Capital One Taxi Medallion Finance, Respondent,v.Patton R. Corrigan et al., Appellants.BriefN.Y.October 11, 2018To Be Argued By: ROBERT S. SMITH Time Requested: 20 Minutes APL-2017-00190 New York County Clerk’s Index No. 651841/15 Court of Appeals STATE OF NEW YORK CAPITAL ONE TAXI MEDALLION FINANCE, Plaintiff-Respondent, —against— PATTON R. CORRIGAN and MICHAEL LEVINE, Defendants-Appellants. REPLY BRIEF FOR DEFENDANTS-APPELLANTS d ROBERT S. SMITH NORA BOJAR FRIEDMAN KAPLAN SEILER & ADELMAN LLP 7 Times Square New York, New York 10036 Telephone: (212) 833-1100 Facsimile: (212) 833-1250 rsmith@fklaw.com STEVEN F. MOLO ROBERT K. KRY MICHELLE J. PARTHUM MOLOLAMKEN LLP 430 Park Avenue New York, New York 10022 Telephone: (212) 607-8160 Facsimile: (212) 607-8161 rkry@mololamken.com Attorneys for Defendants-AppellantsFebruary 12, 2018 i 3330671.1 STATUS OF RELATED LITIGATION This action is related to Transit Funding Associates LLC v. Capital One Equipment Finance Corp., Index No. 652346/2015, pending in Supreme Court, New York County. Plaintiffs in that litigation include Patton R. Corrigan and Michael Levine, the defendants-appellants in this appeal, and one of the defendants in that litigation is the plaintiff-respondent in this appeal. Corrigan and Levine assert a claim for negligent impairment of collateral. Capital One in 652346/2015 asserts counterclaims for breach of contract, conversion and replevin. ii 3330671.1 TABLE OF CONTENTS Page PRELIMINARY STATEMENT ............................................................................ 1 ARGUMENT ............................................................................................................ 1 I. CAPITAL ONE OFFERS NO ANSWER TO THE GUARANTORS’ MAIN ARGUMENT ............................................ 1 II. THE EXPRESS EXCEPTION IN THE GUARANTIES PROVIDES AN INDEPENDENT GROUND FOR DENYING SUMMARY JUDGMENT .............................................. 6 CONCLUSION ....................................................................................................... 11 CERTIFICATE OF COMPLIANCE .................................................................. 12 iii 3330671.1 TABLE OF AUTHORITIES Page(s) Cases Allied Irish Banks, PLC v. Young Men’s Christian Ass’n of Greenwich, 36 Misc. 3d 216, 944 N.Y.S.2d 828 (Sup. Ct. 2012) ........................................... 5 Barclays Bank of New York, N.A. v. Heady Elec. Co., 174 A.D.2d 963 (3d Dep’t 1991) .................................................................. passim Capital One Equip. Fin. Corp. v. Corrigan, et al., No. 653726/2016 (Sup. Ct. N.Y. Cnty.), Docket Nos. 103 and 104 .................. 11 Equator Int’l, Inc. v. NH St. Inv’rs, Inc., 43 Misc. 3d 251, 978 N.Y.S.2d 817 (N.Y. Sup. 2014) ........................................ 5 FDIC v. Frank L. Marino Corp., 74 A.D.2d 620 (2d Dep’t 1980) ................................................................ 2, 3, 4, 7 Graubard Mollen Dannett & Horowitz v. Moskovitz, 204 A.D.2d 218 (1st Dep’t 1994), aff’d, 86 N.Y.2d 112 (1995) .......................... 8 Ill. McGraw Elec. Co. v. John J. Walters, Inc., 7 N.Y.2d 874 (1959) ............................................................................................. 8 National Management Corp. v. Adolfi, 277 A.D.2d 553 (3d Dep’t 2000) ........................................................................ 10 NatWest Bank v. Grauberd, 228 A.D.2d 337 (1st Dep’t 1996) ............................................................. 2, 3, 4, 7 New Netherlands Bank of New York v. Dernberg, 206 A.D. 212 (1st Dep’t 1923) ................................................................. 2, 4, 5, 7 Persichilli v. Metro. Paper Recycling Inc., 30 Misc. 3d 1227(A), 926 N.Y.S.2d 346 (Sup. Ct. 2010) .................................... 5 Pronti v. Grigoriou, 49 A.D.3d 1135 (3d Dep’t 2008) .......................................................................... 8 iv 3330671.1 Rhinebeck Savings Bank v. Putnam County Temple & Jewish Center, 87 A.D.3d 1125 (2 Dep’t 2011) .......................................................................... 10 River Bank America v. Daniel Equities Corp., 205 A.D.2d 476 (1st Dep’t 1994) ....................................................................... 10 Transit Funding Associates LLC v. Capital One Equipment Finance Corp., Index No. 652346/2015 ......................................................................................... i Weindorf v. Wrightman, 133 A.D.3d 822 (2d Dep’t 2015) ........................................................................ 