T. BARRY KINGHAM
FRANCESCA M. ERTS
CURTIS, MALLET-PREVOST, COLT
& MOSLE LLP
101 Park Avenue
New York, New York 10178
Telephone: (212) 696-6000
Facsimile: (212) 697-1559
Attorneys for Appellant
APL-2014-00021
New York County Clerk’s Index No. 651437/12
Court of Appeals
STATE OF NEW YORK
COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A.,
“RABOBANK INTERNATIONAL”, NEW YORK BRANCH,
Respondent,
—against—
FRANCISCO JAVIER HERRERA NAVARRO,
Appellant,
—and—
THE ESTATE OF EDUARDO GUZMAN SOLIS,
Defendant.
BRIEF FOR APPELLANT
d
TABLE OF CONTENTS
Page#
Table of Authorities ................................................................................................... ii
Nature Of The Case ................................................................................................... 1
Questions Presented .................................................................................................. 3
Jurisdictional Statement ............................................................................................ 3
Statement Of Facts .................................................................................................... 4
A. The Guaranty ............................................................................................ 4
B. Mr. Herrera Discovers Guzman's Fraud .................................................. 6
C. Rabobank Assumes Control Over Agra Canada And Agra USA ............ 7
D. Rabobank's Collusive Federal Action Against Agra USA ...................... 9
Proceedings Below .................................................................................................. 11
A. Rabobank's Motion For Summary Judgment
In Lieu Of Complaint Under CPLR 3213 .............................................. 11
B. The Decision Of The IAS Court ............................................................. 12
C. The Decision Of The Appellate Division ............................................... 13
ARGUMENT .......................................................................................................... 15
I MR. HERRERA DID NOT WAIVE RABOBANK'S COLLUSION
A. To Obtain Judgment On The Guaranty,
Rabobank Must Establish
The Existence Of A Guaranteed Obligation .......................................... 15
B. The Waiver Of Defenses Does Not Preclude
Mr. Herrera's Challenge To The
Existence Of A Guaranteed "Obligation" .............................................. 18
C. A Collusive Default Judgment Cannot Be
An "Obligation" Of Agra USA Under The Guaranty ............................ 22
D. The Guaranty's Waiver Cannot Operate To
Shield Rabobank From Its Own Wrongdoing ........................................ 24
II MATERIAL ISSUES OF FACT PRECLUDE SUMMARY JUDGMENT
A. Issues of Fact Exist As To Whether
Rabobank Controlled Agra USA Prior To April 11, 2012 ..................... 26
B. Issues of Fact Exist As To Whether
Rabobank Controlled Agra USA After April 11, 2012 .......................... 28
Conclusion ............................................................................................................... 30
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TABLE OF AUTHORITIES
Page#
CASES
Canterbury Realty & Equipment Corp. v. Poughkeepsie Sav. Bank,
135 A.D.2d 102, 524 N.Y.S.2d 531 (3d Dep't 1988) ........................ 19, 21, 24, 25
Citibank N.A. v. Plapinger,
66 N.Y.2d 90, 485 N.E.2d 974 (1985) ................................................................ 19
Davimos v. Halle,
35 A.D.3d 270 (1st Dept. 2006) .......................................................................... 16
European American Bank v. Mr. Wemmick, Ltd.,
160 A.D.2d 905, 554 N.Y.S.2d 628 (2d Dep't 1990) .......................................... 25
Gardner v. Goodyear Dental Vulcanite Co.,
131 U.S. 103 (1873) ............................................................................................. 23
Lane v. Lane,
175 A.D.2d 103, 572 N.Y.S.2d 14 (2d Dep't 1991) ............................................ 22
Petra Mtge. Capital Corp., LLC v. Amalgamated Bank,
No. 101283/2010, 2014 N.Y. Misc. LEXIS 2533 (Sup. Ct. N.Y. Cnty.
June 6, 2014) ........................................................................................................ 21
Pike v. New York Life Ins. Co.,
72 A.D.3d 1043, 901 N.Y.S.2d 76 (2d Dep't 2010) ............................................ 25
Preamble Props., L.P. v. Thomas K. Woodard Antiques Corp.,
293 A.D.2d 330, 739 N.Y.S.2d 824 (1st Dep't 2002) ......................................... 16
Red Tulip, LLC v. Neiva,
44 A.D.3d 204, 842 N.Y.S.2d 1 (1st Dep't 2007) ............................................... 24
S. Spring Hill Gold Mining Co. v. Amador Medean Gold Mining Co.,
145 U.S. 300 (1892) ............................................................................................. 23
Signature Bank v. Laro Maintenance Corp.,
No. 016790/2009, 2011 N.Y. Misc. LEXIS 3205 (Sup. Ct. Nassau Cnty.
June 21, 2011) ................................................................................................ 20, 21
Sunbelt Rentals, Inc. v. New York Rennaissance,
No. 152106/2012, 2013 N.Y. Misc. LEXIS 6024 (Sup. Ct. N.Y. Cnty.
Dec. 16, 2013) ...................................................................................................... 16
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STATUTES
28 U.S.C. § 1332(a) ................................................................................................. 11
28 U.S.C. § 1332(c) ................................................................................................. 11
RULES
CPLR 321 l(a)(4) ....................................................................................................... 8
CPLR 3213 .................................................................................................... 1, 11, 29
CPLR 560l(a) ............................................................................................................ 3
Local Civil Rules of the U.S. District Courts for the Southern and Eastern
District of New York, Rule 5 5 .2(b) ..................................................................... 10
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Defendant-Appellant Francisco Javier Herrera Navarro respectfully
appeals from the 3-2 decision and order of the Appellate Division, First
Department, dated January 16, 2014, that reversed the Supreme Court's denial of
the Motion for Summary Judgment in Lieu of Complaint of Plaintiff-Appellee
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank International,"
New York Branch ("Rabobank").
