National Union Fire Ins. Co. of Pittsburgh, Pa. v. Robert Christopher Associates

• Decision Date: 18 May 1999
• Docket Number: No. 1,No. 2,1,2
• Citation: 257 A.D.2d 1,691 N.Y.S.2d 35
• Parties: , NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff-Respondent, v. ROBERT CHRISTOPHER ASSOCIATES, et al., Defendants-Appellants. ActionNational Union Fire Insurance Company of Pittsburgh, Pa., Plaintiff-Respondent, v. R. Richard Williams, Defendant-Appellant. Action
• Court: New York Supreme Court — Appellate Division

Page 35

691 N.Y.S.2d 35

257 A.D.2d 1, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff-Respondent, v. ROBERT CHRISTOPHER ASSOCIATES, et al., Defendants-Appellants. Action No. 1.

National Union Fire Insurance Company of Pittsburgh, Pa., Plaintiff-Respondent, v. R. Richard Williams, Defendant-Appellant. Action No. 2.

Supreme Court, Appellate Division, First Department, New York.

May 18, 1999.

Liza A. Chafiian, of counsel (Richard F. Russell, on the brief, D'Amato & Lynch, attorneys) for plaintiff-respondent National Fire Ins. Co.

Patrick C. Campbell, Jr., of counsel (Andrew S. Fisher and Henry T. Berger, on the brief, Fisher, Fisher & Berger and Richard G. Phillips Associates, P.C., attorneys) for defendants-appellants in both actions.

BETTY WEINBERG ELLERIN, P.J., JOSEPH P. SULLIVAN, RICHARD W. WALLACH and ISRAEL RUBIN, JJ.

RUBIN, J.

An entity that extends credit to finance a business venture, especially one that merely provides a bond to guarantee performance of a party's contractual obligation, is not, by implication, a party to the underlying transaction and does not, without more, subject itself to claims or defenses otherwise available against a principal.

Plaintiff, which furnished a financial performance bond to defendants, investors in a real estate limited partnership, is not subject to the defense that the investors were fraudulently induced by the sponsor to purchase interests in the limited partnership. The propriety of the payment made by plaintiff under the performance bond is governed solely by its terms and, in the absence of express provisions to the contrary, is unaffected by any collateral agreement or dealings among the parties to the underlying commercial venture. Likewise, the obligation of defendants to indemnify plaintiff for any loss occasioned by payment under the performance bond is governed by the indemnification agreements signed by defendant investors with plaintiff, which comprise an integral part of the guarantee manifested by the financial performance bond.

Defendants are investors in Franklin Cimarron Pointe Associates, a failed real estate limited partnership formed to develop and operate an apartment complex in Oklahoma City. Defendants J. Christopher Burch and Robert Burch, through their own limited partnership, defendant Robert Christopher Associates, purchased a limited partnership interest in Cimarron Pointe Associates, paying $102,125 in cash and executing a promissory note in the amount of $532,125 for the remainder. Defendant R. Richard Williams purchased a like interest under identical payment terms.

Defendants Robert Christopher Associates and R. Richard Williams made three principal payments under their respective promissory notes. Following their default on subsequent payments, plaintiff satisfied its obligation under the terms of its financial performance bond, issuing payment to the holder of the notes given by the limited partners in the amount of $362,193.47 with respect to each. Plaintiff then brought these actions against each limited partner to recover this sum under the terms of the indemnity agreements with the respective defendants.

This matter was last before this Court for resolution of a dispute concerning the disparate forum selection clauses contained in the notes given by defendants to the lender and in the indemnity agreements executed by the limited partners in favor of plaintiff. On that appeal, we noted that while both writings comprise part of the transaction that provides indemnification to the holder of the notes, "each involves different parties and serves a distinct purpose" (223 A.D.2d 395, 396, 637 N.Y.S.2d 36). Rejecting defendants' contention that because the notes and the indemnification agreements were contemporaneously executed they should therefore be read together, we held that the indemnification agreements are subject to suit in New York. In view of the contrasting provision in the notes conferring exclusive jurisdiction upon the Court of Common Pleas of Montgomery County, Pennsylvania, we dismissed plaintiff's cause of action as subrogee of the holder of the notes, without prejudice to the commencement of an appropriate subrogation action in the designated forum (id., at 398, 637 N.Y.S.2d 36).

Thereafter, plaintiff moved for summary judgment. In each of the two orders appealed from, Supreme Court struck the affirmative defenses and counterclaims and directed the Clerk to enter judgment in favor of plaintiff and against the respective defendants in the amount of $362,193.47, plus interest.

