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VALLEY NATIONAL BANK, v. GREENWICH INSURANCE COMPANY

April 1, 2003

VALLEY NATIONAL BANK, PLAINTIFF, AGAINST GREENWICH INSURANCE COMPANY AND AND XL REINSURANCE AMERICA, INC., DEFENDANTS.


The opinion of the court was delivered by: VICTOR Marrero, District Judge.

DECISION AMENDED ORDER
Plaintiff Valley National Bank ("Valley") filed a complaint (the "Complaint") in this action against Defendants Greenwich Insurance Company and XL Reinsurance America, Inc. (together, "Defendants"), alleging that Defendants failed to pay Valley money owed pursuant to a bond that Defendants had issued to National Investment Services, Inc. ("National") to guarantee the payment of obligations owed by National to Valley. Promptly after filing the Complaint, Valley brought a motion for summary judgment pursuant to Fed.R.Civ.P. 56 (the "Motion"). Defendants opposed the Motion, and included a series of certifications asking for further discovery pursuant to Fed.R.Civ.P. 56(f). By Order dated March 31, 2003, the Court granted the Motion, and indicated that its findings, reasoning and conclusions would be set forth in a separate Decision and Order to be made available to the parties. Accordingly, for the reasons discussed below, the Motion is GRANTED.

I. FACTS

As narrated by Valley, the Complaint describes a simple matter regarding two sureties who refused to honor their contractual commitments to guarantee obligations set forth in a Premium Finance Agreement, dated October 1, 2001 (the "PFA"), entered into between Valley and National. Under the PFA, Valley agreed to advance $7,500,000 (the "Funds") to National, which undertook to use the Funds to finance premiums on National's insurance policy with Twin Oaks Insurance Company, Ltd. ("Twin Oaks").*fn1 Pursuant to a Loan and Security Agreement and a Term Note between Valley and National, dated October 26, 2001 (the "Loan Agreement" and the "Term Note," respectively, and together with the PEA, the "Transaction Documents"), National was scheduled to repay the Funds in eight equal installments of principal every three months, plus accrued interest (the "Installments"). To insure against the risk that National might default on the Installments, Valley received contractual guarantees from National and required National to obtain a premium finance bond (the "Bond") from the Defendants, which guaranteed payment of the obligations owed by National to Valley in the event of any default by National.

The Installments commenced on February 1, 2002. While National paid the first Installment, it failed to make the required payment for the second Installment three months later on May 1, 2002. Two weeks following the missed payment, Valley notified National that it was in default and demanded payment of the remaining amount (the "Remaining Amount") due under the Loan Agreement and Term Note, as well as reasonable costs, expenses and late charges. Simultaneously, Valley notified the Defendants that it was asserting a claim under the Bond for payment of the Remaining Amount together with per diem interest from May 16, 2002. Valley alleges that, by the express terms of the Bond, the Defendants' obligation to pay was immediate and unconditional.

In response to the Complaint, the Defendants paint a far different portrait of what occurred in this transaction. Defendants allege that, unbeknownst to them at the time they issued the Bond, Valley was either involved in, or aware of, a fraudulent scheme by which Valley and other parties disguised simple loans as premium finance arrangements, then negotiated bonds to guarantee these arrangements. According to the Defendants' chronology, Robert Nicosia ("Nicosia"), then executive vice president of Universal Bonding Insurance Company ("UBIC") and an honorary advisory board member of Valley, originally approached Valley at the beginning of 2001 seeking a $7,500,000 loan on behalf of National, but was rebuffed because National did not meet Valley's credit standards for such a loan. As a result, Defendants allege, Nicosia restructured the transaction as a premium finance arrangement, whereby Twin Oaks would issue an insurance policy to National and in return would receive the Funds in the form of premium payments. However, Defendants assert, Nicosia was in fact the sole shareholder of Twin Oaks, and the Funds never reached Twin Oaks nor were they used to pay insurance premiums.*fn2

According to Defendants, because they were unaware that Nicosia had disguised a simple loan as a premium finance arrangement, they agreed to issue the Bond, negotiated by Nicosia, to guarantee National's obligations to Valley under the PFA.*fn3 Defendants contend that if they had known that the Bond was backing what was essentially a line of credit loan, they would never have issued the Bond because they are not in the business of financial guaranty insurance, a higher risk form of insurance that protects lenders against default by borrowers on financial obligations.*fn4

Defendants claim that once informed that National had defaulted on the second Installment, Defendants attempted to investigate the transaction, but Valley was uncooperative. Using the information they were able to gather, Defendants allege that Valley fraudulently induced them to issue the Bond, and ask for the opportunity to conduct further discovery in order to mount a defense based on this allegation.

