that indicated it was very likely that TOA would default on the agreement with Liberty. By its own admission, Rachman did not trust Ronald Halpern, not only because he had previously defaulted on his debts, but because Halpern had actually stolen from Rachman. Rachman had both proof and an admission from Halpern that TOA had misappropriated funds that were concededly owed to Rachman. See Deposition of Laurence Gewirtz (of Rachman) at 45. Moreover, many of Halpern's defalcations had occurred in violation of a contract similar to the very agreement Rachman sought to have bonded by Liberty. Rachman's own counsel, in reporting Halpern to the United States Postal Inspectors, had referred to Halpern's conduct as "an intentional and systematic effort to defraud" Rachman. See Ex. S to Penner Aff. (Correspondence of Neal Factor).
The uncontested evidence also indicates that Halpern never disclosed to Liberty the misconduct he had engaged in with Rachman that lead to the antecedent debt that was the subject of the bond. Nor could Rachman possibly have assumed that Halpern would have made such an admission and still obtained the bond. Indeed, the testimony of Rachman's lawyer, Neal Factor, establishes that Rachman was well aware that Liberty was not informed as to the details of the relationship between TOA and Rachman. Factor testified to having several phone conversations with individuals at Liberty during late December 1988 and the months of January and February 1989. See Deposition of Neal Factor ("Factor Deposition") at 231-39. During the course of these conversations, by Factor's own account, the people with whom he spoke at Liberty were unaware that the purpose of the contract between TOA and Rachman was to repay an antecedent debt -- let alone that this debt had arisen after Halpern had stolen from Rachman and thereby defaulted on a contract nearly identical to the one Liberty was asked to ensure. Because such information was not a matter of public record, and because it was safe for Rachman to assume that Halpern would not have disclosed his indiscretions to Liberty, it must have been clear to Rachman that Liberty was unaware of this material information.
Finally, it is clear that Rachman, through its lawyer, had ample opportunity to apprise Liberty of material information before the surety became liable on the bond. Contrary to Rachman's argument that Liberty became "irrevocably" liable on December 9, 1988, see Plaintiff's Opp. Mem. at 10, Liberty was not liable on the bond, as originally issued, because it purported to secure a "written agreement" that simply did not exist. Both parties acknowledge that there was never a written agreement of December 9, 1988. More significantly, even if there is sufficient evidence to raise an issue of fact as to whether the January 12 Contract simply memorialized an oral agreement made December 9, and even if Liberty would otherwise be liable on the bond notwithstanding the fact that a "written agreement" of December 9 never existed, under the circumstances here, it is clear that Liberty was not immediately liable on the surety bond after it was first issued on December 9, 1988. Before a surety will incur an obligation on a bond, the instrument must be delivered to and accepted by the obligee. See People v. Bostwick, 32 N.Y. 445, 447 (1865) (delivery); Agawam Bank v. Strever, 18 N.Y. 502, 506-07 (1859) (delivery); Davis Sewing Machine Co. v. Richards, 115 U.S. 524, 29 L. Ed. 480, 6 S. Ct. 173 (1885) (acceptance); Hauswald v. Katz, 216 A.D. 92, 97, 214 N.Y.S. 705, 710 (1st Dep't 1926) (acceptance); 63 N.Y. Jur. 2d Guaranty and Suretyship §§ 60-63. The evidence in this case demonstrates that the bond was not delivered to, nor accepted by Rachman until several months after it was first issued by Liberty.
Rachman's lawyer has testified that, in January 1989, when he first received an "example" copy of the bond marked for "exhibit purposes only," he had two concerns. Factor Deposition at 202. First, he was unsure whether a bond could be written to cover the kind of transaction, involving antecedent debt, that Rachman contemplated with TOA. Id. Secondly, he was concerned about the discrepancy between the December 9 Contract, mentioned on the bond, and the January 12 Contract that was in fact the agreement reached between the parties. Id. at 203. Factor explained that he then conducted research for the purpose of answering his own question: "How can I make sure that this bond would cover this particular contract . . . ?" Id. The fruits of his research ultimately lead Factor to persuade Adrian Marshall, at Liberty, to affix a copy of the January 12 Contract to the back of the bond and to alter the face of the bond so that it referred expressly to the January 12 Contract.
Rachman was not only reluctant, if not unwilling, to accept the bond that Liberty proposed to tender originally, but Rachman's lawyer unequivocally admitted that Rachman did not begin to transact business pursuant to the January 12 contract, until it received the altered bond in February, 1989. Specifically, Factor testified that "Rachman was waiting until they had the [altered] bond in their possession before they would begin the transaction pursuant to the contract." Factor Deposition at 245. He then confirmed that the bond was delivered "in early February" of 1989. Id. Thus, by its own admission Rachman did not accept the bond or act in reliance on it, until February 1989, after it had been delivered with the modification made to reflect the January 12 contract.
It is undisputed that Factor had several conversations with individuals at Liberty prior to February 1989. Although he maintains that he took great pains to explain that the contract between Rachman and TOA was for the repayment of an antecedent debt, see Factor Deposition at 234-35, 239, Factor never mentioned to anyone at Liberty that the debt itself was the result of, in Factor's own words, a "systematic effort to defraud Rachman." Ex. S to Penner Aff. (Correspondence of Neal Factor). On the contrary, Factor's admitted purpose during the course of these many telephone conversations was to make sure that individuals at Liberty altered the face of the bond so that it would refer to the January 12 Contract. See Factor Deposition at 204-05, 238. Because these conversations, which resulted in the issuance of a bond that was drafted to conform to Rachman's own specifications, took place before the acceptance of the bond, Rachman had ample opportunity to comply with its obligation to communicate material information to Liberty before the latter became liable on the bond.
Nor should Liberty's negligence preclude it from asserting the defense of fraudulent concealment. While it is true that "one who by a negligent mistake executes a mortgage or a suretyship undertaking can not have it set aside after an innocent party has made a loan in reliance upon it," see 3A Corbin on Contracts § 606 (1960) (emphasis added), Rachman cannot claim the mantle of innocence in this case. Although Rachman did not participate actively in defrauding Liberty, Rachman had both good reason to believe that the surety was being deceived and ample opportunity to so inform Liberty before Rachman accepted the bond and acted in reliance upon it. Under these circumstances, Rachman may not enforce the bond against Liberty. See 63 N.Y. Jur. 2d Guaranty and Suretyship § 180 (1987) ("The surety's carelessness or failure to seek additional information regarding the risk does not deprive the surety of an affirmative defense of fraud where the creditor had a duty to disclose fully all relevant information bearing on the risk.")
Over a century ago, Justice Haight observed:
It is not clear, or always easy to determine, just what facts or circumstances make a case in which it is the duty of a person taking security from another to make known to the proposed surety the facts of the case, and thus warn him of his danger. But it appears to us that where a person taking security knows the facts, and is personally present, having an opportunity to inform the proposed surety, and having reason to believe that the proposed surety does not know the facts, and is being deceived and defrauded into becoming such, it is his duty to post him, and the acceptance of him as surety or indorser, under such circumstances, would be a fraud which would avoid the contract.
Farmers' Nat. Bank of Franklinville v. Van Slyke, 49 Hun 7, 1 N.Y.S. 508, 510 (Sup. Ct., Gen. Term., 5th Dep't 1888). This is such a case. Accordingly, defendant's motion for summary judgment in its favor is granted, and plaintiff's motion is denied.
Edward R. Korman
United States District Judge
Dated: Brooklyn, New York
December 15, 1993