Farouki v. Petra International Banking Corporation , 968 F. Supp. 2d 216 ( 2013 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
)
A. HUDA FAROUKI )
)
Plaintiff, )
)
v. ) Civil No. 08-2137 (RCL)
)
PETRA INTERNATIONAL BANKING )
CORP., et al., )
)
Defendants. )
)
MEMORANDUM OPINION
This matter comes before the Court upon plaintiff and counter-defendant A. Huda
Farouki’s Motion to Dismiss the Second Amended Counterclaim of defendant and counter-
plaintiff Petra International Banking Corporation. Upon consideration of Mr. Farouki’s motion
[85], Petra’s opposition thereto [87], and Mr. Farouki’s reply [89], the Court will GRANT Mr.
Farouki’s Motion to Dismiss the Second Amended Counterclaim. Additionally, the Court
hereby notifies the parties of its intent to enter summary judgment in favor of Mr. Farouki on
Count I of his Amended Complaint.
I. BACKGROUND
Twenty-seven years ago, in 1986, Petra International Banking Corporation (“PIBC” or
“Petra”) and American Export Group International Services, Inc. (“AEGIS”), entered into a
Secured Credit Facility Agreement (“SCFA”) and accompanying promissory note (“the Note”),
establishing a line of credit through which PIBC advanced $3.7 million to AEGIS. See Second
Am. Countercl. ¶ 10, ECF No. 83 [hereinafter Countercl.]; Resp. to Mot. for Leave to File
Second Am. Countercl., Ex. D (Promissory Note, Nov. 12, 1986), at 2 [hereinafter Note]. A.
Huda Farouki, founder and director of AEGIS, personally guarantied the Note. Countercl. ¶ 3,
11. The Guaranty authorized PIBC to unilaterally change the terms of the loan or the time for
payment of the Note; however, the Guaranty did not authorize increases in the principal amount
owed. Countercl., Ex. B (Guaranty Agreement), at ¶¶ 1–4 [hereinafter Guaranty]. A recital
clause at the outset of the Guaranty stated that the underlying loan was made on the condition
that the Guaranty “be executed, sealed and delivered.” Id. at 1. Mr. Farouki’s signature on the
Guaranty is followed by the signature and seal of a notary certifying that Mr. Farouki “executed
the [agreement] . . . as his own free act and deed.” Id. at 5; Countercl. ¶ 11.
Less than one year later, in April 1987, AEGIS filed a Chapter 11 bankruptcy petition,
which triggered PIBC’s right to sue Mr. Farouki under the terms of the Guaranty. Countercl. ¶
16. But rather than seeking to enforce the Guaranty, PIBC “furnished millions of dollars of
additional financing to AEGIS.” Countercl. ¶ 19. To this end, PIBC and AEGIS executed
eleven allonges to the Note and twelve amendments to the SCFA, ultimately increasing the loan
amount to more than ten million dollars. Id.; see also Countercl., Ex. F (Eleventh Allonge to
Promissory Note, Apr. 17, 1990) [hereinafter Eleventh Allonge]. Mr. Farouki was not a party to
any of the allonges or amendments. AEGIS’s effort to repay the loan continued through March
1998, and a large portion of the debt remains outstanding.
In 2008, Farouki sued PIBC, seeking a declaratory judgment that he did not have any
obligations under the Guaranty. PIBC counter-sued in early 2009, seeking to enforce the
Guaranty. This Court dismissed PIBC’s counterclaim, concluding that it was time-barred under
the three-year statute of limitations applicable to simple contracts in the District of Columbia,
2
D.C. Code § 12-301(7), and granted Mr. Farouki summary judgment on his claim for declaratory
relief. Farouki v. Petra Intern. Banking Corp., 811 F. Supp. 2d 388, 409–10 (D.D.C. 2011).
