United States District Court, S.D. New York
April 19, 2004.
WESTRM-WEST RISK MARKETS, LTD., Plaintiff, -against- LUMBERMENS MUTUAL CASUALTY COMPANY, UNIVERSAL BONDING INSURANCE COMPANY, XL REINSURANCE AMERICA, INC., and GREENWICH INSURANCE COMPANY, Defendants
The opinion of the court was delivered by: MIRIAM CEDARBAUM, Senior District Judge
WestRM-West Risk Markets, Ltd. ("WestRM") sues for payment under four
surety bonds issued by defendants Greenwich Insurance Company
("Greenwich") and XL Reinsurance America, Inc. ("XL Reinsurance").*fn1 After limited discovery, WestRM moved for
summary judgment. For the following reasons, the motion is granted.
The following facts are undisputed, except where specifically noted.
In late 2001, Willis Group, Inc. ("Willis"), an English insurance
broker, approached WestRM, a Swiss reinsurance company, with a proposal
for a series of transactions intended to provide professional liability
insurance to National Program Services, Inc. ("NPS"), a New Jersey-based
insurance management company.*fn2 The terms of the transactions that the
parties eventually negotiated were as follows. NPS would obtain an
insurance policy from Drummonds Insurance PCC Limited ("Drummonds"), an
insurance company wholly owned by Willis and located in the Guernsey
Islands. WestRM agreed in a series of three "premium finance agreements"
("PFAs"), to pay the premiums on the policies. This was accomplished by
means of a "Quota Share Reinsurance Policy," by which WestRM reinsured
the policies issued by Drummonds. NPS agreed, in return, to repay WestRM
in scheduled installments over a three-year period.
WestRM demanded that NPS obtain surety bonds to secure the amounts NPS
owed to WestRM under the PFAs. The first PFA, secured by a bond issued by
Lumbermens Mutual Casualty Company ("Lumbermens"), is not at issue here.
The second and third PFAs were each secured by two bonds issued by
defendants Greenwich and XL Reinsurance as joint and several sureties.
The third PFA named Apartment Investment Management Company, Inc.
("AIMCO") as a co-beneficiary of the agreement along with NPS, and the
two bonds securing that PFA named AIMCO as a co-principal.*fn3 The four
bonds secured a total of $25.1 million for the benefit of WestRM. Those
are the bonds at issue on this motion.
No evidence was presented of any contact between WestRM and defendants
during the negotiation and execution of the bonds. By their terms, the
bonds would remain in effect until NPS and AIMCO made all scheduled
payments under each related PFA. If the principals failed to make a
payment, the bonds required WestRM to send a formal written demand for
payment to defendants. Defendants would then be obligated to pay WestRM
the amount of the demand within thirty days. Each of the bonds contained
a New York choice-of-law provision. NPS paid the installments due under the first two PFAs, but, beginning
in April 2002, they failed to pay the installments due on any of the
PFAs. Neither NPS nor AIMCO made payments thereafter. WestRM demanded
payment from NPS pursuant to the second PFA and from NPS and AIMCO
pursuant to the third PFA, but received no further payments. WestRM then
demanded from defendants the amounts owed by NPS and AIMCO. Defendants
refused to pay. WestRM filed this action, and shortly thereafter moved
for summary judgment. That motion was denied to permit limited discovery
in connection with a disparity of dates on the first PFA and the
Lumbermens bond. After completion of that discovery, WestRM renewed its
motion for summary judgment.
A motion for summary judgment should be granted when "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 a judgment as
a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23 (1986). The judge's role in summary
judgment is not "to weigh the evidence and determine the truth of the
matter but to determine whether there is a genuine issue for trial."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). In deciding whether a genuine issue of fact exists, a court must
"examine the evidence in the light most favorable to the party opposing
the motion, and resolve ambiguities and draw reasonable inferences
against the moving party." In re Chateaugay Corp., 10 F.3d 944,
957 (2d Cir. 1993). Nonetheless, "Rule 56(c) mandates the entry of
summary judgment . . . against a party who fails to make a showing
sufficient to establish the existence of an element essential to that
party's case, and on which that party will bear the burden of proof at
trial." Celotex, 477 U.S. at 322.
