Opinion
107236/04.
Decided January 3, 2006.
John P. Gulino, P.C., Staten Island, New York, for Plaintiff.
Peter M. Levine, New York, NY, for Defendants.
This action is based upon a promissory note dated November 17, 1999, pursuant to which defendant Phoenix Hotel Associates Ltd. (PHA) promised to pay Reciprocal Capital Services (Reciprocal Capital) the principal sum of $12,000,000, with interest at 30% per annum (the Promissory Note). Defendants Condor Investment Group (Condor), Phoenix Hotel Associates, Ltd. (PHAL), and Central Adams Management Co. (CA) signed the Promissory Note as general partners of PHA. The note was subsequently assigned to plaintiff Phoenix Global Ventures, LLC.
Plaintiff now moves, pursuant to CPLR 3213, for summary judgment in lieu of complaint, in the amount of $15,600,000, upon the ground that this action is based upon an instrument for the payment of money only. For the reasons set forth below, plaintiff's motion is denied.
Plaintiff is a Connecticut limited liability corporation with two members who reside in New York. Defendant PHA is a California limited partnership that has two managing general partners defendant PHAL, a Nevada corporation, and defendant CA, a California corporation. Defendant Condor, a Delaware corporation, is one of several general partners in PHA.
Defendants executed the Promissory Note on November 17, 1999, originally promising to pay $12,000,000 to Reciprocal Capital. On September 24, 2000, Reciprocal Capital assigned the rights, title, interest and payments owed under the Promissory Note to plaintiff, pursuant to an Assignment of Note and Proceeds signed by plaintiff, defendants and Reciprocal Capital (the Assignment).
Plaintiff claims that, on October 28, 2003, Reciprocal, Condor, PHA, and non-party Phoenix Hospitality LLC delivered an Estoppel Certificate to it with respect to the Promissory Note. The Estoppel Certificate was signed by Dana Pierson, the corporate secretary for Condor, PHAL and CA, on behalf of defendants, and contains a statement that plaintiff is a holder in due course of the Promissory Note.
The Promissory Note provides that it is to be governed by, and in accordance with, the laws of California. The Assignment provides that it is to be governed by the laws of the New York. The Estoppel Certificate provides no governing law.
Plaintiff alleges that defendants failed to make the payments due on the Promissory Note, and that on February 27, 2004, plaintiff sent notice of default, as well as the acceleration of the debt, to each defendant by certified mail. Plaintiff alleges that the amount due under the Promissory Note is $12,000,000, together with interest accruing from December 1, 1999, for a total amount now due of $15,600,000.
On May 11, 2004, plaintiff initiated this action against defendants to recover the $15,600,000 owed on the Promissory Note. Plaintiff commenced this action by filing a Summons and a Notice of Motion for Summary Judgment in Lieu of Complaint. On June 16, 2004, I placed the motion in abeyance, based on plaintiff's failure to provide proof of defendants' consent to jurisdiction in the Supreme Court. While the motion remained in abeyance, on June 25, 2004, defendants PHA, Condor and PHAL filed a notice of removal, seeking to remove this action to the United States District Court for the Southern District of New York, pursuant to the federal removal statute ( 28 USC § 1441) and the federal diversity statute ( 28 USC § 1332). By order entered October 19, 2004, the District Court remanded the action back to this Court.
By letter dated March 14, 2005, counsel for plaintiff requested that judgment upon default be entered against defendants. After an exchange of correspondence by counsel, I ruled that the motion would be decided on the merits, and directed the parties to arrange a briefing schedule.
Plaintiff now moves for summary judgment in lieu of complaint on the Promissory Note, contending that this action is based upon an instrument for the payment of money only, which is now due and payable. In opposition to the motion, defendants contend that plaintiff is not a holder in due course of the Promissory Note, and that thus, the motion should be denied. For the reasons set forth below, the motion is denied, as defendants have raised issues of fact as to whether plaintiff is a holder in due course.
A holder in due course is a holder who takes the instrument for value, in good faith, and without notice that it is overdue or has been dishonored, or that it is subject to any defenses or claims (UCC § 3-302; Hartford Acc. Indem. Co. v. American Exp. Co., 74 NY2d 153; DH Cattle Holdings Co. v. Reno, 196 AD2d 670 [3rd Dept 1993]). Plaintiff bears the burden of establishing its status as a holder in due course ( see UCC § 3-307; First Intl. Bank of Israel, Ltd. v. L. Blankstein Son, Inc., 59 NY2d 436). If plaintiff is not a holder in due course, it takes the Promissory Note subject to all defenses of any party to the instrument (UCC § 3-306).
Under the Uniform Commercial Code, a holder in due course must first be a holder. A holder is defined in section 1-201 (20) as "a person who is in possession of an . . . instrument . . . drawn, issued or indorsed to him or to his order or to bearer or in blank" (UCC § 1-201). Defendants contend that plaintiff cannot claim the status of a holder in due course because, since the Promissory Note was not endorsed to it, plaintiff is not a holder as defined in section 1-201 (2).
