PAF-PAR LLC, Appellant,v.Michael Silberberg, et al., Respondents.BriefN.Y.February 18, 2016To be Argued by: VINCENT J. SYRACUSE (Time Requested: 15 Minutes) APL-2014-00309 New York County Clerk’s Index No. 652243/12 Court of Appeals of the State of New York PAF-PAR LLC, Plaintiff-Appellant, – against – MICHAEL SILBERBERG and BEREL KARNIOL, Defendants-Respondents. BRIEF FOR DEFENDANTS-RESPONDENTS TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT LLP 900 Third Avenue New York, New York 10022 Tel.: (212) 508-6700 Fax: (212) 371-1084 – and – STAHL & ZELMANOVITZ 747 Third Avenue, Suite 33B New York, New York 10017 Tel.: (212) 826-6422 Fax: (212) 826-6402 Attorneys for Defendants-Respondents Date Completed: May 5, 2015 i TABLE OF CONTENTS TABLE OF CONTENTS ........................................................................................... i TABLE OF AUTHORITIES ................................................................................... iii COUNTERSTATEMENT OF THE QUESTIONS PRESENTED ........................... 1 PRELIMINARY STATEMENT ............................................................................... 2 COUNTERSTATEMENT OF THE FACTS ............................................................ 8 A. The Loan Documents and the Guaranty .......................................................... 8 B. The Loan’s Principal is Reduced by $1 Million .............................................. 9 C. The Loan Was Modified .................................................................................. 9 D. Appellant Issues a Payoff Letter Reflecting the Modified Loan Amount .....11 E. The Loan Was Paid in Full and Assigned to Another Entity ........................12 F. This Action ....................................................................................................14 G. The Trial Court’s Decision ............................................................................14 H. The First Department’s Affirmance ..............................................................16 ARGUMENT ...........................................................................................................18 I. THIS ACTION WAS PROPERLY DISMISSED BECAUSE APPELLANT FAILED TO ESTABLISH ITS PRIMA FACIE CASE TO COLLECT UNDER THE GUARANTY ....................................18 A. Appellant Fails to Establish Its Prima Facie Case ....................................18 1. There Was No Longer Any Debt Subject To The Guaranty Because The Borrowers Paid the Underlying Debt Owed In Full ......18 2. There Was No Default By the Primary Obligor..................................20 ii B. The Use of the Words “Absolute and Unconditional”, “Joint and Several” and “Primary Obligors” Does Not As a Matter of Law Convert the Guaranty, a Contract of Secondary Liability, Into One of Primary Obligation .......................................................................22 C. The Cases Cited by Appellant Are Inapposite .........................................26 II. THE EXPRESS TERMS OF THE LOAN DOCUMENTS REQUIRED DISMISSAL OF THIS ACTION ..................................................................29 A. The Guaranty Guaranteed the Borrower’s Obligations Under the Loan Documents, as Modified, Not $13 Million .....................................30 B. The Modification Agreement Substituted the Old Loan Amount with a New Obligation; Such Modification Was Expressly Approved by Respondents ........................................................................32 C. Appellant’s Payoff Letter and Other Contemporaneous Conduct Confirm that the Underlying Debt was Satisfied and Extinguished ........36 D. The Modification Agreement Constituted An Executory Accord That Was Satisfied With the Payment of the Payoff Amount .................38 III. THE WAIVER OF DEFENSES AND DISCLAIMER LANGUAGE CONTAINED IN THE GUARANTY DO NOT APPLY WHEN THE UNDERLYING DEBT WAS PAID IN FULL .............................................40 IV. FINALLY, THIS ACTION WAS PROPERLY DISMISSED BECAUSE APPELLANT LACKS STANDING .........................................44 A. Appellant Presented No Proof That the Guaranty Had Been Validly Assigned to It ...............................................................................45 B. Appellant Assigned Away Its Interest ......................................................46 CONCLUSION ........................................................................................................48 iii TABLE OF AUTHORITIES Cases 4 USS LLC v. DSW MS LLC, 120 A.D.3d 1049 (1st Dep’t 2014) ........... 7, 27-28, 35 665-75 Eleventh Ave. Realty Corp. v. Schlanger, 265 A.D.2d 270 (1st Dep’t 1999) .........................................................................34 Arlona Ltd. Partnership v. 8th of Jan. Corp., 50 A.D.3d 933 (2d Dep’t 2008) ......35 Bank of N. Y. v. Silverberg, 86 A.D.3d 274 (2d Dep’t 2011) ..................................45 Becker v. Faber, 280 N. Y. 146 (1939) ...................................................................34 Bier Pension Plan Trust v. Estate of Schneierson, 74 N.Y.2d 312 (1989) ..................................................................................... 33-34 Chem. Bank v. Meltzer, 93 N.Y.2d 296 (1999) ............................................... passim Citibank (S.D.), N.A. v. Martin, 11 Misc. 3d 219 (Civ. Ct. N.Y. County 2005) ............................................... 45-46 Citicorp USA, Inc. v. PM Holdings, LLC, 29 A.D.3d 363 (1st Dep’t 2006) ...........27 Compagnie Financiere de Cic et de L’Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 188 F.3d 31 (2d Cir. 1999) ...............................................42 Congregation Chachmei Sefarad v. Dickman, 198 A.D.2d 395 (2d Dep’t 1993) .........................................................................39 Congregation Ohavei Shalom v. Comyns Bros., Inc., 123 A.D.2d 656 (2d Dep’t 1986) .........................................................................35 Diehl v. Levine, 2008 NY Slip Op 31662(U), 2008 N.Y. Misc. LEXIS 9653 (Sup. Ct. Nassau County June 12, 2008) ............45 Estate of Broche v. Tai, 98 A.D.3d 601 (2d Dep’t 2012) ........................................21 iv First Am. Bank v. Builders Funding Corp., 200 A.D.2d 946 (3d Dep’t 1994) .................................................................. 27, 41 GE Capital Mortgage Servs., Inc. v. Pinnacle Mortgage Inv. Corp., 897 F. Supp. 842 (E.D. Pa. 1995) .................................................. 21, 25-26, 40-41 Gen. Phoenix Corp. v. Cabot, 300 N.Y. 87 (1949) .................................... 17, 18, 20 H.H. & F.E. Bean, Inc. v. Travelers Indemnity Co., 67 A.D.2d 1102 (4th Dep’t1979) .........................................................................19 Hirsch v Berger Import & Mfg. Corp., 67 A.D.2d 30 (1st Dep’t 1979)..................39 Inland Credit Corp. v. Weiss, 63 A.D.2d 640 (1st Dep’t 1978) ........................ 28-29 J.C. Studios, LLC v. Telenext Media, Inc., 32 Misc. 3d 1211(A), 2011 WL 2651857 (Sup. Ct. Kings County July 6, 2011) ................. 18-19, 20, 43 Jacobson v. Sassower, 66 N.Y.2d 991 (1985) .........................................................36 James McKinney & Son, Inc. v. Lake Placid 1980 Olympic Games, Inc., 61 N.Y.2d 836 (1984) ...........................................................................................45 Laba v. Carey, 29 N.Y.2d 302 (1971) .....................................................................31 Mackler v. Burke, 2 A.D.3d 505, 505-06 (2d Dep’t 2003) ......................................35 Madison Ave. Leasehold, LLC v. Madison Bentley Assoc., LLC, 8 N.Y.3d 59 (2006) ...............................................................................................40 Midland Steel Warehouse Corp. v. Godinger Silver Art Ltd., 276 A.D.2d 341 (1st Dep’t 2000) .........................................................................20 Midwest Corp. v. Global Cable, Inc., 688 F. Supp. 872 (S.D.N.Y 1988) ........................................................... 19, 26, 43 Nationwide Registry & Sec. v. B&R Consultants, 4 A.D.3d 298 (1st Dep’t 2004) .............................................................................39 v Pro-Specialities, Inc. v. Thomas Funding Corp., 812 F.2d 797 (2d Cir. 1987) .................................................................................26 Red Tulip, LLC v. Neiva, 44 A.D.3d 204 (1st Dep’t 2007) .....................................41 Rockland Lease Funding Corp. v. Waste Mgmt. of N.Y., Inc., 245 A.D.2d 779 (3d Dep’t 1997) .........................................................................45 Simon v. Landau, 27 Misc. 2d 269 (Sup. Ct. Queens County 1960) .............................. 24-25, 26, 44 Slatt v. Slatt, 64 N.Y.2d 966 (1985) .........................................................................29 Sweeters v. Hodges, 256 A.D.2d 185 (1st Dep’t 1998) ........................ 18, 20, 21, 43 TBS Enters. v. Grobe, 114 A.D.2d 445 (2d Dep’t 1985) .........................................30 Trustco Bank N.Y. v. Sage, 238 A.D.2d 839 (3d Dep’t 1997) .................................35 United Orient Bank v. Lee, 223 A.D.2d 500 (1st Dep’t 1996) ................................41 Walcutt v. Clevite Corp., 13 N.Y.2d 48 (1963) ............................................... passim Weismann v. Sinorum Deli, 88 N.Y.2d 437 (1996) .......................................... 17, 20 White Rose Food v. Saleh, 99 N.Y.2d 589 (2003) ................................ 33, 34, 35, 43 Statutes CPLR 3211 ...........................................................................................................1, 14 CPLR 3213 ........................................................................................................ 