In cases involving notes, guaranties, and surety bonds, an obligee
establishes its prima facie case by demonstrating the execution of the
obligation at issue, the underlying agreement, and the defendant's
failure to pay. See Orix Credit Alliance, Inc. v. Bell
Realty, Inc., No. 93 Civ. 4949 (LAP), 1995 WL 505891, at *3
(S.D.N.Y. Aug. 23, 1995); see also Valley Nat'l Bank v.
Greenwich Ins. Co., 254 F. Supp.2d 448, 453 (S.D.N.Y. 2003). The
party opposing summary judgment may defeat the motion only by asserting
defenses that raise genuine issues of material fact. See
id. at 454.
WestRM has demonstrated execution of the PFAs, insurance policies, and
surety bonds at issue. Defendants concede that they have not fulfilled
their payment obligations under the bonds. Defendants assert several
affirmative defenses which, they claim, defeat WestRM's prima facie case and preclude summary
judgment. First, defendants make a number of claims of fraudulent
concealment specifically: (1) that WestRM colluded with others to
conceal that the PFAs were really loans; (2) that WestRM knew but failed
to disclose NPS's unstable financial condition; and (3) that WestRM
suspected but did not inform defendants that AIMCO's signatures on the
documents were forged and that AIMCO may not have received consideration
for the obligations it incurred under the third PFA. Second, defendants
argue that irregularities in the transactions void their obligations
under the bonds.
Defendants also request additional discovery on these issues pursuant
to Fed.R.Civ.P. 56(f). The Second Circuit has established a four-part
test for assessing whether a party opposing summary judgment has made a
sufficient showing pursuant to Rule 56(f) to justify granting further
The affidavit must include the nature of the
uncompleted discovery; how the facts sought are
reasonably expected to create a genuine issue of
material fact; what efforts the affiant has made
to obtain those facts; and why those efforts were
Paddington Partners v. Bouchard, 34 F.3d 1132
, 1138 (2d Cir.
1994) (citing Hudson River Sloop Clearwater, Inc. v. Dep't of
Navy, 891 F.2d 414
, 422 (2d Cir. 1989)). In their Rule 56(f)
affidavit, defendants claim that further discovery will permit them to
gain information regarding how the PFAs were disguised as simple loans, whether AIMCO's signatures on the third PFA and
related bonds were forged, and when WestRM was aware of the alleged
forgeries. Defendants propose to propound interrogatories and seek
documents from WestRM, AIMCO, NFS, Willis, and others who, they claim,
possess specific knowledge of these facts. Defendants claim that they
have repeatedly attempted to gain information about the transactions from
WestRM and have been rebuffed.
I. Defendants' Fraud Defenses
Greenwich and XL Reinsurance make three claims of fraud. First, they
claim that WestRM knew about and participated in a scheme developed by
NFS and Willis to disguise as premium financing arrangements what were
really a series of loans intended to cover NPS's existing losses, in
order to induce defendants to bond the transactions. Unlike loans,
insurance premium payments would not appear as liabilities on NPS's
balance sheet. NFS could therefore erase those existing liabilities from
its books and create an illusion of financial health. According to
defendants, had they known the true nature of these agreements, they
never would have issued the bonds, since guaranteeing a loan is
inherently riskier than guaranteeing the repayment of insurance premiums
because of the increased risk of default. As evidence of WestRM's knowledge of or participation in this scheme,
defendants offer documents that, they claim, show that WestRM's lawyers
questioned whether the transactions involved were insurance premium
financing, or actually loans; that WestRM agreed during negotiations that
the full amount of the policy funds would be released immediately to NPS
(which is contrary to the terms of the PFA); and that WestRM and Willis
structured the third PFA to create an illusion of risk transfer.
