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November 13, 2000


The opinion of the court was delivered by: Garaufis, District Judge.


Before the Court are a motion to dismiss the complaint pursuant to FED. R. CIV. P. 12(b)(6) brought by defendants John Adam Kanas ("Kanas"), Patricia Blake ("Blake"), Jeanne's Junior Jungle, Inc. ("JJJ"), and Raynor Country Day School ("RCDS"), and Plaintiffs cross-motion for partial summary judgment brought by Diane Kessenich ("Kessenich") against defendant Jeanne Raynor ("Raynor"). Prior to the reassignment of this case to the undersigned, these motions were referred to Magistrate Judge William D. Wall, who issued his report and recommendation (the "R & R") on July 20, 2000. Plaintiff and Defendants filed their respective objections to the R & R on August 14, 2000. On August 24, 2000 both Defendants and Plaintiff filed responses to each other's objections to the R & R. Having reviewed the parties' submissions on the motion to dismiss, the cross-motion for summary judgment, and in connection with the R & R, this court adopts Magistrate Judge Wall's reasoning and conclusions, with certain modifications, as set forth below.


Plaintiffs allegations in the Amended Complaint fall into two categories: (1) allegations relating to the loans made by Kessenich to defendants Raynor, JJJ, and RCDS (the "Kessenich Loans"); and (2) allegations relating to the security documents allegedly promised to Kessenich, which involve all of the Defendants (the "Kessenich Security Documents"). Plaintiffs cross-motion for summary judgment is based on the Kessenich Loans. Defendants' motion to dismiss is based on the Kessenich Security Documents. The facts are reported here as set forth in the Amended Complaint, and are given the requisite weight in the parties' respective motions, as discussed below.

A. Kessenich's Initial Loans to Raynor and RCDS

1) The EAB Credit Lines

Raynor and Kessenich met in 1994 when Kessenich's grandchild attended JJJ, which is a day care center operated by Raynor. In September, 1994 Raynor asked Kessenich to volunteer as a consultant to Raynor and JJJ.

By notice dated November 10, 1994 the Internal Revenue Service issued a levy on JJJ's bank account at European American Bank ("EAB"), and Raynor asked Kessenich to furnish collateral to EAB "in an amount sufficient for Raynor to obtain a loan from EAB to discharge the levy." (Amended Complaint ("Amend.Compl.") 17.)

Kessenich temporarily pledged a $25,000.00 EAB certificate of deposit, creating a $24,976.79 line of credit (the "EAB Credit Line"), and the levy was discharged with funds loaned to Raynor pursuant to that credit line. (Id. ¶¶ 18-19.) In late August, 1995 Kessenich substituted a zero coupon municipal bond as collateral for the credit line in place of the certificate of deposit (the "Bond Collateral"). (Id. ¶ 20.)

Raynor and JJJ obtained an increase in the EAB Credit Line from $24,976.79 to $90,000.00 (the "Increased EAB Credit Line") in February, 1997 by representing to EAB that Kessenich had approved the application of the Bond Collateral to the Increased EAB Credit Line, despite the fact that Kessenich had not approved such an application. Raynor and JJJ later defaulted on the EAB Credit Line and the Increased EAB Credit Line, and in December, 1998 and January, 1999 falsely represented to EAB that Kessenich had approved the liquidation of the Bond Collateral to satisfy Raynor's balance on the Increased EAB Credit Line. In January, 1999 EAB liquidated the Bond Collateral, which resulted in proceeds of $137,042.10. Of that amount, $66,649.10 was paid in satisfaction of Raynor's obligation to EAB and $70,393.00 was returned to Kessenich. (Id. ¶¶ 50-55.)

2) The $400,000.00 Escrow

In February, 1995 Raynor formed RCDS for the purpose of operating a pre-kindergarten and grade school with advice from Kessenich. Additional space was sought to accommodate the projected combined enrollment of RCDS and JJJ. This search gained urgency when proceedings were initiated to remove JJJ from the building in which it was then located, at 170 Montauk Highway in Speonk, New York. (Id. ¶¶ 21-24.)

In May, 1995 Raynor commenced negotiations with Alpert's Furniture, Inc. ("Alpert's") for a lease on property located at 145A Montauk Highway in Westhampton, New York (the "Leased Premises"). The resulting lease agreement included a provision requiring Raynor to furnish a bond or to place funds in escrow to secure her ability to make certain improvements to the property (the "Leasehold Improvements"), (Id. ¶¶ 25-29.) To raise money for the Leasehold Improvements, Raynor attempted to offer shares of JJJ and RCDS in a private placement. The law firm retained by Raynor was unable, however, to complete the paperwork required in connection with the private placement in time to begin construction immediately following the end of the 1995-96 school year. Due to this delay, and in order to secure the funds required for the Leasehold Improvements, Raynor again sought and received financial assistance from Kessenich. (Id. ¶¶ 29-35.)

