The opinion of the court was delivered by: SAND
There has been tried to the Court a declaratory judgment action brought by Plaintiffs, Management Investment Funding Limited ("MIF")
and Compagnie Financiere de CIC et de l'Union Europeene ("CFC") (collectively "Plaintiffs"), against Defendant Merrill, Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Third-Party Defendant, Calex, Ltd. ("Calex"). This action is brought under a grant of diversity jurisdiction, 28 U.S.C. § 1332(a)(1) (1982), and implicates commercial questions under New York law. Plaintiffs seek a declaration of the continued existence of a binding contractual obligation between Plaintiffs and Defendant pursuant to which Merrill Lynch may not release any funds in the Calex Investment Account
which would cause the balance to fall below $ 2.5 million dollars. Defendant Merrill Lynch seeks a declaration that this contractual obligation is no longer binding.
The real dispute in this case is between Plaintiffs and Third-Party Defendant, Calex, a limited company wholly owned by Mr. Alejandro Weinstock.
The controversy arises over a loan made by Banque de l'Union Europeene (BUE), now known as CFC,
to Prodipe, Inc. ("Prodipe") and unconditionally guaranteed by Mr. Weinstock. It is this Guarantee
which undergirds the agreement between Calex and Merrill Lynch.
There is a conflict, not fully resolved, in the cases of the New York Court of Appeals as to what happens to a surety when, as is the case here, the primary obligor is released from his obligations and there has been a waiver of defenses in the original guarantee agreement but no reservation of rights in the release. We find that the doctrine of strictissimi juris and the cumulative circumstances in this case tilt the balance in favor of Weinstock. The release of the primary obligor by means of an arrangement to which the guarantor did not consent and to which he was not a party; the failure to reserve rights against the guarantor in the release despite a reservation in the form of a general waiver in the original guarantee agreement; the mere exclusion of the guarantor from the scope of the release without an explicit reservation; the participation of one of the three guarantors in orchestrating the exclusion of the other two from the release; the failure to preserve expressly in the release the guarantor's right of recourse or subrogation against the principal; and the acquisition of control over the borrower by the lender thereby increasing the risk to the guarantor and potentially impairing his right of subrogation--all these circumstances together give rise to the conclusion that the Weinstock Guarantee is not enforceable. The agreement with Merrill Lynch to hold the funds in the account was intended to provide a source of readily accessible capital to implement the Guarantee and its collectability. Without an enforceable guarantee, however, Merrill Lynch's obligations are without purpose and therefore not binding. In sum, we conclude that Merrill Lynch is not bound.
The following constitutes our findings of fact, which are, in large part, undisputed and stipulated, as well as our conclusions of law.
In 1987, Alejandro Weinstock, a Mexican citizen
and resident of Mexico, together with Patrick Mery-Sanson ("Mery-Sanson") and Alfredo Balli ("Balli"), formed the Unis Group, Inc. ("Unis"). Unis, in turn, was the owner of record of 99.9% of the stock of Prodipe, a Cayman Islands limited corporation. Prodipe was structured as a holding company whose principal subsidiary, Consorcio Prodipe, S.A. de C.A. ("Consorcio"), managed a resort project in Mexico. (See Pre-Trial Order at P 2 and Calex Post-Trial Br. Ex. A., "Chart of Prodipe's Corporate Structure.") Weinstock, a chartered public accountant, was, at this time, Chairman and Treasurer of Unis, Prodipe, Consorcio and of Consorcio's operating subsidiaries. However, Weinstock resigned as Treasurer and Director of Prodipe in 1993.
On July 23, 1990, Prodipe entered into a loan agreement (the "Loan Agreement") pursuant to which BUE loaned Prodipe $ 2.5 million (the "Loan") in connection with the Mexican resort project. (Pre-Trial Order at P 4; Pls.' Trial Ex. 1.) At the same time, Weinstock (and his colleagues Balli and Mery-Sanson) executed and delivered to BUE a guarantee of the Prodipe Loan (the "Guarantee"). (Pls.' Tr. Ex. 2.) The Guarantee provides, in relevant part, that:
The Guarantors hereby agree that their obligations hereunder shall be unconditional and irrevocable, irrespective of the validity, legality or enforceability of the Loan Agreement, the absence of any action to enforce the same, any waiver or consent by the Bank with respect to any provisions thereof, the recovery of any judgment against the Borrower or any action to enforce the same or any circumstances which might otherwise constitute a legal or equitable discharge [or] defense [of] a guarantor....This Guatantee [sic] shall continue in full force and effect until all amounts due in principal, interest and any obligations payable as aforesaid of or in respect of the Loan Agreement shall be paid in full and shall be valid to any assignee of the rights and benefits under the Loan Agreement.
Under the Loan Agreement, the Guarantors retained a right of subrogation against the borrower. (Pre-Trial Order at P 6.)
By means of an undated letter ("Letter Agreement") drafted prior to the Loan Agreement (Pre-Trial Order at P 10), Weinstock, on behalf of Calex, delivered the following instruction to Merrill Lynch:
On behalf of Calex, Ltd., I hereby instruct you, at the request of and for the benefit of Banque de L'Union Europeene ("BUE"), not to sell, trade, transfer or otherwise dispose of any readily marketable securities held for the account of Calex, Ltd. if such sale, trade, transfer or other disposition (individually or in the aggregate) would result in reduction in the value of the Calex, Ltd. account maintained with you below the amount of $ 2,500,000 unless you first receive a letter or telecopy from BUE authorizing such a sale, transfer, or other disposition.
The Letter Agreement goes on to provide: "In no event shall this letter of instruction have any further force or effect following payment in full by Prodipe of its obligations under the Loan Agreement."
(Pls.' Trial Exs. 4 & 8.) The agreement to maintain the minimum level of funds in the Merrill Lynch account was offered as an inducement to BUE to make the Loan.
Prodipe defaulted on the Loan when it fell due on December 31, 1991. By letter of August 19, 1992, CFC demanded repayment on the Guarantee from Weinstock. (Pls.' Trial Ex. 31.) To date none of the principal of the loan has been repaid. (Pre-Trial Order at P 12.) In 1996, CFC, by a series of transactions, sold the right, title and interest in the Prodipe Loan, Loan Agreement and the Guarantees, first to Compagnie Generale de Batiment et de Construction ("CBC"), which in turn assigned their interests to MIF and two other buyers. (Pre-Trial Order at P 15.) It is not disputed that the Guarantee's validity survives assignment.
Previously, in 1993, CFC, by virtue of a pledge agreement entered into two years prior with the Unis Group, acquired control of 99.97% of the shares of Prodipe. (Pls.' Trial Exs. 36, 37, 38.) Therefore in 1996, CFC was able to sell and transfer the shares of Prodipe to MIF (Third-Party Def.'s ...