United States District Court, S.D. New York
August 5, 2005.
CITICORP LEASING, INC., Plaintiff,
UNITED AMERICAN FUNDING, INC., JOHN J. PREHN, and PETER J. WACHTELL, Defendants.
The opinion of the court was delivered by: WILLIAM PAULEY, District Judge
MEMORANDUM AND ORDER
Citicorp Leasing, Inc. ("Citicorp") brings this diversity
action to collect the unpaid balance on loans made to defendant
United American Funding, Inc. ("UAF"). Defendants John J. Prehn
and Peter J. Wachtell personally guaranteed those loans.
Presently before this Court is Citicorp's motion for summary
judgment on its claims against Prehn and Wachtell (collectively,
"Defendants") and on Defendants' counterclaims. In the
alternative, Citicorp moves to strike Defendants' jury demand as
contractually waived. For the reasons set forth below, Citicorp's
motion for summary judgment is granted as to Defendants'
liability and its motion to strike the jury demand is granted
with respect to the determination of damages.
UAF was a Nevada corporation in the business of leasing and
financing the sale of automobiles.*fn1 (Plaintiff's
Statement Pursuant to Local Rule 56.1 ("Pl. 56.1 Stmt.") ¶ 1;
Defendants' Statement Pursuant to Local Rule 56.1 ("Defs. 56.1
Stmt.") ¶ 1.) In May 1998, UAF entered into two Loan and Security
Agreements (the "Loan Agreements") with European American Bank ("EAB") to finance the purchase of motor vehicles
that it would finance or lease to its customers. (Complaint
("Compl.") Exs. A, B; Pl. 56.1 Stmt. ¶¶ 13, 14; Defs. 56.1 Stmt.
¶¶ 13, 14.) The loans were secured by the motor vehicles and the
finance and lease agreements, as well as UAF's inventory,
property and fixtures. (Compl. Exs. A, B.) In July 2001, EAB
merged with Citibank, N.A. ("Citibank"), which assigned the Loan
Agreements to Citicorp, a Citibank subsidiary. (Pl. 56.1 Stmt. ¶¶
11, 12; Defs. 56.1 Stmt. ¶¶ 11, 12.)
Defendants, who were officers and shareholders of UAF,
personally guaranteed both loans through identical documents
dated May 18, 1998 (the "Guarantees"). (Compl. Ex. C; Pl. 56.1
Stmt. ¶¶ 17, 18; Defs. 56.1 Stmt. ¶¶ 17, 18.) At the time the
Loan Agreements and Guarantees were executed, each defendant
owned 30% of UAF but was not involved in its daily operations.
(Pl. 56.1 Stmt. ¶¶ 5, 6, 8; Defs. 56.1 Stmt. ¶¶ 5, 6, 8.) Rather,
UAF's president, Armando Tully ("Tully"), managed the
business.*fn2 (Pl. 56.1 Stmt. ¶ 3; Defs. 56.1 Stmt. ¶ 3.)
The Guarantees fix Defendants' obligations with respect to the
EAB-UAF loans "unconditionally, absolutely and irrevocably . . .
irrespective of (a) the genuineness, validity or enforceability
of . . . [the Loan Agreements], or (b) the existence, validity or
value of any security for any of the Liabilities." (Compl. Ex.
C.) Further, the Guarantees provide that Defendants' liability is
unaffected by any subsequent modification to the Loan Agreements
or EAB's actions or inaction with respect to UAF and the other
Guarantor consents that from time to time, without
notice to or further consent from Guarantor and
without releasing or affecting its liability
hereunder, . . . any security may be exchanged,
released, enforced, sold, leased or otherwise dealt
with, the provisions of any documents may be
cancelled, compromised, modified or waived, any other
guarantor may be released, and any indulgence may be
granted Debtor, as EAB may in its discretion
determine. (Compl. Ex. C.) Additionally, Defendants "waive[d]
and consent[ed] to the non-perfection, lapse or
disposition of or other dealing with any security
interests or liens at any time granted to EAB as
security for any of the Liabilities." (Compl. Ex. C.)
