The opinion of the court was delivered by: Sweet, District Judge.
Plaintiff, Northwestern National Insurance Company of
Milwaukee, Wisconsin ("Northwestern") has moved for leave to
amend its complaint pursuant to Federal Rule of Civil Procedure
15(a) and for a preliminary injunction pursuant to Federal Rule
of Civil Procedure 65(a) on the basis of an amended complaint
asserting the grounds of equitable, common law and contractual
surety rights of exoneration and quia timet. Defendants Raymond
Cosgrove, William Curran, James McCabe, John Muller and Robert
Norton (the "Cosgrove Defendants"), joined by defendants
Randolph K. Pace ("Pace"), Jerry Silva ("Silva"), and Michael
McCann ("McCann"), cross-move for leave to amend their Answer
and Counterclaim to assert additional affirmative defenses and
causes of action and pursuant to Federal Rule of Civil
Procedure 20(a) for leave to join Allan Esrine (a/k/a "Ivan
Esrine") ("Esrine") as a counterclaim defendant. For the
reasons set forth below, plaintiff's motion for leave to amend
is granted as unopposed. Plaintiff's motion for a preliminary
injunction is granted. Defendants cross-motion is granted in
part as set forth below.
Northwestern is a corporation organized under the laws of the
State of Wisconsin with its principal place of business in the
State of Wisconsin. Northwestern acted as surety to the limited
partners. Benjamin D. Lentz ("Lentz") is and was counsel for
Northwestern during the relevant time periods.
Defendant Michael J. Alberts is an individual citizen of the
State of New Jersey residing at 56 Winding Way, Little Silver,
Defendant James A. Alberts is an individual citizen of the
State of New Jersey residing at 45 Birchwood R., Glen Rock N.J.
Defendant Richard J. Alberts is an individual citizen of the
State of Florida residing at 15714 Warbler Place, Tampa, FL
Defendant Cassandra M. Sheehan is an individual citizen of
the State of New Jersey residing at 115 Tower Hill Drive, Red
Bank, N.J. 07701.
Defendant Raymond J. Cosgrove is an individual citizen of the
State of New Jersey residing at 49 Wardell Avenue, Rumson, N.J.
Defendant Penelope A. Boyle is an individual citizen of the
State of New Jersey residing at 19 Riverlawn Drive, Fair Haven,
Defendant John C. Maucere, Jr. is an individual citizen of
the State of New Jersey residing at 51 Maddaset Cellar Avenue,
Scotch Plains N.J. 07076.
Defendant Jerry Silva is an individual citizen of the State
of New York residing at 2594 Norton Place, Bellmore, N.Y.
Defendant Michael L. Methany is an individual citizen of the
State of Kentucky residing at 11900 East Arbor Drive,
Anchorage, Ky 40223.
Defendant H.U.A. Resources, Inc. is a New Jersey corporation
having its principal place of business at Box 8250 Red Bank,
Defendant Alton Jones is an individual citizen of the State
of Kentucky residing at Rt. # 2-578, London, Ky 40505.
Defendant Arthur Lawson is an individual citizen of the State
of Kentucky residing at RD. # 2 Box 674, London, Ky 40505.
Defendant John J. Muller., Jr. is an individual citizen of
the State of New Jersey residing at 129 Rumson Road, Little
Silver, N.J. 07739
Defendant Michael J. O'Connell is an individual citizen of
the State of Kentucky residing at 209 Pleasant View Avenue,
Louisville, Ky 40206.
Defendant Randolph K. Pace is an individual citizen of the
State of New York residing at 180 East End Avenue, New York
Defendant Michael J. McCann is an individual citizen of the
State of New York residing at 620 Fifth Avenue, New York, N.Y.
Defendant Southern Companies, Inc. is a New Jersey
corporation having its principal place of business at 655
Shrewsbury Avenue, Shrewsbury, N.J. 07701.
Defendant William W. Curran is an individual citizen of the
State of New Jersey residing at 38 Park Street, Apt. 10-A,
Florham Park, N.J. 07832.
Defendant Harold A. Thau is an individual citizen of the
State of Connecticut residing at 19 Saugatuck River Road,
Weston, Ct 06883.
Defendant Patrick J. Rooney is an individual citizen of the
State of New York residing at 94 McDougal Street, New York,
Defendant Van Allen Capital Corp. is a New York Corporation
having its principal place of business at 11 Broadway, New
York, N.Y. 10004.
Defendant Robert T. Norton is an individual citizen of the
State of New Jersey residing at 114 Elm Street, Westfield, N.J.
On May 18, 1988 Northwestern instituted this diversity suit
against defendants. The Cosgrove Defendants filed an Answer to
the complaint in August, 1988. In an opinion of the court of
July 7, 1989 ("July 7 Opinion") 717 F. Supp. 148, the Cosgrove
Defendants were granted in part leave to amend their initial
response to the complaint by filing a counterclaim alleging
fraud (Counts I and II), breach of a duty to disclose (Count
III), breach of a duty of good faith and fair dealing amounting
to constructive fraud (Count IV), and failure to liquidate
collateral and/or apply the proceeds thereof on a pro-rata
basis to offset the alleged debts (Count V).
