Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 1 of 16 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X CITICORP LEASING, INC., : Plaintiff, : -against- : 03 Civ. 1586 (WHP) MEMORANDUM AND ORDER UNITED AMERICAN FUNDING, INC., : JOHN J. PREHN, and PETER J. WACHTELL, : Defendants. : - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X WILLIAM H. PAULEY III, District Judge: Citicorp Leasing, Inc. ( Citicorp ) brings this diversity action to collect the unpaid balance on loans made to defendant United American Funding, Inc. ( UAF ). Defendants John J. Prehn and Peter J. Wachtell personally guaranteed those loans. Presently before this Court is Citicorp s motion for summary judgment on its claims against Prehn and Wachtell (collectively, Defendants ) and on Defendants counterclaims. In the alternative, Citicorp moves to strike Defendants jury demand as contractually waived. For the reasons set forth below, Citicorp s motion for summary judgment is granted as to Defendants liability and its motion to strike the jury demand is granted with respect to the determination of damages. BACKGROUND UAF was a Nevada corporation in the business of leasing and financing the sale of automobiles. 1 (Plaintiff s Statement Pursuant to Local Rule 56.1 ( Pl. 56.1 Stmt. ) 1; Defendants Statement Pursuant to Local Rule 56.1 ( Defs. 56.1 Stmt. ) 1.) In May 1998, UAF entered into two Loan and Security Agreements (the Loan Agreements ) with European 1 UAF is no longer in business and has no assets. (Pl. 56.1 Stmt. 2; Defs. 56.1 Stmt. 2.) Citicorp s claims against it are not implicated in the instant motion.
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 2 of 16 American Bank ( EAB ) to finance the purchase of motor vehicles that it would finance or lease to its customers. (Complaint ( Compl. ) Exs. A, B; Pl. 56.1 Stmt. 13, 14; Defs. 56.1 Stmt. 13, 14.) The loans were secured by the motor vehicles and the finance and lease agreements, as well as UAF s inventory, property and fixtures. (Compl. Exs. A, B.) In July 2001, EAB merged with Citibank, N.A. ( Citibank ), which assigned the Loan Agreements to Citicorp, a Citibank subsidiary. (Pl. 56.1 Stmt. 11, 12; Defs. 56.1 Stmt. 11, 12.) Defendants, who were officers and shareholders of UAF, personally guaranteed both loans through identical documents dated May 18, 1998 (the Guarantees ). (Compl. Ex. C; Pl. 56.1 Stmt. 17, 18; Defs. 56.1 Stmt. 17, 18.) At the time the Loan Agreements and Guarantees were executed, each defendant owned 30% of UAF but was not involved in its daily operations. (Pl. 56.1 Stmt. 5, 6, 8; Defs. 56.1 Stmt. 5, 6, 8.) Rather, UAF s president, Armando Tully ( Tully ), managed the business. 2 (Pl. 56.1 Stmt. 3; Defs. 56.1 Stmt. 3.) The Guarantees fix Defendants obligations with respect to the EAB-UAF loans unconditionally, absolutely and irrevocably... irrespective of (a) the genuineness, validity or enforceability of... [the Loan Agreements], or (b) the existence, validity or value of any security for any of the Liabilities. (Compl. Ex. C.) Further, the Guarantees provide that Defendants liability is unaffected by any subsequent modification to the Loan Agreements or EAB s actions or inaction with respect to UAF and the other guarantors: Guarantor consents that from time to time, without notice to or further consent from Guarantor and without releasing or affecting its liability hereunder,... any security may be exchanged, released, enforced, sold, leased or otherwise dealt with, the provisions of any documents may be cancelled, compromised, modified or waived, any other guarantor may be released, and any indulgence may be granted Debtor, as EAB may in its discretion determine. 2 Tully and his wife Mary were named as defendants in this action but subsequently filed for bankruptcy protection. (Pl. 56.1 Stmt. 4; Defs. 56.1 Stmt. 4.) Citicorp dismissed the Tullys from this action in March 2004. 2