The Guarantees permit Citicorp to "enforce the
Liabilities without resorting first to any other
right, remedy or security." (Compl. Ex. C.) Finally,
Defendants waived their "right to interpose any
counterclaim or consolidate any other action with an
action on" the Guarantees as well as their right to a
jury trial. (Compl. Ex. C.) Both the Loan Agreements
and the Guarantees are governed by New York law.
(Compl. Exs. A-C.)
All parties agree that Tully caused UAF to be delinquent on its
loan obligations. (Pl. 56.1 Stmt. ¶ 21; Defs. 56.1 Stmt. ¶ 21.)
Specifically, as early as 2000, Tully permitted UAF to sell
vehicles "out of trust" by accepting automobile lease payments
that it failed to remit to Citicorp. (Deposition of John Prehn,
dated July 26, 2004 at 30-32, 203-09; Affidavit of Arthur
Loewenthal, dated Sept. 27, 2004 ("Loewenthal Aff.") ¶¶ 4-5.) EAB
wrote to Tully twice in April 2000 regarding these breaches and
copied Defendants on the correspondence. (Pl. 56.1 Stmt. ¶ 22;
Defs. 56.1 Stmt. ¶ 22; Affidavit of Francis McCaughey, dated
Sept. 27, 2004 ("McCaughey Aff.") Ex. H.)
Meanwhile, Tully incorporated a new automobile leasing company
named Armar Corporation ("Armar"). (Affidavit of Armando Tully,
Jr., dated Nov. 9, 2004 ("Tully Aff.") ¶ 17.) Armar also obtained
financing from Citicorp. (Tully Aff. ¶ 18.) Defendants were not
involved in Armar's corporate management, did not guarantee
Citicorp's loans and had no knowledge of Armar's transactions.
(Tully Aff. ¶¶ 17, 18.) In September 2001, Citicorp issued a note
to Armar (the "September 2001 Note") for approximately $298,000.
(McCaughey Aff. Ex. L.) A Citicorp official attests that the
September 2001 Note consolidated the outstanding balances on
certain UAF and Armar accounts. (Loewenthal Aff. ¶ 18; Reply
Affidavit of Arthur Loewenthal, dated Nov. 23, 2004 ("Loewenthal
Reply Aff.") ¶ 3; McCaughey Aff. ¶ 13.) Moreover, Citicorp officials attest that, notwithstanding the
fact that the September 2001 Note was in Armar's name, Citicorp
did not use UAF's cash flow payments to satisfy Armar's
indebtedness and "applied [them] solely and exclusively to the
UAF obligation."*fn3 (Loewenthal Reply Aff. ¶ 4; see
McCaughey Aff. ¶ 14.) Citicorp's internal memoranda corroborate
Citicorp's contention that the two accounts were managed in
tandem but the respective balances and payments kept separate.
(Loewenthal Aff. Exs. A, K.) Nonetheless, Tully asserts that
"Citicorp used the UAF cash flow for other purposes." (Tully Aff.
Due to Tully's ongoing failure to fulfill both UAF's and
Armar's loan obligations, in mid-2001 Citicorp requested that
Tully mortgage his home in Reno, Nevada. (McCaughey Aff. ¶¶ 11-12
& Ex. J: Deed of Trust; Tully Aff. ¶ 20.) Because the home was
valued at $900,000 and Tully had already mortgaged it for
$500,000, Citicorp's second mortgage totaled approximately
$400,000. (Tully Aff. ¶ 20.) In 2002, the first mortgagor
foreclosed, but Citicorp did not receive notice of the
foreclosure sale and could not protect its collateral.
(Loewenthal Reply Aff. ¶ 6; Tully Aff. ¶ 20.) Accordingly, the
first mortgagor purchased the home for the amount of its
outstanding indebtedness far less than the home's value. (Tully
Aff. ¶ 20.)