Second, defendants contend that WestRM knew that NFS failed to disclose
$19.05 million in liabilities in financial statements that it released
pursuant to the transaction. Defendants offer as proof an e-mail exchange
among WestRM executives and Willis representatives that indicates a
concern that the absence of the liability in NPS's financial disclosures
might void the transactions. Defendants argue that NPS's weak financial
condition materially increased their risks and that WestRM had a duty to
disclose this information to them.
Third, defendants argue that WestRM questioned whether AIMCO's
signatures on the transaction documents were valid and whether AIMCO
received consideration for participating in the third PFA, but never
informed defendants of its concerns. WestRM requested that NPS obtain a
power of attorney from AIMCO, but ultimately accepted a letter of
authorization provided by NPS and purportedly signed by the chief
operating officer of AIMCO. AIMCO now claims that the signatures are forged. WestRM also expressed
a concern to Willis representatives that the third PFA could be void if
AIMCO did not receive consideration. According to defendants, instead of
investigating the problem, WestRM directed that language reciting AIMCO's
receipt of consideration be inserted in the PFA. Defendants argue that by
failing to disclose its concerns to them, WestRM may have fraudulently
concealed information that materially increased defendants' risks.
A. The Effect of the Waiver Clause on Defendants' Claims
The viability of defendants' claims of fraud depends on the scope of a
clause contained in each bond which purports to waive any defenses to
enforcement of the bond. The clause, which does not vary in any material
respect in the four bonds, reads as follows:
The Surety's liability under this bond shall not
be released, discharged or affected in any way
(except as expressly provided in this Bond) by any
circumstances or condition (whether or not the
Surety shall have knowledge thereof), including
without limitation: (a) the attempt or the absence
of any attempt by the Obligee to obtain payment or
performance by the Principal or any other surety
or guarantor of the Financial Obligations; (b) any
voluntary bankruptcy, or involuntary bankruptcy,
insolvency, reorganization, arrangement,
readjustment, assignment for the benefit of
creditors, composition, receivership, liquidation,
marshaling of assets and liabilities or similar
events or proceedings with respects to the
Principal (each an "Insolvency Proceeding"), or
any action taken by Obligee, any trustee or
receiver by any court in any such proceeding; and (c) any other
circumstances which might otherwise constitute a
legal or equitable discharge or defense of the
Surety, except as provided under this Bond. The
Surety hereby expressly waives and surrenders any
defense to its liability under this bond based
upon any of the foregoing acts, omissions,
agreements, waivers or matters. It is the purpose
and intent of this Bond that the obligations of
the Surety hereunder shall be absolute and
unconditional under any and all circumstances,
except to the extent provided in this bond.
The leading New York case discussing whether a waiver clause can bar
equitable defenses is Citibank, N.A. v. Plapinger, 66 N.Y.2d 90
(1985). In Plapinger, the officers and directors of United
Department Stores, who had personally guaranteed a line of credit for the
corporation, claimed that they had been fraudulently induced to execute
the guarantee by plaintiffs' oral representations. The New York Court of
Appeals held that a waiver of defenses clause in the guarantee foreclosed
that defense. In an earlier case, Danann Realty Corp. v.
Harris, 5 N.Y.2d 317 (1959), the court had determined that a clause
in a contract for the purchase of a building lease, by which the
purchaser had acknowledged that the seller made no representations
concerning the condition of the building and disclaimed reliance on any
representations outside the contract, was sufficient to bar the
purchaser's defense of fraudulent inducement based on alleged fraudulent
representations. See id. The Court of Appeals recognized that
the clause in Plapinger did not specifically disclaim reliance
on representations by the plaintiff, but noted that the clause was not a "generalized
boilerplate exclusion," either, Plapinger, 66 N.Y.2d at 95.
Rather, it was "a multimillion dollar personal guarantee proclaimed by
defendants to be `absolute and unconditional,'" and was the result of
"extended negotiations between sophisticated business people."
Id. As such, the court held that the clause precluded the
defendants from avoiding their obligations by claiming that fraud
vitiated the transaction.
