Appendix — U. S. Steel Credit Corp. v. American Fletcher Mortgage Co.
Supreme Court brief1981
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_—
Qitice: Supreme Court, U.S,
a, tk B&B D
80-1484 FEB 27 1981
No.
ALEXANDER L. STEVAS,
=.
In the
Supreme Court of the Anited States
October Term, 1980
U. S. STEEL CREDIT CORPORATION,
: Petitioner.
vs.
AMERICAN FLETCHER MORTGAGE COMPANY,
INC., AMERICAN FLETCHER NATIONAL BANK
AND TRUST COMPANY, and
AMERICAN FLETCHER CORPORATION,
Respondents.
APPENDIX TO PETITION FOR WRIT OF
CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE SEVENTH CIRCUIT
(Seventh Circuit Nos. 80-1485, 80-1719)
Wituiuam A. Wick
1000 Merchants Bank Building
11 South Meridian Street
Indianapolis, Indiana 46204
(317) 632-1348
Attorney for Petitioner
Of Counsel For Petitioner:
NicHoias C. NizaMorr
Waite, Ravs, Reis, Wick, & Rrmcner
1000 Merchants Bank Building
11 South Meridian Street |
Indianapolis, Indiana 46204
i
The Scheffer Press, Inc.—(312) 263-6850
CONTENTS OF APPENDIX
Pace No.
1. Court of Appeals Opinion dated 11/3/80 .... 1a-l5a
2. District Court Order of 3/21/80 oou.eeeeese 16a-22a
3. Amendment of 3/21/80 District Court
Re AE I le RC A aN BRON ce I 23a-25a
4. Court of Appeals Judgment Entry dated
eG RRA ee RUS ART AOR ce OF 26a
0. Court of Appeals Order Denying Re-
SPELLS TVS CRE WA Seater 8 ONE mal ee 27a
6. Amended Counterclaim (omitting counts IT,
RE IT Fi ices ciaivinsicansitsspbinnnidesdcynaedeistiaseuinbucen 28a-4la
7. Participation Offerings
ie Se RINE Gulbiphosncschcenissthinnaptiioiclgtinabibbednceniniat 412-43a
i UNE IID, sasiccciscisciceassirccindininersdesctenias 43a-45a
8. Participation Agreement Construction
ey = sasaseariaiicoih tlle nh lntdaoesacdetinini ceiesisanmiyetiidetemesee ni 45a-49a
9. L&D Loan Commitment ...........cccssesscscseeeeeees 0a-52a
10. Construction Loan Commitment ..........ccccce 53a-56a
11. Building Loan Agreement ..........cccccceseseseseees 57a-70a
12. Note for L&D Loan ........: i cunctpabaniabasateacenipipaianaies 71a-72a
13. Note for Construction Loan .........cccccceeseeeees 73a-74a
14. Motion to Dismiss or for Judgment on
Pleadings on Securities Laws Claims ............ 75a-76a
15. U.S. Steel Credit’s Cross-Motion for Sum-
mary Judgment that its Participations were
MII © si csissalatinisateesttinbabditicaghibsnasbsacennsacovishets 77a-78a
16. Affidavit of Nicholas C. Nizamoff .............0.0... 79a-89a
17. Supplemental Affidavit of Stanley J. Mack .... 90a-92a
- je —
APPENDIX
In THE
UNITED STATES COURT OF APPEALS
For The Seventh Cireuit
Nos. 80-1485, 80-1719
AMERICAN FLETCHER MorTGAGE Company, Inc., and
AMERICAN FLetcHER Nationa, Bank Anp Trust
Company,
Plawmtiff s-A ppellees,
vs.
U. S. Srezx Crepir Corporation,
Defendant-Counterclaimant
(Appellant),
vs.
AMERICAN FLeTcHER Mortcace Company, Inc., AMERICAN
FLercHeR Nationa, Bank Anp Trust ComMPANy and
AMERICAN FLETCHER CoRPORATION,
Counterdefendants
(Appellees ).
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. IP 76-276-C-——-Wittiam E. Sreckter, Judge.
Hearp Sepremser 23, 1980—Derciwep Novemser 3, 1980
Before Cummines and Woon, Circuit Judges, and Camp-
BELL, Senior District Judge.*
* The Honorable William J. Campbell, Senior District
Judge of the Northern District of Illinois, is sitting by
designation.
—
~ Cummines, Circuit Judge. In this diversity case, defen-
dant U.S. Steel Credit Corporation appeals in No. 80-1719
from the district court’s interlocutory orders denying de-
fendant’s motion for partial summary judgment on plain-
tiffs’ amended and supplemental complaint and defen-
dant’s motion for a summary judgment declaring the loan
participations in issue to be ‘‘securities’’ within the mean-
ing of federal and Indiana securities laws, and in No. 80-
1485 from the district court’s final order dismissing the
securities fraud counts of defendant’s amended counter-
claim. We affirm.
l. Introduction
On April 10, 1976, plaintiffs brought this action to re-
cover monies allegedly disbursed on behalf of defendant
U. S. Steel Credit Corporation (Steel) pursuant to cer-
tain loan participation agreements. The facts according
to the amended and supplemental complaint are as follows:
In 1973, the American Fletcher Mortgage Company
(Mortgage Company) agreed to make two loans totaling
$5,820,000 to Justin Development Corporation to acquire
land in Cromwell, Connecticut, and construct residential
condominiums thereon. In the same year the Mortgage
Company entered into participation agreements with de-
fendant Steel, American Fletcher National Bank (Bank)
and American Fletcher Mortgage Investors Trust (Trust).
Those three institutions agreed to supply the funds to
the Mortgage Company for disbursement to the borrower
in shares of 40% by Steel, 10% by the Bank, and 50% by
the Trust. The three participants were to receive payments
of principai and interest from the borrower equal to their
proportionate shares of the loans.
In 1974-1975, the project encountered adverse economic
conditions. Therefore, in March 1975 the Mortgage Com-
pany proposed an increase of the loans to provide neces-
sary funds. By the end of April 1975, the Mortgage Com-
pany’s proposal had been approved by the Bank and the
Trust, but not by Steel, which failed to respond to the
proposal throughout the summer of 1975. Consequently,
== $a
the Mortgage Company was wnable to implement the pro-
posal, and the borrower fell into default on its obligations
to the lenders and its general contractor.
On October 10, 1975, the Mortgage Company, with the
consent of the three participants, entered into a settle-
ment with Justin, its general contractor and the loan
guarantors. Under the settlement, the Mortgage Company
took title to the project and disbursed funds due the
general contractor and various creditors of Justin and
generally released Justin, the general contractor and the
guarantors. At that time, less than 50 of the project’s
units had been completed and the rest were still under
construction. No sales could be closed without the prompt
completion of additional units. After the settlement, Steel
demanded that the Mortgage Company’ purchase its in-
terest at an inflated price.
In conjunction with the settlement and prior thereto,
the Mortgage Company disbursed $734,929.59 from loan
proceeds on behalf of the three participants. Steel has
failed to reimburse the Mortgage Company in the amount
of $293,962.83, its 40% share of the disbursements, which
the Mortgage Company claims to have been due from
Steel as of October 16, 1975. As of February 28, 1978,
the Mortgage Company had expended an additional $400,-
541.73 to preserve the project, and Steel therefore alleged-
ly also owes the Mortgage Company 40% of those ex-
penditures, namely $160,216.69.
In March 1976, the Mortgage Company made a forma]
proposal to Steel to develop the project by constructing
certain condominium units and engaging in an April 1976
marketing program. Steel did not respond to the proposal,
which was approved by the Trust and the Bank, until
after the summer of 1976, by which time the prime con-
struction and selling season had passed, thereby resulting
in a further decline in the project’s value.
In January 1977, Steel gave conditional agreement to
a proposal to list the project for sale ‘‘as is’’ for $1,700,-
000. For the next three months, however, Steel refused
——_
to give its formal consent unless the Mortgage Company,
the Bank and the Trust agreed to waive all claims they
had against Steel. This further delayed disposition of the
project so that the Mortgage Company was unable to
find a buyer even at the $1,700,000 price.
The plaintiffs then proceeded to file their amended and
supplemental complaint. In Count I, the Mortgage Com-
pany sought damages of $454,179.52" (plus additional dam-
age sustained after February 28, 1978) plus interest and
costs for Steel’s alleged breach of its express and implied
obligations under the participation agreements. The Bank,
as a third-party beneficiary and as assignee of the third-
party beneficiary Trust, also requested judgment on this
Count for damages in an unspecified amount.
In Count II, the Mortgage Company sought the same
amount of damages as under Count I plus $1,000,000 pu-
nitive damages for Steel’s alleged interference with the
Mortgage Company’s contractual relationships with the
Bank and Trust. The Bank on the same theory requested
compensatory damages plus $3,000,000 punitive damages.
In Count ITI, the Bank, in its own right and as assignee
of the Trust, requested actual damages plus punitive dam-
ages of $3,000,000 for Steel’s alleged breaches of its du-
ties to the Bank and Trust as co-participants in the finan-
cing of the project.’
On January 8, 1979, Steel filed an amended counter-
claim against plaintiffs and an amended claim against
counterdefendant American Fletcher Corporation (AFC),
‘This sum represents the $293,962.83 due the Mortgage
Company as of October 16, 1975, and the $160,216.69 due
the Mortgage Company as of February 28, 1978. These
amounts reflect Steel’s 40% share of the disbursements
by the Mortgage Company.
*A fourth count, alleging abuse of process, was dis-
missed by stipulation on January 31, 1980 (R. Vol. IT at
382). The fourth count of Steel’s amended counterclaim
also alleged abuse of process and was dismissed by the
same stipulation.
— “ae
the parent corporation of the plaintiffs. In Count I of
this pleading, Steel alleged that on October 1, 1973, the
Mortgage Company forwarded to Steel participation of-
ferings in loans for the acquisition and construction of
the condominium project in Cromwell, Connecticut. In
this pleading Steel described the participation offerings
as securities as defined in Section 3(a)(10) of the Seen-
rities Exchange Act of 1934 (15 U.S.C. § 78(a)(10)) and
in Section 2(1) of the Securities Act of 1933 (15 U.S.C.
§ 77(b)(1)). Steel accepted these ‘‘Security Offerings’’
on October 27, 1973, by executing and sending the Mort-
gage Company two participation agreements. Both par-
ticipation agreements were executed by the Mortgage Com-
pany and dated December 31, 1973.
Steel asserted that its acceptance was conditioned upon
the understanding that the Mortgage Company would not
close the Cromwell loans or call upon Steel to make dis-
bursements until Justin had complied with all conditions
precedent under the loan agreements. According to Steel,
the Mortgage Company closed the loans even though
Justin had not satisfied the conditions precedent. Stee!
claims that it was therefore not bound to advance any
monies on the Cromwell loans and that its advances in
response to the Mortgage Company’s draw requests con-
stituted an investment in securities governed by Section
10b of the Securities Exchange Act (15 U.S.C. 4 78j(b)),
S.E.C. Rule 10b-5 (17 C.F.R. § 240.10(b)-5) and Seetion
17 of the Securities Act (15 U.S.C. § 77q).
Steel further alleged that at the time the participation
agreements were entered into and during the period prior
to mid-June 1975, the Mortgage Company had misrepre-
sented certain material facts and omitted to disclose cer-
tain other facts in violation of Section 10b of the 1934
Act, S.E.C. Rule 10b-5 and Section 17 of the 1933 <Aet,
causing Steel to advance $2,306,448.07 to the Mortgage
Company pursuant to the agreements. In Count I Stee!
accordingly sought that amount in damages plus prejudg-
ment interest and costs.
—
Counts V-VIII asserted securities claims in the same
amount against the Bank and AFC as ‘‘controlling per-
sons’’ and aiders, and abettors of the Mortgage Com-
pany’s alleged securities law violations.» By a second
amendment on April 10, 1979, Steel added Counts IX-
XI, alleging similar violations of the Indiana ‘‘Blue Sky”’
law (§§ 23-2-1-12 and 23-2-1-19(a) of the Indiana Code).
On March 20, 1980, the district court denied Steel’s
motion for partial summary judgment on Counts I, II
and III of the amended and supplemental complaint and
subsequently issued a certificate for interlocutory appeal!
under 28 U.S.C. § 1291(b). On April 24, we granted leave
to appeal, and that portion of the case was docketed here
as No. 80-1719.
On March 21, 1980, the district court granted plain-
tiffs motion to dismiss or for judgment on the pleadings
on the securities fraud counts (Counts I, V-XI) of Steel’s
amended counterclaim. This final judgment was based
on Judge Steckler’s conclusion that the loan participa-
tion interests were not securities within the meaning of
the federal and state securities laws. At the same time,
in an interlocutory ruling, Steel’s cross-motion for sum-
mary judgment declaring the loan participations to be
securities was denied as moot by reason of the holding
on the motion to dismiss. Steel’s appeal from the dis-
missal of its securities claims was docketed here as No.
80-1485. Leave to appeal the denial of summary judg-
ment to Steel on the ‘‘securities’’ issue was granted in
our April 24 order, and that appeal was therefore docketed
with the other interlocutory appeal under No. 80-1719.
*Counts II and III, alleging common law fraud and
breach of contract, are not in issue here. Count IV, al-
leging abuse of process, was dismissed by stipulation. See
note 2 supra.
—
II. Denial of Partial Summary Judgment on Plaintiffs’
Claims Was Appropriate.
A. Count I of Amended and Supplemental Com-
plaint
As noted above, the Mortgage Company and the Bank,
as a third-party beneficiary and assignee of the third-
party beneficiary Trust, sued in Count I on a breach of
contract theory. Steel moved for summary judgment with
respect to the Bank on the argument that the Bank and
Trust were not third-party beneficiaries of its participa-
tion agreement with the Mortgage Company.‘ Judge Steck-
ler held that there was a genuine issue of fact as to
whether the participation agreements were intended to
benefit the Bank and Trust and therefore denied the mo-
tion (Steel App. 8-9). Steel contends this holding was er-
roneous because an intent to benefit the Bank and Trust
does not ‘‘affirmatively appear from the language of the
document’’ as required by Indiana law. We disagree.
The contractual obligation on which the Bank and Trust
predicate their claims is ‘‘Steel’s duty to cooperate in
efforts to protect the project and minimize loss—and the
concomitant duty not to submarine the project to further
its own hand’’ (Plaintiffs’ Br. 41). They rely on the
clause in the participation agreements requiring Steel to
reimburse the Mortgage Company for all extraordinary
out-of-pocket costs and expenses incurred ‘‘for the pro-
tection and preservation of security, for the minimizing
of loss * * *’’ (Steel App. 104, 106). In addition, there
is, of course, an implied eovenant of good faith and fair
dealing by Steel. Photovest Corp. v. Fotomat Corp., 606
F.2d 704, 727-729 (7th Cir. 1979), certiorari denied, 445
*Steel suggests in its reply brief that it is entitled to
summary judgment against the Bank individually and as
assignee of the Trust as to plaintiffs’ Counts I, IT and
III because Steel had repudiated the participation agree-
ments (Reply Br. 16-17). Since this argument was not
made below nor indeed in Steel’s principal brief here, we
will not consider it.
a= 8@ oun
U.S. 917; Lesh v. Trustees of Purdue University, 124 Ind.
App. 422, 116 N.E.2d 117, 120 (1953); Indiana Code §
26-1-1-203; 5 Williston on Contracts 4 670, p. 159 (3d.
ed. 1961).
The Bank and Trust had a combined participation in-
terest of 60% in the Cromwell project and stood to incur
60% of the losses. The participation agreements between
Steel and the Mortgage Company expressly state that
this 60% interest belonged to the Bank and Trust, not
the Mortgage Company (Steel App. 103, 105). Thus Steel’s
obligation to minimize loss would ‘‘necessarily and with-
in the contemplation of the parties result in a direct bene-
fit to’’ the Bank and Trust. Jackman Cigar Mfg. Co. v.
John Berger & Son Co., 114 Ind.App. 437; 52 N.E.2d 363,
367-368 (1944). Indeed, as plaintiffs point out, it is dif-
ficult to see whom the minimization of loss clause was
intended to benefit if not the three riskbearers.
For the foregoing reasons, we cannot agree with Steel
that any benefit flowing from the contracts to the Bank
and Trust was as a matter of law merely incidental. At
best from Steel’s viewpoint, the contract is ambiguous as
Judge Steckler concluded, and therefore the question
whether the contractual langauge in the circumstances of
the transaction evidences an intent to benefit the Trust
and Bank is an appropriate one for trial. See Jackman
Cigar Mfg. Co. v. John Berger & Son Co., swpra; Standard
Land Corp. of Indiana v. Bogardus, 154 Ind.App. 283, 289
N.E.2d 803, 824-825 (1972): Shahan v. Brinegar, ........ Ind.
