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TOWN OF CLARKSTOWN v. NORTH RIVER INS. CO.

March 4, 1993

TOWN OF CLARKSTOWN, Plaintiff,
v.
THE NORTH RIVER INSURANCE COMPANY, Defendant.



The opinion of the court was delivered by: VINCENT L. BRODERICK

 VINCENT L. BRODERICK, U.S.D.J.

 I

 This case arises out of default in connection with a condominium construction project. The defendant North River Insurance Company (the "insurer") was surety on a bond given to the plaintiff Town of Clarkstown (the "Town") to assure proper fulfillment of land use requirements. By memorandum order dated October 2, 1992, *fn1" I granted summary judgment to the Town finding the insurer liable on the surety performance bond up to its stated maximum of $ 125,000. I determined that the insurer as surety was entitled to notice of the default of its principal, but that the delay would not have resulted in a loss less than the maximum limit of the bond ($ 125,000). I concluded, however, that the insurer could not be charged with interest for periods prior to its receipt of notice of the default of the principal, and allowed interest only for time elapsed after the notice date of November 16, 1989.

 In the memorandum order of October 2, 1992 I directed the Town to submit a proposed judgment including interest only from the date I found notice had been given to the insurer as surety, and after deducting applicable escrows. In the same memorandum order, I granted the insurer leave to file a third party complaint against the principal on the bond as to which it is surety. *fn2"

 The insurer has raised two objections to the Town's proposed judgment for $ 125,000 plus interest:

 (1) that the proposed judgment fails to deduct escrow funds received by the Town in the amount of $ 39,600; and

 (2) that the October 2, 1992 memorandum order contains no certificate pursuant to Fed.R.Civ.P. 54(b) directing that final judgment be entered as to this portion of the case on the basis of a finding of no just reason for delay.

 II

 It is undisputed that the Town retained an escrow deposit of $ 39,600 in connection with the default on the construction project involved in this case. Relying on various post-default hearsay statements in documents and depositions concerning the purposes of the escrow, the Town contends that this escrow deposit is unavailable as a setoff against the $ 125,000 for which the insurer is responsible under the surety bond. The Town, however, has failed to submit any initiating documents such as agreements or correspondence creating, accompanying or defining the escrow which would delineate its purpose, limits, use or applicability.

 The Town, not the insurer, negotiated for and obtained the escrow, and necessarily the Town had initial possession of any documents created in connection with the deposit of the escrow. The Town has provided no explanation to support the plausibility of the creation of a $ 39,600 escrow without any accompanying documents, *fn3" nor has it suggested what happened to any such documents, if they existed. Absent such an explanation, the Town's purely hearsay evidence as to the nature of the escrow does not make sense. *fn4" Accordingly I draw an adverse inference against the Town with regard to the scope, purpose and effect of the escrow. *fn5"

 The insurer has shown at the least existence of a genuine issue of material fact with respect to its entitlement to claim the escrow as an offset. No trial on that issue is required, however, since the Town made no objection to the procedure set forth in the memorandum order of October 2, 1992 that the applicability of escrows be determined as part of the settlement of the judgment. *fn6"

 III

 The insurer ...


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