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August 22, 1991


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


James Joy and plaintiff Roger Walther each guarantied a loan made in 1986 by defendant The Bank of New York ("the Bank") to Real Estate Research Corporation ("RERC") and each secured his guaranty by pledging shares in AIFS, Inc., a publicly traded company. The security agreements that Joy and Walther each executed in connection with their respective pledges provided that the collateral would secure present as well as future obligations to the Bank. In 1987, the Bank made another loan, this one to RERC's parent, and received a guaranty from Joy, but not from Walther. Both loans are in default and the Bank intends to apply only to the 1987 loan and not to the 1986 loan the proceeds from the sale of collateral pledged by Joy, and to require that Walther honor his guaranty for the unpaid balance of the 1986 loan.

Walther has sued for a declaration that the Bank must apply to the 1986 loan the collateral pledged by Joy. The Bank has counterclaimed for judgment on Walther's guaranty of the 1986 loan as well as attorney's fees. The Bank now moves for summary judgment dismissing Walther's complaint and granting judgment on its counterclaims. For the reasons set forth below, the Bank's motion is granted.


In October 1986, Walther and Joy formed a holding company, JW Holdings, Inc. (JWH), to acquire real estate appraisal and investment advisory firms. It was intended that Walther would be a passive investor while Joy actively managed the venture. (Walther Aff. ¶ 2) One of JWH's first acquisitions was RERC. By means of a term loan, dated October 28, 1986, the Bank financed the acquisition by lending RERC $1.5 million (the "1986 RERC loan").

The Bank received a corporate guaranty of the 1986 RERC loan from JWH and personal guaranties from Walther and Joy. The Bank required also that Joy pledge 124,000 shares and that Walther pledge 276,000 shares of AIFS as collateral for their respective guaranties. Joy's 124,000 AIFS shares will hereafter be referred to as "the Joy collateral." The Bank took possession of all 400,000 shares.

The heart of this case is Walther's claim that the Bank violated his rights as guarantor of the 1986 RERC loan by applying proceeds from the sale of the Joy collateral to a subsequent obligation. Walther's guaranty provided that:

  "the undersigned unconditionally guarantees to the
  Bank . . . the prompt payment when due of all
  present and future obligations . . . of [RERC] to
  the Bank . . . irrespective of the genuineness,
  validity, regularity or enforceability . . . of
  any collateral [securing RERC's obligations to the
  Bank] or of the existence or extent of such
    The undersigned hereby assents that the Bank may
  at any time and from time to time, . . . without
  notice to or further consent of the undersigned, .
  . . exchange or surrender any collateral for . . .
  any of the Obligations [of RERC to the Bank]. . .
  . and may also make any agreement . . . with any
  other . . person liable on any of the Obligations,
  . . . for the extension, renewal, payment,
  compromise, discharge or release thereof, in whole
  or in part, or for any modification . . . of any
  agreement between the Bank and . . . any such
  other . . . person, without in any way impairing
  or affecting this guarantee.
    This guarantee is a guarantee of payment and not
  of collection, and the Bank shall be under no
  obligation to take any action against [RERC] or
  any other person liable with respect to [RERC's
  obligations to the Bank] or resort to any
  collateral security held by it to secure any of
  [RERC's obligations to the Bank] as a condition
  precedent to the undersigned being obligated to
  perform as agreed herein. . . . The undersigned
  hereby waives any rights to be subrogated to the
  rights of the Bank with respect to [RERC's
  obligations to the Bank] until such time as the
  Bank shall have received cash payment in
  satisfaction of all of the Obligations. . . ."

The guaranty contained a New York choice of law clause and provided also that the guarantor would pay the Bank's reasonable expenses, including attorney's fees, associated with the "enforcement or protection" of the guaranty or any of RERC's obligations. A rider to the guaranty limited Walther's total liability to either $1.5 million or the unpaid balance of the 1986 RERC loan, whichever was less. (Kochenthal Aff., Exh. C)

Shortly before executing their respective guaranties to and security agreements with the Bank, Joy and Walther executed a "Contribution Agreement" between themselves. The Bank was not a party to that document and it refused Walther's request for specific acknowledgment or consent to the agreement. (Anderson Aff. ¶ 6) However, according to Walther, the Contribution Agreement was included on a list of documents that the Bank reviewed in connection with the closing of the 1986 RERC loan. (Mitzner Aff., Exh. 1; Anderson Aff. ¶ 6; Walther's Memorandum of Law at 6 n. 3)

The Contribution Agreement stated that it was intended "to insure that Joy will be equally liable to both the Bank and Walther should the Bank be required to call upon the guarantees issued by the Guarantors." Acknowledging that each was "jointly and severally liable" as a guarantor of the 1986 RERC loan, Joy and Walther agreed that:

    "1. In the event of a call under such guarantee
  by the Bank, Joy agrees to be liable and
  responsible for 100% of the amount of such call.
    2. If Walther shall have been required to pay to
  the Bank any amount of the Loan which was not
  repaid by [RERC], Walther shall be entitled to
  reimbursement from Joy of such amount.
    3. Joy agrees to substitute additional
  collateral with the Bank in the event that the
  Bank makes any call under the guarantee which
  would have the effect of causing the Bank to sell
  or otherwise realize on the collateral pledged by
  Walther. The amount of such additional collateral
  shall have a fair market value for collateral
  purposes at least equal to that pledged by