10 Yoi-Lee Realty Corp. v. 177th St. Realty Assocs., 208 A.D.2d 185 (1st Dep’t 1995) ....................................................................... 10 Statutes UCC § 9-207 .............................................................................................................. 7 Other Authorities CPLR 3212 ............................................................................................................. 5, 8 CPLR 3213 ............................................................................................................. 5, 9 3330671.1 PRELIMINARY STATEMENT Capital One1 is trying to get summary judgment before Supreme Court can decide a critical, disputed factual issue: Did Capital One create the injury for which it sues by negligently destroying the value of the collateral it was holding? If it succeeds, Capital One will be able to levy on the guarantors’ assets despite its misconduct, thus perhaps rendering the guarantors unable to litigate and ensuring that the issue will never be decided. To achieve this unfair result, Capital One does its best to avoid discussing the controlling rule of New York law: that negligent impairment of collateral is a non-waivable defense in an action on a guaranty. But Capital One cannot make the rule disappear by ignoring it. The order of the Appellate Division should be reversed. ARGUMENT I.CAPITAL ONE OFFERS NO ANSWER TO THE GUARANTORS’ MAIN ARGUMENT Our main brief starts by saying that the Appellate Division decision has ignored “clear and well-settled law”. Brief for Defendants-Appellants (“Guarantors’ Br.”) at 1. We summarize and cite “[a] line of cases stretching back almost a century, including decisions from three Appellate Division Departments,” 1 Capitalized terms have the same meaning in our opening brief. 2 3330671.1 supporting our position. Id. at 2. The first point in our argument discusses those cases, and others that reinforce our argument. Id. at 13-21. Those cases establish that: (1) “any improper dealing with collateral deposited to secure an indebtedness guaranteed by another is available to the guarantor as a defense” (New Netherlands Bank of New York v. Dernberg, 206 A.D. 212, 213 (1st Dep’t 1923) (emphasis added); see also Barclays Bank of New York, N.A. v. Heady Elec. Co., 174 A.D.2d 963, 965-66 (3d Dep’t 1991) (denying summary judgment based on “affirmative defense” of impairment of collateral)); (2) such improper dealing – and specifically, a negligent refusal to liquidate the collateral on demand – bars a grant of summary judgment to the creditor (FDIC v. Frank L. Marino Corp., 74 A.D.2d 620, 620-21 (2d Dep’t 1980); see also NatWest Bank v. Grauberd, 228 A.D.2d 337, 337-38 (1st Dep’t 1996); Barclays, 174 A.D.2d at 965-66)); and (3) the negligent impairment defense is not waivable (id.). If Capital One had an answer to this argument – if we had misdescribed the cases, or if they were distinguishable, or bad law – that answer would be all over Capital One’s brief. But there is no answer, and Capital One therefore does its best to ignore the case law. The cases we have cited go unmentioned for the first two-thirds of Capital One’s 34-page brief, while Capital One makes the very arguments the cases reject: that the guarantors’ allegation of negligent impairment “cannot 3 3330671.1 constitute a defense” as distinct from a counterclaim (Brief for Plaintiff- Respondent (“Capital One Br.”) at 2) and that “the plain language of the Guaranties” establishes that Capital One is entitled to prevail (id. at 13). One would never know, from reading Capital One’s brief, that the courts have repeatedly, and in no uncertain terms, held that negligent impairment is a “defense” that precludes summary judgment for a guarantor – a defense that no contract language, however plain, can extinguish. When Capital One finally mentions the key cases, it does not say that they were incorrect or should not be followed. It simply does not acknowledge their plain import. Capital One brushes aside Marino, Barclays, NatWest and other cases establishing that the negligent impairment defense is not waivable with the assertion that “Capital One has never argued ‘waiver.’” Capital One Br. at 26. But the language of the guaranties cannot help Capital One unless the negligent impairment defense has been validly waived. In fact, the “defense” language in the guarantees on which the Appellate Division based its holding, and on which Capital One relies here, is an exception to a purported waiver. A145. If it is not arguing waiver, Capital One is wasting its breath in insisting that the “clear and unambiguous” language of the guaranties (Capital One Br. at 1) entitles it to summary judgment. 