The Second Circuit applied Plapinger in Manufacturers
Hanover Trust Co. v. Yanakas, 7 F.3d 310 (2d Cir. 1993), to reach
the opposite conclusion, holding that a waiver clause in a personal
guarantee of loans made to the guarantor's corporation did not bar a
claim of fraudulent inducement by the individual guarantor. The court
noted that the guarantee at issue differed significantly from the
Plapinger guarantee: it was a "generalized boilerplate
exclusion," it was not the product of negotiation, and it did not waive
defenses to its own validity. See id. at 317. The court also
pointed out that the guarantee did not specifically disclaim reliance on
representations by the plaintiff, "contain[ed] no disclaimer of the
existence of or reliance upon representations by [plaintiff], . . . and
no blanket disclaimer of the type found in Plapinger."
Id. The court concluded that "a guarantee must contain explicit
disclaimers of the particular representations that form the basis of the fraud-in-the-inducement claim," because the "touchstone is
specificity." Id. at 316.
Defendants rely on JPMorqan Chase Bank v. Liberty Mutual Ins.
Co., 189 F. Supp.2d 24 (S.D.N.Y. 2002), to support their argument
that the waiver clause in these bonds does not bar their fraud defenses.
In JPMorqan, defendants had issued bonds to guarantee what they
believed were sales of gas and oil by Enron Corporation to Mahonia
Limited and Mahonia Natural Gas Limited ("Mahonia"). In reality,
according to defendants, the transactions were simple loans from
plaintiff's predecessor, the Chase Manhattan Bank ("Chase"), to Enron,
which were disguised as asset sales so that Enron could book them as
revenue. Chase loaned Mahonia the money to purchase the gas and oil from
Enron, and Enron secretly agreed to repurchase the same gas and oil from
Mahonia-controlled entities, at a price equal to what Mahonia owed Chase.
Defendants claimed that only by disguising the loans could Chase and
Mahonia induce them to guarantee the transactions. See id. at
26. The court held that broad disclaimers in the bonds did not waive this
claim of fraudulent inducement. See id. at 27-28. This
conclusion was based largely on the fact that when the defendants had
negotiated the disclaimers, they were completely unaware that other
parties were negotiating separate agreements that transformed the asset
sales into loans. In this case, defendants make no claim that WestRM engaged in secret transactions with NPS or any of the other parties
that turned the PFA into something other than what it appeared to be on
its face. Instead, defendants' fraud claim is based in large part on
information that is apparent from the transaction documents themselves.
Accordingly, JPMorgan does not support defendants' arguments
that the waiver clause in the bonds does not waive their equitable
In Valley National, Judge Marrero held that a waiver clause
identical to the ones at issue in this case barred a defense of
fraudulent inducement by the same defendants Greenwich and XL
Reinsurance in a case involving similar transactions. See
Valley National, 254 F. Supp.2d at 452 n.3. Drawing on the
reasoning of Plapinger and Yanakas, Judge Marrero
found that the clause was a product of negotiation among sophisticated
business entities, noting that Greenwich and XL Reinsurance had in fact
drafted the language of the clause. Id. at 458. Refusing to
hold that Yanakas's requirement of specificity is applicable in
all cases, he reasoned that the requirement was intended to protect the
less sophisticated party in a transaction. Accordingly, specificity is
less important where "the drafter and more sophisticated party in the
transaction now claims that the disclaimer is too broad and not specific
enough." See id. Similarly, the fact that the clause in
question did not disclaim defenses to its own validity was not relevant,
because the fraud claim asserted by defendants did not seek to challenge the validity
of the bond, but of the transaction memorialized in the underlying
documents. See id. at 459. Finally, the court held that the
clause's blanket disclaimers were sufficient to cover the fraudulent
inducement defenses at issue. The bond's language demonstrated that "both
parties had an opportunity to further clarify and carve out any
additional exceptions for liability they wanted to make, but ended up
settling for the inclusive language of the disclaimer waiver."
Valley National is persuasive authority for the proposition
that the waiver clauses in these bonds bar defendants' claims of fraud.
