The opinion of the court was delivered by: Giles, C.J.
By Order of January 17, 2003, the United States Small Business Administration ("SBA") was appointed Receiver for Acorn Technology Fund, L.P. The Receiver was appointed for the purpose of continuing the operations of the limited partnership, including without limitation: managing its portfolio of investments; satisfying the claims of creditors and the sale of assets in the ordinary course of business; and defending and pursuing claims and causes of actions available to it. In the course of attempting to manage and recover all assets of the limited partnership, the Receiver discovered that Fleet National Bank *fn1 ("Fleet") held a certificate of deposit ("CD") in the name of Acorn Technology Fund, L.P. for the principal amount of $2.11 million.
On January 24, 2003, the Receiver made written demand upon Fleet for the release and turnover of the CD and any other funds held by Fleet in the limited partnership's name. Fleet refused to turn over the funds on the grounds that the CD was pledged as collateral for the guaranty of a loan extended to Princeton Valuation Consultants, L.L.C. As of September 18, 2002, an aggregate principal of $2,075,279.17 was owed to Fleet by Princeton Valuation Consultants, L.L.C.
This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1345. *fn2 The SBA, in its capacity as Receiver, has instituted the instant action under its vested power to bring suit on any causes of action on behalf of an entity placed in receivership. See 28 U.S.C. § 754.
Before the court is the Receiver's Motion to have the funds in the CD turned over to the Receiver and Fleet's Cross-Motion seeking leave of court to exercise its rights under the pledge agreement as a secured creditor of the CD or, in the alternative, to permit Fleet to create a constructive trust in its favor from CD funds. For the reasons stated below, the Receiver's Motion is granted and Fleet's Cross Motion is denied.
John B. Torkelsen ("Torkelsen"), his wife Pamela Torkelsen, and family members have an interest in and/or control of four business entities that are tied to this dispute over the $2.11 million currently held in a CD with Fleet. These companies are: Acorn Technology Fund, L.P. ("ATF"); Acorn Technology Partners, L.L.C. ("ATP"); Princeton Valuation Consultants, L.L.C. ("PVC"); and Princeton Technology Management, L.L.C. ("PTM"). Torkelsen's representations to Fleet regarding management fees that allegedly accrued between PVC and ATF form the underlying basis of the controversy. Neither Torkelsen nor his family members have testified in regard to this matter inasmuch as they are targets of a criminal investigation by the Department of Justice and have, therefore, properly invoked their Fifth Amendment rights. As a result, the briefs of the parties on both sides have relied upon Fleet's internal documents to support their claims and arguments.
ATF is a New Jersey Limited Partnership formed pursuant to a certificate of limited partnership filed with the Secretary of State of New Jersey on September 29, 1997. (Receiver's Mem. Supp. Turnover Ex. 8 FL-692.) The partnership was organized for the purpose of operating as a Small Business Investment Company *fn3 ("SBIC") subject to regulation by the SBA as provided for in the Small Business Investment Act of 1958, as amended, 15 U.S.C. §661 et seq. (Id. at Ex. 8 FL-724.) ATF's sole general partner is Acorn Technology Partners, L.L.C., ("ATP"). (Id. at Ex. 8 FL-692.) As an SBIC, ATF provides venture capital, usually as an early stage institutional investor, to start up technology companies that principally are in the fields of e-commerce, e-healthcare, information technology, and software development. (Id. at Ex. 4 FL-357, Ex. 6 FL-1880.) ATF was capitalized with contributions from the SBA and by individual private limited partners. (Id.) The SBA contributed its financing on a 2:1 ratio; the SBA contributed a two dollar match for every private dollar raised. According to ATF's year to date June 2000 financials, the SBA contributed $25.2 million in capital in participating securities. *fn4 (Id. at Ex. 6 FL-1886.) ATF's profit allocation plan requires that the SBA receive approximately 10% of the profit of investments acquired with SBA leverage upon liquidation of the investment; thereafter 25% to 30% of profits are to be paid to the general partner, ATP, with the remaining 65% to 55% of profits to be allocated among the limited partners. (Id.)