BD sine » 390 N.E.2d 1036, 1041 (1979). Furthermore,
we agree with plaintiffs that what is at issue here is the
question who are the real parties-in-interest. If it is found
at trial that the parties did not intend to benefit the Bank
and Trust, that would not, of course, alter the Mortgage
Company’s capacity to sue in Count I for Steel’s alleged
breach of its duty of good faith. Rule 17(a), Fed. R.
Civ. Pro.
valli:
B. Cownt II of Amended and Supplemental Com-
plaint
In Count II plaintiffs assert that Steel through its
dilatoriness interfered with the contractual relationships
between the Mortgage Company, the Trust and the Bank,’
justifying an award of compensatory and punitive dam-
ages to the Mortgage Company and the Bank in its own
right and as assignee of the Trust. Steel moved for sum-
mary judgment on this Count with respect to the Bank
and Trust, arguing that its alleged delaying tactics did
not cause the Mortgage Company to breach any agree-
ment with the Bank or Trust and that without an actual
breach plaintiffs’ claim will not tie under Indiana law.
Steel relies on the fact that the tort of ‘‘interference
with contractual relationship by inducing a breach of
contract’’ recognized by Indiana law requires an actual
breach. The question before the district court, however,
was whether ‘‘Indiana law recognizes the more loosely
defined tort of tortious interference with contractual or
business relations without an actual breach of contract’’
(Steel App. 9).
Since Indiana case law apparently gives no definitive
answer to this question, Judge Steckler properly pro-
ceeded to attempt to determine how the Indiana courts
would decide the question if confronted with it. In con-
cluding that the Indiana courts would recognize such a
tort, he relied on Spier v. Home Insurance Co., 404 F.2d
896, 898 (7th Cir. 1968); Martin v. Platt, ........ Ind. App.
ame » 386 N.E.2d 1026, 1027 (1979); and Gibson v. Miami
Valley Milk Producers, Inc., 157 Ind.App. 179, 299 N.E.2d
631 (1973), all of which lend support to his position.* He
also observed that the commentators recognize the broader
tort. £.g., Restatement (Second) of Torts § 766A (1979)
* The contracts in question are the Mortgage Company’s
participation agreements with the Bank and Trust and
its management agreement with the Trust.
*See also Helvey v. O’Neill, 153 Ind.App. 635, 288 N.E.
2d 553, 560-561 (1972).
— 10a —
and Comment c thereto; Prosser, Law of Torts § 129 (4th
ed. 1971).
Steel cites no authority to the contrary. Kiyose v.
Trustees of Indiana University, 166 Ind.App. 34, 333
N.E.2d 886 (1975), and Martin v. Platt, supra, on which
Steel principally relies, stand for the proposition that
only a third party, and not a party to the underlying
contract, may be liable for tortious interference. Count
II does not, however, allege interference with the con-
tract between the Mortgage Company and Steel. With
respect to the contracts between the Mortgage Company
and the Bank and Trust, Steel is a third party. Since we
find no reason to disagree with Judge Steckler’s conclu-
sion that a claim for tortious interference without an ac-
tual breach of contract would be recognized under In-
diana law, we affirm his denial of Steel’s motion with
respect to Count IT.
C. Count III of Amended and Supplemental Com-
plaint
In Count III, the Bank, again in its own right and as
assignee of the Trust, is seeking actual damages accord-
ing to proof and punitive damages of $3,000,000 based
on Steel’s alleged breach of its obligations as a co-loan
participant to the other participants. Steel’s objection to
this Count is that it had no legal relationship to the Bank
or Trust and therefore no legal obligations to them. Judge
Steckler refused to grant summary judgment for Steel
on the ground that ‘‘if plaintiffs can substantially sub-
stantiate their third-party claim, a contractual relation-
ship giving rise to the duty to act in good faith toward
each other would exist’’ (Steel App. 11). Since Steel con-
cedés the district court’s point (Br. 59), its argument here
must be taken as an extension of the argument we rejected
with respect to Count I, namely, that the Bank and Trust
are as a matter of law not third-party beneficiaries of the
agreement between the Mortgage Company and Steel.
The Bank further argues in support of the district
court’s ruling that the three participants became real es-
—lla~—
tate developers when the Mortgage Company acquired
title to the Cromwell project in settlement with the bor-
rower. Steel’s dilatoriness in 1976, 1977 and 1978 is relied
upon to show that the Bank and Trust sustained damages
equal to 60% of the difference between the project’s April
1978 value ‘‘and the value it would have had if the Mort-
gage Company had been able to implement its proposals :
to move forward with and/or dispose of the project’?
(Steel App. 99). Indiana law has long recognized the duty
of a party engaged in a common enterprise to act in the
utmost good faith toward its co-venturers. Grover v.
Marott, 192 Ind. 552, 136 N.E. 81, 85 (1922). For this
reason and that stated by Judge Steckler, the district court
properly denied Steel’s motion for partial summary judg-
ment with respect to Count ITI.
Accordingly, we affirm the district court’s order of
March 20 in its entirety.’ Our ruling does not mean, of
course, that Steel may not prevail on any or all of the
three Counts after trial.
III. The Loan Participants Are Not Securities.
In its March 21 order, the district court, finding that
Steel’s participation in the loans to Justin did not con-
stitute the purchase of a ‘‘security’’ within the meaning
of the federal and Indiana securities laws, granted plain-
tiffs’ motion to dismiss or for judgment on the pleadings
on the securities fraud counts of Steel’s amended counter-
claim against the Mortgage Company and the Bank and
Steel’s amended claim against AFC. It therefore denied
as moot Steel’s cross-motion for a summary judgment
declaring the loan participations to be securities.
It is undisputed that for the purposes of this appeal
the term ‘‘security’’ is the same under the Securities Act
of 1933, the Securities Exchange Act of 1934 and the In-
diana “Blue Sky” Act. “Unless the context otherwise re-
"This appeal does not question the district court’s denial
of Steel’s motion to strike paragraphs 7, 12 and 13 of
the amended and supplemental complaint.
— 12a —
quires,’’ these laws apply to ‘‘any note * * * or participa-
tion in any profit-sharing agreement * * *.’’ 15 U.S.C.
§$§ 77b(1) and 78c(a)(10); Indiana Code § 23-2-1-1(k).
Because of the qualifying phrase, literal inclusion in the
statutory list of potential securities is not the test for a
“‘security.’’ Whether a security is involved or not depends
upon the economic realities of the transaction in light of
Congressional intent. United Housing Foundation, Ine. v.
Forman, 421 U.S. 837, 848, 849; Canadian Imperial Bank
of Commerce Trust Co. v. Fingland, 615 F.2d 465, 469
(7th Cir. 1980).
Steel appears to concede that the notes from Justin
were not themselves securities (Br. 20-30). That conces-
sion conforms to our decision in C.N.S. Enterprises Ine.
v. G é G Enterprises, Inc., 508 F.2d 1354 (7th Cir. 1975),
certiorari denied, 423 U.S. 825. In turn, the Mortgage
Company and the Bank concede that a participation may
be a security even though the underlying note is not (Br.
8 n.3). Therefore, the sole issue here is whether Steel’s
loan participation was a security under the quadruple test
developed by the case law for determining the existence
of a security. A brief look at the transaction here in light
of that test makes clear that the loan participations were
not securities.
Under Forman, supra, four elements are required for
a security: (1) an investment, (2) in a common venture,
(3) premised upon a reasonable expectation of profits, (4)
to be derived from the entrepreneurial or managerial ef-
forts of others. 421 U.S. at 852; see also S.E.C. v. W. J.
Howey, 328 U.S. 293, 301. Here the only element present
is a common venture, and that alone is insufficient.
The documents executed by the Mortgage Company and
Steel recite that the Mortgage Company is the holder of
loan obligations evidenced by promissory notes, indicating
that this was a collateralized commercial loan with the
return to Steel to be in the form of repayment of principal
plus interest. Steel itself drafted the participation agree-
ments, which were on typical lenders’ forms, and the loan
— 13a —
officer for Steel who prepared the loan proposal based his
recommendation that the loans be made on the existence
of a first mortgage on the property and improvements,
the Bank’s recommendation concerningthe borrower, and
the personal guarantees of Justin’s principals (Plaintiffs’
App. 3). Borrowing for a designated purpose (here the
Justin project) and a short note maturity, here three
years, are indicia of a commercial loan rather than an in-
vestment. C.N.S. Enterprises, supra, 508 F.2d at 1361. To
be sure, the loan was risky, but the risk taken was ‘‘the
ordinary commercial risk taken by any secured lender,’’
not an investment risk. Lincoln National Bank v. Herber,
604 F.2d 1038, 1043 (7th Cir. 1979).
The fact that the loan bore interest does not make it a
security. Canadian Imperial Bank of Commerce Trust
Co. v. Fingland, supra, 615 F.2d at 470; C.N.S. Enter-
prises, Inc. v. G & G Enterprises, Inc., supra, 508 F.2d
at 1359. Steel was not to participate in any of the profits
from the Justin project, and neither the repayment of
the loan nor the rate of return was in any way depen-
dent on the actual profits, if any, of the project. Instead,
it was fixed at a specific rate above prime. In short, this
is not an investment premised upon a reasonable expec-
tation of profits but rather a commercial real estate loan
transaction.
This Court recently held that Congress did not intend
to regulate commercial loan transactions that would
have no impact on the_ securities markets. Lincoln
Nebraska Bank, supra, 604 F.2d at 1042. Thus in the
absence of an investment transaction or impact on the
securities market. the term “security” is not applicable
to commercial loans including the one in issue here. See
Emisco Industries, Inc. vy. Pro’s Inc., 543 F.2d 38, 39 (7th
Cir. 1976); National Bank of Commerce vy. All American
Assurance Co., 583 F.2d 1295, 1301 (5th Cir. 1978). The
cases that Steel relies on to the contrary are those in
which courts in the Second Circuit found securities
—l4a —
because of the literal language of the statutes. The
literal language approach has been rejected by the Su-
preme Court as well as this Court. Forman, supra, 421
U.S. at 848, 849 n. 14; C.N.S. Enterprises, supra.
Steel’s reliance on its lead lender, the Mortgage Com-
pany, for credit evaluations and day-to-day monitoring
of the loan does not, as Steel argues, convert its loan
participations into securities. Steel in fact conducted its
own investigations of the project, and the extent of its
control over management of the loan belies its sugges-
tion that it was dependent on the Mortgage Company’s
entrepreneurial efforts in this venture. Steel retained
the rights of a lender to demand foreclosure, preclude
substitution or release of collateral, prevent modification
of terms of loan obligation, and so on. In any event,
Steel’s decision to enter the participation agreement was
based on its own business judgment, and, as already
noted, the loan was collateralized and guaranteed by the
principals of the development corporation. The interest
on the loan did not derive from the Mortgage Company’s
“See Commercial Discount Corp. v. Lincoln First Com-
mercial Corp. 445 F.Supp. 1263 (S.D. N.Y, 1978) and NBI
Mortgage Investment Corp. v. Chemical Bank [1976-1977 ]
Fed. Sec. L. Rep. (CCH) 95,632 (S.D. N.Y. 1976) and
[1977-1978] Fed. See. L. Rep. (CCH) 996,066 (S.D. N.Y.
1977), both following the literal language approach of
Kachange Nat’l Bank v. Touche Ross & Co., 544 F.2d
1126 (2d Cir. 1976). Steel also relies on Lehigh Valley
Trust Co. v. Central Nat’l Bank of Jacksonville, 409 F.2d
989 (5th Cir. 1969). But see National Bank of Commerce
v. All American Assurance Co., supra, 583 F.2d at 1300-
1301; Bellah v. First National Bank of Hereford, 495 F.2d
1109, 1111-1116 (5th Cir. 1974); McClure v. First Nat’l
Bank of Lubbock, 497 F.2d 490, 492-495 (5th Cir, 1974),
certiorari denied, 420 U.S. 930, which abandon the literal
approach. See also Morsey v. Green (S.D. Fla. No. 76-8044
CA, decided March 28, 1978), affirmed without opinion,
615 F.2d 917 (5th Cir. 1980), certiorari denied, 49 LW
3270, summarized, 49 LW 3267,
— 15a —
entrepreneurial services within the meaning of Forman
but from the underlying notes.
Accordingly, we hold that Judge Steckler did not err
in holding that the Mortgage Company, the Bank and
AFC were entitled to dismissal or judgment on the
pleadings as to Counts I and V-XI of the final Steel
counterclaim and in denying Steel’s cross-motion for
summary judgment on the ground that its participation
interests were not securities within the meaning of the
federal and Indiana Acts.
The orders of March 20 and 21, 1980, are affirmed.
Steel’s motion for reassignment of trial judge is denied.
A true Copy:
Teste:
Clerk of the United States Court of
Appeals for the Seventh Circuit
— 16a —
Untrep States District Court
SouTHerN District Or INpDIANA
INDIANAPOLIS Drviston
AMERICAN FLETCHER Mortcacr Company, Inc., and
AMERICAN FLETCHER NationaL BANK AND TRUST CoMPANY,
Plaintiffs,
Vs.
U. S. Sree, Crepir Corporation,
Defendant and Counterclaimant,
VS.
AMERICAN FLetcHerR Morreace Company, INc.,
AMERICAN FLETCHER NATIONAL BANK AND TRUST CoMPANY,
AND AMERICAN FLETCHER CorporaTION,
Counterdefendants.
IP 76-276-C
ORDER
This matter is before the Court on the motion of
counterdefendants American Fletcher Mortgage Corpora-
tion (“AIF-MC”), American Fletcher National Bank
(“AFNB”), and American Fletcher Corporation (“AFC”)
to dismiss or for judgment on the pleadings on certain
counts of the amended counterclaim of United States
Steel Credit Corporation (“Steel’’?). Also before the Court
is Steel’s cross-motion for a partial summary judgment
on a narrow issue involved in those counts.
The factual background of this lawsuit is as follows.
AFMC, as “lead lender” entered into loan participation
agreement with Steel, AFNB, and American Fletcher
Mortgage Investors (“Trust”). Steel was a 40% par-
ticipant, AFNB a 10% participant, and Trust a 50%
participant. When the condominium project to be financed
by the loans ran into difficulties in 1975, AFMC, as lead
—17a—
lender, attempted to salvage the project in several ways.
Steel, apparently not wanting to inject any more money
into the troubled project refused to go along with rro-
posals agreed to by AFMC, AFNB, and Trust. Finally
the project was sold “as is” allegedly at a far lower price
than could have been obtained had Steel co-operated with
the other parties, giving rise to AFNB and AFMC’s
claims against Steel. Steel’s counterclaim, among other
things, alleges that its interest under the loan participation
agreement was a security, as defined in federal and state
statutes, and that it was defrauded in the purchase of
the securities by AFMC, AFNB, and AFC.
The counterdefendants have moved to dismiss or for
judgment on the pleadings on Counts I, V, VI, VII, and
VIII of the amended counterclaim, all of which allege
violations of federal securities laws, and Counts IX, X,
and XI of the second amendment to the amended counter-
claim, which allege violations of siate securities laws.
The counterdefendants contend that all of these counts
must fail because, as a matter of law, the participation
by Steel in loans made to the borrower did not constitute
the purchase of a security within the meaning of federal
and state statutes. Basically the counterdefendants’ argu-
ment is that the participation interests did not possess
the required elements necessary to make them securities
as defined by the Supreme Court in 9.E.C. v. W.J. Howey,
328 U.S. 293 (1946), and refined in United Housing
Foundation v. Forman, 421 U.S. 837 (1974). “The touch-
stone [of all of the court’s decisions defining a security]
is the presence of an investment in a common venture
premised on a reasonable expectation of profits to be
derived from the entrepreneurial or managerial efforts
of others.” Id. at 852. In the counterdefendants’ view,
— 18a —
since this was a commercial loan, it was not an “invest-
ment,” since the return to Steel was to be in the form
of interest payments on the loan, it was not “for profits,”
and since there was collateral for the loan which was
administered by AFMC, there was no “reliance on the
entrepreneurial or managerial efforts of others.”
In opposition to counterdefendants’ motion and in sup-
port of its own motion for summary judgment, Steel
argues that its participation interests in the loans were
securities and that all the elements of the Howey-Forman
test were met. Steel contends that the principal issue is
whether Steel procured these interests for investment
purposes, in which case the interests are securities. Steel
further maintains that the evidence is quite clear that
it is in the business of investing, not lending, and that
therefore a summary judgment declaring Steel’s interests
to be securities should be entered.
Since both parties agree on the basic elements of the
test to be applied, the issue confronting the Court on
this motion is whether or not Steel’s interest was (1)
an investment (2) in a common venture (3) premised
on a reasonable expectation of profits (4) from the
entrepreneurial or managerial efforts of others. The
analysis of the elements of the above-stated test in the
case of FBS Financial vy. CleveTrust Realty Investors,
et al., [1978] Fed. Sec. L. Rep. (CCH) 9 96,341 (N.D.