PIBC appealed, and the United States Court of Appeals for the District of Columbia
Circuit affirmed in part and reversed in part. See Farouki v. Petra Intern. Banking Corp., 705
F.3d 515, 516 (D.C. Cir. 2013). The Circuit agreed that “Petra’s claim is time-barred,” id. at
516, but reversed the Court’s sua sponte entry of summary judgment in favor of Farouki, stating:
Petra separately contends that the District Court entered summary judgment sua
sponte in favor of Farouki improperly because it afforded Petra neither notice nor
opportunity to respond, as required by Federal Rule of Civil Procedure 56(f)(3).
We have previously held that erroneous entries of summary judgment may be
harmless under Rule 56 where “a nonmoving party could not have produced any
evidence sufficient to create a substantial question of fact material to the
governing issues of the case.” Colbert v. Potter, 471 F.3d 158, 168 (D.C. Cir.
2006) (internal quotation marks and citation omitted). We cannot conclude that
was the case here. The question, under [United States v.] Rollinson, [866 F.2d
1463, 1470 (D.C. Cir. 1989)] was whether the parties modified their contract such
that a new accrual date fell within 12 years of Petra filing its counterclaim. At the
time the District Court made its decision, it did not know whether Petra could
have met the standard announced in Colbert. And while nothing in the record or a
proffer on appeal indicates that the modification, if it occurred, occurred at a time
where the accrual date would fall within the limitations period, notice and
opportunity to respond might have produced evidence of consequence bearing on
the factual issue at hand. Petra should have the opportunity to produce such
evidence.
Id. at 517. 1 As such, the Court of Appeals “vacate[d] the District Court’s grant of summary
judgment and remand[ed] for further proceedings.” Id.
On remand, this Court granted Petra’s motion for leave to file an amended counterclaim
“pleading the facts that its claim is not time-barred or, at a minimum, establishing the existence
of genuine issues of disputed material facts as to the timeliness of PIBC’s claim.” Statement of
P. & A.’s ISO Petra’s Mot. for Leave to File Second Am. Countercl. 3, ECF No. 79. PIBC filed
1
The Circuit assumed, without deciding, that the Guaranty was a sealed instrument and that a 12-year statute of
limitations therefore applied. 705 F.3d at 516; see also D.C. Code § 12-301(6) (setting 12-year limitations period
for sealed instruments). For the reasons stated in its prior opinion and discussed in Section II.A.2, infra, the Court
finds that the 12-year statute of limitations for sealed instruments does not apply here.
3
its Second Amended Counterclaim, and Mr. Farouki moved to dismiss under Rule 12(b)(6) of
the Federal Rules of Civil Procedure.
II. ANALYSIS
A. Motion to Dismiss the Second Amended Counterclaim
1. Legal Standard
A Rule 12(b)(6) motion tests the legal sufficiency of a complaint. Browning v. Clinton,
292 F.3d 235, 242 (D.C. Cir. 2002). “To survive a motion to dismiss, a complaint must contain
sufficient factual matter . . . to state a claim to relief that is plausible on its face.” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (internal quotations omitted). In deciding the motion, the Court
must “accept the plaintiff’s factual allegations as true and construe the complaint liberally,
granting plaintiff the benefit of all inferences that can be derived from the facts alleged.”
Browning, 292 F.3d at 242 (internal quotations omitted).
2. Discussion
In its Second Amended Counterclaim, PIBC did not, as invited by the Circuit, amend its
complaint to plead a modification to the Guaranty agreement “such that [,under Rollinson, 866
F.2d at 1470,] a new accrual date fell within 12 years of [PIBC] filing its counterclaim.” 2 705
F.3d at 517. Rather, PIBC advanced an entirely new legal theory of the case, and pleaded an
additional fact that would, if the Guaranty were subject to a 12-year statute of limitations, make
PIBC’s counterclaim timely. The Court will address each of these in turn.
2
The Court need not decide whether the allonges to the Note or the amendments to the SCFA were sufficient to toll
the statute of limitations under Rollinson. The last of these documents were executed in 1990, and there is no statute
of limitations under which these modifications would render PIBC’s counterclaim timely.
Moreover, the Court questions the applicability of Rollinson, which is a federal case examining a federal statute.