4 3330671.1 Capital One also ignores the broader importance of Marino, NatWest and Barclays. It is certainly true, as Capital One concedes, that those cases hold that negligent impairment claims cannot be waived. But they also hold that, where allegations of negligent impairment remain unresolved, summary judgment on a guaranty must be denied. See Frank L. Marino, 74 A.D.2d at 621 (“As the respondents have alleged a genuine issue of fact, the negligence of the bank and plaintiff in failing to liquidate the collateral after demand, summary judgment [on the guaranties] was properly denied.” (emphasis added)); NatWest, 228 A.D.2d at 337 (“Summary judgment [on the guaranties] should have been denied on the ground that triable issues of fact were raised as to the commercial reasonableness of plaintiff bank’s conduct regarding the preservation of its collateral . . . .” (emphasis added)); Barclays, 174 A.D.2d at 966 (similar). Capital One cannot avoid the express holdings of those cases simply by focusing on other parts of the opinions. New Netherlands established the basic rule, reaffirmed in later cases, that negligent impairment may be relied on by guarantors “as a defense” (206 A.D. at 213; see also Barclays, 174 A.D.2d at 965-66). Capital One does not even cite New Netherlands until page 29, and then does not mention its core holding. Capital One only says, cryptically, that the case “is inapplicable where, as here, the lender has no obligation to prove that it disposed of the collateral in a reasonable manner 5 3330671.1 in order to establish its prima facie claim for payment on a guaranty.” Capital One Br. at 29-30. That is a distinction that simply does not exist. The facts in New Netherlands are indistinguishable from the ones here: A creditor sued to collect on a guaranty, the guarantors defended by arguing that the creditor had improperly dealt with the collateral, and the court held the defense sufficient to prevent a judgment in the creditor’s favor. 206 A.D. at 212-13. Reasonable care in dealing with the collateral was no more an element of the plaintiff ’s prima facie case there than it is here. If Capital One’s position were correct, New Netherlands would have come out the other way.2 Capital One summarizes our argument in an exaggerated form: “Taken to its logical conclusion, Appellants’ argument is that any time a defaulted borrower asserts a claim for negligent impairment seeking money damages against a lender, that claim should constitute a ‘defense’ sufficient to defeat a motion for summary judgment made pursuant to CPLR 3213 against a guarantor of payment.” Capital One Br. at 22-23. Of course, we do not suggest that a party who merely 2 In a footnote, Capital One also tries to distinguish New Netherlands by saying that it was decided before the enactment of CPLR 3213. Capital One Br. at 30 n.10. But it is well established that the summary judgment standard is the same under CPLR 3213 as under CPLR 3212. See Equator Int’l, Inc. v. NH St. Inv’rs, Inc., 43 Misc. 3d 251, 256, 978 N.Y.S.2d 817, 821 (N.Y. Sup. 2014); Allied Irish Banks, PLC v. Young Men’s Christian Ass’n of Greenwich, 36 Misc. 3d 216, 222, 944 N.Y.S.2d 828, 833 (Sup. Ct. 2012), aff’d, 105 A.D.3d 516, 961 N.Y.S.2d 920 (2013); Persichilli v. Metro. Paper Recycling Inc., 30 Misc. 3d 1227(A), 926 N.Y.S.2d 346 (Sup. Ct. 2010). 6 3330671.1 “asserts” a claim with no proof can defeat summary judgment. Here, however, the guarantors offered powerful proof of negligent impairment. See Guarantors’ Br. at 7-9. They submitted 29 pages of factual affidavits and 38 exhibits. A38-291. Supreme Court reviewed this evidence, found a “triable issue of fact”, and denied summary judgment on the guaranties. A19. It also denied a motion to dismiss the negligent impairment claim in the TFA Action, and Capital One took no appeal from that denial. We do not hesitate to adopt the argument Capital One attributes to us, restated to eliminate the exaggeration: A viable negligent impairment claim – one substantial enough to avoid summary judgment – will defeat a creditor’s motion for summary judgment against a guarantor. That is a correct statement of the law, as the cases squarely hold. That simple and uncontestable proposition is enough, without more, to require reversal of the Appellate Division’s order. II.THE EXPRESS EXCEPTION IN THE GUARANTIES PROVIDES AN INDEPENDENT GROUND FOR DENYING SUMMARY JUDGMENT The language of the guaranties is irrelevant here. The guarantors’ negligent impairment defense is unwaivable, and therefore the guarantors may assert that defense whatever the guaranties say. But, as we have argued, the text of the guaranties furnishes an independent reason why Capital One is not entitled to summary judgment. Guarantors’ Br. at 21-23. Capital One’s response rests on strained and indefensible interpretations of the guaranties’ language. 