In the face of a strong and well-reasoned dissent, the majority of the
First Department panel directed the entry of summary judgment in favor of
Rabobank. Mr. Herrera requests that this Court reverse that decision, deny
summary judgment, and direct that the case proceed.
Nature Of The Case
This case arises from a personal guaranty (the "Guaranty") pursuant to
which Mr. Herrera guaranteed payment to Rabobank of all "obligations" of Agra
Services USA, Inc. ("Agra USA").
Rabobank commenced the action by filing a Motion for Summary
Judgment in Lieu of Complaint pursuant to CPLR 3213 (the "Motion"). In the
Motion, Rabobank alleged that a $42 million default judgment that Rabobank had
obtained in federal court against Agra USA, a company that Rabobank itself then
controlled, was an "obligation" for which Mr. Herrera was liable under the
Guaranty. The IAS court (Charles E. Ramos, J.S.C.) properly denied the Motion.
The court held that questions of fact existed as to whether the federal default
judgment was collusively and improperly obtained by Rabobank for the purposes
of triggering Mr. Herrera's Guaranty and therefore was not a valid "obligation"
under the Guaranty.
The Appellate Division reversed the IAS court's decision, with the
majority holding that the standard waiver of defenses in the Guaranty precluded
Mr. Herrera from raising fact issues as to the existence of an "obligation" covered
by the Guaranty. The majority also disagreed with the IAS court's recognition of
issues of fact relating to collusion. Instead, the majority made its own fact
determination, ignoring the facts of record.
The Appellate Division majority erred. As the dissent noted, to obtain
summary judgment Rabobank must first demonstrate the existence of a valid
"obligation" covered by the Guaranty, and Mr. Herrera raised triable fact issues as
to the existence of such an "obligation." The dissent properly recognized that
raising those issues is not a "defense" waived by the Guaranty.
The dissent likewise agreed with the IAS court that material issues of
fact exist as to whether the federal default judgment was obtained collusively by
Rabobank and therefore could not be a valid "obligation" of Agra USA covered by
the Guaranty.
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Questions Presented
1. Did the Appellate Division majority err in finding that a routine
waiver of defenses in the Guaranty excuses Rabobank from establishing that the
"obligation" of Agra USA that Rabobank seeks to enforce against Mr. Herrera, i.e.,
the federal default judgment, is a valid "obligation" under the Guaranty?
This Court should answer this question in the affirmative.
2. Did the Appellate Division majority err in finding that no
material issues of fact exist as to whether Rabobank controlled Agra USA and
therefore had obtained the federal default judgment against Agra USA by collusion
with the very company it controlled?
This Court should answer this question in the affirmative.
Jurisdictional Statement
This Court has jurisdiction to entertain the present appeal pursuant to
CPLR 560l(a). The 3-2 decision and order from which Mr. Herrera appeals was a
final decision and order issued by the Appellate Division, First Department, on
January 16, 2014. The panel's two dissenting justices ruled in Mr. Herrera's favor
on questions of law that were raised before the IAS court and the Appellate
Division, and were therefore preserved for this Court's review. (R. xviii - xxvi).
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Statement Of Facts
A. The Guaranty
Defendant-Appellant Francisco Herrera is a Mexican citizen. An
accountant who resides in Guadalajara, Mexico, Mr. Herrera served as a director of
Agra Services of Canada, Inc. ("Agra Canada"), a Canadian company with its
principal place of business in Guadalajara. Agra Canada was in the business of
trading physical agricultural commodities between Mexico and Canada. (R. 251).
Agra Canada was also the sole shareholder of Agra USA, a Delaware corporation
with an office in Houston, Texas, of which Mr. Herrera was a nominal officer and
director. (R. 354).
Both Agra entities were managed almost exclusively by Eduardo
Guzman Solis ("Guzman"), a former co-defendant in this action. 1 (R. 251-52).
Guzman was responsible for the negotiation, execution, and supervision of all of
Agra Services' business activities. Mr. Herrera was largely uninvolved in either
company's business operations. Id.
In September 2004, Agra Canada entered into a financing agreement
with Plaintiff-Appellee Rabobank, a Netherlands bank (the "Receivables Purchase
Agreement"). (R. 251). Pursuant to this agreement, Rabobank agreed to purchase
and finance certain receivables of Agra Canada. (R. 251-52). In connection with
1 As Guzman died in December 2011, the Estate of Eduardo Guzman Solis was the party
named as co-defendant in this action. Rabobank has obtained a default judgment against the
Guzman Estate for the full amount sought here.
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the Receivables Purchase Agreement, and at Guzman's direction, Mr. Herrera
executed a written personal Guaranty in favor of Rabobank. (R. 251).2 Guzman
executed an identical guaranty. (R. 179).
In the Guaranty, Mr. Herrera guaranteed: (a) the obligations of Agra
Canada arising under the Receivables Purchase Agreement; and (b) all "obligations
and liabilities," when due, of Agra USA to Rabobank. The pertinent provisions are
as follows:
SECTION 1. Obligations.
(a) [t]he obligations of the Seller [Agra Canada]
arising under and pursuant to Article 9.02(a)(iii) of the
Receivables Purchase Agreement which provision, for
the avoidance of doubt, mandates that the Purchaser
[Rabobank] shall have recourse against the Seller for, and
the Seller shall pay to the Purchaser, such amounts due
on a Receivable that are not paid on the Payment Due
Date and are not paid under the applicable Insurance
Policy ... ; and
(b) [t]he punctual payment when due, whether at
stated maturity, by acceleration or otherwise of all
obligations and liabilities of the Company [Agra USA] to
the Purchaser now or hereafter existing including without
limitation under the Repayment Agreement, whether for
principal, interest, fees, expenses or otherwise.
(R. 171-72). The term "obligations and liabilities" in section l(b) is not further
defined.
2 The record reflects that Mr. Herrera does not speak, read, or understand English beyond a
rudimentary level. (R. 251-52).
