Midwest Corp. v. Global Cable, Inc.

• Decision Date: 09 May 1988
• Docket Number: No. 87 CIV. 3896 (SWK).,87 CIV. 3896 (SWK).
• Citation: 688 F. Supp. 872
• Parties: MIDWEST CORP., Plaintiff, v. GLOBAL CABLE, INC. and Michael D. Brown, Defendants.
• Court: U.S. District Court — Southern District of New York

688 F. Supp. 872

MIDWEST CORP., Plaintiff, v. GLOBAL CABLE, INC. and Michael D. Brown, Defendants.

No. 87 CIV. 3896 (SWK).

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

May 9, 1988.

Fisher and Fisher, Brooklyn, N.Y. by Kenneth K. Fisher, for plaintiff.

T. Kevin Murtha, Corona, N.Y., for defendants.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

Plaintiff filed this action seeking to collect on a promissory note and a guaranty on that note pursuant to this Court's diversity jurisdiction. Plaintiff, a West Virginia corporation, claims that defendant Global Cable, Inc. ("Global Cable"), a New York corporation, executed and delivered a promissory note on which it has now defaulted. Plaintiff also claims that defendant Michael Brown ("Brown") executed and delivered a guaranty on the note and has refused to honor it despite Global Cable's default.

Presently before this Court is plaintiff's motion made pursuant to Rule 12(f) of the Federal Rules of Civil Procedure to strike defendant Brown's defenses which assert that the waiver of defenses clause in the guaranty is invalid and unenforceable and plaintiff's motion for summary judgment made pursuant to Rule 56. Plaintiff argues that defendants' defenses are contrary to existing law and that summary judgment is appropriate since material facts are not in issue and since plaintiff is entitled to judgment on the promissory note and guaranty as a matter of law. Defendant responds that the waiver of defenses clause in the guaranty does not waive as a matter of law the defenses of fraud in the inducement, breach of contract and failure of consideration.

BACKGROUND

Defendants state in their Memorandum of Law that defendant Global Cable had purchased supplies and equipment from 1981 until 1986 from a firm known as CWY. During this time period, the owner and principal of CWY was Bill Whitely. In his affidavit, defendant Brown states that at some time prior to October 1, 1986 plaintiff acquired CWY, defendant's supplier. Affidavit of Michael Brown ("Brown Affidavit"), at ¶ 8. It is undisputed that on October 1, 1986 Global Cable executed and delivered a note payable to plaintiff or order in the principal sum of $199,303.59, with $18,118.48 of interest to be accrued at a rate of 10% per annum from October 1, 1986 through September 15, 1987. Payments were to be made in the amount of $8,304.30 at the time the note was delivered and again on October 1, 1986. Similar payments were due on the first and fifteenth day of each month until September 15th, at which time all unpaid principal and interest were to be due. Affidavit of Kenneth Fisher ("Fisher Affidavit"), at ¶¶ 2, 4; Brown Affidavit at ¶ 3. It is also undisputed that on or about October 1, 1986, Brown executed and delivered a personal guaranty entitled "Individual Guaranty and Indemnity" in favor of Midwest to guarantee the note.

Defendant contends that defendants executed the note and guaranty in favor of plaintiff because Bill Whitely, acting as agent of plaintiff, represented to defendant Brown that CWY would face financial hardship and embarrassment if the note and guaranty were not executed. Brown Affidavit at ¶ 6. Brown states he did not receive any compensation for providing the guaranty. Id. at ¶ 7, even though the guaranty itself states that it was executed "for valuable consideration", see Complaint and exhibits thereto. Defendants claim that the consideration for the note and guaranty were supplies which Whitley had caused Brown to believe had been ordered from plaintiff and which were delivered to an agent of Global Cable. Brown Affidavit at ¶ 9. Plaintiff claims the instruments were given in consideration of past debts then due. Fisher Reply Affidavit at ¶ 7. Brown states that in the spring of 1987 he discovered that a substantial percentage of the goods which he believed ordered were not in fact in Global Cable's possession, that commercial documents relating to the orders were not in Global Cable's possession and that other goods delivered by CWY were unusable in Global's business. Id. at ¶ 11. Brown claims to have discussed this matter with Whitely who allegedly agreed to provide the missing documents and offered to repurchase the unusable materials delivered to Global. Id. at ¶ 14. According to Brown, the documents were not received and the offer to purchase was never realized. Id.

