Sally Lewis; Marcelo and Mariana Pasqualis-Politi.
The statute of limitations under the securities laws of each of these states expired years before the foreclosure actions were filed.
See MD Corps and Ass'ns. Code Ann. § 11-703 (1985) (one year); Ohio Rev. Code Ann. § 1707.28 (Paige's 1985) (three years); N.J. Stat. Ann. 49:3-71(e) (1970) (two years); Va.Code Ann. 13.1-522 (1989) (two years). The federal securities law contains a statute of limitations one year from the date of the alleged violation or three years from the first public offering of the alleged security. 15 U.S.C. § 77m (1982).
After the statutes of limitations had run on the defendants' claims for violations of the securities laws by the plaintiff, those claims could no longer be asserted as defenses to a judgment in foreclosure. Under Pennsylvania law, as under federal law, a defendant may assert under the equitable doctrine of recoupment a defense which could not be asserted affirmatively as a counterclaim because of the bar of the statute of limitations. See Kline v. Blue Shield of Pennsylvania, 383 Pa.Super. 347, 556 A.2d 1365, 1368 n.3 (1989); Stulz v. Boswell, 307 Pa.Super. 515, 453 A.2d 1006, 1008-09 (1982) (Pennsylvania law); Provident National Bank v. United States, 507 F.Supp. 1197, 1203-04 (E.D.Pa.1981) (federal law). However, under Pennsylvania law, the defense asserted by way of recoupment must be related to the nature of the demand brought by the plaintiff.
Porter v. Levering, 330 Pa. 392, 395-96, 199 A. 482, 484 (1938). Accordingly, defendants' claims of securities law violations cannot be asserted even as defenses to Mellon's foreclosure actions because they are not part of or incident to the creation of the mortgage itself. Compare Household Consumer Discount Company v. Vespaziani, 490 Pa. 209, 415 A.2d 689, 693-96 (1980), (permitting the assertion of a violation of the Truth in Lending Act as a defense to collection of a loan), with Fleet Real Estate Funding v. Smith, 366 Pa.Super. 116, 530 A.2d 919, 924-25 (1987) (permitting the assertion of failure to follow HUD guidelines as defense to mortgage foreclosure, but rejecting the assertion of a violation of the Truth in Lending Act as a defense to mortgage foreclosure), and New York Guardian Mortgage Corp. v. Dietzel, 362 Pa.Super. 426, 524 A.2d 951, 953 (1987) (rejecting assertion of a counterclaim based on the Truth in Lending Act in a mortgage foreclosure).
Under the mutuality of demand requirement of Pennsylvania's recoupment doctrine as expressed in Porter v. Levering and implied in Household Consumer Discount Company v. Vespaziani, defendants' allegation of a securities law violation by Resort Development Corporation could be asserted as a defense to Mellon's actions on the notes if Mellon is not a holder in due course. See 13 Pa.C.S. § 3306(2). Mellon has the burden of proving, 13 Pa.C.S. § 3307(c), that there is no issue of material fact as to the three requirements of 13 Pa.C.S. § 3302(a), i.e., that it has taken the notes
(1) for value;
(2) in good faith; and
(3) without notice . . . of any defense.
I previously found, at the motion to dismiss stage, that Mellon was a holder for value of the notes. Slip opinion of August 31, 1989, at 5. Now, considering the uncontradicted testimony of Bruce Ostrom, Ostrom deposition, 48, 55, 58, Exhibits supporting Mellon's Motions for Summary Judgment, Exhibit I, docket no. 35, Mellon Bank has established the absence of a disputed issue of material fact as to its good faith and lack of notice. There is a total absence of evidence that Mellon was involved in marketing the condominiums and thereby in the alleged securities law violations. Ostrom additionally stated that Mellon had no knowledge of the means that Resort Development Corporation used to market its condominiums id., 55, and defendants have produced no evidence to the contrary. Defendants' argument that Mellon must be charged with knowledge of any securities law violation alleged to have been committed by Resort Development Corporation simply because of its earlier provision of construction financing was rejected by this circuit in Bankers Trust Co. of Western New York v. Crawford, 781 F.2d 39, 42-43 (3d Cir.1986); their argument that Mellon should be charged with such knowledge simply because it became the assignee of the notes from Resort Development Corporation after Resort Development Corporation's alleged violations must be rejected because Mellon's good faith is determined by its actual knowledge, not by a standard of negligence or duty to inquire. Valley Bank & Trust Co. v. American Utilities, Inc., 415 F.Supp. 298, 301 (E.D.Pa.1976).
B. Fraud in the inducement; unclean hands
Defendants' election to affirm their purchases, to continue to make payments on their mortgages, and to have the use of their condominiums long after the expiration of the same two year statute of limitations which barred defendants' fraud counterclaims, see slip opinion of August 31, 1989 at 8-9, also bars them from asserting the defenses of fraud in the inducement and unclean hands in the mortgage foreclosure actions, even under Pennsylvania's recoupment doctrine. Mellon's foreclosure actions seek an in rem judgment, Insilco Corp. v. Rayburn, 374 Pa.Super. 362, 543 A.2d 120 (1988); Peoples National Bank of Lebanon v. Noble, 338 Pa.Super. 177, 487 A.2d 912 (1985), and Pennsylvania law holds that the mutuality necessary to the assertion of a defense of recoupment against a judgment in foreclosure is absent in a claim of fraud in the inducement. See Chrysler First Business Credit Corp. v. Gourniak, Pa.Super. , 601 A.2d 338, 341-42 (1992) (action for fraudulent inducement is not part of or incident to the creation of the mortgage).
Under the doctrine of mutuality of demand expressed in Porter v. Levering and implied in Household Consumer Discount Company v. Vespaziani, Pennsylvania law might permit the assertion of a recoupment defense on the grounds of fraud in the inducement in the actions on the notes, which are actions in personam. Considering defendants' allegations of Mellon's unclean hands on their merits, however, defendants produce no evidence to show that Mellon was even aware of the alleged fraudulent scheme employed by Resort Development Corporation and the fraudulent sales pitches used by employees and agents of Resort Development. No evidence contradicts Ostrom's testimony establishing Mellon's good faith and lack of knowledge of Resort Development Corporation's fraud.
The defendants' evidence, which in some but not all respects is duplicative of the Bhatla record, indicates that the defendants themselves dealt almost exclusively with Jeff Wheeler, Resort Development Corporation's Vice President for Sales, or with salesmen employed by Wheeler, particularly Bob Sirianni and Art Larson. See Exhibits Supporting Mellon's Motions for Summary Judgment, Exhibit D (Combined Interrogatory answers of defendants/Bhatla plaintiffs). No evidence links the misrepresentations by the salesmen to any action by any employee of Mellon Bank. In Bhatla, the evidence was found to be insufficient to personally involve individual officers and employees of U.S. Capital Corporation and Resort Development Corporation in Wheeler's alleged fraudulent statements. The evidence in this matter is once removed even from that state of affairs, because the evidence of record indicates that the presumptively responsible officials at Resort Development Corporation and its parent, U.S. Capital Corporation, did not personally deal with Mellon Bank. See Bobo deposition, 22, 24-25 (Exhibits Supporting Mellon's Motions, Exhibit; K); Sease deposition, 23 (id., Exhibit L); Tomlin deposition, 38, 41) (id., Exhibit J). Once again, the uncontradicted evidence of record establishes that Mellon is a holder in due course of the notes.
Appropriate orders will be entered in each of these consolidated actions.
BY THE COURT,
D. Brooks Smith
United States District Judge
DATE: July 28, 1992