Independence Community Bank v Olympia Mtge. Corp.
Decided on August 13, 2007
Supreme Court, Kings County
Independence Community Bank, Plaintiff,
Olympia Mortgage Corp., et al, Defendants.
Carolyn E. Demarest, J.
In this action arising out of the secondary mortgage market, in which is alleged, inter alia, contract claims based on a default under a Mortgage Loan Warehousing Agreement (the Loan Agreement) and Individual Guaranty agreements (the Guarantees), and fraud claims, plaintiff Independence Community Bank (Independence) moves for summary judgment in its favor on its first cause of action against defendant Olympia Mortgage Corp. (Olympia) for breach of the Loan Agreement, and on its second cause of action against defendants Sam Pinter and Avruhum M. Donner (Donner) for breach of the Guarantees executed by them. Independence separately moves for summary judgment in its favor on its third cause of action against defendant Leib Pinter for fraud.
On May 18, 2001, Independence, a savings bank, entered into the Loan Agreement with Olympia, a mortgage banker, under which Independence extended a mortgage warehousing line of credit to Olympia for the purpose of enabling Olympia to borrow funds to close mortgage loans which it had originated. The Loan Agreement (which states, in paragraph 8[h], that it was governed by New Jersey law) provides, in paragraph 7 thereof, that upon the occurrence of an event of default, "the principal balance of any outstanding Loans and interest accrued but unpaid thereon shall become immediately due and payable." In connection with the closing of the Loan Agreement, Sam Pinter (an owner and the executive-vice president of Olympia) and Donner (an owner and the president of Olympia) each executed a separate Individual Guaranty (which, in paragraph 7J, provides that it was governed by New Jersey law), which, in paragraph 2 thereof, states that "[e]ach guarantor. . . jointly and severally guarantee[d the] full, prompt and unconditional payment when due" of Olympia's obligations under the Loan Agreement. A third individual guaranty was allegedly executed by defendant Fagie Pinter, who is an owner of Olympia and the wife of Sam Pinter. Fagie Pinter and Sam Pinter claim that Fagie Pinter's signature is a forgery. Independence does not seek judgment against Fagie Pinter on this motion. [*2]
In accordance with the Loan Agreement, Olympia would originate mortgage loans to borrowers purchasing homes by drawing against the line of credit extended to it by Independence. Following the closing on these loans, the original mortgage notes from these loans were remitted to Independence from Olympia and held as collateral pursuant to the terms of a September 18, 2001 Security Agreement. Olympia then would sell these mortgages to various permanent investors, such as the Federal National Mortgage Association (Fannie Mae), and others, such as Norwest (now Wells Fargo) (the investors). Independence would then send the mortgage note and a bailee letter to the investor, identifying the mortgage note as Independence's collateral and directing payment for the mortgage note. The investors would then purchase the mortgage notes by wiring the funds to another of Olympia's mortgage warehouse lenders with whom that investor dealt (for example, to a China Trust bank account) according to the terms of a July 1, 2002 Intercreditor Agreement. That warehouse lender bank would then wire funds paid by the investor to an Independence bank account to repay Independence for its advance to fund the loan on Olympia's line of credit.
Independence was to be repaid for each advance to Olympia from the proceeds received from investors for the sale of each specific mortgage loan that Independence funded. Independence would receive a fax from Olympia, instructing it as to which specific mortgage loans the proceeds of the funds paid by the investors were to be applied. This was an important component of the mortgage warehouse line of credit because if the payment was not properly credited based upon instruction from Olympia, Independence would seek to recover its collateral (the mortgage note) from the investor. Moreover, if an investor had paid for a loan but Olympia directed that the payment be misapplied to a different, older outstanding loan advance, Independence would be unsecured with respect to the unpaid loan. At the same time, the paid loan would remain outstanding on Independence's books. Independence relied upon information from Olympia to maintain its records.
In October 2004, Independence terminated Olympia's line of credit following advice of an investigation by Fannie Mae (which led to a lawsuit by Fannie Mae filed on November 16, 2004 and the appointment of a receiver for Olympia) and the freezing of Olympia's servicing accounts due to an alleged "Ponzi scheme" by Olympia against Fannie Mae, in which Olympia allegedly misrepresented that loans sold to Fannie Mae were current and active loans, when, in fact, such loans had been paid off and the proceeds thereof stolen by Olympia. By letter dated October 28, 2004, Independence demanded from Olympia and the individual guarantors full and immediate payment of amounts due under the Loan Agreement, together with unpaid and accrued interest, default rate interest, and other fees and costs (including attorney's fees and costs) as specified in the Loan Agreement. Olympia and the guarantors failed to tender payment of the amounts due upon Independence's demand. Independence states that as of October 31, 2006, the outstanding balance due and owing to it under the Loan Agreement and the Guarantees (exclusive of legal fees and collection costs), and off-setting partial recovery from other sources, was $11,347,183.60.
