Liberty Mut. Ins. Co. v. Greenwich Ins. Co.

• Citation: 286 F.Supp.2d 73
• Decision Date: 06 October 2003
• Docket Number: No. CIV.A.2002-10160RBC.<SMALL><SUP>1</SUP></SMALL>,CIV.A.2002-10160RBC.<SMALL><SUP>1</SUP></SMALL&gt
• Parties: LIBERTY MUTUAL INSURANCE COMPANY, Plaintiff, v. GREENWICH INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Massachusetts

Page 73

286 F.Supp.2d 73

LIBERTY MUTUAL INSURANCE COMPANY, Plaintiff, v. GREENWICH INSURANCE COMPANY, Defendant.

No. CIV.A.2002-10160RBC.¹

United States District Court, D. Massachusetts.

October 6, 2003.

Gregg D. Shapiro, Choate, Hall & Stewart, Kara M. Zaleskas, Choate, Hall & Stewart, Douglas R. Gooding, Choate, Hall & Stewart, Boston, MA, for Liberty Mutual Insurance Company, Counter Defendant.

Douglas W. Salvesen, Yurko & Salvesen, P.C., Boston, MA, Lawrence R. Moelmann, Hinshaw & Culbertson, Chicago, IL, for Greenwich Insurance Company, Defendant.

FURTHER MEMORANDUM AND ORDER ON LIBERTY'S MOTION FOR SUMMARY JUDGMENT (# 21)

COLLINGS, United States Magistrate Judge.

I. Introduction

In this action Liberty Mutual Insurance Company ("Liberty") is seeking payment on a certain surety bond that Greenwich Insurance Company ("Greenwich") issued on behalf of American Tissue, Inc. ("American Tissue"), its principal, for the benefit of the plaintiff. Liberty provided workers' compensation insurance coverage for American Tissue. The surety bond ("the Bond") was obtained from Greenwich to secure American Tissue's performance of its obligations pursuant to an Agreement For Guarantee of Deductible Reimbursement ("the Agreement") with Liberty.

American Tissue suffered financial difficulties which ultimately led to the company filing for bankruptcy in September, 2001. Approximately one month later Liberty submitted a claim to Greenwich for the full penal sum of the Bond consequent to the failure of American Tissue to met its obligations under the Agreement. This litigation ensued when Greenwich refused to honor Liberty's claim.

II. Procedural Background

On March 3, 2003, I issued a Memorandum and Order on Liberty's Motion For Summary Judgment (# 59), the text of which is incorporated herein by reference. At the conclusion of that Memorandum and Order, I pretermitted decision on the dispositive motion and allowed discovery to be taken on a single discrete issue. When that discovery was completed, the parties submitted further memoranda on the summary judgment motion.

The arguments advanced in the second round of briefs raised additional, novel issues. Consequently, on July 28, 2003, I issued a Further Memorandum and Procedural Order on Liberty's Motion For Summary Judgment (# 79) raising several questions to be addressed by counsel at a hearing set for August 11, 2003. The hearing took place as scheduled with the parties arguing their respective positions. At the conclusion of the hearing, plaintiff's counsel sought leave to file a further memorandum of law on the bankruptcy issue. That request was granted and on August 22, 2003, Liberty filed a Supplemental Memorandum on the Enforceability of the Ipso Facto Clause Against Greenwich Insurance Company (# 80). Three weeks later on September 12th the defendant submitted Greenwich's Response to Liberty's Supplemental Memorandum on the Enforceability of the Ipso Facto Clause Against Greenwich (# 81). Following oral argument and the submission of these final briefs, the motion for summary judgment stands ready for final resolution.

III. Discussion

On September 10, 2001, American Tissue filed a voluntary petition for bankruptcy protection. (Declaration of Kevin Reid # 24 ¶ 18 and Exh. 13) The terms of the Agreement between American Tissue and Liberty provided, inter alia, as follows:

11. Defaults. Any of the following events shall be an "Event of Default":

* * * * * *

(c) The insolvency of the Policyholder, commencement by Policyholder of corporate or other liquidation or dissolution proceedings, failure by Policyholder to pay debts generally as they become due, general assignment by the Policyholder for the benefit of creditors, or the filing by or against Policyholder of any petition, proceeding, case or action under the provisions of the United States Bankruptcy Code or other law for the relief of or relating to debtors.

* * * * * *

12. Remedies.

* * * * * *

(c) If any Event of Default, as described in ¶ 11(b) through 11(j) has occurred, Liberty Mutual may do one or more of the following, in such order as Liberty Mutual shall determine in its sole and absolute discretion:

* * * * * *

(iv)submit a claim upon the Surety Bond for the full penal sum of the bond and draw upon the full amount of the Letter of Credit.

Agreement ¶ 11(c) and ¶ 12(c)(iv).