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(R. 172).
Mr. Herrera's Guaranty also contained a standard waiver provision:
SECTION 2. Guaranty Absolute.
The Guarantor guarantees that the Obligations will be
paid strictly in accordance with the terms of the
applicable agreements .... The liability of the Guarantor
shall be absolute and unconditional irrespective of:
(iv) any other circumstance which might otherwise
constitute a defense available to, or a discharge of, the
Seller or a guarantor.
Agra USA also executed a guaranty in favor of Rabobank, signed on
its behalf by Guzman and Mr. Herrera as directors. (R. 332). In language identical
to Mr. Herrera's Guaranty, it guaranteed the obligations of Agra Canada arising
under the Receivables Purchase Agreement, and likewise recited a boilerplate
waiver of defenses. (R. 332-33).
B. Mr. Herrera Discovers Guzman's Fraud
Guzman, who had personally managed the seven-year relationship
with Rabobank under the Receivables Purchase Agreement, died in December
2011. (R. 251-52). Shortly thereafter, Rabobank informed Mr. Herrera that Agra
Canada had failed to remit its regular quarterly payment under the Receivables
Purchase Agreement. (R. 252). After retaining an accounting firm to investigate,
Mr. Herrera discovered that Guzman, without Mr. Herrera's knowledge, had been
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operating a fraudulent scheme. Apparently, Guzman had been sending fictitious
documents to Rabobank to obtain advances on the basis of nonexistent
transactions. (R. 252). Mr. Herrera learned that, as a result, the receivables Agra
Canada had pledged to Rabobank were fictitious. Agra Canada ostensibly owed
approximately $42 million to Rabobank for advances against fictitious receivables.
C. Rabobank Assumes Control Over Agra Canada And Agra USA
Upon learning of Guzman's fraud, Rabobank immediately began to
assume control over Agra Canada and Agra USA. As the senior secured creditor
of Agra Canada, Rabobank filed an application for a bankruptcy order against Agra
Canada in Alberta, Canada on January 18, 2012. (R. 339). Rabobank then caused
its agent, Deloitte & Touche Inc. ("Deloitte"), to be appointed as the receiver and
trustee of Agra Canada's bankrupt estate. Id.
Deloitte was not only being paid by Rabobank; they shared the same
attorney, Haynes & Boone LLP ("Haynes Boone") (R. 341-61) (indeed, Haynes
Boone remains counsel for Rabobank in the present case). Due to the symbiotic
relationship among the three entities, Deloitte, rather than independently pursuing
recovery of assets on behalf of the Agra Canada estate and its creditors, instead
deferred to Rabobank and Haynes Boone with respect to its recovery efforts. For
example, Deloitte's First Report of the Interim Receiver (the "Report"), dated
February 1, 2012, reveals that because Rabobank had already "commenced
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proceedings" against Agra USA as of January 18, 2012,3 Deloitte had decided to
"take[] only minimal actions with respect to property in the United States."
(R. 343). Deloitte's initial failure to take any action or responsibility in preserving
the assets of Agra USA (R. 342) was merely the beginning of its role as an agent
operating exclusively at the sole command of and for the benefit of Rabobank.
In February 2012, Rabobank, acting through Haynes Boone and
Deloitte, began to seize control of Agra USA' s property. Thus, on February 17,
2012, Haynes Boone sent to a Texas attorney for Mr. Herrera a letter concerning
property of Agra USA with "instruct[ions]" that the attorney "immediately take
steps to preserve any materials, documents, or computers in [his] control."
(R. 368-69).
Then, on April 11, 2012, Rabobank caused Deloitte to formally
remove Mr. Herrera as the director and officer of Agra USA. (R. 368-369). At
Rabobank's instruction, the Deloitte trustee, Bruce Beggs, was named as sole
officer and director of Agra USA. Id. An April 25, 2012 letter from Haynes
Boone to Mr. Herrera's Texas lawyer states:
3 Prior to commencing this action in New York County Supreme Court, Rabobank
commenced a proceeding in the District Court of Harris County, Texas as against Agra Canada,
Agra USA, Herrera, and Guzman, to recover the amounts owed to it on the allegedly outstanding
Receivables. (R. 275). Rabobank voluntarily dismissed that action on June 6, 2012, when
Mr. Herrera cross-moved to dismiss the Supreme Court action on grounds of prior action
pending. See CPLR 321 l(a)(4).
-8-
On April 11, 2012, as sole stockholder of Agra Services
USA, Inc., Agra Services of Canada Inc. voted to remove
all prior directors and officers of Agra Services USA,
Inc. and elected Bruce Beggs of Deloitte & Touche Inc.
to serve as President, sole Officer, and sole Director of
Agra Services USA Inc. As a result, Mr. Beggs now
holds exclusive corporate authority over Agra Services
USA, Inc.
Id. (emphasis added).
D. Rabobank's Collusive Federal Action Against Agra USA
Represented by Haynes Boone, Rabobank commenced an action
against Agra USA on March 2, 2012 in the United States District Court for the
Southern District of New York (the "Federal Action"). (R. 285-93).4 Rabobank
alleged in its complaint that Agra USA was obligated to pay the approximate
$42 million because it had guaranteed the "receivables" owed to Rabobank by
Agra Canada. Id.
Given Rabobank's exercise of control over Agra USA even prior to
the commencement of the Federal Action, it should come as no surprise that Agra
USA did not respond, object, or otherwise ever appear in the Federal Action.
(R. 366-67).
4 Rabobank also named Mr. Herrera and Guzman as defendants. However, the federal
court did not have subject matter jurisdiction over an action by a Dutch plaintiff against two
Mexican citizens. See 28 U.S.C. § 1332(a) and (c). Accordingly, Rabobank ultimately filed a
notice of voluntary dismissal of the complaint against Mr. Herrera and Guzman on April 19,
2012. (R. 284). That left Agra USA, which Rabobank controlled, as the only defendant in the
Federal Action.
