Opinion
00 Civ. 7672 (GBD)
May 31, 2002
MEMORANDUM OPINION AND ORDER
In this breach of contract action, plaintiff seeks to recover on a guarantee bond issued in its favor by defendant. Plaintiff moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Defendant opposes this motion and makes a cross-motion for summary judgment. For the reasons set forth below, plaintiff's motion for summary judgment is granted and defendant's cross-motion for summary judgment is denied.
Background
By an October 9, 1999 charter party ("the Charter"), Oceanic Marine (Gibraltar) Limited ("OMG") chartered the vessel, Edinburgh Castle, to Premier Operations Ltd. ("Premier"). (Adams Aff. Ex. 2.) The Charter indicated that the vessel was to be renamed Big Red Boat II ("BRB") and specified April 30, 2000 as the delivery date. (Adams Aff. Ex. 2.) The Charter included several payments which Premier was required to satisfy on or before the date of delivery including: $500,000 refurbishment costs (Adams Aff. Ex. 2 at Cl. 27.3), the first month's hire payment at $34,664.23 per day (Adams Aff. Ex. 2 at Cl. 41.1), a non-refundable deposit of $1,265,400 (Adams Aff. Ex. 2 at Cl. 42.1), and a bank guarantee or performance bond for $5,296,200 (Adams Aff. Ex. 2 at Cl. 42.2). On or about January 11, 2000, Ed Van Name of Van Name Surety Brokers, Inc., broker for Premier, contacted Scott Adams of Avalon Risk Associates, Inc., agent for Greenwich Insurance Company ("Greenwich"), to inquire about Greenwich's interest in writing the $5.2 million bond required under Cl. 42.2. (Adams Aff. Ex. 1.) Greenwich, through its agent, expressed preliminary interest. (Adams Aff. at ¶ 12.) OMG and Premier executed on March 14, 2000 an addendum to the Charter, changing the delivery date to May 28, 2000 with all of the other terms of the Charter remaining unchanged. Greenwich received a copy of this addendum. (Adams Aff. at ¶ 13.) On or about May 24, 2000, Mr. Van Name notified Mr. Adams that the bond would only be needed in the amount of $1 million due to negotiations between OMG and Premier for OMG to purchase several vessels in the Premier fleet or for an equity position in Premier. (Adams Aff. Ex. 4.) Mr. Van Name also informed Mr. Adams that the nominal owner of the Charter would be changed from OMG to BRB in accordance with the change in the name of the vessel and, thus, BRB would be named as obligee under the bond. (Adams Aff. at ¶ 15; Adams Aff. Ex. 4.) Greenwich issued the Charter Guarantee Bond ("the Bond") for $1 million on May 25, 2000. (Adams Aff. Ex. 5.)
On or before May 27, 2000, Premier informed OMG that it was unable to pay the refurbishment cost and deposit, or provide the $5.2 million bond. (Adams Aff. Ex. 7.) On May 27, 2000, OMG and Premier executed an addendum to the Charter deferring the payment of the refurbishment cost and the bond until October 1, 2000, and requiring Premier to procure second priority mortgages in favor of OMG on several vessels in the Premier fleet on or before delivery and until the refurbishment cost, deposit, and bond were paid and delivered. (Adams Aff. Ex. 7.) Also on May 27, 2000, OMG and Premier executed another addendum indicating that Premier was unable to register the mortgages before delivery and that OMG would deliver the vessel as planned subject to Premier delivering the mortgages by May 31, 2000. (Adams Aff. Ex. 8.) OMG and Premier executed a letter agreement on May 27, 2000 memorializing the changes to the Charter and indicating OMG's intent to assign its rights under the Charter to BRB. (Adams Aff. Ex. 9.) The vessel was delivered on or about May 28, 2000. (Lund Aff. ¶ 11.)
By August 2000, Premier had failed to make several payments under the Charter. On August 4, 2000, OMG notified Premier of its failure to pay $1,859,967.80 in hire payments and demanded prompt payment with the threat of termination of the Charter and withdrawal of the vessel for failure to comply. (Gutowski Aff. Ex. 5.) On September 13, 2000, OMG notified Premier of its withdrawal of the vessel as of September 14, 2000 due to Premier's failure to make the hire payments under the Charter. (Lund Aff. Ex. 4.) In accordance with the terms of the Bond, on September 30, 2000, BRB informed Greenwich of Premier's failure to pay hire in the amount of $2,614,849.65 and of the termination of the Charter and made a formal demand for payment under the Bond. (Adams Aff. Ex. 6.) Greenwich refused to pay and BRB filed this action on October 11, 2000.