Although no evidence presented here suggests that Greenwich and XL
Reinsurance drafted these bonds, the fact that another court found that
the same defendants did draft identical language in other surety bonds
shows, at least, that defendants were familiar with the bond language and
were not the unsophisticated newcomers to these transactions that they
claim to be. Indeed, the fact that the Valley National
agreements were executed several months before the bonds issued here
decreases the force of defendants' claim, asserted throughout their
papers, that they were latecomers to these negotiations who were never
fully informed as to the nature of the transactions.
With respect to defendants' first claim of fraud that WestRM
knew that these transactions were actually loans and either actively concealed or failed to disclose that fact to
defendants the case for waiver is even stronger than in
Valley National. These PFAs contain language that should have
alerted defendants that the financing arrangements in question might be
enforceable only as loans. Each PFA contains the following clause:
It is understood and agreed that if the Policy
that is the subject of this Premium Finance
Agreement &/or the related Quota Share
Reinsurance Policy is cancelled or made null and
void or is otherwise unenforceable as a
reinsurance contract this Premium Finance
Agreement shall automatically be recategorised as
and constitute a loan from [WestRM] to NPS. . . .
The two Premium Finance Bonds issued by
[defendants] in connection with the transaction
will continue to be in place and will not be
cancelled for the time any payments under this
transaction are outstanding. All documents
mentioned are incorporated herein by reference.
Defendants contend that they never would have issued the bonds if they
had known that these transactions were actually loans. Clearly, the
presence of this language in the PFAs is not a disclaimer by defendants
of specific representations by WestRM. But it does indicate that
defendants should have been aware of the loan-like structure of the
transactions. As sophisticated sureties, defendants could have demanded
changes in the language of the disclaimer or of the PFAs that would have
protected them from the possibility that the "true nature" of the
transactions they were bonding might be other than as represented. But
the language shows that defendants agreed that their obligations would
remain in force even if the PFAs were converted into the very transactions they now claim they would have refused to bond.
The fact that the transactions have gone awry provides insufficient
ground to rewrite the terms of the bond disclaimers, when defendants
possessed both the ability to negotiate a narrower disclaimer and some
notice that such negotiation might be in order.
Defendants' second and third fraud defenses namely, that WestRM
failed to disclose NPS's shaky financial condition and its own suspicions
regarding AIMCO's signature and whether AIMCO had received consideration
are also barred by the waiver clause.
B. New York Fraudulent Concealment Law
Even if the disclaimer clauses in the bonds did not bar equitable
defenses, defendants' claims of fraud would fail. Since there is no
evidence of communication between WestRM and defendants, defendants'
claim of fraud must be bottomed on fraudulent concealment. But defendants
have failed to satisfy New York's test for fraudulent concealment by a
surety obligee, which consists of four elements:
1) the obligee must know facts that materially
increase the surety's risk, and have reason to
believe that surety would be unwilling to assume
such a higher risk;
2) the obligee must have reason to believe that
such facts are unknown to the surety; 3) the
obligee must have the opportunity to communicate
the relevant information to the surety; and 4) the
obligee must have the duty to disclose the
information based upon its relationship to the
surety, its responsibility for the surety's
misimpression, or other circumstances. Rachman Baa v. Liberty Mut. Ins. Co., 46 F.3d 230, 237 (2d
Cir. 1994). There is no definitive test for determining when a duty to
disclose arises, but the Second Circuit has noted a variety of
circumstances in which such a duty has been found to arise: for example,
when the obligee deals directly with the surety in obtaining the bond,
when silence would amount to an affirmative misrepresentation (that is,
when the obligee has in some way created the misimpression), when the
obligee colluded in the deception, when the obligee and surety are in a
fiduciary relationship, or when the obligee has unique access to the
information (for example, when it has sole control over the information).
See id. at 235-37; see also Big Red Boat (Two) Ltd, v.