By letter of January 12, 1990 the Cosgrove Defendants sought
to resolve discovery disputes concerning (1) the status of
Esrine, a disbarred felon, who had participated in the
transactions underlying this suit, allegedly as an agent of
Northwestern; (2) the relationship between Northwestern and the
former law firm of Finley, Kumble, Wagner, Underberg, Manley,
Myerson & Casey ("Finley Kumble") whose partner was retained by
defendants when allegedly the same partner was representing
Northwestern on another matter; as well as (3) the
circumstances surrounding Northwestern's loss of its bond
rating in 1984. The letter was treated as a motion returnable
on February 2, 1990. Northwestern's motion for leave to amend
and preliminary injunction pursuant to the amended complaint
was also returnable on this date. By letter of January 31,
1990, the parties adjourned the motion from February 2 to
February 16 allowing defendants to also move for leave to
amend. By letter of February 12, the parties adjourned all
three motions to March 9, 1990. Oral argument was heard on that
date and the motions considered submitted. By letter of March
13, 1990 Pace, and by letter, affidavit, and memorandum of law,
Silva and McCann joined in the Cosgrove cross-motion and
opposition to Northwestern's motion. Corrected documentary
submissions were made in April by the Cosgrove Defendants.
By order to show cause brought on June 14, 1990, and
returnable the following date, Northwestern sought to preserve
the status of the parties on the motions sub judice, in the
event that the Merchant Marine Bank (the "bank") would seek to
draw on a letter of credit, thereby requiring Northwestern to
pay as surety for the defendants on obligations owing to the
bank. Northwestern sought this preservation of the rights of
all parties to prevent rendering the pending motion for quia
timet and exoneration moot. Over opposition, by memo
endorsement, the posture of the parties was considered
unaltered by the bank's actions pending the outcome of the
All of the defendants except Maucere, H.U.A., Muller,
Southern, and McCabe were former limited partners of Southern
Pipeline Partners ("the partnership"), an Oklahoma limited
partnership which was formed for the purpose of constructing
and operating a gas pipeline in southeastern Oklahoma.*fn1 As
part of their purchase price of limited partner units of the
partnership, the limited partners executed and delivered
promissory notes to the partnership. The partners endorsed,
assigned, and negotiated these promissory notes to Equilease
To induce Equilease to purchase the promissory notes,
Equilease required the limited partners to deliver a surety
bond guaranteeing that the limited partners would make timely
payments of principal and interest under their promissory
notes. To induce Northwestern, as their surety, to issue such
a bond on behalf of the limited partners as principals, each of
the limited partners executed and delivered to Northwestern an
application for surety bond
which contained an agreement to indemnify the surety and an
Northwestern issued its Bond (the "Equilease Bond") in favor
of the partnership as the named Obligee, and Equilease as the
named permitted assignee. Northwestern guaranteed the limited
partners' obligations under their promissory notes.
The partnership made interest and principal payments on the
Equilease loan through the Spring of 1986, reducing the
principal balance by approximately $925,000, and thereby
reducing the balance due on each of the limited partner's notes
from $185,000 to $160,000 on a per unit basis. The partnership
was unable to meet payments due in June 1986 and thereafter. On
or about September 30, 1986 and on or about December 16, 1986,
Equilease advised Northwestern that the limited partners had
defaulted in their obligations under their promissory notes,
and demanded payment from Northwestern pursuant to the bond.
Northwestern, as surety, made total payments of $2,095,688.66
to Equilease, on behalf of the limited partners.
In late December, Southern Pipeline Development, Inc.
("Development"), a co-general partner of the partnership and
Southern Reserve, Inc. ("Reserve"), the parent company and sole
shareholder of Development, advised Northwestern and Equilease
of a proposed restructuring of the limited partners' promissory
notes negotiated to Equilease and bonded by Northwestern. In
general, the restructuring consisted of (1) the transfer of the
partnership's assets to Reserve; (2) Reserve's borrowing of
$6,845,000 from a new financial institution; (3) the assumption
by the former limited partners of the $6,845,000 borrowing by
execution of assumption agreements; (4) Northwestern issuing a
financial guarantee bond in favor of the new financial
institution guaranteeing the payments due under the assumption
agreements; (5) Reserve and Development indemnifying
Northwestern against all loss, cost and expense it would incur
by issuing a new financial guarantee bond, and, as collateral
security for their promise to indemnify, would grant to
Northwestern a first security interest/mortgage in the
transportation system; and (6) Reserve's use of the $6,845,000
loan proceeds to pay Equilease the remaining monies due on the
limited partners' promissory notes (less a discount), reimburse
Northwestern for the payments it had made to Equilease on
behalf of the limited partners, and establishment of a fund of
$700,000 to make improvements to the transportation system. The
restructuring was to be consummated on or before December 31,
1986. The limited partners allege that Esrine "masterminded"
the entire restructuring with the goal of immunizing
Northwestern from "attack" by the limited partners and that
throughout, Esrine and Northwestern were "one in [sic] the
Allegedly unbeknownst to Alberts or the Cosgrove Investors,
Finley Kumble had been representing Northwestern since 1985 in
the Gas Reclamation, Inc. Litigation ("GRI") and in litigation
in California at the same time. There is no record of any
correspondence advising Finley Kumble's respective clients of