Opinion
2003-258.
Decided August 1, 2005.
PHILLIPS LYTLE LLP, John Schmidt, Jr., Mark W. Brown, Esq., Buffalo, New York, Attorneys for Plaintiff.
LAMBERT WEISS, Stephen H. Marcus, Esq., New York, New York, Attorneys for Defendant Hartford Fire Insurance Company.
HARTER, SECREST EMERY, Karen Kaczmarski, Esq., Buffalo, New York, Attorneys for Theodore Kurtzman and Diane Kurtzman.
GROSS, SHUMAN, BRIZDLE GILFILLAN, P.C., Robert J. Feldman, Esq., Buffalo, NY, Attorneys for Cheryl A. Howe.
The instant matter came before the Court upon the motion of Defendant and Third-Party Plaintiff Hartford Fire Insurance Company (hereinafter Hartford) for an order granting summary judgment dismissing the first and second causes of action in the complaint. Plaintiff National Fuel Gas Distribution Corporation (hereinafter NFG) cross-moved for partial summary judgment against Hartford, to dismiss the first through fifth, seventh, eighth, tenth, and eleventh affirmative defenses and the second, third, fourth and seventh counterclaims.
Plaintiff National Fuel Gas Distribution Corporation (hereinafter NFG) had moved to compel discovery and/or to preclude, and for leave to serve an amended complaint, with a return date of April 5, 2005. Hartford then cross moved for summary judgment. NFG requested additional time to respond, and the motions were adjourned for oral argument until May 23, 2005. On that date, the Court ruled from the bench on Plaintiff's motion to compel and/or to preclude and amend, as well as on several other motions concerning subpoenas. The Court reserved decision on the motion and cross motion for summary judgment.
A list of the papers filed with respect to the motions appears in the addendum to this Memorandum Decision. Upon consideration of the foregoing, the Court denies Hartford's motion for summary judgment, and grants that part of NFG's motion that seeks an order dismissing the first affirmative defense and the seventh affirmative defense and counterclaim, and denies the motion insofar as it seeks to dismiss the second, third, fourth, fifth, eighth, tenth, and eleventh affirmative defenses and counterclaims.
FACTUAL BACKGROUND
The following facts are alleged or proven by the papers.
This is an action on a surety bond, whose principal filed for bankruptcy in October 2000. The principal, Iroquois Energy Management, LLC (hereinafter Iroquois), the alleged successor to Iroquois Energy Brokers, LLC, was a marketer of natural gas that, in 1996, entered into an agreement with NFG permitting Iroquois to market natural gas to end users in Western New York ( see Hart Affid. ¶¶ 3, 7). The agreement was entitled the "Service Agreement For Supplier Transportation, Balancing and Aggregation Under Service Classification No. 33" (hereinafter STBA Agreement) ( see Hart Affid Exhibit H [agreement commencing on October 1, 1996 through September 30, 1997]). Under the STBA Agreement, NFG agreed to transport natural gas to Iroquois' STBA customers, for charges as specified in NFG's tariff (Public Service Commission No. 7) and Service Classification 33 (hereinafter SC 33).
Iroquois Energy Brokers (IEB) was the signatory to the "Service Agreement For Supplier Transportation, Balancing and Aggregation Under Service Classification No. 33" (hereinafter STBA Agreement), whereas Iroquois Energy Management, LLC was the named principal under the bond at issue in this litigation. NFG alleges that it was undisputed that Iroquois was the successor to IEB, but there is no proof of that on this record, other than the affidavit of Jeffrey Hart, an NFG employee.
NFG's tariff, PSC No. 7-GAS, was renamed No. 8 during the the events at issue here; the Service Classification (SC) was renamed SC 19 ( see Hart Affid. ¶ 8). According to NFG, the tariff can be found on-line at www2.dps.state.ny.us/ETS/search/search.cfm.
As stated by Jeffrey Hart, NFG's General Manager-Transportation Services:
As a result of energy deregulation in the late 1990s in New York, gas marketers such as Iroquois experienced significant and rapid growth. These marketers would contract with suppliers for natural gas, and gas utilities for transportation and other services through existing pipelines, to provide gas service to residential and commercial end users.
(Hart Affid. ¶ 10). Thus, under the STBA, Iroquois contracted with NFG to deliver natural gas from Iroquois' suppliers to the city gate and for NFG to then transport that gas to Iroquois' customers via NFG's transportation system ( see Hart Affid. Exhibit H, at ¶¶ D-E). Further, NFG and Iroquois were essentially competitors in the supplying of natural gas.
The STBA Agreement permitted NFG to require security from marketers for their payment of charges ( see Hart Affid. ¶ 9, Exhibit H ¶ D[4], at NF3237). In addition, in 1999, the New York State Public Service Commission (PSC) adopted the Uniform Retail Access Business Practices ("UBPs") which were applicable to gas marketers such as Iroquois ( see Hart Affid. ¶ 8 Exhibit I). The UBPs also permitted NFG to require the posting of security to be provided by (in this case) gas marketers using its transportation system ( see id., Exhibit I at 2-7).
Bates numbers are given when necessary to identify cited exhibits.
Initially, Iroquois obtained a bond in NFG's favor in the penal sum of $1,000,000.00 from the Insurance Company of North America (INA) ( see Marcus Affirm. Exhibit G). Then, by letter dated February 16, 2000, NFG informed Iroquois that, based upon its current level of customer enrollment, the $1,000,000 surety bond from INA was not adequate. Rather,
an increase of $3,800,000 is necessary to meet your aggregation group security deposit requirement. As you know, the security deposit amount is based upon historical consumption of the enduser customers currently in your STBA aggregation group and calculated pursuant to the methodology adopted by the Public Service Commission * * *. Therefore a minimum security deposit of $4,800,000 is required to retain the endusers currently enrolled in your STBA group. * * *
(Marcus Affirm. Exhibit H [emphasis in original]).
As of February 16, 2000, Iroquois was in arrears in payments to NFG of over $1,800,000 ( see Marcus Affirm. Exhibit I [bill from NFG to Iroquois dated January 7, 2000, for month of December]; Exhibit J [bill dated February 5, 2000 for month of January 2000]). The overdue amount on the December 1999 invoice was $704,992.07; the overdue amount on the January 2000 invoice was $1,809,523.56, with (including current charges) a total amount owed of $3,224,041.11 ( see id.).
Through Lawley Services (Lawley), Iroquois contacted several commercial sureties in an attempt to obtain the required bond of $4.8 million. INA agreed to renew its bond in the amount of $1 million, but did not agree to an increased amount ( see Schmidt Affid. ¶ 6). Hartford and another surety requested information from Lawley regarding Iroquois (Schmidt Affid. ¶ 9 Exhibit G), including financial statements ( id. Exhibit H).
An underwriter from the Hartford Home office, John Bruno, noted in a memo to file dated February 17, 2000:
Observations to date.
[IEB and Iroquois] are profitable entities with significant salary withdrawls [sic] depleting/minimizing equity growth
* * *
Bond form.
1. Payment terms are ill-defined, ie. "18 days after rendition of bill". Contracts do not define payment terms. Bond should be promulgated with a defined time period by business days, for bond payment, after surety put on notice of default. Bond should not allow for multiple time periods without payment. i.e. billing extensions that aggregate liability.
(Schmidt Affid. Exhibit H [Bruno memo — HFI 0419]). At a deposition, Bruno described the type of bond at issue as being a "hazardous" bond under Hartford's underwriting standards ( id. Exhibit J at 30).
In a February 22, 2000 e-mail to one of Hartford's Syracuse office underwriters, John Gagnon, Bruno stated in part:
To confirm our conversation after today's conference call with John Howe [one of Iroquois' principals] and Bob Suglia [Lawley agent], you are authorized to convey to the producer that we are interested in putting together an excess capacity commitment of $3.8 MM over a primary $1MM placement * * *. This commitment would be effective through August 3, 2000 * * *.