Ohio 1977), appears to this Court to be a well-reasoned,
step-by-step approach in line with admonitions of the
Supreme Court and the Seventh Circuit to avoid literalisin
and to examine and consider each case on its own facts
in light of economic realities. United Housing Foundation
v. Forman 421 U.S. 837, 849 (1974); C.N.S. Enterprises,
— 19a —
Inc. v. G. & G. Enterprises, Inc., 508 F.2d 1354, 1362
(7th Cir. 1975). [Seventh Circuit cited favorably a similar
list of factors for analysis at 1361.]
In the first phase of the FBS analysis, several factors
are examined to determine the status of the “investment”
element. These include (1) the name given the transaction
by the parties, (2) the subjection of money to risk, con-
sidering particularly the length of the term, (2) the
existence of collateral, (4) the existence of a “take-out
lender” to buy out the participants’ interests, and (5)
the contemplated and actual use of the funds.
Examining these factors, the Court notes first that the
documents executed by AFMC and Steel recite that AFMC
is the holder of loan obligations evidenced by promissory
notes. The parties then agree that AFMC “hereby sells
-.. unto [Steel] ...aratable participating share of Forty
Per Cent ... in and to said note[s], and all proceeds and
avails of said note[s} and the security therefore. .. .”
Thus, the agreement refers to the loans and notes, which
lends support to counterdefendants’ position. On the
other hand, it also refers to the purchase of a “share.”
However, labeling an interest a “share” is not dispositive,
as can be seen from the ruling in Forman, supra. In
deposition testimony various Steel employees refer to
both “loans” and “investments.” Thus it cannot be said
that the parties’ characterization of the interests is per-
suasive evidence of either interpretation.
Dealing next with the factor of the subjection of money
to risk and considering in particular the length of time
involved, the Court notes first, as have other courts,
see, C.N.S. Enterprises, supra; FBS Financial, supra, at
93, 156, that although subjection of money to the risk
— 20a —
of continued business operations is characteristic of an
investment and hence security status, this risk in and of
itself is not dispositive of the question. The FBS Financial
Court remarked that one way to distinguish a “risky
loan” from “risk capital” is to determine the length of
time the money is retained by the enterprise receiving
it. The longer this period, the more the interest appears
to be in investment. BS Financial, at 93, 156. It appears
that in this case the length of time the borrower was
to retain the money was three years, which is considerably
longer than the less than one year period involved in
FBS Financial. Of course, since loans with three year
and longer terms are made quite often, the three year
term in this case cannot be dispositive of the question.
Turning next to the question of collateral, the Court
notes that there was collateral for the loan, as well as
sureties and the personal guarantees of individuals asso-
ciated with the borrower. Although it does not appear
that Steel had direct rights in the collateral, AFMC,
as lead lender, could not release any security for the
loans without the consent of Steel. Under similar cireum-
stances, the Court in Provident Nat. Bank v. Frankford
Trust Co., 468 F. Supp. 448, 455 (E.D. Pa. 1979), found
that it was unrealistic to suggest . . . that the loan par-
ticipation itself was not . . . collateralized.”
In FBS Financial the Court felt that the existence of
a “take-out lender” who was to buy out the participant’s
interests in a relatively short period of time, thus guar-
anteeing a minimum return, was indicative of a loan. In
the instant situation, nothing comparable to the take-out
lender exists.
Concerning the question of the actual and contemplated
use of the funds, it appears that the instant case differs
— 2la —
from FBS Fimancial in that in FBS the funds paid in
by the sub-participant were used by the participant to
meet current commitments rather than to obtain “invest-
ment assets” or new capital assets. Here it seems rather
obvious that new capital assets were acquired with the
funds. However, the Court recognizes that funds are
constantly loaned for the purpose of purchasing new
capital assets; therefore this factor is also not dispositive
of the “investmeat versus loan” question.
Summarizing on the investment element of the Howey-
Forman test, the Court feels that the evidence is rather
evenly balanced between “security” and “loan.”
Moving on now to the question of the existence of a
reasonable expectation of profits, the Court finds that
Steel could reasonably expect to receive repayment of
principal and interest fixed at a certain percentage over
prime. The amount of these payments had nothing to do
with the profits or productivity of the enterprise financed.
This is indicative of a loan. 'BS Finance, supra, at 93,
159; National Bank of Commerce of Dallas vy. All American
Assurance Co., 583 F.2d 1295 (5th Cir. 1978).
The final requirement of the Howey-Forman test of a
security is that the profits are to be derived from the
entrepreneurial or managerial efforts of others. The
courts in both FBS Fimmancial, supra, at 93, 159, and
Provident, supra, at 455, found that the efforts of a “lead
lender” in administering a loan were not managerial
or entrepreneurial in the sense that they generate the
return expected by the parties to the participation.
In summary, based upon the Court’s conclusions on the
“reasonable expectation of profits” issue and the “entrep-
reneurial and managerial efforts” ue, the Court finds
— 22a —
that the participation interests were not securities within
the meaning of the federal and state securities laws.
Accordingly, the motion of counterdefendants AFMC
AFNB, and AFC to dismiss or for judgment on the
pleadings on Counts I, V, VI, VII, and VIII of the
amended counterclaim and Counts IX, X, and XI of the
second amendment to the amended counterclaim is
GRANTED. The cross-motion of defendant-counterclaim-
ant Steel for a summary judgment declaring the loan
participation interests to be securities is MOOT by reason
of the Court’s ruling on counterdefendants’ motion.
IT IS SO ORDERED.
Dated this 21st day of March, 1980.
/s/ William E. Steckler
United States District Judge
— 23a —
Unitep States District Court
SouTHERN Districr Or Inprana
INDIANAPOLIS Division
AMERICAN FLercHer Mortreacr Company, Inc., and
AMERICAN FLETCHER NATIONAL BANK AND Trust CoMPANY,
Plaintiffs,
VS.
U. S. Sree, Crepir Corporation,
Defendant and Counterelaimant,
VS.
AMERICAN FLeTcHER MortcGace Company, Inc.,
American FietcHer Nationat Bank ann Trusr Company,
AND AMERICAN FLETCHER CoRPORATION,
Counterdefendants.
Cause No. IP 76-276-C
AMENDMENT OF MARCH 21, 1980 ORDERS,
ADDING RULE 54(b) CERTIFICATE AND
CERTIFICATE FOR INTERLOCUTORY APPEAL,
' AND STAYING FURTHER PROCEEDINGS
PENDING APPEAL
This cause came on before the Court upon the Motion of
Counterclaimant, U.S. Steel Credit Corporation (‘‘Steel’’)
for a Rule 54(b), F.R.Civ.P., certification of the Court’s
Order dated March 21, 1980, granting Counterdefendants’
motion to dismiss or for judgment on the pleadings on
federal and state ‘‘securities’’ fraud counts of Steel’s
counterclaim (Counts I, V, VI, VII, VIII, 1X, X and
XI), and upon Steel’s further motion for a stay of pro-
ceedings in this cause, pending appeal of final judgment
on such March 21, 1980, Order.
And the Court, having examined Steel’s Motion and
supporting Brief, having discussed the matter informally
nim Slit oan
with counsel for all parties, and being fully advised in
the premises, NOW FINDS that Steel’s Motion should
be granted.
As to this Court’s ruling which denies Steel’s cross-
motion for a partial summary judgment declaring Steel’s
loan participations to be ‘‘securities’’ within the meaning
of the federal and state securities acts, the Court further
finds that the issues presented by such cross-motion meet
the three tests for interlocutory appeal pursuant to 28
U.S.C. §1292(b), and should be certified for interlocutory
appeal, so that all rulings of this Court under its Order
of March 21, 1980, may be considered together on appeal
to the United States Court of Appeals for the Seventh
Circuit.
It is, therefore, ORDERED, ADJUDGED AND DB-
CREED that this Court’s Order of March 21, 1980, is
hereby amended by the addition of the following para-
graphs:
Pursuant to Rule 54(b) of the Federal Rules of Civil
Procedure, this Court has determined and now certifies
that there is no just reason for delay, and hereby directs
the entry of final judgment on the order granting Coun-
terdefendants’ Motion to Dismiss or for Judgment on the
Pleadings on Counts I, V, VI, VII, VIII, IX, X and XI
of Steel’s Counterclaim, as amended.
As regards this Court’s Order denving Steel’s cross-
motion for summary judgment on the question of whether
or not Steel’s participations were ‘‘securities’’ as defined
in the Federal Securities Act of 1933 [15 U.S.C. §77(b)
(1)], the Securities Exchange Act of 1934 [15 U.S.C.
§78(c)(A)(10) and the Securities Act of Indiana (1.C.
§23-2-1-(k)], it is the opinion of this Court that, within
— 2a —
the meaning of 28 U.S.C. §1292(b), such question involves
a controlling question of law as to which there is sub-
stantial ground for difference of opinion and that an im-
mediate appeal from the order may materially advance the
ultimate termination of this litigation.
Further proceedings in this litigation in this Court are
hereby stayed, pending the outcome of appeal of the
rulings and issues certified in this Order, as amended.
Dated this 28th day of March, 1980.
/ William E. Steckler
William E. Steckler
Judge
Copies to:
Wuuam A. Wick
NicHouas C. NizAMorF
Waite, Ravs, Reis, Wick & Rircner
1000 Merchants Bank Building
11 South Meridian St.
Indianapolis, IN 46204
THEODORE R. Borum
James H. Ham, III
Baker & DANIELS
810 Fletcher Trust Building
Indianapolis, IN 46204
— 26a —
- Opinion by Judge Cummings
JUDGMENT — ORAL ARGUMENT
Unitep States Court Or APPEALS
For the Seventh Circuit
Chicago, Illinois 60604
November 3, 1980
Before
Hon. Water J. Cummines, Circuit Judge
Hon. Haritincton Woon, Jr., Circuit Judge
Hon. Wiiuiam J. Campse.i, Senior District Judge*
Nos. 80-1485 and 80-1719
AMERICAN FLETCHER MortcAGre Company, Inc., and
AMERICAN FiercHer Nationa BANK ANp Trust CoMPANY,
Plaintiffs,
VS.
U. S. Steet Crepir Corporation, a Delaware Corporation,
Defendant and Counterclaimant-Appellant,
VS.
AMERICAN FLetcHer Mortcacr Company, Inc.,
AMERICAN FLercHer Nationa BANK AND Trust CoMPaNy,
AND AMERICAN FLETCHER CORPORATION,
Counter-Defendants-Appellees.
Appeals from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
' No. IP 76-C-276
Wituiaim FE. Strecker, Judge.
This cause was heard on the record from the United
States District Court for the Southern District of Indiana,
Indianapolis Division, and was argued by counsel.
On consideration whereof, IT IS ORDERED AND
ADJUDGED by this Court that the judgment of the said
District Court in this cause appealed from be, and the
same is hereby AFFIRMED, with costs, in accordance
with the opinion of this court filed this date.
*' The Honorable William J. Campbell, Senior District
Judge of the Northern District of Illinois, is sitting by
designation.
— 27a —
Unitep States Court Or AppEas
For the Seventh Circuit
Chicago, Illinois 60604
December 3, 1980
Before
Hon. Watrer J. Cummrnas, Circuit Judge
Hon. Haruinctoy Woon, Jr., Circuit Judge
Hon. Wituiam J. Campse.y, Senior District Judge’
Nos. 80-1485 and 80-1719
American FLetcHer Morteace Company, Inc., et al.,
Plaintiffs,
vs.
U. S. Sreex Crepir Corporation,
Defendant-Counterclaimant (Appellant),
Vs.
AMERICAN FLetcHer Mortcace Company, Inc., et al.,
Counterdefendants (Appellees).
Appeals from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. IP 76-276-C
Wim E. Sreckier, Judge.
ORDER
On consideration of the petition for rehearing and
suggestion for rehearing en banc filed in the above-entitled
cause by appellant U. S. Steel Credit Corporation, no
judge in active service has requested a vote thereon,
and all of the judges on the original panel have voted
to deny a rehearing. Accordingly,
IT IS ORDERED that the aforesaid petition for re-
hearing be, and the same is hereby DENIED.
“The Honorable William J. Campbell, Senior District
Judge of the Northern District of Illinois, is sitting by
designation.
— “Sam
Unitep States Districr Court
SouTHEeRN District Or INpIANA
INDIANAPOLIS Division
AMERICAN FLETCHER Mortcace Company, Inc., and
AMERICAN FLETCHER NATIONAL BANK AND TRUST CoMPANy,
Plaintiffs,
Vs.
U. S. Sreet Crepir Corporation,
Defendant and Counterclaimant,
VS.
AMERICAN FLetcHeR Mortcace Company, Inc.,
AMERICAN FLETCHER NATIONAL BANK AND TRUST CoMPANY,
AND AMERICAN FLETCHER CoRPORATION,
Counterdefendants.
Cause No. IP 76-276-C
U. S. STEEL CREDIT CORPORATION’S
AMENDED COUNTERCLAIM AND AMENDED
CLAIM AGAINST COUNTER-DEFENDANT
For its Amended Counterclaim against Plaintiffs and
Amended Claim against Counte-Defendant, American
Fletcher Corporation, Defendant, U. S. Steel Credit Cor-
poration, states the following:
Count I
Securtties Act Violations by AFMC
For First Count of its Amended Counterclaim and
Amended Claim, U. S. Steel Credit Corporation (“Credit
Corporation”) says:
1. This Court has jurisdiction of this Court under
28 U.S.C. $1331, since the instant claim arises under the
laws of the United States and the matter in controversy
— 29a —
exceeds the sum of $10,000.00, exclusive of interest and
costs. 15 U.S.C. $78aa also confers jurisdiction.
2. On or about October 1, 1973, Plaintiff, American
Fletcher Mortgage Company (“AFMC”), from its offices
in Indianapolis, Indiana, forwarded by United States
mail to Credit Corporation at its offices in New York,
New York, Participation Offerings in loans for the aequi-
sition and development and construction of a condomini-
um project in Cromwell, Connecticut (“The Project”).
Copies of the said Participation Offerings are hereto
attached and made a part hereof as Exhibits “A” and
“B”, respectively.
3. The said Participation Offerings (hereinafter called
“The Security Offerings”) constituted offerings of securi
ties, as defined in $3(a)(10) of the Securities Exchange
Act of 1934, as amended [15 U.S.C. §78(a)(10)] und
§2(1) of the Securities Act of 1933, as amended [15
U.S.C. $77(b)(1)].
4. On or about October 27, 1973, Credit Corporation
executed and forwarded by United States mail from New
York City to Indianapolis proposed participation agree-
ments (“The Participation Agreements”), indicating
Credit Corporation’s acceptance of AKFMC’s Security
Offerings. Copies of the Participation Agreements are
hereto attached and made a part hereof as Exhibits “C”
and “D”’, respectively.
Do. The Participation Agreements were subsequently
executed by AFMC on a date unknown to Credit Corpo-
ration. The date inserted in both Participation Agree-
ments by AFMC was December 31, 1973.
6. Credit Corporation’s acceptance of the Security
Offerings, as evidenced by its execution of the Partici-
— 30a —
pation Agreements, was conditioned upon the understand-
ing that AIMC would not close the Cromwell loans, or
call upon Credit Corporation to make disbursements
thereunder, unless and until the borrower, Justin Develop-
ment Corporation (“Justin”) had complied with all con-
ditions precedent required of Justin under the Loan
Agreements, which were incorporated by reference in the
Participation Agreements. Among other conditions prece-
dent, the Building Loan Agreement (copy of which is
hereto attached and made a part hereof as Exhibit “ 1”)
required Justin to submit to AFMC and secure AFMC’s
approval of (a) the General Contract for Construction
of the Project, and (b) Performance and Labor and Ma-
terial Payments Bonds.
7. Despite the fact that Justin satisfied none of the
foregoing conditions precedent, AFMC closed the Loans
and, for a period of sixteen months between the date of
closing the Construction Loan in February, 1974, and
mid-June, 1975, made disbursements thereunder, exacting
from Credit Corporation its share of each of such dis-
bursements, without either compelling compliance by
Justin or disclosing to Credit Corporation the fact of
Justin’s non-compliance.
8. During said sixteen months period, wherein, by
reason of Justin’s continued failure to meet conditions
precedent, neither Credit Corporation, nor any of the
other participants or lenders, was legally bound to ad-
vance any monies on the Cromwell loans, each of Credit
Corporation’s advances in response to AFMC’s periodic
draw requests represented an investment in securities,
governed by §10(b) of the Securities Exchange Act of
1934 [15 U.S.C. §78j(b)] and Securities Exchange Com-
— 3la —
mission Rule 10(b)-5 [17 C.F.R. §240.10(b)-5] and by
$17 of the Securities Act of 1933 [15 U.S.C. §77q].
