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CROSSLAND FED. SAV. BANK v. A. SUNA & CO.

September 29, 1995

CROSSLAND FEDERAL SAVINGS BANK, by the FEDERAL DEPOSIT INSURANCE CORPORATION, as Conservator, Plaintiff against A. SUNA & COMPANY, INC., ALAN SUNA and THE ESTATE OF HARRY SUNA, by its executrix BERNICE SUNA, Defendants.


The opinion of the court was delivered by: LEVY

 LEVY, United States Magistrate Judge:

 Plaintiff CrossLand Federal Savings Bank moves for summary judgment and to amend the complaint to reflect the fact that it is no longer under the conservatorship of the Federal Deposit Insurance Corporation ("FDIC"). By order dated December 14, 1992, the Honorable Eugene H. Nickerson, United States District Judge, referred this case to then Magistrate Judge Zachary Carter to report and recommend on all dispositive motions. On January 28, 1993, this case was reassigned to then Magistrate Judge Allyne R. Ross, and upon her appointment as district judge the case was reassigned to Magistrate Judge John L. Caden. Finally, on March 24, 1995, the above-captioned matter was referred to the undersigned. For the reasons set forth below, the undersigned respectfully recommends that plaintiff's motion for summary judgment be granted and that damages be awarded in the amount of three million dollars, plus interest, attorneys' fees and costs.

 Background

 There are no disputes with regard to the material facts of this case. On May 26, 1988, CrossLand Savings, F.S.B. ("Old CrossLand") loaned A. Suna & Co. ("Suna Co.") three million dollars. The loan was evidenced by a promissory note (the "Original Note") and agreement for the extension of a revolving line of credit (the "Original Agreement"). As part of the Original Agreement, Harry and Alan Suna, both officers of Suna Co., executed and delivered an unconditional guaranty of the payment of Suna Co.'s obligations (the "Guaranty"). Old CrossLand and Suna Co. then modified the Original Agreement on March 14, 1990, creating an "Amended Agreement." Harry and Alan Suna executed a new promissory note (the "Replacement Note") at that time. The Replacement Note became due on August 31, 1991, and has not yet been repaid.

 On January 23, 1992, the Director of the Office of Thrift Supervision (the "OTS") closed Old CrossLand and appointed the FDIC as its receiver. A new bank, Crossland Federal Savings Bank ("New CrossLand") was formed on the same date and the FDIC was appointed as its conservator. New CrossLand subsequently purchased the assets of Old CrossLand, including the assets that form the basis of this action.

 On March 18, 1992, after Harry Suna, Chairman of Suna Co., indicated a desire to discuss a possible workout or restructuring of the loan, the executive board of New CrossLand met to discuss the Suna Co. credit agreement. The board authorized Tom Murphy, then the Vice-President designated to handle the Suna Co. loan, to restructure the credit agreement into a term loan. However, authorization for Mr. Murphy to offer this modification to Suna Co. was conditional upon two changes from the terms originally suggested by Mr. Murphy. The term of the loan was to be limited to one year instead of two, and the $ 30,000 fee suggested by Mr. Murphy was to be applied to the principal rather than being paid as a fee. On March 24, 1992, Mr. Murphy sent a fax to Harry Suna. The fax, which included a handwritten note on the cover sheet and was signed "Tom," listed some of the conditions for restructuring the Suna Co. loan; it also included an amortization schedule for the proposed term loan.

 Before any settlement discussions took place, and later while such discussions were ongoing, New CrossLand sent a series of letters (the "pre-negotiation letters") to Suna Co. These letters specified that although New CrossLand wished to negotiate with Suna Co., it had not yet agreed to modify the existing loan. The letters also stressed that all settlement discussions would be without prejudice and that changes to the existing agreement were to become effective only when "definitive documentation" had been signed. Although New CrossLand requested that he do so, Harry Suna did not sign and return the first pre-negotiation letter, dated April 20, 1992.

 Harry Suna died on May 6, 1992. New CrossLand then engaged in workout discussions with Stuart Suna, Harry Suna's successor as Chairman of Suna Co., and sent a second pre-negotiation letter to Stuart Suna, dated June 11, 1992. That letter also went unexecuted. Following further workout discussions between Mr. Murphy and Stuart Suna, Mr. Murphy sent Stuart Suna a one-page letter summarizing the agreed-upon points in their negotiations and proposing additional terms requested by New CrossLand's loan committee. That letter, dated June 15, 1992, was never signed by either of the parties. However, Stuart Suna executed a third pre-negotiation letter, dated July 22, 1992, which contained language substantially similar to that of the earlier pre-negotiation letters. Specifically, the July 22, 1992 pre-negotiation letter stated:

 
[New CrossLand] has not offered, and is not at this meeting offering, either orally or in writing to waive or forbear from exercising any rights or remedies it may have against the Borrower; and . . . [New CrossLand] has not, and is not at this meeting offering to make any new loans or grant or extend any financial accommodations to the Borrower.