7 3330671.1 The guaranties – drafted by Capital One – are more favorable to the guarantors than many similar documents. Contrary to Capital One’s assertions, these guaranties are not “unconditional”. They make an express exception to the provision that the guarantors’ liability is not “limited or impaired by … the invalidity, irregularity or unenforceability” of the loan documents. The exception exists “to the extent that there is a final adjudication … of a valid defense to Borrower’s obligations”. Capital One focuses on the words “defense” and “final adjudication”, but in each case its argument is ill-founded. In asserting that negligent impairment is not a “defense” but a “counterclaim”, Capital One ignores the express statements in New Netherlands and elsewhere that it is a “defense” (206 A.D. at 213; Barclays, 174 A.D.2d at 965- 66, upholding “affirmative defense” based on UCC § 9-207, which provides for a duty of reasonable care in preservation of collateral). Capital One also ignores cases that, while not explicitly using the term defense, nevertheless treat negligent impairment as a defense by relying on it to deny summary judgment for the plaintiff. NatWest, 228 A.D.2d at 337-38 (denying summary judgment to creditor based on “triable issues” as to negligence in the preservation of collateral, without using either label, “defense” or “counterclaim”); Frank L. Marino, 74 A.D.2d at 621 (denying summary judgment on guaranty based on “viable setoff or counterclaim” asserting negligence in failing to liquidate collateral); see also 8 3330671.1 Barclays, 174 A.D.2d at 965-66 (referring to “viable setoff or counterclaim” and then upholding “affirmative defense”). In short, the courts, whether using the word “defense” or “counterclaim” or neither or both, consistently treat negligent impairment as a defense by denying summary judgment to creditors where allegations of negligent impairment remain unresolved. This is a sound rule. It would be unfair and contrary to common sense to give summary judgment to Capital One for the full amount of its claim, and later to decide that the claim is wholly or partly extinguished by Capital One’s negligence in allowing the collateral to lose its value. See Guarantors’ Br. at 22-23. As Justice Scarpulla put it during oral argument at Supreme Court: “It makes no sense to say . . . pay up the loan . . . and give it back in the event I find that you violated the loan agreement and the money isn’t due.” Transcript of hearing, January 21, 2016 at 28.3 3 Moreover, even if negligent impairment of collateral were only a counterclaim and not a defense, Supreme Court was well within its discretion to deny summary judgment while that counterclaim remained pending. See Ill. McGraw Elec. Co. v. John J. Walters, Inc., 7 N.Y.2d 874, 876-77 (1959) (noting the “well-established rule that it is improper to award summary judgment while there exists a meritorious counterclaim for an amount equal to or greater than that demanded in the complaint”); Pronti v. Grigoriou, 49 A.D.3d 1135, 1135-36 (3d Dep’t 2008) (same); Graubard Mollen Dannett & Horowitz v. Moskovitz, 204 A.D.2d 218, 219 (1st Dep’t 1994) (same), aff’d, 86 N.Y.2d 112 (1995). The very fact that the CPLR permits (but does not require) a trial court to sever a counterclaim upon granting summary judgment on the principal claim implies that, absent severance, there is no automatic right to judgment while the counterclaim remains pending. See CPLR 3212(e)(2). 