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SHULMAN v. CONTINENTAL BANK

May 8, 1981

Martin SHULMAN & Harry Shulman
v.
CONTINENTAL BANK



The opinion of the court was delivered by: GREEN

MEMORANDUM

This lawsuit arose out of a loan agreement between the plaintiffs, Martin and Harry Shulman, and the defendant, Continental Bank. In the complaint, consisting of five counts, plaintiffs allege claims for violations of the Bank Holding Company Act, 12 U.S.C. ยง 1971 et seq., breach of contract, unjust enrichment, fraudulent misrepresentation and punitive damages. The defendant bank has moved for summary judgment pursuant to Fed.R.Civ.P. 56. I have determined that genuine issues as to material facts exist as to Counts II, III, IV and V, so I will deny the defendant's motion on these claims. Regarding Count I, however, there are no material facts in dispute, and defendant is entitled to summary judgment on that claim as a matter of law.

 For many years a very profitable operation, STE suffered significant financial losses in 1976 and 1977. As a result, by June, 1977, the company required additional financing. The March 9, 1977 loan agreement was amended to increase the line of credit by $ 750,000.00 to an aggregate of the lesser of $ 7,250,000.00 or 75% of the accounts receivable eligible under the formula set forth in the original agreement. The amendment, dated June 24, 1977, also required STE to provide additional security in the form of a first mortgage on some Massachusetts real estate and security interests in all the accounts receivable, inventory, contract rights and general intangibles of STE's nine foreign subsidiaries.

 The fortunes of STE continued to decline, and in February of 1978, STE approached Continental Bank about an additional loan. The bank, however, refused to advance additional funds unless STE first received a substantial amount of capital from another source. Attempting to find other sources of financing STE asked its largest creditor, American Airlines, for a loan. In a March 22, 1978 meeting attended by representatives of STE, Continental and American Airlines, the terms of a proposed $ 1,500,000.00 loan were discussed. If American would loan the $ 1.5 million to STE, the bank would allow STE to give security to American in the form of accounts receivable over ninety days old and two parcels of real estate. *fn1" American Airlines refused to make the loan.

 Unable to find another source of funds, plaintiffs Martin and Harry Shulman asked the president of Continental, Roy Peraino, if the bank would be willing to make an additional loan to the STE if they personally were to make a substantial loan to the company. The Shulmans and Continental subsequently entered into a loan agreement; this agreement is the subject of the instant litigation. Even a cursory reading of the briefs submitted in connection with this motion reveals disagreement about both the terms of this loan agreement and whether or not the parties have performed under those terms.

 The complaint alleges that the Shulmans and Continental entered into a contract whereby the Shulmans agreed to put up $ 1.3 million, which would be used to purchase a junior participation in the bank's existing loan to STE, and STE agreed to put up additional collateral in the form of two pieces of real estate in consideration for which the bank would loan STE an additional $ 1 million. It is undisputed that on March 30, 1978, representatives of Continental met with Harry and Martin Shulman to negotiate the loan agreement. The parties also agree that on April 11, 1978, they signed a document entitled "Junior Participation and Subordination Agreement" ("J.P.A.") and that on May 8, 1978 the representatives of the bank and of STE signed a document entitled "Second Amendment to the Loan and Security Agreement ("Second Amendment")." *fn2" According to plaintiffs, these two documents, the J.P.A. and the Second Amendment, "when read together, evidence the Contract". (p.2, Plaintiffs' first Post-Argument Memorandum). Plaintiffs assert that while both STE and they performed their parts of the contract, Continental, despite repeated demands from STE, has never loaned STE any portion of the $ 1 million.

 Defendant disputes plaintiffs' characterization of the contract. It is Continental's position that the J.P.A. and the Second Amendment set forth clearly and unambiguously the terms of the agreement. *fn3" Those documents show, according to defendant, that plaintiffs indeed agreed to provide STE $ 1.3 million via a participation in Continental's existing loan to STE, but the bank's obligation to provide the additional $ 1 million to STE did not arise unconditionally. Continental claims that under the agreement several conditions had to be fulfilled before the bank was obligated to make available the $ 1 million. First, the Shulmans had to provide all of the $ 1.3 million; according to the bank, the last payment was not made by plaintiffs until June 12, 1978. A second condition of the loan agreement, according to Continental, was that STE had to ask the bank for the money. The bank alleges that neither STE nor any of its subsidiaries ever made such a request after June 12, 1978. Continental further contends that even if the company had made a request, under the agreement, the bank did not have to honor the request because STE did not have sufficient collateral as required by the accounts receivable formula.