This is a conditional comitment [sic] based upon ALL of the following.
1. Full understanding of the specific security calculation used by National Fuel.
2. Acceptable/reasonable bond form language.
* * *
4. 12/31/99 corporate reviewed FYE statements for both companies — anticipated completion date?
5. 12/31/99 concurrent personal statements, including spousal assets/liabilities [of principals]
6. Commitment to quarterly reviewed financial statements
7. Copy of business plan
* * *
John, would like Hartford folks to meet with the principals, if we move forward. Goal is to understand the business and if the information gets aligned right, then maybe look to take out CIGNA [sic: meaning INA] in August 2000. At that point capital commitments and other financial negotiations may make sense. Bottom-line, this seems much like a fuel tax bond for a fuel oil dealer. The difference is a much quicker loss scenario and less "hard assets" vs. minimal "tail" liability.
(Schmidt Affid. Exhibit H, at HFI 0752 [handwritten notes omitted]).
The parties dispute how much financial information Iroquois provided to Hartford. In any event, NFG asserts that Hartford never sought any information from NFG concerning Iroquois' financial condition; rather, the only information Hartford sought from NFG was an explanation of the formula used by NFG to calculate its security requirements for gas marketers ( see Schmidt Affid. ¶ 14 Exhibit L).
NFG's counsel asserts in an affidavit that, prior to issuing the Bond, Hartford never requested or received Iroquois' 1999 fiscal year end financial statements; Iroquois' accounts receivable and accounts payable information or monthly reports; any information regarding Iroquois' payment history with NFG; or, any of NFG's invoices to Iroquois ( see Schmidt Affid. ¶ 16). NFG's counsel states in his affidavit:
17. Had Hartford obtained the above information, it would have discovered that:
a. Iroquois was significantly indebted to National Fuel prior to the issuance of the Iroquois Bond.
b. Iroquois had not made a full, timely payment to National Fuel since mid 1999.
c. Iroquois owed National Fuel $3,358,441.09 in March 2000, the month Hartford issued the Iroquois Bond.
d. Iroquois' financial records were inadequate and lacking in detail.
(Schmidt Affid. ¶ 17; see Hart Affid. ¶ 14).
Under date of March 2, 2000, Hartford executed a commercial surety bond as surety for Iroquois (hereinafter the Iroquois Bond). In it, Hartford agreed to pay NFG "any full or partial amounts due to [NFG] in the event that [Iroquois] fails to make a complete and timely payment of all sums due to [NFG]" ( see Marcus Affirm. Exhibit E [emphasis supplied]). The Bond further provides, referring to Iroquois as the Principal, Hartford as the Surety and NFG as the Obligee:
NOW, THEREFORE, if said Principal makes all payments due per the terms of the Agreement, then this obligation is null and void, otherwise to remain in full force and effect.
PROVIDED, however.
1) The Surety shall pay any full or partial amounts due to Obligee in the event that Principal fails to make a complete and timely payment of all sums due to the Obligee. In no event shall the full amount of payment exceed THREE MILLION EIGHT HUNDRED THOUSAND Dollars ($3,800,000.00). * * *
* * *
3) The Obligee must notify the Surety in the event of a "Default" by said Principal. "Default" for the purpose of this Surety Bond means the failure of the Principal to pay all amounts due said Obligee within Eighteen (18) days from the invoice date of a bill for STBA charges.
4) The Obligee must present a notice of claim in writing to the Surety by certified mail. * * * Said notice must contain an itemized list of the amounts due and shall be accompanied by documentation that the Obligee has drawn fully upon the underlying bond. Additionally, the Obligee must notify the Surety in writing within five (5) business days if the Principal is in default, partially or in full, and that said Obligee has made a determination to grant an extension of time for payment by said Principal.
(Marcus Affirm. Exhibit E [emphasis supplied]). Hartford had the right to cancel the bond upon sixty (60) days written notice ( id.) In addition, Hartford was not obligated to pay until INA's bond, "taken as joint security", had been paid in full ( id.).
NFG's invoice to Iroquois dated March 7, 2000 (for the period of February 2000) reflects a past due amount of $1,966,830.38 and a gross amount owed of $3,358.441.09 ( see Marcus Affirm. Exhibit K), while the April 4, 2000 invoice (for the period of March 2000) reflects a past due amount of $2,858,441.09 and a gross amount owed of $4,228,739.56 ( id. Exhibit L). Payment on the April 4 invoice was due on April 25, 2000 ( id. Exhibit L).
Under cover letter dated April 7, 2000, NFG sent Iroquois notice that it was in default of payment obligations under the STBA Agreement and that, "[u]nless sufficient payment is received no later than April 13, 2000, [NFG] will commence execution on Iroquois' security in the amount necessary to bring the delinquent account into balance" (Marcus Affirm Exhibit P; Hart Affid. Exhibit O, at NF6563). Hartford counsel asserts that this information was not transmitted to Hartford at that time ( see Marcus Affirm. at 5).
ADDITIONAL NFG-IROQUOIS AGREEMENT
Thereafter, NFG and Iroquois entered into an Agreement for Supplemental Security (AFSS), which provided for Iroquois to make an initial payment of $200,000 no later than March 29, 2000 and to make payments weekly thereafter, according to a payment schedule ( see Hart Affid. Exhibit L). The AFSS was signed by an NFG representative on April 13, 2000 ( see id.).
The AFSS provided in part as follows:
WHEREAS, the tariff, including SC 19, incorporates the PSC Uniform Retail Access Business Practices ("UBPs");
WHEREAS, the UBPs permit and STBA Agreement requires a supplier to satisfy certain credit requirements pertaining to its activities as a supplier;
WHEREAS, the UBPs provide that a supplier is creditworthy if it pays any outstanding balance due the utility for services rendered and provides a Surety Bond;
WHEREAS, [Iroquois] has provided two Surety Bonds * * * to [NFG] in partial satisfaction of the security requirement for customers enrolled under [Iroquois's] STBA Agreement(s);
WHEREAS, notwithstanding the foregoing, [Iroquois], having not paid the full outstanding balance due to [NFG] for services rendered, has not satisfied the UBPs creditworthiness requirement;
WHEREAS, under the UBPs and [NFG's] Tariff, [NFG] is authorized to initiate termination procedures against [Iroquois] and draw upon the Surety Bonds;
WHEREAS, [NFG] and [Iroquois] desire that such termination procedures and action against the Surety Bonds be temporarily stayed, at the discretion of [NFG], pursuant to the terms and conditions hereof,
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants * * * set forth below, [NFG] and [Iroquois] agree as follows:
1. * * * As shown on the Payment Schedule, each payment has been calculated to include estimated charges for STBA service arrears and current charges for services rendered. In the ordinary course [NFG] will issue a monthly STBA bill ("Monthly Bill") adjusted to reflect actual payments made according to the Payment Schedule. The Monthly Bill shall include late payment charges assessed on the arrears and not included in the Payment Schedule. In addition to making payment on the Payment Schedule, [Iroquois] shall pay charges owing on the Monthly Bill * * *.
2. [Iroquois] shall pay all amounts described in above paragraph no. 1 by wire transfer with payment confirmed no later than the close of business on the due date. Failure to timely make such payments shall constitute a default hereunder.
(Hart Affid. Exhibit L [emphasis supplied]).
With respect to the reference in the AFSS to the fact that the UBPs permitted NFG to "initiate termination procedures against [Iroquois] and draw upon the Surety Bonds", the UBPs provide in pertinent part: "The utility may call upon the security posted by [a marketer] after providing 5 days' notice to the [marketer] whenever the [marketer] fails to pay the utility on a timely basis, unless the [marketer] makes payment in full within the 5-day notice period" (Hart Affid. Exhibit I at 8).
