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NORTHWESTERN NAT. INS. v. ALBERTS

June 25, 1990

NORTHWESTERN NATIONAL INSURANCE COMPANY OF MILWAUKEE, WISCONSIN, PLAINTIFF,
v.
MICHAEL J. ALBERTS, JAMES R. ALBERTS, CASSANDRA M. SHEEHAN, RAYMOND COSGROVE, PENELOPE A. BOYLE, JOHN C. MAUCERE, JERRY SILVA, MICHAEL L. METHENY, H.U.A. RESOURCES, INC., ALTON JONES, ARTHUR LAWSON, JOHN L. MULLER, MICHAEL J. O'CONNELL, RANDOLPH K. PACE, SOUTHERN COMPANIES, INC., MICHAEL J. MCCANN, WILLIAM CURRAN, JAMES M. MCCABE, HAROLD A. THAU, PATRICK J. ROONEY, VAN ALLEN CAPITAL CORP., AND ROBERT T. NORTON, DEFENDANTS.



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.

Parties

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, N.J. 07739.

Defendant James A. Alberts is an individual citizen of the State of New Jersey residing at 45 Birchwood R., Glen Rock N.J. 07452.

Defendant Richard J. Alberts is an individual citizen of the State of Florida residing at 15714 Warbler Place, Tampa, FL 33624.

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. 07760.

Defendant Penelope A. Boyle is an individual citizen of the State of New Jersey residing at 19 Riverlawn Drive, Fair Haven, N.J. 07701.

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. 11710.

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, N.J. 07701.

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 N.Y. 10128.

Defendant Michael J. McCann is an individual citizen of the State of New York residing at 620 Fifth Avenue, New York, N.Y. 10020.

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 James Mason McCabe is an individual citizen of the State of New Jersey residing at 691 Harding Road, Little Silver, N.J. 07739.

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, N.Y. 10012.

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. 07090.

Prior Proceedings

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 motions.

Facts

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 Corporation ("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 estoppel letter.

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 same."

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 the ...


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