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Accordingly, on April 3, 2012, Rabobank filed a request in the
Federal Action for the entry of a default against Agra USA. (R. 363-67).
Although the Clerk entered the default, Rabobank could not obtain a default
judgment from the Clerk. Rabobank was instead required to file a motion for the
entry of a default judgment. 5
On April 11, 2012, as noted above, Rabobank caused the removal of
Mr. Herrera as officer and director of Agra USA, and replaced him with Beggs, the
Deloitte trustee. (R. 368-69).
On April 16, 2012 and April 19, 2012, just days after installing its
own agent as sole officer and director of Agra USA, Rabobank filed, respectively,
an Order to Show Cause and supporting Declaration seeking entry of a default
judgment against Agra USA. (R. 375-77). U.S. District Judge Gardephe signed
the Order to Show Cause on April 16, 2012, directing Agra USA to appear on
April 24, 2012 to show cause as to why a default judgment should not be entered.
(R. 375-76).
Of course, defendant Agra USA, under plaintiff Rabobank's complete
control, did not appear on April 24 or otherwise respond or oppose entry of the
judgment. A default judgment (the "Federal Default Judgment") was entered
5 See Local Civil Rule 55.2(b) of the Local Civil Rules of the United States District Courts
for the Southern and Eastern District of New York. Mr. Herrera and Guzman were still
nominally defendants in the case at this time and remained so until April 24, 2012 when the
Court approved the Notice of Voluntary Dismissal as to them.
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against Agra USA on April 30, 2012, the same day that Rabobank filed the instant
action in New York County Supreme Court against Mr. Herrera. (R. 383).
Proceedings Below
A. Rabobank's Motion For Summary Judgment
In Lieu Of Complaint Under CPLR 3213
Rabobank' s Motion, brought as an accelerated proceeding under
CPLR 3213, initially asserted that Mr. Herrera was liable to Rabobank for
$41,991,980 under only Section l(a) of the Guaranty, representing amounts due to
Rabobank by Agra Canada for the "receivables" allegedly sold to it. (R. 219-36).
In opposition to the Motion, Mr. Herrera demonstrated that there could be no
"receivables" as defined by the Receivables Purchase Agreement, which covered
only actual, not fictitious, receivables. Therefore, section l(a) of the Guaranty
could not apply. In its Reply, Rabobank asserted for the first time that it was
invoking section 1 (b) of the Guaranty as to the "obligation" owed by Agra USA by
virtue of the Federal Default Judgment obtained by Rabobank and Haynes Boone.
(R. 296-311).6
Mr. Herrera obtained permission from the IAS court to file a
Sur-Reply in order to address Rabobank's new argument. In the Sur-Reply,
6 Rabobank made no mention of section l(b) of the Guaranty in its Motion when filed on
April 30, apparently because the federal default judgment was not signed until that very day.
Rather than amend the Motion immediately, however, Rabobank waited to raise the
"Section 1 (b )" guaranty until filing its Reply after Mr. Herrera had filed his Opposition to the
Motion.
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Mr. Herrera argued that section 1 (b) of the Guaranty could not apply to the Federal
Default Judgment because the Guaranty purports to guarantee only those
"obligations" of Agra USA "when due," and the Federal Default Judgment was not
a valid "obligation" due to Rabobank. (R. 320-23). Rather, it was the product of
collusion because Rabobank, the plaintiff, controlled Agra USA, the "defaulting"
defendant. Id. Therefore, questions of fact as to whether it was indeed collusively
created by Rabobank precluded summary judgment.
B. The Decision Of The IAS Court
By a decision and order dated December 12, 2012, the IAS court
correctly denied Rabobank's Motion. (R. 7-17). At oral argument, Justice Ramos
noted that the court must "first understand as Defendant points out, what, in fact, is
the subject matter of the guarantee? And if it is the receivables [under section l(a)
of the Guaranty,] and there were no receivables, then the guarantee doesn't
guarantee anything." (R. 25-26). Similarly, as to Rabobank's attempt to collect
under section 1 (b) of the Guaranty (covering the obligations of Agra USA to
Rabobank), Justice Ramos found that a showing of collusion would invalidate the
very existence of any "obligation" under that Guaranty. (R. 31) ("The only way I
can get around [Rabobank's waiver argument] would be to buy [Herrera's]
collusion argument .... ").
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In its written decision and order, the IAS court held that fact questions
as to the existence of real "receivables" precluded summary judgment as to
section l(a) of the Guaranty. (R. 16).
As to Section 1 (b) of the Guaranty, the court found that issues of fact
existed as to who controlled Agra USA "during the course of the District Court
action, at the time of default, and when judgment was entered[,]" and thus whether
Rabobank's Federal Default Judgment was the product of collusion. (R. 17). The
court recognized that even following entry of the Federal Default Judgment, Agra
USA would not be able to contest the validity of that judgment due to Rabobank' s
exercise of dominion and control over it. Id. Accordingly, the court found that
material issues of fact precluded summary judgment as to section 1 (b) of the
Guaranty, and therefore denied Rabobank's Motion for Summary Judgment in
Lieu of Complaint.
C. The Decision Of The Appellate Division
On January 16, 2014, in a 3-2 decision and order, the Appellate
Division reversed the IAS court's denial of summary judgment. (R. vii).
First, the majority held that, under the Guaranty's waiver provision,
Mr. Herrera was precluded from raising issues of fact as to the existence of the
"obligation" sought to be enforced against him. (R. xiii - xiv). The Appellate
Division held that, even if viewed as insisting upon Rabobank's affirmative duty to
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establish that a valid "obligation" existed under the terms of the Guaranty, raising
the issue of collusion in the Federal Default Judgment was a "defense" that
Mr. Herrera had waived in the general waiver of defenses. Id.
