934 F.2d 30 (2nd Cir. 1991), 1325, Borey v. National Union Fire Ins. Co. of Pittsburgh, Pa.

Docket Nº:1325, 1326, Docket 90-9093, 90-9111.
Citation:934 F.2d 30
Party Name:George S. BOREY, et al., Plaintiffs, Lewis Lanese, et al., Plaintiffs-Appellants, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, et al., Defendants, Reliance Insurance Company, Defendant-Appellee. Norman M. BRUCE, et al., Plaintiffs, A. Burton White, et al., Plaintiffs-Appellants, v. Thomas A. MARTIN, et al., Defendants, Reli
Case Date:May 29, 1991
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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934 F.2d 30 (2nd Cir. 1991)

George S. BOREY, et al., Plaintiffs,

Lewis Lanese, et al., Plaintiffs-Appellants,

v.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH,

PENNSYLVANIA, et al., Defendants,

Reliance Insurance Company, Defendant-Appellee.

Norman M. BRUCE, et al., Plaintiffs,

A. Burton White, et al., Plaintiffs-Appellants,

v.

Thomas A. MARTIN, et al., Defendants,

Reliance Insurance Company, Defendant-Appellee.

Nos. 1325, 1326, Docket 90-9093, 90-9111.

United States Court of Appeals, Second Circuit

May 29, 1991

Argued March 25, 1991.

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Philip Fertik, Chicago, Ill. (Marilyn Neiman, Patricia C. Hayashi, Beigel & Sandler, New York City, of counsel), for plaintiffs-appellants.

William R. Mait, New York City (Robert R. Wang, Mait, Wang & Simmons, Brown & Wood, New York City, of counsel), for defendant-appellee.

Before OAKES, Chief Judge, KEARSE and McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge:

Plaintiffs-appellants ("the Investors" or "the principals") appeal from an order granting a preliminary injunction to defendant-appellee, Reliance Insurance Company ("Reliance" or "the surety"), which required the Investors to pay into the court their respective shares of unpaid installments on certain promissory notes pending the outcome of the litigation. Judge Sweet granted the preliminary injunction in order to enforce the surety's rights of quia timet and exoneration.

BACKGROUND

Plaintiffs in these consolidated actions are groups of investors who, as limited partners in the defendant limited partnerships, executed promissory notes to these limited partnerships. The notes were then assigned to certain banks, which demanded financial guarantees before they would buy

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the notes. To that end, the Investors persuaded defendant Reliance to act as surety. Before agreeing to become a surety, however, Reliance required the Investors to execute indemnification agreements, agreeing to hold Reliance harmless in case of a default on the notes. After the execution of these indemnification agreements, Reliance issued financial guarantee bonds in favor of the limited partnerships, as obligees, and the banks, as assignees of the notes.

In September, 1987, the Investors began to default on their notes. The banks then called upon Reliance to cover the Investors' defaults. Reliance, as surety, was required to pay more than $3.6 million to the lending institutions, as creditors. The Investors claimed that their obligations were void because they had been fraudulently induced to invest in the limited partnerships. The Investors then brought suit, asserting securities fraud and common law fraud on the part of the general partners and Reliance. Their consolidated complaint sought, inter alia, a declaratory judgment that they were not liable under either the notes or the indemnification agreements.

Reliance answered the complaints and counterclaimed against the Investors for the sums it had already paid out as surety for the Investors. Reliance then moved for judgment on the pleadings. Judge Sweet denied this motion, holding that the Investors had sufficiently pleaded a claim for fraud on the part of Reliance. Faced with the prospect of growing liability because of the Investors' continued defaults, Reliance moved, in October, 1990, for a preliminary injunction to enforce its rights of quia timet and exoneration.

In granting the preliminary injunction, Judge Sweet relied on his prior decision in Northwestern Nat'l Insurance Co. v. Alberts, 741 F.Supp. 424 (S.D.N.Y.1990) (appeal pending). He found the present case indistinguishable from Alberts, where he had also granted a preliminary injunction to enforce the surety's rights to quia timet and exoneration. In Alberts, Judge Sweet considered the merits of the request for quia timet and exoneration relief as being separate and apart from the underlying fraud claims. He determined that the surety was likely to succeed on the merits of the preliminary injunction motion, and that, absent a preliminary injunction, the surety would suffer irreparable harm because it would be obligated to pay the...

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