On September 26, 2002, Citicorp again wrote to Tully concerning
UAF's continued failure to remit lease payments to Citicorp and
copied Defendants. (Affidavit of Joseph Field, dated Sept. 30,
2004 ("Field Aff.") Ex. H;.) The letter warned: "[N]o further
defaults will be tolerated." (Field Aff. Ex. H.)
Nonetheless, UAF's delinquency persisted, and on December 16,
2002 Citicorp foreclosed on UAF's automobile lease portfolio.
(Field Aff. Ex. I: Letter from Susan G. Rosenthal, Esq. to Prehn
and Wachtell, dated Jan. 16, 2003.) At the time Citicorp declared
a default, UAF owed $1,270,358 under the Loan Agreements. (Field
Aff. Ex. I.) By letter dated January 16, 2003, Citicorp's counsel wrote directly to Defendants
to provide notice of UAF's default and alert them to their
potential exposure for any unpaid balance. (Field Aff. Ex. I.) On
July 25, 2003, after placing notices in automotive periodicals
and directly advising interested parties, including Defendants,
Citicorp conducted a foreclosure sale on the lease portfolio at
its offices. (Loewenthal Aff. ¶¶ 10-12; Loewenthal Reply Aff. ¶¶
8-9 & Ex. D.) Citicorp was the only participant in the
foreclosure sale and purchased the UAF portfolio for $474,524.
(Loewenthal Aff. ¶ 12; Loewenthal Reply Aff. ¶ 9.) Citicorp
claims that Defendants are liable for the $614,711 unpaid loan
balance that UAF has yet to satisfy through cash payments or
collateral. (Loewenthal Aff. ¶ 20.) Defendants refuse to pay this
In March 2003, Citicorp commenced this action claiming breach
of guaranty by Defendants. Defendants counterclaim for a
declaratory judgment that Citicorp materially modified one of the
Loan Agreements, thereby terminating the Guarantees. Defendants
also counterclaim for fraud, estoppel, breach of fiduciary duty,
breach of contract and breach of an implied covenant of good
faith and fair dealing.*fn4 Defendants demand a jury trial.
Citicorp now moves for summary judgment on its claims and on
Defendants' counterclaims or, in the alternative, to strike
Defendants' jury demand.
I. Summary Judgment Standard
Summary judgment is warranted "if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show 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 Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23
(1986). The burden of demonstrating the absence of any genuine
dispute as to a material fact rests with the moving party.
Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970); Grady
v. Affiliated Cent., Inc., 130 F.3d 553, 559 (2d Cir. 1997). In
determining whether there is a genuine issue as to any material
fact, "[t]he evidence of the non-movant is to be believed, and
all justifiable inferences are to be drawn in his favor."
Liberty Lobby, 477 U.S. at 255.
II. Citicorp's Prima Facie Case
Under New York law, a creditor seeking to enforce a written
unconditional guaranty satisfies its prima facie case by
establishing: (1) an absolute and unconditional guarantee; (2)
the underlying debt; and (3) the guarantor's failure to satisfy
the unpaid debt. Kensington House Co. v. Oram, 293 A.D.2d 304,
305, 739 N.Y.S.2d 572, 572 (1st Dep't 2002); Key Bank of Long
Island v. Burns, 162 A.D.2d 501, 502, 556 N.Y.S.2d 829, 830 (2d
Dep't 1990); accord U.S. Sec. & Futures Corp. v. Irvine, No.
00 Civ. 2322 (RMB), 2003 WL 1907877, at *4 (S.D.N.Y. Apr. 16,
2003). Defendants do not dispute that the Guarantees they
executed are absolute and unconditional; that UAF defaulted on
the Loan Agreements; and that they have failed to satisfy the
underlying debt. (Defs. 56.1 Stmt. ¶¶ 17-18, 21-25.)