Second, the majority found that, in any event, there were no material
issues of fact as to collusion because Mr. Herrera was still formally a director of
Agra USA until April 11, 2012. (R. xiv - xv). The majority speculated that
Mr. Herrera therefore could have asserted a defense on Agra USA's behalf in the
Federal Action (thus actually underscoring the existence of questions of fact on
this point). Id. The majority further failed to address the undisputed evidence
demonstrating that Rabobank had begun exerting control over Agra USA, to the
exclusion of Mr. Herrera, prior to April 11, 2012, and that for almost three weeks
after April 11, 2012, Rabobank continued to actively and aggressively seek a
default judgment against Agra USA, which it controlled exclusively.
The dissenting justices, on the other hand, correctly recognized:
(1) Mr. Herrera's insistence that Rabobank establish the existence of a valid
"obligation" is not a "defense" waived by the Guaranty; and (2) material issues of
fact exist as to who controlled Agra USA, and the circumstances of Rabobank's
collusive federal lawsuit. (R. xviii - xxvi). The dissenting justices would have
affirmed the IAS court and denied summary judgment.
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ARGUMENT
I
MR. HERRERA DID NOT WAIVE
RABOBANK'S COLLUSION
The Appellate Division majority erroneously determined that, even if
Rabobank's Federal Default Judgment against Agra USA had been procured by
means of a collusive lawsuit, the waiver provision in Mr. Herrera's Guaranty
would nonetheless, in effect, grant Rabobank a carte blanche to enforce against
Mr. Herrera a collusively-obtained judgment of almost $42 million. (R. xii - xiv).
In reaching that conclusion, the majority ignored the legal
requirements for summary judgment and incorrectly labeled as a waived "defense"
one of the critical elements that every plaintiff must establish in seeking summary
judgment on a guaranty (including a guaranty with a waiver of defenses):
a plaintiff must establish the existence of an indebtedness covered by the guaranty
and the defendant may challenge that claim. The failure to recognize and enforce
these legal principles is the fundamental error in the majority decision of the
Appellate Division.
A. To Obtain Judgment On The Guaranty, Rabobank Must
Establish The Existence Of A Guaranteed Obligation
There can be no question in this or any case that a guarantor can only
be liable for an obligation or debt that is subject to the terms of the guaranty.
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See, e.g., Preamble Props., L.P. v. Thomas K. Woodard Antiques Corp.,
293 A.D.2d 330, 331, 739 N.Y.S.2d 824, 824-25 (1st Dep't 2002) (guarantors
could not be held liable for lease payments that did not constitute obligations
accruing under their guaranties); Sunbelt Rentals, Inc. v. New York Rennaissance,
No. 152106/2012, 2013 N.Y. Misc. LEXIS 6024, at *15-16 (Sup. Ct. N.Y. Cnty.
Dec. 16, 2013) (even though it was "uncontested" that guarantors had executed
unconditional guaranties, summary judgment was improper where plaintiff failed
to establish the existence of an underlying debt "for which the guarantors may be
held liable under their personal guaranties").
Thus, the IAS court correctly held:
On a motion for summary judgment to enforce an
unconditional guaranty, the creditor must prove the
existence of the guaranty, the underlying debt, and the
guarantor's failure to perform under the guaranty
(Davimos v. Halle, 35 AD3d 270, 273 ][1st Dep't 2006]).
A guaranty must be construed "in the strictest manner"
(id.).
(R.15). These elements are, in effect, conditions precedent to recovery on a
guaranty.
Mr. Herrera does not challenge the validity of the Guaranty or his
non-payment. He does challenge whether an "obligation" exists -- the "underlying
debt" -- that is subject to the Guaranty. Mr. Herrera has raised a fact issue as to
collusion that eliminates the underlying debt, and thus calls into question the
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existence of an "obligation" of Agra USA. The majority erred, however, in finding
that "collusion, even if it existed, goes to the question of how and when the default
judgment was entered, not to the question of the underlying indebtedness."
(R. xvii). That finding misses the point: the question of how and when the default
judgment was entered does go to the question of the underlying indebtedness under
section l(b) of the Guaranty, i.e., whether there was an "obligation" under that
section. The "underlying indebtedness" that Rabobank seeks to enforce here is the
Federal Default Judgment against Agra USA.
The majority confused the alleged indebtedness that Rabobank seeks
to collect from Mr. Herrera under section l(a) of the Guaranty (the unpaid
receivables of Agra Canada) with the alleged indebtedness Rabobank seeks to now
collect under section 1 (b) (the Federal Default Judgment against Agra USA). On
appeal to the Appellate Division, and before this Court, Rabobank seeks to enforce
only section l(b). It does not seek to enforce section l(a). Indeed, Rabobank did
not appeal the denial of summary judgment as to section l(a).7 Thus, contrary to
the Appellate Division's holding, Mr. Herrera need not allege "that [Rabobank]
colluded with Guzman to engage in a fraudulent scheme leading to a $42 million
indebtedness." (R. xvii). The $42 million indebtedness that Rabobank seeks to
7 Significantly, neither Rabobank nor the Appellate Division asserted that the waiver of
defenses in the Guaranty precludes Mr. Herrera from demonstrating that fact issues exist as to
the validity of the "receivables" covered by section 1 (a) of the Guaranty.
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collect here is not the outstanding receivables but, rather, the Federal Default
Judgment that was obtained after Rabobank assumed control over the Agra
entities. Mr. Herrera has properly set forth material issues of fact as to whether the
Federal Default Judgment was an "obligation" covered by the Guaranty.
B. The Waiver Of Defenses Does Not Preclude
Mr. Herrera's Challenge To The
Existence Of A Guaranteed "Obligation"
The majority opinion accuses Mr. Herrera of making a "merely
semantic" argument by "reframing a defense as the failure of a condition
precedent." (R. xiii). Respectfully, the majority missed the key point: as set forth
above, Rabobank must establish the existence of a debt covered by the Guaranty.