14, 45 N.Y. General Obligation Law § 15–501 ..................................................................39 N.Y. Real Property Law § 25.30 ..............................................................................37 N.Y. Real Property Law § 274-a .............................................................................37 Other Authorities 23 Williston on Contracts, § 61:31 (4th ed. 2013) ..................................................43 Defendants-Respondents Michael Silberberg (“Silberberg”) and Berel Karniol (“Respondents”) respectfully submit this brief in opposition to Plaintiff-Appellant Paf-Par LLC’s (“Appellant”) appeal to this Court from the Order of the Appellate Division, First Department, dated June 5, 2014, 118 A.D.3d 446 (1st Dep’t 2014) (the “Order”) (R. 274-76) 1 , which unanimously affirmed the Decision and Order of Justice Jeffrey K. Oing, dated March 20, 2013, and entered on March 26, 2013, that denied Appellant’s motion for summary judgment and granted Respondents’ cross-motion to dismiss this action pursuant to CPLR 3211(a)(1), (3) and (7). COUNTERSTATEMENT OF THE QUESTIONS PRESENTED 1. Whether the First Department correctly affirmed the dismissal of this action finding that Respondents’ obligations under the guaranty were extinguished because they had guaranteed the payment of the borrowers’ obligations under the loan documents -- not any specific loan amount -- and the primary obligors later fully satisfied their obligations to the lender in accordance with the payoff letter issued by Appellant? It is respectfully submitted that this Court should answer this question in the affirmative, and should affirm the Order of the First Department. 1 Unless otherwise indicated, numbers preceded by “R.” refer to the pages of the Record on Appeal. 2 2. Whether the First Department properly affirmed the dismissal of this action for the separate reason that Appellant failed to establish standing to sue under Respondents’ guaranty? It is respectfully submitted that this Court should answer this question in the affirmative, and should affirm the Decision of the First Department. PRELIMINARY STATEMENT In this action, Appellant seeks to enforce Respondents’ guaranty of the payment and performance of the borrowers’ obligations under the loan documents that are before this Court, notwithstanding the fact that it is undisputed that the primary obligors’ obligations were modified, and thereafter satisfied in full. Both the trial court and First Department correctly determined that the claim against Respondents has absolutely no merit; put bluntly, Appellant’s claims are nothing more than a post-facto fabrication by Appellant – which in hindsight has second thoughts about the deal it struck with Respondents – designed to wrongfully extract money from Respondents when in fact nothing is owed and, as shown below, Appellant does not even have standing to pursue its claims. The modification of the underlying debt has to be placed in its proper context. At the height of the 2009 financial crisis, Respondents’ request for an extension on the underlying loan was answered by an offer from Appellant—which was having 3 financial problems—to reduce the principal amount due on the loan by $2 million in exchange for a quick pay-off by the borrowers. Respondents, who were the principals of the borrowers, accepted Appellant’s offer and immediately made plans to pay off the loan at a discount. The loan documents were modified accordingly to reflect the parties’ agreement. Respondents duly complied with their end of the bargain; in accordance with the terms of the modified loan agreement and Appellant’s own payoff letter, the underlying debt (as modified) was paid in full and the loan debt was extinguished. Then, almost three years after the loan was paid off, Appellant presumably began second-guessing the deal it made, and commenced this litigation against Respondents. Despite the fact that the primary obligors’ underlying obligations under the modified promissory note were fully satisfied, Appellant expects this Court to hold that Respondents are nevertheless responsible to pay the $2 million that it discounted, arguing that the modification agreement was not really a modification of the loan documents (even though Appellant drafted it as such) but was a “release” solely with respect to the borrowers. Moreover, Appellant argues that certain language contained in the guaranty prevented Respondents’ obligations under the guaranty from being reduced or modified alongside those of the 4 borrowers, and somehow elevated Respondents from guarantors with only secondary liability to primary obligors. Appellant’s arguments are entirely inconsistent with the law, and the parties’ agreement, intent and conduct. Several material facts omitted from Appellant’s analysis demonstrate the fatal flaws in its arguments: (1) Contrary to Appellant’s suggestion, the subject guaranty does not guarantee the payment of any specific dollar amount–not the $13 million that was originally loaned and not the $10 million which the parties later agreed upon ($1 million was paid down on the loan prior to the modification resulting in a balance of $12 million). It guarantees the payment of “Guaranteed Obligations,” which are defined as the borrowers’ obligations under the loan documents. The loan documents, in turn, explicitly include any modified promissory note. Here, the promissory note was modified from a principal balance of $12 million to a principal balance of $10 million, and the $10 million was paid in full by the borrowers; (2) The plain language of the modification agreement and other documents drafted by Appellant unequivocally show that the modification agreement was not simply a “release” of the borrower’s obligations, it was a “modification” of the “indebtedness under the [Promissory] Note” (R. 66 at ¶ 5). Indeed, Appellant issued a payoff letter, which set forth the precise amount needed 5 to pay off the loan in full (R. 243), and also sent Respondents correspondence that described payment of the modified promissory note as a payoff of the loan “in full” (R. 232) -- not a settlement reached with the borrowers or a release of borrowers’ obligations as Appellant now contends; (3) The primary obligors are not in default of their underlying loan obligations; any technical default under the loan documents was cured by the modification of the loan, and payoff of the modified loan amount; and (4) Appellant’s conduct, immediately after the loan was paid off, shows that it understood that no further money was owed under the Loan: it assigned the promissory note and other loan/security documents from Appellant to an unrelated third-party, at Respondents’ insistence; 2 it released in excess of $300,000 that it held in escrow to Respondents; and it released the lien it held on Respondent Silberberg’s home. If $2 million was still owed on the guaranty (despite the payoff letter and its payment in full), Appellant surely would not have taken these steps. Given these undisputed facts, Appellant has no basis now to claim any rights under the guaranty. In sum, Appellant has no answer to the fact that the loan has 2 As discussed infra at 44-46, Appellant had no ownership interest in the guaranty when it commenced this action, having assigned it along with the other loan documents to a third-party. And, as the First Department found, Appellant never proffered any evidence of the assignment of the loan documents to it from the original creditor, another factor pointing to Appellant’s lack of standing. 6 been fully paid off pursuant to the terms of the parties’ modification agreement and as instructed by Appellant’s own payoff letter, and that there was never a default under the modified loan agreement. Consequently, there can be no liability under the guaranty signed by Respondents. While Appellant obviously tries to paint a different picture in its appeal, there was nothing extraordinary about the trial court’s dismissal of this action or the First Department’s affirmance: no novel principles of law were presented and the courts applied well-established precedent holding that Appellant could not establish a prima facie case to collect under the guaranty because (1) no money was owed to Appellant, and (2) as a result, there was no default that would trigger liability under the guaranty. Although Appellant, to be sure, may now be unhappy with the deal it made several years ago, it is basic law that a guarantor does not owe anything if the underlying primary obligation has been satisfied. Moreover, because Appellant failed to establish a prima facie case, its reliance on the disclaimers and waiver of defenses in the guaranty is unavailing. It is well-settled that those provisions preclude the guarantor from asserting all defenses, except a basic one: actual payment of the debt and performance in full by the primary obligor, which is exactly what occurred here. 7 Appellant mistakenly relies on the provisions in the guaranty that provide that it is unaffected by the “release” or “modification” of the underlying debt. These provisions do not apply when the underlying debt is paid and do not support the conclusion that, notwithstanding the payoff of the debt, the guarantor remains liable. Commercial law would be turned on its head if one could still collect on a guaranty even if the underlying debt were paid in full. 4 USS LLC v. DSW MS LLC, 120 A.D.3d 1049 (1st Dep’t 2014), the case which Appellant contends created an intra-department conflict in the First Department, is consistent with the decisions in this case. The First Department’s holding in 4 USS LLC’s represents nothing new as far as the law pertaining to guaranties is concerned, and nevertheless dealt with the exact opposite issue involved here. Where the debt was modified, approved by the guarantors, and thereafter fully paid off, as in our case, and there was no default under the modified loan documents, as in our case, there can be no action on the guaranty. For the foregoing reasons and those set forth below, the First Department and the trial court properly denied Appellant’s motion for summary judgment, and granted Respondents’ cross-motion to dismiss this action. This Court should affirm the Order. 