188 F.3d 31 (2nd Cir. 1999), 98-9331, Compagnie Financiere v Merrill Lynch

• Citation: 188 F.3d 31
• Party Name: COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE; MANAGEMENT INVESTMENT FUNDING LIMITED, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Interpleader-Plaintiff, CALEX LTD., Interpleader-Defendant-Appellee
• Case Date: August 09, 1999
• Court: United States Courts of Appeals, U.S. Court of Appeals — Second Circuit

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188 F.3d 31 (2nd Cir. 1999)

COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE; MANAGEMENT INVESTMENT FUNDING LIMITED, Plaintiffs-Appellants,

v.

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Interpleader-Plaintiff,

CALEX LTD., Interpleader-Defendant-Appellee

Docket No. 98-9331

United States Court of Appeals, Second Circuit

August 9, 1999

Argued: June 9, 1999

Appeal from a judgment of the United States District Court for the Southern District of New York (Leonard B. Sand, Judge) declaring that a letter agreement instructing interpleader-plaintiff to keep $2.5 million in securities in interpleader-defendant's account pending discharge of an underlying debt was not binding.

Vacated and remanded.

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STEPHEN G. RINEHART, Parker Chapin Flattau & Klimpl, LLP, New York, New York, for Plaintiffs-Appellants.

DANIEL J. KORNSTEIN, Kornstein Veisz & Wexler, LLP, New York, New York, for Interpleader-Defendant-Appellee.

Before: LEVAL and SOTOMAYOR, Circuit Judges, and POLLACK,¹. Senior District Judge.

SOTOMAYOR, Circuit Judge:

Plaintiffs-appellants Compagnie Financiere de CIC et de L'Union Europeenne ("CFC") and Management Investment Funding Limited ("MIF") appeal from a judgment of the United States District Court of the Southern District of New York (Sand, J.) declaring that a letter agreement (the "Letter Agreement") did not bind interpleader-plaintiff Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The letter - which was written by a guarantor, J. Alejandro Weinstock, to his investment bank, Merrill Lynch - asked Merrill Lynch to hold certain investments in escrow to secure the guarantee of an underlying loan

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transaction. The district court held that the letter agreement was not binding on Merrill Lynch because the guarantee secured by the Letter Agreement was discharged upon the release of the principal debtor.

This appeal presents the question whether, under New York law, a guarantee agreement containing a general waiver of defenses prevents a guarantor from being discharged of its payment obligations by virtue of the principal debtor's release. For the reasons to be discussed, we hold that it does. We therefore vacate the district court's judgment and remand for further proceedings consistent with this opinion.

BACKGROUND

In July of 1990, Prodipe, Inc. ("Prodipe") obtained a loan (the "Loan Agreement") from CFC to develop a resort project in Mexico. Repayment of the loan was guaranteed jointly and severally by Prodipe's president and principal shareholder, Weinstock, along with Alfredo Balli and Patrick Mery-Sanson, two of Prodipe's other main officers and shareholders (collectively, the "Guarantors"). The guarantee agreement (the "Guarantee Agreement") was governed by New York law and permitted the assignment of any rights secured by the Loan Agreement. The Guarantee Agreement also granted the Guarantors subrogation rights against the borrower and contained a general waiver of defenses.

In December of 1991, Prodipe defaulted. As a result of a default on a separate investment transaction, and after the filing of the instant action, CFC ultimately acquired voting control over Prodipe. CFC then sold this voting control and the loan to Compagnie Generale de Batiment et de Construction, S.A. ("CBC"), which in turn sold both to MIF, a corporation controlled by one of the three original guarantors, Mery-Sanson.

As part of these transactions, CFC, the bank lender, CBC, the assignee of the bank, and MIF, the present owner of Prodipe's assets, released Prodipe, the borrower, and its former and current stockholders and directors "(other than Mr. Alexandro Weinstock, a Mexican citizen, and Mr. Alfredo Balli, a Mexican citizen and their respective affiliates and representatives, successors, assigns, administrators, executors, heirs, estates and legal representatives) . . . from any and all actions, . . . debts, . . . [and] guarantees . . . relating to or touching upon the [the resort project in Mexico] . . . ." (Emphasis added).