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 3 of 16 (Compl. Ex. C.) Additionally, Defendants waive[d] and consent[ed] to the non-perfection, lapse or disposition of or other dealing with any security interests or liens at any time granted to EAB as security for any of the Liabilities. (Compl. Ex. C.) The Guarantees permit Citicorp to enforce the Liabilities without resorting first to any other right, remedy or security. (Compl. Ex. C.) Finally, Defendants waived their right to interpose any counterclaim or consolidate any other action with an action on the Guarantees as well as their right to a jury trial. (Compl. Ex. C.) Both the Loan Agreements and the Guarantees are governed by New York law. (Compl. Exs. A-C.) All parties agree that Tully caused UAF to be delinquent on its loan obligations. (Pl. 56.1 Stmt. 21; Defs. 56.1 Stmt. 21.) Specifically, as early as 2000, Tully permitted UAF to sell vehicles out of trust by accepting automobile lease payments that it failed to remit to Citicorp. (Deposition of John Prehn, dated July 26, 2004 at 30-32, 203-09; Affidavit of Arthur Loewenthal, dated Sept. 27, 2004 ( Loewenthal Aff. ) 4-5.) EAB wrote to Tully twice in April 2000 regarding these breaches and copied Defendants on the correspondence. (Pl. 56.1 Stmt. 22; Defs. 56.1 Stmt. 22; Affidavit of Francis McCaughey, dated Sept. 27, 2004 ( McCaughey Aff. ) Ex. H.) Meanwhile, Tully incorporated a new automobile leasing company named Armar Corporation ( Armar ). (Affidavit of Armando Tully, Jr., dated Nov. 9, 2004 ( Tully Aff. ) 17.) Armar also obtained financing from Citicorp. (Tully Aff. 18.) Defendants were not involved in Armar s corporate management, did not guarantee Citicorp s loans and had no knowledge of Armar s transactions. (Tully Aff. 17, 18.) In September 2001, Citicorp issued a note to Armar (the September 2001 Note ) for approximately $298,000. (McCaughey Aff. Ex. L.) A Citicorp official attests that the September 2001 Note consolidated the outstanding balances on certain UAF and Armar accounts. (Loewenthal Aff. 18; Reply Affidavit of Arthur Loewenthal, dated Nov. 23, 2004 ( Loewenthal Reply Aff. ) 3; McCaughey Aff. 13.) 3
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 4 of 16 Moreover, Citicorp officials attest that, notwithstanding the fact that the September 2001 Note was in Armar s name, Citicorp did not use UAF s cash flow payments to satisfy Armar s indebtedness and applied [them] solely and exclusively to the UAF obligation. 3 (Loewenthal Reply Aff. 4; see McCaughey Aff. 14.) Citicorp s internal memoranda corroborate Citicorp s contention that the two accounts were managed in tandem but the respective balances and payments kept separate. (Loewenthal Aff. Exs. A, K.) Nonetheless, Tully asserts that Citicorp used the UAF cash flow for other purposes. (Tully Aff. 16.) Due to Tully s ongoing failure to fulfill both UAF s and Armar s loan obligations, in mid-2001 Citicorp requested that Tully mortgage his home in Reno, Nevada. (McCaughey Aff. 11-12 & Ex. J: Deed of Trust; Tully Aff. 20.) Because the home was valued at $900,000 and Tully had already mortgaged it for $500,000, Citicorp s second mortgage totaled approximately $400,000. (Tully Aff. 20.) In 2002, the first mortgagor foreclosed, but Citicorp did not receive notice of the foreclosure sale and could not protect its collateral. (Loewenthal Reply Aff. 6; Tully Aff. 20.) Accordingly, the first mortgagor purchased the home for the amount of its outstanding indebtedness far less than the home s value. (Tully Aff. 20.) On September 26, 2002, Citicorp again wrote to Tully concerning UAF s continued failure to remit lease payments to Citicorp and copied Defendants. (Affidavit of Joseph Field, dated Sept. 30, 2004 ( Field Aff. ) Ex. H;.) The letter warned: [N]o further defaults will be tolerated. (Field Aff. Ex. H.) Nonetheless, UAF s delinquency persisted, and on December 16, 2002 Citicorp foreclosed on UAF s automobile lease portfolio. (Field Aff. Ex. I: Letter from Susan G. Rosenthal, Esq. to Prehn and Wachtell, dated Jan. 16, 2003.) At the time Citicorp declared a default, UAF owed $1,270,358 under the Loan Agreements. (Field Aff. Ex. I.) By letter dated 3 Cash flow is the portion of the monthly payment required by a lender above and beyond that necessary to amortize the loan. (Tully Aff. 13.) 4