8 COUNTERSTATEMENT OF THE FACTS A. The Loan Documents and the Guaranty In July 2006, various entities controlled by Respondents executed a promissory note (the “Promissory Note”), mortgage and related documents (collectively, the “Loan Documents”) in favor of CAD Funding, LLC (“CAD”) to evidence a $13 million loan from CAD to Respondents’ business entities (the “Loan”). R. 80 (Silberberg Aff. ¶ 4); R. 88-228. As further security for the Loan, Respondents executed a guaranty dated July 14, 2006 (the “Guaranty”), which guaranteed “the payment and performance of the Guaranteed Obligations as and when the same shall be due and payable.” R. 47 (§ 1.1). The “Guaranteed Obligations” are defined in Section 1.2 of the Guaranty as the “Borrower’s obligations under the Loan Documents.” R. 48 (§ 1.2). The term “Loan Documents” is defined in the “Security Instrument” securing the loan (R. 47 [Recital A]), as including the Security Instrument, the Promissory Note and all other agreements, instruments, certificates or documents executed by the Borrowers in connection with the Loan. R. 124. In its Recital A, the Guaranty expressly defines the Promissory Note to include any modifications thereof. R. 47. Thus, by its express terms, the Guaranty covers any modified promissory note. 9 B. The Loan’s Principal is Reduced by $1 Million In December 2008, one of the properties secured by the mortgage was sold. The borrowers used one million of the sale proceeds to pay CAD, which in turn released the property from the mortgage lien and reduced the outstanding principal on the Loan to $12 million. R. 80 (Silberberg Aff. ¶ 6), R. 229. Sometime thereafter, CAD allegedly assigned the Loan to Appellant. 3 C. The Loan Was Modified The Loan was due to mature in July 2009. In recognition of the drastic collapse of the real estate financing markets which would make it difficult to refinance the Loan, Respondents contacted Appellant prior to that time, by letter dated April 28, 2009, to discuss a possible extension of the Loan. R. 81 (Silberberg Aff. ¶ 8), R. 230-231. Respondents’ request for an extension had a favorable reception. 4 R. 81 (Silberberg Aff. ¶¶ 9-10). At a meeting between the parties, Appellant offered to modify the total principal owed under the Loan and suggested 3 Although the issue was raised before the trial court, Appellant never offered a single document proving that the Loan Documents were validly assigned to it--not on Appellant’s principal papers in support of its motion for summary judgment or in its reply papers. As discussed in Point IV infra, and as the First Department concluded, this fact alone required the denial of Appellant’s summary judgment motion, and dismissal of this action. 4 Respondents were also the principals and representatives of the borrowers. R. 80 (Silberberg Aff. ¶ 4). Therefore, any communications by the lender with the borrowers automatically meant that the communications were directed to the Respondents-guarantors. 10 reducing the amount owed to $10 million if Respondents could pay that amount quickly. 5 Id. (Silberberg Aff. ¶ 10). On July 17, 2009, Elliot Neumann, Appellant’s chief operating officer, memorialized the offer in an email to Respondent Silberberg, stating, inter alia, that Appellant would be willing to accept $10 million as “short pay of the loan in full.” R. 81 (Silberberg Aff. ¶ 9), 232. As it later became apparent, Appellant’s offer was precipitated by the financial troubles that Appellant was experiencing at the time. 6 Appellant desperately needed cash to create liquidity, and it asked Respondents to satisfy the Loan quickly in exchange for a $2 million discount. Id. (Silberberg Aff. ¶ 10), R. 233-240. Respondents accepted Appellant’s offer. And, on July 24, 2009, the parties executed a Loan Modification and Extension Agreement (“Modification Agreement”), which reduced the principal amount due under the Promissory Note from $12 million 7 to $10 million, provided that Respondents satisfied the Loan in 5 In Respondents’ experience, such modifications, where the lender would reduce the amount of principal due in exchange for a quick payoff, were not uncommon. R. 82 (Silberberg Aff. ¶ 14). 6 Indeed, shortly after the Loan was modified, Park Avenue Bank, a bank related to Appellant, failed and its chief executive officer was arrested. R. 81 (Silberberg Aff. ¶ 10); R. 233-240. 7 As mentioned above, Respondents had earlier paid $1 million, bringing the balance of the original $13 million loan down to $12 million. 11 full by August 31, 2009. 8 R. 82 (Silberberg Aff. ¶ 11); R. 65-71. As further security, Appellant requested and received a mortgage on Respondent Silberberg’s home as additional collateral for the borrowers’ performance under the Modification Agreement. R. 68 (¶ 13). Respondents consented to and approved the modification of the Loan. R. 71. At the signing of the Modification Agreement, Respondents made a $1 million payment which reduced the principal balance owed on the Loan to $9 million. R. 82 (Silberberg Aff. ¶ 11), R. 241; R. 65-66 (¶¶ 2, 4). The amount owed on the Loan was further reduced to $8 million when in August 2009, Respondents paid another $1 million and exercised an option under paragraph 4 of the Modification Agreement to extend the maturity on the modified Loan to September 30, 2009. R. 82 (Silberberg Aff. ¶¶ 12-13), R. 242. D. Appellant Issues a Payoff Letter Reflecting the Modified Loan Amount There was never a default on the modified Loan obligations. On or about September 25, 2009, Appellant gave borrowers a “payoff letter” which said that the principal owed on the Promissory Note as of September 2009 was $8 million (not 8 On or about July 21, 2009, Appellant sent the borrowers a purported default letter stating, inter alia, that the Loan had matured on July 15, 2009 and asking that the full payoff sum of the Loan be paid in full on or before August 3, 2009. See R. 62-63. The borrowers, however, were never in monetary default. Moreover, the letter did not reflect the parties’ ongoing discussions. R. 81 (Silberberg Aff. ¶ 9). Indeed, three days later, the parties entered into the Modification Agreement, which mooted the earlier default letter. R. 65-71. 12 $10 million) (the “Payoff Letter”). R. 243-244. In addition, the letter explicitly acknowledged that the amount necessary to “pay off” the Loan in full was $8,091,251.67. Id. at 243. The Payoff Letter, in relevant part, provides: Dear Borrower: Per your request, please be advised that the following amount is needed to pay off the above referenced loan: Principal Outstanding: $ 8,000,000.00 Accrued Interest: 9/15/2009- 9/30/2009 @ 6.7% $ 27,916.67 Current Due Fees: $ 3,335.00 Exit/Extension Fee: $ 60,000.00 Assignment Fee: (See Below) Total Payoff Payment: $ 8,091,251.67 Id. (emphasis added); R. 83 (Silberberg Aff. ¶ 15). Neither in the Modification Agreement, nor in the Payoff Letter or in any other document, did Appellant expressly reserve its rights to pursue claims against Respondents for the $2 million reduction of principal due under the Promissory Note. E. The Loan Was Paid in Full and Assigned to Another Entity On September 30, 2009, the borrowers complied with the terms of the Modification Agreement and Payoff Letter, and paid the full amount stated in the Payoff Letter, $8,091,251.67. R. 84 (Silberberg Aff. ¶ 17); R. 245. 13 It was always Respondents’ intent and understanding that the Guaranty would be extinguished upon the full payment of the modified Loan. R. 85 (Silberberg Aff. ¶ 20). Consistent with that understanding, prior to Respondents’ payment of the $8 million, they insisted that Appellant’s attorney confirm that it held all the Loan Documents for immediate assignment to Syracuse Retail Funding, LLC (“Syracuse Retail”), an entity unrelated to Appellant, upon Appellant’s receipt of the “payoff” amount. R. 85 (Silberberg Aff. ¶ 21); R. 257-258. In a letter, dated September 29, 2009, Appellant’s attorneys expressly acknowledged that all documents relating to the Loan, including all “collateral documents,” would be assigned to Respondents upon their payment of the $8 million. R. 257-59. Consistent with that agreement, upon receipt of the final payoff amount, Appellant assigned all of the Loan Documents to Syracuse Retail. R. 84 (Silberberg Aff. ¶ 18); R. 246-256. As stated in the Assignment of Mortgage, the assignment included all “notes or obligations described in said mortgage, and the monies due and to grow due thereon with the interest.” R. 247. There was no carve-out from the assignment for the Guaranty. R. 85 (Silberberg Aff. ¶ 21). Moreover, by its own conduct, Appellant expressly acknowledged that nothing was left owed on the Loan. Pursuant to the mortgage, Appellant held over $300,000 in escrow for the purpose of securing various operating and tax expenses 14 on the properties secured by the mortgage. In or about October 2009, after the $8 million was paid, Appellant released all of the money ($321,742.83) that it held in escrow to the borrowers. R. 85-86 [Silberberg Aff. ¶ 22]; R. 260-63. In addition, Appellant released the lien placed on Respondent Silberberg’s home. F. This Action On June 26, 2012, almost three years after the Loan was paid off, Appellant commenced this action against Respondents by serving and filing a motion for summary judgment in lieu of the complaint, pursuant to CPLR 3213, demanding that Respondents pay Appellant $2 