Discussion
Under Rule 56, summary judgment may be granted where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). A genuine issue of material fact for trial exists if, based on the record as a whole, a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986). A district court must view the record in the light most favorable to the nonmoving party by resolving all ambiguities and drawing all reasonable inferences in favor of that party. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 587-88, 89 L.Ed.2d 538, 106 S.Ct. 1348 (1986); Anderson, 477 U.S. at 255; Tomka v. Seiler Corp., 66 F.3d 1295, 1304 (2d Cir. 1995). The moving party bears the burden of demonstrating that no genuine issue of material fact exists. Anderson, 477 U.S. at 256; Tomka, 66 F.3d at 1304. Nevertheless, the party opposing the motion bears the ultimate burden of proving that there is evidence which creates a genuine issue of material fact for trial. Twin Laboratories v. Weider Health Fitness, 900 F.2d 566, 568 (2d Cir. 1990). The nonmoving party cannot meet this burden by simply relying on mere conclusory allegations, speculation, or conjecture. Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986).
The parties do not dispute that, under the terms of the Bond, Greenwich is required to pay BRB in the amount of $1,000,000 in the event that Premier fails to make all payments under the charter. On its cross-motion, defendant argues that, as a matter of law, the modifications made to the Charter after defendant issued the Bond rendered its obligations void. Plaintiff maintains that defendant is discharged only if the alterations in the charter were material and caused injury or prejudice to the defendant. Defendant contends that any alteration in the Charter voids the Bond. In the alternative, defendant argues that the changes to the Charter also satisfy the more rigorous standard urged by plaintiff because the changes substantially increased defendant's risk.
Defendant is correct that there is a line of authority in this circuit which states that surety contracts are strictissimi juris and, therefore, any alteration of the underlying contract discharges the surety. See, e.g., Management Investment Funding Ltd. v. Merrill Lynch, Pierce, Fenner Smith, Inc., 19 F. Supp.2d 129, 136 (S.D.N.Y. 1998) (citation omitted), vacated on other grounds, 188 F.3d 31 (2d Cir. 1999), on remand, 2000 WL 145461 (S.D.N.Y. Feb. 9, 2000), rev'd on other grounds, 232 F.3d 153 (2d Cir. 2000); Depositors Trust Co. v. Hudson General Corp., 485 F. Supp. 1355, 1362 (E.D.N.Y. 1980) (citations omitted) (applying New York law). However, there is also a line of authority which specifically distinguishes compensated, corporate sureties. In contrast to private sureties, "compensated corporate sureties are sophisticated repeat players who undertake surety obligations for profit. The law recognizes that it would be unfair to extend to them the protection of having their obligations construed strictissimi juris." Mountbatten Surety Co., Inc. v. Kips Bay Cinemas, Inc., 2000 WL 1752916 (S.D.N.Y. Nov. 29, 2000) (citation omitted). As stated in St. John's College v. Aetna Indemnity Co., 201 N.Y. 335, 342 (1911) (citing U.S.F. G. Co. v. United States, 191 U.S. 416 (1903)), "[t]he rule of strict construction is liable at times to work a practical injustice, and it ought not to be extended beyond the reason for the rule, particularly when the surety is engaged in the business of becoming surety for pay and presumably for profit." As a result, "[u]nder New York law, it is well established that `a compensated, corporate surety is not a favorite of the law and its contract of suretyship will be construed in a manner most favorable to a claimant.'" Cam-Ful Industries, Inc. v. Fidelity Deposit Co. of Md., 922 F.2d 156, 163 (2d Cir. 1991) (citation omitted). Thus, only material alterations to the underlying contract will discharge compensated, corporate sureties. See id. at 161; St. John's College, 201 N.Y. 335, 340. Plaintiff has therefore set forth the applicable standard.
Defendant's argument that the changes in the Charter are material is based on its assertion that its liability under the Bond was not triggered until the vessel was delivered. Defendant argues that the changes in the Charter increased defendant's risk because certain pre-delivery obligations for which defendant would not have been liable were converted into post-delivery obligations for which defendant became liable. However, in determining when the surety's liability commences, a court must examine the terms, conditions, and language of the bond itself. In re Estate of Camarda, 425 N.Y.S.2d 1012, 1015 (1980). The language of the bond must be given its ordinary meaning. Crisafulli Brothers, Inc. v. Clanton, 512 N.Y.S.2d 927, 928 (1987). The Bond at issue in the present action clearly and unambiguously states, "[t]he term of this bond shall be from May 25, 2000 to May 27, 2005." (Adams Aff. Ex.5.) As such, defendant became liable under the Bond on May 25, 2000, regardless of the delivery date. See Greenblatt v. Delta Plumbing Heating Corp., 834 F. Supp. 86 (S.D.N.Y. 1993), vacated on other grounds, 68 F.3d 561 (2d Cir. 1995). Defendant argues that its liability attached at delivery because the Bond only secures Premier's "use" of the vessel. (Def.'s Reply Mem. at 3.) However, defendant misinterprets the language of the Bond. The Bond states
[w]hereas, said Principal [Premier] has entered into a Charter Agreement, dated October 9, 1999, for the use of the vessel . . . the condition of this obligation is such that if the Principal shall faithfully make all payments required under said Charter Agreement . . ., then this obligation shall be void, otherwise to remain in full force and effect.