(Kochenthal Aff., Exh. F)

Walther states that the Contribution Agreement "required Joy to apply his AIFS collateral . . . first to satisfy the obligation to the Bank [under the 1986 RERC loan], and [also] provided that my AIFS collateral and other assets would be called upon only to the extent that Joy's assets could not satisfy the debt." (Walther Aff. ¶ 4) The Bank challenges only the relevance of the Contribution Agreement and not Walther's interpretation of it. However, it appears that the agreement says nothing about the status of the 124,000 AIFS shares which Joy initially pledged; it requires merely that Joy pledge additional shares in the event the Bank sells Walther's shares. The document embodied Joy and Walther's agreement to apportion between themselves their joint and several liability to the Bank. Although he does not claim that the Bank was bound in any way by the terms of this separate agreement, Walther does suggest that "the imprecise terms of the guarantee should be interpreted in light of the realities of the entire transaction, including the Contribution Agreement." (Plaintiff's Memorandum of Law at 36 n. 34)

In 1987, JWH needed to borrow $1.5 million to finance the acquisition of two real estate consulting firms — Zuchelli, Hunter & Associates ("ZHA") and Thompson Site Selection Research, Inc. ("Thompson"). Walther refused to guaranty this loan. However, the Bank nonetheless agreed to lend that sum to JWH on the condition that Walther temporarily guaranty a prior working capital loan to RERC. Walther agreed to provide the interim guaranty only if it would expire once JWH acquired ZHA and Thompson. The Bank agreed to Walther's condition and the loan, hereafter referred to as the "1987 JWH loan," closed on June 19, 1987.

JWH secured repayment of the $1.5 million 1987 JWH loan by pledging the stock in its three subsidiaries, RERC, ZHA and Thompson. In addition, Joy executed a personal guaranty. Walther did not guaranty the 1987 JWH loan and is not obligated in any way for its repayment. (Defendant's Rule 3(g) Statement ¶ 15) As promised, Walther's interim guaranty expired once JWH acquired ZHA and Thompson. Therefore, after the two acquisitions, there remained two guarantied obligations to the Bank: (1) the 1986 RERC loan — guarantied by Walther and Joy personally with each guaranty secured by Walther's 276,000 AIFS shares and Joy's 124,000 AIFS shares, respectively; and (2) the 1987 JWH loan — secured by the stock in JWH's subsidiaries and guarantied by Joy alone. However, because the security agreement executed at the time of the 1986 RERC loan included future obligations, Joy's second guaranty was secured by the same Joy collateral as secured his first guaranty. Moreover, "[t]o secure the liabilities of the undersigned under [the] guaranty," Joy's second guaranty itself provided the Bank with a security interest in all personal property in its possession and authorized the Bank to apply that collateral to the guaranty. (Kochenthal Aff., Exh. E) Thus, by operation of the security agreement executed in 1986 and the terms of his second guaranty, the Joy collateral secured both of Joy's guaranties.

Walther claims that when he allowed the 1987 JWH loan to go forward, he did not realize that the Joy collateral would effectively secure that loan as well as the 1986 RERC loan. In particular, he claims to have been unaware that Joy guarantied the second loan. (Walther Aff. ¶ 9) Moreover, Walther claims also that at the time of the transaction he asked Joy about the "possible impact the second loan might have on [his] guaranty of the [1986 RERC loan]" and that Joy had assured him that the Bank "never [made] any mention" of the AIFS stock, or "any interrelationship between the two loans." (Id. ¶ 8) However, Walther does not assert that there were any representations made by the Bank regarding the effect of the 1987 loan. He claims only that he was unaware of the Bank's "current interpretation" of the status of the Joy collateral when he allowed the 1987 loan to close. (Id. ¶ 10)

Both loans have been in default since March 1988. Walther claims to have learned for the first time in December 1988 that the Bank was "taking the position" that it could apply the Joy collateral to the 1987 JWH loan. (Walther Aff. ¶ 14) Since then, Walther alleges that he has tried to minimize his potential liability by arranging a transaction in which JWH could sell ZHA and Thompson for an amount that would pay partially the 1987 JWH loan, but that the Bank "resisted all good faith negotiations" for the sale of these companies. (Id. ¶ 16) However, except for stating that "the Bank took a passive role" when he subpoenaed RERC's former auditor for certain tax information, (id.), and describing the Bank's workout specialist as "extremely negative, inflexible, and unwilling to expend any effort to resolve the financial difficulties being experienced by Joy's companies," (id. ¶ 12), the only fact Walther provides in his affidavit to support his allegation of bad faith is that the Bank first refused his request that it demand financial statements from ZHA and Thompson, and then, when it did accede to his request, it "sent letters to the wrong parties seeking the wrong information." (Id. ¶ 16) In his complaint, Walther alleges that in December 1989, the Bank "refused to accommodate" the "expressed . . . willingness" of the principal of Thompson to buy back the company for $2.25 million, (Complaint ¶ 31), although this allegation does not appear in his affidavit in opposition to the summary judgment motion.

Walther alleges also that even after he provided the Bank with evidence that ZHA was being mismanaged and its assets wasted, the Bank "ignored" his requests to liquidate both ZHA and Thompson. (Walther Aff. ΒΆ 17) In his complaint, but not his affidavit, Walther asserts that he provided the Bank with evidence that certain former officers and employees of ZHA had breached their employment agreements with the ...

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