Since Citicorp established a prima facie case, the burden
shifts to Defendants to assert a meritorious defense for which a
genuine issue of material fact exists. See Bank Leumi Trust
Co. of N.Y. v. Ratter & Liebman, 182 A.D.2d 541, 542,
582 N.Y.S.2d 707, 708 (1st Dep't 1992); Gateway State Bank v.
Shangri-La Private Club for Women, Inc., 113 A.D.2d 791, 792,
493 N.Y.S.2d 226, 227 (2d Dep't 1985); see also United Bank of
Africa, P.L.C. v. Odimayo, No. 93 Civ. 3998 (WK), 1994 WL
185826, at *2-4 (S.D.N.Y. May 10, 1994) (evaluating defendants'
affirmative defenses despite their irrevocable and unconditional
guarantee). III. Defendants' Affirmative Defenses and Counterclaims
Defendants advance four arguments in opposition to Citicorp's
claims and in support of their counterclaims: (1) Citicorp
modified the underlying Loan Agreements by agreeing that excess
cash flow from UAF would be used to satisfy Armar's debt to
Citicorp; (2) Citicorp failed to mitigate its damages by
misapplying UAF's cash flow to the Armar loan and failing to
protect its interest in the Tully home; (3) Citicorp's sale of
the portfolio collateral was commercially unreasonable; and (4)
Citicorp conspired with Tully to fraudulently conceal UAF's true
state of affairs from Defendants, causing them to decline an
opportunity to sell UAF's automobile lease portfolio. Citicorp
maintains that these defenses and counterclaims are barred by the
unconditional and absolute Guarantees.
Unconditional guarantees are enforceable if "written in clear
and unambiguous terms." EMI Music Mktg. v. Avatar Records,
Inc., 317 F. Supp. 2d 412, 419 (S.D.N.Y. 2004); see Otto Roth
& Co. v. Gourmet Pasta, Inc., 277 A.D.2d 293, 295,
715 N.Y.S.2d 78, 80 (2d Dep't 2000); Korea First Bank of N.Y. v. Cha,
259 A.D.2d 378, 379, 687 N.Y.S.2d 124, 125 (1st Dep't 1999). The rule
reflects the notion that when parties "have expressly allocated
risks, the judiciary shall not intrude into their contractual
relationship." Grumman Allied Indus., Inc. v. Rohr Indus.,
Inc., 748 F.2d 729, 735 (2d Cir. 1984) (discussing Danann
Realty Corp. v. Harris, 5 N.Y.2d 317 (1959)).
Where a guarantee recites that it is unconditional, certain
defenses are automatically precluded and thus non-meritorious.
For example, an unconditional guarantor cannot raise the defense
of fraudulent inducement. Citibank, N.A. v. Plapinger,
66 N.Y.2d 90, 95 (1985) (affirming summary judgment for a creditor
and rejecting the guarantor's fraudulent inducement counterclaim
because "the substance of defendants' [`absolute and
unconditional'] guarantee forecloses their reliance on the claim
that they were fraudulently induced"); Bank Leumi Trust Co. of
N.Y. v. Block 3102 Corp., 180 A.D.2d 588, 589, 580 N.Y.S.2d 299,
300 (1st Dep't 1992) ("The language of the guarantees specifies that they
are absolute and unconditional, negating the claim of fraudulent
inducement."). Nor can an unconditional guarantor argue the
failure of an alleged condition precedent not specified in the
guarantee. See Morgan Stanley High Yield Secs., Inc. v. Seven
Circle Gaming Corp., 269 F. Supp. 2d 206, 220 (S.D.N.Y. 2003).
Further, a guarantor cannot assert defenses that he expressly
waived. See United Orient Bank v. Lee, 233 A.D.2d 500, 500,
637 N.Y.S.2d 96, 96 (1st Dep't 1996) ("As the guarantees
contained waivers of all defenses other than payment, defendants
were precluded from asserting claims of release."); Gannett Co.