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 5 of 16 January 16, 2003, Citicorp s counsel wrote directly to Defendants to provide notice of UAF s default and alert them to their potential exposure for any unpaid balance. (Field Aff. Ex. I.) On July 25, 2003, after placing notices in automotive periodicals and directly advising interested parties, including Defendants, Citicorp conducted a foreclosure sale on the lease portfolio at its offices. (Loewenthal Aff. 10-12; Loewenthal Reply Aff. 8-9 & Ex. D.) Citicorp was the only participant in the foreclosure sale and purchased the UAF portfolio for $474,524. (Loewenthal Aff. 12; Loewenthal Reply Aff. 9.) Citicorp claims that Defendants are liable for the $614,711 unpaid loan balance that UAF has yet to satisfy through cash payments or collateral. (Loewenthal Aff. 20.) Defendants refuse to pay this amount. In March 2003, Citicorp commenced this action claiming breach of guaranty by Defendants. Defendants counterclaim for a declaratory judgment that Citicorp materially modified one of the Loan Agreements, thereby terminating the Guarantees. Defendants also counterclaim for fraud, estoppel, breach of fiduciary duty, breach of contract and breach of an implied covenant of good faith and fair dealing. 4 Defendants demand a jury trial. Citicorp now moves for summary judgment on its claims and on Defendants counterclaims or, in the alternative, to strike Defendants jury demand. DISCUSSION I. Summary Judgment Standard Summary judgment is warranted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 4 Except as discussed below, defendants are no longer pursuing their counterclaims. (Transcript of Hearing, dated Dec. 10, 2004 at 12.) 5
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 6 of 16 247 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The burden of demonstrating the absence of any genuine dispute as to a material fact rests with the moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970); Grady v. Affiliated Cent., Inc., 130 F.3d 553, 559 (2d Cir. 1997). In determining whether there is a genuine issue as to any material fact, [t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor. Liberty Lobby, 477 U.S. at 255. II. Citicorp s Prima Facie Case Under New York law, a creditor seeking to enforce a written unconditional guaranty satisfies its prima facie case by establishing: (1) an absolute and unconditional guarantee; (2) the underlying debt; and (3) the guarantor s failure to satisfy the unpaid debt. Kensington House Co. v. Oram, 293 A.D.2d 304, 305, 739 N.Y.S.2d 572, 572 (1st Dep t 2002); Key Bank of Long Island v. Burns, 162 A.D.2d 501, 502, 556 N.Y.S.2d 829, 830 (2d Dep t 1990); accord U.S. Sec. & Futures Corp. v. Irvine, No. 00 Civ. 2322 (RMB), 2003 WL 1907877, at *4 (S.D.N.Y. Apr. 16, 2003). Defendants do not dispute that the Guarantees they executed are absolute and unconditional; that UAF defaulted on the Loan Agreements; and that they have failed to satisfy the underlying debt. (Defs. 56.1 Stmt. 17-18, 21-25.) Since Citicorp established a prima facie case, the burden shifts to Defendants to assert a meritorious defense for which a genuine issue of material fact exists. See Bank Leumi Trust Co. of N.Y. v. Ratter & Liebman, 182 A.D.2d 541, 542, 582 N.Y.S.2d 707, 708 (1st Dep t 1992); Gateway State Bank v. Shangri-La Private Club for Women, Inc., 113 A.D.2d 791, 792, 493 N.Y.S.2d 226, 227 (2d Dep t 1985); see also United Bank of Africa, P.L.C. v. Odimayo, No. 93 Civ. 3998 (WK), 1994 WL 185826, at *2-4 (S.D.N.Y. May 10, 1994) (evaluating defendants affirmative defenses despite their irrevocable and unconditional guarantee). 6
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 7 of 16 III. Defendants Affirmative Defenses and Counterclaims Defendants advance four arguments in opposition to Citicorp s claims and in support of their counterclaims: (1) Citicorp modified the underlying Loan Agreements by agreeing that excess cash flow from UAF would be used to satisfy Armar s debt to Citicorp; (2) Citicorp failed to mitigate its damages by misapplying UAF s cash flow to the Armar loan and failing to protect its interest in the Tully home; (3) Citicorp s sale of the portfolio collateral was commercially unreasonable; and (4) Citicorp conspired with Tully to fraudulently conceal UAF s true state of affairs from Defendants, causing them to decline an opportunity to sell UAF s automobile lease portfolio. Citicorp maintains that these defenses and counterclaims are barred by the unconditional and absolute Guarantees. Unconditional guarantees are enforceable if written in clear and unambiguous terms. EMI Music Mktg. v. Avatar Records, Inc., 317 F. Supp. 2d 412, 419 (S.D.N.Y. 2004); see Otto Roth & Co. v. Gourmet Pasta, Inc., 277 A.D.2d 293, 295, 715 N.Y.S.2d 78, 80 (2d Dep t 2000); Korea First Bank of N.Y. v. Cha, 259 A.D.2d 378, 379, 687 N.Y.S.2d 124, 125 (1st Dep t 1999). The rule reflects the notion that when parties have expressly allocated risks, the judiciary shall not intrude into their contractual relationship. Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 735 (2d Cir. 1984) (discussing Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (1959)). Where a guarantee recites that it is unconditional, certain defenses are automatically precluded and thus non-meritorious. For example, an unconditional guarantor cannot raise the defense of fraudulent inducement. Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 95 (1985) (affirming summary judgment for a creditor and rejecting the guarantor s fraudulent inducement counterclaim because the substance of defendants [ absolute and unconditional ] guarantee forecloses their reliance on the claim that they were fraudulently induced ); Bank Leumi Trust Co. of N.Y. v. Block 3102 Corp., 180 A.D.2d 588, 589, 580 N.Y.S.2d 299, 300 (1st 7
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 8 of 16 Dep t 1992) ( The language of the guarantees specifies that they are absolute and unconditional, negating the claim of fraudulent inducement. ). Nor can an unconditional guarantor argue the failure of an alleged condition precedent not specified in the guarantee. See Morgan Stanley High Yield Secs., Inc. v. Seven Circle Gaming Corp., 269 F. Supp. 2d 206, 220 (S.D.N.Y. 2003). Further, a guarantor cannot assert defenses that he expressly waived. See United Orient Bank v. Lee, 233 A.D.2d 500, 500, 637 N.Y.S.2d 96, 96 (1st Dep t 1996) ( As the guarantees contained waivers of all defenses other than payment, defendants were precluded from asserting claims of release. ); Gannett Co. v. Tesler, 177 A.D.2d 353, 353, 577 N.Y.S.2d 248, 249 (1st Dep t 1991) (holding that all defenses were properly rejected because, by the plain language of the guarantee, defendant was precluded from raising any defenses or counterclaims relating to the underlying debt ); see generally Compagnie Financiere de Cic et de L Union Europeenne v. Merrill, Lynch, Pierce, Fenner & Smith Inc., 188 F.3d 31, 35-36 (2d Cir. 1999). Therefore, a defendant cannot rely on defenses that were waived by a guarantee to defeat summary judgment, even if the defendant establishes an issue of fact. See Generale Bank v. Wassel, 779 F. Supp. 310, 318 (S.D.N.Y. 1991) ( [T]he Appellate Division often reverses the [New York] Supreme Court and grants summary judgment on an unconditional guarantee and waiver of defenses, even though the lower court has discerned disputed issues of fact. ). By their own admission, Defendants are highly sophisticated businessmen who guaranteed other financing transactions. (Pl. 56.1 Stmt. 19, 20; Defs. 56.1 Stmt. 19, 20; Affidavit of John J. Prehn, dated Nov. 4, 2004 3-5.) By signing the Guarantees, they forfeited their right to interpose counterclaims in this action. (Compl. Ex. C.) Accordingly, Citicorp is entitled to summary judgment on Defendants counterclaims. See SCP (Bermuda), Inc. v. Bermudatel, Ltd., 242 A.D.2d 429, 430, 662 N.Y.S.2d 249, 250 (1st Dep t 1997) (directing that summary judgment be granted on guarantor s counterclaims because they were expressly waived by the guarantee). Nonetheless, this Court will evaluate Defendants counterclaims for the 8
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 9 of 16 purpose of determining whether they should be dismissed with or without prejudice. See United Bank of Africa, 1994 WL 185826, at *4 (dismissing defendants counterclaims without prejudice because [b]oth Guaranties prohibit the bringing of any counterclaims in an action for its enforcement. This can not be construed as prohibiting any separate suit on any claims the defendants might assert ). Moreover, while the Guarantees do not contain a blanket waiver of all defenses against Citicorp, Defendants expressly forfeited certain rights and defenses. Accordingly, this Court considers each of Defendants arguments in light of both the Guarantees and the evidence in the record. A. Modification of the Loan Agreements As an affirmative defense and their first counterclaim, Defendants contend that Citicorp and Tully modified the underlying Loan Agreements and thereby relieved Defendants of their obligations as guarantors. (Defendants Memorandum in Opposition to