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CITICORP LEASING, INC. v. UNITED AMERICAN FUNDING

August 5, 2005.

CITICORP LEASING, INC., Plaintiff,
v.
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.

  BACKGROUND

  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 guarantors:
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. ¶ 16.)

  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 amount.

  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.

  DISCUSSION

  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 ...


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