ATP is a New Jersey Limited Liability Company and serves as ATF's sole General Partner. (Id. at Ex. 6 FL-1880.) Torkelsen is the president and manager of ATP. (Id. at EX. 8 FL-771.) ATP is owned by several individuals with Pamela Torkelson as the primary shareholder. As General Partner, ATP is entitled to charge and collect annual management fees, as allowed by the SBA for operation of ATP's business affairs. (See Ex. 8 FL-744.)
PVC is a New Jersey Limited Liability Company whose ownership interests are structured as a Torkelsen family holding company with Pamela Torkelsen owning 80%, Leif Torkelsen, John Torkelsen's adult son, owns 10%. The Torkelsen Ladies, an unidentified group of investors, owns 10%. (Receiver's Mem. Supp. Turnover Ex. 6 FL-1880.)
PTM is a New Jersey limited liability company which is also structured as a Torkelsen family holding company with the same individuals owning interests in the same percentages as that of PVC. (Id.) PTM is the investment advisor to ATF and is responsible for hiring ATF personnel. (Id.)
In 2000 the credit demands of the Torkelsen controlled entities began to exceed the financial limits of the small banking institutions with which they were doing business. It was determined that these financial institutions were "of a size that proved to be an impediment for credit facilities." (Receiver's Mem. Supp. Turnover Ex. 4 FL-356.) Accordingly, Torkelsen sought to establish new banking relationships for his companies. (Id.) In August 2000, Torkelsen met with Jim Napoda ("Napoda"), then Account Officer and Vice President of Summit Bank ("Summit"), to discuss banking opportunities available through Summit. A lunch meeting with Napoda was arranged by Paul Shur and Rick Pinto, *fn5 Torkelsen's attorneys, at Torkelsen's office located at 5 Vaughan Drive in Princeton. (Id.)
Napoda concluded that the lunch meeting was a significant success. (Id.) Torkelsen discussed the venture capital firm he managed, the businesses controlled by the family, and the credit opportunities he wanted to explore with Summit, including a credit facility to PVC for tax-related purposes. (Id.) Beyond the borrowing needs of his companies, Torkelsen explained that he foresaw lending opportunities for Summit in the refinancing of an investment condominium in Lambertville, New Jersey owned by Pamela Torkelsen. (Id.) He also suggested that prospective opportunities existed in large cash balances maintained by the Torkelsens' companies. Torkelsen told Napoda that his companies regularly kept $4 to $5 million in balances in a combination of CDs or depository accounts. (Id.) He stated that Pamela Torkelsen was the owner of several retail stores, including The Golden Rhino located at 51 Bridge Street in Lambertville, New Jersey. (Receiver's Mem. Supp. Turnover Ex. 4 FL-356.) He described Pamela Torkelsen's other holdings as including a condominium in Phoenix, Arizona located in the Waterworks complex, valued at $700,000, and a horse breeding farm in New Hope, New Jersey. (Id.)
In Napoda's August 1, 2000 memorandum, he noted the advantages of a client relationship with the Torkelsens. He also documented the risks to Summit if a banking relationship were established. He observed that all financial statements submitted in support of a credit facility request would reflect that the Torkelsens' assets were listed primarily in Pamela Torkelsen's name or in Trust. (Id. at Ex. 4 FL-357.) He noted that he was told that, on the advice of counsel, ownership was transferred to Pamela Torkelsen after a consulting business owned by Torkelsen went into default. (Id.) He recorded that Torkelsen disclosed that he had incurred federal tax liens based on bad financial advice. (Id.) Napoda also noted that he had been told that those liens were being settled through negotiations with the Government and that it was expected that the liens would be settled for $500,000. In light of this information, Napoda formed the belief that profitable opportunities existed for Summit through the establishment of accounts and investment property loans, as well as the loans secured by CDs. (Id.) He felt that if he and his Summit team put their heads together and actively pursued Torkelsen they could "do something good for the customer and Summit." (Id.)
On August 21, 2000, Napoda and Torkelsen met again. This time, they met at the Torkelsen private residence in Princeton, New Jersey. Pamela Torkelsen participated in the meeting. The purpose of the meeting was to discuss financials relative to a residential mortgage for a condominium in New Hope, New Jersey. Napoda was affected by the appeal and charm of the Princeton residence as evidenced by his internal memorandum of that date. In part, he wrote that "the residence is the most impressive that I have seen in my many years here in Princeton." (Id. at 4 FL-298.) The beauty and expanse of the residence convinced him of the Torkelsens' success and wealth.
