United States District Court, D. Rhode Island
CHERI BECKER, ALLEN HARTLEY, RACHEL HARTLEY, USA ISLAND SEAFOOD, INC., and SAIPAN USA FISHERIES, INC. Plaintiffs,
INDEPENDENCE BANK, Defendant,
COURTNEY L. ZIETZKE and ROCKFORD ZIETZKE Counterclaim Defendants.
MEMORANDUM AND ORDER
J. MCCONNELL, JR., UNITED STATES DISTRICT JUDGE.
at the prospect of becoming involved in long line fishing in
the unfished waters surrounding Saipan, Cheri Becker, Allen
Hartley, and Rachel Hartley invested millions of dollars to
bolster the Zietzke brothers, Courtney and Rockford
("Rocky"), and their companies USA Island Seafood,
Inc. and Saipan USA Fisheries, Inc. ("the
Companies") in their endeavors in the Northern Mariana
Islands. Neither Ms. Becker nor the Hartleys had any
experience in the fishing industry, but became heavily
involved, eventually becoming officers in the Companies.
Despite their attempts to right the ship through
reorganization and additional borrowing, their fortunes
figuratively sunk in those waters, as they were unable to
overcome the mismanagement and their inexperience. Plaintiffs
blame Independence Bank, who first loaned Courtney Zietzke
money to fish in 2007, claiming it encouraged them to sink
their money into the Companies, which the Bank knew were
mismanaged and failing. The Bank blames the Plaintiffs
themselves for inexperience, mismanagement, and perhaps,
all was lost, Plaintiffs sued the Bank, alleging that the
Bank "knowingly defrauded" them by actively
misleading and/or failing to disclose known facts about the
Companies' failing finances and poor prospects. They
argue that perpetrating this fraud was part of the Bank's
exit strategy to recover the money and get personal
guarantees on the failing loans. The Bank moves for summary
judgment, arguing that it is undisputed that there was no
fraud or misrepresentation because Plaintiffs knew everything
the Bank knew about the Companies' finances and became
deeply invested in the Companies knowing there was a risk.
L. Zietzke had previous experience operating fishing
companies and was looking for a loan to start fishing the
newly opened waters surrounding Saipan, the largest of the
Northern Marina Islands, a commonwealth of the United States
in the western Pacific Ocean. Independence Bank at that time
wanted to cultivate business relationships in the Northern
Mariana Islands. In March 2007, the Bank loaned $1.6 million
to Courtney Zietzke and his Companies,  later named USA
Island Seafood, Inc. and Saipan USA Fisheries. At the time of
this loan, Courtney owned two fishing vessels, the CAP'N
WADE (later renamed the LADY CAROLINA) and the F/V HUNTER J
(later renamed the MISS SAIPAN). Courtney bought the
CAP'N WADE in 2002 and sold it to NMFI in 2006. Courtney
knew from a survey performed when he bought the ship that a
Stability Study needed to be done and a Trim & Stability
booklet had to be on board whenever the vessel was
underway. The March 2007 loan documents reflected
Courtney's ownership of these vessels.
five months after this 2007 loan, the Bank became concerned
with the financial state of the Companies. In a very explicit
communication, the Bank told Courtney that the loan was in
crisis and on the Bank's watch list. The Bank told
Courtney that the Companies would be out of money before they
even started catching fish. It encouraged Courtney to find a
way to replace the depleted reserve accounts.
Zietzke's brother, Rocky Zietzke, met Plaintiff Cheri
Becker in 2007, Rocky and Kenneth Mahmood approached her in
November 2007 and asked her to loan Mr. Mahmood $100, 000 on
a 120'day term. She agreed. Ms. Becker loaned Mr. Mahmood
another $100, 000 before the end of the term for the first
loan. In March 2008, the $200, 000 that Ms. Becker loaned to
Mr. Mahmood up to that point, plus another $100, 000 was
converted to shares in the Companies. While she alleges that
these were personal loans to Mr. Mahmood, she testified that
she knew they were investments in Courtney's fishing
Companies in Saipan, Nevertheless, as of March 2008, Ms.
Becker was officially an investor in the Companies. She
engaged an attorney to assist in setting up a new corporate
March 2008, Ms. Becker traveled with Rocky and Mr. Mahmood to
Saipan, presumably to learn more about the businesses in
which she had invested. During that trip, the Bank's
majority owner, Robert Catanzaro told her that the Companies
were behind on the March 2007 loan payments. Ms. Becker made
those late payments to the Bank. Traveling back to Saipan two
months later, Ms. Becker discovered other evidence of
Courtney's mismanagement, including unpaid bills, wages
and vendors, and over $250, 000 that appeared to be missing.