v. Tesler, 177 A.D.2d 353, 353, 577 N.Y.S.2d 248, 249 (1st Dep't
1991) (holding that all defenses were properly rejected because,
"by the plain language of the guarantee, defendant was precluded
from raising any defenses or counterclaims relating to the
underlying debt"); see generally Compagnie Financiere de Cic
et de L'Union Europeenne v. Merrill, Lynch, Pierce, Fenner &
Smith Inc., 188 F.3d 31, 35-36 (2d Cir. 1999). Therefore, a
defendant cannot rely on defenses that were waived by a guarantee
to defeat summary judgment, even if the defendant establishes an
issue of fact. See Generale Bank v. Wassel, 779 F. Supp. 310,
318 (S.D.N.Y. 1991) ("[T]he Appellate Division often reverses the
[New York] Supreme Court and grants summary judgment on an
unconditional guarantee and waiver of defenses, even though the
lower court has discerned disputed issues of fact.").
By their own admission, Defendants are highly sophisticated
businessmen who guaranteed other financing transactions. (Pl.
56.1 Stmt. ¶¶ 19, 20; Defs. 56.1 Stmt. ¶¶ 19, 20; Affidavit of
John J. Prehn, dated Nov. 4, 2004 ¶¶ 3-5.) By signing the
Guarantees, they forfeited their "right to interpose
counterclaims" in this action. (Compl. Ex. C.) Accordingly,
Citicorp is entitled to summary judgment on Defendants'
counterclaims. See SCP (Bermuda), Inc. v. Bermudatel, Ltd.,
242 A.D.2d 429, 430, 662 N.Y.S.2d 249, 250 (1st Dep't 1997)
(directing that summary judgment be granted on guarantor's
counterclaims because they were expressly waived by the
guarantee). Nonetheless, this Court will evaluate Defendants'
counterclaims for the purpose of determining whether they should be dismissed with or
without prejudice. See United Bank of Africa, 1994 WL 185826,
at *4 (dismissing defendants' counterclaims without prejudice
because "[b]oth Guaranties prohibit the bringing of `any
counterclaims' in an action for its enforcement. This can not be
construed as prohibiting any separate suit on any claims the
defendants might assert"). Moreover, while the Guarantees do not
contain a blanket waiver of all defenses against Citicorp,
Defendants expressly forfeited certain rights and defenses.
Accordingly, this Court considers each of Defendants' arguments
in light of both the Guarantees and the evidence in the record.
A. Modification of the Loan Agreements
As an affirmative defense and their first counterclaim,
Defendants contend that Citicorp and Tully modified the
underlying Loan Agreements and thereby relieved Defendants of
their obligations as guarantors. (Defendants' Memorandum in
Opposition to Summary Judgment ("Defs. Mem.") at 6-7.)
Specifically, Defendants allege that Citicorp and Tully agreed to
pay off the separate Armar loan with payments from UAF.
Generally, if the obligation subject to a guaranty is modified
without the guarantor's consent, the guarantor is relieved of his
liability on the obligation. Bier Pension Plan Trust v.
Schneierson, 74 N.Y.2d 312, 315 (1989) ("[T]he principal debtor
may not alter the surety's undertaking to cover a different
obligation without the surety's consent. If they do so the surety
is discharged because the parties have substituted a new
contract, to which it never agreed, for the original.") However,
"[a] guarantor is not relieved of his obligations where the
written guaranty allows for changes in the terms of the guaranty
and expressly waives notice to the guarantor of such changes."
Country Glen, L.L.C. v. Himmelfarb, No. 603691-2003, 2004 WL
1852889, at *4 (N.Y. Sup. Ct. Apr. 29, 2004) (citing White Rose
Food v. Saleh, 292 A.D.2d 377, 738 N.Y.S.2d 683 (2d Dep't 2002); Banque Worms v. Andre
Cafe Ltd., 183 A.D.2d 494, 583 N.Y.S.2d 438 (1st Dep't 1992)).
By signing the Guarantees, Defendants "consent[ed] that from
time to time, without notice to or further consent from
[Defendants] and without releasing or affecting [their liability
under the Guarantees], . . . the provisions of any documents may
be cancelled, compromised, modified or waived." (Compl. Ex. C.)