Thus, the AFSS provided for the initial payment as noted above, and that Iroquois would make weekly payments commencing April 7, 2000 "for services provided under the STBA Agreement" according to the Payment Schedule ( id. Exhibit L ¶ 1 Attachment A). The Payment Schedule provided for weekly payments ranging from $297,716.25 to $510,664.02, for a total of $3,058,441.08 to be paid off by the end of July 2000; the schedule stated, "[c]hart shows accelerated payment schedule with current past due balance paid by the end of July as well as all current bills" (Hart Affid. Exhibit L, Attachment A [emphasis supplied]). Meanwhile, NFG would continue to issue monthly invoices to Iroquois, "adjusted to reflect actual payments made according to the Payment Schedule" ( id. Exhibit L at HFI 2340), as well as monthly charges of 1.5 percent interest on the arrears ( see id.; see also Hart Affid. ¶ 21 Marcus Affirm. Exhibit Q). For example, the invoice dated May 4, 2000, for April gas charges, stated current charges of $912,841.97; a prior balance of $2,903,873.57, a late payment charge (after adjustments) of $43,485.71, and a total amount owed of $3,855,822.81, due on May 25, 2000 ( id). Thus, late fees continued to accrue on the unpaid balances notwithstanding the AFSS agreement, which (in the case of the May invoice) Iroquois could have avoided if it had paid the balance due of $3,855,822.81 by May 25, 2000.
The AFSS further provided:
4. Upon [Iroquois's] default, as defined above, [NFG] may, at its discretion, (a) call upon the Surety Bonds in accordance with the procedures set forth in the UBPs; and (b) to the extent proceeds from the Surety Bonds are or will be insufficient to cover the amount owed by [Iroquois], begin termination of [Iroquois's] STBA service. For purposes of the Company's right to call upon the Surety Bonds, this Agreement constitutes notice under the UBPs.
5. This Agreement is confidential. Neither party shall disclose the terms of this Agreement to any third party. Provided, however, that this Agreement or its terms may be disclosed to the PSC Staff in response to a written request served by the PSC Staff on [NFG] or [Iroquois]. Any such disclosure shall be accompanied by a request for trade secret status as permitted by the regulations of the PSC.
(Hart Affid. Exhibit L [emphasis supplied]). NFG's counsel asserts in his affidavit that the confidentiality provisions were requested by Iroquois because Iroquois "presumably did not want its competitors and customers to know it was in arrears and had entered into these subsequent arrangements" with NFG (Schmidt Affid. ¶ 51). NFG denies that the AFSS was an "extension of time for payment" under the Iroquois Bond ( see Schmidt Affid. ¶¶ 54-59).
Hart asserts that Iroquois was late with payments twice under the terms of the AFSS, in early April (as noted by the abovementioned letter) and in June 2000, but "rectified those issues promptly", whereupon "[i]t became unnecessary to provide notice to Hartford" (Hart Affid. ¶ 24 Exhibit O).
JUNE DEFAULT LETTER TO IROQUOIS
By letter dated June 16, 2000, NFG notified Iroquois that, because Iroquois had been in default of its "payment obligations" since June 2, NFG was authorized under the UBPs to either draw down on any security that might be available or, if the security were insufficient to cover the default amount, to initiate the process to discontinue service of Iroquois's customers ( see Marcus Affirm. Exhibit S).
On its face, the security posted by Iroquois is sufficient to cover the default amount. Accordingly, this letter constitutes further notice that [NFG] intends to draw down on the security that is currently available to cover Iroquois' amount in default. Our action on Iroquois' bond is subject to notice provisions therein. We remain interested, however in exploring alternate avenues of relief.
( id.). NFG therefore temporarily suspended Iroquois' right to enroll additional customers effective June 15, 2000 ( id.). However, Hartford asserts that it received no notice of these events ( see Marcus Affirm. at 6).
NFG INVESTIGATES IROQUOIS
In June 2000, NFG conducted an on-site review of Iroquois' operations and financial records ( see Hart Affid. ¶ 27). NFG then issued a Summary of Internal Audit Findings, to Iroquois ( see id. Exhibit P). That summary stated in part that Iroquois's management provided NFG with no financial records that could be used as a basis to prepare financial statements for the period subsequent to December 31, 1999 ( see Exhibit P at FN6335).
The fact that there are no financial statements or useful substitute creates initial concern. Management continues to state that the business is a going concern and is profitable. However, with nothing to support that assertion in the way of financial records we are not comfortable agreeing with management nor could we confidently verify their assertions
( id.) Further, the summary stated that, utilizing the December 1999 balance sheet reviewed by an independent public accounting firm as the starting point, and using management-provided information, but assuming that any asset or liability on which there was no updated information available had the same balance at May 31, 2000 as of December 31, 1999:
[f]ollowing the assumption that the difference between assets and liabilities must be an adjustment to equity it appears that Iroquois experienced a loss of approximately $4 million between January 1, and May 31, 2000. The unrecorded liability owed to [NFG] was not considered in this calculation
( id. Exhibit P at NF6339). Hartford asserts that it was not notified of this information ( see Marcus Affirm. at 7).
SECOND ADDITIONAL AGREEMENT WITH IROQUOIS
On June 30, 2000, NFG and Iroquois entered into the Agreement No. 2 for Supplemental Security (AFSS No. 2), which required Iroquois to prepay for anticipated monthly charges "for all services to be rendered by [NFG] to Iroquois pursuant to the terms of the STBA Agreement" (Hart Affid. Exhibit M, at NF2904). The AFSS No. 2 provided that NFG was "conscientiously discharging its duties to protect the interests of residential and other classes of ratepayers and to protect the integrity of its system" and therefore had "requested Iroquois to provide increased security and prepayment to limit financial exposure" ( id. Exhibit M at NF2903).
1. On June 30 Iroquois shall pay to [NFG] the amount of $190,000 and on July 10, 2000 Iroquois shall further pay to [NFG] the amount of $806,629.84 which amounts shall constitute a payment in advance for all services to be rendered by [NFG] to Iroquois pursuant to the terms of the STBA Agreement, including, without limitation, all estimated charges and fees, for the following months; July and August of 2000 * * *
2. Beginning on August 1, 2000 and on the 1st day of each month thereafter for the duration of this Agreement * * * Iroquois shall pay to]NFG] a sum equal to the amount listed on the attached Schedule A for the corresponding payment date * * *.
(Hart Affid. Exhibit M, at NF2904). Again, the AFSS No. 2 provided that neither party could disclose the terms of the Agreement to any third party except the PSC or the New York State Department of Public Service ( see id. at NF2905).
NFG contends that the AFSS No. 2 was not an extension of time for payment, rather, a prepayment agreement, which provided additional security to NFG as permitted under the STBA, and which "in fact" benefitted Hartford (Schmidt Affid. ¶¶ 60-61).
HARTFORD CONTINUES ITS BOND
By letter dated June 29, 2000, NFG reminded Iroquois that it must renew or replace the Hartford Bond no later than July 10 ( see Hart Affid. Exhibit Q). Thereafter, having not heard back from Iroquois, NFG suspended Iroquois' new customer enrollment on July 10 (Hart Affid. ¶ 30). NFG then received a Continuation Certificate for NFG, Hartford and Iroquois to sign, continuing the Bond until August 3, 2001 ( see Hart Affid. Exhibit S). NFG declined to sign the certificate, instead sending a letter dated August 1, 2000 to Hartford, stating:
[NFG] is in receipt of a Continuation Certificate issued by Hartford on July 13, 2000 for an effective date of August 3, 2000. [NFG] does not execute continuation certificates in its ordinary course of business. By this letter, however, [NFG] accepts continuation of the above surety bond for the term of one (1) year commencing August 3, 2000 and terminating August 3, 2001
( id. Exhibit T).
