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January 15, 2002


The opinion of the court was delivered by: Larimer, Chief Judge.



This is a diversity action arising out of a series of related financial transactions among plaintiffs, Ben and Shirley Harris, defendant/third-party plaintiff Key Bank National Association, d/b/a Key Bank, Key Bank of New York, and Key Bank of Central New York ("Key Bank" or "the bank"), and third-party defendants 1564 St. Paul Street Partners, Lass Associates a/k/a "Last Associates," Sanford Liebschutz, Edward J. After, Martin L. Schuster, Jack Schuster and Bell Schuster ("the partners"). The complaint asserts various claims under New York law against Key Bank, all relating in one way or another to plaintiffs' allegation that Key Bank mishandled collateral that plaintiffs had pledged to secure a loan, causing plaintiffs to lose the value of the collateral, and to suffer various other consequential damages.

On March 14, 2000, the court issued a Decision and Order which granted in part Key Bank's motion for summary judgment by dismissing plaintiffs' claim for constructive fraud, but which denied Key Bank's motion to dismiss plaintiffs' claims for negligence, breach of fiduciary duty, and breach of the duty of good faith. Harris v. Key Bank Nat. Ass'n, 89 F. Supp.2d 408 (W.D.N.Y. 2000).

Key Bank filed a third-party complaint against the partners on June 2, 2000, alleging three causes of action under New York law for rescission, contribution and indemnity, and unjust enrichment. The partners have now moved for summary judgment dismissing the third-party complaint. Key Bank has cross-moved for summary judgment dismissing plaintiffs' remaining claims.


The relevant facts are fully set forth in my March 14, 2000 Decision and Order, familiarity with which is assumed, and will be only briefly summarized here. In June 1984, plaintiffs sold an apartment building on St. Paul Street in Rochester to the partners. As part of the $775,000 purchase price, the partners executed a promissory note for the benefit of plaintiffs in the amount of $195,000 (the "St. Paul Street Note"). As security for this note, the partners gave plaintiffs a second mortgage on the property.

In May 1985, in a completely separate transaction, plaintiffs borrowed $150,000 from Key Bank. Plaintiffs executed a demand note for the benefit of the bank in the amount of $150,000 ("Key Bank Note"). As security for that note, plaintiffs assigned to Key Bank the $195,000 St. Paul Street Note and the second mortgage interest that secured it.

In time, both the partners and plaintiffs began having difficulty making their monthly payments on their respective notes. For several years, with the blessing of plaintiffs, the partners sent their payments on the St. Paul Street note directly to Key Bank and not to plaintiffs, in order to fulfill the partners' obligation to plaintiffs and plaintiffs' obligation to the bank simultaneously. Various other proposals concerning the parties' obligations were made and considered over the years, but in early 1994, Key Bank sold plaintiffs' Key Bank Note to the partners (doing business as "Lass" or "Last" Associates) for $75,000, which was the remaining balance on the note at that time, along with the $195,000 St. Paul Street Note and the second mortgage interest that secured it.

In April 1994, Lass Associates demanded that plaintiffs pay the $75,000 balance on the Key Bank Note within fifteen days. When plaintiffs failed to do so, Lass Associates served on plaintiffs written notice, pursuant to U.C.C. 9-505(2), that Lass Associates proposed to retain the assigned collateral, i.e., the St. Paul Street Note and second mortgage, in full satisfaction of the Key Bank Note. Plaintiffs neither objected to nor responded to this notice, although it is not entirely clear from plaintiffs' deposition testimony and that of their then-attorney, David Berlowitz, why that was so.

Thereafter, plaintiffs sued the partners in New York State Supreme Court, Monroe County, to enforce the St. Paul Street Note. The state court ruled that since the bank had repledged the Key Bank Note to Lass Associates and Lass Associates had foreclosed on that note, Lass Associates was now the owner of the St. Paul Street Note, and plaintiffs did not have standing to enforce it. Plaintiffs then brought this action against Key Bank, alleging that the bank impaired the value of plaintiffs' collateral when it transferred the collateral and the Key Bank Note to Lass Associates.


I. Key Bank's Motion for Summary Judgment

A. Law of the Case

Plaintiffs argue that the court should deny Key Bank's motion for summary judgment based on the "law of the case" doctrine. "The doctrine of the law of the case `posits that if a court decides a rule of law, that decision should continue to govern in subsequent stages of the same case.'" Aramony v. United Way of America, 254 F.3d 403, 410 (2d Cir. 2001) (quoting In re Crysen/Montenay Energy Co., 226 F.3d 160, 165 n. 5 (2d Cir. 2000), cert. denied, 532 U.S. 920, 121 S.Ct. 1356, 149 L.Ed.2d 286 (2001)). In general, a court "will only reconsider a prior decision in the same case if there has been an intervening change in controlling law, there is new evidence, or a need is shown to correct a clear error of law or to prevent manifest injustice." United States v. Sanchez, 35 F.3d 673, 677 (2d Cir. 1994), cert. denied, 514 U.S. 1038, 115 S.Ct. 1404, 131 L.Ed.2d 291 (1995).

This principle must be followed by the district court when an appellate court has ruled on a matter of law in the case. See, e.g., United States v. Minicone, 994 F.2d 86, 89 (2d Cir. 1993), cert. denied, 513 U.S. 940, 115 S.Ct. 344, 130 L.Ed.2d 300 (1994). It is discretionary, however, for a court that is considering whether to revisit its own prior decisions in the same case. See, e.g., Lewis v. Whelan, 99 F.3d 542, 545 (2d Cir. 1996); United States v. Uccio, 940 F.2d 753, 758 (2d Cir. 1991); Scottish Air Int'l Inc. v. British Caledonian Group, PLC, 152 F.R.D. 18, 24-25 (S.D.N.Y. 1993). In such cases, the application of the law-of-the-case doctrine "does not limit a court's power to reconsider its own decisions prior to final judgment." Sagendorf-Teal v. County of Rensselaer, 100 F.3d 270, 277 (2d Cir. 1996). See also In re PCH Assocs., 949 F.2d 585, 592 (2d Cir. 1991); DiLaura v. Power ...

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