Thus, Defendants acknowledged that their obligation would
continue notwithstanding any modification to the Loan Agreements.
See Regency Equities Corp. v. Reiss, No. 93 Civ. 8096 (CSH),
1995 WL 362496, at *2 (S.D.N.Y. June 16, 1995) ("Under New York
law, if a guarantor or surety chooses to waive objections to
modifications, such an agreement is valid and enforceable.");
117-14 Union Turnpike Assocs. v. County Dollar Corp.,
589 N.Y.S.2d 880 (1st Dep't 1992) (affirming summary judgment against
guarantors because any defense that the loan agreement had been
modified was "waived by the language of the irrevocable and
unconditional guaranty"). Even if the evidence presents a genuine
issue as to whether Citicorp and Tully modified the Loan
Agreements, Defendants waived any defense or claim based on such
Accordingly, the Guarantees are enforceable and Defendants'
first counterclaim is dismissed with prejudice.
B. Failure to Mitigate Damages
Defendants argue as an affirmative defense and their fourth
counterclaim that Citicorp failed to mitigate its damages by (1)
not taking reasonable steps to protect its interest in the Tully
home; and (2) misapplying UAF's payments to the Armar loan.
(Defs. Mem. at 8-9.)
The Guarantees establish Defendants' liability on UAF's loan
obligations "irrespective of . . . the existence, validity or
value of any security" for the loans, and whether or not Citicorp
"resort[ed] first to any other right, remedy or security."
(Compl. Ex. C.) Moreover, Defendants "waive[d] and consent[ed] to the non-perfection, lapse
or disposition of or other dealing with any security interests or
liens at any time granted to EAB as security" for UAF's
liabilities. (Compl. Ex. C.) Where a guarantee is unconditional
and expressly establishes the guarantor's obligation to pay
regardless of "any action, or failure to act" by the creditor,
the creditor has "the choice as to how and when it [i]s going to
proceed in order to obtain satisfaction of the debt" and the
guarantor cannot challenge the manner in which the creditor seeks
to collect the debt. FDIC v. Schwartz, 78 A.D.2d 867, 868,
432 N.Y.S.2d 899, 901 (2d Dep't 1980); accord Gateway State Bank
v. Winchester Builders, Inc., 248 A.D.2d 588, 589,
670 N.Y.S.2d 518, 519-20 (2d Dep't 1998); Milliken & Co. v. Stewart,
182 A.D.2d 385, 386, 582 N.Y.S.2d 127, 128 (1st Dep't 1992) ("Where a
guaranty states that it is primary and unconditional and binds
the guarantor to pay immediately upon the default of the debtor,
it is considered to be a guarantee of payment and upon default
the creditor may proceed directly against the guarantor in the
first instance." (citations omitted)). Having waived any defense
regarding Citicorp's failure to pursue or maximize UAF's loan
collateral, Defendants cannot now argue that Citicorp failed to
protect its interest in the Tully home.
With respect to Defendants' contention that Citicorp misapplied
UAF's cash flow by applying it to pay down Armar's indebtedness,
Defendants have failed to raise a triable issue of fact. Tully
attests that, pursuant to his agreement with a Citicorp
representative, "nearly the entire amount of every monthly
payment made pursuant to [the September 2001] Note came from cash
flow which belonged to UAF" and that "Citicorp used the UAF cash
flow for other purposes" than to pay down UAF's debt. (Tully Aff.
¶¶ 16, 19.) However, contrary to Tully's assertions, the
September 2001 Note included the outstanding deficiency on the
UAF accounts as well as the Armar accounts. (Loewenthal Aff. ¶
18; Loewenthal Reply Aff. ¶ 3; McCaughey Aff. ¶ 13.) Moreover,
the manner in which Citicorp applied UAF's proceeds rests solely
within Citicorp's corporate knowledge, and Citicorp's officials
and internal documents attest that Citicorp kept the loan payments separate and applied each to the
appropriate account. (Loewenthal Aff. Exs. A, K; Loewenthal Reply
Aff. ¶ 3; McCaughey Aff. ¶ 14.) Tully's conclusory and
unsubstantiated assertions to the contrary are insufficient to
create an issue of fact. See Kulak v. City of New York,
88 F.3d 63, 71 (2d Cir. 1996); Blue v. Koren, 72 F.3d 1075,
1083-84 (2d Cir. 1995) ("[C]onclusory assertions are insufficient
to defeat a motion for summary judgment.").