The Guaranty explicitly states that it is governed by the law of the District of Columbia, Guaranty at 5, and in
diversity cases such as this, the Court “must look to local law for the applicable statute of limitations,” Kuwait
Airways Corp. v. Am. Sec. Bank, N.A., 890 F.2d 456, 460 (D.C. Cir. 1989); see also, e.g., Guaranty Trust Co. v.
York, 326 U.S. 99, 110–11 (1945).
4
a. The Note As A Negotiable Instrument
In order to take advantage of the protracted statute of limitations afforded to commercial
paper by the D.C. Code, PIBC argues that the “Note as amended by the 11th Allonge is a
negotiable instrument.” Statement of P. & A. ISO Opp’n to Mot. to Dismiss Opp’n 13, ECF No.
87 (emphasis added) [hereinafter Opp’n]; see also D.C. Code § 28:3-118(b) (defining the statute
of limitations for negotiable instruments as six years after the last demand for payment).
Critically, however, Mr. Farouki did not sign the Eleventh Allonge. Indeed, Mr. Farouki signed
only one document in his individual capacity—the Guaranty. By its terms, the Guaranty
extended only to changes to the terms or time for payment of the Note and expressly excluded
amendments to the principal amount, such as the Eleventh Allonge. Guaranty ¶ 1 (“It is
understood that this Guaranty is limited to the payment of the Note . . . and shall not extend to
any other sums or obligations owed by Borrower to Lender.”). Any personal liability assigned to
Mr. Farouki must therefore arise from the Guaranty and the underlying Note.
Under D.C. law, a guaranty is treated as a negotiable instrument when it guaranties, and
is executed during same transaction as, a negotiable instrument. Cusimano v. First Maryland
Sav. & Loan, Inc., 639 A.2d 553, 559 (D.C. 1994). Thus, the question whether the Farouki
Guaranty is negotiable turns upon whether the Note itself is a negotiable instrument.
A negotiable instrument is an “unconditional promise or order to pay a fixed amount of
money” that (1) is payable to order; (2) is payable on demand; and (3) does not state any other
undertaking or instruction. D.C. Code § 28:3-104. The Note guarantied by Mr. Farouki is
payable to order and on demand; however, it fails every other prong of the statutory definition.
First, is not unconditional because the rights and obligations under the Note are defined
by reference to the Secured Credit Facility Agreement. See Note at 2.; see also 6 William D.
5
Hawkland & Lary Lawrence, UCC Series § 3-106:2 (“[A] writing is conditional if it states that
rights or obligations with respect to the promise or order are stated in another writing.”). Second,
the Note does not contain a promise to pay a fixed amount of money, but only “so much . . . as
shall be advanced” of the $ 3.7 million principal amount. See Note at 1; see also Hawkland et
al., § 3-104:7 (“A fixed amount is an absolute requisite to negotiability.”). The amount owed is
not discernible from the face of the Note, but depends upon the amount advanced pursuant to the
line of credit facility and drawn under letters of credit. See Note at 2. This introduces an
“element of uncertainty . . . as to the amount payable under [the] instrument” and destroys
negotiability. Hawkland et al., § 3-104:7. For this reason, most authorities agree that credit
facilities are not negotiable. See, e.g., Jill Gustafson et al., 11 Am. Jur. 2d Bills and Notes § 84
(“A note given to secure a line of credit under which the amount of the obligation varies,
depending on the extent to which the line of credit is used, is not negotiable”); see also In re
1301 Connecticut Ave. Associates, 126 B.R. 823, 831 (Bankr. D.D.C. 1991) (applying D.C. law
to hold that a note “for the principal sum . . . or so much thereof as may be advanced hereunder”
is non-negotiable). Third, by incorporating the SCFA and other documents, see Note at 2, the
Note states other undertakings or instructions. As just one example, the SCFA requires the
borrowers to “[m]aintain, preserve and protect all licenses, patents, franchises, trademarks and
trade names.” Countercl., Ex. A (Secured Credit Facility Agreement, Nov. 12, 1986).
