the event of a default of the principal amount not exceeding $ 997,439.00.
The Department of Finance also entered into a separate Inter-Creditor Agreement with Chemical Bank on July 9, 1987. In this agreement, the Department of Finance acknowledged that its agreements with Twin Rivers, ANB, RGI and AIC were subject and subordinate to two priority mortgages securing the Pavilion Apartments which were held by Chemical.
Twin Rivers and ANB failed to make payment on their Note when it became due on September 15, 1989. Under the Inter-Creditor Agreement, the City could not declare a default until Chemical declared a default and accelerated its mortgages with the defendants. On October 28, 1992, Chemical brought a mortgage foreclosure action on the Pavilion Apartments against Pavilion Holding Corp., ANB and the Department of Finance in Cook County, Illinois. The City was represented in that action.
On December 29, 1992 a Judgment of Consent Foreclosure was entered in Chicago, Illinois. Under the Judgment, Chemical accepted a deed for the Pavilion Apartments property. The Court found that the Department of Finance had "exhausted its remedies against the defendants." The Court further found that Chemical had no right to a deficiency judgment against any mortgagor under the Chemical mortgages for the Pavilion Apartments or against any other person liable for the indebtedness secured by the mortgages. The value of the Pavilion Apartments was less than the amount due to Chemical and, at the end of the foreclosure action, the Note at issue here remained unsatisfied.
Plaintiff sent notices to Twin Rivers and ANB on September 10, 1993 and October 3, 1994 demanding payment of the Note. The City has not received any payments from either Twin Rivers or ANB. Plaintiff also sent notices to defendant RGI on these same dates. RGI has not made any payments to the Department of Finance. On February 17, 1994 plaintiff sent a notice to defendant AIC demanding payment. AIC has not made any payment to the Department of Finance.
Defendants move to dismiss the complaint against them for failure to state a claim pursuant to Fed. R. Civ. Pro. 12(b)(6). Defendants contend that the City has not satisfied the two conditions precedent necessary before an action can be commenced on the Guarantees. For the reasons which follow below, I find that the City has satisfied the two conditions precedent to commence this action and defendant's motion to dismiss is denied.
a. Standard Under Rule 12(b)(6).
An action cannot be dismissed pursuant to Fed. R. Civ. Pro. 12(b)(6) unless "it appears . . . that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." See Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Staron v. McDonald's Corp., 51 F.3d 353, 355 (2d Cir. 1995) (citations omitted). When reviewing a motion to dismiss, the Court must "accept as true the factual allegations of the Complaint" and "read the Complaint liberally, drawing all inferences in favor of the pleader." IUE AFL CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir. 1993).
b. Exhaustion of Remedies
A guaranty is a collateral promise to answer for the payment of a debt or obligation of another, in the event the first person liable to pay or perform the obligation fails. A guaranty may be either a guaranty of payment or of collection. A court must look to the language of the specific guaranty to determine the nature of the guaranty. Tucker Leasing Capital Corp. v. Marin Medical Management Inc., 833 F. Supp. 948, 957 (E.D.N.Y. 1993).
The difference between a guaranty of collection and a guaranty of payment is quite simple. In a guaranty of collection, the guarantor undertakes the responsibility to pay if and only if the debt cannot be collected from the principal through legal proceedings. See McMurray v. Noyes, 72 N.Y. 523, 525 (1878); see also Northern Ins. Co. v. Wright, 76 N.Y. 445 (1879); 63 N.Y. Jur.2d, Guaranty and Suretyship, § 369 at 487-88. Thus, there are two conditions precedent to enforce a guaranty of collection; one, a legal proceeding must be initiated against the principal debtor, and two, the party seeking payment is unable to collect from the principal debtor after he exercised due diligence in attempting to collect the debt. McMurray, 72 N.Y. at 525.
In contrast, a guarantor of payment undertakes an unconditional guaranty that the debtor will pay on the debt. If for some reason, the debtor fails to make payment to the creditor, he can proceed directly against the guarantor. Id. Unlike the requirements a creditor must take to enforce a guaranty of collection, a creditor who seeks to enforce a guaranty of payment need not take any preliminary steps against the principal debtor before he seeks to collect the debt owed from the guarantor of payment. Id.
Here, there is no dispute that the guarantees are guarantees of collection. The language is specific and states that it is a guarantee of collection. Further, in each guaranty, the guarantor, either RGI or AIC, specifically states that it guarantees the collection of the obligor's liabilities. The language of the guarantees is as follows:
This is a guarantee of collection and not of payment. Guarantor hereby guarantees the collection of the Liabilities of the Obligor upon the condition that, in the event Obligor defaults in the payment of any of the Liabilities of Obligor, the Obligee shall first have exhausted all of its remedies against Obligor to recover from the Obligor so much of the Liabilities of Obligor as can be thereby obtained, before requiring payment of any part thereof from the Guarantor.
Defendants assert that because this is a guaranty of collection, the City must first exhaust ordinary means before it moves to enforce the guaranty, Consolidated Steel Corp. v. Pressed Steel Car Co., 118 Misc. 480, 194 N.Y.S. 649 (1922), and that until plaintiff exhausts all ordinary means of collection against defendants Twin Rivers and ANB, plaintiff's action is premature. Defendants further contend that a creditor is obligated to exercise due diligence in enforcing his legal rights against the obligor before seeking to recover from the guarantor of collection.
The City contends that a subsequent provision contained in the RGI Guaranty gives them the right to sue immediately. The relevant provision on which the Department of Finance relies directly follows the language quoted above and states:
Notwithstanding the foregoing, in the event Obligor has sold the property and all sums due to Chemical Bank (whether for principal, interest or otherwise) pursuant to its mortgage liens on the Property have been paid in full there shall be no requirement that the Obligee exhaust its remedies against Obligor.