million pursuant to the Guaranty. R. 38-46. Respondents cross-moved to dismiss the action, pursuant to CPLR 3211(a)(1), (3) and (7), on the grounds that: 1) the underlying loan obligation secured by the Guaranty had indisputably been satisfied in full; and 2) Appellant lacked standing to bring this claim because it (a) never provided any proof of the assignment from the original lender, CAD, to it, and (b) nevertheless was no longer a party to the Guaranty, having assigned all the loan documents – including the Guaranty – to Syracuse Retail. R. 72-87. G. The Trial Court’s Decision At the conclusion of oral argument on February 6, 2013, the trial court denied Appellant’s motion for summary judgment, and granted Respondents’ cross-motion 15 to dismiss Appellant’s action. R. 30-33. In concluding that Appellant’s claim for enforcement of the Guaranty failed as a matter of law, the court found that Appellant “cannot establish the existence of a debt for the very simple reason that the debt was discharged pursuant to the terms of the loan modification agreement, and payoff letter.” R. 30. The court reasoned that Appellant’s attempt to collect from Respondents, the guarantors, more than what is owed by the borrowers cannot be sustained, since it is axiomatic that a guarantor cannot owe more than the principal obligor. R. 30-31. In addition, the court found that Appellant failed to establish its prima facie case on the Guaranty because the principal obligors were not in default. R. 31. In arriving at that holding, the court explained that any initial default by the borrowers was remedied by the loan modification, and under the loan modification there was no default. Instead, the borrowers paid off the loan pursuant to the loan modification. Given there was no default, the court properly concluded that Respondents had no liability under the Guaranty. R. 32-33. Moreover, the trial court rejected Appellant’s argument that pursuant to the language contained in Section 1.3 and Article II of the Guaranty, the Guaranty could not be affected by any increase, decrease or modification to the borrowers’ Guaranteed Obligations, reasoning: 16 Specifically plaintiff relies on Section 1.2 (sic) of the original guarantee which states that it is irrevocable, absolute and continuing, and the fact that any time the guaranteed obligations may be increased or reduced shall not release or discharge the obligation of the guarantor to lender with respect to the guarantee obligations. This section plainly does not apply to the facts here where the guaranteed obligations were not merely reduced, but were discharged by way of the modification and by way of the borrower’s payment under the loan modification of $11 million. 9 Similarly, with respect to plaintiff’s argument, the defendants agree that their obligations would not be reduced or discharged under various circumstances outlined in Article 2 of the guarantee. That too is inapplicable since all of those provisions apply only to the guarantee (sic) obligations which is defined in the guarantee as all of borrower’s obligations under the loan documents which include the modifications. R. 32. H. The First Department’s Affirmance The First Department’s Order unanimously affirmed the trial court’s decision. R. 274-76. The court held that Appellant failed to make out a prima facie case since it could not show that Respondents failed to make a payment called for by the terms of their Guaranty. R. 275. In arriving at that holding, the First Department reasoned: 9 The $11 million number referenced in the trial court’s decision included $1 million that was paid by the debtor prior to the loan modification, and $10 million that was paid in satisfaction of its obligations under the Modification Agreement. 17 It is well settled that since a guaranty ‘is a contract of secondary liability . . . a guarantor will be required to make payment only when the primary obligor has first defaulted.’ Weismann v. Sinorum Deli, 88 N.Y.2d 437, 446 (1996). Here, there is no dispute that defendants guaranteed the payment of the borrower’s obligation under a promissory note, and that the borrower satisfied its obligations under the note, as modified by the Loan Modification and Extension Agreement signed by plaintiff. Nevertheless, plaintiff argues that despite the borrower’s full payment of the modified loan amount, the guaranty for the original loan amount is still enforceable because Article II of the guaranty states that it cannot be ‘. . . diminished, impaired, reduced or adversely affected by . . . [,]’ inter alia, modifications. However, as the Court below held, this language cannot operate to make the guarantor liable for more than what the primary obligor was obligated to pay and did pay. R. 274-75. Separate and apart from the fact that Loan was paid in full, the First Department found that Appellant had no right to sue Respondents because it lacked standing to sue on the Guaranty. R. 275-76. As set forth more fully below, the holdings of the trial court and First Department are entirely consistent with the precedent of this Court, and should be affirmed. See Chem. Bank v. Meltzer, 93 N.Y.2d 296, 302-04 (1999); Weismann v. Sinorum Deli, Inc., 88 N.Y.2d 437, 446 (1996); Walcutt v. Clevite Corp., 13 N.Y.2d 48, 56 (1963); Gen. Phoenix Corp. v. Cabot, 300 N.Y. 87, 95 (1949). 18 ARGUMENT I. THIS ACTION WAS PROPERLY DISMISSED BECAUSE APPELLANT FAILED TO ESTABLISH ITS PRIMA FACIE CASE TO COLLECT UNDER THE GUARANTY A. Appellant Fails to Establish Its Prima Facie Case To establish a prima facie case to enforce a guaranty, it is a fundamental principle of suretyship that a plaintiff must show both the: (1) the existence of a debt and (2) the primary obligor’s default on that debt. Here, Appellant’s attempt to impose liability on Respondents failed on both counts. 1. There Was No Longer Any Debt Subject To The Guaranty Because The Borrowers Paid the Underlying Debt Owed In Full As this Court has previously instructed, “as far as the underlying debt is concerned, [a guarantor] stands in the shoes of his principal” (Gen. Phoenix Corp., 300 N.Y. at 95), such that where the principal obligor has no liability to plaintiff, the guarantor cannot be held liable as a matter of law. Walcutt, 13 N.Y.2d at 56 (“guarantor is not liable unless the principal is bound”); see, e.g., Sweeters v. Hodges, 256 A.D.2d 185, 185 (1st Dep’t 1998) (where the principal obligor is not in default, no amount is due under the guarantee upon which plaintiff premises his right to recover against the guarantor); J.C. Studios, LLC v. Telenext Media, Inc., 32 Misc. 19 3d 1211(A), 2011 WL 2651857, at *10 (Sup. Ct. Kings County July 6, 2011) (where the principal obligor, TeleNext, has no liability to plaintiff under the agreement, Proctor & Gamble, as a guarantor “stands in the shoes of [its] principal,” and cannot be held liable). Moreover, a guarantor cannot be liable for an amount greater than that for which the principal obligor is liable. See Midwest Corp. v. Global Cable, Inc., 688 F. Supp. 872, 875 (S.D.N.Y 1988), citing Walcutt, 241 N.Y.S.2d at 56; H.H. & F.E. Bean, Inc. v. Travelers Indemnity Co., 67 A.D.2d 1102, 1103 (4th Dep’t1979). In this case, there is no legitimate dispute that: (1) the Guaranty expressly guaranteed the “borrowers’ obligations under the Loan Documents,” which included the Promissory Note as modified (see supra at 8); (2) the borrowers’ obligations were modified pursuant to the Modification Agreement, which explicitly reduced the outstanding principal owed under the Promissory Note to $10 million upon certain conditions being met (R. 65-69); (3) Appellant issued a Payoff Letter reflecting that the total “amount [] needed to pay off” the Loan was a little over $8 million (R. 243); (5) the borrowers paid off the Loan (as modified) in full on or about September 30, 2009 in accordance with the terms of the Modification Agreement and Appellant’s Payoff letter (R. 245); and (6) the borrowers have no obligation to make any further payments to Appellant under the Loan Documents. 20 Based upon these undisputed facts, Appellant’s claim against Respondents was properly dismissed. Put simply, because the principal obligors fully satisfied their obligations under the Loan Documents and have no liability to Appellant, Respondents, the guarantors, cannot be held liable as a matter of law. Walcutt, 13 N.Y. 2d at 56; Sweeters, 256 A.D.2d at 185; J.C. Studios, LLC, 2011 WL 2651857, at *10; see also R. 275 [the First Department’s Order] (guarantor cannot be liable for more than what the primary obligor was obligated to pay and did pay); R. 31 [Trial Court Decision] (guarantor cannot owe more than the principal obligor). 2. There Was No Default By the Primary Obligor Appellant’s claim also fails because it cannot satisfy the second requisite for a judgment against a guarantor –the existence of a default by the primary obligor. It is a basic principal of commercial law that a guaranty is an agreement to pay a debt owed by another. By definition a guaranty is a contract of secondary liability. Weismann, 88 N.Y.2d at 446; Gen. Phoenix Corp., 300 N.Y. at 95; see also Midland Steel Warehouse Corp. v. Godinger Silver Art Ltd., 276 A.D.2d 341, 343 (1st Dep’t 2000). A guarantor’s liability accrues only after default on the part of the primary obligor. Weismann, 88 N.Y.2d at 446; Gen. Phoenix Corp., 300 N.Y. at 95; Chem. Bank, 93 N.Y.2d at 303. Consequently, where the primary obligor is not in default of its underlying obligation, no amount can be due under the 21 guaranty. See, e.g., Sweeters, 256 A.D.2d at 185 (affirming dismissal of action; holding that “because the principal obligor herein is not in default, its obligation having been duly suspended pursuant to the subordination agreement executed by plaintiff, no amount is now due under the guaranty upon which plaintiff premises his right to recover”); Estate of Broche v. Tai, 98 A.D.3d 601, 601 (2d Dep’t 2012) (dismissing action against the guarantor where payment on the underlying note was not due). Here, the primary obligors were not in default. Even assuming arguendo that there was a technical default under the Promissory Note prior to its modification, as the trial court observed, any such default was remedied by the loan modification, and under the loan modification there was no default. 