Chemical Bank v. Meltzer

• Decision Date: 04 May 1999
• Citation: 93 N.Y.2d 296,712 N.E.2d 656,690 N.Y.S.2d 489
• Parties: CHEMICAL BANK, Respondent, v. BRUCE G. MELTZER, Appellant, et al., Defendant.
• Court: New York Court of Appeals Court of Appeals

93 N.Y.2d 296

712 N.E.2d 656

690 N.Y.S.2d 489

CHEMICAL BANK, Respondent, v. BRUCE G. MELTZER, Appellant, et al., Defendant.

Court of Appeals of the State of New York.

Argued March 30, 1999.

Decided May 4, 1999.

Cahn Wishod & Lamb, L. L. P., Melville (Joel M. Markowitz of counsel), for appellant.

Mark E. Segall, New York City, and Caroline A. Mellusi for respondent.

Chief Judge KAYE and Judges BELLACOSA, SMITH, LEVINE, CIPARICK and ROSENBLATT concur.

OPINION OF THE COURT

WESLEY, J.

This appeal highlights the innovative and complex financing strategies used by local government officials to attract corporations to their municipalities and to stimulate economic development. We are asked to dust off the venerable law of suretyship, guaranty and subrogation and to reexamine these principles within the context of a multifaceted, contemporary business transaction which involves several parties, sophisticated financing arrangements and a variety of legal obligations.

In 1984 Major Building Products Wholesalers, Inc. sought to acquire land to construct a new facility for its business. In an effort to assist Major Building with this venture and to encourage the company to construct the facility within the Town of Brookhaven, the Town's Industrial Development Agency (IDA) offered the company favorable financing arrangements and tax incentives.¹ The IDA issued a nonrecourse Industrial Development Revenue Bond in the amount of $1.1 million in December 1984. Pursuant to the terms of the bond purchase agreement, the IDA sold the bond to Manufacturers Hanover Trust Company, which subsequently merged with plaintiff Chemical Bank (Bank). As security for payment of all sums due the Bank under the bond purchase agreement, the IDA granted the Bank a first mortgage on the property and facility.

At the time the bond was issued, the IDA took title to the facility in its own name, and a lease between Major Building (as tenant) and the IDA (as landlord) was executed. The IDA then pledged and assigned the lease to the Bank as additional security on the bond. According to the terms of the lease Major Building was entitled to occupy the facility for a term of 15 years. Additionally, the bond proceeds were to be used to acquire equipment and/or renovate the facility. Major Building also agreed to remit rent directly to the Bank, rather than to the IDA, in amounts equal to the monthly debt service on the bond. Thus, under the terms of the entire transaction, Major Building's rent payments were to be used to make the installment payments of principal and interest under the bond until fully paid, at which time Major Building would purchase the facility for $1.

A guaranty also was executed by Major Building, its principal (General Building Products Corporation) and defendant Meltzer, president of Major Building. The guarantors jointly and severally agreed to guarantee payment of the bond in the event of an IDA default. The guaranty states that "upon any default * * * in the payment when due, of the principal of, any premium on, or interest on the Bond or of any sum payable * * * under the Bond Purchase Agreement, the Mortgage or the Assignment, [Meltzer] will promptly pay the same" and that he and the other signatories of the guaranty were "jointly and severally, absolutely, irrevocably and unconditionally" liable to the Bank for all payments due under this financing arrangement, "each as a primary obligor and not merely as a surety."

On April 16, 1991 the Bank extended additional credit to Major Building via the IDA and took a $2 million second mortgage on the property in order to settle a debt Major Building owed to another bank. This mortgage recited that it was "subject and subordinate to the lien of an existing first mortgage dated December 1, 1984 made by the [IDA] to the [Bank] in the original principal sum of $1,100,000.00." The second mortgage was executed by the IDA as mortgagor, accepted by the Bank as mortgagee, and approved by Major Building as "the lessee of the [mortgaged] premises." Meltzer did not guarantee payment under the second loan in any capacity. He did not sign any other writing in connection with the second mortgage, nor did he participate in this transaction.