9. On or before the final exccution of the Participa-
tion Agreements, and at various times thereafter during
the period prior to mid-June, 1975, AFMC knowingly,
deliberately and with intent to deceive, or with reckless
disregard for the obviously deceptive consequences of its
conduct, and in order to induce Credit Corporation to
make its initial investment commitment, and to continue
investing in AFMC’s Security Offerings and to prevent
Credit Corporation from revoking its investment com-
mitment and discontinuing investments in such Security
Offerings, AFMC misrepresented certain material facts
to Credit Corporation, and omitted to disclose to Credit
Corporation certain other material facts, including (but
not limited to) the following:
(a) AFMC misrepresented to Credit Corporation its
intentions with respect to loaning funds for in-
terest and finance charges on The Project. Its
eost breakdown on the Land Aequisition & Devel-
opment Loan (“lL & D Loan’’) indicated the sum
of $250,000.00 allocated to interest and financing
charges, which led Credit Corporation to believe
that this amount was budgeted for the L & D
Loan only. In fact, AFMC intended — the
$250,000.00 to cover interest and finance charges
on both loans, for which purpose the said sum
was hopelessly inadequate.
(b) AFMC failed to disclose to Credit Corporation
that the personal guarantors of the Cromwell
Loans were also personal guarantors of two
other loans to Justin in the aggregate sum of
more than $7,700,000.00 for the acquisition, le-
velopment and construction of a different con-
dominium project at Brandford, Connecticut,
which was in progress at the same time as the
Cromwell Project.
/~
(c)
(d)
(e)
— 32a —
AFMC failed to disclose that the same borrower
(Justin), the same general contractor (Jobeo,
Inc.) and (with the exception of Credit Corpora-
tion) largely the same participating lenders, in-
volved in the Cromwell Project, were also in-
volved in the Branford Project, which created
the risk of diversion of Cromwell Loan Funds
to Branford.
AFMC misrepresented to Credit Corporation
that 450 condominium units were to be developed
and constructed at Cromwell, whereas it was
apparent from the master construction contract,
entered into in May, 1973, and from the Site
Plan, that Justin and Jobco proposed to develop
and build only 400 condominium units, and the
zoning laws at Cromwell limited to 400 the maxi-
mum number of condominium units of the size
and area contemplated by the parties, which
could lawfully be constructed on the Cromwell
site.
AFMC failed to disclose to Credit Corporation
that it closed and made disbursements on both
of the Cromwell Loans without obtaining from
Justin a proper site plan.
(f) AFMC failed to disclose to Credit Corporation
(g)
the long continued failure of Justin to furnish
a proper Construction Contract and a proper
Performance and Payment Bond as recited in
rhetorical paragraphs 6 and 7, above.
AFMC failed to disclose to Credit Corporation
that the first phase construction contract, initially
entered between Justin and Jobeo, called for
construction of only 100 condominium units,
whereas the Building Loan Agreement required
150 units to be constructed in the first phase.
AFMC further failed to disclose to Credit Cor-
poration that when in response to AFM(C’s
objection to the 100 unit contract a new first
phase contract for 150 units was prepared and
(h)
(1)
— 33a —
signed by Jobco, Justin failed to execute it, and
though repeatedly requested to do so, could not
be persuaded to sign the 150 unit contract until
sixteen months thereafter.
AFMC failed to disclose to Credit Corporation
that in January, 1975, it discovered, upon exami-
nation of a proposed form of bond rider received
from the Bonding Company, that Justin and
Jobeo had surreptitiously amended the price
clause of the construction contract without con-
sultiug or advising AFMC. AFMC further failed
to disclose that its efforts to obtain a copy of
the price clause amendment during the next six
months proved unsuccessful, and that it executed
the bond rider in mid-June, 1975, without deletion
of the reference to the price clause amendment.
In fact, the price clause amendment purported
to convert the construction contract from a fixed
price contract to a cost plus 10% contract.
AFMC failed to disclose to Credit Corporation
that prior to the closing of the Cromwell Con-
struction Loan, its legal counsel in charge of
closing the Loan had warned that the Loan was
inadequate to complete development and con-
struction of the first phase of the Project. It
became clear to AFMC in late 1974, that the
Loans were inadequate to complete the first
phase. Yet, in January of 1975, at a time when
AFMC was working on a proposal to increase
the Cromwell Loans, AFMC falsely represented
to Credit Corporation that the Loans were “in
balance and on track”.
(j) AFMC induced Credit Corporation to consent to
the release of the personal guaranty of Jobco’s
president on the ground that such release was
necessary in order to secure a performance bond
on Jobco. Credit Corporation agreed to release
Jobco’s president on the express condition that
a proper performance bond be obtained. AFMC
(1)
— 34a —
then proceeded to release Jobco’s president from
his personal guaranty without having obtained
a proper performance bond, and then concealed
from Credit Corporation the fact that it had
done so.
AFMC failed to disclose to Credit Corporation
that Justin had discharged its architect (who
also was one of the pesronal guarantors) and
had changed the Plans and Specifications for
construction, without obtaining AF-MC’s approval.
AFMC failed to disclose to Credit Corporation
that, despite the absence in the cost breakdown
of the Wonstruction Loan of any provision for
disbursement of funds needed to pay interest on
that Loan, it was, nevertheless, advancing funds
for the payment of interest on both the L & D
Loan and the Construction Loan far in excess
of the $250,000.00 budgeted in the L & D Loan
for that purpose. It further failed to disclose to
Credit Coporation that it was applying funds
budgeted for one purpose under its cost break-
downs to other entirely different purposes, that
it was indiscriminately diverting funds from the
lL. & D Loan to the Construction Loans and vice-
versa, and that as a result of these activities.
both of the Cromwell Loans wee out of balance.
(m) In March, 1975, in an effort to induce Credit
(n)
Corporation to agree to increasing the Cromwell
Loans, AFMC represented to Credit Corporation
that it had “full bonding” on the Cromwell Loans.
when it knew that such was not the case.
In order to obtain full bonding, the Bonding
Company had stipulated, among other conditions,
it must have the lender’s assurance that the
loan funds were sufficient to complete construc-
tion of the first phase of the Project in accor-
dance with the Construction Contract. AFMC
failed to disclose to Credit Corporation that it
obtained the increased bond in mid-June, 1975,
— 35a —
by giving the Bonding Company the assurance
it sought concerning the sufficiency of the ioan
funds, and that AF MC gave this assurance even
though AFMC Imew (i) that the existing loan
was insufficient, (ii) that AFMC’s commitment
to increase the loan was conditioned upon ap-
proval of such increases by Credit Corporation
and the other participants, and (iii) that Credit
Corporation had neither approved nor given any
assurance that it would approve an increased
loan.
(0) Further instances of misrepresentations and
non-disclosures on the part of AFMC in connec-
tion with the Cromwell Loans are enumerated
in Credit Corporation’s particularized Statement
of Claims, paragraphs e and f of which, on pages
3-6, are incorporated herein as if set forth at
length herein, except to the extent that such
paragraphs are in substance duplicated herein.
10. All of the facts whieh AFMC misrepresented or
failed to disclose as aforesaid, were “material facts”,
which, if promptly and accurately disclosed, would have
had an important influence on the decision of any reason-
able investor, including Credit Corporation to invest
initially or to continue investing in the Cromwell Project.
11. Over the period, beginning with the closing of
the Cromwell L & D Loan, in 1973, and ending prior to
the time in mid-June, 1975, when AFMC first obtained
Justin’s signature on the Construction Contract for 150
condominium units, and obtained the increased performn-
ance bond, Credit Corporation, in detrimental reliance
upon the assumed accuracy and completeness of AFMC’s
statements of material fact in connection with the Security
Offerings, and without knowledge of the material mis-
representations and non-disclosures described above, ad-
vanced to AIFMC, pursuant to the Participation Agree-
ments, sums amounting in the aggregate to $2,063,448.47.
——
a i
— 36a —
12, AFMC’s conduct in misrepresenting and omitting
material facts as aforesaid in connection with its Security
Offerings were in violation of §10(b) of the Securities
Exchange Act of 1934 and Rule 10(b)-5 promulgated
thereunder, as well as §17 of the Securities Act of 1933.
13. As a proximate result of AFMC’s violations of the
above statutes and rule, Credit Corporation has been
damaged in the sum of at least $2,063,448.47.
WHEREFORE, Credit Corporation prays for judg-
ment in its favor and against AFMC as follows:
(1) That the Participation Agreements, attached as
exhibits “C” and “D”, be rescinded:
(2) That the sum of $2,063,448.47, advanced by Credit
Corporation pursuant to said Participation Agreements
be returned to Credit Corporation as compensatory dam-
ages, together with such additional sums as the evidence
shall justify and pre-judgment interest and costs:
(3) That Credit Corporation be awarded all other
and further relief, which shall be proper in the premises.
Count V
AIF'NB’s Securities Law Violations
As a “Controlling Person”
For Fifth Count of its Amended Counterclaim and
Amended Claim and first count against American National
Bank and Trust Company (“AFNB”), Credit Corporation
Says:
1.-13. Credit Corporation re alleges and incorporates
herein as if set forth at length herein rhetorical para-
graphs 1 through 13 of Count I of this pleading.
14. At all times material hereto AFNB has been en-
gaged in a variety of financing activities and Credit Cor-
— 37a —
poration has been engaged in a variety of investing,
financing and leasing activities.
15. By various means, including (but not limited to)
placing its officers and employees in management positions
with AFMC and on important committees, AFNB, at all
times material hereto asserted actual control over AFMC,
and was a “controlling person” as described in $20(a)
of the Securities Exchange Act of 1934.
16. AFNB, in controlling the actions of AFMC, speci-
fied in rhetorical paragraphs 2 through 12 of Count I
above, violated §10(b) of the Securities Exchange Act
of 1934, as amended, and Rule 10(b)-5 [17 C.F.R. $240.10
(b)-5], promulgated thereunder.
17. As a proximate result of AFNB’s violation cf
said statute and rule, Credit Corporation has been dam-
aged in the sum of at least $2,063,448.47, plus substantial
additional damage in amounts not vet determined.
WHEREFORE, Credit Corporation prays for judg-
ment in its favor and against AFNP on this Count V
as follows:
(1) That Credit Corporation be awarded compensa-
tory damages in such amount, not less than $2,063,448.47,
as the evidence shall justify, together with pre-judgment
interest and costs;
(2) That Credit Corporation be awarded such other
and further relief as shall be proper in the premises.
Count VI
AFNB’s Liability for Aiding and Abetting AFMC
For Sixth Count of its Amended Counterclaim and
Amended Claim, and for its second count against Amer-
ican Fletcher National Bank and Trust Company,
(‘‘AFNB’’), Credit Corporation says:
— 38a —
1. Credit Corporation re-asserts and incorporates as
if set forth in length herein the allegations of rhetorical
paragraphs 1 through 12 of Count I above.
2. Through various AFNB personnel, who were posted
in key management positions with AFMC and on important
committees of AFMC, AFNB kept itself fully informed
of all of the material facts concerning the Cromwell
loans and has knowledge that such material facts were
either being misrepresented or concealed from Credit
Corporation; yet AFNB took no corrective action.
3. As stated above and in other respects AFNB aided
and abetted AFMC in its violations of §10(b) of the
Securities Exchange Act of 1934 and Securities Exchange
Commission Rule 10(b)-5 [17 C.F.R. §240.10(b)-(5)] and
AFMC was, therefore, itself in violation of the said Act
and Rule.
4. As a proximate result of AFMB’s conduct in viola-
tion of said Statute and Rule, Credit Corporation has
been damaged in the sum of at least $2,063,448.47, plus
substantial additional damages in amounts not yet deter-
mined.
WHEREFORE, Credit Corporation prays for a judg-
ment in its favor and against AFNB on this Count VI
as follows: .
-
(1) That Credit Corporation be awarded compensa-
tory damages in such amount, not less than $2,063,448.47,
as the evidence shall justify, together with pre-judgment
interest and costs; and
(2) That Credit Corporation be awarded such other
and further relief as shall be proper in the premises.
Count VII
AFC’s Liability as a Controlling Person
For Seventh Count of its Amended Counterclaim and
Amended Claim and for its First Count against Amer-
— 39a —
ican Fletcher Corporation (“AFC”), Credit Corporation
says:
1.-13. Credit Corporation re-asserts and incorporates
herein as if set forth at length herein, the averments of
rhetorical paragraphs 1 through 13 of Count I above.
14. At all times material hereto, AFC has been en-
gaged in a variety of financing activities and Credit Cor-
poration has been engaged in a variety of investing,
financing and leasing activities.
15. AFC is the parent corporation, which owns virtually
all of the outstanding shares of AFMC and AFNB.
16. AFC has placed its own personnel in key manage-
ment positions and on important committees of AFMC
and has caused its subsidiary, AFNB to do likewise.
17. Through such ownership and control of AFMC and
by so placing its own personnel and personnel of its
subsidiary, AFNB, AFC has, at all times material here-
to, exerted actual control over AFMC and was a ‘‘con-
trolling person’’, as defined in §20(a) of the Securities
Act of 1934, as amended [15 U.S.C. §78(t) ].
18. AFC, in controlling the actions of AFMC, spe-
cified in rhetorical paragraphs 2 through 12 of Count I
above, violated §10(b) of the Securities Exchange Act of
1934, as amended, and Rule 10(b)-5 [17 C.F.R. $240.10(b)-
5], promulgated thereunder.
19. As a proximate result of AFNB’s violation of said
Statute and Rule, Credit Corporation has been damaged
in the sum of at least $2,063,448.47, plus substantial addi
tional damage in amounts not yet determined.
WHEREFORE, Credit Corporation prays for a judg-
ment in its favor and against AFC on this Count VIT as
follows:
(1) That Credit Corporation be awarded compensatory
damages in such amount, not less than $2,063,448.47, as
the evidence shall justify, together with pre-judgment in-
terest and costs; and
a
(2) That Credit Corporation be awarded such other
and further relief as shall be proper in the premises.
Count VIII
AFC’s Inability for Aiding and Abetting AFMC
For Eighth Count of its Amended Counterclaim and
Amended Claim and for Second Count against American
Fletcher Corporation (‘‘AFC’’), Credit Corporation says:
1.-12. Credit Corporation re-asserts and incorporates
herein as if set forth at length herein the allegations of
rhetorical paragraphs 1 through 12, above, of Count I.
13. Through AFC personnel and various personnel of
its subsidiary, AFNB, who were posted in key manage-
ment positions and on important committees of AFMC,
AFC kept itself fully informed of all of the materia!
facts concerning the Cromwell loans, and had knowledge
that such material facts were either being misrepresented
or concealed from Credit Corporation; yet AFC took no
corrective action.
14. As stated above and in other respects, AFC aided
and abetted AFMC in its violations §10(b) of the Secu-
rities Exchange Act of 1934 and Securities Exchange Com-
mission Rule 10(b)-5 [17 C.F.R. §240.10(b)-(5)] and AFC
was, therefore, itself in violation of the said Act and
Rule.
15. As a proximate result of AFC’s conduct in viola-
tion of said Statute and Rule, Credit Corporation has
been damaged in the sum of at least $2,063,448.47, plus
substantial additional damages in amounts not yet deter-
mined.
WHEREFORE, Credit Corporation prays for a judg-
ment in its favor and against AFC on this Count VIII
as follows:
(1) That Credit Corporation be awarded compensatory
damages in such amount, not less than $2,063,448.47, as
the evidence shall justify, together with pre-judgment
interest and costs; and
— 4la —
(2) That Credit Corporation be awarded such other
and further relief as shall be proper in the premises.
/s/ William A. Wick
William A. Wick
/8/ Nicholas C. Nizamoff
Nicholas C. Nizamoff
Attorneys for U.S. Steel —
Credit Corporation
White, Raub, Reis, Wick, & Riegner
1000 Merchants Bank Building
Indianapolis, IN 46204
EXHIBIT ‘A’?
AMERICAN FLETCHER MORTGAGE COMPANY
A Subsidiary of American Fletcher Corporation
600 American Fletcher Building
Indianapolis, Indiana 46204
Tel. (317) 633-2443
PARTICIPATING OFFERING
TO
U. S. STEEL CREDIT CORPO? ATION
BORROWER:
Justin Development Corporation (See Remark #4)
LOCATION:
North Side of Route 72 near Interstate 91
Cromwell, Hartford County, Connecticut
TYPE OF LOAN:
Land Acquisition (¢$ 860,000.)
and Development ($1,670,000.)
TYPE OF PROPERTY:
To be developed for 450 condominium units.
LOAN AMOUNT: |
$2,530,000. (76%)
— 42a —
APPRAISAL:
$3,240,000. (AFMC)
AMOUNT DISBURSED:
$1,315,300.
MATURITY:
Three (3) Years
PARTICIPATION OFFERED:
40% ($1,012,000.) U. S. Steel Credit Corporation
0% ($1,265,000.) American Fletcher Mortgage Inves-
tors
10% ($ 253,000.) American Fletcher National Bank
$2,530,000.
ESTIMATED YIELD:
Five percent (5%) above AFNB base rate, adjusted
as necessary.