Relying on those terms in the Agreement, on October 9, 2001, Liberty sent a certified letter to the Surety Claim Department at Greenwich, the text of which read:

"STATEMENT"

In accordance with the terms of the Greenwich Insurance Company bond to Secure Deductible Reimbursement Agreements—Bond N. 45017865 dated January 24, 2001, we hereby notify you, as stated in the Agreement For Guarantee of Deductible Reimbursement # 6577-R, of an "Event of Default" as described in Item # 11(c) of that agreement, American Tissue has filed a Petition for Bankruptcy, Bankruptcy Court, District of Delaware, Petition No. 01-10412. Under the relevant security agreement Item # 12(c)(iv), Liberty Mutual is entitled under these circumstances to the remedy of submitting a claim upon the Surety Bond for the full penal sum of the bond.

The undersigned obligee therefore presents this claim for the full penal sum of $3,700,000.00 on Bond No. 45017865 and requests payment of the claim within thirty (30) days of receipt of this statement.

Declaration # 24 ¶ 20 and Exh. 14.

Greenwich has failed and refused to pay Liberty the full penal sum of the Bond. (# 24 ¶ 21)

It was asserted in the plaintiff's original summary judgment papers that the bankruptcy filing by American Tissue constituted a default under the Agreement that entitled Liberty to submit a claim to Greenwich for the full amount of the Bond. (# 22 at 8; # 35 at 5; # 47 at 9-10) This was but one of a myriad of arguments advanced by the plaintiff in seeking the entry of judgment as a matter of law. Greenwich responded in kind, raising a panoply of reasons why summary judgment should not be granted.

In the initial Memorandum and Order (# 59), I noted that not all of Greenwich's grounds for disputing Liberty's claim needed to be addressed since I viewed one as ultimately dispositive. I then dropped a footnote, writing as follows:

Certain of the defendant's arguments have merit. For example, the Court agrees with Greenwich's contention that ¶ 11(c) of the Agreement is an "ipso facto" clause under 11 U.S.C. § 365(e)(1) and, as such, is prohibited. See, e.g., In re Manufacturing Technologies, Inc., Adversary Proceeding No. 00-1297, slip op. # 15 (August 16, 2000) and slip op. # 29 (D.Mass., October 31, 2000).

Memorandum and Order # 59 at 12 n. 19.

Liberty contends that this ruling was erroneous and so moves for reconsideration.

The plaintiff's primary point is that the provisions of the Bankruptcy Code are intended to protect debtors by

provid[ing] a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy "a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934).

Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see also In re Spigel, 260 F.3d 27, 31 (1st Cir.2001).

According to Liberty, since Greenwich is not a debtor, but rather a surety, the Bankruptcy Code affords it neither rights nor benefits. This is a view that several courts have espoused. For example, in In re F.T.L., Inc., 152 B.R. 61 (E.D.Va.1993), it was explained that:

This court has previously held that in the absence of compelling unusual circumstances, guarantors of a debtor must file their own bankruptcy petition to receive the benefits of bankruptcy law. See Crumpler v. Wetsel Seed Company (In re Southside Lawn & Garden), 115 B.R. 79, 81 (Bkrtcy.E.D.Va.1990). Nothing in § 362 suggests Congress intended to strip from creditors of a bankrupt debtor the protection they sought and received when they required a third party to guaranty the debt. Credit Alliance Corp. v. Williams, 851 F.2d at 121. The very purpose of a guarantee is to assure a creditor that in the event the debtor defaults, the creditor will have someone to look to for reimbursement. Credit Alliance Corp. v. Williams, 851 F.2d at 122 (citing Rojas v. First Bank National Ass'n, 613 F.Supp. 968, 971 (E.D.N.Y.1985)).

In re F.T.L., Inc., 152 B.R. at 63 (footnote omitted); see also In re Southside Lawn & Garden/Suffolk Yard Guard, 115 B.R. 79, 81 (E.D.Va.1990); Dime Savings Bank, FSB v. Greene, 813 A.2d 893, 896 (Pa.Super. 2002).

Greenwich argues, however, that its obligations under the Bond are co-extensive with those of its principal, American Tissue. According to the defendant, since the ipso facto clause cannot be use as a trigger to alter the rights of American Tissue under the Agreement, neither can it be used against Greenwich. Certainly there is case law to support this general proposition:

The basic rule on the liability of sureties is that "the surety is not liable to the creditor unless his principal is liable"[;] thus he may plead the defenses which are available to his principal, Williston § 1214, at 714; Law of Suretyship § 7.1, at 200. See Asociacion De Azucareros De Guatemala v. United States National Bank of Oregon, 423 F.2d 638, 641 (9th Cir.1970); Stephens v. First Bank and Trust of Richardson, 540 S.W.2d 572, 574 (Tex.Civ.App.—Waco 1976); CE Building Products, Inc. v. Seal-Rite Aluminum Products of N.H., 316 A.2d 198, 199, 114 N.H. 150 (1974); The Bomud Co. v. Yockey Oil Co., 180 Kan. 109, 299 P.2d 72, 76 (1956); Krekel v. Thomasma, 255 Mich. 283, 238 N.W. 255, 256 (1931) (the liability of guarantors "depends on the liability of their principal"); Stifel Estate Co. v. Cella, 220 Mo.App. 657, 291 S.W. 515, 519 (1927) ("If the guarantee has no cause of action against the principal, certainly...