Summary Judgment ( Defs. Mem. ) at 6-7.) Specifically, Defendants allege that Citicorp and Tully agreed to pay off the separate Armar loan with payments from UAF. Generally, if the obligation subject to a guaranty is modified without the guarantor s consent, the guarantor is relieved of his liability on the obligation. Bier Pension Plan Trust v. Schneierson, 74 N.Y.2d 312, 315 (1989) ( [T]he principal debtor may not alter the surety s undertaking to cover a different obligation without the surety s consent. If they do so the surety is discharged because the parties have substituted a new contract, to which it never agreed, for the original. ) However, [a] guarantor is not relieved of his obligations where the written guaranty allows for changes in the terms of the guaranty and expressly waives notice to the guarantor of such changes. Country Glen, L.L.C. v. Himmelfarb, No. 603691-2003, 2004 WL 1852889, at *4 (N.Y. Sup. Ct. Apr. 29, 2004) (citing White Rose Food v. Saleh, 292 A.D.2d 9
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 10 of 16 377, 738 N.Y.S.2d 683 (2d Dep t 2002); Banque Worms v. Andre Cafe Ltd., 183 A.D.2d 494, 583 N.Y.S.2d 438 (1st Dep t 1992)). By signing the Guarantees, Defendants consent[ed] that from time to time, without notice to or further consent from [Defendants] and without releasing or affecting [their liability under the Guarantees],... the provisions of any documents may be cancelled, compromised, modified or waived. (Compl. Ex. C.) Thus, Defendants acknowledged that their obligation would continue notwithstanding any modification to the Loan Agreements. See Regency Equities Corp. v. Reiss, No. 93 Civ. 8096 (CSH), 1995 WL 362496, at *2 (S.D.N.Y. June 16, 1995) ( Under New York law, if a guarantor or surety chooses to waive objections to modifications, such an agreement is valid and enforceable. ); 117-14 Union Turnpike Assocs. v. County Dollar Corp., 589 N.Y.S.2d 880 (1st Dep t 1992) (affirming summary judgment against guarantors because any defense that the loan agreement had been modified was waived by the language of the irrevocable and unconditional guaranty ). Even if the evidence presents a genuine issue as to whether Citicorp and Tully modified the Loan Agreements, Defendants waived any defense or claim based on such a modification. Accordingly, the Guarantees are enforceable and Defendants first counterclaim is dismissed with prejudice. B. Failure to Mitigate Damages Defendants argue as an affirmative defense and their fourth counterclaim that Citicorp failed to mitigate its damages by (1) not taking reasonable steps to protect its interest in the Tully home; and (2) misapplying UAF s payments to the Armar loan. (Defs. Mem. at 8-9.) The Guarantees establish Defendants liability on UAF s loan obligations irrespective of... the existence, validity or value of any security for the loans, and whether or not Citicorp resort[ed] first to any other right, remedy or security. (Compl. Ex. C.) Moreover, 10
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 11 of 16 Defendants waive[d] and consent[ed] to the non-perfection, lapse or disposition of or other dealing with any security interests or liens at any time granted to EAB as security for UAF s liabilities. (Compl. Ex. C.) Where a guarantee is unconditional and expressly establishes the guarantor s obligation to pay regardless of any action, or failure to act by the creditor, the creditor has the choice as to how and when it [i]s going to proceed in order to obtain satisfaction of the debt and the guarantor cannot challenge the manner in which the creditor seeks to collect the debt. FDIC v. Schwartz, 78 A.D.2d 867, 868, 432 N.Y.S.2d 899, 901 (2d Dep t 1980); accord Gateway State Bank v. Winchester Builders, Inc., 248 A.D.2d 588, 589, 670 N.Y.S.2d 518, 519-20 (2d Dep t 1998); Milliken & Co. v. Stewart, 182 A.D.2d 385, 386, 582 N.Y.S.2d 127, 128 (1st Dep t 1992) ( Where a guaranty states that it is primary and unconditional and binds the guarantor to pay immediately upon the default of the debtor, it is considered to be a guarantee of payment and upon default the creditor may proceed directly against the guarantor in the first instance. (citations omitted)). Having waived any defense regarding Citicorp s failure to pursue or maximize UAF s loan collateral, Defendants cannot now argue that Citicorp failed to