Weinstock secured his guarantee of the loan with a Letter Agreement given to assure the bank lender that he would have sufficient funds to cover the borrower's debt. This letter directed Merrill Lynch to maintain $2.5 million (the principal amount of the loan) in marketable securities held by Merrill Lynch in an account in the name of Calex Ltd. (the "Calex Account"), a company wholly owned by Weinstock. Merrill Lynch was instructed to hold these securities until either "payment in full by Prodipe of its obligations under the Loan Agreement" or receipt by Merrill Lynch of a letter or telecopy from CFC, the bank lender, authorizing the sale, transfer or other disposition of the securities.

On October 1, 1992, almost a year after Prodipe's default and shortly after a futile demand for payment from Weinstock, CFC wrote Merrill Lynch for confirmation that the $2.5 million would be maintained in the Calex account to cover Prodipe's debt, as instructed in the Letter Agreement. Merrill Lynch responded by letter dated December 11, 1992, stating that it had no contractual duty to CFC under the agreement. Merrill Lynch insisted that it was "merely an innocent stakeholder and [did] not wish to become embroiled in this matter."

On April 30, 1993, CFC brought an action in the United States District Court for

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the Southern District of New York asking for a judgment "declaring that a valid and binding contractual obligation between [CFC] and Merrill Lynch exists pursuant to which Merrill Lynch may not release any funds from the [Calex] Account which would cause such account balance to fall below $2.5 million without prior receipt of permission from [CFC] to take such action from [CFC] . . . ." Merrill Lynch subsequently interpleaded Calex so that Calex and CFC could establish their respective claims with respect to the Calex Account.

On September 3, 1998, the district court issued a written opinion deciding that Merrill Lynch was not bound by the Letter Agreement. See Management Investment Funding, 19 F.Supp.2d at 129. The court reasoned that the Letter Agreement, which purported to secure Weinstock's guarantee of the original loan, could only be binding if Weinstock, as a guarantor, was still liable for the loan after Prodipe's release. The court then held that although the Guarantee Agreement contained a broadly worded waiver of defenses, this "language . . . [did] not constitute an unbounded advance consent to the total release of the principal from all obligations." Id. at 136. In coming to this conclusion, the court expressed particular concern that the release was executed under circumstances where the lender had acquired the debtor, where the guarantors who were not released were not parties to the releasing transaction, and where the release did not expressly mention a continued right of recourse against Weinstock. Id. The court thus granted Merrill Lynch's and Calex's requests for a declaratory judgment. This appeal followed.

DISCUSSION

As noted at the outset, this case presents the question whether, under New York law, a guarantee agreement containing a general waiver of defenses prevents a guarantor from being discharged by virtue of the principal debtor's release. After reviewing the relevant documents in this case - i.e., the release, the Guarantee Agreement and the Loan Agreement - all of which are governed by New York law, the district court answered this question in the negative. We review the court's interpretations of these documents and of New York's surety law de novo. See, e.g., Cooper v. New York Office of Mental Health, 162 F.3d 770, 773 (2d Cir. 1998); Banque Arabe et Internationale d'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 152 (2d Cir. 1995). We note that guarantee agreements are construed strictissimi juris under New York law, see People v. Stuyvesant Ins. Co., 413 N.Y.S.2d 843, 846 (Sup. Ct. 1979), and that "the court must protect the surety against a liability which is not strictly within the terms of the [guarantee] contract," id. at 847. Although this standard mandates that the "obligations undertaken by the guarantor are to be strictly applied," this application occurs only "after the meaning of the contract of guarantee has been determined according to the ordinary principles of contract construction." Banco Portugues do Atlantico v. Asland, S.A., 745 F.Supp. 962, 967 (S.D.N.Y. 1990) (citing Stuyvesant Ins. Co., 413 N.Y.S.2d at 847 (citing...