Defendants allege that they were fraudulently induced to invest in the limited partnership by the sponsor's failure to disclose that the success of its Oklahoma City apartment complex depended on continued prosperity in the oil and gas industry and that the industry was then in recession, which, according to their brief, "was actually having a devastating effect on, not only the regional economy, but the rental housing economy in particular." Defendants further contend that while the financial performance bond issued by plaintiff constitutes an unconditional obligation to pay the holder of the notes in the event of defendants' default, the indemnification agreements signed by defendants "contain nothing which could even arguably have led the Defendants to believe that their obligations under the indemnification agreement[s] were unconditional and that they were effectively agreeing to waive any defense to payment under the note."

Defendants contend that Supreme Court erred in granting summary judgment to plaintiff based on the indemnification agreements they entered into with plaintiff. They argue that it is "at least fairly debatable whether reasonable minds could differ as to whether an indemnification agreement between a principal and surety creates an unconditional and absolute obligation of indemnification". Defendants rely on Federal case law in support of their position that the asserted ambiguity raises a question of fact precluding summary judgment.

Under circumstances similar to those of this case, several decisions conclude that it is uncertain whether plaintiff's obligation to make reimbursement under the indemnification agreement is conditional or unconditional. For example, in National Union Fire Ins. Co. v. Fremont, 760 F.Supp. 334, 338 (S.D.N.Y. 1991), the Federal District Court for the Southern District of New York stated: "Because the indemnity agreement does not specify which type of suretyship applies, it is ambiguous as to the type of suretyship the parties intended. This factual issue cannot be decided on a motion for summary judgment" (citing National Union Fire Ins. Co. v. Alexander, 728 F.Supp. 192, 199 [SDNY]; see also, National Union Fire Ins. Co. v. Calvinvest, 1992 U.S. Dist LEXIS 1956; National Union Fire Ins. Co. v. Cooper, 1990 U.S. Dist LEXIS 4878).

These cases are all derived from the Second Circuit Court of Appeals' decision in National Union Fire Ins. Co. v. Turtur, 892 F.2d 199 (2nd Cir. 1989), which adopted a broad construction of Rudman v. Cowles Communications, 30 N.Y.2d 1, 330 N.Y.S.2d 33, 280 N.E.2d 867. In Rudman, the New York Court of Appeals was confronted with two contracts between the same parties, one providing for the acquisition of the plaintiff's business by the defendant and the other providing for the plaintiff's employment by a wholly-owned subsidiary of the defendant. The Court stated (at 13), "Whether the parties intended to treat both agreements as mutually dependent contracts, the breach of one undoing the obligations under the other, is a question of fact. In determining whether contracts are separable or entire, the primary standard is the intent manifested, viewed in the surrounding circumstances".

Turtur (supra ) is factually similar to the matter under review. Investors in a limited partnership defaulted on notes secured by a financial performance bond issued by National Union, which had sued the defendants for reimbursement under the terms of its indemnification agreement (and also as subrogee of the holder of the notes). Expanding upon the notion that "a party may not compel performance of an agreement which that party has induced by fraud" (Turtur, supra, at 203), the Second Circuit Court concluded (at 204) that "since fraud in the inducement, like a material breach, excuses performance by the other party to a contract, there would appear to be no reason in principle why, if two contracts are part of the same exchange, a fraudulent inducement as to one of the contracts might not, in at least some situations, excuse performance by the defrauded party of the other contract." In reversing the grant of summary judgment to the plaintiff guarantor, the Circuit Court cited the ruling in Rudman v. Cowles Communications, supra, at 13, 330 N.Y.S.2d 33, 280 N.E.2d 867, concluding, "The issue of the dependency of separate contracts, therefore, boils down to the intent of the parties. Questions of intent, we note, are usually inappropriate for disposition on summary judgment" (Turtur, supra, at 205).

In general, whether individual writings should be construed as mutually dependent or treated as distinct agreements is governed by the intent of the parties. However, even where two contracts involve essentially the same parties, as in Rudman, supra, at 13, 330 N.Y.S.2d 33, 280 N.E.2d 867, the form of the agreements, though not conclusive, is significant, as the New York Court of Appeals emphasized in that case: "Recognizing that the agreements involved formally different parties, and actually executed on different dates in June, 1966, the conclusion of separateness becomes all but inescapable" (id.). Furthermore, even if the mutual dependency of the two contracts were to be established, the available remedy for nonperformance of one contract is rescission of the dependent contract which, "lying in equity, is a matter of discretion" (id.).

With...