The typical affirmative defenses referred to by the majority, such as fraudulent
inducement (R. xiv), dispute a plaintiff's legal right to recover upon an otherwise
valid underlying debt. Mr. Herrera does not seek to do that, as he is not calling
into question the validity of the Guaranty, nor is he calling into question
Rabobank's legal right to recover upon "obligations" accruing under the Guaranty.
Rather, he disputes the very existence of a debt covered by the Guaranty. Nothing
in the waiver of defenses precludes Mr. Herrera from forcing Rabobank to fulfill
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the requirements for obtaining summary judgment on a guaranty. 8
As the dissenting opinion recognizes, this case falls squarely within
the holding articulated by the Third Department in Canterbury Realty &
Equipment Corp. v. Poughkeepsie Sav. Bank, 135 A.D.2d 102, 524 N.Y.S.2d 531
(3d Dep't 1988). There, the guarantors had unconditionally guaranteed "payment,
when due ... of any and all liabilities of [Canterbury] to the Bank." 135 A.D.2d at
104, 524 N.Y.S.2d at 532. The guarantors, however, set forth evidence indicating
that, similar to Rabobank's collusive acquisition of the Federal Default Judgment,
the Bank in Canterbury had "unfairly brought about the occurrence of the very
condition precedent ... upon which it relied to accelerate the loan against the
guarantors." 135 A.D.2d at 107, 524 N.Y.S.2d at 534. Even though the guarantees
at issue were "unconditional" and waived all defenses, the court held that it was
obligated to hold "the Bank to the terms of that [guaranty] itself ... [because] [t]he
guarantors only obligated themselves unconditionally to make payments on
Canterbury's liabilities 'when due."' 135 A.D.2d at 106, 524 N.Y.S.2d at 534.
8 In citing to Citibank N.A. v. Plapinger, 66 N.Y.2d 90, 485 N.E.2d 974 (1985), the
majority mistakenly mischaracterizes as a "defense" Rabobank's prima facie duty to prove that
the Guaranty applies. (R. xiv). In Citibank, a written waiver precluded defendant from asserting
the affirmative defense of fraudulent inducement because to allow defendant to claim that the
guaranty at issue did not encompass the parties' agreement in its entirety would "in effect
condone defendants' own fraud in deliberately misrepresenting [their] true intention ... when
putting their signatures to their 'absolute and unconditional' guarantee." 66 N.Y.2d 90, 95, 485
N.E.2d 974, 977 (citations omitted). The reasoning in Citibank is thus inapposite, as Mr. Herrera
neither questions the validity of the Guaranty nor Rabobank's right to collect. Mr. Herrera asks
only that Rabobank be reqmred to meet its burden to establish the existence of an "obligation"
covered by the Guaranty. To hold Rabobank to the terms of the Guaranty would not, as in
Citibank, condone any "fraud in deliberately misrepresenting" his signature on the Guaranty.
-19-
Reasoning that a debt wrongfully accelerated by the Bank could not constitute a
"due" obligation, the court denied the Bank's motion for summary judgment. Id.
Summary judgment should be denied in the instant case on the exact same
grounds: a judgment that is void due to Rabobank's collusion does not constitute
an "obligation" owed to Rabobank under the terms of the Guaranty.
The court reached a similar conclusion in Signature Bank v. Laro
Maintenance Corp., No. 016790/2009, 2011 N.Y. Misc. LEXIS 3205 (Sup. Ct.
Nassau Cnty. June 21, 2011). There, the defendant-guarantors presented evidence
demonstrating that the plaintiff's agent had "orchestrated the default" - a default
which plaintiff subsequently sought to enforce under the defendants' guarantees.
Id. at *7. The defendants claimed that an obligation had not yet accrued under the
guarantees due to the plaintiff's wrongful acceleration of the debt. Id. The court
was quick to clarify that the defendants' position was "not a defense to the
Guaranty" and did not implicate the broad waiver clauses contained in the
defendants' guarantees. Id. at *6. Rather, the court held, the defendants'
arguments "go to a basic fact question that the Plaintiff must resolve in order
to establish a prima facie case .... " Id. Accordingly, the court denied summary
judgment because the defendants successfully raised "triable issues of fact
regarding Plaintiff['s] knowledge and encouragement of [the] impending
default .... " Id. at *7-8.
-20-
This Court should do the same here, where the issue is whether
Rabobank knowingly created a collusive default judgment to manufacture an
"obligation" under the Guaranty. Such an "obligation" is no obligation at all. See,
e.g., Petra Mtge. Capital Corp., LLC v. Amalgamated Bank, No. 101283/2010,
2014 N.Y. Misc. LEXIS 2533, at *14-15 (Sup. Ct. N.Y. Cnty. June 6, 2014) ("It
has long been established that '[a] promisee who prevents the promisor from being
able to perform the promise can not maintain suit for nonperformance; lie
discharges the promisor from duty' .... because the so-called defaults upon which
Amalgamated relies were caused by Amalgamated's halt in processing and paying
advances, Amalgamated's motion for summary judgment on its cause of action for
foreclosure is denied.") (citations omitted).
Here, however, the Appellate Division majority ignored Signature
Bank and tried to distinguish Canterbury by asserting that Mr. Herrera - and the
dissent - fail to recognize that the purported collusion here is a "defense" and not
the failure of a condition precedent. (R. xvi - xvii). Again, the majority missed
the point. Mr. Herrera's argument is not, as the majority characterized it, an issue
of "semantics" with Mr. Herrera simply labeling a "defense" as a "condition
precedent." The collusion (as to which fact questions exist) prevents Rabobank
from meeting its burden of establishing the existence of the very underlying
indebtedness at issue: a legitimate obligation of Agra USA guaranteed by
-21-
Mr. Herrera. 9 That is unquestionably a condition precedent to triggering the
Guaranty.