Independence claims that following its termination of Olympia's credit line, it learned for the first time that throughout the course of Olympia's relationship with it, Olympia and Leib Pinter (the brother of Sam Pinter), who is an owner and officer of Olympia with primary responsibility for Olympia's secondary marketing business, and defendant Barry Goldstein (Goldstein), an owner and managing director of Olympia with primary responsibility for the [*3]finances of Olympia, with the aid of defendant Alan J. Braun, C.P.A. (Braun), Olympia's independent auditor and accountant, engaged in a fraudulent "rolling kite" scheme by knowingly submitting to Independence fraudulent pay-off information, whereby they falsely represented to Independence the payments made by Olympia's investors for mortgage loans funded through Independence, and directed that such payments be misapplied by Independence. Independence avers that Olympia misrepresented to it which mortgage loans the payments by the investors were to be applied, attributing them to earlier older outstanding loans, causing it to lose its security interests in the loans, and that Olympia otherwise misapplied and converted the payments. Specifically, Independence asserts that Olympia had been paid more than $8,383,517.34 by Fannie Mae for 36 outstanding mortgage loans funded through Independence, but failed to properly report such payments to plaintiff, and, instead, directed Independence to misapply the payments. It further asserts that Olympia failed to report five other payments, totaling $773,120.34 from a different investor, Norwest, for five other Government National Mortgage Association (GNMA) mortgage loans funded by Independence. It states that it has not received repayment of these amounts, and has been damaged in the total amount of $9,156,637.68 (plus interest).
On November 9, 2004, Independence filed this action against Olympia, Sam Pinter, Fagie
Pinter, Donner, Leib Pinter, Goldstein, Braun, and Doe Defendants I-X (unknown persons who
participated in Olympia's alleged misconduct), alleging ten causes of action. Defendants have
interposed answers, and all discovery has been completed.
First and Second Causes of Action Against Olympia and Guarantors
In addressing Independence's motion insofar as it seeks summary judgment in its favor with respect to its first cause of action, which seeks recovery against Olympia based upon its default under the Loan Agreement, the court notes that under both New Jersey and New York law, when presented with a clear and unambiguous contract, a court need not look beyond the four corners of the agreement, and must enforce the writing according to its terms (see Kampf v Franklin Life Ins. Co., 33 NJ 36, 161 A2d 717, 720 [NJ 1960]; Continental Ins. Co. v 115-123 West 29th St., 275 AD2d 604, 605 ). Here, the terms of the Loan Agreement are clear and unambiguous. Paragraph 7 of the Loan Agreement expressly and unequivocally provides that upon an event of default by Olympia, all outstanding sums shall be immediately due and payable to Independence. Olympia admits that a receiver was appointed for Olympia; the New York Banking Department has suspended Olympia's Mortgage Banker License, which Olympia has since permanently surrendered; Olympia terminated substantially all of its employees involved in the operations of its day-to-day business activities; Olympia is unable to pay its debts as they become due; Olympia ceased originating new mortgage loans; and Olympia is unable to account for sums of money paid to it. Each of the foregoing constitutes an event of default under the Loan Agreement.
Olympia does not deny that it has defaulted under the Loan Agreement, that Independence demanded immediate payment of all amounts due, and that it failed to tender payment of the amounts demanded by Independence, which are due and owing to it under the Loan Agreement. Olympia, in opposition to Independence's motion, attempts to raise a defense that Independence failed to mitigate its damages. It claims that Independence was uniquely positioned to discover the fraud and should have prevented the fraud or discovered it sooner. [*4]Olympia asserts that Independence should have exercised reasonable diligence to discover the misconduct of Olympia's rogue employees, such as by auditing Olympia's books to check on the status of the loans.
Olympia's purported defense of mitigation of damages is devoid of merit. "[T]he burden of proving facts in mitigation of damages rest[s] upon the party breaching the contract" (Ingraham v Trowbridge Builders, 297 NJ Super 72, 83, 687 A2d 785, 791 [NJ Super 1997] [internal citation omitted]). Here, Olympia has not submitted any evidentiary facts whatsoever to demonstrate a basis for this defense (see generally Lund v Chemical Bank, 797 F Supp 259, 271 [SD NY 1992]).
