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NATIONAL UNION FIRE INS. CO. v. FREMONT

March 25, 1991

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., PLAINTIFF,
v.
JOSEPH FREMONT AND BEVERLY FREMONT, WILLIAM J. KNOWLTON, DONAL W. LOOSELY, CARL H. MCBAIN, SIMEON MORIN AND JOHN R. WOILLARD, JR., DEFENDANTS.



The opinion of the court was delivered by: Stanton, District Judge.

OPINION AND ORDER

National Union Fire Insurance Company of Pittsburgh ("National Union"), an issuer of financial guarantee bonds, sues to enforce an indemnity agreement between itself and limited partners in a tax shelter limited partnership, and to enforce its rights as subrogee on the limited partners' promissory notes which it honored on their behalf. National Union issued a bond which guaranteed to the partnership, and to the bank that financed the partnership, that the limited partners would make all of the capital contributions represented by the promissory notes they gave to the partnership. The defendant limited partners stopped making their required contributions, and National Union made them on their behalf. Now it sues them for reimbursement under indemnity agreements they gave National Union at the time it guaranteed their payments, and as subrogee of the notes on which they defaulted.

National Union moves for summary judgment against defendant Simeon Morin. The motion is granted.

BACKGROUND

In December, 1982 defendant, Simeon Morin purchased a limited partnership interest in E.A. Associates ("E.A.A."), a New York Limited Partnership. Defendant paid for this interest partly with cash and partly with a series of five promissory notes (the "notes") in the total principal amount of $71,300. Pl. Statement Pursuant to Rule 3(g) ¶ 2.

Defendant and National Union entered into an indemnity agreement regarding the notes (the "indemnity agreement"), and National Union issued a bond guaranteeing the notes (the "bond"). The indemnity agreement required defendant to reimburse plaintiff for any payments it made under the bond, and for interest and expenses incurred in obtaining reimbursement. The bond guaranteed the payment of defendant's notes and required National Union, as surety, to make payment on the notes in the event of defendant's default. Pl. 3(g) Statement ¶¶ 3-4. The bond further provided that if National Union made payments on the notes to cure an investor's default, it would be subrogated to the note holder's rights against the investor. Exhibit C to Complaint ¶ 7.

Defendant failed to make payment on his final note, which became due on March 15, 1987. Pursuant to the terms of the bond, plaintiff made payment for him. Plaintiff sues to recover this payment and interest, attorneys' fees, and expenses pursuant to the indemnity agreement. It now moves for summary judgment.

DISCUSSION

1. Summary Judgment

Summary judgment shall be granted "if 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 a judgment as a matter of law." Fed.R. Civ.P. 56(c). "Summary judgment is appropriate when, after drawing all reasonable inferences in favor of the party against whom summary judgment is sought, no reasonable trier of fact could find in favor of the nonmoving party." Lund's, Inc. v. Chemical Bank, 870 F.2d 840, 844 (2d Cir. 1989). If a summary judgment motion is properly supported, "the adverse party 'must set forth specific facts showing that there is a genuine issue for trial.'" Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986) (quoting Fed.R.Civ.P. 56(e)).

2.  National Union's Rights Under the Promissory Note

National Union seeks recovery under the notes pursuant to the bond, and as the transferee of LaSalle National Bank (the "bank"). It argues that the bank was a holder in due course of the note, and that it enjoys all the bank's rights and is entitled to payment on the note as the bank's transferee.

It is undisputed that the bank was a holder in due course of defendant's note. A holder of a promissory note establishes a prima facie case for recovery by proving execution of the note and a default in payment pursuant to its terms. Hogan & Co. v. Saturn Management, Inc., 78 A.D.2d 837, 433 N.Y.S.2d 168, 169 (1st Dep't. 1980); Shields v. Stevens, 55 A.D.2d 1017, 391 N YS.2d 766, 767 (4th Dep't. 1977). Once a holder establishes a prima facie case, the maker has the burden of coming forward with proof of evidentiary facts — not merely conclusory allegations — demonstrating the existence of a genuine and substantial issue rebutting the holder's entitlement to payment. Shields, 391 N.Y. So.2d at 767.

National Union, as transferee of the promissory note, assumes the right of the transferor bank unless the "transferee . . . has himself been a party to any fraud or illegality affecting the instrument or . . . as a prior holder had notice of ...


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