C. A Collusive Default Judgment Cannot Be
An "Obligation" Of Agra USA Under The Guaranty
The Guaranty provides in Section 1 (b) that Mr. Herrera guarantees all
"obligations and liabilities" of Agra USA to Rabobank, "when due." By its terms
if no "obligation" or "liability" is "due," the Guaranty cannot apply. It cannot
apply here because a collusively obtained "obligation" is no obligation at all. As
the dissent makes clear (R. xxii):
Plaintiff is entitled to recover on the guarantee only if it
meets its prima facie burden of establishing that the
guarantee by its terms is applicable. The waiver of
defenses provision cannot confer on plaintiff the absolute
right to recover what it has unilaterally deemed to be an
"obligation," if in fact no such obligation exists.
Here, the IAS court correctly held that fact issues as to the existence of the
obligation preclude summary judgment.
Significantly, neither the Appellate Division majority nor Rabobank
disputes the legal proposition that a collusive default judgment is void. See Lane v.
Lane, 175 A.D.2d 103, 104, 572 N.Y.S.2d 14, 16 (2d Dep't 1991) (rejecting
collusive default judgment used as basis for a malpractice action against
9 Of course collusion can be a defense in appropriate circumstances as in the two
authorities cited by the majority. (R. xiii). But the fact that it has constituted a true "defense" in
other cases that are unlike this one does not make it a waived "defense" here.
-22-
defendant's attorney: "[t]o now allow this default judgment, allegedly obtained
through collusion, to be used as a basis for this malpractice claim against
[Defendant's attorney] offends one's sense of justice."). This rule is of long
standing. See S. Spring Hill Gold Mining Co. v. Amador Medean Gold Mining
Co., 145 U.S. 300, 301 (1892) (holding controversy was not "real" where party had
become the "dominus litis" on both sides); Gardner v. Goodyear Dental Vulcanite
Co., 131U.S.103 (1873) (holding that where party to a suit paid the fees of
counsel on both sides, suit was collusive and the judgment should be vacated).
Rabobank was indeed the "dominus litis" on both sides of the Federal
Action. Accordingly, Agra USA could not have a legal duty to pay Rabobank for
the Federal Default Judgment and there was no "obligation," in turn, owed by
Mr. Herrera under the terms of the Guaranty.
Any ruling to the contrary would lead to unjust results. Thus, for
example, if Rabobank had appended to its Motion a false and forged $42 million
promissory note from Agra USA to Rabobank, the Appellate Division's ruling
would require Mr. Herrera to pay that note without first questioning whether the
note is a valid "obligation" under the Guaranty. Quite simply, as the dissent states,
the waiver of defenses contained in Mr. Herrera's Guaranty cannot confer upon
Rabobank an absolute right to recover on what it has unilaterally deemed to be an
"obligation." Rabobank is entitled to recover on the Guaranty only if it can meet
-23-
its prima facie burden of proving that the Guaranty applies by its terms.
Mr. Herrera should not be precluded from raising fact issues as to the very
existence of the obligation that is necessary to trigger the Guaranty.
D. The Guaranty's Waiver Cannot Operate To
Shield Rabobank From Its Own Wrongdoing
As the orchestrator of the collusive Federal Default Judgment that it
now seeks to enforce against Mr. Herrera, Rabobank cannot claim the protection of
the Guaranty's waiver provision in an effort to immunize itself from its own
wrongdoing. That would constitute an impermissible and egregious manipulation
of the courts and of the Guaranty.
The Appellate Division majority failed to address this point. In Red
Tulip, LLC v. Neiva, 44 A.D.3d 204, 211, 842 N.Y.S.2d 1, 6 (1st Dep't 2007), 10 the
court specifically noted that a waiver of defenses would not apply where the facts
of a case could "support a finding that [plaintiff] wrongfully caused [defendant's]
default or some other condition precedent that led to acceleration of the debt." Red
Tulip, 44 A.D.3d at 211, 842 N.Y.S.2d at 6 (emphasis added). Similarly in
Canterbury, the court found that the Bank's wrongful acceleration of the debt
owed to it was sufficient to overcome the guarantor's "absolute" waiver, and
10 The majority was aware of Red Tulip, citing it for the proposition that a written waiver
precludes a defendant from raising affirmative defenses.
-24-
"serve[d] to discharge the guarantors' obligation." 135 A.D.2d at 107, 524
N.Y.S.2d at 534-535.
Likewise here, Rabobank's wrongful creation of an ostensible
"obligation" of Agra USA is not covered by the waiver provisions of the Guaranty.
Any other result would be unjust and violate the established principle that "a
written waiver in any form cannot operate to shield a party from [its] own fraud."
Pike v. New York Life Ins. Co., 72 A.D.3d 1043, 901 N.Y.S.2d 76 (2d Dep't 2010)
(citations omitted) (holding that a waiver of "all rights, claims and demands" did
not preclude plaintiffs from advancing causes of action against defendant insurance
company for fraudulent misrepresentation and fraudulent inducement in
connection with the subject insurance policies); see also European American Bank
v. Mr. Wemmick, Ltd., 160 A.D.2d 905, 906-907, 554 N.Y.S.2d 628, 630 (2d Dep't
1990) (denying plaintiff bank's motion for summary judgment because defendants'
waiver of all counterclaims could not be used to shield the bank "from its own
tortious conduct" where defendants set forth evidence of the bank's fraudulent
misrepresentations).
-25-
II
MATERIAL ISSUES OF FACT
PRECLUDE SUMMARY JUDGMENT
If the Federal Default Judgment was the product of Rabobank's
collusion with Agra USA, a company it controlled, that judgment is void and
cannot constitute a valid "obligation" of Agra USA encompassed by the Guaranty.
The Appellate Division majority decision does not dispute that legal conclusion, as
discussed above. However, the majority erred in finding that there were no
material issues of fact as to collusion. (R. xiv - xv).