Moreover, a duty to mitigate damages does not apply where "the party whose duty it is primarily to perform the contract has equal opportunity for performance and equal knowledge of the consequences of the performance" (Ingraham, 297 NJ Super at 83, 687 A2d at 791). Here, Olympia's own employees perpetrated the wrongdoing and, thus, it was not only in the best position to discover their wrongdoing, but is charged with their conduct. The perpetrator of a fraud cannot assert its own agent's misconduct as a defense to repaying its contractual debt by claiming that its victim should have been more circumspect in catching it (see Bonnco Petrol, Inc. v Epstein, 115 NJ 599, 611, 560 A2d 655, 661 [NJ 1989]; Peter W. Kero, Inc. v Terminal Const. Corp., 6 NJ 361, 370, 78 A2d 814, 818 [NJ 1951]; Lloyd v Hulick, 63 A 616, 617 [NJ 1906]; Angerosa v White Co., 248 App Div 425, 426 , affd 275 NY 524 ). Consequently, as Olympia has no viable defense to Independence's claim of Olympia's liability under the Loan Agreement, summary judgment on Independence's first cause of action must be granted (see CPLR 3212 [b]).
With respect to Independence's motion insofar as it seeks summary judgment on its second cause of action, which seeks recovery against Sam Pinter and Donner based upon their failure to pay under the Guarantees, it is noted that "[o]n a motion for summary judgment to enforce a written guaranty, all that the creditor need prove is an unconditional guaranty, the underlying debt, and the guarantor's failure to perform under the guaranty" (City of New York v Clarose Cinema Corp., 256 AD2d 69, 71 ; see also United States on Behalf of Small Business Admin. v DelGuercio, 818 F Supp 725, 727-728 [D NJ 1993]; Eastbank N.A. v Phoenix Garden Restaurant, 216 AD2d 152, 152 ). Courts will strictly enforce the terms of an unconditional guaranty of payment (see Center 48 Ltd. Partnership v May Dept. Stores, 355 NJ Super 390, 406, 810 A2d 610, 619 [NJ Super 2002]; Housatonic Bank & Trust Co. V Fleming. 234 NJ Super 79, 82, 560 A2d 97, 99 [NJ Super 1987];CIT Group/Credit Finance v Weinstein, 261 AD2d 203, 204 ; National Westminster Bank USA v Sardi's Inc., 174 AD2d 470, 471 ; Citizens & So. Commercial Corp. v Catapano, 164 AD2d 812, 814 ).
The terms of Sam Pinter's guaranty and Donner's guaranty are clear and unconditional. Paragraph 2 of each of the Guarantees provides: "2. Each Guarantor hereby jointly and severally guarantees full, prompt and unconditional payment when due of each and every Liability of Borrower to Bank, now existing or hereafter incurred, whether matured or unmatured, and the full prompt and unconditional performance of every term and condition of any transaction to be kept and performed by Borrower to Bank. This Guaranty is a primary obligation of the undersigned and shall be a continuing inexhaustible Guaranty without limitation as to the amount or duration and may not be revoked [*5]except by notice in writing to Bank and received by Bank at least thirty (30) days prior to the date set for such revocation."
The Guarantees further provide, in paragraph 6 thereof, that: "Upon an Event of Default under the Liability of Borrower or hereunder, bank may, without notice to Borrower make the Liability of Borrower immediately due and payable hereunder to the undersigned, and Bank shall be entitled to enforce the obligations of the undersigned hereunder."
Sam Pinter and Donner do not dispute that they executed the Guarantees, that an event of default by Olympia has occurred, and that they have failed to make payment of the amounts due to Independence pursuant to the terms of the Guarantees.
Donner, in opposition to Independence's motion, asserts that he agreed to sign the guaranty only because he understood that any liability he might incur under the guaranty would be reduced by the existence of two additional guarantors, Sam Pinter and Fagie Pinter. He contends that since Fagie Pinter's signature was allegedly forged and the guaranty was only to take effect upon the commitment of all three guarantors, the guaranty never became effective as a result of Independence's alleged failure to obtain the signature of Fagie Pinter.
Donner's contention is without merit. Donner's guaranty to Independence was a complete and integrated agreement between Donner and Independence. "[W]here a guaranty is clear and unambiguous on its face and, by its language, absolute and unconditional, the signer is conclusively bound by its terms absent a showing of fraud, duress or other wrongful act in its inducement" (National Westminster Bank, 174 AD2d at 471; see also Interchange State Bank v Rinaldi, 303 NJ Super 239, 250-251, 696 A2d 744, 749-750 [NJ Super 1997]).
The terms of Donner's guaranty are clear and unconditional. The sole signer of Donner's Individual Guaranty is Donner. Donner's guaranty does not provide for execution by any other guarantor or require the validity of any other guaranty. Nothing in the guaranty supports Donner's claim that it was only to take effect upon the commitment of all three guarantors. There is no condition precedent to its enforceability; it did not in any way provide that it was conditioned upon the execution of a guaranty by another party.