For all of these reasons, neither the Guaranty nor the underlying promissory Note is
negotiable under D.C. law and the six-year statute of limitations does not apply.
b. The Unsealed Guaranty
PIBC next argues that its counterclaim was timely because Mr. Farouki personally made
a payment to PIBC in October 1997, which revived the debt and tolled the statute of limitations
6
on the Guaranty. See, e.g., Dulberger v. Lippe, 202 A.2d 777, 778 (D.C. 1964) (“[P]art payment
on a debt or obligation interrupts or tolls the statute of limitations.”); 54 C.J.S. Limitations of
Actions § 392 (noting that payment by guarantor tolls statute of limitations as to principal debt).
Even accepting this fact as true, however, PIBC’s claim remains time barred given this Court’s
prior ruling that a three-year statute of limitations—and not the 12-year limitations period for
sealed instruments—applies to this case. PIBC contends that this ruling “was mistaken” because
the recital clause of the Guaranty is definitive evidence of the parties’ intent to create a sealed
instrument. Opp’n at 25. But the parties’ intent is meaningless if they did not actually seal the
deal. See Murray v. Wells Fargo Home Mortgage, 953 A.2d 308, 318 (D.C. 2008) (holding that
recital of intent to seal, “in the absence of a seal, does not operate to make the instrument one
under seal. It is the attachment or adoption of a seal that is the operative fact.”). To this point,
PIBC persists in its argument that “the signature of Farouki was contemporaneously put under
seal by the notary public in his presence.” Opp’n at 27. This misapprehends the role of a notary
public. A “notary stamp[] certifies that [Mr. Farouki] signed the agreement in front of a notary
public, but it suggests nothing more.” Murray, 953 A.2d at 319. This is especially true given
that, as in Murray, Mr. Farouki’s signature was “affixed before the notary seals were placed on
the document.” Id. (emphasis added). Consequently, Mr. Farouki could not have adopted the
notarial seal, and the Guaranty is not a sealed instrument.
At the very least, therefore, PIBC’s cause of action against Mr. Farouki accrued when he
failed to make any payments after October 1997, and the three-year limitations period expired
long before PIBC’s counterclaim in 2009. As such, the Court finds that the counterclaim is time-
7
barred as a matter of law, and Mr. Farouki’s Motion to Dismiss the Second Amended
Counterclaim is GRANTED. 3
B. Mr. Farouki’s Claim for Declaratory Relief
Mr. Farouki’s original claim for declaratory relief is all that remains of this case. Federal
Rule of Civil Procedure 56(f) permits a district court, in the absence of a motion and “[a]fter
giving notice and a reasonable time to respond,” to “grant summary judgment for a nonmovant.”
Summary judgment is appropriate when “there is no genuine dispute as to any material fact and
the [party] is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).
Even assuming the truth of every fact alleged by PIBC, and giving PIBC the benefit of all
reasonable inferences, the Court has concluded that, as a matter of law, any claim against Mr.
Farouki is time-barred by the applicable statute of limitations. Thus, the Court believes that
summary judgment is appropriate on Mr. Farouki’s claim for declaratory relief. Although the
parties have already submitted extensive briefing on the limitations issue, the Court must comply
with the letter of Rule 56(f). Accordingly, the parties are hereby notified of the Court’s intention
to enter summary judgment on Count I of Mr. Farouki’s Amended Complaint.
A separate Order consistent with this Memorandum Opinion and setting forth the
schedule for replies to the Court’s finding under Rule 56(f) shall issue this date.
Signed by Royce C. Lamberth, United States District Judge, on September 17, 2013.
3
In contrast to the cases where the Circuit has discouraged granting a motion to dismiss on statute of limitations
grounds based upon the complaint alone, see, e.g., Richards v. Mileski, 662 F.2d 65, 73 (D.C. Cir. 1981), the parties
have had a full opportunity to brief this issue on three occasions—and PIBC was granted leave to amend its
complaint in response to briefing on this issue.
8