REMARKS:
1. The land security consists of approximately 40
acres located on the north side of Route 72 near
Interstate 91 in Cromwell, Hartford County, Con-
necticut. Cromwell lies twelve miles south of Hart-
ford, Connecticut, and is considered a bedroom
community for Hartford and New Haven.
i 2. Adjoining the site to the east is Cromwell Hills
Condominiums, a 525-unit complex of which the
first phase of 355 units has been offered in the
market for a little less than two years. 330 of the
units are sold and occupied. The subject is con-
sidered to be superior to the adjacent project be-
cause of unit size and square foot sales price and
design.
3. The subject property is to be improved for a total
of 450 condominium units, which will have average
sales prices of $33,725. per unit. The instant land
— 43a —
acquisition and development loan will be repaid
from unit sales at the rate of $7,500. per unit,
which equates to complete repayment upon 75%
of sales.
4. The borrower is the Justin Development Corpora-
tion of White Plains, New York. On April 12,
1973, the Executive Committee of AFMI approved
a 50% participation along with a 10% participa-
tion approval from AFNB on the land acquisition
and development. The principals of Justin Develop-
ment Corporation are Mr. Michael §. Puntillo, with
a net worth of $3,500,000.; Mr. Donald J. Colasono,
net worth $941,400.; Mr. Gene L. Simms, net worth
$1,105,000.; Mr. Robert <A. Freeman, net worth
$308,500.; Mr. Robert G. Schuermann, net worth
$161,300. The total combined net worth is $6,016,-
000. Each of the above individuals will personally
guarantee the entire amount of this loan. En-
closed with this offering are personal statements
and resumes on the individuals.
0. The development work on the subject site will have
the protection of performance and labor and ma-
terial payment bonds.
EXHIBIT ‘‘B”’
AMERICAN FLETCHER MORTGAGE COMPANY
A Subsidiary of American Fletcher Corporation
600 American Fletcher Building
Indianapolis, Indiana 46204
Tel. (317) 633-2443
PARTICIPATION OFFERING
TO
U. S. STEEL CREDIT CORPORATION
BORROWER:
Justin Development Corporation (See Remark #4)
——"
LOCATION:
North Side of Route 72 near Interstate 91
Cromwell, Hartford County, Connecticut
TYPE OF LOAN:
Construction (Rollover)
TYPE OF PROPERTY:
Construction of 150 condominium units in Phase I to
be rolled over into additional phases containing a total
of 450 units.
LOAN AMOUNT:
$3,290,000. - Rollover
APPRAISAL:
$5,058,750. (AFMC)
AMOUNT DISBURSED:
-O-
MATURITY:
Three (3) years from date of loan closing; individual
unit construction loans not to exceed one (1) year.
PARTICIPATION OFFERED:
40% ($1,316,000.) U. S. Steel Credit Corporation
D0% ($1,645,000.) American Fletcher Mortgage Inves-
tors
10% ($ 329,000.) American Fletcher National Bank
$3,290,000.
ESTIMATED YIELD:
Four percent (4%) above AFNB base rate, adjusted as
necessary.
REMARKS:
1. The security consists of approximately 40 acres
located on the north side of Route 72 near Inter-
state 91 in Cromwell, Hartford County, Connecticut,
= 45a --
on which a total of 450 condominium units are to
be built. The amount of this construction loan is
to cover construction of Phase I consisting of 150
units and is to be rolled over into additional phases.
2. Average sale price of the units to be constructed
will be $33,725. Repayment to the construction loan
will be made through unit sales at a rate of 65%
of the unit sale price.
3. Construction not to exceed 100 spec units at any
one time. Additional starts will be allowed upon
each individual sale on a one for one basis. The
outstanding construction loan balance will not ex-
ceed $3,290,000. at any time.
4. The borrower is the Justin Development Corpora-
tion of White Plains, New York. On April 12,
1973, the Executive Committee of AFMI approved
a 50% participation along with a 10% participa-
tion approval from AFNB on the construction loan.
The principals of Justin Development Corporation
are Mr. Michael S. Puntillo, with a net worth of
$3,500,000.; Mr. Donald J. Colasono, net worth
$941,400.; Mr. Gene L. Simms, net worth $1,105,-
000.; Mr. Robert A. Freeman, net worth $308,500. ;
Mr. Robert G. Schuermann, net worth $161,300. The
total combined net worth is $6,016,000. Each of
the above individuals will personally guarantee the
entire amount of this loan.
9. Construction on the subject site will have the pro-
tection of performance and labor and material pay-
ment bonds.
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into this 31st
day of December, 1973, by and between AMERICAN
FLETCHER MORTGAGE COMPANY, a national asso-
ciation (hereinafter called “Company”) and U. 8S, STEEL
CREDIT CORPORATION, a Delaware corporation
(hereinafter called “Corporation”),
— 46a —
WITNESSETH:
WHEREAS, Company is the holder of a certain loan
obligation evidenced by a certain original Promissory
eee , 1974, in the principal amount
of Three Million Two Hundred Ninety Thousand and
No/100 Dollars ($3,290,000.00), said Note being payable
to Company or order and duly executed by Justin De-
velopment Corporation, photostat copy of said Promis-
sory Note being attached hereto as Exhibit “A” (said
Promissory Note being hereinafter called the “Note”) ;
and
WHEREAS, Company is party to a certain Building
Loan Agreement dated ..........0.. , 1974, by and between
Company and the makers of the Note, governing the dis-
bursement of proceeds and administration of the loan
obligation evidenced by the Note, a photostat copy of
said Building Loan Agreement being attached hereto as
Exhibit “B”;
NOW, THEREFORE, in consideration of the premises
and other good and valuable consideration, the parties
hereto agree as follows:
1. a. Company hereby sells, transfers and conveys
unto Corporation, without recourse, a ratable par-
ticipating share of Forty Per Cent (40% or
$1,316,000.00) in and to said Note, and all pro-
ceeds and avails of said Note and the security
therefor, excepting fees collected by Company as
compensation for the processing, closing and ad-
ministration of the loan obligation (said parti-
cipating share being hereinafter called the “Cor-
poration Participation”) ;
b. American Fleteher Mortgage Investors is to
have a ratable participating share of Fifty Per
Cent (50% or $1,645,000.00) and the American
Fletcher National Bank and Trust Company is to
have a ratable participating share of Ten Per
Cent (10% or $329,000.00) in and to said Note,
and all proceeds and avails of said Note and the
security therefor;
i) |
— 47a —
Company shall hold the Note and all security
therefor and all instruments and documents re-
lated to the loan obligation and all proceeds and
avails thereof, in trust for the benefit of Corpora-
tion as its interests appear; and Company shall
not modify nor consent to the modification of any
terms of the loan obliagtion or release any of
the security therefor without the written consent
of Corporation, except in accordance with the
terms of the Building Loan Agreement;
Company shall make disbursements of the pro-
ceeds of the Note in accordance with the terms
of the Building Loan Agreement, and prior to the
time of each such disbursement Corporation shall
remit to Company upon forty-eight (48) hours
notification an amount in cash equal to Forty Per
Cent (40%) of the disbursement to be made; each
such notification shall be deemed a_representa-
tion by Company that, insofar as Company knows
or is aware, no material breach of the Building
Loan Agreement exists, and all terms of the
Building Loan Agreement are in full foree and
effect;
Upon the making of each disbursement, Company
shall advise Corporation, in writing, the amount
of such disbursements, the cumulative amount of
all disbursements made to date, the cumulative
amount of all repayments of principal made to
date, the outstanding interest and principal of
the Note, the amount of the Corporation Partici-
pation, the amounts of all interest. principal, re-
imbursements of expense, or other proceeds and
avails of the Note, which have been colleeted by
Company and have not heen distributed; and such
other data and information as may be reasonably
necessary to reflect the status of the loan obliga-
tion;
Company shall administer the loan obligation in
accordance with the terms of the Building Loan
Agreement, shall be responsible only for willful
6.
_
misconduct, bad faith or gross negligence, and
shall remit promptly to Corporation (a) all re-
ceipts of interest, principal, and other proceeds
and avails of the Note and the security therefor
to the extent of the Corporation Participation,
and (b) all amounts received in reimbursements
of costs and expenses to the extent that such
costs and expenses have been paid by Company
from funds provided by Corporation;
Company shall notify Corporation promptly of
any material default in the terms of the loan ob-
ligation, or any other matter which, in Company’s
judgment, adversely affects the interest of Cor-
poration, and in the event of any material default
Company shall exercise all of its rights to en-
force collection of the loan obligation either upon
its own initiative or upon request by Corpora-
tion; and Corporation agrees to reimburse Com-
pany, upon demand, for all extraordinary out-of-
poeket costs and expenses which may be incurred
for the protection and preservation of security,
for the minimizing of loss and for the enforce-
ment of collection of the loan obligation by legal
process or otherwise, including courts costs and
reasonable attorney fees, to the extent of Forty
Per Cent (40%) of such costs and expenses;
Company hereby warrants and represents that
the aggregate amount of interest and other com-
pensation in lieu of interest, if any, collected from
or payable by the maker or guarantor of the Note
does not and will not exceed the limitation, if any,
upon the rate of compensation provided by ap-
plicable laws relating to usury, and hereby in-
demnifies Corporation against any and all loss
or e suffered on account of operation of
any of such laws;
Neither Company nor Corporation shall sell ex-
cept as set forth above or otherwise dispose of
the Note or the Corporation Participation ; pro-
— 49a —
vided, however, that upon request by Company,
Corporation shall sell, transfer and convey unto
Company the Corporation Participation for a cash
price equal to (a) the unpaid interest and princi-
pal of the Note which at the time are represented
by the Corporation Participation, and (b) all
outstanding amounts of funds provided by Cor-
poration to pay costs and expenses.
IN WITNESS WHEREOF, the parties hereto have
caused this Participation Agreement to be executed in
duplicate originals the day and year first above written.
Attest:
American Fletcher Mortgage
Company
(Signatures Illegible) (Signatures Ilegible)
Assistant Secretary Vice President
U. S. Steel Credit
Corporation
(Signatures Illegible) (Signatures Illegible)
Assistant Secretary Vice President
— Sia —
EXHIBIT “C”
AMERICAN FLETCHER MORTGAGE COMPANY
An Affiliate Of The American Fletcher Corporation
AFMC
600 American Fletcher Building
Indianapolis, Indiana 46204
Tel. 317 633-2443
March 22, 1973
Justin Development Corperation
c/o Mr. Robert A. Freeman
Gaynor, Freeman, Glick and Pisani
271 North Avenue
New Rochelle, New York 10801
Re: Cromwell Village
Cromwell, Connecticut
Gentlemen:
We hereby commit to make a first mortgage land ac-
quisition and development loan on the above referenced
project under the following terms and conditions:
LOAN AMOUNT:
$2,530,000.
INTEREST RATE:
Five percent (5%) above the prime rate of the
American Fletcher National Bank and Trust Com-
pany, per annum. from time to time in effect, pay-
able monthly.
In addition, the borrower shall pay $25,000. (1%)
on or prior to first disbursement. Additional amounts
equal to 1% of the loan balance shall be payable at
each loan closing anniversary date.
TERM:
Three (3) years from date of closing.
— 5la —
REPAYMENT:
Principal reduction to be made through unit sales
at a rate of $7,000. per unit.
MORTGAGOR:
Justin Development Corporation
GUARANTOR:
Edward T. Edwards is to be liable for the entire
amount of the land acquisition and development loan _
for the entire term of said loan.
SECURITY:
Approximately 40 acres located on the north side
of Route 72 near Interstate 91 in Cromwell, Hart-
ford County, Connecticut, to be developed for 450
condominium units.
DISBURSEMENTS:
$660,000. to be disbursed at loan closing for land
acquisition; balance is to he disbursed as work is
in place and supported by statements of certified
costs as required by AFMC.
SPECTAL CONDITIONS:
1, All necessary and customary closing expenses are
to he borne by you.
2. Documentation is to be satisfactory to us and
our counsel,
3. Evidence of proper zoning, survey, utility avail-
ability, and title is to be submitted to us for
our approval.
4. Detailed plans and specifications are to be sub-
mitted to us for our approval.
5. Construction must commence no later than sixty
(60) days after loan closing.
6. The American Fletcher Mortgage Company is to
have the exclusive right to arrange construction
and permanent mortgage financing for the de-
velopment of this property.
— 52a —
7. It is understood that we may offer this loan,
or a portion thereof, to American Fletcher
Mortgage Investors.
8. We are to be furnished with a satisfactory con-
tract or contracts relative to the development
of the property, together with performance and
payment bonds satisfactory to us and our coun-
sel.
9. We reserve the right to employ independent en-
gineers, of our selection, at your expense, to cer-
tify costs and work in place as some proceeds.
10. Annual Audit Statements are to be provided to
us at the close of each fiscal year.
11. You agree to comply with all governmental regu-
lations, including, but not limited to. applicable
environmental statutes.
12. In the event that the borrower fails to take
down this loan within sixty (60) days after ac-
ceptance of this commitment, liquidated damages
will be due and payable to American Fletcher
Mortgage Company of $25,300. (1%) to reimburse
AFMC for expenses incurred herewith.
In order for this commitment to be valid and binding
upon us, please acknowledge your understanding and ac-
ceptance of the terms and conditions contained herein
by signing, dating, and returning to us the enclosed two
carbon copies of this letter no later than April 5, 1973.
Very truly yours,
American Fletcher Mortgage
Company
/s/ Herbert B. Feldmann /s/ John A. Nauert
Herbert B. Feldman, John A. Nauert, Vice
President President
JPT/dsk
Approved and Accepted:
Justin Development
Corporation
Kdward T. Edwards /8/ Robert A. Freeman
Secretary
Date: April 10, 1973
— 53a —
EXHIBIT ‘‘C’’
AMERICAN FLETCHER MORTGAGE COMPANY
An Affiliate of the American Fletcher Corporation
600 American Fletcher Building
Indianapolis, Indiana 46204
Tel. (317) 633-2443
March 22, 1973
Justin Development Corporation
c/o Mr. Robert A. Freeman
Gaynor, Freeman, Glick and Pisani
271 North Avenue
New Rochelle, New York 10801
Re: Cromwell Village
Cromwell, Connecticut
Gentlemen:
We hereby commit to make a first mortgage construction
loan on the above referenced project under the follow-
ing terms and conditions:
LOAN AMOUNT:
$3,290,000. Rollover
INTEREST RATE:
Four percent (4%) above the prime rate of the
American Fletcher National Bank and Trust Com-
pany, per annum, from time to time in effect, payable
monthly.
In addition, the borrower shall pay 1% of the con-
struction loan amount per unit at time of initial dis-
bursement on each unit.
TERM:
Three years from date of closing; individual unit
construction loans not to exceed one year.
— 54a —
REPAYMENT:
Principal reductions to be made through sales at a
rate of 65% of unit sale price.
MORTGAGOR:
Justin Development Corporation
GUARANTOR:
Edward T. Edwards is to be liable for the entire
amount of the construction loan for the entire term
of said loan.
SECURITY:
150 condominium units in Phase I consisting of 15
one-bedroom units, 100 two-bedroom units, and 35
three-bedroom units.
DISBURSEMENTS:
Disbursements are to be made as work is in place
and supported by statements of certified costs as
required by AFMC.
SPECIAL CONDITIONS:
1. All necessary and customary closing expenses
are to be borne by you.
2. Documentation is to be satisfactory to us and
our counsel.
3. Evidence of proper zoning, survey, utility avail-
ability, and title is to be submitted to us for our
approval.
4. Detailed plans and specifications are to be sub-
mitted to us for our approval.
5. Construction must commence no later than sixty
(60) days after loan closing.
6. The American Fletcher Mortgage Company is to
have the exclusive right to arrange permanent
mortgage financing for the development of this
property.
13.
14.
— 55a —
It is understood that we may offer this loan, or
a portion thereof, to American Fletcher Mortgage
Investors.
We are to be furnished with a satisfactory con-
tract or contracts relative to the development of
the property, together with performance and pay-
ment bonds satisfactory to us and our counsel.
We reserve the right to employ independent en-
gineers, of our selection, at your expense, to
certify costs and work in place as same proceeds.
Annual Audit Statements are to be provided to
us at the close of each fiscal year.
. You agree to comply with all governmental regu-
lations, including, but not limited to, applicable
environmental statutes.
Mortgagee to collect from the borrower $200.00
per unit at the time said unit is released by
American Fletcher Mortgage Company.
In the event that the borrower fails to take down
this loan within sixty (60) days after acceptance
of this commitment, liquidated damages will be
due and payable to American Fletcher Mort-
gage Company of $32,900. (1%) to reimbuse
AFMC for expense incurred herewith.
Construction not to exceed 100 spee units at
any one time. Additional starts will be allowed
upon each individual sale on a one for one basis.
The maximum exposure not to exceed $3,290,000.
for any phase.
