Thus, defendant argues, the release bars the instant claims by Hibjay, Barker and Cheney. Defendant Pratt's Memorandum of Law, Doc. 98, at 6. In the alternative defendant argues that, even if a material question of fact exists as to duress, there is no material question on the issue of ratification. Because plaintiffs accepted the benefits of the release without renouncing it or seeking an early judicial declaration of its invalidity, defendant argues, plaintiffs are barred from now seeking to void the release. Defendant further argues ...


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