9 3330671.1 Nor is there merit to Capital One’s argument (not adopted by the Appellate Division) that the term “final adjudication” in the exception clause of the guaranties entitles it to prevail. As Supreme Court said, “‘a valid defense to the Borrower’s obligations under the Loan documents to payment of its liabilities’ is what is being determined in the TFA Action.” A19. Supreme Court properly decided to withhold summary judgment until the TFA Action was resolved and the extent of the liability, if any, was finally adjudicated. According to Capital One, it is entitled to summary judgment against the guarantors unless the borrower, TFA, has already obtained a “final adjudication” that there is “a valid defense to the Borrower’s obligations”. In other words, Capital One reads the phrase to require TFA to defeat Capital One in a race to judgment. But the availability of simplified proceedings for accelerated judgment on a guaranty under CPLR 3213 would make this a race that Capital One would always win. There would be virtually no way that the borrower could obtain a “final adjudication” on the impairment claim in a plenary action before the CPLR 3213 simplified proceeding for accelerated judgment was resolved. If the exception had the meaning that Capital One attributes to it, there was no reason to include it in the guaranties. Supreme Court’s obviously sensible decision was amply justified by the close relationship between the two cases. Courts have repeatedly held that 10 3330671.1 summary judgment on a financial instrument is improper where the defendant asserts a claim based on a related contract that is “intertwined” or “interwoven” with the principal claim. See, e.g., Yoi-Lee Realty Corp. v. 177th St. Realty Assocs., 208 A.D.2d 185, 190 (1st Dep’t 1995) (denying summary judgment on mortgage note because defendant asserted counterclaims on other contracts “emanating from a single, albeit complex, transaction”); River Bank America v. Daniel Equities Corp., 205 A.D.2d 476 (1st Dep’t 1994) (summary judgment on note and guaranty denied because the defendants had a claim against plaintiffs under an agreement relating to the same project); Weindorf v. Wrightman, 133 A.D.3d 822 (2d Dep’t 2015) (issue “as to whether plaintiff breached an asset purchase agreement that was intertwined with the promissory note”); National Management Corp. v. Adolfi, 277 A.D.2d 553, 554-55 (3d Dep’t 2000) (stay of foreclosure action justified by pendency of an action by defendants against plaintiff, a judgment in which “would at the very least serve as a set off” against recovery in the foreclosure); Rhinebeck Savings Bank v. Putnam County Temple & Jewish Center, 87 A.D.3d 1125 (2 Dep’t 2011) (foreclosure action stayed pending separate action challenging validity of mortgages). That is the situation here: The express exception in the guaranties links the guarantors’ liability to the negligent impairment defense, and that is no less true merely because the court must “finally adjudicate” that defense to determine the extent of the guarantors’ liability.4 Supreme Court was correct in holding that the exception in the guaranties is a valid reason for denying summary judgment to Capital One. CONCLUSION The judgment appealed from and the order of the Appellate Division brought up for review should be reversed, and Supreme Court’s order denying Capital One’s motion for summary judgment should be reinstated. February 12, 2018 New York, New York Respectfully submitted, lA/J Steven F. Molo Robert K. Kry Michelle J. Parthum MOLO LAMKEN LLP 430 Park Ave. New York, New York 10022 (212) 607-8160 Robert S. Smith FRIEDMAN KAPLAN SEILER & ADELMAN LLP 7 Times Square New York, New York 10036 (212) 833-1100 Attorneys for Defendants-Appellants Patton R. Corrigan and Michael Levine 4 In discussing this issue, Capital One mentions, gratuitously, that it has asserted fraudulent conveyance claims against the guarantors and others. Capital One Br. at 22 n.6. What Capital One fails to mention is that the claims have already been dismissed in their entirety as to Corrigan, and in large part as to Levine also. See Capital One Equip. Fin. Corp. v. Corrigan, et al,No. 653726/2016 (Sup. Ct. N.Y. Cnty.), Docket Nos. 103 and 104. 11 3330671.1 CERTIFICATE OF COMPLIANCE I hereby certify pursuant to 22 NYCRR §500.13(c) that this brief was prepared on a computer. A proportionally spaced typeface was used as follows: Name of typeface: Times New Roman Point size: 14 Line spacing: Double The total number of words in the brief, inclusive of point headings and footnotes and exclusive of pages containing the status of related litigation, the corporate disclosure statement, the table of contents, the table of cases and authorities, the statement of questions presented, and any addendum containing material required by subsection 500.1(h) is 2674. i- (SDated: February 12,2018 Robert S. Smith 12 3330671.1