A. Issues of Fact Exist As To Whether
Rabobank Controlled Agra USA Prior To April 11, 2012
The Appellate Division focuses on April 11, 2012 as the date until
which Mr. Herrera allegedly had some role in Agra USA. (R. xiv). That is the
date when Deloitte, Agra Canada's trustee acting for Rabobank, formally removed
Mr. Herrera as an officer and director of Agra USA. Accordingly, the majority
points to the dates March 7, 2012 (the date the Federal Action was commenced
against Agra USA) and April 4, 2012 (the date Rabobank served its request for
entry of the default judgment) as determinative in insinuating that Mr. Herrera
-26-
could have asserted a defense on behalf of Agra USA at those moments in time. 11
(R. xiv - xv).
The majority, however, ignored the extensive evidence in the record
reflecting that Rabobank began asserting control over Agra USA even prior to the
formal removal of Mr. Herrera as director. 12
Rabobank first obtained control over Agra Canada in January 2012
when it placed Agra Canada into receivership in Alberta, Canada, and arranged for
the appointment of its agent, Deloitte, as receiver and trustee. (R. 339). Deloitte
was paid by Rabobank and was represented by Rabobank's own lawyers, Haynes
Boone. It was tasked with seeking recovery of the assets of Agra Canada and Agra
USA, the wholly-owned subsidiary of Agra Canada, for the exclusive benefit of
Rabobank. (R. 341-61).
Thus, Rabobank obtained writs of garnishment against Agra USA in
Texas on January 18, 2012. (R. 343). Through Haynes Boone and Deloitte,
11 Although Mr. Herrera lacked the ability to assert it on Agra USA's behalf, Agra USA did
have a viable argument that would have precluded judgment: specifically, that its guaranty of
Agra Canada's "receivables" was not triggered because there were no legitimate "receivables"
subject to its guaranty. (R. 318-19). Of course the Rabobank-controlled Agra USA would not
make that argument to the federal court. It is the identical argument later presented by Mr.
Herrera in this action as to the identical provision in his Guaranty, an argument that survived
summary judgment and that Rabobank did not challenge on appeal.
12 It should be noted, however, that because of the accelerated nature of the proceeding
under CPLR 3213, the parties had neither exchanged any pleadings nor conducted any discovery
at the time Rabobank's Motion was briefed and submitted to the IAS Court. Relevant documents
on the issue of control were produced by the parties only after Rabobank's appeal had been fully
submitted to the First Department.
-27-
Rabobank further extended its de facto control over Agra USA as early as February
2012. (R. 368-69). At that time, Haynes Boone, with knowledge that Mr. Herrera
was nominally a director of Agra USA, began seizing the assets of Agra USA and
instructed a lawyer for Mr. Herrera to secure and return any such property to
Deloitte. Id.
Through Haynes Boone, Rabobank then commenced the Federal
Action in New York against Agra USA on March 2, 2012, with full knowledge
that Agra USA's "obligations" were guaranteed by Mr. Herrera, and that Agra
USA in fact had no assets. (R. 285, 346, 354). When, as Rabobank and Haynes
Boone knew would happen, Agra USA did not respond to the complaint,
Rabobank requested on April 3, 2012 that the Clerk of the District Court "enter" a
default against Agra USA. (R. 363-67).
Accordingly, even as of April 11, 2012, when Mr. Herrera was
replaced as the director of Agra USA with the Deloitte trustee, the record presents
material issues of fact as to whether Mr. Herrera retained any practical or legal
ability to respond to the Federal Action on behalf of Agra USA.
B. Issues of Fact Exist As To Whether
Rabobank Controlled Agra USA After April 11, 2012
The Appellate Division majority erred critically in ignoring
Rabobank's conduct following the removal of Mr. Herrera as director on April 11,
-28-
2012. The Federal Default Judgment was not actually entered against Agra USA
until almost three weeks later, on April 30, 2012. During this time, Rabobank
continued to affirmatively (and collusively) seek the judgment against Agra USA,
a company it unquestionably controlled. Following appointment of Rabobank's
agent, Deloitte partner Bruce Beggs, as sole director of Agra USA:
( 1) Rabobank, represented by Haynes Boone, filed an Order to
Show Cause on April 16, 2012 as to why "an order should not be issued granting
[Rabobank] a default judgment .... " (R. 375-76);
(2) A Haynes Boone partner filed a "Declaration in Support of
Order to Show Cause for Entry of Default Judgment" on April 19, 2012 in which
he represented to the court simply that "Agra USA failed to answer or otherwise
respond to the complaint." (R. 379); and
(3) Agra USA, controlled by Rabobank, failed to appear for the
hearing on April 24, 2012 set by U.S. District Judge Gardephe to explain why
default should not be entered. (R. 375-76).
The Federal Default Judgment was not actually entered until
April 30, 2012. (R. 383). Thus, even if Rabobank had not exercised its de facto
control over Agra USA as early as February 2012, and even if Mr. Herrera could
have asserted a defense on Agra USA' s behalf prior to April 11, 2012, Rabobank
pursued and secured a default judgment against an entity that was unquestionably
-29-
within its exclusive control for almost three weeks after Mr. Herrera was formally
removed as director of Agra USA.
The majority of the Appellate Division thus erred in failing to
consider the totality of events in the Federal Action for purposes of assessing
whether material issues of fact exist to preclude an award of summary judgment.
Upon examination of these facts taken as a whole, it is clear that the fact question
of who controlled Agra USA at the crucial time remains vigorously disputed.
The IAS court and the Appellate Di vision dissent were correct:
Rabobank's Motion for Summary Judgment in Lieu of Complaint should have
been denied.
Conclusion
The Order of the Appellate Di vision should be reversed.
August 4, 2014
New York, New York
17927548 -30-
Respectfully submitted,
CURTIS, MALLET-PREVOST,
COLT & MOSLE LLP
By: .:..' ---"""'1:::::::::::-
T. Barry King m
Francesca M. Erts
101 Park A venue
New York, New York 10178-0061
(212) 696-6000
Attorneys for Defendant-Appellant