THIRD ADDITIONAL AGREEMENT
Meanwhile, on or about July 5, 2001, Iroquois and NFG entered into the Repayment Agreement, which provided that, inter alia, Iroquois "wishe[d] to restructure certain indebtedness owed by [it] for services provided by [NFG] to Iroquois under the STBA Agreement" (Hart Affid. Exhibit N at 1). In the Repayment Agreement, NFG and Iroquois agreed in part as follows:
1. As of July 5, 2000, Iroquois is indebted to [NFG] under the STBA Agreement in the amount of $2,859,747.17 * * *
2. Beginning on August 15, 2000, and on the 15th day of each month thereafter for the duration of this Agreement * * * Iroquois shall pay * * * a sum equal to the amount listed on the attached Schedule A * * * which amounts shall represent ten equal monthly payments of the indebtedness listed in paragraph 1 hereof plus a 1.5 percent monthly late payment charge on any balance * * *
( id. at 2). These amounts were in addition to the prepayments required under AFSS No. 2 ( id. ¶ 4 at 2). The Repayment Agreement was also confidential ( id. ¶ 8 at 3).
In the August invoice from NFG to Iroquois dated September 1 and due September 22, 2000, total current charges are $433,187.41, with a prior balance of minus $47,054.96, and therefore a total amount due of $383,579.31. The invoice states that it is "Informational only send no payment" (Marcus Affirm. Exhibit CC [capital letters omitted]). Thus, after entering into the Repayment Agreement, NFG removed the past due amounts from the current invoices to Iroquois.
DEFAULT LETTERS
In the meantime, however, by letter dated August 1, 2000, NFG provided Hartford with notice of Iroquois' default ( see Hart Affid. ¶ 37 Exhibit U). In all, there were three letters of default from NFG to Hartford, but only the third letter, by express statement, also constituted a notice of claim.
The August 1 letter stated in pertinent part:
* * * This letter is intended to serve as notice of default and that the parties have agreed to a modification of time of payment.
Because Iroquois continues to meet its payment obligations to National Fuel under previously established arrangements, this letter is not a notice of claim
( id.). NFG asserts that Hartford requested no information from NFG after this letter ( see Hart Affid. ¶ 38), and that fact is not refuted by Hartford.
Iroquois also corresponded with Hartford concerning the August 1 notice of default from NFG. As stated by NFG's counsel, Iroquois "apparently provided an incorrect explanation" of the notice of default, claiming that the eighteen-day time limit under the Iroquois Bond was inconsistent with NFG's normal payment terms, requiring payment by the 25th day of the month, and thus that, in other words, it was only a technical default. Iroquois requested that Hartford change the language of the default provisions in the bond ( see Schmidt Affid. ¶ 62 Exhibit Y [letter from Iroquois to Hartford]), which Hartford ultimately agreed to (but did not) do ( see id. Exhibit Z). In addition, Iroquois disclosed the existence of the additional agreements with NFG, stating:
Additionally, we [Iroquois] have entered into an agreement with [NFG] which alters the terms of a former agreement. In so altering those terms [NFG] has extended the original payment date of the former agreement.
( id. Exhibit Y, at LS0245).
John Gagnon from Hartford's Syracuse office sought a copy of the "new agreement" from Iroquois ( see Schmidt Affid. Exhibit Y at HFI 0119, Exhibit Z). Hartford's internal memoranda indicate that Hartford had a copy of the Repayment Agreement no later than October 10, 2000 ( see Schmidt Affid. Exhibit AA).
An internal Hartford memorandum dated October 15, 2000, reported that a meeting was held involving Iroquois' principals, Hartford's Underwriter Gagnon, and Hartford's agent Suglia, among others, in response to news that Iroquois would no longer service residential customers ( see Schmidt Affid. Exhibit DD at HFI0063). The memo reported that Iroquois was in compliance with the terms of the Repayment Agreement to date and that the Repayment Agreement:
— Came about because of cash flow problems over the first half of the year due to rising gas prices in conjunction with fixed priced contracts balanced-billed customers. Ultimately Iroquois was unable to effectively meet payments to National Fuel at the same time purchase the needed gas for the 2001 heating season. Thus, they negotiated payment terms with National Fuel which would allow them to work through their cash flow issues
— With the Residential customers turned over to National Fuel, National Fuel now owes Iroquois money for prepayments made
( id. Exhibit DD at HFI 0064).
Hartford at that point was pursuing the underwriting of additional bonds for Iroquois, with respect to gas suppliers ( see Schmidt Affid. Exhibit CC, DD at HFI 0064). After becoming aware of the AFSS No. 2, Hartford's underwriter suggested in an internal memorandum that they might have to "alter our definition of default based on the prepayment' terms under the new Supplemental Agreement 2" (Schmidt Affid. Exhibit CC, at HFI 0108).
By letter dated September 8, 2000, NFG notified Iroquois that it (Iroquois) was in default of the AFSS no. 2 because prepayment had not been received by September 1 ( see Marcus Affirm Exhibit GG). The letter stated that, unless that payment was made immediately Iroquois would be required to pay the outstanding balance of $2,631,437.28 immediately, along with an advance deposit or irrevocable letter of credit in the amount of $885,800 by September 13, 2000 "to meet the credit requirement of $5,685,800" ( id). In other words, NFG was demanding, in addition to the $1,000,000 INA bond and the $3.8 million Hartford Bond, an additional amount of security of $885,800 ( id.).
NFG sent a second letter of default to Hartford dated September 21, 2000 ( see Marcus Affirm. Exhibit HH). That letter stated in pertinent part:
As result of a dispute regarding invoicing accuracy, Iroquois withheld payment due National Fuel under the arrangement previously established by the parties. Thus as a technical matter, Iroquois defaulted for purposes of the Surety. Accordingly, this letter is a notice of default. The parties, however, are working toward resolution of the billing issues and at this point, Iroquois has agreed to meet its adjusted payment obligations.
This letter is not a notice of claim.
( Id.).
NFG sent a third notice of default to Hartford by letter dated October 19, 2000 (Marcus Affirm. Exhibit JJ). The letter stated in pertinent part:
This letter is intended to provide notice of default under the terms of the Surety, inasmuch as Iroquois failed to submit a payment to [NFG] on October 1, 2000 under the terms of a previously-established prepayment arrangement. Subsequent to October 1, 2000, however, Iroquois requested a voluntary partial discontinuance of its aggregation services and substantially reduced the number of customers it serves. Accordingly, [NFG's] projected bills for Iroquois were reduced and the October 1 payment has been satisfied with proceeds from Iroquois' existing prepayment balance.
Going forward, Iroquois' prepayment obligations to [NFG] will be adjusted to reflect the reduced number of customers serviced. [NFG] has neither granted Iroquois an extension of time to pay for such prepayments nor modified the terms of other payment arrangements
( id.).
By letter dated October 30, 2000, NFG notified INA and Hartford that, inter alia, NFG had terminated the STBA Agreement with Iroquois on October 26, 2000 for failure to maintain operational performance obligations ( see Marcus Affirm. Exhibit KK).
BANKRUPTCY, DENIAL OF CLAIM, AND FILING OF SUIT
Then, on October 31, 2000, Iroquois filed for protection under Chapter 11 of Bankruptcy Code ( see Hart Affid. Exhibit A).
NFG filed an amended proof of claim in the Iroquois bankruptcy proceeding in the amount of $2,732,737.93 (Hart Affid. Exhibit B). The amended proof of claim indicates that "[o]f this amount, INA will be subrogated to [NFG], after [NFG] is paid in full, for an amount actually paid by INA to [NFG], which is currently $1,000,000." ( id. p. 2).