(Adams Aff. Ex.5.) (emphasis added). This language does not restrict defendant's liability under the Bond solely to post-delivery obligations. The terms of the Bond and defendant's liability thereunder began on May 25, 2000. Consequently, defendant's liability under the Bond was not increased by the deferral of any payments which were originally to be made on or before the delivery date of May 28, 2000.
Defendant further argues that summary judgment should not be granted in plaintiff's favor because defendant is entitled to further discovery regarding BRB's standing to assert claims under the Bond, OMG/BRB's failure to inform defendant of the changes to the Charter, the circumstances surrounding what defendant considered to be Premier's anticipatory repudiation of the charter, and the extent of Premier's financial liability to BRB. Further inquiry regarding these matters is unwarranted. BRB clearly has standing to assert claims under the Bond because it is named as the obligee on the face of the Bond. See generall Rachman Bag Co. v. Liberty Mutual Insurance Co., 46 F.3d 230 (1995);Armstrong Rubber Co. v. Autotransformation, Inc., 402 N.Y.S.2d 892 (1978) (obligee under bonds sued the surety).
Moreover, OMG/BRB, as obligee, was not required to notify defendant before the Bond was written of possible future changes to the charter. "[S]ureties must usually take the initiative and inquire about information they deem important." Rachman, 46 F.3d 230, 235 (citation omitted). Defendant does not allege that its obligations under the Bond are discharged as a result of incomplete or incorrect information it received from Premier or OMG/BRB in response to any inquiry. See id. Rather, defendant argues that OMG/BRB had an affirmative duty to disclose. In Rachman, the Second Circuit analyzed relevant New York caselaw and set forth the following test to determine a surety bond obligee's liability for fraudulent concealment:
1) the obligee must know facts that materially increase the surety's risk, and have reason to believe that surety would be unwilling to assume such a higher risk; 2) the obligee must have reason to believe that such facts are unknown to the surety; 3) the obligee must have the opportunity to communicate the relevant information to the surety; 4) the obligee must have the duty to disclose the information based upon its relationship to the surety, its responsibility for the surety's misimpression or other circumstances.46 F.3d 230, 237. With respect to the fourth prong, "other circumstances" include where the obligee has control of the information. Id.
There is no evidence that OMG/BRB shared the requisite relationship with defendant, or was responsible for defendant's misimpression. Rather, the evidence illustrates that this was an arm's length business transaction conducted between agents for Premier and defendant. Defendant alleges that Premier was also acting on behalf of OMG/BRB. (Defendant Greenwich's Response to Plaintiff's Local Rule 56.1 Statement ¶ 9.) However, there is no evidence to support this conclusory allegation. See Adams Aff. Exs. 1 4. This Court cannot deny plaintiff's motion for summary judgment based on defendant's unsupported conjecture that OMG/BRB participated in a scheme to defraud defendant. OMG/BRB was not m control of the information regarding the changes to the charter. Defendant could have obtained this information from Premier. However, there is no indication that defendant requested a copy of the Charter or made inquiries regarding any other possible changes to the Charter, even after it was advised of the changes in the amount and the obligee for the Bond. "The policy behind surety bonds is not to protect a surety from its own laziness or poorly considered decision." Cam-Ful Industries, 922 F.2d 156, 162. Furthermore, and more importantly, the changes to the Charter did not materially increase the defendant's risk and, thus, neither Premier nor OMG/BRB had knowledge of such facts as is required by the first prong of the test. Without such knowledge, there could not have been a scheme to defraud defendant.
There is also no basis to conclude that Premier was in breach of the Charter at the time defendant issued the Bond on May 25, 2000. Under the original Charter, Premier was not obligated to provide the refurbishment cost, deposit, and $5.2 million bond until delivery on May 28, 2000. "Where the contract is wholly executory, there must be some express and absolute refusal to perform, or some voluntary act on the part of the individual which renders it impossible for him to perform, in order to constitute an anticipatory breach for which an action will lie. . . ." Ga Nun v. Palmer, 202 N.Y. 483, 489 (1911). Reading the facts in a light most favorable to defendant, there is no basis for this Court to conclude that there was an express and absolute refusal to perform by Premier, but rather a renegotiation of the terms of performance as evidenced by the addendums to the Charter executed on May 27, 2000.
Defendant alleges that it has no knowledge of when the vessel was actually delivered, the date and amount of any hire payments that were made, or the date the vessel was withdrawn. (Defendant Greenwich's Response to Plaintiff's Local Rule 56.1 Statement ¶¶ 10, 13, 16.) However, defendant has proffered no evidence to infer that the delivery and withdrawal of the vessel did not occur on the dates indicated by BRB or that BRB's calculation of the amount in arrears is erroneous. Defendant is required to pay plaintiff in the amount of $1,000,000 under the Bond upon plaintiff's submission of proper documentation to support its calculation of the amount owed by Premier.
For the foregoing reasons, plaintiff's motion for summary judgment is granted and defendant's cross-motion for summary judgment is denied.