Between January 1985 and January 1993, Major Building paid all sums due under the 1984 IDA financing scheme. In 1993, however, the company defaulted on its lease payments to the IDA. Given that these payments were specifically earmarked to service the debt on the bond, the IDA subsequently defaulted on the bond. The Bank then sought to enforce the guaranty to secure payment. General Building defaulted on the guaranty by seeking bankruptcy protection, leaving Major Building and Meltzer as the only collection possibilities under the guaranty.

After the Bank unsuccessfully demanded payment from Meltzer and Major Building it filed a motion against them on the guaranty for summary judgment in lieu of complaint pursuant to CPLR 3213. The Bank sought $337,756 in principal, $59,698.37 in interest through July 29, 1995, interest computed at prime rate from July 29, 1995 to entry of judgment, and attorneys' fees.

Meltzer then offered to tender the full amount due under the bond, on the condition that he be subrogated to the Bank's rights as a creditor under the 1984 bond purchase agreement. He asked that the first mortgage, given as security for the 1984 loan, be assigned to him. The Bank refused, but indicated that it would instead supply a satisfaction of the mortgage pursuant to Real Property Law § 275.² Meltzer declined the proposal and cross-moved to compel the Bank to honor his common-law right as subrogee by assigning the bond and first mortgage to him conditioned upon his payment of all sums due. Major Building did not appear.

Supreme Court granted the Bank's motion, denied Meltzer's motion, directed entry of judgment in favor of the Bank, and severed plaintiff's claim for attorneys' fees, referring that issue to a Referee. The court concluded that Meltzer was a guarantor and not a surety and therefore was not entitled to assignment of the Bank's mortgage rights. The court also noted that assignment of the first mortgage would be inequitable, as it would defeat the purpose of the guaranty and would impair the Bank's second mortgage if Meltzer foreclosed. An additional judgment was entered later disposing of the claim for attorneys' fees.

The Appellate Division, with one Justice dissenting, affirmed (245 AD2d 214). The majority concluded that Meltzer's payment did not entitle him to subrogation of the first mortgage because he was not a surety. Rather, the Appellate Division determined that since the guaranty signed by Meltzer did not distinguish among the three guarantors in the transaction and stated that they are "`jointly and severally, absolutely, irrevocably and unconditionally'" primary obligors, his status as a surety was "simply not supported by the [guaranty that he] signed" (id., at 215). Thus, the Court concluded, Meltzer did not have subrogation rights.

Presiding Justice Murphy dissented. He concluded that Meltzer was "cast as a surety in the 1984 financing transaction" (id., at 216). He noted that Major Building, not Meltzer, was the primary beneficiary of the 1984 transaction and that Major Building had primary responsibility to service the debt through the lease. Justice Murphy reasoned that because Meltzer was really only obligated to pay in the event Major Building defaulted, Meltzer was answering for the debt owed principally by another—the usual role of a surety. According to Justice Murphy, Meltzer should not be denied the recourse ordinarily available to a surety, including subrogation rights and assignment of the mortgage. We granted leave to appeal and agree with Justice Murphy. The Appellate Division order therefore should be reversed.

A suretyship arrangement is, at its core, the confluence of three distinct, yet interrelated, obligations. These obligations are embodied in the tripartite relationship of principal obligor and obligee; obligee and secondary obligor; and secondary obligor and principal obligor. When a secondary obligor is bound to pay for the debt or answer for the default of the principal obligor to the obligee, the secondary obligor is said to have suretyship status (see, General Phoenix Corp. v Cabot, 300 NY 87, 92). In other words, in transactions giving rise to suretyship status, the secondary obligor is answerable to the obligee in some way with respect to a duty, the cost of which, as between the principal obligor and the secondary obligor, ought to be borne by the principal obligor (Restatement [Third] of Suretyship and Guaranty § 1, comment b). While commercial transactions have evolved over the years, these principles remain at the core of suretyship doctrine.

In order to determine Meltzer's status, we...