protect its interest in the Tully home. With respect to Defendants contention that Citicorp misapplied UAF s cash flow by applying it to pay down Armar s indebtedness, Defendants have failed to raise a triable issue of fact. Tully attests that, pursuant to his agreement with a Citicorp representative, nearly the entire amount of every monthly payment made pursuant to [the September 2001] Note came from cash flow which belonged to UAF and that Citicorp used the UAF cash flow for other purposes than to pay down UAF s debt. (Tully Aff. 16, 19.) However, contrary to Tully s assertions, the September 2001 Note included the outstanding deficiency on the UAF accounts as well as the Armar accounts. (Loewenthal Aff. 18; Loewenthal Reply Aff. 3; McCaughey Aff. 13.) Moreover, the manner in which Citicorp applied UAF s proceeds rests solely within Citicorp s corporate knowledge, and Citicorp s officials and internal documents attest that 11
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 12 of 16 Citicorp kept the loan payments separate and applied each to the appropriate account. (Loewenthal Aff. Exs. A, K; Loewenthal Reply Aff. 3; McCaughey Aff. 14.) Tully s conclusory and unsubstantiated assertions to the contrary are insufficient to create an issue of fact. See Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996); Blue v. Koren, 72 F.3d 1075, 1083-84 (2d Cir. 1995) ( [C]onclusory assertions are insufficient to defeat a motion for summary judgment. ). Accordingly, Defendants arguments that Citicorp failed to mitigate its damages are without merit, and Citicorp is entitled to summary judgment on this aspect of Defendants fourth counterclaim, which this Court dismisses with prejudice. C. Fraud and Unclean Hands Defendants next argue that Citicorp conspired with Tully to conceal from Defendants the fact that UAF sold vehicles out of trust and that Defendants relied on Citicorp s misrepresentations and omissions in deciding not to liquidate UAF s automobile lease portfolio. Defendants characterize their argument, alternatively, as a claim of fraud and a defense of unclean hands (Defs. Mem. at 2, 5-6). This Court notes that the only counterclaim asserted in Defendants Amended Answer that raises a charge of fraud is the third counterclaim, which also asserts claims for estoppel, breach of contract and breach of an implied covenant of good faith and fair dealing. (Amended Answer 51-59.) However, that counterclaim concerns allegations that Citicorp orally agreed to release Defendants if Tully executed a second mortgage on his home and UAF surrendered the loan portfolio. (Amended Answer 52.) Defendants fraud counterclaim does not allege that Citicorp misrepresented whether UAF was delinquent in fulfilling its loan 12
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 13 of 16 obligations. Thus, this Court will not consider Defendants arguments in this regard as supporting any of their counterclaims. 5 Therefore, Defendants argument is a defense of unclean hands. However, unclean hands is an equitable defense and unavailable in an action seeking money damages. Cohen v. Elephant Wireless, Inc., No. 03 Civ. 4058 (CBM), 2004 WL 1872421, at *3 (S.D.N.Y. Aug. 19, 2004); see Aetna Cas. & Sur. Co. v. Aniero Concrete Co., 404 F.3d 566, 607 (2d Cir. 2005) ( Unclean hands is an equitable defense to equitable claims. Because the SCA seeks damages in an action at law, Aetna cannot avail itself of unclean hands as a defense. ) (citing In re Gulf Oil/Cities Serv. Tender Litig., 725 F. Supp. 712, 742 (S.D.N.Y. 1989); Hasbro Bradley, Inc. v. Coopers & Lybrand, 128 A.D.2d 218, 515 N.Y.S.2d 461, 463 (1st Dep t 1987); Pecorella v. Greater Buffalo Press, Inc., 107 A.D.2d 1064, 486 N.Y.S.2d 562, 563 (4th Dep t 1985)). As such, the defense concerning Citicorp s alleged omissions and misrepresentations is inapposite and presents no bar to summary judgment. D. Sale of Collateral Finally, Defendants argue that Citicorp has failed to establish that its foreclosure sale of UAF s lease agreement portfolio was commercially reasonable. Specifically, Defendants challenge the fact that Citicorp was the only bidder at the foreclosure sale and assert that Citicorp underbid the portfolio s true value. (Defs. Mem. at 7-8.) A secured party seeking to recover a deficiency bears the burden of establishing the commercial reasonableness of the disposition of collateral. U.C.C. 9-504(3); HSBC Bank USA v. IPO, LLC, 290 A.D.2d 246, 246, 735 N.Y.S.2d 531, 532 (1st Dep t 2002); Assocs. Commercial Corp. v. Liberty Truck Sales & Leasing, Inc., 286 A.D.2d 311, 311, 728 N.Y.S.2d 5 To the extent not precluded by the Guarantees, of course, defendants may pursue a claim of fraud in a separate proceeding. 13