On November 10, 2000, NFG submitted to Hartford a notice of claim under the Bond (Hart Affid. ¶ 5 Exhibit C). That notice provides in part:
National Fuel hereby submits a notice of default and a notice of claim under the terms of the Bond. The basis of this notice is as follows:
* * * Iroquois' agreements with National Fuel required, among other things, that Iroquois submit payment on October 15 of each month. Iroquois defaulted (as defined in the Bond) on its October 15, 2000 payment obligation as of November 2, 2000. That default was in addition to an earlier default noticed to Hartford on October 19, 2000. Furthermore, on October 31, 2000, Iroquois filed a voluntary petition in bankruptcy, under Chapter 11 of the Bankruptcy Code * * *.
(Hart Affid. Exhibit C). Hartford requested more information (Hart Affid. Exhibit D), which was provided by NFG under cover letter dated January 8, 2001 ( id. Exhibit E). Among the information provided was a copy of the October 2000 invoice to Iroquois (which had been printed but not mailed, given the bankruptcy proceedings, see Hart Affid. ¶ 43), seeking a total amount due of $403,633.56 on or before November 22, 2000 ( see Hart Affid. Exhibit E, at NF4005).
By letter dated March 1, 2001, Hartford denied NFG's claim under the Bond, on several bases, including that: 1) INA had not yet paid on its $1 million bond in full, a condition precedent to Hartford's obligation; 2) NFG did not provide prompt notification of a default by Iroquois, another alleged condition precedent to Hartford's obligation; 3) express notice requirements, additional condition precedents to recovery, were ignored by NFG, including the failure to notify Hartford that the invoices for June and July 2000 reflected prior indebtedness of $2.3 million and $2.8 million respectively; 4) the October 2000 invoice to Iroquois was only for $403,633.56, less than the sum of INA's bond; 5) although the Bond names Iroquois as principal, Iroquois Energy Brokers is the party to the STBA; 6) no document evidenced the extension of the STBA past 1997; 7) three confidential agreements between Iroquois and NFG materially altered the risk assumed by Hartford, which bonded only the STBA agreement; and 8) NFG failed to disclose to Hartford substantial outstanding arrearages prior to the inception of Hartford's Bond, rendering the Bond voidable ( see Hart Affid. Exhibit F).
In May 2002, INA tendered a $1,000,000 check to NFG ( see Hart Affid. Exhibit G).
The instant action was filed in 2003. In the amended complaint, NFG seeks damages from a number of commercial gas customers who obtained surety bonds from Hartford, as well as against Hartford directly based upon the Iroquois Bond ( see Marcus Affirm. Exhibit A [dated Feb. 2003]). The first cause of action seeks a declaration that Hartford is liable to NFG under the Iroquois Bond, and the second cause of action asserts that Hartford breached the Iroquois Bond and caused damages of not less than $1,732,737.93 plus interest, costs and expenses ( id. ¶¶ 59-62).
The remaining causes of action in the amended complaint are against the other defendants, and are not here at issue.
Hartford's Amended Answer to the Amended Complaint asserts twelve affirmative defenses and four counterclaims against NFG ( see Marcus Affirm. Exhibit B). The counterclaims seek rescission and a declaratory judgment, based upon NFG's alleged failure to disclose facts material to the risk assumed by Hartford ( see id. at ¶¶ 85-96, 107-109).
Hartford thereafter served a third-party complaint against John P. Howe and Theodore Kurtzman, the owners, officers and/or members of Iroquois and their wives ( see Marcus Affirm. Exhibit C). The third-party complaint also states claims against the Iroquois Natural Gas Co., a party that neither answered nor appeared. The third-party complaint alleges that, in connection with the Iroquois bond, the third-party defendants executed a General Agreement of Indemnity in favor of Hartford as indemnitee and must indemnify Hartford should it be found liable to NFG ( see id. Exhibit C ¶¶ 8-15). In addition, Hartford sought collateral security from the third party defendants ( see id., Exhibit C ¶¶ 16-22). Mr. Howe filed for bankruptcy protection in 2004 and received a discharge, and is therefore no longer subject to the claims at issue.
DISCUSSION
I. HARTFORD'S MOTION FOR SUMMARY JUDGMENT A. INTRODUCTION
Hartford contends that NFG breached the obligation in the Bond to give Hartford notice of Iroquois' purported default, and thus rendered the Bond void, because fulfillment of the default notification requirement is a condition precedent to Hartford's obligation under the Bond ( see Hartford Brief at 1, 11-16). Further, Hartford contends that summary judgment should be granted based upon NFG's concealment of material information from Hartford. Specifically, Hartford asserts that the continuation and renewal of the Bond was vitiated by NFG's silence about three confidential payment agreements between Iroquois and NFG as well as Iroquois' successive defaults in making payment to NFG, when NFG had a duty under the contract to keep Hartford informed of any "default" and other pertinent information ( see Hartford Brief at 1-2, 16-18). Hartford asserts that its motion for summary judgment is based upon its surety bond, its bond continuation certificate, and NFG's own records and correspondence, and therefore that the pertinent facts are incontrovertible ( see Marcus Affirm at 1).
NFG, in response, contends that it had no duty to volunteer information regarding Iroquois' financial condition, and further that the notice of default language in the Bond at issue constitutes a promise, not a condition ( see NFG Brief at 18-24). NFG further asserts that its leniency in enforcing Iroquois' obligations for past due amounts did not discharge Hartford from liability on the Bond ( see id. at 24-26). Finally, NFG contends that even if the notice provision were to be construed as a condition precedent, Hartford excused NFG from complying with it ( see id. at 26-27). NFG also asserts that summary judgment is inappropriate at this time because discovery is incomplete ( id. at 27).
In reply papers, Hartford contends that, contrary to an earlier position, NFG's claim is now based upon its November 2000 invoice to Iroquois (showing a balance due under the STBA Agreement of $403,633.56) and the July 5, 2000 AFSS "secret" agreement between NFG and Iroquois ( see Reply Brief at 1, citing Hart Affid. ¶ 48 Exhibits N and Z) and, therefore, Hartford is entitled to summary judgment, because it bonded performance under the STBA Agreement only and not the July 2000 payment agreement, which is not authorized by the STBA Agreement, the UBPs, or the Tariff and is unenforceable ( see Marcus Reply Affirm. at 2; Reply Brief at 1-2, 9-10). Further, Hartford contends that NFG had an obligation to inform it about the "secret" agreements before Hartford agreed to renew its bond ( see Reply Brief at 4-5, 8). In a reply brief, NFG contends that Hartford's reply and response papers demonstrate the existence of several issues of material fact.
Hartford's contention based upon an allegation that Iroquois is a "non-residential customer" under NFG's tariff is without merit and will not be further discussed.
B. CONDITIONS PRECEDENT
Hartford contends that the following language in its bond was a condition precedent to its liability, not fulfilled by NFG: "the Obligee must notify the Surety in writing within five (5) business days if the Principal is in default, partially or in full, and that said Obligee has made a determination to grant an extension of time for payment by said Principal" (Marcus Affirm. Exhibit E ¶ 4).
It is well-settled that "the rule of construction [of contracts] is not changed because the defendant is a surety" ( Utica City Natl. Bank v. Gunn, 222 NY 204, 207, quoted in State v. Peerless Ins. Co., 108 AD2d 385, 390 [1st Dept 1985], affd 67 NY2d 845). However,
[a] compensated, corporate surety * * * is not a favorite of the law and its contract of suretyship will be construed in a manner most favorable to a claimant (see Simpson, Suretyship, § 30)
( Timberline Elec. Supply Corp. v. Insurance Co. of North Amer., 72 AD2d 905, 906 [4th Dept 1979], aff'd 52 NY2d 793; see Davis Wallbridge, Inc. v. Aetna Cas. and Sur. Co., 103 AD2d 1010, 1011 [4th Dept 1984]). Hartford does not dispute that the language of the bond was drafted primarily by Hartford, with little or no input from NFG ( see Hart Affid. ¶ 11; Schmidt Affid. Exhibits T and W).