Greenwich Ins. Co., No. 00 Civ. 7672 (GBD), 2002 WL 1163557, at *4-5
(S.D.N.Y. May 31, 2002); Gen'l Crushed Stone Co. v. New York,
19 N.Y.2d 737 (1967).
Defendants argue that superior knowledge on the part of an obligee,
without more, gives rise to a duty to disclose information to a surety.
But the case defendants cite, Manley v. AmBase Corp.,
126 F. Supp.2d 743 (S.D.N.Y. 2001), involved parties in direct business
negotiations with each other not sureties and obligees who each
negotiated separately with the principal and, as here, did not deal with
each other directly at all. Superior knowledge satisfies prongs one and
two of the Rachman Bag test; to hold that it also satisfies
prong four would nullify the requirement of a separate duty to disclose.
Rachman Bag makes clear that more than mere knowledge is
required to trigger an obligee's affirmative duty to disclose.
Rachman Bag further states that "it is the duty of sureties
`to look out for themselves and ascertain the nature of [their]
obligations.'" Id. at 235 (quoting Security National Bank
v. Compania Anonima de Seguros, 190 N.Y.S.2d 820, 823 (Sup.Ct.
1959)) (alteration in original). "Sureties must usually take the
initiative and inquire about information they deem important."
Id.; see also Cam-Ful Industries, Inc. v.
Fidelity & Deposit Co. of Maryland, 922 F.2d 156, 162 (2d Cir.
1991) ("The policy behind surety bonds is not to protect a surety from
its own laziness or poorly considered decision."); Valley
National, 254 F. Supp.2d at 461 (holding that "it is not the duty
of [obligee] to perform [sureties'] due diligence on a contract
negotiated by and between [sureties] and [insured], and signed by
representatives from those entities"); Marine Midland Bank v.
Smith, 482 F. Supp. 1279, 1287 (S.D.N.Y. 1979); Chemical Bank
v. Layne, 423 F. Supp. 869, 871 (S.D.N.Y. 1976).
As discussed below, each of defendants' claimed fraud defenses fails
under one or more prongs of the Rachman Bag test.
1. WestRM's Participation in the Structuring of the PFAs
First, defendants claim that WestRM colluded with Willis to disguise simple loans as premium finance agreements, in order to
deceive defendants into bonding transactions they otherwise would have
rejected as too risky. If true, WestRM's collusion would have triggered
its duty to disclose the true nature of the agreements to defendants,
and, absent the waiver clause, defendants would have a valid defense to
the enforcement of their obligations.
However, defendants have failed to raise a genuine issue of material
fact with respect to WestRM's participation in the alleged fraud.
Defendants point to a number of documents from WestRM's lawyers advising
that the PFAs as drafted might be interpreted by a court as loans or
might be otherwise unenforceable as insurance. WestRM's lawyers also
pointed out that it appeared from the documents they were reviewing that
the funds would be transferred from WestRM directly to NFS, and
questioned whether this was in accordance with the agreements. But these
documents only demonstrate WestRM's awareness of the structural problems
of the transactions. They do not show that WestRM cured those defects by
committing fraud. Moreover, these documents refer either to the first PFA
bonded by Lumbermens (to which defendants were not parties) or to drafts
of the later PFAs that differed from their final products. That WestRM's
lawyers advised the company of potential drafting problems during the
process of negotiating multimillion dollar financing arrangements is not surprising, and cannot form the basis of a claim that WestRM
fraudulently concealed information from defendants.
