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AMERICAN MOTORISTS INS. CO. v. PENNSYLVANIA BEADS

October 14, 1997

AMERICAN MOTORISTS INSURANCE CO., Plaintiff, against PENNSYLVANIA BEADS CORPORATION, Defendant.


The opinion of the court was delivered by: BRIEANT

 Brieant, J.

 Presently before this Court for decision is plaintiff's motion for summary judgment pursuant to Fed. R. Civ. P. 56 (c) and defendant's petition to stay the proceedings pending resolution of the case defendant has filed against the United States Customs Service in the United States Court of International Trade. On April 14, 1997, plaintiff American Motorists Insurance Company ("AMICO") brought an action against defendant Pennsylvania Beads Corporation ("PB Co.") to recover under an indemnity agreement.

 AMICO is incorporated under Illinois law and is licensed to do business as a surety under New York law. PB Co. is incorporated and located in Pennsylvania. PB Co. is engaged in the business of importing "beddies" products into the United States. In order to conduct this business, PB Co. had to guarantee its compliance with the regulatory and statutory requirements of the United States Customs Service, by providing a surety bond on Customs Form 301, the conditions of which are set by regulation. See 19 C.F.R. § 113.62 (1997); see also 19 U.S.C. § 1623 (1994) (authorizing customs officials to require and regulate surety bonds).

 On February 22, 1996 PB Co.'s president, Ramesh Chandriani, executed a bond with PB Co. as principal, AMICO as surety and the United States as obligee. The bond became effective as of March 1, 1996 and the limit of liability is set at $ 50,000.00. The bond is a continuous bond, "remaining in force for one (1) year beginning with the effective date and for each succeeding annual period, until terminated." The bond also constitutes "a separate bond for each period in the amounts listed below for liabilities [with a limit of $ 50,000.00] that accrue in each period." See Exhibit A to Plaintiff's Complaint.

 As a consideration for the agreement to act as PB Co.'s surety on the bond, AMICO and PB Co. had previously executed on February 13, 1996 an Indemnity Agreement. In Paragraph Two, PB Co. undertook and agreed:

 
To indemnify and save harmless [AMICO] from and against all liability, claim, demand, loss, damage, expense, cost, and attorney's fees which it shall at any time incur by reason of its execution of any bond or its payment of or its liability to pay any claim, and to place [AMICO] in funds to meet all its liability under any bond, promptly upon request and before [AMICO] may be required to make any payment thereunder; and the voucher or other evidence of the payment by [AMICO] of any liability, claim, demand, loss, damage, expense, cost and attorney's fees, shall be prima facie evidence of the fact and amount of [PB Co.'s] liability to [AMICO] under this agreement. Any demand upon [AMICO] by the [United States] shall be sufficient to conclude that liability exists and [PB Co.] shall then place [AMICO] with sufficient funds as collateral security to cover the liability.
 
See Exhibit B to Plaintiff's Complaint.

 It is the collateral security provision of this paragraph which is the subject of the present dispute.

 It is undisputed that sometime after the effective date of the bond, plaintiff received a formal demand from the United States Customs Service against the bond executed on behalf of defendant, requesting payment of $ 225,379.24. See Plaintiff's Statement Pursuant to Local Rule 56.1; see also Defendant's Statement Pursuant to Local Rule 56.1. Under the terms of the United States Customs Bond, plaintiff's liability to Customs is limited to $ 50,000.00 for each year in which the bond is in effect. Because the bond has been in effect for two one year periods--from March 1, 1996 to February 28, 1997 and from March 1, 1997 to February 28, 1998--plaintiff is potentially liable to Customs for up to $ 100,000.00.

 Pursuant to the terms of the indemnity agreement, plaintiff demanded that defendant post $ 100,000.00 as collateral security. After defendant refused to post such collateral security, plaintiff commenced this action. Plaintiff's motion for summary judgment seeks to require defendant to deposit with plaintiff funds in the amount of $ 100,000.00 as collateral security for its potential liability to Customs, and further requests attorney's fees in the amount of $ 6,400.00.

 Defendant urges this Court to deny plaintiff's motion, arguing that the Indemnity Agreement is ambiguous, that enforcement of the Agreement's collateral security provisions would be contrary to public policy, and finally that the amount plaintiff requests as attorney's fees is unreasonable. According to defendant, the $ 225,379.24 originally demanded of plaintiff by the Customs Service represents the amount of taxes assessed to defendant as a result of the Customs Service's reclassification of defendant's products as cigarettes, rather than cigars. That reclassification subjected PB Co.'s products retroactively to a substantially higher tax rate and defendant has contested it before the United States Court of International Trade. See Defendant's Memorandum of Law ("Def. Mem.").

 Discussion

 A. Summary Judgment on Plaintiff's Demand for ...


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