Kessenich delivered $400,000.00 to Raynor's attorney, J. Stewart McLaughlin ("McLaughlin") with the understanding that the money would be held in escrow to secure performance of the Leasehold Improvements (the "$400,000.00 Escrow"). Prior to delivery of the money, Raynor represented to Kessenich that the actual construction costs would be paid with the proceeds from the private placement, that the escrow funds were to be used only as collateral, and that the escrow funds would be secured with the assets of RCDS and Raynor's personal assets. With the $400,000.00 Escrow in place, Alpert's and RCDS entered into a lease dated August 1, 1996 (the "Alpert's Lease"). (Id. ¶¶ 30-36.)

B. The Construction Loans

1) The $350,000.00 Construction Loan

Between August, 1996 and May, 1997 Raynor asked Kessenich several times for more money, claiming that the funds were needed to meet payroll expenses and to prevent the delay of the new school's opening, and that the $400,000.00 Escrow could not be used for these purposes. Once again, Kessenich provided funds. Between August 9, 1996 and September 26, 1996 Kessenich made a series of so-called "construction loans" to pay for improvements to the Leased Premises. These loans, totaling $350,000.00, were made by wire transfers from Kessenich to RCDS's account at North Fork Bank (the "$350,000.00 Construction Loans"). (Id. ¶¶ 37-39.) On or about October 7, 1996 Raynor and RCDS executed and delivered a demand promissory note in the amount of $350,000.00 in regard to the $350,000.00 Construction Loans (the "First ($350,000.00) Promissory Note"). (Id. ¶ 40.)

2) The $98,000.00 Construction Loan

Kessenich continued to extend loans. On October 9, 1996 she made a wire transfer of $98,000.00 to RCDS's account (the "$98,000.00 Construction Loan"). Meanwhile, McLaughlin disbursed $269,625.77 from the $400,00.00 Escrow (the "$269,625.77 Loan") without Kessenich's knowledge or permission. Raynor and RCDS executed and delivered a second demand promissory note in the amount of $717,625.77 to evidence their indebtedness for the $350,000.00 Construction Loan, the $98,000.00 Construction Loan, and the $269,625.77 Loan (the "Second ($717,625.77) Promissory Note"). (Id. ¶¶ 41-43.)

3) The $10,000 & $26,000 Loans

On January 9, 1997 an additional $10,000.00 was disbursed by McLaughlin from the $400,000.00 Escrow, and in May, 1997 Kessenich loaned an additional $26,000.00 to Raynor and RCDS (the "$10,000.00 Loan" and the "$26,000.00 Loan"). Raynor and RCDS executed and delivered yet another demand promissory note in the amount of $26,000.00 (the "Third ($26,000.00) Promissory Note") and Raynor again agreed to execute and deliver additional "security instruments," to be drawn up by a lawyer whom Kessenich would hire. (Id. ¶¶ 44-48.)

C. The "Security Instruments"

1) The Promised Security

Kessenich alleges that she made all of these financial accommodations to Raynor because she and Raynor enjoyed a confidential and fiduciary relationship and because Raynor promised, "directly, and by implication, to pledge her interest in JJJ and RCDS Inc. and RCDS Inc.'s interest in the Alpert lease to Kessenich as security" for the loans. (Id. ¶¶ 81-82.) Throughout 1996 Raynor and McLaughlin agreed to prepare, but never actually delivered, documents relating to the promised security. In April, 1997 Kessenich hired John Schnaufer, an attorney, to prepare the debt and security agreements. At this time, Raynor reaffirmed her promises that:

1) RCDS would execute a leasehold mortgage assigning and mortgaging its interest in the Alpert's lease to Kessenich;
2) Raynor would pledge all her stock in JJJ and RCDS to Kessenich and execute UCC-1 financing statements in connection therewith;
3) RCDS would assign all rents to which it was entitled as a result of the Alpert's Lease, including rents RCDS received from JJJ Corp.;
4) RCDS and JJJ would grant security interests in all personal property owned by them and used at the schools, and execute certain UCC financing statements in this regard;
5) RCDS would assign to Kessenich the option, granted in the Alpert's Lease, to purchase the Leased Premises and an adjacent parcel.

(Id. ¶ 83.)

Based on these promises and the information provided by Raynor and McLaughlin, Schnaufer drew up the Kessenich Security Documents. Schnaufer sent the Kessenich Security Documents to Raynor and McLaughlin on July 24, 1997. Raynor and McLaughlin reviewed these documents, which they "approved and agreed upon in each and every particular." (Id. ¶ 83.)

2) Involvement of Defendants Kanas and Blake

In August, 1997 Raynor told Kessenich that she had spoken to Kanas, who was interested in sending his son to RCDS, and that Kanas wished to meet with Kessenich.*fn1 Kanas, Blake, Plaintiff and Schnaufer met on August 15, 1997 at Kanas's office at North Fork Bancorporation. Blake served both as in-house counsel for North Fork and as Kanas's personal attorney. Kanas demonstrated familiarity with the Kessenich Security Documents during the meeting. After about two hours, during which time Kanas, Blake, Plaintiff and Schnaufer had been discussing RCDS and Kessenich's involvement with RCDS, Raynor was called into the meeting. Kanas then advised Raynor that she should ...

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