In re Gas Reclamation, Inc. Securities Litigation

• Decision Date: 11 July 1990
• Docket Number: MDL No. 665 (LBS). No. M-21-41.
• Parties: In re GAS RECLAMATION, INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

741 F. Supp. 1094

In re GAS RECLAMATION, INC. SECURITIES LITIGATION.

MDL No. 665 (LBS). No. M-21-41.

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

July 11, 1990.

Sylvor, Schneer, Gold & Morelli, New York City, for Abish Investors, Bard Investors, Herbert W. Katz and Manuel L. Katz; Richard L. Gold, Iris S. Richman, of counsel.

Page & Addison, Dallas, Tex., for Breese Investors; Douglas M. Robison, of counsel.

Geary, Stahl & Spencer, Dallas, Tex., for Breese Investors; John T. Palter, of counsel.

Weil, Gotshal & Manges, New York City, for Northwestern Nat. Ins. Co. of Milwaukee, Wisconsin; H. Adam Prussin, Dennis J. Block, Robert W. Rodriguez, Timothy Parlin, of counsel.

Fennell & Minkoff, New York City, for Connecticut Nat. Bank, Unibank A/S, Ensign

Bank FSB, and Morris Sav. Bank. Darrell K. Fennell, Nancy Harnett, Michael Winger, of counsel.

OPINION

SAND, District Judge.

In this multidistrict case consolidated before this Court for pre-trial matters, investors in Gas Reclamation, Inc. ("GRI") bring suit for violations of federal securities laws, the Racketeer Influenced and Corrupt Organizations Act, common law and various state statutes. We assume familiarity with the general factual background of the claims asserted and with this Court's prior decisions. See In re Gas Reclamation, Inc. Sec. Litig., 733 F.Supp. 713 (S.D. N.Y.1990); In re Gas Reclamation, Inc. Sec. Litig., 1987 Transfer Binder Fed.Sec. L.Rep. (CCH) ¶ 93,731, 1988 WL 45632 (S.D.N.Y. Apr. 18, 1988); In re Gas Reclamation, Inc. Sec. Litig., 659 F.Supp. 493 (S.D.N.Y.1987). Before the Court today are three separate groups of motions, and we address each in turn.

I. Banks' Motions for Partial Summary Judgment

The Connecticut National Bank ("CNB"), Ensign Bank FSB ("Ensign"), Morris County Savings Bank ("Morris") and Privatbanken A/S ("Privatbanken) (collectively, the "Banks") move for partial summary judgment, pursuant to Rule 56 of the Federal Rules of Civil Procedure, on their cross-claims against Northwestern National Insurance Company of Milwaukee, Wisconsin ("Northwestern") for payment on various surety bonds. We grant their motion.

The Banks hold a group of promissory notes ("Notes") made at various dates between April and October 1984 by investors in Gas Reclamation, Inc. ("GRI") to finance their purchases of gas reclamation units. Each Note requires equal quarterly payments of principal and interest over a term of approximately four and one-half years and at an interest rate set at a specified percentage over a specified prime rate. In the case of default in any payment and other specified events, each Note would, at the option of the holder, become immediately due and payable, and the interest rate would be increased to three-percent over the non-default rate. As part of the several transactions in which the Banks acquired the Notes, Northwestern, as surety for the investors, issued eleven Financial Guarantee Bonds ("Bond") which guaranty payment of principal and interest on the Notes. The Notes were originally issued to the Intercontinental Monetary Corporation ("IMC") and Privatbanken; IMC subsequently assigned the Notes it held to CNB, Ensign and Morris.

GRI collapsed almost immediately. Most of the investors never made any payments to the Banks, and almost all of the Notes are now in default. In their original consolidated complaint, the investors asserted several securities laws and other claims against the Banks, and this Court denied the Banks' motion to dismiss those claims in its Opinion of April 9, 1987, In re Gas Reclamation, Inc. Sec. Litig., 659 F.Supp. 493 (S.D.N.Y.1987). From the first defaults in early 1985 until October 1987, Northwestern made certain payments to the Banks on each of the defaulted Notes to comply with its understanding of its option to cure the investors' defaults. On October 6, 1987, in response to this Court's denial of the motions to dismiss, Northwestern stopped making payments to the Banks on the defaulted Notes, claiming that the investors' claims against the Banks, if proven, would constitute defenses to payments under the Bonds.

After discovery was completed, most of the investors stipulated to the discontinuance of their claims against the Banks, and the Banks withdrew their claims against the investors. On August 11, 1989, each of the Banks served on Northwestern amended pleadings asserting the claims on which the Banks now seek summary judgment. The Banks argue that Northwestern has breached the Bonds and that the Banks are entitled to payment of each defaulted Note in full, including default interest from the date of investor default on each Note.