10 R. 33; see, e.g., GE Capital Mortgage Servs., Inc. v. Pinnacle Mortgage Inv. Corp., 897 F. Supp. 842, 849 (E.D. Pa. 1995) (denying GE Capital’s motion for summary judgment against the guarantors; concluding that if an oral agreement that modified the parties’ obligations under the original agreement was found to be effective, it cancelled the primary obligor’s default, upon which the guarantors’ liability was contingent). 10 As discussed supra at 11 n.7, Respondents were never in monetary default of their loan obligations. Appellant’s purported default letter concerning the maturity of the Loan did not reflect the parties’ negotiations, and nevertheless was mooted by the Modification Agreement, and payoff of the Loan. 22 Here, the Modification Agreement undeniably is legally effective, and erased any alleged default by the borrowers under the Loan Documents. Consequently, this action was properly dismissed. B. The Use of the Words “Absolute and Unconditional”, “Joint and Several” and “Primary Obligors” Does Not As a Matter of Law Convert the Guaranty, a Contract of Secondary Liability, Into One of Primary Obligation Appellant tries to circumvent these well-established principles of law by arguing that the Guaranty’s use of the words “absolutely, irrevocably and conditionally covenants,” and “is liable, jointly and severally, for the Guaranteed Obligations as a primary obligor” transformed the Guaranty from an instrument of secondary liability into a primary obligation. App. Br. 11 at 2-4, 27-28. According to Appellant, this Court must ignore the fact that the primary obligors satisfied their underlying obligations, and allow it to proceed against Respondents because the Guaranty was an “absolute and unconditional” promise to repay the original loan amount. See App. Br. at 5, 27-35. Appellant’s argument misstates established principles of New York commercial law. This Court’s decision in Chemical Bank v. Meltzer, 93 N.Y.2d at 303 defeats Appellant’s argument that New York law 11 References to the “App. Br.” are to the Brief for Plaintiff-Appellant, dated February 12, 2015, that has been submitted in the pending appeal. 23 should allow the parties to convert guaranties, which are contracts of “secondary liability,” into primary obligations. In Chemical Bank, the guaranty agreement before the Court contained language similar to the guaranty in this case, providing that the defendant and other signatories of the guaranty were “jointly and severally, absolutely, irrevocably and unconditionally” liable to the Bank for all payments due under the financing arrangement “each as a primary obligor and not merely as a surety.” Id. at 300. Notwithstanding this language, the Court explained that the borrower (Major Building) was the primary obligor to Chemical Bank, not the defendant guarantor (Melzer), and that the guarantor was required to pay the debt only after the primary obligor’s default. Id. at 303. In the words of Judge Wesley writing for a unanimous Court: While it is true that a court may not rewrite clear and unambiguous contracts, the guaranty here is replete with inconsistencies. The express language of the guaranty does identify the guarantors as ‘primary obligors’ to the Bank on the bond, and ‘not merely sureties.’ The document itself, however, is a guaranty, and those bound by the instrument are referred to as ‘guarantors.’ . . . . Moreover, contrary to the lower courts’ focus on a few words of a single instrument, this instrument must be analyzed as an integrated whole. To adopt the approach employed by the lower courts would elevate form over substance, obfuscate the nature of [the guarantor’s] legal 24 obligations and gloss over the essential character of this transaction. Id. at 303-04 (emphasis added) (internal citations omitted). In somewhat different language, while a guaranty may use words such as “primary obligor”, “absolute, unconditional and irrevocable,” and “joint and several,” that does not mean that the courts transform the guaranty from a secondary obligation into a primary obligation permitting the plaintiff to hold the guarantor liable even though, as here, the underlying obligation has been satisfied by the primary obligor and there is no default. There is nothing unique or controversial about this principle, which has been applied by other courts. For instance, in Simon v. Landau, 27 Misc. 2d 269 (Sup. Ct. Queens County 1960), the court flatly rejected the contention that the use of the words “primary obligors” rendered the defendants co-makers or co-obligors jointly liable with the corporation for its indebtedness under its bonds. Id. at 272-73. The court explained that the term “primary obligors” in the guaranty agreements must be read in light of the other instruments and documents in the case and was intended simply to continue defendants’ personal liability as guarantors of payment notwithstanding the possible subsequent extension or modification of the corporate debt without the consent of the guarantors. Put another way, the words “primary 25 obligor” were added to address the general rule that a guarantor is discharged by any alteration of the contract to which his guaranty applied absent his consent. Consequently, the stockholders “remain merely guarantors of the corporation’s debt to the plaintiff,” and were not transformed into co-obligors. Id. In addition, in GE Capital Mortgage, 897 F. Supp. 842 (E.D. Pa. 1995), plaintiff GE Capital sought to enforce certain guaranties that were collateral to a certain Credit Agreement, which contained language similar to Guaranty here upon which Appellant relies. Id. at 845-46. In opposing GE Capital’s motion for summary judgment, the guarantors argued that the parties had entered into an oral agreement which superseded the original Credit Agreement, and cancelled Pinnacle’s default, and since there was no current default under Pinnacle’s obligations, GE was not entitled to pursue any claims under the guaranties. In response, GE Capital argued that the “absolute” and “conditional” nature of the guaranties at issue, allowed it to proceed against the guarantors (the Miller Defendants) without establishing that the primary obligor (Pinnacle) was currently in default under the Credit Agreement. Id. at 847. Applying New York law, the court recognized that notwithstanding the fact that the guaranties contained language that it “absolutely and unconditionally guaranteed” the “prompt and unconditional payment” of all monies under a credit 26 agreement, the guarantors could not be held liable unless the primary obligor (Pinnacle) was currently in default of its underlying obligation. Id. In denying GE Capital’s motion, the court reasoned that the oral agreement, if legally effective, erased Pinnacle’s default under the Credit Agreement, and if there was no default by the primary obligator, the guarantor could not be liable as a matter of law. Id. at 847-48, citing Pro-Specialities, Inc. v. Thomas Funding Corp., 812 F.2d 797, 799 (2d Cir. 1987) (holding that the district court could not have found a guarantee without first finding the principal debtor liable on the principal obligation; “the general rule is that the ‘guarantor is not liable unless the principal is bound’”), quoting Walcutt, 13 N.Y.2d at 56; Midwest Corp., 688 F. Supp. at 875 (“guarantor cannot be liable for an amount greater than for which the principal is liable”). For the same reasons articulated in Chemical Bank, Simon, and GE Capital Mortgage, Appellant’s reliance on the “absolute and conditional,” “joint and several,” and “primary obligor” language contained in the Guaranty is unsustainable. C. The Cases Cited by Appellant Are Inapposite None of the cases Appellant cites support its position that the use of the words “primary obligor” and “absolutely, irrevocably and conditionally covenants” transforms the Guaranty into one of primary obligation, nor are any of those cases on 27 point. Put simply, none of the cases cited by Appellant involve the situation at bar where the guarantor’s obligations were extinguished because the borrowers fulfilled their underlying obligations under the Loan Documents in full. Contrary to Appellant’s contentions, the facts of the recent First Department case, 4 USS LLC v. DSW MS LLC, 120 A.D.3d 1049 (1st Dep’t 2014), are inapposite and do not create an intra-department conflict in the First Department. In 4 USS LLC, which involved the guarantee of a lease, the defendant’s primary argument in opposition to plaintiff’s enforcement of the guaranty was that plaintiff’s modification of the lease, without defendant’s consent, voided the guaranty as a matter of law. Id. at 1051. Here, Respondents do not claim that the modification voided the Guaranty; it argues the exact opposite. Indeed, unlike the defendant in 4 USS LLC, Respondents here expressly approved the modification and agreed to be bound by it terms. 