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BANQUE NATIONALE DE PARIS S.A. v. INSURANCE CO. OF

September 8, 1995

BANQUE NATIONALE DE PARIS S.A. - DUBLIN BRANCH - successor in interest to Banque Nationale de Paris (Ireland) Limited, Plaintiff, against INSURANCE COMPANY OF NORTH AMERICA, Defendant. INSURANCE COMPANY OF NORTH AMERICA, Third-Party Plaintiff, -against- FEI, LTD., JOHN J. FOGARTY and JEAN FOGARTY, Third-Party Defendants.


The opinion of the court was delivered by: LEWIS A. KAPLAN

 LEWIS A. KAPLAN, District Judge.

 On July 20, 1993, BNP alleged that FEI failed to repay the $ 300,000 loan and demanded that INA honor its obligation to make the payment. (See Killeen Aff. Ex. 3) On or about November 12, 1993, BNP brought suit against INA. (Cpt, Killeen Aff. Ex. 5) INA settled the action with BNP for $ 200,000 and brought suit, in June 1994, against the third party defendants for the amount of the settlement plus all expenses, including attorneys fees, incurred. (Third Party Cpt, Killeen Aff. Ex. 7) INA now moves for summary judgment, pursuant to Federal Rule of Civil Procedure 56, against third party defendants.

 Discussion

 In order to prevail on the motion for summary judgment, the third party plaintiff must establish that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). It must demonstrate this on the basis of affidavits "made on personal knowledge . . . setting forth such facts as would be admissible in evidence, and showing affirmatively that the affiant is competent to testify to the matters stated therein." Rule 56(e). In order to defeat the motion, the adverse parties must set forth, also by affidavits, specific facts showing that there is a genuine issue for trial.

 INA's Right to Settle

 Third party defendants assert first that there is a genuine issue of material fact relating to INA's right to settle the underlying claim of BNP in this litigation. They are mistaken.

 The indemnity agreement provides that INA has "the right to adjust, settle or compromise any claim, demand, suit or judgment upon the Bonds unless the Principal and the Indemnitors shall request the Surety to litigate such claim or demand . . . and shall deposit with the Surety at the time of such request cash or collateral satisfactory to the Surety." ( Agreement of Indemnity, Killeen Aff. Ex. 1 P 11) Defendants have not offered any evidence to show that they provided INA with the cash or collateral required by the agreement. In fact, third party defendant John J. Fogarty affirms that he advised INA "of the financial inability" of the third party defendants "to advance any funds to INA concerning the BNP claims." (J. Fogarty Aff. P 15) As a result of this failure to meet the requirements of the indemnity agreement, INA was free to settle any claims in good faith. See, e.g., Fireman's Fund Insur. Co. v. Nizdil, 709 F. Supp. 975, 977 (D. Or. 1989) (as a result of failure to provide surety with collateral security required by indemnity agreement, surety was free to settle claims under terms of the agreement); Ebasco Constructors, Inc. v. A.M.S. Construction Co., Inc., 195 A.D.2d 439, 440, 599 N.Y.S.2d 866, 867 (2d Dep't 1993) (same); cf. Lori-Kay Golf, Inc. v. Lassner, 61 N.Y.2d 722, 472 N.Y.S.2d 612, 460 N.E.2d 1097 (1984). There is no triable issue material to INA's right to settle the claim.

 Settlement Made in Good Faith

 FEI asserts that INA's settlement payment to BNP was not made in good faith. In support of this assertion, third party defendant John J. Fogarty attests that he advised INA's counsel that there appeared to be two defenses to BNP's claim and, rather than amending its answer or making a motion based on the defenses, that INA settled the claim. (J. Fogarty Aff. PP 13-15) The Court holds, however, that defendants have failed to raise a genuine issue of fact material to this allegation of bad faith.

 The implied duty of good faith and fair dealing prevents any party to a contract from depriving another party of the benefits of the agreement. See Filner v. Shapiro, 633 F.2d 139, 143 (2d Cir. 1980). A performance in good faith entails acting with a "faithfulness to an agreed common purpose and consistency with the justified expectations of the other party." RESTATEMENT (SECOND) CONTRACTS ยง 205, comment a (1981).

 Here, INA acknowledges that the third party defendants advised it of the alleged defenses, but it is also undisputed that INA investigated and evaluated those alleged defenses before settling for sixty-seven cents on the dollar. (See Wolgel Aff. PP 7-8 & Exs. 5-9) There is not a scintilla of evidence, as distinct from conclusory assertions, that INA acted inappropriately. Indeed, it obviously was in INA's economic interest to press the alleged defenses for all they were worth, as the third party defendants' failure to post collateral meant that INA's own funds were at risk on BNP's claim. There is no evidence that INA failed to extract in the settlement whatever value could be derived from the alleged defenses.

 The Court's conclusion that INA is entitled to judgment is supported by analogy to the business judgment rule in corporate law. The management of corporate affairs is entrusted by contract (i.e., the certificate of incorporation) and statute *fn1" to the board of directors. In view of the role of the board and its superior expertise in business matters relative to a reviewing court, informed business judgments by boards are presumed appropriate absent a showing of self-interest or ...


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