Defendant Global Cable paid to Midwest $8,304.30 on October 1, 1986, $16,608.60 on November 11, 1986, $3,500 on January 8, 1987, $7,500 on January 27, 1987 and $5,000 on June 13, 1987. Brown Affidavit at ¶ 4; Affidavit of Harold Elswick ("Elswick Affidavit"), at ¶ 4. On February 17, 1987 defendant wrote plaintiff stating that it acknowledged its deficiency and obligations pursuant to the note. Fisher Affidavit at ¶ 9; Exhibit "Letter" to Notice of Motion. Plaintiff wrote defendants on April 29, 1987 demanding payment due under the note. Plaintiff claims that approximately $150,000 was due under the note as of September 30, 1987 in interest and principal. Elswick Affidavit at ¶ 6. Plaintiff asserts, and defendant does not deny, that Brown has not made any payments under the guaranty. Fisher Affidavit at ¶ 12.

By letter dated February 12, 1988, defendant advised the Court that Global Cable had filed for bankruptcy pursuant to Chapter 7 of the United States Bankruptcy Code on December 18, 1987. Accordingly, the action is stayed against defendant Global Cable pursuant to 11 U.S.C. § 362(a)(1). The Court will consider, however, plaintiff's motion against defendant Brown.

DISCUSSION

The Defenses

Defendant argues that the waiver of defenses clause in the guaranty executed by Brown, which states that "fictitious, incorrectness, invalidity or unenforceability for any reason, of any instrument or writing, or acts of commission or omission by Holder of the note or Maker identified as Global Cable or its assignees;" is void as against public policy since it would require defendant Brown to pay plaintiff even if plaintiff's own acts or omissions render the instrument invalid as against plaintiff. Defendant argues that since the guaranty is a contract separate from the underlying contract, Brown may raise the defenses of fraud, breach and lack of consideration notwithstanding the waiver clause. Since this action is based on diversity and since the parties agree that the note is governed by the law of New York, such law will be applied. The terms of the Note are to be governed by the laws of West Virginia.¹

As a general rule, a guarantor cannot be held liable for a guaranteed debt unless the principal debtor is liable on the principal obligation and has defaulted. Pro-Specialties v. Thomas Funding Corp., 812 F.2d 797, 799 (2d Cir.1987) (guarantor cannot be held liable at the same time that principal held not liable). The obligations of a guarantor are collateral or secondary to those of the principal obligor. Id. While the traditional rule holds that a guarantor may not assert as a defense independent causes of action belonging to the principal obligor, such as fraud, Walcutt v. Clevite Corp., 13 N.Y.2d 48, 56, 241 N.Y. S.2d 834, 838, 191 N.E.2d 894, 897 (1963), more recent decisions have stated that a guarantor may assert any defense that would be available to the principal obligor, see Durable Group, Inc. v. De Benedetto, 85 A.D.2d 524, 444 N.Y.S.2d 662, 663 (1st Dept.1981) (noting that allegations by guarantor of economic duress and coercion go to the essence of the agreement). In any event, when the guarantor and the principal obligor are so close as to be considered one and the same, the guarantor may assert the defenses of the principal. Walcutt, supra, 241 N.Y.S.2d at 838, 191 N.E. 2d at 897.²

1. Fraudulent Inducement

Defendant's argument that the fraudulent inducement defense is viable fails, however. In New York, a creditor generally "can not recover from a guarantor where the creditor has practiced any fraud to induce the guarantor to assume the obligation of guaranty." General Motors Acceptance Corp. v. Kalkstein, 101 A.D.2d 102, 474 N.Y.S.2d 493, 495 (1st Dept.1984). In the present case, Brown asserts that Whitely, plaintiff's agent, induced him into signing the guaranty by falsely representing that certain goods had been shipped and received by Global Cable. When the guarantor has specifically disclaimed certain defenses, however, the New York Court of Appeals has determined that the guarantor may not assert fraud in the inducement as a defense. Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 495 N.Y.S.2d 309, 485 N.E.2d 974 (1985).

While lower New York courts have admonished that a waiver of defense clause must be specific, see GTE Automatic Electric v. Martins, Inc., 127 A.D.2d 545, 512 N.Y.S.2d 107, 108 (1st Dept.1982), the Citibank court held that the defense of fraudulent inducement would not be available even though the waiver did not specifically state that the guarantor had not relied on the oral agreement which the guarantor claimed was the fraudulent inducement. Instead, since the guarantor had stated that the guaranty was "absolute and unconditional" and was "irrespective of (i) any lack of validity ... of the ... underlying loan agreement", the waiver was sufficient and binding. Citibank, supra, 495 N.Y.S.2d at 312, 485 N.E.2d at 977. This Court recently applied this rule and noted that the "personal unconditional guarantees of corporate officers given in return for corporate funding are not subject to the defense of fraud in the inducement, lest the defense provide an inducement to fraud." Azuma N.V. v. Sinks, 646 F.Supp. 122, 127 (S.D.N.Y.1986). Given the waiver in Brown's guarantee, he cannot now assert that plaintiff's agent fraudulently induced him by making oral representations that goods had been shipped and received. Consequently, Brown's defense of fraud in the inducement fails and plaintiff's motion to strike this defense is granted.

2. Breach of Contract

For the same reasons as stated...