12 Moreover, unlike 4 USS LLC, here: (i) there was no default on the part of the borrowers after the modification of the Loan; (ii) Appellant issued a Payoff Letter, 12 For the same reason, Citicorp USA, Inc. v. PM Holdings, LLC, 29 A.D.3d 363 (1st Dep’t 2006) and First Am. Bank v. Builders Funding Corp., 200 A.D.2d 946, 947 (3d Dep’t 1994) are inapposite. In Citicorp USA, the guarantor argued the amendment to the loan agreement impermissibly modified the guaranty. Id. at 363. The court held that defendant’s absolute and unconditional guaranty precluded this argument, and found that defendant nevertheless provided advance consent in the guaranty to any modifications or amendments. Id. at 363-64. Again, this is the complete opposite of our case where Respondents contend that the modification is effective. See also First Am. Bank, 200 A.D.2d at 947 (same). 28 which recited the precise amount of principal due, which was duly paid; and (iii) after the debt was fully paid, Appellant acknowledged the satisfaction of the Loan by assigning the Promissory Note and other loan/security documents to Syracuse Retail, releasing the funds it held in escrow, and releasing the lien it held on Respondent Silberberg’s home. Nor is Inland Credit Corp. v. Weiss, 63 A.D.2d 640 (1st Dep’t 1978) on point. In Inland Credit, the First Department held that the lender on a promissory note could enforce a guaranty despite the fact that it had delivered the underlying note to the borrower. Id. at 640-41. Unlike the case at bar, however, the primary obligor in Inland was in default of its debt obligations, and the underlying debt remained outstanding. Id. (“the underlying debt was not extinguished”). Moreover, the court’s holding was predicated on the fact that the note transfer was merely intended to clear title so that another mortgage could close. Id. (“Clearly the return of the note and release of the mortgage were not intended to discharge Bridgewater’s debt but were for the sole purpose of clearing title so that the permanent mortgage could close”). In Inland, if the note transfer would have been the result of a payoff of the 29 borrower’s debt (as in our case), it undoubtedly would have acted as a bar to the enforcement of the guaranty. 13 II. THE EXPRESS TERMS OF THE LOAN DOCUMENTS REQUIRED DISMISSAL OF THIS ACTION On this appeal, Appellant erroneously contends that the First Department essentially rewrote the parties’ agreement and turned Article II of the Guaranty into scrap transforming the Guaranty into a secondary obligation instead of enforcing the Guaranty’s express language that it a “primary” obligation. See App. Br. at 36. Contrary to what Appellant says, it is Appellant who is trying to trash the language of the Guaranty and the related documents. It is a well-settled rule of contract interpretation that a contract is to be construed in accord with the parties’ intent as expressed in the words they used. Slatt v. Slatt, 64 N.Y.2d 966, 967 (1985). “While the intent and purpose of a written instrument is to be ascertained from the instrument itself, it is a well-established rule of contract law that all contemporaneous instruments between the same parties relating to the same subject matter are to be read together and 13 Using Justice Oing’s language, unlike the case at bar, in Inland “there was no satisfaction, . . . what happened there was merely a sort of ministerial act or sort of paper trail so they could close on the title of the property. Here you guys [plaintiff] took actual cash, eight million dollars . . . . no, you took more than eight million dollars. You have in your possession $11 million in cash.” R. 14. 30 interpreted as forming part of one and the same transaction” in order to ascertain the intent of the parties. TBS Enters. v. Grobe, 114 A.D.2d 445, 446 (2d Dep’t 1985); Chem. Bank, 93 N.Y.2d at 303. Appellant’s principal argument in this appeal that the Modification Agreement “left the $13 million ‘Loan Amount’ under the Note ‘in full force and effect’” and promised only to ‘“forgive’ the Borrower’s default and failure to repay $2 million of the $13 million” (see App. Br. at 24) cannot be squared with the parties’ intent, the express language of the Guaranty and other loan documents, and significantly, Appellant’s contemporaneous conduct. A. The Guaranty Guaranteed the Borrower’s Obligations Under the Loan Documents, as Modified, Not $13 Million Appellant’s claim that the Guaranty must be read as “fix[ing]” Respondents’ liability at the original Loan Amount of $13 million regardless of the subsequent 31 modification of the original debt (see App. Br. at 38) defies logic and the language of the agreements. 14 Nowhere does the Guaranty refer to the payment of any specific dollar amount. Instead, it guarantees the full payment of what the parties called the “Guaranteed Obligations” (R. 47), which are defined in Section 1.2 of the Guaranty as the “Borrowers’ obligations under the Loan Documents.” R. 48. The term “Loan Documents” explicitly includes the Promissory Note and all other agreements executed by the borrowers with the Loan. R. 124. And, the Guaranty unequivocally defines the Promissory Note to include any modifications thereof. R. 47 (Recital A) (“together with all renewals, modifications, increases and extensions thereof.”); see also R. 88 [Recital A of the Promissory Note] (“This Note evidences a loan . . . (as same may hereafter be amended, modified or supplemented, the ‘Mortgage’) (emphasis added). 14 Appellant’s reliance on Laba v. Carey, 29 N.Y.2d 302, 308 (1971) is unavailing. In Laba, Judge Scileppi, writing for a unanimous court, dealt with an apparent conflict between two phrases within a contract (the “subject to” and “insurance” clauses), and held that all parts of the contract must be read together to determine the scope of the seller’s obligation. The court further instructed that the intent of the parties “must be gleaned from the several provisions of the contract” and that courts must “adjudicate [the parties’] rights according to the unambiguous terms of the contract and therefore must give the words and phrases employed their plain meaning.” Id. This holding is entirely consistent with the result reached in the courts below. Indeed, when the terms of the Guaranty are read together with the other loan documents, which are part of the same transaction and which are expressly referenced in the Guaranty, it is clear that Appellant’s interpretation of the Guaranty cannot be sustained. 32 It follows that once the parties entered into the Modification Agreement -- a “Loan Document” -- and the “Borrowers’ obligations under the Loan Documents” were modified, so too were Respondents’ obligations under the Guaranty. B. The Modification Agreement Substituted the Old Loan Amount with a New Obligation; Such Modification Was Expressly Approved by Respondents Although Appellant concedes that the Modification Agreement is a “Loan Document” (App. Br. at 39), it nevertheless argues that the Modification Agreement did not reduce the Loan Amount itself, but simply “released” or forgave $2 million of the borrowers’ obligations. See id. at 38-39. The argument must be rejected for several reasons. As evidenced by Appellant’s own Payoff Letter, the Modification Agreement, did not simply forgive the debt solely “with respect to the borrowers” (App. Br. at 4), it did much more: it expressly reduced the principal amount owed under the Promissory Note which is what Respondents guaranteed. If Appellant, a sophisticated lender with all the power in this transaction, had wanted to forgive the debt only “with respect to the borrowers”, it could have easily drafted the agreement accordingly. Instead, it drafted the Modification Agreement to expressly provide that it was agreeing to a reduction in the dollar amount of the Loan Amount that was originally stated in the Promissory Note. For instance, Paragraph 5 expressly states 33 that “[p]rovided that Borrower complies with the terms and conditions set forth herein and no Events of Default shall have occurred after the date of this Agreement then Lender shall forgive the indebtedness under the [Promissory] Note in the amount of $2,000,000.” R. 66 at ¶ 5 (emphasis added). Paragraph 6 of the Modification Agreement further provides that “the purpose of this Agreement being simply to renew, extend and modify the indebtedness evidenced by the [Promissory] Note.” R. 67. Other provisions in the agreement also demonstrate that the Modification Agreement amended the amount owed under the Promissory Note and not merely the borrowers’ liability. See R. 65-66 (¶ 2 [payment of $1 million reduces “Principal Sum of the Note” to $11 million]; R. 66 (¶ 3 [referring to the terms of the Promissory Note “as amended by this Agreement”]); and id. (¶ 4 [referring to the Promissory Note, the Mortgage or any of the Loan Documents “as modified by this Agreement”] and [applying payments to the “principal balance of the Loan”]. Nor is there any merit to Appellant’s contention that the original Loan Amount remained in full force and effect because the Guaranty itself was not modified. See App. Br. at 24. It is fundamental that once the underlying contract is modified that modification substitutes a new obligation for the old one. See White Rose Food v. Saleh, 99 N.Y.2d 589, 591 (2003); Bier Pension Plan Trust v. 34 Estate of Schneierson, 74 N.Y.2d 312, 316 (1989); Becker v. Faber, 280 N. Y. 146, 149 (1939). Here, Respondents expressly approved and authorized the modification of the Loan (R. 83 (Silberberg Aff. ¶ 16)), as evidenced by their signatures below the statement: THE UNDERSIGNED GUARANTOR AUTHORIZES AND APPROVES OF THIS MODIFICATION AND ACKNOWLEDGES THE CONTINUING EFFECTIVENESS OF THE GUARANTEE. R. 71 (Capitalization in the original). Appellant’s suggestion that this provision evidenced Respondents’ acknowledgement that they would still owe $12 million (the principal outstanding before the Modification Agreement was entered into) despite the reduction of the principal due on the Loan to $10 million is absurd and contrary to the parties’ intent. As Appellant is undoubtedly aware, that language was included in the Modification Agreement to address the general principle of law that a “[a] guaranty is to be interpreted in the strictest manner” (White Rose Food, 99 N.Y.2d at 591), particularly in favor of a private guarantor (see 665-75 Eleventh Ave. Realty Corp. v. Schlanger, 265 A.D.2d 270, 271 [1st Dep’t 1999]), such that it cannot be altered without the guarantor’s consent (see White Rose Food, 99 N.Y.2d at 591). Modification of the contract to which the guaranty applies, without the guarantor’s 35 consent, will generally discharge the guarantor’s obligation. Id.; see, e.g., Mackler v. Burke, 2 A.D.3d 505, 505 (2d Dep’t 2003); Congregation Ohavei Shalom v. Comyns Bros., Inc., 123 A.D.2d 656 (2d Dep’t 1986). 