Here, the Promissory Note is an instrument that was issued to Reciprocal Capital. The Promissory Note is not drawn or issued to plaintiff or its order. Rather, plaintiff is merely an assignee of the Note, who has possession of it. The mere possession of order paper does not transform a person into a holder ( Hartford Acc. Indem. Co. v. American Exp. Co., 74 NY2d at 159 ["Unless checks have been drawn to their order, possessors cannot be holders"]). Thus, because the Promissory Note is not indorsed to plaintiff, plaintiff is not a holder ( Marine Midland Bank, N.A. v. Price, Millers, Evans Flowers, 57 NY2d 220, 225 [by accepting check without indorsement, bank precluded "from being a holder, and thus a holder in due course"]; National Bank of North America v. Flushing Natl. Bank, 72 AD2d 538, 539 [1st Dept 1979] ["Without an indorsement, a transferee cannot be a holder"]).
Plaintiff does not contest that the Promissory Note was not indorsed to it ( see Tr. of Oral Argument, at 22-24). Nevertheless, plaintiff contends that the Estoppel Certificate, which provides that defendants are estopped from denying that "[plaintiff] is a holder in due course of the Note" (Aff. of Michael Milea, Exh D), converts it into a holder in due course. However, the statement set forth in the Estoppel Certificate that plaintiff is a holder in due course is merely conclusory and not binding ( American Inv. Bank, N.A. v. Dobbin, 209 AD2d 780, 781 [3rd Dept 1994] ["although the affidavit of Bernard recites that plaintiff is a holder in due course, on this record that allegation is conclusory"]).
Moreover, defendants present evidence that Dana Pierson did not have the authority to sign the Estoppel Certificate on behalf of Condor, PHAL or CA ( see Pierson Decl ¶¶ 5-7 [Pierson signed the Estoppel Certificate on behalf of Condor, PHAL and CA at the direction of her boss, Mark Cohn, who is now a convicted felon, and did not inform any shareholder, director or other officer of these corporate entities that she signed the Estoppel Certificate on their behalf]; Decl of Steven Cohn, ¶¶ 20, 30 [Mark Cohn had no authority to direct Pierson to sign the Estoppel Certificate on behalf of Condor, PHAL or CA, because he had resigned his positions with each of those corporation several months earlier as a result of his criminal prosecution]). These allegations raise issues of fact as to whether the Estoppel Certificate was authorized ( see Snukal v. Flightways Mfg., Inc., 23 Cal4th 754 [party seeking to enforce contract with corporation has burden of establishing contracting officer's authority to bind corporation]; see also Fleet Bank v. Consola, Riccitelli, Squadere Post No. 17, Inc., 268 AD2d 627 [3rd Dept 2000]), and thus whether, under those circumstances, the Estoppel Certificate can convert plaintiff into a holder in due course.
Defendants also present evidence that neither Reciprocal Capital, the original payee, nor plaintiff, gave consideration for the Promissory Note, thus raising an issue of fact as to whether plaintiff took the Promissory Note for value, as required by UCC § 3-303 ( see S. Cohn Decl, ¶¶ 22-27; 37-38; Pierson Decl., ¶¶ 14-15; see e.g. Saks v. Charity Mission Baptist Church, 90 CalApp4th 1116 [2d Dist 2001] [because Church never received funds advanced by the plaintiff, promissory notes were not supported by consideration and could not be enforced against Church]; Felt v. Olson, 74 AD2d 722, 723 [4th Dept], affd 51 NY2d 977 [to succeed on claim based on promissory notes, "it was necessary for plaintiff to prove that there was consideration for the notes"]).
Likewise, defendants raise issue of fact as to whether plaintiff took the Promissory Note in good faith, as defined in UCC 3-304 (7) ( see S. Cohn Decl, ¶ 8; Pierson Decl., ¶ 10), or whether, by taking the Promissory Note, a demand instrument, more than 6 years after its issue, it took the Promissory Note knowing it was overdue, in violation of UCC § 3-304 (3) (c) ( see Meeker v. Halsey, 87 F2d 299 [2d Cir 1937] [bank not holder in due course when demand note held for more than one year before being pledged]; Grossman v. Chechila, 127 Misc 151 [App Term, 1st Dept 1926] [transfer of demand note one year after its date was not made within a reasonable time]).
Therefore, because of the many issues of fact regarding the circumstances under which plaintiff/assignee took the Promissory Note, summary judgment must be denied ( see Advanta Business Services Corp. v. Five C's Hardware Paint Store, Inc., 256 AD2d 369 [2nd Dept 1998] [summary judgment denied as there were questions of fact as to whether assignee was a holder in due course]; American Inv. Bank, N.A. v. Dobbin, 209 AD2d at 781 ["Examination of the record indicates that questions of fact are raised requiring a trial as to whether [plaintiff/assignee] is a holder in due course of the instrument in question"]; Abco Refrigeration Supply Corp. v. TGS Corner Enterprises, Inc., 161 AD2d 414 [1st Dept 1990] [summary judgment denied in suit to collect on promissory note where plaintiff challenged assignee's alleged status as holder in due course]).
I have consider the remaining claims, and find them to be without merit.
Accordingly, it is
ORDERED that the motion to for summary judgment in lieu of complaint is denied; and it is further
ORDERED that defendant is directed to serve an answer to the complaint within 10 days after service of a copy of this order with notice of entry; and it is further
ORDERED that a pretrial conference will be held on Friday, January 27, 2006 at 10:00 a.m., in Part 60, Room 540, 60 Centre Street, New York, NY.