In order for this commitment to be valid and binding
upon us, please acknowledge your understanding and ac-
ceptance of the terms and conditions contained herein by
— 56a —
Signing, dating, and returning to us the enclose? two
carbon copies of this letter no later than April 5, 1973.
Very truly yours,
American Fletcher Mortgage Company
/s/ Herbert B. Feldmann
Herbert B. Feldmann, President
/s/ John A. Nauert
John A. Nauert, Vice President
JPT/dsk
Approved and Accepted:
Justin Development Corporation
/s/ Edward T. Edwards
Edward T. Edwards
/8/ Robert A. Freeman
Secretary
Date April 11, 1973
— 57a —
BUILDING LOAN AGREEMENT
This instrument, executed in duplicate this 21 day of
February, 1974, by and between JUSTIN DEVELOP-
MENT CORP., a New York Corporation, authorized to
do business in the State of Connecticut, (hereinafter called
the ‘‘Borrower’’), and AMERICAN FLETCHER MORT-
GAGE COMPANY, INC., an Indiana corporation (here-
inafter called the “Lender”),
WHEREAS, the Borrower as the owner in fee of or
the owner of the leasehold estate in the lands hereinafter
described in Exhibit ‘‘A’’ hereto attached and made a
part hereof, has applied to the Lender for a mortgage
loan to aid the Borrower in the construction of a certain
condominium project (hereinafter called the ‘‘Project’’)
in accordance with certain Drawings and Specifications
hereinafter referred to.
NOW, THEREFORE, in consideration of the mutual
promises hereinafter contained and of other valuable con-
siderations, the parties hereto agree as follows:
1. The Borrower agrees to take and the Lender agrees
to make (subject among other things, to this agreement)
a loan in principal sum of $3,290,000.00, to be advanced
as hereinafter provided, bearing interest from the date
of each advance, said loan being evidence by certain col-
lateral documents called the ‘‘Note’’ and the ‘‘Mortgage.’’
(See Exhibit ‘‘D’’, a copy of said ‘‘Note’’, attached hereto
and made a part of this instrument.)
2. The terms ‘‘Borrower’’ and ‘‘Lender’’ herein shall
be construed to refer whenever applicable to ‘‘Owner’’
and ‘‘Mortgagee’’ respectively. Further, the term
“‘Lender’’ herein shall be deemed to include any person
to whom the Note and the Mortgage hereinbefore men-
tioned shall be assigned.
.— 58a —
3. The Borrower agrees to erect the Project on the
lands described in Exhibit ‘‘A’’ by July 1, 1977*** in
accordance with Drawings and Specifications designated
“Cromwell Condominiums” by Donald J. Colasono As-
sociates, dated July 13, 1973, Job. No. 7305 no advance
of funds shall be made by the Lender until com-
plete and acceptable Drawings and Specifications, as
determined by the Lender, are deposited with the Lender.
Borrower authorizes Lender to disburse to Lender, the
' 1% construction loan fee, per unit, at time of initial
disbursement of each unit. See Exhibit ‘‘C’’ for release
fees per unit, to be collected by Lender, and for maximum
number of units to be constructed at one time.
3. (a) At Lender’s written request Borrow agrees to
record required documents pursuant to the terms of
Connecticut Statutes pertaining to condominiums and es-
tablishing individual, unit fee title structure. Lender
agrees to execute a Consent to such documentation pro-
vided the documentation is in compliance with the afore-
mentioned State law pertaining to condominiums and
provided further that the lien of the Mortgage securing
this loan as transferred to the unit fee estates created
thereunder, is of equal dignity, priority and legal effect
as said lien is on the date of execution, delivery and orig-
inal recordation of said Mortgage.
(b) The Lender herein agrees, upon the request of the
Borrower hereunder, to execute partial releases from
the encumbrance of the Mortgage securing the indebted-
ness created herein under the conditions stated in this
paragraph. The payment for such releases shall be that
as provided for under the terms of the Exhibit “C” at-
tached hereto and made a part of this Loan Agreement.
Said partial releases will be issued upon the receipt of
the required payments aforenoted and provided that the
*** subject to completion of each individual condominium
unit, within one year from date of initial disbursement
for that particular unit.
— 59a —
Lender, at Borrower’s expense, receives an endorsement
to Lender’s Mortgagee Title Insurance Policy, insuring
that said Title Insurance Policy is not adversely affected
as to the coverage provided thereunder, by reason of the
delivery and recordation of such partial release, and pro-
vided further that the note and mortgage securing this
loan, and all other documents, are current, in full force
and effect, and not in default.
(c) All of the terms of this Loan Agreement have been
specifically incorporated by reference to the Mortgage
securing the indebtedness created by this Agreement by
specific language of incorporation contained in the Mort-
gage. It is hereby agreed and reaffirmed between Borrower
and Lender that the provisions contained in this Loan
Agreement are specifically incorporated by reference to
and made a part of the Mortgage referred to herein, as
if fully set forth in said Mortgage.
(d) Borrower agrees to retain majority control over
any legal entity developed for the maintenance, super-
vision and administration of any common area and re-
creational facilities over, appurtenant to or for the benefit
of the real estate securing this loan as described above.
Said majority control will be maintained for so long as
any portion of the loan balance referred to herein is
outstanding.
4. The Borrower agrees that any and all requests for
changes in said Drawings and Specifications must be in
writing, signed by its authorized personnel and submit-
ted to Lender for approval. No such changes shall be
made without the consent of the Lender.
5. Applications for advances under this agreement
are to be made by the Borrower to the Lender in a form
and manner acceptable to the Lender. Said Applications
shall be made once a month after the commencement of
work hereunder, for work done during the preceding
— 60a —
month. Applications shall be filed with the Lender at
least five days before the date upon which the advance is
desired. Applications shall be in accordance with the Cost
Breakdown initialed by the Borrower and attached hereto
as Exhibit‘ ‘B” and made a part hereof. The Borrower
shall only be entitled to payment in an amount approved
by the Lender with respect to each application.
The Borrower agrees as a condition precedent to the
advance of any portion of the loan that the Lender. may
require the Borrower to furnish, among other things, at
Lender’s option:
a. A duly certified survey of recent date.
b. Satisfactory title evidence.
ce. Acknowledgments of payment and release of liens
from the general contractor, if any, and all sub-
contractors and materialmen dealing directly with
the principal contractor, if any. The said acknowl-
edgments and releases shall be in the form re-
quired by local lien laws and shall cover all work,
labor and materials, including equipment and
fixtures of all kinds done, performed, or fur-
nished for the Project. The Lender may require
the said acknowledgment and releases down to
the date of the requested advance, and concur-
rently with the final payment for the entire
Project.
d. Submission to the Lender and approval by Lender
of the General Contract.
e. Submission to the Lender and approval by the
Lender of a dual obligee Performance Bond with
Labor and Material Payment Bond.
The Lender may at its option hold back from any
advance an amount equal to 10% of the advance applied
for, which amount shall be payable upon completion to
the satisfaction of the Lender of the entire Project, in-
cluding offsite utilities, if any, in accordance with afore-
— 6la —
said Drawings and Specifications. Final payment here-
under may be withheld until after the expiration of any
period in which laborers, sub-contractors, or material-
men may have for filing Notices of Mechanics Liens.
Borrower agrees that Lender may at Lender’s option
require advances under this agreement be made through
the facilities of a title company. Borrower further agrees
to exercise any necessary document required by Lender
or title company to perfect the disbursing arrangement.
If at any time, either prior to the commencement of
construction or during the construction period, the pro-
jected cost of the improvements as estimated by the
Lender, exceeds the amount of $3,290,000 for 150 units,
the Lender may require the Borrower to deposit such
excess with the Lender or the pertinent title company
upon demand; such deposit is to be then utilized for econ-
struction costs before the Lender shall be required to
make any further disbursements hereunder.
6. The Lender and its agents shall, at all times
during construction, have the right of entry and free
access to the Project and the right to inspect all work
done, labor performed, and materials furnished in and
about the Project and to inspect all books, sub-contracts
and records of the Borrower.
For purposes of such inspections the Borrower shall
notify Lender at the following stages of construction:
a. Caissons, footings, and reinforeed concrete slabs
immediately prior to placing concrete.
b. Roof and floor framing prior to sheathing.
ce. Installation of mechanical piping before cover-
ing.
d. Rough-in of electrical in buildings before cov-
ing.
e. Rough-in of plumbing in buildings before cover-
ing.
62a, —
f. On any request for funds if inventory of materials
stored is to be included.
g. Final inspection of all phases of work.
Borrower and Lender agree that the purpose of Lend-
er’s inspections is to verify the progress of construction
and in no manner can be taken to indicate or substantiate
that work completed or being done is in accordance with
the approved Drawings and Specifications.
7. The Borrower agrees that the Project shall be
constructed entirely upon the premises mortgaged to the
Lender by the Borrower and will not encroach upon or
overhang any easement or right-of-way nor upon ‘the
land of others. The Project will be constructed strictly
in accordance with all applicable building, zoning, deed
and plat restrictions, statutes, ordinances, regulations
and administrative orders, and in conformity with the
requirements of the Board of Fire Underwriters or similar
body. The Borrower will from time to time furnish satis-
factory evidence of compliance with respect to the fore-
going if required by the Lender. Borrower agrees to
maintain insurance as provided in the mortgage and as
required by the Lender and Local and State Laws.
8. The Borrower agrees that the Lender shall have
a security interest in all building materials and all other
personal property, including but not limited to carpeting,
appliances and equipment placed upon the lands described
in Exhibit “A” prior and subsequent to their incorpora-
tion into the improvements to be constructed, and that
all of such building materials shall be free and clear of
any lien or security interest of any other party when de-
livered to said lands. Borrower further agrees that the
Lender may file any financing statements necessary to
perfect its security interest in said personal property
signed by the Lender alone. Borrower further agrees that
should the Lender enter upon the premises to complete
the Project as the Lender is empowered to do upon
default of the Borrower under the provisions of Article
—- G3e —
9 the Lender may use any of such materials in the com-
pletion of the Project.
9. If the Borrower at any time prior to the comple-
tion of the Project abandons the same or ceases work
thereon for a period of more than twenty (20) days or
fails to complete the erection of the Project strictly
in accordance with the Drawings and Specifications, ex-
cept as to changes approved as herein provided by the
Lender, or makes changes in the Drawings and Specifi-
cations, without first securing written approval of the
Lender, or otherwise fails to comply with the terms here-
of. then such failure shall be deemed a default hereun-
der at the option of the Lender and the Lender at its
option, may terminate this agreement or at any time
thereafter may enter into possession of the premises and
perform any and all work and labor necessary to com-
plete improvements substantially according to Drawings
and Specifications and may employ watchmen to pro-
tect the premises from injury; all sums so expended by
Lender to be deemed paid to Borrower and secured by
said Mortgage. For this purpose, the Borrower hereby
constitutes and appoints the Lender its true and lawful
attorney-in-fact with full power of substitution in the
premises, to complete the Project in the name of the
Borrower, and hereby empowers said attorney or at-
torneys as follows: To use any funds of the Borrower,
including any balance which may be held in escrow and
any funds which may remain unadvanced under the Mort-
gage for the purpose of completing the Project in the
manner called for by the Drawings and Specifications
hereinbefore mentioned; to make such additions and
changes and corrections in the Drawings and Specifica-
tions which shall be necessary or desirable to complete
the Project in substantially the manner contemplated by
the Drawings and Specifications; to employ such con-
tractors, sub-contractors and agents, architects and in-
spectors as shall be required for said purposes; to pay,
settle or compromise all existing bills and claims which
may be liens against the said Project, or as may be neces-
nulla.
sary or desirable for the completion of the job, or the
clearance of title; to execute all applications and certi-
ficates in the name of the Borrower which may be re-
quired by any of the contract documents and to do any
and every act which the Borrower might do in its own
behalf, including but not limited to the execution of all
permanent loan documents. =
Pts ry
It is further understood and agreed that this power
of attorney shall be deemed to be a power coupled with
an interest and cannot be revoked. The above mentioned
attorney shall also have power to prosecute and defend
all actions or proceedings in connection with the con-
struction of the Project or mortgaged premises and to
take such action and require such performance as he
deems necessary. The Borrower hereby assigns and quit
claims to the Lender all sums unadvanced under said
Mortgage and all sums due in escrow conditioned upon
the use of said sums in trust for the completion of the
Project, such assignment to become effective only in
ease of the Borrower’s default.
10. The Borrower agrees to comply with all the terms
and conditions of certain commitment letters described,
in brief, as follows: Letter from Lender to Borrower
dated March 22, 1973; and Letter from Lender to Borrower
dated May 21, 1973, and Letter from Lender to Borrower
dated November 21, 1973. Said letters have been ac-
cepted by Borrower and are attached hereto as Exhibit
“C” and made a part hereof.
11. The Borrower further agrees that the Lender may,
at its option, waive any of its rights under any one or
more of the provisions of this agreement, but that such
waiver shall not constitute waiver of any other or all
provisions not specifically waived, nor shall it give rise
to a duty on the part of the Lender in the future to
continue to waive any of its rights.
12. This instrument shall be binding upon the parties
hereto and their respective successors and assigns.
— 65a —
IN WITNESS WHEREOF, the parties hereto have
caused these presents to be executed this 21 day of Feb-
ruary, 1974.
Signed, Sealed and Deliv- Justin Development Corp.
ered in the presence of: A Corporation
Francis X Cavanaugh By: Robert Schuermann,
Sandra C. Teichert Its President
By: Robert A. Freeman
Its Secretary
American Fletcher Mortgage Company, Inc.
By: Milton Learner
Attest:
STATE OF CONNECTICUT )
) SS: GREENWICH
COUNTY OF FAIRFIELD )
Before me, the.undersigned, a Notary Public in and for
said County and State, this 21 day of February, 1974,
personally appeared JUSTIN DEVELOPMENT CORP.,
a New York Corporation authorized to do business in the
State of Connecticut, by Robert Schuermann and Robert
A. Freeman, its President and Secretary respectively,
signers and sealers of the foregoing instrument and ac-
knowledged the execution of the foregoing instrument as
their free act and deed and the free act and deed of said
corporation, for the purposes and uses stated therein.
WITNESS my hand and Notarial Seal.
/s/ Sandra C. Teichert
Notary Public
My Commission Expires:
March 31, 1974
— 66a —
COUNTY OF MARION )
) SS:
STATE OF INDIANA )
Before me, the undersigned, a Notary Public in and for
said County and State, this .... day Of cesses , 1974,
I > INUIT 8 5.5. siccanstivessicisesiakaadib neebistiitlnsabpebnninacdgiiile
respectively, of American Fletcher Mortgage Company,
Ine., who as such officers, for and on its behalf, acknowl-
edged the execution of the foregoing instrument.
WITNESS my hand and Notariai Seal.
SOCEM EERE EEE HEE EEH HERE HERE EEE HEHEHE
Notary Public
This instrument prepared by:
Milton Learner
600 American Fletcher Building
Indianapolis, Indiana 46204
— 67a —
EXHIBIT “A”
A certain piece or parcel of land situated on the wester-
ly side of Willowbrook Road, in the Town of Cromwell,
County of Middlesex and State of Connecticut, more par-
ticularly described on map entitled ‘‘Survey Map Prop-
erty of Justin Development Corp., Cromwell, Conn., Igor
Vechesloff Professional Engineer & Land Surveyor, 51
Lorraine Street, Hartford 5, Connecticut, Scale 1” — 100’,
Date 3/5/69, Revised 10/20/72 and Revised 5/11/73,
Drawing No. 1107,” and bounded and described as follows:
Commencing at a point in the westerly line of Willow-
brook Road at the intersection of the northeasterly corner
of property now or formerly of H. & 8S. Tool Co., and
the southeasterly corner of the premises herein described;
thence running along the northerly boundary line of
property now or formerly of H. & S. Tool Co., South
77°54’35” West 889.06 feet to a point in the northerly
boundary line of Nike Road; thence running along the
northerly boundary line of said Nike Road North 80°13’
25” West 172.48 feet to a point at the intersection of
property now or formerly of Arthur H. Alden III and
Joseph G. Perotti; thence running along the easterly line
of property of Alden and Perotti, North 12°25’17” West
607.94 feet to a point; thence running North 64°31/01”
West 200.00 feet to a point; thence running North 15°00’
00” Kast 739.25 feet to a point; thence North 75°00/00”
West 191.98 feet to a point in the easterly boundary line
of property now or formerly of William F. Harrington,
et al; thence along the easterly boundary line of land of
said Harrington, et al and land of James M. Davidson
North 1°30’00” East 405.60 feet to a point at the inter-
section of land now or formerly of Thomas Kelly; thence
running along the southerly boundary line of land of said
Kelly, South 84°05’00” East 217.35 feet to a point; thence
continuing along the southerly line of land of said Kelly,
South 70°15’32” East 61.19 feet to an iron pin; thence
continuing along the southerly boundary line of said Kelly,
== GGe ....