15 However, where the guarantor consents to the modification, as is the case here, the guarantor has agreed to the substitution of the new obligation for the old one. See Trustco Bank N.Y. v. Sage, 238 A.D.2d 839, 840-41 (3d Dep’t 1997); Arlona Ltd. Partnership v. 8th of Jan. Corp., 50 A.D.3d 933, 934 (2d Dep’t 2008). Here, Respondents expressly agreed to the substitution of the new obligation for the old. Nor is there any merit whatsoever to Appellant’s repeated preaching that the First Department’s “[Order] will have a profound chilling effect upon lenders’ willingness to work with defaulting borrowers” (App. Br. at 6, 13, 35). Appellant ignores the reality that lenders are the ones with all the leverage in such negotiations. If Appellant had wanted to simply release the borrowers, and not Respondents, it would have structured the deal as a settlement with the borrowers which contained a release of the borrowers, while expressly reserving its rights to pursue claims against Respondents, not as a modification of the Loan Documents as Appellants did here. 15 Indeed, as discussed supra, that was the very argument raised by the defendant guarantor in 4 USS LLC, the First Department case which Appellant contends conflicts with the Order – that the modification of the lease, without the guarantor’s consent, “voided the guaranty as a matter of law because it materially increased the risk that there would be a call upon the guaranty.” 120 A.D.3d at1051. 36 Alternatively, it could have expressly reserved its rights to pursue claims against the Respondents in the Modification Agreement or Payoff Letter. Appellant did neither. Having drafted the agreement as a Modification Agreement, which was expressly approved and authorized by Respondents, and wherein the “indebtedness under the Note” was forgiven in the amount of $2 million, Appellant is now stuck with the agreement it bargained for, and in fact, drafted. See Jacobson v. Sassower, 66 N.Y.2d 991, 993 (1985) (“In cases of doubt or ambiguity, a contract must be construed most strongly against the party who prepared it . . .”). Conversely, it is the result that Appellant requests that would unsettle lender financing law, if debtors and their guarantors could no longer rely upon payoff letters, like the one issued by Appellant here, as setting forth the outstanding balance owed on loans. C. Appellant’s Payoff Letter and Other Contemporaneous Conduct Confirm that the Underlying Debt was Satisfied and Extinguished Appellant’s contemporaneous conduct in issuing a Payoff Letter, assigning the Loan Documents, releasing amounts held in escrow to the borrowers, and releasing the lien of the mortgage it held on Respondent Silberberg’s home further undercuts Appellant’s argument that $2 million in debt remained outstanding. 37 Under RPL § 274-a, a payoff letter must be delivered by the mortgagee at closing and must set forth “the amount of principal of said mortgage remaining unpaid . . . and the amounts, if any, claimed to be unpaid . . . .” See also 2-25 Warren’s Weed N.Y. Real Prop. § 25.30[10] (2013) (“certificates or closing letters, also called ‘pay-off’ letters, from the mortgagees, certifying the amount of principal remaining unpaid, . . . and the amounts of principal and interest claimed to be unpaid, must be delivered at the closing”). In other words, upon the mortgagor’s request, mortgagees are required by statute to deliver payoff letters that set forth the outstanding balances of the loans they hold. Here, the Payoff Letter, also drafted by Appellant’s representatives, unequivocally stated that $8 million remained outstanding on the Loan, and no more. R. 243. The borrowers paid the amount set forth in that letter in full. R. 245. What is even more telling, however, is Appellant’s conduct after it received the payoff amount. Surely, if money was still owed to Appellant, it would not have: 1) assigned the Promissory Note and all other loan documents to Syracuse Retail; 2) released over $300,000 that had been held in escrow, and 3) released a lien it held on Respondent Silberberg’s home. These acts confirm that at the time Appellant accepted the money, it understood that no money was owed on the Loan and that all obligations had been satisfied. In other words, it understood that it would be game 38 over on all claims. It is revisionist history for Appellant to now come to this Court and suggest otherwise. Finally, it makes no sense that the guarantors should be liable for the $2 million differential here. The borrowers, which even Appellant admits owed $10 million under the Modification Agreement, were controlled by Respondents. R. 80 (Silberberg Aff. ¶ 4). These are the same people. It would be illogical for the guarantors to agree to reduce the debt of their companies but not their own personal liability under the Guaranty. See R. 83-85 (Silberberg Aff. ¶¶ 16, 20-22). D. The Modification Agreement Constituted An Executory Accord That Was Satisfied With the Payment of the Payoff Amount Appellant’s reliance on the language in the Modification Agreement that “a novation is expressly denied and not intended to be effected” to support its contention that the original Loan Amount of $13 million remained in full force and effect is similarly misplaced. The Modification Agreement did not operate as a novation, but rather an executory accord that was satisfied when the borrowers paid off the Loan, as modified, in full. Unlike a novation, in which the parties intend that a new agreement will immediately discharge the existing obligation, an executory accord is “an agreement embodying a promise express or implied to accept at some future time a stipulated 39 performance in satisfaction or discharge in whole or in part of any present claim, cause of action, [or] contract ... and a promise express or implied to render such performance in satisfaction or in discharge of such claim, cause of action, [or] contract ....” N.Y. Gen. Oblig. Law § 15–501. In New York, “[a]s a general rule, the acceptance of a [payment] in full settlement of a disputed, unliquidated claim, without any reservation of rights, operates as an accord and satisfaction discharging the claim.” Nationwide Registry & Sec., Ltd. v. B&R Consultants, Inc., 4 A.D.3d 298, 299 (1st Dep’t 2004) (citations omitted); see, e.g., Hirsch v. Berger Import & Mfg. Corp., 67 A.D.2d 30, 34-35 (1st Dep’t 1979); Congregation Chachmei Sefarad v. Dickman, 198 A.D.2d 395, 395 (2d Dep’t 1993) (accord and satisfaction occurred when defendant cashed plaintiff’s check that contained a notation that it represented the “complete bal[ance]” of the amount owed). The Modification Agreement expressly contemplated some stipulated performance in the future by the borrowers that would “forgive the indebtedness under the Note,” and provided that in the event the borrowers failed to pay the amounts contemplated, the foregoing forgiveness would not apply. R. 66 (¶ 5). Here, the borrowers fully complied with the terms of the Modification Agreement and Appellant’s Payoff letter, and Appellant accepted the payoff amount without any reservation of its rights against Respondents. Appellant’s acceptance of the 40 bargained for payment is a textbook “accord and satisfaction,” which extinguished the initial Promissory Note as well as all prior debt and dooms a subsequent action on the Guaranty to dismissal. III. THE WAIVER OF DEFENSES AND DISCLAIMER LANGUAGE CONTAINED IN THE GUARANTY DO NOT APPLY WHEN THE UNDERLYING DEBT WAS PAID IN FULL As both the trial court and First Department concluded, Appellant’s attempt to salvage its claim against Respondents on the Guaranty by pointing to waiver of defenses and disclaimer language in the Guaranty cannot be sustained. Respondents here do not rely on any “defense” that was subject to the Guaranty’s waiver clause. Rather, as recognized in the courts below, Respondents’ cross-motion to dismiss was premised on Appellant’s failure, in the first instance, to establish a prima facie case; Appellant could not show the existence of a debt or a default. R. 30-33, 274-75; see, e.g., Madison Ave. Leasehold, LLC v. Madison Bentley Assoc., LLC, 8 N.Y.3d 59, 69 (2006) (affirming holding that guarantors were entitled to summary judgment dismissing complaint; the fact that there was no monetary default by the tenant rendered the landlord’s argument based on the “no waiver” clauses in the lease and guaranty academic); GE Capital Mortgage, 897 F. Supp. at 849 (citing New York law; holding that defendant’s reliance on a 41 modification agreement to show that a guaranteed loan was fully paid is not a defense; it simply prevents Appellant from establishing its prima facie case). Moreover, as established in the very cases cited by Appellant, waiver language in a guaranty precludes the guarantor from asserting all defenses except one: the actual payment of the debt and performance in full by the primary obligor, which is exactly what occurred in this case. See, e.g., Red Tulip, LLC v. Neiva, 44 A.D.3d 204, 209 (1st Dep’t 2007) (recognizing that “the guaranty [the guarantor] signed in connection with the mortgage loan waived all defenses and counterclaims except ‘actual payment,’ which she has never alleged.” (emphasis added); 16 United Orient Bank v. Lee, 223 A.D.2d 500, 500 (1st Dep’t 1996) (while defense of release was waived, defense of payment was not). In addition, Appellant’s argument that it is permitted to recover the original Loan Amount ($13 million) under the Promissory Note, despite the modification of that obligation and the borrowers’ full payment of the modified loan amount, because Article II of the Guaranty states that it cannot be “diminished, impaired, reduced or adversely affected by”, inter alia, modifications (see App. Br. at 16-18, citing §§ 2.1, 2.2, 2.4, 2.5 and 2.10 of the Guaranty), is similarly unsustainable. As 16 In Red Tulip, unlike our case, it is undisputed that, the mortgage debt had not been paid. 44 A.D.3d at 205. Likewise, in First Am. Bank, there was no dispute that a default occurred and that the underlying debt had not been paid. 200 A.D.2d at 947. 