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 14 of 16 695, 696 (2d Dep t 2001). Such a burden is absolute and cannot be waived by a guarantor. Weinstein v. Fleet Factors Corp., 210 A.D.2d 74, 74, 620 N.Y.S.2d 946, 946 (1st Dep t 1994); Marine Midland Bank v. CMR Indus., Inc., 159 A.D.2d 94, 106, 559 N.Y.S.2d 892, 900 (2d Dep t 1990) ( [T]he UCC requirement that any post-default disposition of collateral be commercially reasonable... may not be waived. (citation omitted)); see also Bank of China v. Chan, 937 F.2d 780, 785 (2d Cir. 1991) ( Were the New York Court of Appeals to address this question, we think it would hold that a guarantor may not waive the defense of commercial unreasonableness under the New York Uniform Commercial Code. ). The commercial reasonableness of a sale of collateral incorporates the time of the sale and the means used by the creditor to attract bidders. See Sumner v. Extebank, 88 A.D.2d 887, 888, 452 N.Y.S.2d 873, 874 (1st Dep t 1982) ( U.C.C. 9-504 grants the secured creditor the right to dispose of collateral in cases of default, as long as notice is sent to the debtor, and the sale is commercially reasonable as to the time, place, manner and terms. ); Gen. Elec. Credit Corp. v. Durante Bros. & Sons, Inc., 79 A.D.2d 509, 510, 433 N.Y.S.2d 574, 576 (1st Dep t 1980) (finding a sale of collateral commercially unreasonable because the newspaper selected for advertising was clearly not the most appropriate one for reaching the intended market ). Citicorp attests that it publicly advertised the July 25, 2003 foreclosure sale and sent prior notice directly to interested parties, including Defendants. (Loewenthal Aff. 10-12; Loewenthal Reply Aff. 8-9 & Ex. D.) However, Citicorp does not state when or where the public notice was issued and does not submit a copy. Similarly, the notice Citicorp issued to interested parties is undated (Loewenthal Reply Aff. Ex. D), and Citicorp presents no evidence of the date on which it was mailed. Accordingly, this Court cannot assess the adequacy of the notices, and Citicorp has failed to demonstrate the absence of a triable issue of fact regarding the commercial reasonableness of its foreclosure sale. Nonetheless, any issue as to reasonableness is relevant to the amount of damages 14
Case 1:03-cv-01586-GWG Document 59 Filed 08/05/2005 Page 15 of 16 to which Citicorp is entitled, not to Defendants liability. See Gen. Trading Co. v. A & D Food Corp., 292 A.D.2d 266, 267, 738 N.Y.S.2d 845, 846 (1st Dep t 2002) ( Whether defendants are liable upon their guarantee is an issue which may be resolved apart from and in advance of any determination as to whether the sale of the collateral was conducted in commercially reasonable fashion. ); European Am. Bank v. Kahn, 175 A.D.2d 704, 708, 573 N.Y.S.2d 274, 277 (1st Dep t 1991) ( [P]laintiff s compliance with [UCC 9-504], which plaintiff has the burden of establishing, bears upon the assessment of damages but does not as a matter of law bar the grant of partial summary judgment as to liability based upon the facts herein. ). As such, this Court refers this action to the Magistrate Judge for an inquest on Citicorp s damages. 6 IV. Attorneys Fees Each Guarantee provides: Guarantor shall, upon demand, pay or reimburse EAB for all costs and expenses (including, without limitation, attorneys fees and disbursements) incurred or paid by EAB in enforcing any of its rights or remedies with respect to this Guarantee or any of the Liabilities. (Compl. Ex. C.) The issue of Citicorp s reasonable attorneys fees and expenses is also referred to the Magistrate Judge for an inquest. 6 Defendants do not oppose Citicorp s motion to strike the jury demand. In fact, defendants expressly waived their right to a jury trial on any issue relating to the Guarantees, including the commercial reasonableness of Citicorp s foreclosure sale. (Compl. Ex. C.) Thus, Citicorp s motion to strike the jury demand is granted. 15
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