American Motorists Ins. Co. v. United Furnace Co., 88 CIV. 1238 (PKL).

• Decision Date: 14 November 1988
• Docket Number: No. 88 CIV. 1238 (PKL).,88 CIV. 1238 (PKL).
• Citation: 699 F. Supp. 46
• Parties: AMERICAN MOTORISTS INSURANCE CO., Plaintiff, v. UNITED FURNACE CO., INC., Defendant.
• Court: U.S. District Court — Southern District of New York

699 F. Supp. 46

AMERICAN MOTORISTS INSURANCE CO., Plaintiff, v. UNITED FURNACE CO., INC., Defendant.

No. 88 CIV. 1238 (PKL).

United States District Court, S.D. New York.

November 14, 1988.

Sherri L. Goldsmith, Russotti & Barrison, New York City, for plaintiff.

Edmund Maciorowski, Detroit, Mich. (Galvin, Haroian & Mlawski, New York City, of counsel), for defendant.

OPINION AND ORDER

LEISURE, District Judge:

The plaintiff in this diversity action, American Motorists Insurance Company ("American Motorists" or the "insurance company"), is a surety company. Defendant, United Furnace Company, Inc. ("United"), operates a job shop and foundry in Michigan at which it performs a variety of machinery operations, and melts down scrap metal. American Motorists seeks to have United place it in funds, as collateral, to secure it against liability that it alleges it incurred by virtue of the writing of a Continuous Bond. American seeks this recovery under the terms of an indemnity agreement executed by defendant in favor of American Motorists, in connection with the writing of the Bond.

Defendant has moved, pursuant to Fed. R.Civ.P. 12(b)(6), to dismiss the complaint. Plaintiff has cross-moved for summary judgment pursuant to Fed.R.Civ.P. 56. For the reasons stated below, defendant's motion is granted. Accordingly, plaintiff's motion for summary judgment is denied.

I. Background

It is undisputed that plaintiff American Motorists is an Illinois corporation, licensed to do business as a surety in New York, and maintains an office at Two World Trade Center, New York, New York. Defendant United is a Michigan corporation, with offices at 4445 Lawton Avenue, Detroit, Michigan.

In early 1976, United entered into a contract with the Ford Motor Company, whereby United agreed to machine, at its Michigan location, certain engine block castings produced in Ontario, to melt down any resulting waste, and then return the waste and castings to Ford's plant in Ontario. See, Defendant's Memorandum In Support Of Its Motion To Dismiss, ("Defendant's Mem.") p. 2. Articles imported into the Customs territory of the United States are generally subject to duty, unless specifically exempted therefrom. 19 U.S.C. § 1202 (Revised Tariff Schedules). Pursuant to regulations promulgated under the Tariff Schedules, an exemption from duty is provided for in cases where the articles being imported will not remain in the United States for a period of more than one year. To guarantee compliance with the terms of the regulations, a surety bond is required. 19 C.F.R. 10.39. Such a bond is the subject of this action.

American Motorists issued, and United executed and delivered, a $60,000 Continuous Bond. The Bond was issued in the form prescribed by the regulations. See 19 C.F.R. 10.31. Contemporaneously, United executed an indemnity agreement. The relevant language of that agreement states:

To indemnify and save harmless Company from and against any and all liability, claim, demand, loss, damage; expense, cost and attorneys' fees which it shall at any time incur by reason of its execution of any bond or its payment of or its liability to pay any claim, and place Company in funds to meet all its liability under any bonds promptly upon request and before Company may be required to make any payment; and the voucher or other evidence of payment or of the fact and amount of Indemnitor's liability to Company under this agreement shall be prima facie evidence of the fact and amount of said Indemnitor's liability to said Company under this agreement. Any demand upon the Company by the Obligee shall be sufficient to conclude that a liability exists and the Indemnitor shall then place the Company with sufficient funds as collateral security to cover the liability.

Attached as Exhibit B to Plaintiff's Motion for Summary Judgment. During a six month period in 1986, United received, machined and exported the articles that were the subject of its contract with Ford, the Continuous Bond, and the aforesaid agreement.

