Becker v. Independence Bank

          MEMORANDUM AND ORDER

          JOHN J. MCCONNELL, JR., UNITED STATES DISTRICT JUDGE.

         Intrigued 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, greed.

         When 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.

         FACTS

         Courtney 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, ^[1] 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^[2] had to be on board whenever the vessel was underway. The March 2007 loan documents reflected Courtney's ownership of these vessels.

         Just 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.

         Courtney Zietzke's brother, Rocky Zietzke, met Plaintiff Cheri Becker in 2007, Rocky and Kenneth Mahmood^[3] 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 structure.

         Also in 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.

         The 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.

         Mr. 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.^[4] 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.

         By the 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.

         Still 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.

         At the 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.^[5] 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.

         Presumably, 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.

         Despite this influx of $846, 580.29, ^[6] 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.

         To add 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.

         PROCEDURE

         The 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.

         STANDARD OF REVIEW

         "Summary 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.

         THE BANK'S MOTION FOR SUMMARY JUDGMENT

         In 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.

         Because most of Plaintiffs' claims hinge on whether the Bank made fraudulent and/or negligent misrepresentations, the ...