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June 22, 1995


The opinion of the court was delivered by: DAVID N. HURD

 This matter is before the court pursuant to the motion for summary judgment of defendant Federal Deposit Insurance Corporation Receiver of Jefferson National Bank ("FDIC"). Plaintiffs responded in opposition and no oral arguments were heard.

 Defendant Harry Michael Jock, doing business as Jock's Construction ("Jock"), entered into a contract with the U.S. Department of Housing and Urban Development ("HUD"), administered by the Akwasasne [Indian Nation] Housing Authority, to construct forty homes on St. Regis Mohawk Reservation in September, 1988. Jock obtained several loans in order to finance the construction. Apparently the first such loan was for $ 100,000.00 with Jefferson National Bank, Massena, New York ("JNB"), evidenced by a demand grid note *fn1" dated February 15, 1989. This note was secured by a $ 100,000.00 Certificate of Deposit ("CD") owned by the Housing Assistance Council ("HAC").

 The second loan was for $ 100,000.00, also with JNB, and was evidenced by a demand grid note dated June 1, 1989. This loan was secured by a $ 100,000.00 CD in the name of the plaintiffs herein, George H. Goodhue, Jr. and Maureen L. Shaw. *fn2" This loan was to finance construction of 28 houses remaining to be built. It is this loan, the Goodhue/Shaw guarantee, and subsequent events relating to them, which are the subject of this lawsuit.

 At the time the note was executed by Jock, Goodhue executed an Assignment of Certificate of Deposit and a Hypothecation Authorization. The Assignment provided that it "shall be effective for any renewals of above [$ 100,000] loan until same is entirely paid." (Dupee Dep. Ex.4.) The Hypothecation Authorization also provided that the collateral would secure extensions or renewals of Jock's Construction debt. (See id. Ex.5.) A promissory note was executed by Jock on June 1, 1989, providing for payment to Goodhue the principal sum of $ 100,000.00 due upon forfeiture of the CD held as security at JNB and providing leases on certain of Jock's land as security for the note. Also executed on June 1, 1989, was a contract between Goodhue and Jock under which Goodhue provided security for Jock's JNB loan and Jock agreed to pay $ 1,000.00 for each house completed and to indemnify Goodhue for any amount of the CD forfeited to JNB.

 On June 15, 1989, Jock executed another demand grid note in the amount of $ 150,000.00. The June 15 note was secured by the $ 100,000.00 Goodhue/Shaw CD, and the June 1 note was marked "PAID BY RENEWAL." (See id. Ex.2.) Further, Goodhue executed another Hypothecation Agreement on June 15, 1989.

 On July 4, 1989, Jock executed a promissory note in the amount of $ 32,000.00 payable to Goodhue. The final payment on that note was made sometime after July 17, 1989.

 On August 8, 1989, Jock entered into a contract with Edward Kaneb, of Kaneb Corporation ("Kaneb"), under which Kaneb provided management of the construction of the remaining 24 houses and working capital for the project. The working capital was obtained via a demand grid note with JNB in the amount of $ 400,000.00 executed by Jock on August 9, 1989. The note was personally guaranteed by Kaneb. The contract required that Jock purchase all prefabricated houses from a certain builder owned by Kaneb, deposit all receipts into a construction account, and make disbursements from the construction account only with the signature of an authorized Kaneb agent.

 The apparent effect of this provision was that Kaneb controlled all monies relating to the construction project. Kaneb authorized weekly draws from the account for expenses. As Jock completed houses and received payment from HUD, Kaneb apparently had discretion to allocate the funds in the construction account to loans and other outstanding payables such as subcontractors. In fact, the contract provided that "any such monies received . . . [which] are deemed by the Kaneb Corporation to be over and above the amount necessary for weekly operating expenses, may at the discretion of Kaneb Corporation be used to offset monies outstanding on the line of credit established for this project . . . ." (Id. Ex.35 P 6.)

 Other details and provisions of the above notes and contracts are not specifically related to the issues herein and therefore are not discussed. Furthermore, there may be other notes executed by Jock and/or Kaneb which are irrelevant here and are not discussed.

 As of March 28, 1991, there was a balance due of $ 85,946.34 on the HAC $ 100,000.00 grid note. Jock was apparently in default on that note, having made no payments since November 1989. JNB applied $ 45,509.16 from the HAC CD to the Jock note, pursuant to the security agreement. JNB returned the remaining value of the CD to HAC.

 On February 22, 1990, plaintiffs notified JNB that they would not guarantee any further draws on the Jock loan for which their CD was collateral. Although the notice referred to the loan of $ 100,000, JNB apparently took it as applying to the $ 150,000 loan which was secured by the Goodhue/Shaw CD. The loan ledger shows no draws after February 22, 1990, and only one payment, on March 12, 1990. The principal balance was then $ 103,353.48. See id. Ex.25, p.11. On March 29, 1991, JNB took the $ 100,000.00 Goodhue/Shaw CD to set off the note, leaving an unpaid balance of $ 7,666.67. See id. p.3, 9, 11. JNB did not notify plaintiffs that the CD was taken to pay the defaulted loan, but plaintiffs did stop receiving interest on the CD after that date.

 According to the $ 400,000.00 note ledger, numerous draws and payments were made on that loan. On April 30, 1990, a payment of $ 105,780.39 was made. On May 1, 1990, a final payment of $ 404.31 was made and the demand grid note was marked "PAID."

 On or about June 1, 1992, plaintiffs filed suit in federal court against JNB and others seeking recovery of the $ 100,000.00 CD. On February 26, 1993, the Office of the Comptroller of the Currency determined that JNB was unsafe or unsound, closed the bank, and appointed the FDIC as receiver of JNB. The federal court action was stayed pending plaintiffs' pursuit of administrative claims with FDIC. FDIC disallowed ...

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