46 F.3d 230 (2nd Cir. 1995), 214, Rachman Bag Co. v. Liberty Mut. Ins. Co.

Docket Nº:214, Docket 94-7115.
Citation:46 F.3d 230
Party Name:RACHMAN BAG COMPANY, a partnership composed of Plains Bag and Bagging Co., Inc., and Rachman Bag Co., Inc., Plaintiff-Appellant, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee.
Case Date:February 01, 1995
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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46 F.3d 230 (2nd Cir. 1995)

RACHMAN BAG COMPANY, a partnership composed of Plains Bag

and Bagging Co., Inc., and Rachman Bag Co., Inc.,




No. 214, Docket 94-7115.

United States Court of Appeals, Second Circuit

February 1, 1995

Argued Sept. 8, 1994. *

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[Copyrighted Material Omitted]

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Neal Factor, Factor & Shweky, New York City, for plaintiff-appellant.

Kimberly S. Penner, Sedgwick, Detert, Moran, & Arnold, New York City (David J. Daly, Lecomte, Emanuelson, Tick, & Doyle, Boston, MA, on the brief), for defendant-appellee.

Before: MESKILL, MAHONEY, and WALKER, Circuit Judges.

WALKER, Circuit Judge:

This action is brought by Rachman Bag Company ("Rachman"), an obligee on a surety bond, against the surety Liberty Mutual Insurance Company ("Liberty") for payment of the bond. Plaintiff appeals a judgment of the United States District Court for the Eastern District of New York (Edward R. Korman, Judge ) granting defendant summary judgment on its defense of fraudulent concealment and denying plaintiff summary judgment on its claim. Rachman contends that the district court abused its discretion in allowing Liberty to amend its amended answer to include the defense and that there are genuine issues of material fact as to

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whether Rachman engaged in fraudulent concealment.

For the reasons explained below, we reverse the order of the district court and remand.


On December 9, 1988, Textiles of America ("TOA") obtained a bond from defendant Liberty naming Rachman as obligee and Liberty as surety. The bond purported to secure a normal business transaction between TOA and Rachman. Unbeknownst to Liberty, however, the bond actually secured an arrangement whereby TOA would repay through services over $400,000 stolen from Rachman by TOA's president, Ronald Halpern. Liberty's refusal to honor the bond after learning of the true nature of the underlying transaction led to this suit.

Rachman and TOA began doing business in 1987. During that year, TOA both purchased textiles from Rachman and solicited orders from others to be filled by Rachman. Within a few months, Rachman's attorney and partners learned that Halpern had used a variety of shady practices to pilfer money and goods from Rachman. In particular, Halpern paid Rachman with bad checks, retained payments destined for Rachman from customers, and kept goods rejected by Rachman customers who were repaid by Rachman.

Rachman confronted TOA with its discovery in late 1987 and served Halpern with a civil complaint. After intensive negotiations, the two parties reached an agreement under which Rachman would refrain from prosecuting the complaint and Halpern would repay his debt by obtaining business for Rachman. A few months later, however, Rachman learned that Halpern had continued his unseemly practices and had defaulted on the agreement. As a result, TOA's obligation to Rachman stemming from Halpern's thievery had risen to over $400,000. Upon learning this information, Rachman ceased its dealings with Halpern and TOA.

Halpern approached Rachman to make amends in November, 1988. After acknowledging his wrongdoing, Halpern proposed another arrangement under which he would solicit orders for Rachman's textiles and return a portion of TOA's profit as repayment for the thefts. As part of the deal, Halpern requested an additional loan from Rachman. When Rachman's partners expressed reluctance, Halpern offered to obtain a surety bond to secure his performance. The two parties reached an oral agreement on December 9, 1988; the same day, Halpern obtained a $350,000 bond from Liberty as security.

When obtaining the bond from Liberty, Halpern did not explain the true nature of the arrangement between TOA and Rachman. Halpern told Liberty representatives only that the bond was needed to secure a contract for delivery of textiles. He did not explain that the contract was for the repayment of an antecedent debt, much less that the obligation arose from Halpern's admittedly wrongful conduct. He also did not disclose that he had defaulted on a nearly identical prior agreement. Halpern told Liberty that the bond was to secure a "written agreement ... for Delivery of Institutional Textiles" at a time when Rachman and TOA had yet to put the arrangement in writing. Liberty had previously provided bonds to TOA and, taking Halpern at his word, conducted essentially no investigation beyond interviewing Halpern before issuing the bond to TOA on December 9.

While the foregoing facts are not in dispute, the same cannot be said of the subsequent communications between Rachman and Liberty. Glendora Harris, a Liberty representative, testified that she called Rachman in late December, 1988 to inquire about the status of the transaction and was referred to Rachman's attorney, Neal Factor. She recounted that Factor asked whether Liberty had a copy of the contract and then mentioned a loan. Harris testified that Factor, upon learning that Liberty knew very little about the underlying transaction, did not explain its true nature but simply agreed to provide Liberty with a copy of the contract. At that time, a written contract still had not been executed.

Factor, on the other hand, testified that he told someone from Liberty that the contract

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involved an antecedent debt. Factor further stated that he contacted Liberty in January to explore why the bond had not been prorated, as is customary for bonds that guarantee debts. He found that the Liberty representative, Adrian Marshall, did not understand either his question or the nature of the contract that the bond guaranteed. When he asked to speak to the underwriting department in order to clear up the misunderstanding, Liberty refused to permit him to do so.

On January 12, 1989, Rachman and TOA finally executed a written contract. The contract for "repayment of the indebtedness" specified that TOA was to repay Rachman $10,000 per month for the first two years of the contract and approximately $13,000 per month for the third year. At TOA's option, payment would be either in cash, textiles, or profits from new sales contracts solicited for Rachman by TOA. It is unclear whether this contract replaced, amended, or merely memorialized the earlier oral agreement. In any event...

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