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
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.
In connection with their pledges, Walther and Joy executed
identical security agreements in which each, as "Borrower,"
granted the Bank a lien on all his personal property (referred
to in each agreement as the "Collateral"), including the AIFS
shares, "as security for all present or future obligations or
liabilities of any and all
kinds . . . whether incurred by Borrower as maker, endorser,
drawer, acceptor, guarantor, accommodation party or otherwise.
. . ." The security agreements also authorized "the Bank in its
discretion, at any time, whether or not the Collateral is
deemed by it adequate, to appropriate and apply upon any of the
[Borrower's obligations to the Bank], whether or not due, any
[Collateral]. . . ." Therefore, under the terms just quoted,
Walther and Joy each agreed that his shares of AIFS stock would
secure both present and future obligations to the Bank, and
that the Bank could apply the AIFS stock to "any" obligation of
the relevant obligor.
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.
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
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. ¶ 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 ...