As a result, Ms. Becker, along with Mr. Mahmood and Rocky,
initiated legal action against Courtney and other
shareholders to remove them from control. In May 2008,
Courtney assigned all of his shares in the Companies to
Rocky! Ms. Becker was Chief Executive Officer by this time.
Companies and their mew management team were working to
overcome the issues caused by Courtney's mismanagement.
Ms. Becker made the final decision to hire Phil Westbrook and
Dave Lewis to captain the vessels. She said that the new
captains' vision and expertise gave the investors
"the encouragement of go forward." In addition to
needing the experienced captains, Ms. Becker, Rocky, and Mr.
Mahmood knew they needed more capital. Ms. Becker reached out
to Allen and Rachel Hartley to invest. During a June 2008
meeting, Ms. Becker told them that the Companies were
mismanaged and funds had been misused, but that they were a
good investment opportunity.
Hartley sought confirmation of Ms. Becker's pitch so he
called Mr. Catanzaro from the Bank during his meeting. They
spoke on the phone for less than a half hour. During this
conversation, Mr. Hartley asked for financial information
about the Companies. Specifically, he asked what the
Companies could do financially, Mr. Hartley testified that
his conversation with Mr. Catanzaro led him to believe that
the investment in the Companies was a good one. Sometime
afterward, Michael Sammartino, Director of Business
Development at the Bank sent Mr. Hartley an email attaching
pro forma tangible net worth balance sheets for the
Companies. The Bank sent these statements in response
to Mr. Hartley's inquiry about what the Companies could
do in the future. The pro forma did not indicate that the No.
were for specific years, but listed "year one" and
"year two" projections. The cash on hand reflected
a balance from August 2007, almost a year old at that point.
Plaintiffs' expert Luke Northwall testified that prior
management created this pro forma in 2007 and it was a
projection of a company's potential financial success,
Mr. Hartley himself testified that he knew that management,
not banks, prepare financial reports. Despite his testimony
that he believed the Bank was passing off the No. as real in
the pro forma, Mr. Hartley admitted that he knew the
Companies had no income. He felt the Companies were
mismanaged, but "just felt they could make a go of
it." It is undisputed, however, that the Hartleys knew
at this time that the Companies had no income, were behind on
payments, and had outstanding expenses. When Ms. Becker asked
him to invest one million dollars, he agreed. He knew that
part of the investment was to get caught up on loan payments
to the Bank.
end of 2008, it is undisputed that Ms. Becker lived in Saipan
and managed the Companies. Once Mr. Hartley became an
investor in June or July 2008, he took on the task of writing
general accounting software to remedy the faulty system that
was in place. Ms. Becker testified that she and Mr. Hartley
became "very active in the daily management and joined
in with the existing management team to learn this
industry." As of October 3, 2008, Mr. Hartley and Ms.
Becker each owned 190, 000 shares of each of the Companies.
They were doing their best to make the Companies succeed. In
a December 2008 letter, Ms. Becker updated the Bank on
various aspects of the Companies' progress and
management, including details of how the investors were
working to overcome the issues Courtney created through his
mismanagement. Specifically, the letter states that the new
management team hired captains with fishing experience,
invested more of their personal funds, removed past
ownership, settled lawsuits, and paid back wages and past due
bills. She acknowledged that the vessels were not in the
condition they thought and required repairs. They were in the
process of rehabilitating the physical plant. The LADY
CAROLINA was out fishing. She noted that the investors would
have "had plenty of money to go forward" "if
it wasn't for the poor management of the past and all of
their debts, lawsuits, etc. along with having to purchase
various items that had supposedly been purchased in the
existing loan." Ms. Becker concluded by asking that the
Bank add $500, 000 to the existing 2007 loan.
operating from the 2007 loan to Courtney and any personal
funds that Ms. Becker and the Hartleys were contributing to
keep the loan payments current, the Companies'
management, the two captains, and Frank Crabtree put together
a business plan in January of 2009. Ms. Becker saw parts of
it, but reviewed the final plan once completed. During the
same period, Mr. Hartley asked the Bank for a $1.9 million
loan. In February, he had finished updating the financial
data into the software and recognized the urgent need for
additional capital. He sought a quick line of credit. Mr.