Initially, if the Bond were determined by the Court to be unambiguous, whether the notice provision is a condition precedent would be a question of law for the Court to determine ( see Omni Quartz Ltd. v. CVS Corp., 287 F3d 61, 64 [2d Cir 2002] [New York law]; 120 Greenwich Development Assoc., LLC v. Reliance Ins. Co., 2004 WL 1277998 [SDNY 2004]). "If, however, the language in the insurance contract is ambiguous and susceptible of two reasonable interpretations, the parties may submit extrinsic evidence as an aid in construction, and the resolution of the ambiguity is for the trier of fact" ( State v. Home Indemnity Co., 66 NY2d 669, 671; see Hartford Acc. Indem. Co. v. Wesolowski, 33 NY2d 169, 172; Village of Hamburg v. American Ref-Fuel Co. of Niagara, L.P., 284 AD2d 85, 88 [4th Dept], lv denied 97 NY2d 603). The parties have submitted extrinsic evidence of the drafting of the Bond to assist the Court in interpreting its language.
The Court determines that the Bond is ambiguous but, because discovery is incomplete, summary judgment must be denied. The Court notes, however, that even if it were to determine that the notice provision in paragraph 4 of the Bond is a condition precedent to recovery, NFG has raised issues of fact whether it complied with the "condition" or, in the alternative, whether Hartford waived or excused that "condition" ( see NFG Brief at 26-27). The Court further notes that the Bond at issue is an excess bond, a point not focused on by the parties but clearly a factor of some importance with respect to its interpretation.
A contractual condition precedent is "an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises'" ( Oppenheimer Co. v. Oppenheim, Appel, Dixon Co., 86 NY2d 685, 690, quoting Calamari Perillo, The Law of Contracts § 11-2, at 438 [3d Ed.]; see Merritt Hill Vineyards Inc. v. Windy Hgts. Vineyard, Inc., 61 NY2d 106, 112; Jim Ball Chrysler LLC v. Marong Chrysler-Plymouth, Inc., 17 AD3d 1113 [4th Dept 2005]).
If the condition does not occur and is not excused, the promised performance need not be rendered
(Calamari Perillo, The Law of Contracts § 11.5, at 398 [4th ed]).
Express conditions are "those agreed to and imposed by the parties themselves" ( Oppenheimer Co., Inc., 86 NY2d at 690). Express conditions include those provisions in a contract which are indisputably conditions in other words, that state words to the effect that a certain performance "shall be a condition precedent to recovery" ( see Calamari Perillo, § 11.10 at 405 [4th ed]), as well as conditions that are implied-in-fact.
In addition to conditions implied in law (constructive conditions), there are also conditions implied in fact. Such a condition is treated as an express condition. However, an implied in fact condition is not spelled out in words but rather is gathered from the terms of the contract as a matter of interpretation
(Calamari Perillo, § 11.8, at 402 [4th ed] [internal citations quotation marks omitted]).
In the instant case, the language of the Bond does not indisputably set up a notice of default as an express condition. Thus, the question remains whether the requirement of notice of default in paragraph 4 of the Bond is an implied-in-fact condition precedent.
Under Court of Appeals' precedent, "[i]n determining whether a particular agreement makes an event a condition courts will interpret doubtful language as embodying a promise or constructive condition rather than an express condition. This interpretive preference is especially strong when a finding of express condition would increase the risk of forfeiture by the obligee" ( Oppenheimer Co. v. Oppenheimer, Appel Dixon Co, 86 NY2d at 691, citing Restatement [2d] of Contracts § 227 [1]). It has been specifically held that "[a] surety bond, if unambiguous, should be given its plain, ordinary and proper meaning * * *; any ambiguity is to be resolved in favor of those to be protected" ( Dupack v. Nationwide Leisure Corp., 73 AD2d 903, 904 [1st Dept1980]). Further, as stated in Calamari Perrillo:
As a rule of thumb, provisions commencing with words such as "if," "on condition that," subject to," and " provided" create conditions precedent. However, this result cannot be guaranteed because of the presumption in favor of language of promise and because all language requires interpretation
(Calamari Perillo, § 11.10, at 405-406 [4th ed], citing Restatement [2d] of Contracts § 226, comment a] [other footnotes omitted]; see also Restatement [2d] of Contracts § 226, illus. [b] [5] [a]).
As stated in the Restatement (2d) of Contracts: "No particular form of language is necessary to make an event a condition, although such words as "on condition that," "provided that" and "if" are often used for this purpose. An intention to make a duty conditional may be manifested by the general nature of an agreement, as well as by specific language. Whether the parties have, by their agreement, made an event a condition is determined by the process of interpretation. That process is subject to the general rules * * *. For example, as in other instances of interpretation, the purpose of the parties is given great weight * * *, and, in choosing between reasonable meanings, that meaning is generally preferred which operates against the draftsman" (Restatement [2d] of Contracts § 226, comment a).
As far back as 1871 in New York, the Court of Appeals stated:
* * * there is no inconsistency in a surety being entitled to notice of the default of his principal; and yet the consequence of not giving the notice being to exonerate him only to the extent of the damage sustained by reason of the omission * * *
* * * [I]n cases where, by the laches of the creditor, the surety's means of indemnity are impaired, his liability is discharged only to the extent of the loss sustained by reason of such neglect. * * *
There seems to be no good reason why these principles should not be applicable to a case where the guarantor is entitled to notice by the terms of his contract, unless, by the reasonable construction of the contract, the giving of the notice is a condition precedent
( Barhydt v. Ellis, 45 NY 107, 110).
The parties have cited no cases interpreting a bond similar to the one at issue here. Hartford relies primarily upon a case from the United States Court of Appeals for the Second Circuit, Elm Haven Const. Ltd Partnership v. Neri Const. LLC, 376 F3d 96 [2d Cir 2004]), which is a diversity case construing Connecticut law and thus of limited application here, where the Bond specifically recites that New York law must apply. More importantly, the obligee under the performance bond at issue in that case hired a replacement subcontractor for the subcontractor/principal under the performance bond without notice to the surety, thus breaching its obligation to give the surety the opportunity to complete the performance under the bond's provisions ( see Elm Haven, 376 F3d at 101). The facts are entirely inapposite.
In another case relied upon by Hartford, 120 Greenwich Development Assoc. LLC v. Reliance Ins. Co., 2004 WL 1277998 [SDNY 2004]), a copy of which case Hartford attaches to its brief, the obligee the owner of the construction project in question argued that the obligations of the bond in question did not constitute conditions precedent, despite the use of the word "conditions" to describe them; rather, they merely provided the surety with a defense to the extent that it could show prejudice as a result of the owners/obligee's failure to provide timely notice of the principal's default ( see 120 Greenwich, 2004 WL 1277998, * 11). The United States District Court for the Southern District of New York held that the language of the bond "create[d] unambiguous preconditions for triggering [the surety's] obligations under the Bond" ( id. *12; see Security Mut. Ins. Co. of New York v. Acker-Fitzsimons Corp., 31 NY2d 436, 440). That case also interpreted a standard form performance bond that had been interpreted in other cases to contain language of conditions precedent ( see 120 Greenwich, 2004 WL 1277998, * 12 and cases cited).
The Court determines that the Bond at issue here is ambiguous whether or not the requirement of notice by a certain time of default and extension of time of payment was intended to be a condition precedent. Because the Bond is ambiguous, and because discovery is not yet complete (and, in fact, the Court is issuing herewith an order on Plaintiff's motion to compel production of documents and answers to interrogatories), Hartford's motion for summary judgment on this issue must be denied. ( see Hunt v. Bankers and Shippers Ins. Co. of New York, 60 AD2d 781, 783 [4th Dept 1977]; see also Jana-Rock Const. Co. v. City of Rome, 289 AD2d 970 [4th Dept 2001]; see generally Morse/Diesel, Inc. v. Trinity Inds. Inc., 875 F Supp 165, 172 [SDNY 1994]; 23 Williston on Contracts § 61:39 [4th ed 2004]).