Each Bond imposes an unconditional obligation on Northwestern to pay the Banks upon the default of any investor on an underlying Note: "The Surety Northwestern shall pay Loss hereunder in immediately available funds no later than fifteen (15) days after the receipt of Notice of Default...." Bond, ¶ 8. The parties do not dispute that the Banks hold the Notes, that the Notes are in default, that Northwestern issued the Bonds which insure payment of the Notes, and that Northwestern stopped making payments in October 1987. Northwestern advances three arguments in opposition to the Banks' motions.

A.

First, Northwestern argues that this Court should stay its decision on the Banks' motions for partial summary judgment until after this Court decides Northwestern's motion to enforce its rights of quia timet and exoneration against the investors. Since in this Opinion, we also decide Northwestern's motion, Northwestern's request for a stay is moot.

B.

Second, the Banks and Northwestern disagree as to the amount of Northwestern's liability under the surety Bonds. There is no dispute as to which Notes are covered by the surety Bonds and the original principal amount of those Notes. The disagreement concerns the amount of interest due and the method for calculating the credit owed to Northwestern for the payments it has already made to the Banks. The Banks argue that Northwestern must pay principal plus default interest from the original date of default for each investor, less a credit for the amounts Northwestern paid during the time it chose to cure the investors' defaults. The Banks would apply such credit first to the default interest due and then to reduce the outstanding principal balance. Since Northwestern's payments from early 1985 to October 1987 did not include default interest, such calculation would result in incomplete principal payments during that period. Northwestern argues that it is not required to pay any default interest, but instead owes principal and interest from the time it stopped curing the investors' defaults in October 1987. Alternatively, Northwestern argues that if it does owe default interest, such additional interest is not due for the period during which it cured the investors' defaults. Finally, Northwestern argues that even if it did owe default interest from the time of each investor's original default, its agreement with the Banks provides that Northwestern should nonetheless receive credit for full and timely principal payments from early 1985 to October 1987, the period it chose to cure the investors' defaults.

To resolve this dispute, this Court must look to the language of the surety Bonds and the Notes. "Summary judgment is appropriate where the language of the contract is unambiguous, and reasonable persons could not differ as to its meaning." United States v. 0.35 of an Acre of Land, 706 F.Supp. 1064, 1070 (S.D. N.Y.1988) (citations omitted). The court must decide as a legal matter whether a contract is ambiguous, and "contract ambiguity is not established simply because the parties disagree as to the meaning of a particular provision." Id. (citations omitted). On motions for summary judgment, courts must give effect to the objective intent of the parties as indicated by the unambiguous terms of their written agreements.

The parties do not dispute that all the Notes provide for acceleration in the event of default and for a three-percent increase in interest after the Notes become due, either at stated maturity or on acceleration. Paragraph eight of all of the surety Bonds requires Northwestern to pay the "Loss," which all the Bonds define in substantially the same way as:

"Loss" as to any Note shall mean the aggregate amount of unpaid principal plus accrued and unpaid interest on the Note which is in Default, such interest to be calculated at the rate specified in such Note from the date interest began to accrue until the date on which the Surety pays such Loss hereunder in accordance with Section 8. Notwithstanding anything to the contrary herein Loss shall exclude penalties of any nature and expenses of collection, and shall be reduced by any payments of principal made by or on behalf of the Defaulting Principal before payment by the Surety. The aggregate of all Losses under this Bond shall not exceed the Limit of Liability.

Bond, ¶ 1(c) (emphasis supplied). The only material difference in the surety Bonds' definitions of "Loss" is that the Privatbanken Bonds omit the italicized language excluding "penalties."

Northwestern argues that the three-percent increase in interest on default is a "penalty" that is excluded from the definition of "Loss" in all but the Privatbanken Bonds. We disagree. The surety Bonds all provide for the application of New York law. Under New York law, an agreement to pay an increased interest rate on default is not a penalty, but compensation for the increased risk of non-collection. See Citibank, N.A. v. Nyland (CF8), Ltd., 878 F.2d 620, 624-25 (2d Cir.1989) (following Ruskin v. Griffiths, 269 F.2d 827 (2d Cir.1959), cert. denied, 361 U.S. 947, 80 S.Ct. 402, 4 L.Ed.2d 381 (1960)); Union Estates Co. v. Adlon Constr. Co., 221 N.Y. 183, 187, 116 N.E. 984 (1917) ("Likewise, an agreement to pay interest upon a loan from its date until its payment at a rate before and...