Hartley made the February and March 2009 loan payments on the
2007 loan. He continued to work on the loan application in
May 2009. The delay in applying for the additional loan funds
was because the Plaintiffs were unable to come up with the
required fishing reports; the MISS SAIPAN never fished and
the crew of the LADY CAROLINA had not yet catch fish. This
delay continued through October 2009.
same time, the Companies received valuation reports on the
two vessels, Upon Plaintiffs' request, Allied Marine
Surveyors performed surveys on the LADY CAROLINA and the MISS
SAIPAN, valuing them at $890, 000 and $710, 000
respectively. Ms. Becker asked the Bank for more
funding. On December 29, 2009, Rocky, Ms. Becker, and the
Hartleys entered into a loan agreement for $1, 000, 000,
which included personal guarantees for not only the 2009
loan, but also for the March 2007 loan. This is the first
time that the individual Plaintiffs became obligated to the
Bank. Prior to December 2009, none of the Plaintiffs had any
financial relationship or responsibility to the Bank.
to assist Plaintiffs with setting a successful course for
their fishing business, the Bank introduced them to Donald
Wen, who had a successful squid operation. Ms. Becker
testified that she met with Mr. Wen in February or March of
2010. She testified, "He didn't want to have a
portion of our businesses, he wanted to create a third
business that was going to be called ISP, International
Seafood Processing, and we were going forward on that, "
Ms, Becker indicated that Mr. Wen became her mentor and that
she appreciated the help he gave her.
this influx of $846, 580.29,  the Companies were almost out of
money within months; they had just over $60, 000 left by
April 19, 2010. The Bank could not loan the Companies any
more money because the Plaintiffs were underperforming
borrowers, Plaintiffs got a loan from Commonwealth
Development Authority to fund the Companies' operations.
They failed to see a profit, however.
further strain on their finances, the Coast Guard informed
the Companies in May 2011 that the LADY CAROLINA needed a
stability booklet to fish. First, they needed to make repairs
to get the stability booklet. Plaintiffs endeavored to make
them, but the vessels still did not have the required
stability booklets by August 2012. Ms. Becker updated the
Bank and asked for a six-month deferral on the loan payments.
In December 2012, the Bank did modify the loan, adjusting it
to interest only payments for 24 months. Mr. Hartley made
those payments until December 2014. There is no dispute that
Plaintiffs have failed to pay since and that the loans are in
default. Plaintiffs allowed the insurance on the vessels to
lapse. A typhoon later destroyed the vessels.
three individual investors, Ms. Becker and Mr. and Mrs.
Hartley, along with the two operating Companies filed a
seven-count complaint, asserting seven causes of action
against the Bank: (1) fraudulent misrepresentation and
concealment, (2) breach of the implied duties of good faith
and fair dealing, (3) instrumentality lender liability, (4)
breach of fiduciary duty, (5) conversion, (6) negligent
misrepresentation and omission, and (7) unjust enrichment.
The Bank answered and filed a six-count counterclaim against
the Plaintiffs and third-party defendants Courtney Zietzke
and Rockford Zietzke alleging four counts of breach of
contract, unjust enrichment, and conversion.
judgment is appropriate only when 'there is no genuine
issue as to any material fact' and 'the moving party
is entitled to a judgment as a matter of law.'"
Sparks v. Fid. Nat'l Title Ins. Co., 294 F.3d
259, 265 (1st Cir. 2002) (quoting Fed.R.Civ.P. 56(c)). The
substantive law identifies the facts that are material.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). "Only disputes over facts that might affect the
outcome of the suit under the governing law will properly
preclude the entry of summary judgment." Id.
"In deciding a summary judgment motion, " this
Court "must view the evidence in the light most
favorable to the nonmoving party and must draw all reasonable
inferences in the nonmoving party's favor."
Sparks, 294 F.3d at 265.
BANK'S MOTION FOR SUMMARY JUDGMENT
asserting these claims against the Bank, Plaintiffs seek to
hold it liable for a series of representations and/or
omissions where the Bank allegedly made statements that led
Plaintiffs to believe that their investment in the Companies
was sound. According to Plaintiffs, the Bank's statements
were false because Mr. Catanzaro (and others at the Bank)
knew but failed to disclose that the Companies were
mismanaged and in dire financial condition and that, the two
vessels were inoperable. Plaintiffs allege that the Bank was
motivated to make these false misrepresentations and
omissions because it had an exit strategy-it wanted to
recover on the loans it made to the Companies and knew it
would not without new investors and an infusion of cash.
Believing the Companies to be potential gold mines,
Plaintiffs invested in them to their personal financial ruin.
most of Plaintiffs' claims hinge on whether the Bank made
fraudulent and/or negligent misrepresentations, the ...