Accordingly, Defendants' arguments that Citicorp failed to
mitigate its damages are without merit, and Citicorp is entitled
to summary judgment on this aspect of Defendants' fourth
counterclaim, which this Court dismisses with prejudice.
C. Fraud and Unclean Hands
Defendants next argue that Citicorp conspired with Tully to
conceal from Defendants the fact that UAF sold vehicles out of
trust and that Defendants relied on Citicorp's misrepresentations
and omissions in deciding not to liquidate UAF's automobile lease
portfolio. Defendants characterize their argument, alternatively,
as a claim of fraud and a defense of unclean hands (Defs. Mem. at
This Court notes that the only counterclaim asserted in
Defendants' Amended Answer that raises a charge of fraud is the
third counterclaim, which also asserts claims for estoppel,
breach of contract and breach of an implied covenant of good
faith and fair dealing. (Amended Answer ¶¶ 51-59.) However, that
counterclaim concerns allegations that Citicorp orally agreed to
release Defendants if Tully executed a second mortgage on his
home and UAF surrendered the loan portfolio. (Amended Answer ¶
52.) Defendants' fraud counterclaim does not allege that Citicorp
misrepresented whether UAF was delinquent in fulfilling its loan obligations. Thus, this Court will not consider Defendants'
arguments in this regard as supporting any of their
Therefore, Defendants' argument is a defense of unclean hands.
However, "unclean hands is an equitable defense and unavailable
in an action seeking money damages." Cohen v. Elephant Wireless,
Inc., No. 03 Civ. 4058 (CBM), 2004 WL 1872421, at *3 (S.D.N.Y.
Aug. 19, 2004); see Aetna Cas. & Sur. Co. v. Aniero Concrete
Co., 404 F.3d 566, 607 (2d Cir. 2005) ("Unclean hands is an
equitable defense to equitable claims. Because the SCA seeks
damages in an action at law, Aetna cannot avail itself of unclean
hands as a defense.") (citing In re Gulf Oil/Cities Serv. Tender
Litig., 725 F. Supp. 712, 742 (S.D.N.Y. 1989); Hasbro Bradley,
Inc. v. Coopers & Lybrand, 128 A.D.2d 218, 515 N.Y.S.2d 461, 463
(1st Dep't 1987); Pecorella v. Greater Buffalo Press, Inc.,
107 A.D.2d 1064, 486 N.Y.S.2d 562, 563 (4th Dep't 1985)). As such,
the defense concerning Citicorp's alleged omissions and
misrepresentations is inapposite and presents no bar to summary
D. Sale of Collateral
Finally, Defendants argue that Citicorp has failed to establish
that its foreclosure sale of UAF's lease agreement portfolio was
commercially reasonable. Specifically, Defendants challenge the
fact that Citicorp was the only bidder at the foreclosure sale
and assert that Citicorp underbid the portfolio's true value.
(Defs. Mem. at 7-8.)
A secured party seeking to recover a deficiency bears the
burden of establishing the commercial reasonableness of the
disposition of collateral. U.C.C. § 9-504(3); HSBC Bank USA v.