Indeed, under the express written terms of the guaranty, Donner "jointly and severally guarantee[d] full, prompt and unconditional payment" of Olympia's liability to Independence, and the guaranty was made "a primary obligation" of his, as the guarantor. Paragraph 4 (c) of the guaranty also specifically provides that Independence "without impairing . . . the obligations of [Donner] . . . could [e]xercise or refrain from exercising any rights against . . . any . . . [other] guarantor," and paragraph 7 (H) of the guaranty expressly provides that "[n]either the Guarantors' obligation to pay and perform in accordance with the terms of this Guaranty, nor any remedy for the enforcement thereof . . . shall be impaired . . . by any impairment, modification, change, discharge, release [or] limitation . . . of . . . the obligations of any [other guarantor]." Thus, by the express terms of the guaranty, Donner, in signing it, acknowledged his unconditional individual liability to pay to Independence the amount due to it by Olympia regardless of whether Fagie Pinter's guaranty was or was not enforceable. The lack of execution by another guarantor has no effect on the liability of Donner, a separate signatory to the guaranty, where, as here, Donner unconditionally guaranteed the loan (see Interchange State [*6]Bank v Rinaldi, 303 NJ Super 239, 249, 696 A2d 744, 749 [NJ Super 1997];Chemical Bank v Nemeroff, 233 AD2d 239 ).
Moreover, a lending institution owes no duty to one of several guarantors to ascertain the true identities of the other parties executing a guaranty (see Great Falls Bank v Pardo, 263 NJ Super 388, 395, 622 A2d 1353, 1356 [NJ Super 1993] aff'd, 273 NJ Super 542, 642 A2d 1037 ; Lesser v Strubbe, 67 NJ Super 537, 545, 171 A2d 114, 119 [NJ Super 1961]. aff'd 39 NJ 90 ; Banque National De Paris v 1567 Broadway Ownership Assocs., 214 AD2d 359, 360 ; First Am. Title Ins. Co. v Kevlin, 203 AD2d 681, 682 ; Money Store/Empire State v Lenke, 151 AD2d 256, 257 ). The defense of forgery is personal only to the individual whose name was forged, not to his or her co-guarantors (see Ligran, Inc. v Medlawtel, Inc., 186 NJ 583, 590, 432 A2d 502, 506 [NJ 1981];Newark Finance Corp. 115 NJL 388, 393, 180 A2d 862, 864-865 [ NJ 1935]; Banque National De Paris, 214 AD2d at 360), and, thus, the forging of the signature of one guarantor cannot give rise to a defense to another guarantor. This is particularly true, where, as here, each guaranty was a separate "Individual Guaranty," which, by its terms, was unconditional and not limited in its enforceability against that guarantor, and did not depend upon the execution of any other guarantees by any other guarantor.
Donner further argues that even if the guaranty was valid, Independence's failure to obtain the signature of Fagie Pinter constitutes a material modification to the guaranty agreement. He claims that his obligations, as a guarantor, could not be altered without his consent, and that, due to Independence's modification of the guaranty agreement, he became relieved of any obligations under the guaranty.
Such argument is unavailing. The absence of a guaranty by Fagie Pinter did not in any way modify the guaranty under which Donner was jointly and severally responsible. There was no modification of Olympia's underlying debt or obligations to Independence. Therefore, as Donner has no cognizable defense to Independence's claim under the guaranty, Independence is entitled to summary judgment on its second cause of action as against Donner (see CPLR 3212[b]).
Sam Pinter, in opposition to Independence's motion, asserts, in his affidavit, that he would not have agreed to sign his name to a guaranty if he knew that his wife, Fagie Pinter, was also going to execute a guaranty of the loan to Olympia because it would affect the manner in which his family's assets were held. While Sam Pinter maintains that Fagie Pinter's signature was a forgery and that she, in fact, never executed a guaranty, he contends that since he executed the guaranty with the understanding that his wife, Fagie Pinter, would not have to also execute a guaranty, no "meeting of the minds" between him and Independence occurred. Sam Pinter further claims that Independence also would not have made the loan to Olympia if both he and Fagie did not guarantee the loan, and that this further establishes that there was no "meeting of the minds" on the part of Independence. He argues that, therefore, no guaranty contract ever came into being between him and Independence.
