McLaughlin), and Cosmopolitan's president, chief operating officer and director (defendant Vercillo), all of whom were acting to further their own personal interests.
The Utah participation agreement was part of a financing arrangement that Terry Brown, the principal of Brown Leasing, and Marc Kaplan, the principal of MDI/KMPL, took to Cosmopolitan in 1989. MDI/KMPL entered into a $ 5 million loan agreement with the bank, secured by three trust deeds ("Utah loan"). Brown Leasing was, in turn, going to participate in the loan, and it did enter into the Utah participation agreement with Cosmopolitan. There were, thus, two agreements. One was set forth in the rather voluminous Utah loan documents executed by MDI/KMPL and Cosmopolitan. The other was a form Certificate of Participation entered into between Brown Leasing and Cosmopolitan. Under the Utah participation agreement, Brown Leasing participated with Cosmopolitan up to the amount of $ 3.354 million of the up to $ 5 million loan to MDI/KMPL for development of property near the Deer Valley Ski Resort in Utah. Upon complete repayment of the Utah loan, or, as plaintiffs contend, repayment of Cosmopolitan's share, the Bank was to release the three trust deeds that had been used by MDI/KMPL to secure its indebtedness. The plaintiffs contend, and the record supports, that the parties anticipated that the Bank share of the loan would be repaid prior to Brown Leasing's share. This was plaintiffs' suggestion, according to Terry Brown, in order to make the loan more attractive to Cosmopolitan: the Bank was to advance its funds only after Brown Leasing advanced its funds and the Bank was to be paid first. Neither the Utah loan agreements nor the Utah participation agreement, however, so provided, and in practice the Bank was the first in rather than last in, although the initial repayments were credited solely to Cosmopolitan.
By November 1990, the amount outstanding under the Utah loan was approximately $ 1.78 million, all of which had been advanced by Cosmopolitan. At this point the Bank, which was experiencing financial difficulty, indicated that it would provide no more money under the Utah loan. Although Brown Leasing loaned an additional $ 2.239 million to MDI/KMPL for the project in 1991, plaintiffs contend that this sum was neither intended nor construed to be part of the Utah loan, as evidenced by separate promissory notes issued by MDI/KMPL to secure the loans. Defendants counter with a number of documents, some signed by plaintiffs themselves, which characterize Brown's loans as being part of the Utah loan in fulfillment of its obligations under the Utah participation agreement.
In a wholly separate June 1989 transaction, Cosmopolitan purchased from Brown undivided participations and interests in four notes held by Brown. Allegedly at the direction of Cosmopolitan, Brown took most of the proceeds from these four participations and loaned them to Jerome Cosentino, a state politician ("Cosentino loan"). Plaintiffs allege that Cosmopolitan guaranteed the Cosentino loan, despite the fact that the guaranty document was drafted on the letterhead of Cosmopolitan's parent company, Cosmopolitan Bancorp Inc., rather than on Cosmopolitan's letterhead. By late 1990, the Cosentino loan was in default and Cosmopolitan, the alleged guarantor, had not bought back the loan. Brown ceased paying Cosmopolitan its obligations under the four participations and initiated a lawsuit against Cosmopolitan to compel it to comply with the guaranty agreement and release Brown's interests in the four participations. During this period, Cosmopolitan alleges that Brown received approximately $ 325,000 from the owner of one of the notes, proceeds which Brown did not share with Cosmopolitan despite the mandate of the four participations agreement. Brown contends that its obligations to Cosmopolitan were not due when the Bank performed the setoff at issue here.
In early March 1991, MDI/KMPL began repayment on the Utah loan with two partial payments, both of which were used solely to reduce Cosmopolitan's share of the principal, leaving approximately $ 820,000 still owing the Bank. Brown Leasing was not given any percentage of the repayments. On March 28, 1991, MDI/KMPL wire-transferred the Bank slightly more than the full amount of the outstanding debt attributable to the Bank, approximately $ 858,000, allegedly expecting that this payment also would be used solely to reduce, and thus extinguish, Cosmopolitan's loan. Plaintiffs allege that contrary to this expectation, which was grounded in the parties' course of dealing, defendants reversed Cosmopolitan's bookkeeping entry for MDI's March 28, 1991 principal payment and applied approximately $ 718,000 of the payment as a setoff to the four participations. Defendants contend that the Utah participation agreement required it to allocate MDI/KMPL's repayment in the manner that it did, and that the setoff was proper because Brown had breached the four participations.
On or around the day of the wire transfer, and one week prior to the setoff, Cosmopolitan had received a letter from the law firm of Kwiatt & Silverman, Brown's attorneys, demanding that MDI/KMPL's $ 858,000 payment be applied in one of the following two ways ("Kwiatt & Silverman demand letter"):
1. Pay Brown . . . its " . . . pro rata share of that portion of the payment of collection which is attributable to principal at the rate stated" in the [Utah] Participation Agreement (a sum we calculate to be approximately $ 575,000);
2. Or for Cosmopolitan to forthwith release all right, title and interest it may have in and to the collateral referred to in said Participation Agreement since Cosmopolitan's interest therein has been fully satisfied and Cosmopolitan is therefore barred from asserting further claims in and to the Collateral referred to in the said Participation Agreement.