Torkelsen told Napoda that ATF planned to open a number of accounts with Summit and that the bank could expect that a number of other accounts would be opened on behalf of Pamela Torkelsen's businesses. (Id.) For this, Torkelsen asked Napoda to provide a credit facility fully secured by a CD for $2 million. (Receiver's Mem. Supp. Turnover Ex. 4 FL-298.) Napoda foresaw the credit facility as a bridge to Summit providing other profitable financial services to the Torkelsens. He recorded in his August 21, 2000, notes that "[t]he receipt of detailed financial information will give [Summit] a better understanding of the Torkelsen family and their various investments so that we can properly underwrite any and all facilities and be in a position to cross-sell the Bank's numerous services." (Id. at Ex. 4 FL-298.)
In September 2000, the application process for the loan to PVC was initiated. An internal Summit credit analysis was prepared by Steve Zajac ("Zajac"), a loan officer. (Id. at Ex. 6 FL-1880-1882.) Zajac recommended that Summit lend PVC $2 million on the condition that the loan be fully secured by a $2.2 million liquid Short Term Investment Management ("STIM") account. (Id. at Ex. 6 FL-1882.) The $2.2 million would cover the principal and one year of interest for the term loan. (Id. at Ex. 6 FL-1881.) It was anticipated that ATF would provide the necessary collateral by funding the STIM account from its own cash assets. The analysis recorded that the purpose for the loan was reimbursement for outstanding fees which totaled $8.4 million. This amount was supposedly owed by ATF to PVC for managing the operations of ATF. Significantly, the analysis also identified the SBA regulations that required ATF to reserve $5 million of capital as cash. Therefore, the analysis concluded that direct payment to PVC was possible only if holdings of ATF matured for liquidation. (Id. at Ex. 6 FL-1880-81.)
Zajac's analysis showed that a management fee agreement existed between PVC and ATF that called for ATF to pay management fees to PVC when its investments were liquidated. However, the timing of such a liquidation could not be predicated with any accuracy and was further complicated by the performance of each investment. (Id. at Ex. 6 FL-1882.) Zajac opined that "while ATF may provide significant cash flow from future capital gains, the nature of ATF's investments is highly risky and the liquid collateral is appropriate." (Id. at Ex. 6 FL-1882.) Nevertheless, PVC was not entitled to management fees since it was not ATF's General Partner. (See id. at Ex. 8 FL-744) Summit chose not to question this irregularity and totally disregarded the document trail that showed that PVC was a Torkelsen family holding company wholly unrelated to ATF. Summit chose to accept Torkelsen's representations as to PVC's need for the loan and chose to rely on the CD to cover its exposure to risk.
A copy of ATF's Limited Partnership Agreement as well as financials purporting to show creditworthiness were supplied to Summit on behalf of PVC for the period ending December 31, 1999. (Id. at Ex. 6 FL-1883-84; Ex. 7.) The detailed income statement, prepared on a cash basis, reflected a net loss of $447,000 with operating expenses of $2.669 million. This exceeded revenues of $2.222 million. (Id. at Ex. 6 FL-1884.) The income statement for 1999 was not footnoted with any explanation that professional fees, a line item expense, should be offset by a receivable for fees owed by ATF to PVC. A detailed balance sheet for PVC for the period ending December 31, 1999, reported negative net worth of $452,000 based on $842,000 in total assets against $1.294 million in liabilities. (Id. at Ex. 6 FL-1883.)
The loan package materials also included financials for ATF for periods ending December 31, 1998, December 31, 1999, and year to date June 30, 2000. (Id. at Ex. 6 FL-1887-90.) The detailed income statement for ATF reported a net loss in 1998 of $1.647 million, a net loss in 1999 for $1.169 million, and a net loss of $1.285 million as of June 30, 2000. (Id. at Ex. 6 FL-1887.) ATF's balance sheet did not reflect management fees owed to PVC.
On September 18, 2000, Torkelsen instructed Zajac by letter that PVC would be the borrower for the Torkelsen controlled entities and that collateral for the STIM account would be provided by ATF. (Id. at Ex. 7 FL-345.) This letter advised that all documents executed on behalf of ATF would have Torkelsen sign as Manager of ATP, the general partner of ATF and that Pamela Torkelsen, as president of PVC, would execute all documents on behalf of PVC. (Id.)