 According to defendant, the Second Amendment incorporates the accounts receivable formula set forth in both the original loan agreement and the first amendment except it extends the potential line of credit from $ 7,250,000.00 to $ 8,250,000.00 and changes the applicable percentage of accounts receivable from 75% to 85%. While it is never stated directly, the bank's position appears to be that it was committed on receipt of the 1.3 million participation from plaintiffs to loan to STE the lesser of $ 8,250,000.00 or 85% of the company's accounts receivable less than ninety days old. Continental has submitted an affidavit of Edward V. Caruso, an executive vice-president of Continental Bank, which states that a collateral statement given the bank by STE on June 15, 1978 showed that as of May 27, 1978, 85% of the accounts receivable available for collateral amounted to $ 5,534,028.00 while the outstanding loan was in the amount of $ 5,250,000.00. Similarly, according to a STE collateral statement submitted to the bank on July 21, 1978, 85% of the relevant accounts receivable was $ 5,206,820.00 while the outstanding loan to the company was $ 5,250,000.00. Given these figures, defendant argues, even if STE had made the proper requests it would not have been entitled to receive any of the $ 1 million loan commitment.

 Plaintiffs dispute the claims of Continental in several respects. First, the Shulmans deny that the bank's obligation to loan the $ 1 million was tied to an accounts receivable formula. Indeed, plaintiffs argue that the language of the Second Amendment shows that the $ 1 million was part of a $ 2 million loan tied to fixed assets and was not dependent on accounts receivable collateral. *fn4" Alternatively, plaintiffs assert that even assuming that the accounts receivable formula applied, they in fact made their last payment on May 12, 1978 when Harry Shulman pledged to the bank common stocks and bonds worth $ 725,000.00 as payment for the remaining $ 412,000.00 owed.

 Plaintiffs also dispute defendant's claims regarding the applicable collateral statements for determining loan availability. As the Shulmans point out, defendant has not identified any provision in the loan agreements which states which collateral statement will govern loan availability at any given time. Continental argues that the July 21, 1978 collateral statements prove that STE was not entitled to any of the additional $ 1 million loan while plaintiffs argue that the collateral statements of May 1, 1978, May 23, 1978 and June 15, 1978, showing loan availability in the amounts of $ 793,619.00, $ 675,087.00 and $ 284,028.00 respectively, establish that the bank was required to make available part of the $ 1 million.

 I turn now to an analysis of the issues raised by the instant motion. The standards governing a motion for summary judgment are well settled; however, a few observations about those principles bear repeating here. Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." The moving party carries the initial burden of establishing that there is no genuine issue of material fact, Adickes v. S. H. Kress & Co., 398 U.S. 144, 159-60, 90 S. Ct. 1598, 1609-10, 26 L. Ed. 2d 142 (1970), and all inferences from the evidence must be drawn in favor of the party opposing the motion. Small v. Seldows Stationery, 617 F.2d 992, 994 (3d Cir. 1980). Further, summary judgment is not appropriate if there is "the slightest doubt" concerning the material facts. Tomalewski v. State Farm Life Insurance Co., 494 F.2d 882, 884 (3d Cir. 1974). Viewing the record in this case in light of these precepts, I find that the plaintiffs, the parties opposing the motion, have identified material facts which are in dispute, precluding summary judgment on the claims for breach of contract, unjust enrichment, fraudulent misrepresentation and punitive damages.

 THE BANK HOLDING COMPANY ACT CLAIM

 Plaintiffs Martin and Harry Shulman allege that the defendant bank violated Section 1972(1)(C) of the Bank Holding Company Act (the "Act") when it required them to provide $ 1.3 million, in the form of a junior participation in the bank's loan to STE, as a condition for extending further credit to the company. *fn5" In response, defendant asserts that it did not require plaintiffs to enter into a junior participation agreement but rather conditioned any additional loan on STE's first obtaining substantial capital from another source. Continental maintains it never asked the Shulmans to put up their own money but that the Shulmans decided themselves to provide the additional money. Moreover, it is the bank's view that a requirement that a potential borrower acquire capital from other sources is not an unusual banking practice, and therefore, as a matter of law, this case does not involve a violation of Section 1972(1)(C) of the Bank ...


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