Sam Pinter's "meeting of the minds" defense is devoid of merit. As noted above with respect to Donner, the express written terms of the guaranty provided that Sam Pinter's liability to Independence thereunder was joint, several, and unconditional, and did not depend upon the guarantees or lack thereof of others (see Chemical Bank, 233 AD2d at 239). Sam Pinter agreed that he could be held solely responsible for Olympia's obligations to pay all amounts due to Independence, without regard to the enforceability of his wife's guaranty. Additionally, [*7]Independence's desire to have three guarantors to protect its interests did not impact upon Sam Pinter's guaranty since he was, in any event, jointly and severally liable on his guaranty. Moreover, if as Sam Pinter asserts, Fagie Pinter's signature was forged, her purported guaranty was void and Sam Pinter received what he bargained for, i.e, his wife was not a guarantor.
Sam Pinter's reliance upon cases that stand for the legal principle that a forged signature on a contract renders the contract void ab initio as against the person whose signature was forged (see e.g. Opals on Ice Lingerie v Bodylines Inc., 320 F3d 362, 370 [2d Cir 2003]; Orlosky v Empire Sec. Sys., 230 AD2d 401, 403 ) is misplaced since Sam Pinter concedes that his signature on the guaranty was not forged, and that he signed the guaranty. Sam Pinter is the only signatory to his individual and unconditional guaranty, and it requires no other signature for its validity. Therefore, Sam Pinter cannot assert the alleged forgery of a third guarantor's guaranty as a defense to his failure to perform his payment obligations under the guaranty which contained his signature that was admittedly not forged.
Sam Pinter further argues that Independence acted without the care required to protect him, as a regular customer of the bank, from harm. Specifically, he claims that Independence should have sent him a copy of the guaranty which allegedly contained his wife's signature and that it should have checked Fagie Pinter's signature against its own records to discover the alleged forgery.
Sam Pinter's argument is unavailing. The relationship between a bank and its depositors or between a borrower and lender, is a debtor-creditor relationship, which does not give rise to a fiduciary relationship (see United Jersey Bank v Kensey, 306 NJ Super 540, 552, 704 A2d 38, 44 [NJ Super 1997], certification denied 153 NJ 402 ; Call v Ellenville Nat. Bank, 5 AD3d 521, 523 ). Sam Pinter has not offered any evidentiary proof whatsoever to show that Independence departed in any way from the banking industry's standard practices regarding guarantees. Independence confirms that guarantees were required to be signed by the guarantor and witnessed and acknowledged before a licensed notary public. In addition, pursuant to paragraph 7 (I) of the guaranty, Sam Pinter expressly waived notice of acceptance and any other notices. Moreover, it is noted that Sam Pinter acknowledged that he signed at least 11 commitment letters between May 2001 and September 2004, each of which identified Fagie Pinter as a guarantor, and that he never sought to repudiate the guaranty.
Sam Pinter also relies upon Uniform Commercial Code § 3-406, in arguing that Independence failed to exercise ordinary care with respect to the alleged forgery of Fagie Pinter's guaranty. Such reliance is entirely misplaced as that law applies only to negotiable instruments, not to a guaranty.
Sam Pinter additionally contends that his guaranty cannot be enforced because the loan closing did not occur in a bank branch. Such contention is without merit. The statutes relied upon by Sam Pinter pertain to the conduct of certain types of business from auxiliary offices and the establishment of branch offices, and do not require banks to obtain guarantees only in the confines of a bank branch (see NJSA 17:9A-23.3; New York Banking Law § 105). In any event, Sam Pinter has completely failed to demonstrate that any loss which occurred was in any way due to the holding of the loan closing outside of a bank branch.
Sam Pinter further argues that more discovery is needed to properly oppose Independence's motion. Such argument must be rejected. Sam Pinter does not assert that there are any outstanding discovery requests, or state what additional discovery is needed by him or [*8]what facts he would ascertain by any such discovery (see CPLR 3212 [f]; Graham v City of New York, 279 AD2d 435, 436 ). Consequently, summary judgment in favor of Independence on its second cause of action as against Sam Pinter is mandated (see CPLR 3212 [b]).
With respect to damages on Independence's first and second causes of action, Independence has submitted the sworn affidavit of Walter Hrycyna (Hrycyna), its senior vice-president in charge of its mortgage warehousing group, who explains how Independence calculated the outstanding balance due and owing to Independence from Independence's records, and sets forth that this balance equals $11,347,183.60 as of October 31, 2006. Pursuant to paragraph 5 (g) of the Loan Agreement and paragraph 6 of the Guarantees, Olympia and the guarantors are also obligated to pay all costs and expenses, including reasonable attorneys' fees, incurred by Independence in connection with the enforcement of its rights under those agreements. While plaintiff has made a prima facie showing as to its losses, defendants are entitled to a review of the documentation relied upon.