II. DISCUSSION

A. STANDARD OF REVIEW

1. Valley's Rule 56 Motion

In considering a motion for summary judgment, the Court must grant such a motion only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see Rodriguez v. Hahn, 209 F. Supp.2d 344, 346 (S.D.N.Y. 2002) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). The role of the Court is not to resolve issues of fact, but rather "to determine as a threshold matter whether there are genuine unresolved issues of material fact to be tried." Gibson v. Am. Broad. Companies, Inc., 892 F.2d 1128, 1132 (2d Cir. 1989)

In cases involving notes and guaranties, this Court has held that "a plaintiff establishes its prima facie entitlement to summary judgment by establishing the execution of the agreements at issue and nonpayment thereunder." Orix Credit Alliance, Inc. v. Bell Realty, Inc., No. 93 Civ. 4949, 1995 WL 505891, at *3 (S.D.N.Y. Aug. 23, 1995); see also Sterling Nat'l Bank & Trust Co. v. Fidelity Mortgage Investors, 510 F.2d 870 (2d Cir. 1975) (summary judgment on note appropriate where no disputed issue of fact existed with respect to execution or non-payment). Some authorities consider a contract of guaranty to be synonymous with a contract of suretyship, mainly because both relationships involve a person or entity "who promises to answer for the debt, default, or miscarriage of another. . . ." Cal. Civ. Code § 2787 (1993) (declaring that "[t]he distinction between sureties and guarantors is hereby abolished."); see, e.g., Yin v. Society National Bank Indiana, 665 N.E.2d 58, 64 n. 2 (Ind. Ct. App. 1996) ("[W]e recognize that the words "guaranty" and "guarantor" are synonyms for "suretyship" and "surety," respectively.); Lowe v. Albertazzie, 516 S.E.2d 258, 263 n. 11 (W. Va. 1999) (citing West Virginia statute to conclude that "the terms "surety" and "guarantor" are widely held to be synonymous"); see also Restatement (Second) of Conflict of Laws § 194, cmt. a (1971) (using "suretyship" and "guaranty" interchangeably because "there has never been general agreement as to what distinction, if any, should be drawn between the two terms"); Restatement of Security § 82, cmt. g (1941) (using the term "guaranty" as a synonym for "suretyship"); 38 Am. Jur.2d Guaranty § 11 (1999) (noting that "some authorities hold that a contract of guaranty is not distinguishable from a contract of suretyship")

The main distinction between a contract of guaranty and a contract of suretyship is that "[a] "surety" is typically jointly and severally liable with the principal obligor on an obligation to which they are both bound, while a "guarantor" typically contracts to fulfill an obligation upon the default of the principal obligor." Restatement (Third) of Suretyship and Guaranty § 1, cmt. c. (1996); see also Anderson v. Rizza Chevrolet, Inc., 9 F. Supp.2d 908, 911 n. 2 (N.D. Ill. 1998) ("A surety is primarily liable to a creditor. In contrast, a guarantor incurs secondary liability for the debt of another.") (citations omitted)

This distinction is relevant in deciding when the obligor's responsibilities begin, but once a determination is made that an obligor has such a responsibility, the difference between the two types of obligatory instruments is not significant, for both involve a promise to answer for a third person's debt. Thus, the prima facie test developed by this Court for plaintiffs moving for summary judgment against a guarantor, which requires proof that the principal debtor has not fulfilled its obligation, should be equally applicable to plaintiffs moving for summary judgment against sureties, especially given that the liability for a surety is stricter because the surety can "be sued jointly with the principal without demand or notice." 38 Am. Jur.2d Guaranty § 12. As a result, Valley must demonstrate only that the Bond was executed by National and Defendants, and that Defendants did not fulfill their payment obligations, in order to establish a prima facie entitlement to summary judgment. Once a prima facie case has been established, the plaintiff is entitled to summary judgment unless the defendant can assert defenses that would raise a genuine issue of material fact. See Indus. Bank of Japan Trust Co. v. Haseotes, No. 92 Civ. 6074, 1993 WL 322775, at *4 (S.D.N.Y. Aug. 19, 1993)

The Court is persuaded that Valley has met its initial burden. Valley has demonstrated, and Defendants do not contest, that the Bond was entered into freely by National and Defendants. Moreover, Defendants admit that they have not yet fulfilled their payment obligations under the Bond. Thus, Valley is entitled to summary judgment requiring Defendants to pay Valley under the terms of the Bond unless Defendants can assert defenses that raise any genuine issue of material fact.

2. Defendants' Rule 56(f) Response

While Rule 56 does not require that any discovery take place before a motion for summary judgment can be granted, see Demery v. Extebank Deferred Comp. Plan (B), 216 F.3d 283, 286 (2d Cir. 2000), it does provide the opposing party the opportunity to request more time for further discovery if it is unable to present facts essential to justify its opposition. See Fed.R.Civ.P. 56(f). As the Second Circuit has explained, this rule exists because of the belief that "[a] party opposing a motion for summary judgment must have had the opportunity to discover information that is essential to its opposition to the motion." Sutera v. Schering Corp., 73 F.3d 13, 18 (2d Cir. 1995) (citations omitted); see also Bonnie & Co. Fashions, Inc. v. Bankers Trust Co., 945 F. Supp. 693, 706 (S.D.N.Y. 1996) ("Rule 56(f) requires courts to ensure that parties have a reasonable opportunity to make their record before ruling on a motion for summary judgment").

Thus, Rule 56(f) is a safeguard against premature grants of summary judgment and this Court has found that it "should be applied with a spirit of liberality." Bonnie & Co. Fashions, Inc., 945 F. Supp. at 706 (citation omitted). Yet, Rule 56(f) "is not a shield against all summary judgment motions. Litigants seeking relief under the rule must show that the material sought is germane to the defense . . ." Paddington Partners v. Bouchard, 34 F.3d 1132, 1138 (2d Cir. 1994) (citation omitted)

To determine whether an opponent of a summary judgment motion has proven sufficiently that Rule 56(f) should be invoked, the Second Circuit has established a four-part test to examine the affidavit or ...


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