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WESTRM-WEST RISK MARKETS, LTD. v. LUMBERMENS MUTUAL CAS.

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.

Background

  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.

  Discussion

  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 discovery:
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 unsuccessful.
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 ...


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