South 80°20’50” East 853.54 feet to a point, 3.56 feet west
of an iron pin, said point being located in the westerly
boundary line of Willowbrook Road; thence running along
the westerly line of said Willowbrook Road, South 8°57’
01” West 93.125 feet to a point; thence continuing along
the westerly boundary line of said Willowbrook Road
South 0°18’00” East 547.07 feet to a point; thence con-
tinuing along the are of a curve on the westerly boundary
line of said Willowbrook Road, said curve having a cen-
tral angle of 11°03’15” and a radius of 300.00 feet, 154.345
feet to a point; thence continuing along the westerly line
of said Willowbrook Road South 11°21’15” East 347.83
feet to a point; thence continuing along the westerly line
of said Willowbrook Road, South 19°18’02” East 180.99
feet to a point; thence continuing along the said westerly
line of Willowbrook Road, South 21°28’25” East 132.89
feet to a point; thence continuing along the westerly line
of said Willowbrook Road South 25°55’25” East 86.70
feet to the point of beginning.
Containing 41.285 acres.
— 69a —
= . Payacnt Xo. .
‘© the period: August 20, 1973 1.0 —Bobrwaxy ‘ 1974 pinclusiv
ae of Job _ Willowbrook Commons ; Our Zeb Ko.
Crome), Connecticut ' Your Job Ko.
. _-_——————__
P. 0.° Ko. ;
° Route 72 ac Country Squire Road (etic a mes
cation of Work Sheet Ko.
———KL
atractor's Name Jobco, Inc. Contract Price$3,290,000
: (Luap Sum)
atractor’s Address Great Neck, New York Estimated Price $ a
(Unit Sum)
tes Subcontractor/Material Total Earned to/| Retainage | Amounts | Amounts
.aber . Desler Contract Date Prev- to
: + *| dously be Paid
Paid
- | Dwelling Unitsr
1 General Conditions 130,130 | . 55,409. 55,409
2 Building Excavation - 113,725 42,383 |. ; 42,38:
3 Concrete Work __.. 286,489 33,626 ; 33,62€
4 Structural Steel - - 31,209 22,073 i "22,07:
5 Carpentry 1,262,962 35,250 oak ~ 35, 25¢
7 Dampproofing & Caulking 16,196 --0- a -1. Qe
é Kitchen & Lav. Cab. 105,090 -0- | a pee
9 Drywall - [| 322,515 -0- +: =O
10 Painting. é + = 78, 610 -0- -0-
11 °.| Flooring 109,640 -0- : —
12 Hardware & Toilet Acceg. 21,928 -0- “ “o-
13 Windows & $l. Doors 60,235 ~-0- as -0-
14 Fireplaces . 17,379 -0- ; -0-
15 Refrig. ,Range,Dish., : ant
RS Disp. 114,372 -0- , -0-
16 Electrical. me | 158,947 _ =0- 4 -§-
17 Plumbing - 192,535 4,400 . . th ae
18 | HVAC 210,012 -0- |: "0. heh
19 Bond Premium | 23,000 22,638 23,63:
; .
TOTAL . 13,290,000 | 226,779 uh ~ . bale, 77:
I hereby certify that the aforementioned total contract price of
TFepresents the total coms to construre 150 units, es per breakd|
sheet. >
JUSTIN “ee CORP
— 70a --
1S x 17,250 = 258,750
Lso 3,290,000
60 x 21,700 = 1,302,000 .
40 x 22,450 = 698,000
35 x 23,750 = 831,250]
. ry
Nf
Gr
— 7la —
EXHIBIT “D”
NOTE
$2,530,000 DUE: June 1, 1976
Cromwell, Connecticut, .........c.00... , 1973
On or before June 1, 1976, for value received, the un-
dersigned, jointly and severally, promise to pay to the
order of
AMERICAN FLETCHER MORTGAGE COMPANY,
INC.,
At its main office in the City of Indianapolis, Indiana
the principal sum of Two Million Five Hundred Thirty
Thousand and no/100 ($2,530,000.00) Dollars or so much
thereof as is from time to time advanced hereunder, with
interest on the balance of principal remaining unpaid
from time to time at the rate of five per cent (5%) per
annum above the daily “Base Rate” in effect at American
Fletcher National Bank and Trust Company of Indian-
apolis. Indiana until maturity or so long as there is no
uneured default in the payment of any installment of
principal or interest hereunder, and with interest at the
rate of fourteen per cent (14%) per annum, after matur-
ity and while there exists any uncured default hereunder,
until paid, said principal and interest being payable as
follows:
Interest only at stated rate is due and payable on
June 1, 1973 and on first day of each month there-
after including the first day of June, 1976, the entire
balance of principal together with any unpaid inter-
est shall be due and payable on June 1, 1976:
all without relief from valuation or appraisement laws
and with attorney’s fees and costs of collection, author-
ized under applicable law.
This Note is secured hy a Real Estate Mortgage of
even date herewith executed, acknowledged and delivered
by the Makers hereof to the Payee and secured by Real
— 72a —
Estate located in Middlesex County, Connecticut. Upon
failure to pay the principal or interest, or any installment
of principal or interest of this Note when due, or upon
failure to comply with any of the terms. provisions and
conditions of the Mortgage securing the payment hereof,
all of the indebtedness then unpaid shall, at the option
of the holder hereof, become immediately due and col-
leetible without notice.
The Makers and endorsers severally waive present-
ment for payment, protest, notice of protest and notice
of non-payment of this Note.
The Makers shall have the privilege of prepaying the
indebtedness evidenced hereby only with the written con-
sent of the holder. Delay in exere sing any of the holder’s
rights or options hereunder shall not constitute a waiver
thereof, and waiver of any right or option shall not con-
stitute a waiver of the right to exercise the same in the
event of any subsequent default. Makers and endorsers
hereof hereby jointly and severally consent to the exten-
sion of time for the payment of this Note or any install-
ment hereof, any modification hereof, release from li-
ability of any maker, endorser, guarantor, or any other
person or entity at any time liable for the payment here-
of, and the modification or release of any collateral at
any time held as security of this Note, without notice
and without affecting the liability of any maker or en-
dorser.
Time is of the essence of this Note. This is an acquisi-
tion/development loan for a business purpose; multiple
advances will be made hereunder, interest shall acerue
from the date of each such advance.
JUSTIN DEVELOPMENT CORP.,
A Corporation
SS
Its Secretary/Treasurer
— 73a —
EXHIBIT “D”
NOTE
$3,290,000.00 EERE Seneca ore , 1977
Cromwell, Connecticut,...0......ccccccseeeee —
2 Sn . 1977, for value received,
the undersigned, jointly and severally, promise to pay
to the order of
AMERICAN FLETCHER MORTGAGE COMPANY.,
INC.,
at its main office in the City of Indianapolis, Indiana, the
principal sum of Three Million Two Hundred Ninety
Thousand and no/100 Dollars ($3,290,000.00) or so much
thereof as is from time to time advanced hereunder, with
interest on the balance of principal remaining unpaid
from time to time at the rate of four per cent (4%) per
annum above the daily “Base Rate” in effect at Ameri-
can Fletcher National Bank and Trust Company of In-
dianapolis, Indiana until maturity or so long as there
is no uncured default in the payment of any installment
of principal or interest hereunder, and with interest at
the rate of fifteen per cent (15%) per annum, after matur-
ity and while there exists any uncured default hereunder,
until paid, said principal and interest being payable as
follows :
Interest only at stated rate is due and payable on
iictianitiannnaiiocaienda , 1974, and on the first day of each
month thereafter, including the first day of ...0.......
ssseeeeen LOTT, the entire balance of principal together
with any unpaid interest shall be due and payable
WY si ccisacersseentenieenens , 1977;
all without relief from valuation or appraisement laws
and with attorney’s fees and costs of collection, author-
ized under applicable law.
This Note is secured by a Real Estate Mortgage of
even date herewith, executed, acknowledged and delivered
— 74a —
by the Makers hereof to the Payee and secured by Real
Estate located in Middlesex County, Connecticut. Upon
failure to pay the principal or interest, or any install-
ment of principal or interest of this Note when due, or
upon failure to comply with any of the terms, provisions
and conditions of the Mortgage securing the payment
hereof, all of the incebtedness then unpaid shall, at the
option of the holder hereof, become immediately due and
collectible without notice.
The Makers and endorsers severally waive present-
ment, protest, notice of protest and notice of non-pay-
ment of this Note.
The Makers shall have the privilege of prepaying the
indebtedness evidenced hereby only with the written con-
sent of the holder. Delay in exercising any of the holder’s
rights or opinions hereunder shall not constitute a waiver
thereof, and waiver of any right or option shall not
constitute a waiver of the right to exercise the same in
the event of any subsequent default. Makers and endorsers
hereof hereby jointly and severally consent to the ex-
tension of time for the payment of this Note or any in-
stallment hereof, any modification hereof, release from
liability of any maker, endorser, guarantor, or any other
person or entity at any time liable for the payment here-
of, and the modification or release of any collateral at
any time held as security of this Note, without notice
and without affecting the liability of any maker or en-
dorser.
Time is of the essence of this Note. This is a con-
struction loan for a business purpose; multiple advances
will be made hereunder, interest shall acerue from the
date of each such advance.
JUSTIN DEVELOPMENT CORP.
Its Secretary
—_ te—
Unrrep Srares District Court
SovtHern Disrricr Or InNpiuwa
InptiANaApoLtts Drvtstox
AMERICAN FLETCHER MorTGAGE Company, Iye., and
AMERICAN FLETCHER Nationan BANK axp Trust CoMPANY,
Plaintiffs.
vs.
U. S. Sreex Creprr Corporation,
Defendant and Counterelaimant.
vs.
American FietcHer Morteace Company, Inc...
AMERICAN FLetTcHEerR Nationa, BANK AND Trust? CoMPANY,
AND AMERICAN FLETCHER CorPoraTIoN,
Counterdefendants.
Cause No. IP 76-276-C
MOTION TO DISMISS OR FOR
JUDGMENT ON THE PLEADINGS AS TO
SECURITIES LAWS CLAIMS
Counterdefendants American Fleteher Mortgage Com-
pany, Ine., American Fletcher National Bank And Trust
Company and American Fletcher Corporation hereby move
the Court for judgment on the pleadings dismissing
Counts *, V, VI, VII and VIII of ‘‘U.S. Steel Credit Cor-
poration’s Amended Counterclaim And Amended Claim
Against Counter-Defendant,”’ filed January 8, 1979, and
Counts IX, X and XI of the ‘‘Seecond Amendment To
Amended Counterclaim And Amended Claim Of U.S. Stee!
Credit Corporation’’ submitted February 9, 1979, with
leave to file granted Steel on April 10, 1979. Each such
count purports to assert violations by the counterdefen-
dants of the federal (Counts I and V through VIII) or
state (Counts IX through XI) securities laws.
The reason for the motion is that as a matter of law,
the participation by U.S. Steel Credit Corporation
— ae
(‘‘Steel’’) in loans to Justin Development Corporation
did not constitute the purchase or sale of a ‘‘security’’
within the meaning of the federal or state securities laws.
Because no ‘‘security’’ is involved, Steel’s securities
claims must be dismissed.
The insufficiency of Steel’s securities law claims is clear
from the face of Steel’s pleadings, including the exhibits
thereto. To the extent the Court may rely upon matters
outside the pleadings, counterdefendants request that this
motion be treated as a motion for summary judgment
pursuant to Rules 12(b) and (c) and Rule 56 of the Fed-
eral Rules of Civil Procedure.
A brief in support of this motion is submitted herewith.
Respectfully submitted,
/s/ Theodore R. Boehm
/s/ James H. Ham, III
Attorneys for the plaintiffs
and counterdefendants American
Fletcher Mortgage Company, Inc.,
American Fletcher National Bank
And Trust Company and American
Fletcher Corporation
THEODORE R. BOEHM
JAMES H. HAM, III
BAKER & DANIELS
810 Fletcher Trust Building
Indianapolis, Indiana 46204
(317) 636-4535
— 77a —
EXHIBIT “C”
Unitep States Districr Court
SouTHERN District Or INpIANA
INDIANAPOLIS Division
AMERICAN FLETCHER MortTGAGE Company, Inc.,
AMERICAN FLETCHER NatTionaL BANK AND TRUST CoMPANY,
Plaintiffs,
VS.
U. S. Srert Creprr Corporation,
Defendant and Counterclaimant,
VS.
American FLetcHer Mortcacr Company, INnc.,
AMERICAN FLercHer NationaL BANK AND TRUST CoMPANYy,
AND AMERICAN FLETCHER Corporation,
Counterdefendants.
Cause No. IP 76-276-C
U. S. STEEL CREDIT CORPORATION’S CROSS-
MOTION FOR SUMMARY JUDGMENT THAT ITS
PATICIPATIONS WERE “SECURITIES”? UNDER
FEDERAL AND STATE SECURITIES ACT
U. S. Steel Credit Corporation (‘‘USSO’’), by counsel,
pursuant to Rule 56 of the Federal Rules of Civil Pro-
cedure, hereby moves the Court for Summary Judgment,
declaring that its ‘‘participations’’, acquired from Ameri-
can Fletcher Mortgage Company (‘‘AFMC’’) in connec-
tion with the Cromwell, Connecticut, condominium loans
were ‘‘securities’’ within the meaning of the Federal and
State of Indiana Securities Acts.
The grounds of this Motion are that there is no genuine
issue of material fact in respect of the status of such
participations as ‘‘securities’’ and that USSC is entitled
to summary judgment on this issue, raised in its counter-
claim herein, as a matter of law.
— 78a —
In support of this Motion, USSC files herewith a Brief,
setting forth the applicable Counts of its Counterclaim,
as amended, in which such ‘‘securities’’ issues are raised
against the Counter-Defendants, as well as the applicable
principles of law and ruling authorities.
In further support of this Motion, USSC files herewith
the Affidavit of Nicholas C. Nizamoff, one of USSC’s
counsel, verifying the citations of deposition testimony
referred to in the accompanying Brief.
/s/ William A. Wick
Attorney for U. S. Steel Credit Corporation
Of Counsel for U. S. Steel Credit Corporation:
WHITE, RAUB, REIS, WICK & RIEGNER
1000 Merchants Bank Building
11 South Meridian Street
Indianapolis, IN 46204
(317) 632-1348
CERTIFICATE OF SERVICE
I hereby certify that a copy of the foregoing Motion
was this 22nd day of February, 1980, served upon Theo-
dore R. Boehm, Esq. and James H. Ham, III, Baker &
Daniels, 810 Fletcher Trust Building, Indianapolis, In-
diana 46204, by depositing a copy of same in the United
States mail, postage prepaid.
/s/ William A. Wick
— 79a —
Unitep States Districr Court
SouTHeERN District Or INDIANA
INDIANAPOLIS Division
American FLyercHer Mortcace Company, Inc., and
American FLercHer NATIONAL Bank ANv Trust Company,
Plaintiffs,
Vs.
U. S. Sree, Crepir Corporation,
Defendant and Counterclaimant,
VS.
American FLrrcurer Morrcace Company, Inc.,
AMERICAN FLETCHER NATIONAL BANK AND Trust Company,
AND AMERICAN FLETCHER CorPORATION,
Counterdefendants.
Cause No. IP 76-276-C
AFFIDAVIT OF NICHOLAS C. NIZAMOFF
STATE OF INDIANA )
) SS:
COUNTY OF MARION )
Before me, a Notary Public in and for the aforesaid
county and state, personally appeared Nicholas C. {Niza-
moff, who being first duly sworn upon his oath, deposes
and says:
1. Affiant is one of the counsel for U. S. Steel Credit
Corporation, Defendant and Counterclaimant in the
above-entitled action.
2. As such counsel, affiant personally participated in
the taking of the depositions, referred to below, and can
verify that the deposition testimony, referred to in U. S.
Steel Credit Corporation’s accompanying Brief faithfully
reports the deposition testimony set forth in affiant’s copy
of the transcript of such testimony.
— 80a —
3. The deposition of Stanley John Mack was initially
taken on behalf of American Fletcher Mortgage Company
on the 7th, 8th and 9th days of March, 1978, in Indian-
apolis.
4. Mr. Mack testified that he had been employed by
U. S. Steel Credit Corporation since January, 1970, with
the title of Assistant Treasurer and Assistant Secretary
(Mack dep. p. 9).
d. After testifying that 90 to 95% of the Credit Cor-
poration’s financing involved real estate construction loans
(Mack dep. p. 22) and being asked if transactions in-
volving millions of dollars were at stake, Mr. Mack an-
swered as follows:
‘Yes. I wonder if I could clarify. When we talked
of real estate loans, the Credit Corporation does not
as a practice lead a loan. We are a participating lend-
er. We buy participations from other lead lenders.”