IPO, LLC, 290 A.D.2d 246, 246, 735 N.Y.S.2d 531, 532 (1st Dep't
2002); Assocs. Commercial Corp. v. Liberty Truck Sales &
Leasing, Inc., 286 A.D.2d 311, 311, 728 N.Y.S.2d 695, 696 (2d Dep't 2001). Such a burden is absolute and cannot be
waived by a guarantor. Weinstein v. Fleet Factors Corp.,
210 A.D.2d 74, 74, 620 N.Y.S.2d 946, 946 (1st Dep't 1994); Marine
Midland Bank v. CMR Indus., Inc., 159 A.D.2d 94, 106,
559 N.Y.S.2d 892, 900 (2d Dep't 1990) ("[T]he UCC requirement that
any post-default disposition of collateral be commercially
reasonable . . . may not be waived." (citation omitted)); see
also Bank of China v. Chan, 937 F.2d 780, 785 (2d Cir. 1991)
("Were the New York Court of Appeals to address this question, we
think it would hold that a guarantor may not waive the defense
of commercial unreasonableness under the New York Uniform
The commercial reasonableness of a sale of collateral
incorporates the time of the sale and the means used by the
creditor to attract bidders. See Sumner v. Extebank,
88 A.D.2d 887, 888, 452 N.Y.S.2d 873, 874 (1st Dep't 1982) ("U.C.C.
§ 9-504 grants the secured creditor the right to dispose of
collateral in cases of default, as long as notice is sent to the
debtor, and the sale is commercially reasonable as to the time,
place, manner and terms."); Gen. Elec. Credit Corp. v. Durante
Bros. & Sons, Inc., 79 A.D.2d 509, 510, 433 N.Y.S.2d 574, 576
(1st Dep't 1980) (finding a sale of collateral commercially
unreasonable because "the newspaper selected for advertising was
clearly not the most appropriate one for reaching the intended
market"). Citicorp attests that it publicly advertised the July
25, 2003 foreclosure sale and sent prior notice directly to
interested parties, including Defendants. (Loewenthal Aff. ¶¶
10-12; Loewenthal Reply Aff. ¶¶ 8-9 & Ex. D.) However, Citicorp
does not state when or where the public notice was issued and
does not submit a copy. Similarly, the notice Citicorp issued to
interested parties is undated (Loewenthal Reply Aff. Ex. D), and
Citicorp presents no evidence of the date on which it was mailed.
Accordingly, this Court cannot assess the adequacy of the
notices, and Citicorp has failed to demonstrate the absence of a
triable issue of fact regarding the commercial reasonableness of
its foreclosure sale.
Nonetheless, any issue as to reasonableness is relevant to the
amount of damages to which Citicorp is entitled, not to Defendants' liability.
See Gen. Trading Co. v. A & D Food Corp., 292 A.D.2d 266,
267, 738 N.Y.S.2d 845, 846 (1st Dep't 2002) ("Whether defendants
are liable upon their guarantee is an issue which may be resolved
apart from and in advance of any determination as to whether the
sale of the collateral was conducted in commercially reasonable
fashion."); European Am. Bank v. Kahn, 175 A.D.2d 704, 708,
573 N.Y.S.2d 274, 277 (1st Dep't 1991) ("[P]laintiff's compliance
with [UCC § 9-504], which plaintiff has the burden of
establishing, bears upon the assessment of damages but does not
as a matter of law bar the grant of partial summary judgment as
to liability based upon the facts herein."). As such, this Court
refers this action to the Magistrate Judge for an inquest on
IV. Attorneys' Fees
Each Guarantee provides: "Guarantor shall, upon demand, pay or
reimburse EAB for all costs and expenses (including, without
limitation, attorneys' fees and disbursements) incurred or paid
by EAB in enforcing any of its rights or remedies with respect to
this Guarantee or any of the Liabilities." (Compl. Ex. C.) The
issue of Citicorp's reasonable attorneys' fees and expenses is
also referred to the Magistrate Judge for an inquest. CONCLUSION
For the foregoing reasons, Citicorp's motion for summary
judgment is granted as to Defendants' liability on Citicorp's
claims. Citicorp's motion for summary judgment is also granted on
Defendants' counterclaims, which are dismissed with prejudice.
Citicorp's motion to strike the jury demand is granted. This
Court refers this action to Magistrate Judge Gabriel W.
Gorenstein for an inquest with respect to Citicorp's damages and
reasonable attorneys fees and expenses.