Plaintiff's motion for summary judgment against Olympia, Donner and Sam Pinter is granted
as to liability. The assessment of damages is reserved pending trial as to other defendants.
Third Cause of Action Against Leib Pinter
Independence has also moved for summary judgment in its favor on its third cause of action for fraud against Leib Pinter. It is well established that to prevail on a fraud claim against a defendant, a plaintiff is required to prove " a misrepresentation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury" (Pope v Saget, 29 AD3d 437, 441 ; see also Lloyd I. Isler, P.C. v Sutter, 160 AD2d 609, 610 ).
Leib Pinter has admitted, in his answer, that throughout the course of Olympia's relationship with Independence, he engaged in a fraudulent "rolling kite" scheme by submitting to Independence knowingly fraudulent pay-off information, whereby he falsely represented to Independence the payments made by Olympia's investors for mortgage loans funded through Independence, and consciously directed the misapplication of such payments. Leib Pinter has also admitted that when Olympia received notice of payments from investors for mortgage loans that it had funded through advances from Independence under the Loan Agreement, he fraudulently concealed the true facts concerning such payments by, among other things, failing to disclose such payments or misrepresenting which mortgage loans such payments should be applied to and misapplying such payments.
In addition to Leib Pinter's admissions, Olympia's former Director of Operations, Patricia Trinidad (Trinidad), testified at her deposition that she was instructed by Leib Pinter to apply the proceeds of loans sold to Fannie Mae to pay down the oldest outstanding loans on the lines of credit, rather than repay the specific loans for which funds had been advanced by Independence. Olympia's receiver, Karen Kincaid Balmer (the Receiver), also testified, at her deposition, that Leib Pinter acknowledged that the practice of paying the oldest loans first was concealed from the warehouse banks. Thus, Independence has established that Leib Pinter made misrepresentations of material fact regarding the loans which were intentionally false, and that he had knowledge that such misrepresentations were false when they were made and that Independence was expected to rely thereon to its detriment (see generally Pope, 29 AD3d 3d at [*9]441; Lloyd I. Isher, P.C., 160 AD2d at 610).
While Leib Pinter has admitted that he knowingly made the misrepresentations with the intent that Independence rely on them to its detriment by extending credit to Olympia, Leib Pinter, in opposition to Independence's motion, argues that Independence has not shown that it reasonably relied upon his misrepresentations Independence, however, has submitted the affidavit of Walter Hrycyna, wherein he attests that throughout the course of Independence's relationship with Olympia, Independence relied to its detriment by extending credit to Olympia on false information provided by Olympia concerning, among other things, the payoff information for the proceeds of Independence-funded mortgage loans sold by Olympia to investors and Olympia's financial condition.
Leib Pinter, in response, argues that Independence has not shown that its reliance upon his fraudulent misrepresentations was reasonable and that a triable issue of fact exists as to the reasonableness of Independence's reliance so as to preclude summary judgment on its fraud claim. In support of this argument, he claims that Independence should have exercised more diligence so as to discover his fraud and prevent it from continuing. He claims that plaintiff knew or should have known of his fraudulent scheme of paying down the oldest loans first based upon certain indications of his fraud, which should have put Independence on notice of this fraud.
Specifically, Leib Pinter asserts that one of these indications was that Richard Gedney of China Trust Bank once opined that Olympia ran a "sloppy operation," and that, therefore, Independence must have known about his fraudulent kiting scheme. A review of the actual deposition testimony, however, reveals that the comment related to consideration of Olympia from a "physical standpoint," i.e., the physical condition of Olympia's prior office (Hrycyna's Dep. Tr. at 31-32). No concerns were raised regarding Olympia's financial operations. Thus, Mr. Pinter's suggestion is patently insufficient to raise a triable issue of fact as to Independence's reasonable reliance on Leib Pinter's fraudulent misrepresentations.
Leib Pinter also asserts that since some loans exceeded the 90-day permissible warehouse period, which constituted an event of default, Independence must have been aware of the "rolling kite" scheme. Leib Pinter points to Mr. Hrycyna's deposition testimony that, in connection with Independence's acquisition of the Olympia account as part of an asset purchase from Fleet Bank in 2001, Independence observed a few loans that were on the line beyond the 90-days permitted for the loan to be purchased by an investor (Hrycyna's Dep. Tr. at 23-25). He also notes that James Liccardo (Liccardo), Independence's former vice-president and relationship manager, testified at his deposition that even before Independence's acquisition of the Olympia account in 2001, Olympia had defaulted when loans were not paid off during the permissible warehouse period (Liccardo's Dep. Tr. at 34). Leib Pinter further relies upon Liccardo's deposition testimony that the average amount of time that a loan remained on the warehouse line for Olympia was probably longer than his other portfolio customers (Liccardo's Dep. Tr. at 113).