Over a three day period in September 2000, Torkelsen authorized the deposit of approximately $2.621 million into a checking account opened at Summit. (Receiver's Mem. Supp. Turnover Ex. 9 FL-400-03, 405-07, 396.) Thereafter, at least that amount was transferred to the STIM account established in ATF's name as collateral for the PVC loan. (Id.)
On September 28, 2000, a loan agreement and a private bank promissory/credit note were executed between Summit as lender and by PVC as the borrower for $2 million. (Id. at Ex.11 FL-1221-23, 1224-29.) Pamela Torkelsen and Leif Torkelsen, as mangers of PVC, were signatories to the loan documents. (Id. at Ex. 11 FL-1221-23, 1224-29.) Repayment was to be made in a single payment on September 28, 2001. Simultaneously, a private bank pledge and a security agreement were executed between ATF and Summit. Pursuant to this document, ATF agreed as pledgor to guarantee payment of all amounts due under the PVC note. (Receiver's Mem. Supp. Turnover Ex. 12 FL-1178.) Torkelsen signed these documents as manager of ATP and as the general partner of ATF. (Id. at Ex. 12 FL-1180.) A certificate of limited partnership authorization was also executed which stated that ATP was authorized on behalf of ATF to execute and deliver to Summit a guaranty. (Fleet's Mem. Opp'n. Turnover Ex. I.) Torkelsen was the sole signatory to this certificate. Summit accepted his representations through the certificate fully and without question and did not determine through independent investigations whether SBA authorization had actually been issued permitting this transaction. Shortly thereafter, Summit issued to PVC three separate treasurer's checks totaling $2 million. (Receiver's Mem. Supp. Turnover Ex. 13.)
Two weeks after the loan proceeds were disbursed to PVC, Summit sought character references on Torkelsen. Summit chose not to seek the aid of counsel during the review period of PVC's loan application (Id. at Ex. 14 FL-342), and Summit did not avail itself of counsel to investigate the corporate structures of PVC, or its purported guarantor, ATF. (See Ex. 6 FL-1878; Ex.18 FL-1625.)
By October 2000, Summit was pursuing the prospect of lending PVC another $1 million. (Id. at Ex. 15 FL-2365.) In anticipation of approval, Torkelsen authorized an October 3, 2000, wire transfer of $1.5 million drawn from ATF's California Bank and Trust account. This transfer was deposited in the STIM account that was previously established as the collateral for the credit facility extended to PVC. (Id. at Ex. 17 FL-390-91.) Notwithstanding the substantial deposit to the STIM account, the request for another credit facility required Summit to assess the current loan request and to re-evaluate the credit facility approved in the prior month.
On October 17, 2000, a conference call *fn6 was held with Summit loan officers and the Torkelsen accountants to discuss the purpose of the previous $2 million loan to PVC and the recent loan request for an additional $1 million. (Id. at Ex. 15 FL-2368.) Zajac authored an internal memorandum, which recorded his recollection of the conference. Zajac noted that he was told that ATF was not in a position to pay PVC for the various fees and expenses since ATF's assets were fully committed in a variety of investments with holding requirements for periods of one to five years. (Id.) Further it was stated that all expenses and fees were expected to be repaid when the ATF investment portfolio was partially or fully liquidated, thereby creating a large cash flow which could be down streamed to PVC. (Id.) Zajac noted that Summit was also told that ATF was restricted from borrowing the funds directly to reimburse PVC because borrowing was limited under its charter as an SBIC and the SBA's regulations under which it operated. (Id.)
Napoda, who also participated in the conference call, prepared an internal memorandum dated October 17, 2000. He recorded that Torkelsen's accountants stated that the purpose of the new loan was to defer tax consequences related to the liquidation of investments held by ATF and to preserve any available cash for prospective investments while the purpose of the former loan was to cover expenses or management fees owed to PVC. (Id. at Ex. 16 FL-323.) The accountants stated that ATF was not in a position to pay PVC management fees until an investment was liquidated. Therefore, the purpose of the loans was to cover timing difference and accruing management fees. (Id.)