 New CrossLand demanded payment on the Replacement Note by letters dated July 7, 1992 and July 23, 1992. When payment was not received, New CrossLand initiated this action on August 17, 1992. On May 21, 1993, an involuntary petition for bankruptcy was filed against Suna Co.; the petition was converted to a Chapter 11 bankruptcy petition on July 19, 1993. As a result of Suna Co.'s bankruptcy, New CrossLand is pursuing only its claims against Alan Suna and the Estate of Harry Suna, the guarantors of the loan agreement.

 On August 19, 1993, the FDIC ended its conservatorship of New CrossLand, which thereupon became a privately-owned, federally chartered stock bank. New CrossLand subsequently reorganized. In March 1994, Brooklyn Bancorp ("Bancorp") was formed as a holding company for New CrossLand, which became a wholly owned subsidiary of Bancorp. All shares of New CrossLand stock were exchanged for Bancorp stock; New CrossLand then merged with CrossLand Interim Federal Savings Bank, a Bancorp subsidiary. New CrossLand emerged as the surviving bank and a wholly-owned subsidiary of Bancorp.

 New CrossLand filed the present motion for summary judgment before then Magistrate Ross on September 14, 1994. On October 21, 1994, the summary judgment motion was stayed on consent of both parties, and New CrossLand withdrew the motion on December 19, 1994. The motion was reinstated on March 31, 1995, and oral argument was held before the undersigned on June 6, 1995.

 1. New CrossLand's Motion to Amend the Complaint.

 As an initial matter, New CrossLand seeks leave to amend the caption of its complaint to reflect the fact that it is no longer under the conservatorship of the FDIC. Materials submitted by both parties, including the shareholder's report and the affidavits submitted by New CrossLand, demonstrate that on August 19, 1993, New CrossLand became a privately owned stock bank that is no longer under the conservatorship of the FDIC.

 Rule 15(a) of the Federal Rules of Civil Procedure states that leave to amend a pleading "shall be freely given when justice so requires." It is an abuse of discretion for the court to deny a motion for leave to amend a pleading in the absence of undue delay, bad faith or improper motive, unless the amendment would be futile or meritless. Cortec Indus. v. Sum Holding Co., 949 F.2d 42, 49 (2d Cir. 1991). See also Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962). The party opposing the motion for leave to amend has the burden of demonstrating that the amendment would be prejudicial, contrary to justice or futile. Tucker Leasing Capital Corp. v. Marin Medical Mgt., Inc., 833 F. Supp. 948, 960 (E.D.N.Y. 1993).

 The Sunas advance two arguments in opposition to plaintiff's motion to amend. First, they contend that New CrossLand's motion must be denied because plaintiff has failed to comply with FED.R.CIV.P. 25(c), which provides:

 
in any case of transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.

 The Sunas argue that the merger of New CrossLand and Crossland Interim Savings Bank to form a new bank as a subsidiary of Bancorp creates a triable issue of fact as to who owns the Amended Agreement, the Replacement Note and the Guaranty which form the basis of this litigation. Specifically, the Sunas allege that assets were transferred from New CrossLand to Bancorp and that Bancorp may now be the proper party in interest. The Sunas' argument is without merit. Indeed, the language of FED.R.CIV.P. 25(c) itself undermines their argument, since it states explicitly that even where there has been a transfer of interest the action may be continued "by or against the original party." Thus, even if there had been a transfer of interest to Bancorp, New CrossLand would still be permitted to continue the action as the original party.

 In addition, the Sunas have introduced no evidence that a transfer of interest to Bancorp ever took place. *fn1" The documents offered by both parties, including the shareholder's report and 10-K report from OTS offered by the Sunas, support the conclusion that, while Bancorp acquired all of New CrossLand's stock, it did not actually acquire any of New CrossLand's assets. The Sunas are incorrect, therefore in arguing that there is a triable issue of fact as to whether New CrossLand is the proper party in interest.