United engaged the services of a customshouse broker, licensed by the United States Customs Service in accordance with 19 C.F.R. 111.1 et seq. of the Customs Regulations, to process the administration and cancellation of the temporary importation bond charges. United contends that it relied on this broker to process and cancel these temporary importation bond charges, and had no information that this had not occurred. Shortly after United engaged the customshouse broker, the broker went into bankruptcy and its records were seized by the Customs Service. Among the records seized were the documents necessary for the cancellation of United's liquidated damages under the bond. See Defendant's Mem., pp. 2-3. United then apprised the Customs Service of the situation and petitioned the Customs Service to review these records. See Letter of Marjola Malinowski, attached as Exhibit 1 to Defendant's Mem. Subsequently, United obtained a release of copies of its records and an extension of time to supplement its petition for mitigation of the liquidated damages under the bond. See Defendant's Mem., p. 3; Department of Treasury letter, dated June 21, 1988, attached thereto as Exhibit 3.

Pursuant to the provisions of 19 C.F.R. 10.39, the Customs Service has the authority to consider various factors and circumstances in a situation where a surety bond of this type has been breached, and may elect to reduce the amount of liquidated damages due.

Beginning in July of 1987, the U.S. Customs Service began to make demands upon defendant, the surety American Motorists, for payment of liquidated damages pursuant to the terms of the bond. However, to date there has been no legal action commenced against either American Motorists or United by the Customs Service.¹ American Motorists has made no payment to the Customs Service and has incurred no actual expense or loss. Furthermore, the Customs Service has yet to review or act upon United's petition to mitigate, but, as noted above, has indicated that it will entertain such a petition when received.

American Motorists seeks to be placed in funds as collateral for liability under the bond. The insurance company bases this demand upon its argument that, by the terms of the indemnity agreement, the surety may demand that the principal make funds available to the surety to reimburse it for any actual payment to the obligee.

II. Discussion

On a motion to dismiss, the complaint must be read generously and every favorable inference drawn in favor of the plaintiff. Pross v. Katz, 784 F.2d 455, 457 (2d Cir.1986); Metzner v. D.H. Blair & Co., Inc., 663 F.Supp. 716, 719 (S.D.N.Y.1987). The complaint thus should only be dismissed if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Stone v. Chung Pei Chemical Industry Co. Ltd., 790 F.2d 20, 22 (2d Cir.1986). Indeed, it is the Court's duty "to determine whether the facts set forth justify taking jurisdiction of grounds other than those most artistically pleaded." Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 558 (2d Cir.1985) (citations omitted).

The Indemnification Agreement

The existence of the indemnification agreement and the language of the terms contained therein are undisputed. American Motorists contends that the terms of the agreement are meant to provide for indemnity before the surety insurance company has incurred any actual loss or expense. American Motorists argues that the demands made by the Customs Service are sufficient to constitute "liability" under the provisions of the indemnification agreement. To further support its position that a liability has in fact been incurred, American Motorists has submitted a September 27, 1988 letter written by the Customs Service to plaintiff demanding full payment of the unpaid assessments against United by October 17, 1988.² American Motorists' allegation that this demand amounts to a "liability" is premised on the language in paragraph 2 of the letter, which states that further bonds issued by the insurance company as a surety will be refused until payment is made.

A surety's right to indemnification for its losses and expenses under a bond has been consistently upheld under New York law. Fidelity and Deposit Company of Maryland v. Refine Construction Company, Inc., No. 83 Civ. 6894 (RWS) (S.D.N.Y. 1984) available on WESTLAW, 1984 WL 536; Continental Casualty Co. v. National Slovak Sokol, 269 N.Y. 283, 199 N.E. 412 (1936); Aetna Casualty & Surety Co. v. Fleischman Wine & Liquor Co., 269 N.Y. 614, 200 N.E. 23 (1936); United States Fidelity and Guaranty Company v. Green, 34 A.D.2d 935, 311 N.Y.S.2d 779 (1st Dept.1970). The indemnification agreement is therefore fully valid on its face.

As noted above, the indemnification agreement between the parties contained a clause whereby defendant agreed to place American Motorists in funds to meet all its liability under the bond "before American Motorists may be required to make any payment; and the voucher or other evidence of payment or of the fact and amount of Indemnitor's liability to American Motorists ... shall be prima facie evidence of the fact and amount of Indemnitor's said liability." Such clauses are valid under both federal and New York law. Fidelity and Deposit Company of Maryland v. Refine Construction Company, Inc., No. 83 Civ. 6894 (RWS) (S.D.N.Y. 1984) citing Transamerica Insurance Co. v. Bloomfield, 401 F.2d 357, 362 (6th Cir. 1968); Standard Accident Insurance Co. v. Higgins, 9 Misc.2d 371, 170 N.Y.S.2d 73, 75 (Sup.Ct.1957). Based on the undisputed facts, plaintiff has failed to establish a prima facie case for indemnification, as it has presented no evidence of any actual payment, and further, has presented no basis to establish the amount of any liability, claim, demand, loss, or expense...