Subsequent to that call, a Summit loan offering analysis dated October 19, 2000 was prepared. It recommended approval for the loan of an additional $1 million to PVC. (Id. at Ex. 18 FL-1623.) On October 25, 2000, a $1 million loan agreement and private bank promissory/credit note between Summit and PVC were executed. (Id. at Ex. 19 FL-1243-48, 1249-51.) As with the initial loan made to PVC, the payment schedule called for the principal to be paid in a single payment on September 28, 2001. Torkelsen again executed a private bank pledge and security agreement which pledged the ATF assets held in the STIM account as collateral for the loan extended to PVC. (Id. at Ex. 20 FL-1234-36.) On October 27, 2000, Summit issued a check in the amount of $1 million to PVC. (Id. at Ex. 21.)
On December 28, 2000, Torkelsen executed, on behalf of ATP, a private bank collateral assignment of deposit account agreement and a pledge and security agreement. Together, these documents authorized the transfer of $3.075 million, a substantial portion of the monetary value held in the STIM account, to a Summit Jumbo CD and pledged these assets as collateral for the two loans extended to PVC. (Id. at Ex. 22 FL-1193-94; FL-1188-90.)
In 2001, Summit was acquired by Fleet. Shortly after acquisition, the Private Client Group along with other departments within Fleet initiated a review of the loans extended to PVC. The review was performed in advance of the September 28, 2001 maturity date. (Id. at Ex. 28 FL-1966.) Fleet's internal review was precipitated by a concern that the Summit loans had not been appropriately structured and that the SBA had not approved ATF's guarantees of the Summit loans. (Id. ) Linda King, a Fleet loan officer, was especially concerned about financial statements submitted by ATF. In an internal memorandum dated August 1, 2001, she wrote:
We recently received 2000 financial statements from ATF (audited) and PVC (internally prepared) as well as 2000 tax returns for ATF. In reviewing these financials, we noted a couple of items that we did not understand in view of the original purpose of the loan. AFT's balance sheet as of 12/31/01 (sic) does not include any fees or other items payable to PVC nor does PVC's balance sheet indicate fees payable from AFT. We also noted that ATF's financial statements contain no disclosure of the collateral pledged in support of our loan to ATF. In addition to these financial statement items that were not as we expected, ATF's financial statement indicated that PVC is no longer a limited partner in ATF.
Pursuant to Fleet's evaluation, Lydia C. Stefanowicz, an associate attorney with Drinker Biddle and Shanley L.L.P., was asked to review the loan documents and all related corporate documents so as to "insure that Fleet's interest was properly perfected and the loan to PVC was otherwise properly documented." (Id.) Stefanowicz reviewed the various loan documents, the SBA regulations regarding loans and management fees, borrower and guarantor organizational documents, financial statements, and a term sheet for a loan extension to PVC. (Id. at Ex. 25 FL-1913-16.) Despite knowledge of the SBA requirement for SBA written approval, she concluded that Fleet was adequately protected by its loan documents and that Fleet's collateral position regarding the pledged CD was properly perfected. (Id. at Ex. 28 FL-1966.)
The Private Client Group subsequently met with Torkelsen to discuss his intentions for repayment by the September 28, 2001 maturity date. (Id. at Ex. 28 FL-1966.) Torkelsen reported that the debt could not be paid by the designated due date. He explained that his liquidity problems were tied to a poor performing 2001 IPO market. ATF was reportedly prevented from taking any of the companies in which it invested to the public market. As a result, a source of repayment was not available and additional time would be needed to arrange refinancing to liquidate the debt with Fleet. (Id. at Ex. 28 FL-1966.) Torkelsen said he hoped that repayment would come from leveraging real estate owned by Pamela Torkelsen and that this could be accomplished by the end of the year. (Id. at Ex. 28 FL-1966.)
On September 28, 2001, an amendment to the loan and security agreements between Fleet and PVC was executed, which consolidated the two loans into one loan of $3 million and extended the maturity date from September 28, 2001 to a new maturity date of December 31, 2001. (Id. at Ex. 27 FL-1260-64; Ex. 28 FL-1966.) Pursuant to this agreement, principal and interest payments were scheduled out on an installment basis with $500,000 due by October 31, 2001, $1 million due ...