The differing results from interpreting a contractual provision as an implied-in-fact condition precedent as opposed to a promise may be severe. Generally, express conditions precedent to liability under a contract must be "literally performed"; substantial compliance is not sufficient ( Oppenheimer Co. v. Oppenheim, Appel, Dixon Co., 86 NY2d at 690, 692, quoting Restatement [2d] of Contracts, § 237, comment d, at 220). However, with respect to surety bonds, substantial compliance with conditions precedent involving notice may be enough ( see e.g. 63 N Y Jur2d, Guaranty Suretyship § 357 [2005]; International Fid. Ins. Co. v. County of Rockland, 98 FSupp 2d 400, 400-408 [SDNY 2000] [applying New York law]). The Court need not now reach this issue.
Even if the Bond were deemed to be unambiguous and, in addition, to require timely notice of default as a condition precedent, the Court would determine that NFG raised an issue of fact whether it complied with such a "condition". Hartford contends that NFG's March and April 2000 invoices to Iroquois showed defaults by Iroquois about which NFG failed to notify Hartford and that the AFSS (Marcus Affirm Exhibit O) was an agreement by NFG to extend the time for payment of Iroquois' debt of which NFG failed to notify Hartford in breach of its bond ( see Hartford's Brief at 3-4). However, according to NFG's transportation manager, Hart, Iroquois had not "defaulted" and had not been granted an extension of time for payment at the time of the AFSS ( see Hart Affid. ¶¶ 22-23).
The first notice provision in the bond does not require notice at any particular time ( see Marcus Affirm. Exhibit E ¶ 3). The second notice provision appears in paragraph 4, which provides, first, that NFG must present a notice of claim in writing, containing "an itemized list of the amounts due and shall be accompanied by documentation that the Obligee has drawn fully upon the underlying bond" ( id. Exhibit E). In fact, INA did not pay upon the underlying bond until March 2002, a year and a half after Iroquois filed for bankruptcy. Thus, no notice of claim could have been complete until that date. The Bond then states, as noted earlier, that "the Obligee must notify the Surety in writing within five (5) business days if the Principal is in default, partially or in full, and that said Obligee has made a determination to grant an extension of time for payment by said Principal" (Marcus Affirm. Exhibit E ¶ 4 [emphasis supplied]).
Hartford alleges that NFG breached that provision by failing to notify Hartford prior to August 1, 2000, the time of the first notice of default, despite the fact that NFG had already issued at least five "statements of arrearage" (presumably including the March through June invoices) postdating the inception of Hartford's bond, the last of which was dated July 4, 2000, and entered into two agreements to extend time for payment ( see Hartford Brief at 13). NFG responds, and the Court concurs, that the arrearages noted above existed when Hartford executed the Bond on March 2 ( see Hart Affid. Exhibit K), and the fault for Hartford's lack of awareness of those arrearages does not lie with NFG ( see Hart Affid. ¶¶ 17, 18, 37, 40, 42; infra part II). Second, the AFSS and AFSS No. 2 did not extend time for payment, as there are no provisions in those two agreements that prevent NFG from demanding the entire balance due at any time ( see NFG Brief at 11-12; Hart Exhibits L M, and infra part B). In fact, AFSS No. 2 was a prepayment agreement insofar as it required prepayment before Iroquois could incur transportation charges ( see NFG Brief at 13-14; Hart Affid. Exhibit M). In addition, Hartford requested no information from NFG prior to renewal of the bond ( see Hart Affid. ¶ 38; NFG Brief at 14-15). Notice of Default was provided August 1, 2000 and there is a question of fact whether that notice was sufficient under the circumstances. Thus, even if the provision were determined to be a condition precedent, summary judgment would be denied.
Finally, in a separate argument, Hartford contends that that NFG cannot by secret agreements which were not disclosed to Hartford, extend Hartford's responsibility to NFG ( see Hartford Brief at 15-16; see also Matter of Liquidation of Union Indemnity Ins. Co., 299 AD2d 203 [1st Dept 2002]).
The obligation of a surety or guarantor of due performance of a contract cannot be extended, without the surety's consent, to cover performance of a different contract.
( Matter of Liquidation of Union Indem. Ins. Co, 299 AD2d at 203, citing Bier Pension Plan Trust v. Schneierson, 74 NY2d 312, 315; Becker v. Faber, 280 NY 146, 151). "By alteration in the obligation of the principal, the principal is discharged from performance of the obligation in its original form and, in effect, a new obligation is substituted for the old" ( Becker v. Faber, 280 NY at 149; see Big Red Boat (Two) Ltd. v. Greenwich Ins. Co., 2002 WL 1163557 [SDNY] aff'd 84 Fed Appx 1488 [2d Cir 2004] [unpublished decisions]).
The New York Court of Appeals differentiates between leniency towards the principal and modification of the underlying contract:
We have not held that an act of leniency towards the principal by the assured through remission of a part of an obligation or waiver of full performance constitutes an alteration of the obligation of the principal which will discharge the surety completely. Reduction in the rate of interest is a remission of part of the obligation. Remission or waiver of part of the performance which might be exacted by the assured from the principal does not release the principal from performance of the part of the original obligation which remains unchanged and in full force; and if the principal fails in such performance the surety may be held for the default in accordance with the surety's agreement. Neither principal nor surety is held in such case for a new or altered obligation; both are held to performance of an obligation assumed in the original agreement
( Becker v. Faber, 280 NY at 150 [emphasis supplied]). However, where the obligee extends the time for payment of the principal debt for even a few days, the surety is discharged, according to a long line of decisions ( see Becker, 280 NY at 151).
Leniency shown to a debtor in default, delay permitted by the creditor without change in the time when payment of the debt might be demanded, does not, however, constitute an extension of the time for payment. That requires a binding contract which precludes the creditor from enforcing payment according to the terms of the original contract and confers upon the debtor the right to withhold payment after the original debt has become due
( Becker, 280 NY at 151 [emphasis in original]; see Bier Pension Plan Trust v. Estate of Schneierson, 74 NY2d 312, 315-316; see also Keene Corp. v. International Fidelity Ins. Co., 736 F2d 388, 391-92 [7th Cir 1984] ["a compensated surety is not discharged by an extension of time for performing the underlying contract unless the extension is supported by valid and sufficient consideration"]; American Bonding Co. of Baltimore v. Kelly, 172 AD 437, 441 [2nd Dept 1916] [same]).
In this case, the Court determines that the evidence shows that the AFSS and the AFSS No. 2 did not extend the maturity of the debt from Iroquois to NFG; rather, they constituted leniency or indulgence in enforcing the debt to which Hartford acquiesced after receiving notice of those two agreements. In any event, as noted earlier, there are issues of fact which preclude the granting of summary judgment.
C. FRAUDULENT CONCEALMENT
Hartford's second basis for summary judgment is that NFG fraudulently concealed Iroquois' indebtedness to NFG until after Hartford had renewed its bond ( see Hartford Brief at 16-19). Hartford contends that it was prejudiced because it was not informed about the debt restructuring agreement entered into in early July 2000 which removed the unpaid balance from NFG's billing under the STBA agreement just prior to Hartford's renewal of the Bond; if Hartford had been informed promptly of a default by Iroquois, it contends, its potential exposure under the Bond would have been limited to less than $400,000, the balance due on the April 2000 invoice ( see Hartford's Reply Brief at 4-6).