 
If a party dies and the claim is not thereby extinguished, the court may order substitution of the proper parties. The motion for substitution may be made by any party or by the successors or representatives of the deceased party and, together with the notice of hearing, shall be served on the parties as provided in Rule 5 and upon persons not parties in the manner provided in Rule 4 for the service of a summons, and may be served in any judicial district. Unless the motion for substitution is made not later than 90 days after the death is suggested upon the record by service of a statement of the fact of the death as provided herein for the service of the motion, the action shall be dismissed as to the deceased party. (emphasis added)

 Since Rule 25(c), concerning transfers of interest, refers to Rule 25(a) in the context of service of process, *fn2" the Sunas claim that the ninety-day limit on motions to amend the complaint following the death of a party set forth in Rule 25(a) somehow applies to motions to amend after transfers of interest in the corporate context. In other words, the Sunas argue that the motion to amend is time-barred because plaintiff failed to make the motion within ninety days of the transfer of interest. However, there is no support for this position in either the procedural rules or the case law.

 Miles, Inc. v. Scripps Clinic & Research Foundation, 810 F. Supp. 1091 (S.D.Ca.1993), which defendants cite in support of their position, is not applicable to the instant case. In Miles, the court dismissed causes of action against an estate that was not substituted as a party within ninety days of the defendant's death. The court in Miles did not rely on or even mention Rule 25(c) and it did not state that Rule 25(a) applies to corporate transfers of interest. United States v. Transocean Air Lines, Inc., 356 F.2d 702 (5th Cir. 1966), also cited by defendants, is equally inapposite. There, the court held that a trustee in bankruptcy who never made a motion to be substituted as a party for a bankrupt corporation did not become a party to the action. The court in Transocean Air Lines did not mention a ninety-day limitation on motions to amend in any context. Accordingly, defendant provides no authority for its argument that the ninety-day limitation on motions to substitute after the death of a party under Rule 25(a) applies to transfers of interest under Rule 25(c).

 Since New CrossLand has demonstrated that it is no longer under the conservatorship of the FDIC, and since the Sunas have offered no compelling reason for the court to deny New CrossLand's motion, the undersigned respectfully recommends that New CrossLand's motion to amend the complaint be granted. *fn3"

 2. New CrossLand's Motion for Summary Judgment.

 New CrossLand also moves for summary judgment against Alan Suna and the Estate of Harry Suna, as guarantors of the Amended Agreement and the Replacement Note. Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). The court must consider the burdens of production and proof that would be required at trial. Anderson v. Liberty Lobby, 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). Summary judgment should be awarded, therefore, when the party bearing the burden of proof with regard to a critical element of a claim or defense fails to make a sufficient evidentiary showing as to that element. Celotex, 477 U.S. at 322.

  The initial burden in this case rests with New CrossLand, which must demonstrate that the guarantors remain liable on the Replacement Note. A creditor establishes its prima facie case against a debtor by offering proof of the three elements of its claim: (1) an executed loan agreement; (2) a promissory note payable to the creditor; and (3) evidence that the note has not been paid. E.g., Banner Indus., Inc. v. Key B.H. Assocs., 170 A.D.2d 246, 246, 565 N.Y.S.2d 456, 456 (1st Dep't 1991); Kornfeld v. NRX Technologies, Inc., 93 A.D.2d 772, 773, 461 N.Y.S.2d 342, 343 (1st Dep't 1983), aff'd, 62 N.Y.2d 686, 465 N.E.2d 30, 476 N.Y.S.2d 523 (1984). *fn4" Evidence of an executed guaranty is the final element of plaintiff's prima facie case since New CrossLand is pursuing its claims against the guarantors. 117-14 Union Turnpike Assoc. v. L.P. County Dollar Corp., 187 A.D.2d 357, 357, 589 N.Y.S.2d 880, 880 (1st Dep't 1992); Key Bank of Long Island v. Burns, 162 A.D.2d 501, 502, 556 N.Y.S.2d 829, 830 (2d Dep't 1990). New CrossLand has submitted copies of the executed Amended Agreement, Replacement Note and Guaranty, along with an affidavit of non-payment (the "Kramer affidavit"). The Sunas do not dispute the validity of this evidence, nor do they maintain that the loans have been repaid. Accordingly, New CrossLand has met its initial burden for summary judgment.

 The Sunas oppose summary judgment by raising several affirmative defenses. First, they contend that New CrossLand is not the proper party in interest. Second, they argue that Old CrossLand made an oral promise to provide life insurance in the name of Harry Suna, and that the failure of the bank to perform this obligation relieves the guarantors of their responsibility under the loan agreement. Third, the Sunas contend that alteration of the loan agreement and related documents released the guarantors from the Guaranty. Finally, the Sunas maintain that the bankruptcy stay that prevents New CrossLand from pursuing its claims against Suna Co. also prevents the bank from enforcing its rights against guarantors Harry and Alan Suna.