6. Asked at a later point what types of loans were
involved, Mr. Mack testified (p. 25) :
‘“‘But there is no set percentage of a type of loan
that we’re seeking to participate in.
We’re currently involved in hotel financing, shopping
centers, condominiums, small industrial warehouses.
I guess that is pretty much it.’’
7. Asked if the Credit Corporation had any written
‘guidelines for suitable investments,’’ Mr. Mack answered
**No’’, but he said that the Credit Corporation did have
rules of thumb, as follows:
‘We stay in short term investments, interim-type
loans. Generally loans that are restricted to the con-
struction.’? (Mack dep. p. 87)
8. He then added (p. 87):
‘*We do not want to be, as I indicated, a lead lender.
We do want to have the lead retain a substantial part
of the loan.’’
— 8la —
9. Asked whether USSC raised money for its invest-
ments with a line of credit, Mr. Mack responded (p. 11):
“Usually we raise our money through commercial
paper. We do have a line of credit, but commercial
paper normally has been our source for funds.”
10. Affiant also participated in the deposition of Wil-
liam H. Lang, taken on behalf of the Plaintiff in Tampa,
Florida, on January 8, 1980.
11. Mr. Lang testified that in 1973 he was either Pres-
ident or Chairman of U. S. Steel Credit Corporation
(Lang dep. p. 5) and that he is presently retired (Lang
dep. pp. 5-6).
12. At a later point in his deposition, in response to
a question as to the reason for the Credit Corporation’s
interest in having the lead bank retain a share of the
loan, Mr. Lang responded:
“A lead lender’s responsibility is a principal reliance
upon which an investor, such as a credit corporation,
would be basing: its decision.”
13. Affiant also participated in the deposition of W.
Bruce Thomas, taken in Pittshurgh on January 17, 1980.
14. Mr. Thomas testified that in 1973 he was Pres-
ident of U. S. Steel Credit Corporation and remained in
that position until mid-1975 (Thomas dep. p. 3). He also
held and still holds positions with U.S. Steel Credit
Corporation’s parent, United States Steel Corporation.
15. On the subject of U. S. Steel Credit Corporation’s
reliance upon the lead bank, Mr. Thomas testified:
“No. Our method always was to rely on the local
bank for the administration. They were in the com-
munity, they knew the people. It was customers of
theirs. They were on site. They had an organization
designed to do that. We never staffed this organiza-
tion [USSC] to do the sort of thing you were talking
— 82a —
about. We relied on the lender, originator of the
loan, to do that work.’’
16. Asked what the lead lender was expected to do
if it identified a problem in connection with the loan, Mr.
Thomas testified :
“Well, I think we felt they had an obligation to ad-
vise us at the earliest opportunity that there were
problems in the loan.” (Thomas dep. p. 25)
17. Thereafter the questions and answers of Mr.
Thomas continued as follows:
“Q. And having done that, what then are you or
they supposed to do?
A. They would continue to handle the administra-
tion of it. We would, even at that point, have no
role in it except to start worrying I guess, about
our loan.
Q. Did you feel that it was up to them to attempt
to make some sort of a recommendation to you, and
if there were other participants, them as well, as to
what to do about the situation?
A. Yeah. Well, they would in the normal course
have to develop a recommendation. We typically were
a minor investor in the total loan, so they had a
bigger stake or they or other investors together had
a bigger stake than we did. And it was the bank’s
responsibility to develop a recommendation and make
it to us.
Q. It is fair to say that part of your basic approach
to these participations was to take essentially a mi-
nority position and rely in significant part on the
fact that the leading bank had its own money in the
project and, therefore, would presumably do what it
thought was best?
A. Well, it had its own money, it had its reputa-
tion, it had a group that were in the business of ad-
ministering these types of loans. And we did, you
know, we had these investments all over the coun-
try.” (Thomas dep. pp. 25-26).
— 88a —
18. On the subject of reliance upon the lead bank, Mr.
Mack gave the following testimony:
“Q. Now generally, what do you consider in review-
ing the proposal and determining whether to rece
ommend it?
A. I guess the first thing is who is offering it to
us. And what we might know about them, the bank
or the mortgage company or mortgage banker.
Q. Generally whether the—
A. Are they competent so far as we know at the
time.
Q. What do yeu do to form a judgment as to
whether they are or not competent?
A. The vast majority have a relationshiy with U.S.
Steel. A commercial relationship with U.S. Steel.
And this is the biggest source of proposals to us,
these banks. And these banks have mortgage com-
panies or mortgage departments. And in one way
or another, they become aware of the services of
the credit corporation.
And we then become acquainted with that particu-
lar department, mortgage department or mortgage
subsidiary, as the case may be. The credit corpora-
tion, see.
We would be reluctant to do business with just
some strange bank that we had no knowledge about.
So as I indicated, the first is with whom are we
doing business? Where is the proposal coming from?’’
(Mack dep. pp. 43-44).
19. Further testifying on USSC’s reliance on the lead
bank, Mr. Mack gave the following answers to the follow-
ing questions:
“*Q. You just assume that the architect is competent?
A. Well, we do more than that. We assume that
the lead lender has made an analysis of it.
Q. You assume that the lead lender has done things
like look at it from a structural point of view?
a= 84a
A. Has had his cost people and his engineering
people review those plans and specs, yes.
Q. You think that lead lenders review them from
an engineering point of view?
A. Yes. I know they do in some cases, depending
on the type of structure.’ (Mack dep. p. 48)
20. Further on the role of a leader, Mr. Mack gave
the following testimony in response to the following
questions:
**Q. What do you understand the role of the lead
lender to be in that kind of arrangement in general?
A. The role of the lead lender would be to originate
the loan.
Aud usually this is one of his customers, people
that he has done or developers that he has done
business with and knows.
He would obtain the information necessary for
him to make a determination whether or not he
wanted to make the loan. He would negotiate the
terms and conditions and the rate. He would develop
the information about the borrower, about the project.
Do the analysis. Go through the necessary steps in
review of legal documents. Make sure that the project
had the necessary approvals, zoning and environmen-
tal. He would review the cost.
And if the project was substantially enough, he
would have his analysis review the builder’s estimated
cost. He would have his people review the budget.
He might have his engineers review the drawings
and specifications.
And then once he had developed all this informa-
tion and was seeking a participant, he would discuss
generally the outline of what he proposed to do.
And once the participant agreed to participate with
them and executed the agreement and the project
got underway, he would administer that project. He
would send his people out to inspect the progress.
He would send his people out to inspect the progress.
— 85a —
He would require, again depending on the size of the
project, certification from the inspecting architect or
inspecting engineer.
The proper certification from the general contrac-
tor, from the developer. He would monitor the dis-
persements [sic]. He should inspect the project again,
depending on its size how frequently, and determine
if the moneys were going into what they were sup-
posed to go into. That the dollars and materials
were going into place.
And determine as he went along through his en-
gineering people or cost analysts that there were
sufficient funds left in the loan to complete.
And if there were not, if any problems arose, he
would get in touch with the participants and indicate
what they were. And attempt to resolve those prob-
lems, whatever they might be. And carry the project
through to conclusion.
If the project got into trouble, he would handle the
necessary negotiations in attempting to solve that
with the borrower or other parties that might be
involved, guarantors or whatever, with the concur-
rence of the participants, checking with them, getting
their input.
If a foreclosure became, or however you attain
title of a property, to take it over, complete it or
do whatever is necessary to liquidate that asset and
pay off everybody that was involved in it.’’ (Mack
dep. pp. 79-81)
21. In connection with the building loan agreement,
Mack also testified that USSC relied upon AFMC to see
that it was properly closed and executed (Mack dep. p.
279):
‘‘But I was also relying on American Fletcher to
execute the document properly. And I had a fairly
decent idea as to what would be in that building loan
agreement from the previous building loan agree-
ments.’’
— 86a —
22. Mr. Mack further testified to his reliance upon
advice of Mr. Trepinski of AFMC, concerning the per-
sonnel of Justin Development Company, the developer-
borrower (Mack dep. p. 304):
**But I seem to remember a conversation concerning
the principals. And they appeared to have the mix
of backgrounds that looked good.
They had a knowledgeable, experienced developer.
They had an experienced mortgage man who handled
their financing of permanent mortgage. Then they
had an experienced architect and a reliable, reputable
general contractor.
So the various requirements or expertise seemed
to be present among that group.”’
23. The deposition of James T. Trepinski was taken
in Cleveland, Ohio on behalf of U.S. Steel Credit Cor-
poration on July 20, 1977.
24. Mr. Trepinski testified that he had been a vice
president of Toledo Home Mortgage Company, which was
acquired by AFMC in August, 1969 (Trepinski dep. p.
32). He then became vice-president in charge of loan
production for the Ohio division of AFMC (p. 33). He
was then promoted to senior vice-president of AFMC
and moved to Indianapolis (p. 34).
25. Questioned as to the procedures followed by AFMC
in originating, processing and servicing a construction
loan, Mr. Trepinski testified (Trepinski dep. pp. 50-51):
“‘The Loan Originating Department would entertain
the construction loan request from a client, would
consider that request, review it, underwrite it, recom-
mend it to AFMC’s loan committee; upon approval
would turn the situation over to the Legal Depart-
ment for an orderly closing.
The Legal Department would manage that closing
and would supervise that construction loan through
its completion and also supervise, if appropriate, the
delivery of that loan to a permanent investor.”
— 87a —
26. As to the origination of loans by AFMC, Mr. Tre-
pinski testified to the following information, which AFMC
would seek from the prospective borrower as a basis for
evaluating the loan (Trepinski p. 52):
‘‘That information would include everything involved
with the project itself. By that I’m talking about
such things as appraisals, contracts, surveys, archi-
tectural works, drawings, contractor bonding capabil-
ity, market study reports, demographic material and
all of the types of information concerning the bor-
rowing in entity, whatever it might be.’’
27. As to evaluation of the information supplied to
AFMC by the prospective borrower, Mr. Trepinski testi-
fied that ‘‘the preliminary evaluation would be made by
that loan officer’’ (p. 53). The loan officer, he said, did
the ‘preliminary screening and underwriting of the pro-
posed deal’’ (p. 54), then prepared a ‘‘summary analysis’’
(p. 55). Mr. Trepinski went on to testify that he would
examine the summary analysis and decide whether to
take the next step of submitting it to the Loan Committee
(p. 55).
28. As to the information which AFMC would expect
to have in hand before submission of the prospective loan
to its Loan Committee, Mr. Trepinski testified that it
would include the following (pp. 57-58):
‘Included with that, but not necessarily only these
items, a full appraisal, full and complete analysis of
the market in the event of being an income type prop-
erty, an analysis of leases, survey information, com-
plete construction costs, proposal data on proposed
contractors, data on the borrowing entity and _ its
worth, time frame schedules for construction; if
appropriate, information on sales capability or leasing
capability, to name some of the major items,’’
29. Trepinski also testified concerning plans and spe-
cifications (dep. p. 62):
—- 88a, —
“‘Plans and specifications would be required to be
reviewed by the loan officer, compared to the general
proposal, delieverd to the Legal Department also for
for review.”’
30. Trepinski also testified that AFMC would require
the borrower to submit a breakdown of his estimated
construction costs, the purpose being (dep. 71):
“to evaluate the overall cost of the project and loan
amount, resultant loan amount to determine whether
or not such request was reasonable.’’
31. In the case of new borrowers, with whom AFMC
had had no prior experience, Trepinski testified that
(dep. p. 76):
‘‘AFMC would require not only the financial informa-
tion submitted by the proposed borrower, but would
also undertake to conduct his own investigation of
that proposed borrower’s tinancial condition.’
32. Mr. Trepinski went on to testify that after ap-
proval by the Loan Committee of the prospective loan,
the Loan Origination Department would prepare a par-
ticipating offering (Trepinski dep. p. 171). At a later
point in his deposition, Mr. Trepinski identified the par-
ticular participation offerings, which were submitted to
U.S. Steel Credit Corporation in connection with the
Cromwell loan, copies of which, designated as deposition
exhibits 73 and 74, are attached to this Affidavit. (dep.
p. 280, 281).
33. Tr. Trepinski also testified to other information,
which customarily would have been submitted to a pro-
posed participant, as follows (dep. pp. ........ ):
**Q. What other material would have been supplied
to the participating lender?
A. The type of material that we discussed yesterday.
Q. The surveys and plats and appraisals and...
A. Yes. That’s right.
=
Would cost breakdowns have been supplied?
Normally, ves.
Would feasibility studies have been supplied?
It could well be, yes.
Would financial statements of the principals in-
volved be supplied?
A. Yes; yes.’’
34. As to the particular documentation, which was
supplied to USSC, AFMC Requests for Admissions and
USSC’s Responses thereto, as filed in this action, show
the receipt by USSC in 1973 of such documents as the
following: an Appraisal (Ex. 1001), a Marketing and
Feasibility Report (Ex. 1002) and LA&D Loan Cost
Breakdown (Ex. 1003), Puntillo (contractor’s president)
financial data (Exs. 1011, 1012), financial data on prin-
cipal officers of the Developer Justin Development Cor-
poration (Exs. 1013-1031), financial statements of Devel-
oper and Contractor (Exs. 1032, 1033, 1034).
35. And further affiant saith nought.
/s/ Nicholas C. Nizamoff
Nicholas C. Nizamoff
erere
Subscribed and sworn to before me, a Notary Public
in and for the above said County and State, this 22 day
of February, 1980.
/s/ Brenda L. Jackson
Notary Public
/s/ Brenda L. Jackson
(Printed)
My commission expires:
8-13-82
County of residence:
Marion
— 90a —
UNITED STATES DISTRICT COURT
Southern District of Indiana
Indianapolis Division
AMERICAN FLETCHER MORTGAGE COMPANY,
INC, and
AMERICAN FLETCHER NATIONAL BANK AND
TRUST COMPANY,
Plaintiffs,
Vs.
U.S. STEEL CREDIT CORPORATION,
Defendant and Counterclaimant,
VS.
AMERICAN FLETCHER MORTGAGE COMPANY,
INC.
AMERICAN FLETCHER NATIONAL BANK AND
TRUST COMPANY, and
AMERICAN FLETCHER CORPORATION,
Counter-Defendants.
Cause No. IP 76-276-C
SUPPLEMENTAL AFFIDAVIT OF STANLEY
J. MACK
State of Florida )
SS:
County of Dade _ )
Stanley J. Mack, being first duly sworn upon his oath,
deposes and says:
1. Affiant is and has been since 1973, as well as prior
thereto, Assistant Treasurer and Assistant Secretary of
U. 8. Steel Credit Corporation (‘‘USSC’’). Affiant was
personally involved on behalf of his employer with the
acquisition by USSC of participations in connection with
an Acquisition and Development Loan (‘‘A & D Loan’’)
and a Construction Loan, made by American Fletcher
Mortgage Company (‘‘AFMC’’) to Justin Development
— 9la —
Corporation to finance a major condominium construc-
tion project in the Town of Cromwell, Connecticut. Affiant
has been active on behalf of USSC during the entire
period of its involvement with the Cromwell project and
has personally participated in virtually all dealings with
AFMC in connection with such project.
2. Copies of the executed participation agreements are
hereto attached and made a part hereof as ‘‘Exhibit A”’
and ‘‘Exhibit B’’, respectively.
3. USSC has never construed the participation agree-
ments as assigning to it any interest in the unpaid in-
debtedness of Justin Development Corporation, or the
security therefor, as distinguished from amounts received
by AFMC in repayment of such indebtedness, or realized
from foreclosure or sale of the security, and USSC has
never interpreted the participation agreements as con-
ferring upon it any rights against the borrower, Justin
Development Corporation, whatsoever.
4. At no time has AFMC, or any officer or employee
of AFMC, given any indication to Affiant, by word or
deed, of any belief on the part of AFMC or its represen-
tatives that the attached participations conferred upon
USSC any right in the unpaid indebtedness, or the
security therefor, or any rights against Justin, the bor-
rower, whatsoever.
5. At no time has affiant received any indication from
the borrower, Justin Development Corporation, or any
representative of the borrower, of any belief on Justin’s
part that USSC had any rights or claims against Justin.
6. Proof that AFMC and Justin Development Cor-
poration regarded USSC as having no interest in the
unpaid indebtedness, or security therefor, is established
by the settlement between those two parties (as well as
the contractor, Jobeo, Inc.), made on October 10, 1975.
When that settlement, which included the release of all
claims against Justin and Jobco, Ine. and Jobco’s Bonding
Company, was consummated, USSC was not required or
— 92a —
invited to execute any of such releases, and in fact was
not even furnished with copies of the executed settlement
documents or releases prior to the commencement of
this litigation.
7. And further affiant saith nought.
/s/ Stanley J. Mack
Stanley J. Mack
State of Florida )
) SS:
County of Dade _ )
Sworn to before me and subscribed in my presence this
6th day of March, 1980.
/s/ Marjorie D. Bailey
Notary Public
My Commission Expires:
12/25/82
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.