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Merrill Lynch Business Financial Services, Inc. v. Kupperman

2010 WL 2179181 (U.S. Dist. Ct. D. N.J. 2010) (Unpublished)

LOAN; FRAUD; RICO — A RICO claim based on loan fraud can be sustained even if there is no public harm, merely a scheme to defraud a financial institution.

A limited liability company obtained a bank loan, and the same company’s predecessor in interest obtained a loan from a second bank. Both banks alleged that the company’s principal and managing member intentionally overstated the company’s assets in order to obtain the loans and defraud the banks. The Court considered four motions for summary judgment, including one by the first bank against the principal for fraud and for state and federal racketeering violations, and the second against the other bank for a declaration that it held a first priority security interest with respect to the company’s assets; the others were by the second bank against the principal for fraud and against the first bank for the same priority declaration.

The first bank had extended a line of credit to the company based on financial statements proffered by its principal, purportedly audited by an independent firm. However, no such audit had been performed. The principal, in violation of the loan agreement, then transferred many of his company’s assets to a wholly-owned subsidiary in exchange for a promissory note. Later, despite the company’s ceasing its business activity, the principal continued to submit financial statements to the first bank in order to continue financing. When the bank asked the principal for the status of several ongoing lawsuits the company was involved in, the principal replied with a fictitious letter from an uninvolved law firm. Additionally, the principal submitted false personal financial statements of an associate in order to land a loan guarantee. When the company later filed for bankruptcy, the principal never told its bankruptcy counsel about the line of credit.

In a fraud claim, the plaintiff must show a material misrepresentation of fact; made with knowledge of its falsity; with the intention that it would be relied upon by the other party; reliance thereon by the other party to its detriment; and damages. The court considered each element and granted the first bank’s motion for summary judgment.

The principal was found to have misstated the financial position of the wholly-owned subsidiary when making applications for a loan and advances with the second bank. In part, the principal overstated receivables by reporting the full sale amount on commission transactions, rather than reporting only the earned commissions. Because the fraud count was similarly unopposed, the Court granted summary judgment on that count.

In considering the federal racketeering claim, the Court looked to whether there was sufficient evidence that the principal had been conducting a racketeering activity and whether the type of claim asserted was cognizable under the federal RICO statute. Because the principal committed various types of bank fraud by way of schemes to defraud a financial institution, it found racketeering activity. Additionally, the Court rejected the principal’s assertion that the RICO claim was inapplicable because there had been no public harm, noting that the Third Circuit had rejected any requirement for public harm. Thus, the bank was granted summary judgment on the federal racketeering claim as well as on a related state claim, since the state claim essentially mirrored the federal one.

The first bank then sought a first priority right to the company’s assets. In opposing the motion, and asserting a first priority right of its own, the second bank raised a number of arguments. First, it argued that the first bank lacked standing to assert a fraud claim because that claim belonged to the bankrupt company’s trustee. However, the Court found that the trustee had abandoned the claim by declining to pursue it. Accordingly, the first bank had independent standing. Next, the second bank claimed that the first bank had waived its claim by entering into a settlement with the trustee. However, the Court found that the relevant claims were specifically exempted from the settlement agreement. Third, the second bank argued that the first bank could not specifically identify the assets for which it claimed a secured interest, and similarly could not identify the proceeds that flowed from those assets. However, the Court found that the first bank did not need to identify the specific collateral proceeds in order to demonstrate priority.

Next, the Court rejected the second bank’s claim that the first had failed to point to a fraudulent transfer, because the Court found a series of indications that showed there had been fraud. Fifth, the Court found that the second bank did not qualify as a holder in due course because it collected the accounts receivable from the company after having received notice of the first bank’s security interest in those same assets. Finally, the Court found the first bank’s lien interest was superior because it had a pre-existing security interest in the company’s assets; and for the first bank’s judgment interest in that personal assets of the principal to be a superior one because it had obtained a writ of attachment before the second bank received one.


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