 It is well-settled that a party cannot avoid summary judgment simply by raising conclusory allegations or unfounded opinions. See Western World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990) (summary judgment motion cannot be defeated through "'mere speculation or conjecture'") (quoting Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932, 94 L. Ed. 2d 762, 107 S. Ct. 1570 (1987)); Borthwick v. First Georgetown Securities, Inc., 892 F.2d 178, 181 (2d Cir. 1989) (opposing party cannot "escape summary judgment merely by vaguely asserting the existence of some unspecified disputed material facts"). Moreover, a mere "scintilla" of evidence is insufficient to withstand summary judgment; rather, the adverse party must "set forth specific facts showing that there is a genuine issue for trial." Liberty Lobby, 477 U.S. at 250-251. The party opposing summary judgment must also demonstrate that any factual issue it raises is a material issue capable of affecting the outcome of a trial. Id. at 248. A material issue is one that would allow a reasonable jury to return a verdict for the non-moving party. Id. When the burden of proof on a particular claim or defense rests with the party opposing the summary judgment motion, the moving party is not required to negate the adverse party's claim, nor is it required to make any evidentiary showing with respect to that claim or defense. The moving party may prevail simply by revealing the lack of evidence to support the adverse party's position. Celotex, 477 U.S. at 323, 325. Accordingly, New CrossLand can succeed here by demonstrating that each of defendants affirmative defenses is either factually or legally insufficient to create a triable issue of fact. Each of the Sunas' affirmative defenses will be addressed in turn.

 First, as explained above, defendants argue that there is a material issue of fact as to whether New CrossLand is the proper party in interest. According to the Sunas, plaintiff may not be the real party in interest because it does not hold the Amended Agreement, Replacement Note and Guaranty that form the basis for this litigation. In response to this argument, New CrossLand has offered considerable proof that it is the current holder of those documents. Affidavits and other records submitted by plaintiff show that New CrossLand is the owner of the relevant instruments and is the correct party in this case. *fn5" The Kramer affidavit demonstrates that New CrossLand, having purchased all of the assets of Old CrossLand, is the current holder of the Replacement Note, Amended Agreement and Guaranty. New CrossLand has also submitted other materials that recount the chain of title by which New CrossLand acquired these instruments. The purchase agreement and the Strazza affidavit establish that New CrossLand acquired the Suna Co. loan from Old CrossLand when the latter was closed by OTS. While Bancorp later acquired New CrossLand, New CrossLand retained all of its assets. Plaintiff has therefore met its burdens of production on this issue, as it has offered compelling evidence to suggest that it is the correct party in this case.

 Despite all of this evidence, the Sunas contend that New CrossLand is not the correct party in interest and is not the current holder of the Replacement Note, Amended Agreement and Guaranty. Pointing to New CrossLand's reorganization as a subsidiary of Bancorp, the holding company created for the purpose of reorganizing New CrossLand, the Sunas argue that Bancorp is the real party in interest, or at the very least, that there is a triable issue of fact as to who is the real party in interest. However, speculation and unsubstantiated allegations are insufficient to avoid summary judgment. See Western World Ins. Co., 922 F.2d at 121; Borthwick, 892 F.2d at 181. Since New CrossLand has met its burden of production by submitting the Strazza affidavit and the purchase agreement, the Sunas must produce evidence in support of their position in order to create a triable issue of fact.

 The materials submitted by the Sunas, however, support New CrossLand's contention that it is the proper party in interest. The shareholder's report submitted by defendants states that Bancorp has no independent assets of its own. Its only asset is New CrossLand, its subsidiary company. (See Shareholder Report, Suna Exhibit 17, pp. 47-51). Another report submitted by the Sunas substantiates the chain of title set forth in the Strazza affidavit. (See 10-K report, Suna Exhibit 16, p.1). Defendants have offered no evidence to support their contention that a party other than New CrossLand is the holder of the Suna Co. loan documents. Accordingly, they have failed to establish that a material issue of fact exists on this issue.

 B. Defendants' Remaining Affirmative Defenses

 New CrossLand argues that the court need not consider the validity of the Sunas' remaining affirmative defenses in order to award summary judgment. Relying on the waiver of rights in paragraph 2 of the Guaranty, New CrossLand argues that the Sunas have surrendered their right to ...


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