It is settled law in New York that "absent either an express agreement in the surety bond or inquiry by the surety, a creditor has no duty to keep the surety informed of the debtor's financial situation * * *. Rather, the surety bears the burden of making inquiries and informing itself of the relevant state of affairs of the party for whose conduct it has assumed responsibility" ( State v. Peerless Ins. Co., 67 NY2d 845, 847; see U.S. Capital Ins. Co. v. Buffalo and Erie County Regional Devel. Corp., 177 AD2d 949 [4th Dept], lv denied 79 NY2d 760).
The policy behind surety bonds is not to protect a surety from its own laziness or poorly considered decision." A surety cannot rest supinely, close his eyes, and fail to seek important information,' and then seek to avoid liability under the guaranty by claiming he was not supplied with such information." Mohasco Industries, Inc. v. Giffen Industries, Inc., 335 F.Supp. 493, 497 (S.D.N.Y. 1971) (citation omitted). See also St. Paul Fire Marine Ins., 646 F.2d at 1072 ("The law does not favor the indifferent, unseeing surety who fails to help himself.").
( Cam-Ful Industries, Inc. v. Fidelity and Deposit Co. of Maryland, 922 F2d 156, 162 [2d Cir 1991]).
In its reply brief, Hartford asserts that Peerless Ins Co. is inapposite, because the bonds in that case contained no notification requirements, unlike the Bond in the instant matter ( see Reply Brief attachment [copies of bonds in Peerless case]); and asserts that, where a surety requests information, silence on the part of the obligee can amount to fraudulent concealment ( see id. at 9-11).
It is true that a surety's "guarantee induced by fraudulent misrepresentation or concealment of a material fact is void" ( State v. Peerless Ins. Co., 67 NY2d 845, 848). However, under New York law, there is a four-part test for determining whether an obligee's failure to inform a surety of material facts amounts to fraudulent concealment:
1) the obligee must know facts that materially increase the surety's risk, and have reason to believe that [the] surety would be unwilling to assume such a higher risk; 2) the obligee must have reason to believe that such facts are unknown to the surety; 3) the obligee must have the opportunity to communicate the relevant information to the surety; and, 4) the obligee must have the duty to disclose the information based upon its relationship to the surety, its responsibility for the surety's mis-impression, or other circumstances
( Rachman Bag Co. v. Liberty Mut. Ins. Co., 46 F3d 230, 237 [2d Cir 1995] [applying New York Law]; see generally Mohasco Inds. Inc v. Giffen Inds., Inc., 335 F Supp 493 [SDNY 1971]).
Here, Hartford has failed to establish as a matter of law that NFG had the duty to disclose the existence of the AFSS and the AFSS No. 2 before renewal of the bond, whereas NFG has established as a matter of law that Hartford failed to request any information from NFG before Hartford initially executed the bond concerning Iroquois' financial status, and that Hartford also failed to obtain such information from Iroquois. Further, the Court determines that, as a matter of law, Hartford's claim of fraudulent concealment lacks merit because it cannot prove reliance, "an essential ingredient in a fraud claim" ( State v. Peerless Ins. Co., 67 NY2d at 848; see Brenkus v. Metropolitan Life Ins. Co., 309 AD2d 1260, 1261 [4th Dept 2003]). Thus, Hartford's motion for summary judgment is denied.
II. NFG'S MOTION FOR SUMMARY JUDGMENT
NFG cross-moves for summary judgment dismissing certain affirmative defenses and counterclaims asserted by Hartford.
The first affirmative defense in Hartford's Amended Answer to the Amended Complaint is that NFG had a duty to disclose Iroquois's pre-inception indebtedness ( see Amended Answer ¶¶ 81-84). The seventh affirmative defense and counterclaim asserts essentially the same facts, but alleges that NFG's "concealment" of the indebtedness "materially increased the risk assumed by Hartford when it became the surety" and therefore that the Bond is voidable ( see Amended Answer ¶¶ 107-109). The law is otherwise ( see New York v. Peerless Ins. Co., 67 NY2d at 847; see also Rachman Bag Co., 46 F3d at 237; and supra Part B). The first affirmative defense and seventh affirmative defense and counterclaim are dismissed.
The second affirmative defense and counterclaim states that NFG breached the obligation of good faith in every contract. The claim by NFG that this defense is duplicative is without merit, and the motion insofar as it seeks to dismiss this defense and counterclaim is denied.
The third affirmative defense and counterclaim asserts that there were material changes made to the contractual relationship between NFG and Iroquois such that the obligations and risk described in the bond were changed and increased in material ways, without Hartford's knowledge or consent, and therefore Hartford is discharged from its liability ( see Amended Answer ¶¶ 90-93). The fourth affirmative defense and counterclaim is virtually identical ( see Amended Answer ¶¶ 94-96). As noted supra pp. 34-36, the Court determined that NFG established as a matter of law that neither the AFSS nor the AFSS No. 2 operated to discharge the surety under New York law. However, there are questions of fact whether the Repayment Agreement did so, and the motion insofar as it seeks to dismiss these affirmative defenses and counterclaims with respect to the Repayment Agreement, is denied.
The fifth affirmative defense asserts, apparently, that NFG is not entitled to any payment from Hartford because the amount billed for October 2000 to Iroquois is less than the amount of the primary insurer's liability ( see Amended Answer ¶¶ 97-101). Dismissal of this defense would be premature prior to determination of the amount of damages, if any, owed by Hartford to NFG.
The eighth affirmative defense asserts that Iroquois Energy Brokers was the signatory to the "Service Agreement For Supplier Transportation, Balancing and Aggregation Under Service Classification No. 33" (hereinafter STBA Agreement), the agreement that was bonded, whereas Iroquois Energy Management, LLC was the named principal under the Bond. Hartford therefore asserts that is has no liability under the Bond ( see Amended Answer ¶¶ 110-111). NFG responds that Iroquois Energy Management, LLC was the successor to Iroquois Energy Brokers, LLC, and that Hartford was well aware of that fact prior to executing the bond ( see Hart Affid. ¶¶ 3, 49; Schmidt Affid. Exhibit M). Nonetheless, there is no proof of that succession on this record, and therefore, the motion is denied insofar as it seeks to dismiss the eighth affirmative defense.
The tenth affirmative defense asserts that the 1996 STBA Agreement referenced in the Hartford Bond continued by its express terms only until September 30, 1997, and expired before the inception of the Bond. Hartford therefore asserts that is has no liability under the Bond ( see Amended Answer ¶¶ 113-115). NFG contends that its tariff dictated that such agreements were automatically renewable annually ( see Schmidt Affid. Exhibit C, Service Classification 33 ¶ H) and that the parties' conduct, correspondence, and the AFSS, AFSS No. 2 and Repayment Agreements demonstrate that the STBA Agreements continued to be renewed ( see NFG Brief at 32). Again, this defense is deferred until trial, in the absence of express proof that the STBA Agreements were renewed annually through October 2000.
The eleventh affirmative defense asserts that Iroquois and NFG entered into various agreements which were a novation and replacement for the STBA agreement or a modification of the STBA agreement and, therefore, that Hartford is released from its liability under the bond ( see Amended Answer ¶¶ 116-117). Although there is no evidence on this record that there was a novation through the AFSS, the AFSS No. 2 or the Repayment Agreement, again, there is no proof that the STBA agreement was renewed beyond 1997. Therefore, the Court denies the motion insofar as it seeks to dismiss the eleventh affirmative defense.
In due consideration of the aforementioned:
1) the Court denies Hartford's motion for summary judgment;
2) the Court grants that part of NFG's motion that seeks an order dismissing the first affirmative defense and the seventh affirmative defense and counterclaim; and
3) the Court denies NFG's motion insofar as it seeks to dismiss the second, third, fourth, fifth, eighth, tenth, and eleventh affirmative defenses and/or counterclaims.
Plaintiff's counsel to submit order on notice to all other parties.