Defendants also point to an e-mail sent from Willis to WestRM after the
closing of the second PFA and during the negotiation of the third. In
this e-mail, Willis's representative explains that because the premium to
be paid under the proposed third PFA would exceed the insurer's liability
by $1.6 million, no transfer of risk would occur. Therefore, the
transaction might not appear to be true insurance. Willis proposed
reducing the amount of the premium stated in the policy to ten percent
less than the liability limit, and transferring the difference to a
separate document, the PFA, where it would appear as a "premium finance
fee." This transfer would ensure that WestRM would "achieve [its] desired
For several reasons, this document fails to raise a genuine issue of
material fact with respect to WestRM's active participation in the
alleged fraud. First, it is clear from the rest of the e-mail that Willis
and WestRM were not attempting to deceive defendants through this
maneuvering. The Willis representative begins his e-mail by explaining
that Willis's lawyers had questioned whether the previous PFAs contained
a risk transfer element, which, he stated, "is of concern to me even
if your position is protected" (emphasis added). WestRM's position
was protected by virtue of defendants' bonds. In other words, this document shows that Willis and WestRM were not concerned that
the sureties could avoid their obligations by claiming that the PFAs were
loans, not insurance. Accordingly, they would have perceived no need to
deceive defendants. The document thus fails to show collusion.
Second, the subsequent PFA and its associated insurance policy do not
reflect the plan proposed in this e-mail. The PFA recites a premium
amount of $12.5 million, making no mention of a "premium finance fee."
The related insurance policy states that its limit of liability is $11
million, and a schedule attached to the policy reiterates both the
premium and the liability limit. Like the previous PFAs, the fact that
the premium was higher than the liability limit is apparent from the
insurance policy, which was explicitly incorporated by reference into the
PFA. Even if Willis had proposed, and WestRM had endorsed, a plan
intended to conceal the true nature of the transaction from the
defendants, the transaction documents do not implement such a plan.
Most importantly, this e-mail reveals nothing that the defendants could
not have discerned from the face of the documents. Surely defendants'
lawyers could have raised the same concerns about risk transfer that
Willis and WestRM's lawyers raised, and defendants could have demanded
assurances from the other participants. Instead, defendants bonded these
transactions, and even agreed that their obligations would remain in force if the PFAs were reinterpreted as loans.
Accordingly, nothing in this e-mail or the other documents offered by
defendants raises a genuine issue of fact with respect to WestRM's
participation in the alleged fraud.
2. WestRM's Awareness of NPS's Unreported Liabilities
With respect to WestRM's supposed concealment of NPS's shaky financial
condition, WestRM points out, and defendants do not dispute, that the
report containing a record of NPS's potential $19.05 million liability
was publicly filed in the Guernsey Islands as part of the process of
obtaining approval for the Drummonds insurance cell created for these
transactions. The report was thus part of the record of the transactions.
Accordingly, defendants have failed to show that WestRM had any reason to
believe that defendants were not in possession of the information.*fn4
Defendants have also failed to show that WestRM had a duty to disclose
this information to them. None of the Second Circuit's examples of
situations that may give rise to a duty to disclose apply here: WestRM
did not deal directly with defendants, the parties did not have a
fiduciary relationship, and WestRM was not responsible for creating
defendants' impression that NPS was financially stable. Neither have defendants
proffered facts showing that WestRM was in sole control of this
information, or that WestRM conspired with others to hide the information
from defendants. WestRM learned of possible irregularities in NPS's
financial reporting through its own exercise of due diligence. Defendants
may not now attempt to avoid their obligations for failing to perform
adequate due diligence themselves. Cf. New York v. Peerless Ins.
Co., 67 N.Y.2d 845, 847 (1986) ("It has long been settled in this
State that absent either an express agreement in the surety bond or
inquiry by the surety, a creditor has no duty to keep the surety informed
of the debtor's financial situation.").
3. WestRM's Concerns about AIMCO
Similarly, WestRM was under no duty to convey to the defendants any
concerns it may have had about the authenticity of AIMCO's signatures on
the transaction documents. As an initial matter, after questioning the
signatures, WestRM sought and obtained assurances from NPS that the
signatures were proper. Thus, it is not clear that WestRM had
any suspicions after its initial concerns were allayed. In addition,
defendants have not shown that WestRM had a duty to disclose its concerns
to them. Again, defendants rely on WestRM's superior knowledge. But that
knowledge resulted from WestRM's scrutiny of the bonds themselves documents clearly available to defendants. Accordingly,
that knowledge is not sufficient to sustain a duty on WestRM's part to
disclose its suspicions to defendants.