The foregoing deposition testimony, however, provides no basis to conclude that Independence was or should have been aware of Leib Pinter's fraudulent "rolling kite" scheme. The fraud at issue here arose from Leib Pinter's admitted misapplication of pay-off funds, not from the existence of an occasional stale loan or the age of the loan advances. Furthermore, Hrycyna explained, at his deposition, that while a few items were past 90 days, given the size of the facility and line, it was "not anything that was unusual" since "any company . . . doing [that] [*10]kind of volume, was going to have items that go past the 90 days" (Hrycyna's Dep. Tr. at 23-25). Indeed, Liccardo specifically testified that "[o]ur experience [with Olympia] was that loans generally paid off within the permissible warehouse period and that there were no irregularities (Liccardo's Dep. Tr. at 33). Thus, contrary to Leib Pinter's argument, the deposition testimony actually establishes that a small number of loans outstanding beyond the 90 day period was not unusual in the industry and corroborates plaintiff's contentions that it was defrauded specifically by Olympia's practice of directing the application of payments to the oldest (most stale) outstanding loans, thereby concealing the true extent of Olympia's default and preventing discovery of the fraud.
Furthermore, while Leib Pinter asserts that stale loans were a reason for Independence declaring the Olympia account in default in 2004, the evidence establishes that Independence did not declare the default simply due to the existence of stale loans. Rather, the default was triggered when Independence learned that Fannie Mae had frozen or taken custody of Olympia's bank accounts and was conducting a fraud investigation of Olympia, and Trinidad informed Independence that the outstanding loans had actually been purchased by investors without applying such payments to the correct mortgage so that Independence had no collateral to secure some of its loans. The reliable evidence presented, including the testimony of Olympia's own employees, clearly indicates that plaintiff had no suspicion that it was being systematically defrauded until Olympia's massive scheme was discovered by Fannie Mae.
Leib Pinter also argues that, according to Liccardo's deposition testimony, he had concerns regarding vacillations in the amounts on deposit in Olympia accounts at Independence, and that balances would change considerably from month-to-month. Liccardo, however, actually testified, at his deposition, that Independence's concern was only that it was not "capturing" all of Olympia' s accounts, and that he was told by Patty Trinidad of Olympia that the vacillations were due to the payment of taxes which were "done quarterly so there would be a large outflow of funds from a custodial account at a given time" (Liccardo's Dep. Tr. at 105-106). Mr. Liccardo was unaware of any specific discrepancies in particular accounts.
Leib Pinter further contends that Liccardo's deposition testimony that there were times when Olympia could not make interest payments or "haircuts" (a partial payment of principal) indicates that Independence had reason to investigate and should have uncovered the fraud. Such contention is without merit. Liccardo explained, in his deposition testimony, that when he inquired, he was told that Olympia was "managing their cash and they wanted to invest their cash as best they could and not keep it idle in a demand deposit [account]" (Liccardo's Dep. Tr. at 136). Moreover, Liccardo testified that it only took Olympia a day or two to wire the funds into the warehouse account to cover interest payments (Liccardo's Dep. Tr. at 138). Thus, the mere fact that Olympia occasionally did not have such funds in its warehouse account to make payments, for which it gave Liccardo an explanation, is insufficient to raise a genuine issue of fact as to whether Independence should have been aware of Leib Pinter's fraudulent scheme.
Leib Pinter also points to the fact that Independence received "exception reports" concerning unpaid loans which were supposed to be followed up by it. Liccardo, at his deposition, testified with respect to the "exception reports" that there was a spotty effort in the operation area to follow-up such reports where a loan had been shipped to an investor but no payment had been received. (Liccardo's Dep. Tr. at 171). Mr. Liccardo testified that he had made inquiry of Avruhum Donner, President of Olympia, regarding one such stale loan and [*11]Donner volunteered to pay it off (Liccardo Dep. Tr. at 173-174). There is no evidence of specific attempts to investigate other such loans. Although it appears that plaintiff was less than diligent in monitoring the status of the loans to Olympia, there is no evidence of any report that would have revealed Leib Pinter's fraud.
Leib Pinter finally contends that Independence knew about his fraudulent practice, acquiesced in the practice, and ratified the practice because its employees made money as a result of such practice. He claims that Independence did not care about the fraud, so long as a payment stream of income was being regularly generated. He argues that Independence had a profit incentive to accept the Olympia loans regardless of the underlying payment irregularity. As Liccardo testified at his deposition, part of his annual bonus was based on the deposit balance that he generated so that if there was a higher balance in the deposit accounts, which included Olympia, in a higher bonus would result (Liccardo's Dep. Tr. at 50-52). The mere fact that Liccardo's bonuses were calculated in this manner, however, does not indicate that Liccardo had any awareness of, or supported, Leib Pinter's fraudulent scheme, or that Independence did not reasonably rely upon Leib Pinter's fraudulent misrepresentations and thereby suffered a loss. Defendant's gratuitous and self-serving accusations are without evidentiary support.