42 the trial court recognized, Appellant’s argument only makes sense when the language relied upon by Appellant is taken out of context. R. 32. As an initial matter, Appellant ignores that the various sections in Article II that it cites to all refer to the Guaranteed Obligations, which are clearly defined in the Guaranty as the “Borrower’s obligations under the Loan Documents,” and which, as discussed supra, include modifications. Thus, when the Promissory Note was modified, the Guaranteed Obligations were also modified. And when those modified loan obligations were paid off, the debt was satisfied and extinguished --not released, not modified, not reduced. 17 If Appellant’s reading of the Guaranty 17 This case does not involve a release of the borrowers despite Appellant’s best efforts to characterize it as such; it involved the modification of a loan as reflected by the Modification Agreement, pursuant to which the underlying debt was paid in full and discharged. Consequently, Appellant’s reliance on Compagnie Financiere de Cic et de L’Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 188 F.3d 31 (2d Cir. 1999) (see App. Mem. at 30-31, 33) is misplaced. In Compagnie, the Second Circuit dealt with the issue of whether under New York law, a guaranty agreement which contains a general waiver of defenses prevents a guarantor from being discharged when the principal debtor was released by the lender. Id. at 32. The borrower defaulted. The lender then assumed ownership of the borrower and thereafter released the borrower and all of its stockholders and directors, while expressly reserving its rights against the guarantors (“other than Mr. Alexandro Weinstock, . . . [and his] respective affiliates and representatives [ ] . . from any and all actions, . . . debts, . . .[and] guarantees . . .relating to or touching upon the [project].” Id. at 33, 37 (emphasis in original). Based on these facts, the court held that the lender could still pursue payment from the guarantor because the debt remained unpaid and the lender had expressly reserved its rights in the release against the guarantors. Id. at 36-37. Here, unlike Compagnie, not only was the underlying debt paid in full, but no express reservation of rights exists in either the Modification Agreement or Payoff letter against Respondents. 43 were taken to its illogical conclusion, then Appellant could sue for the entire amount of the initial loan regardless of whether Appellant was fully paid by the borrowers. The First Department correctly found that this language cannot, as a matter of law, “make the guarantor liable for more than what the primary obligor was obligated to pay and did pay.” R. 275; see Walcutt v. Clevite Corp., 13 N.Y. 2d 48, 56 (1963) (“guarantor is not liable unless the principle is bound”); Sweeters v. Hodges, 256 A.D.2d 185, 185 (1st Dep’t 1998) (where the principal obligor is not in default, no amount is due under the guaranty); J.C. Studios, LLC, 2011 WL 2651857, at *10 (where the principal obligor has no liability, the guarantor cannot be held liable); Midwest Corp. v. Global Cable, Inc., 688 F. Supp. 872, 875 (S.D.N.Y 1988) (guarantor cannot be liable for an amount greater than that for which the principal obligor is liable). Moreover, the various sections of Article II of the Guaranty, upon which Appellant relies heavily, were inserted because, as discussed supra, under the common law, a modification of the primary obligation in any material form would automatically release the guarantors from the guaranty. See White Rose Food, 99 N.Y.2d at 591; 23 Williston on Contracts § 61:31 (4th ed. 2013). Thus, their purpose is simply to continue a guarantor’s personal liability notwithstanding the possible subsequent extension, reduction, modification or other adjustment of the 44 debt without the consent of the guarantors (see Simon, 27 Misc. 2d at 272), and not, as Appellant argues, to preclude any modification to the Guaranty or make Respondents primary obligors under the Loan Documents. The language contained in Section 1.3 of the Modification Agreement, “[T]he fact that at any time or from time to time the Guaranteed Obligations may be increased or reduced shall not release or discharge the obligation of Guarantor to Lender with respect to the Guaranteed Obligations,” similarly was inserted to avoid this risk. Moreover, as the trial court held, this section does not apply to the facts in this case where the Guaranteed Obligations were not merely reduced, but were extinguished by virtue of the borrower’s payment in full of its obligations under the loan modification. R. 32. IV. FINALLY, THIS ACTION WAS PROPERLY DISMISSED BECAUSE APPELLANT LACKS STANDING As a separate matter, this action was properly dismissed because Appellant lacks standing to enforce the Guaranty for two reasons: (1) the original lender was CAD and Appellant never proffered any evidence of an assignment to it; and (2) Appellant is no longer a party to the Guaranty, having assigned all the loan instruments to an unrelated third party upon the payoff of the Loan. 45 A. Appellant Presented No Proof That the Guaranty Had Been Validly Assigned to It As the First Department found, Appellant failed to provide any proof that the Loan Documents, including the Guaranty, had been validly assigned to it by CAD in the first place. R. 275-76. Absent proof of such an assignment, Appellant had no standing to sue under the Guaranty. Although Appellant had an opportunity to submit such proof in the trial court when its motion was heard, it failed to do so. Consequently, its motion pursuant to CPLR 3213 was defective as a matter of law. See, e.g., Bank of N. Y. v. Silverberg, 86 A.D.3d 274, 279 (2d Dep’t 2011) (when a plaintiff’s standing to commence suit is questioned, the plaintiff must prove its standing in order to be entitled to relief); Rockland Lease Funding Corp. v. Waste Mgmt. of N.Y., Inc., 245 A.D.2d 779, 779 (3d Dep’t 1997) (judgment for plaintiff reversed because it presented no record of assignment); Diehl v. Levine, 2008 NY Slip Op 31662(U), 2008 N.Y. Misc. LEXIS 9653, at *24-25 (Sup. Ct. Nassau County June 12, 2008) (“only where there is a properly executed assignment does an assignee become the ‘real party in interest’ and acquire standing to enforce the rights of an assignor”), citing James McKinney & Son, Inc. v. Lake Placid 1980 Olympic Games, Inc., 61 N.Y.2d 836, 838 (1984); Citibank (S.D.), N.A. v. Martin, 11 Misc. 3d 219, 226 (Civ. Ct. N.Y. County 2005) 46 (“Given that courts are reluctant to credit a naked conclusory affidavit on a matter exclusively within a moving party’s knowledge, an assignee must tender proof of an assignment of a particular account”). B. Appellant Assigned Away Its Interest There is a separate reason why Appellant lacks standing. The original parties to the Guaranty were Respondents and the “Lender,” specifically defined as CAD Funding, LLC. R. 47. The Guaranty and Promissory Note explicitly recognize that the Lender includes its “successors” and/or “assigns.” R. 56 (§ 5.6), 88. Thus, whoever is the “Lender” under the underlying Loan Documents is the guaranteed party under the Guaranty. Here, Appellant concedes, as it must, that when the loan was paid off, the Loan Documents were assigned to an entity called Syracuse Retail, which is unrelated to Appellant. See R. 42 (Norman Aff. ¶ 13) (“At Borrower’s request, Paf-Par assigned the mortgage to Syracuse”). In fact, the Assignment of Mortgage states that the mortgage and related documents were assigned together with “the bonds or notes or obligations described in said mortgage, and the monies due and to grow due thereon with the interest.” R. 247. There can be no Guaranty without a Promissory Note and, therefore, when the Promissory Note was assigned, so too was the Guaranty. This makes complete sense: since the Promissory Note, by the terms 47 of the Modification Agreement, was fully paid off, Appellant had no further legitimate need to hold onto the Guaranty. R. 84 (Silberberg Aff. ¶ 19). Therefore, by definition, Syracuse is the “Lender” and the guaranteed party under the Guaranty–not Appellant. Given Appellant’s lack of standing, the First Department properly affirmed dismissal of this action. CONCLUSION Accordingly, the Court should affirm the First Department's Order in its entirety. Dated: New York, New York May 5, 2015 Respectfully submitted, TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT LLP By:Otb\ k-<:= Vincent J. Syracuse Maryann C. Stallone 900 Third A venue New York, New York 10022 Tel: (212) 508-6700 Fax: (212) 371-1084 S yracuse@thsh. com Attorneys for Respondents Michael Silberberg and Berel Karniol - and- STAHL & ZELMANOVITZ Joseph Zelmanovitz 747 Third Avenue, Suite 33B New York, New York 10017 Tel: (212) 826-6422 Attorneys for Respondents Michael Silberberg and Berel Karniol -48-