Defendants also argue that WestRM questioned whether AIMCO received
consideration for incurring liability under the third PFA, and resolved
the issue by inserting a boilerplate recitation of consideration in the
document, rather than by confirming that AIMCO did receive
consideration pursuant to an agreement with NPS. Again, defendants fail
to offer a credible argument for WestRM's duty to disclose this concern.
Much of the information that defendants argue WestRM should have
disclosed to them appears to be information apparent from the face of the
agreements or information that defendants themselves could have obtained
from NPS. Accordingly, defendants have raised no genuine issue of
material fact with respect to their fraud defenses.
C. Defendants' Request for Discovery
Defendants' request for additional discovery indicates that they seek
further exploration of matters relating to the alleged fraud committed by
WestRM and others. Because the waiver clauses in the bonds foreclose
defendants' fraud defenses, and because defendants have failed to raise a
genuine issue of material fact with respect to any of those defenses
despite conducting some discovery, they have not shown how further discovery could
reasonably be expected to raise genuine issues of material fact.
Accordingly, further discovery is unwarranted.
II. Defendants' Claims of Irregularities in the Transactions
Finally, defendants claim to raise issues of fact with respect to two
alleged irregularities in these transactions that may make defendants'
First, defendants argue that evidence uncovered in the limited
discovery permitted thus far suggests that WestRM paid the premium
directly to NFS, not to the insurer, Drummonds. Essentially, defendants
argue that such payment would amount to a modification of the agreement
underlying their obligation sufficiently material to relieve them of
their duty to pay under the bonds. See, e.g., Big Red Boat,
2002 WL 1163557, at *2.
In response to an order dated February 5, 2004, requesting briefing on
this issue, WestRM offered several documents indicating that it had, in
fact, paid Drummonds, not NFS. These include WestRM's internal ledger
records showing payments of similar amounts shortly after the execution
of each PFA, as well as confirmations from WestRM's American
correspondence bank, American Express, showing that the bank made those
payments into an account held at Harris Bank in New York by the Royal
Bank of Scotland for the benefit of Drummonds. Defendants have failed to rebut this evidence with anything more substantial than the
suggestion that WestRM fabricated the evidence. Accordingly, defendants
have failed to raise a genuine issue of material fact with respect to
WestRM's payments under the PFAs.
Second, defendants argue that if the AIMCO signatures on the third PFA
and related bonds are forgeries, then their obligations are void. While
defendants do raise an issue of fact by offering the affidavit of an
AIMCO official who states that the signatures purporting to be his are
not, defendants are incorrect in arguing that they may avoid their
obligations to WestRM because a third party's signature was forged. The
cases on which defendants rely stand only for the proposition that a
party may not be contractually bound when its own signature is forged.
See, e.g., Opals on Ice Lingerie v. Bodylines,
Inc., No. 99 Civ. 3761 (ILG), 2002 WL 718850 (E.D.N.Y. Mar. 5,
2002). It is not clear why WestRM should bear the burden of the potential
forgery, especially considering that WestRM had no direct dealings with
AIMCO, while defendants had a pre-existing indemnity agreement with AIMCO
and were therefore in a better position than WestRM to authenticate the
signatures directly. Furthermore, New York law is fairly clear that "[i]n
an action by a payee against one who has signed a note as surety, it is
no defense thereto that the name of one or more of the obligors on such
instrument has been forged, though the surety signed the same in the
belief that the signatures were genuine, where it appears that the instrument was
accepted by the payee without notice of the forgery." Morris Plan
Co. of Albany v. Adler, 213 N.Y.S. 227 (Sup.Ct. 1925) (applying the
rule to an action to enforce payment under a promissory note). Defendants
have failed to raise an issue of fact about whether WestRM accepted the
bond with notice of the forgery. Accordingly, the possibility that
AIMCO's signature may have been forged is no defense to enforcement of
Defendants' request for additional discovery on these two issues is
For the foregoing reasons, defendants' Rule 56(f) motion for additional
discovery is denied, and WestRM's motion for summary judgment is granted.