Thus, Leib Pinter has not raised any triable issue of fact as to any awareness of his fraud that could have rendered Independence's reliance upon his misrepresentations unreasonable. According to Hrycyna's uncontroverted sworn affidavit, Independence did not learn that Olympia had misapplied the investor payments until after Olympia's default in October 2004.
Leib Pinter's attempt to cast blame on Independence for not discovering his own fraud and for relying upon his fraudulent misrepresentations, is rejected. "It is no excuse for a culpable misrepresentation that means of probing it were at hand" (Lloyd I. Isler, P.C., 160 AD2d at 610,quoting Albert v Title Guar. & Trust Co., 277 NY 421, 423 ; see also, Rosenchein v Mc Nally, 17 AD2d 834 ). Thus, the mere presence of opportunities for investigation will not preclude the right of reliance (see Albert,277 NY at 423). This is especially true where there has been intentional fraud (see Lloyd I. Isler, 160 AD2d at 610; Angerosa, 248 App Div at 426). Moreover, "to deny relief to the victim of a deliberate fraud because of [its] own [alleged] negligence would encourage falsehood and dishonesty" (Angerosa, 248 App Div at 426).Here, the fraudulent "rolling kite" scheme was not a patent defect, and, although it may have been possible, with greater diligence, to ascertain the facts, the uncontroverted evidence presented establishes that, in this commercial banking setting, plaintiff's reliance upon Olympia's representations was expected, if not necessary. In fact, it appears that the complex industry practices by which payments on Olympia's debt to plaintiff were made by third parties to third parties precluded plaintiff from discovering the truth since only Olympia was in a position to advise it regarding the correct application of such payments. Thus, inasmuch as the nature of the transaction was such as to cause Independence to rely upon Lieb Pinter's misrepresentations, Independence has established that it reasonably relied on such misrepresentations as a matter of law.
Leib Pinter argues that Independence has not presented sufficient evidentiary proof to sustain its burden of showing damages. He asserts that he did not admit, in his answer, that any damages were sustained by Independence, and claims that Independence has not shown that he knew the extent of the shortfall or that any alleged damages were proximately caused by anything done by him. [*12]
While Leib Pinter did not admit to the amount of the damages sustained, his admissions establish that he participated in the fraudulent "rolling kite" scheme and made misrepresentations to Independence as to the application of pay-off proceeds received from investors. Hrycyna's deposition testimony and affidavit set forth that the effect of these misrepresentation was that a principal balance of $8,383,517.34 remained outstanding on Olympia's line of credit for 36 Fannie Mae loans, and a principal balance of $773,120.34 remained outstanding on Olympia's line of credit for five Norwest loans. Trinidad's deposition testimony further confirms that Olympia had already received payments from Fannie Mae for the loans outstanding on Independence's line of credit, further demonstrating that the proximate cause of Independence's damages was the misapplication of those payments (Trinidad's Dep. Tr. at 278-280, 326-328).
Leib Pinter argues that Liccardo's deposition testimony raises doubts concerning Independence's claim for damages by noting that Liccardo testified, at his deposition, that Fannie Mae remitted payments for pooled loans to Olympia's other warehouse bank, China Trust, which forwarded payments to Independence, and that Independence would not know that it was getting the correct amount of funds from China Trust (Liccardo's Dep. Tr. at 128). Liccardo explained, however, that the operational staff at Independence had reconciled those payments (Liccardo's Dep. Tr. at 128-129). There is nothing in Liccardo's deposition testimony which raises any triable issue of fact as to the accuracy of Independence's claimed damages. However, defendants are entitled to review the documentation supportive of plaintiff's computations and the issue of damages will, therefore, be reserved pending further discovery and possibly trial.
Accordingly, Independence's motion for summary judgment in its favor on its first cause of action against Olympia and its second cause of action against Sam Pinter and Donner is granted as to liability. Independence's motion for summary judgment in its favor on its third cause of action for fraud against Leib Pinter is also granted as to liability. The assessment of actual damages, including attorneys fees, is deferred pending trial of the remaining causes of action.
All parties are directed to appear for further conference at 10 AM on September 27, 2007 in Room 756 of Supreme Court, Kings County.
This constitutes the decision and order of the court.
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J. S. C.