The opinion of the court was delivered by: SAND
This is an action on a guarantee of a loan made by plaintiff Marine Midland Bank ("Bank") to a coal mining enterprise in which defendants W. Angie Smith ("Smith") and Marius E. Araktingi ("Araktingi") own a major equity interest.
Jurisdiction is based on diversity of citizenship.
Plaintiff moves for summary judgment pursuant to F.R.Civ.P. 56.
Marine Midland originally brought this action in the Supreme Court of the State of New York. After removal to this Court,
the Bank moved for summary judgment on the ground that there was no genuine issue of material fact on the requisite proof of its claims: the guarantees, the underlying debt and default and the nonpayment by the guarantors. In an opinion dated June 13, 1979, this Court found no dispute as to any of those facts. Smith and Araktingi both raised an affirmative defense to the Bank's claim, however, and argued that a factual issue existed as to that defense: that the Bank had fraudulently induced them to sign the guarantees in May, 1978. Although the Court found "that defendants have produced no facts to substantiate this defense" (Opinion at p. 9), it permitted discovery for sixty days from the date of the Opinion "limited to whether defendants were fraudulently induced by the Bank to execute the amended guarantee in May, 1978" (Id.).
With discovery complete, plaintiff's motion for summary judgment is now renewed.
The Bank seeks full summary judgment in the amount of $ 4 million based on the May, 1978 guarantees, which were substituted for $ 2 million guarantees executed in October, 1977. Alternatively, the Bank asks that partial summary judgment be entered in the amount of $ 2 million if the Court finds that issues of material fact exist with respect to the substituted guarantees. Defendants oppose the summary judgment motion, pray that the complaint be dismissed and assert various counterclaims. Plaintiff in turn moves that the counterclaims be dismissed. We hold that full summary judgment should be granted in plaintiff's favor, and defendants' counterclaims should be dismissed.
A. The Parties and the Partnership Agreement
Atlas-Dirty Devil Mining ("ADDM" or "the Company") is a Nevada general partnership formed for the purpose of carrying out a coal strip-mining project in southeastern Utah. ADDM is owned in equal shares by Dirty Devil Mining Company ("Dirty Devil") and Atlas Resources, Inc. ("Atlas"). Dirty Devil is a Nevada corporation which was formed in 1977 in anticipation of entering into a business venture with Atlas to raise the capital to develop and operate a strip coal mine on Utah properties ("the Project") for which Atlas owned the mining leasehold rights. Atlas, a Texas corporation wholly owned by C. B. Woodward ("Woodward"), had acquired leases of coal bearing properties in Wayne and Emery Counties, Utah.
Defendants Smith and Araktingi are two of the five principals concerned with the ADDM Project. Together, they own approximately 40% Of the voting stock of Dirty Devil.
The other three ADDM principals are John Severson ("Severson") and Grimm Mason ("Mason"), each owners of approximately 20% Of the voting stock of Dirty Devil, and Woodward, owner of Atlas and the other general partner of ADDM.
As provided by the partnership agreement, ADDM management was to be "the full and complete responsibility of C. B. Woodward or any other individual appointed by Atlas, and John A. Severson, or any other individual appointed by Dirty Devil . . .". P 7, Partnership Agreement. Thus, so far as the ADDM Project was concerned, Woodward and Severson were its managers and were the representatives of the two general partners and of the other principals, including the defendant guarantors in this case.
In the summer of 1977, Mason, Severson, John Corette (of Cole, Corette and Bradfield),
Woodward and possibly others, entered into discussions with Gary R. Haines ("Haines") and John B. Lyons ("Lyons"), officers of the Bank, concerning a proposed loan by the Bank to ADDM to finance the Project. Negotiations were successfully concluded, and a closing of the loan was held on October 26, 1977 at the Bank's New York offices. Araktingi and Smith attended that closing. Acting on behalf of the Company and its two partners, Woodward and Severson executed a promissory note to the Bank in the amount of $ 5,500,000 to cover projected capital costs of the Project's construction and development.
In addition, joint and several individual guarantees of payment of up to an aggregate of $ 2 million of the Company's obligations under a Term Loan Agreement were signed by Woodward, Severson, Mason, Araktingi and Smith. (Exhibit 1 to October 9, 1979 affidavit of MacNeil Mitchell, hereinafter cited as "Mitchell Affidavit", pp. 100035-36.)
Also executed at the closing was the Term Loan Agreement itself, which set forth in detail the duties of the Borrower, the obligations of the Bank, and the conditions upon which the personal guarantees were extended. Included as a condition of lending in Article II, Section 3.01(e)(c) of the Term Loan Agreement of October 26, 1977 was a clause providing that the Bank shall have received an original counterpart of the Miller contract. The J. W. Miller Companies ("Miller") were selected by the principals to provide services to ADDM, as described in construction and management contracts between Miller and ADDM. The Bank was not a party to either contract, nor to any other contracts with Miller.
Miller's services to ADDM were terminated in March 1978 by ADDM, acting through Severson and Woodward, the managers of ADDM designated respectively by its partners, Dirty Devil and Atlas (Exhibit 18 to October 9 Mitchell Affidavit). Although Miller's termination would have otherwise violated the Term Loan Agreement, the Bank agreed not to declare an event of default.
By the Spring of 1978, it appeared that there would be a cost overrun on the Project and that additional capital had to be found and the bank loan increased if the project was to be completed. In May, 1978, the Term Loan Agreement was amended to increase the loan to $ 7,450,000. In connection with the increased loan, on May 7, 1978, defendants Smith and Araktingi agreed orally to increase their guarantees to $ 4 million, confirmed their agreement by telex the next day, and in due course executed and delivered new guarantees identical to the prior $ 2 million guarantees except for the amount.
The new loan also proved inadequate. In July, 1978, the Bank agreed to lend ADDM another $ 550,000 and by the end of 1978, the loan was increased by another $ 200,000. ADDM has since filed a petition under Chapter XI of the Bankruptcy Act.
ADDM's promissory note required principal payments on September 30, 1978 and December 31, 1978. Under Section 5.01 of the Term Loan Agreement, incorporated by reference in the promissory note, a default in any payment due under the note entitles the Bank to declare the note immediately due and payable. No payments having been made, the Bank has made such a declaration.
Summary judgment is a "remedy to be granted only where the requirements of Rule 56, Fed.R.Civ.P., have clearly been met." United States v. Bosurgi, 530 F.2d 1105, 1110 (2d Cir. 1976). Under Rule 56, it must appear to the court that "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Rule 56(e) provides that "when a motion for summary judgment is supported by the documents listed in Rule 56(c) depositions, affidavits, answers to interrogatories, and admissions an adverse party may not rest upon mere conclusory allegations or denials. The party opposing the motion must set forth concrete particulars . . . .". S.E.C. v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir. 1978). In determining whether to grant a motion for summary judgment, "the district court "cannot try issues of fact; it can only determine whether there are issues to be tried.' " Id. Moreover, it ...