$250,000 Business Loan to Poker-Playing Lawyer Can Be Called, Court Says

A Buffalo, N.Y.-area financial institution that loans money to law firms to finance litigation was within its rights when it decided not to gamble on an attorney who used money he borrowed to play poker, a federal judge has ruled.

Western District of New York Judge Richard J. Arcara ruled in Counsel Financial Services v. Melkersen Law, 08- cv-0156A(Sr), that Counsel Financial Services could call in just under $250,000 in outstanding principal on attorney Michael J. Melkersen's loan, plus $22,420 in outstanding interest and $3,923 in late payments.

Melkersen argued that neither his card-playing, nor other personal uses of the revolving line of credit he received from Counsel Financial, was proscribed in the promissory note or personal guaranty for the money he signed in 2005.

As Melkersen explained in an October 2007 e-mail to Counsel Financial, he had been "successful" playing poker "for many years, and therefore, my activity in that regard was always done with an expectation of a profit and improving my personal financial situation.

"I was not aware that I could not take personal draws from the Counsel line [of credit] in a reasonable amount, nor was I aware that there were any restrictions on how I used my partnership draws or otherwise spent my personal funds," Melkersen maintained in the e-mail.

However, Counsel Financial's general counsel, Philip B. Abramowitz, said Monday that Melkersen misunderstood the purpose of the loan.

"His view was that playing poker was business," Abramowitz said in an interview. "Well, the money was for business, not for him to play poker with."

Judge Arcara's Feb. 23 ruling adopted the Jan. 27 recommendation of U.S. Magistrate Judge H. Kenneth Schroeder Jr.

It granted summary judgment to the lender and rejected Melkersen's contention that he should be allowed to conduct discovery on his counterclaim that Counsel Financial had breached his loan agreement by appearing to indicate to him that not only did it not intend to call in his loan, but was favorably inclined to his request in 2007 to extend his line of credit from $250,000 to $500,000.

Melkersen and his firm, Melkersen Law of New Market, Va., cannot state a viable claim of promissory estoppel under New York law because "they cannot assert a clear and unambiguous promise to increase the line of credit to $500,000," Magistrate Judge Schroeder held.

He said Melkersen's proposed counterclaim for breach of contract also fails because the lawyer cannot show any actual damages he or his firm suffered from Counsel Financial's decision to call in the outstanding balance on its loan in October 2007.

"Where a party has failed to come forward with evidence sufficient to demonstrate damages flowing from the breach alleged and relies, instead, on wholly speculative theories of damages, dismissal of the breach of contract claim is in order," Magistrate Judge Schroeder held, quoting Lexington 360 Assocs. v. First Union Nat'l Bank of N.C., 234 AD2d, 187 (1996).

Counsel Financial is a commercial lending institution in the Buffalo suburb of Amherst, N.Y., specializing in making loans to finance litigation at smaller law firms, often in personal injury cases.

Melkersen said in an affidavit filed in federal court in Buffalo that when he sought to expand his line of credit from $250,000 to $500,000, he was told by a Counsel Financial case analyst, "I like what I see." But the analyst's superiors wanted more documentation from Melkersen, who was eventually asked to line up a guarantor for the expanded loan.

According to Melkersen, he detailed how parts of his "draws" from Counsel Financial were used for personal expenses and was told by the lender's auditor that the company would not "bat an eye" if lawyers used their funds to "buy a Ferrari," so long as the monthly interest payments came in on time.

Acting on what he believed were oral assurances that he would get the expanded line of credit, Melkersen said he renewed a $25,000 advertising contract with the Yellow Pages, expanded and remodeled his office and hired a $45,000-a-year paralegal.

Melkersen said he made his last monthly payment on his loan for September 2007 but, according to Magistrate Judge Schroeder's report, did not make the payment the following month. He was informed that month that not only was Counsel Financial not going to expand his line of credit, but was calling in the outstanding principal on the $250,000.

Counsel Financial Services sued for repayment in New York's Erie County Supreme Court in January 2008. The action was removed to federal court by the defendants, who asserted diversity jurisdiction.

John Kennedy Rottaris of Gross, Shuman, Brizdle & Gilfillan in Buffalo represented Melkersen.

Neither Rottaris nor Melkersen returned calls Monday for comment.