Opinion
Case No. 00-15452 (REG), (Jointly Administered).
March 25, 2005
Matthew C. Gruskin, Esq. (argued), Shiboleth, Yisraeli, Roberts Zisman LLP, New York, NY, Counsel for Claimants.
Andrew K. Glenn, Esq. (argued), Ronna G. Jackson, Esq., Kasowitz, Benson, Torres Friedman LLP, New York, NY, Counsel for Reorganized Debtors.
DECISION ON REORGANIZED DEBTOR'S OBJECTIONS TO CLAIM OF MERIT ABRASIVE PRODUCTS, INC. AND WALDOCK LIMITED
In this contested matter in the confirmed chapter 11 cases of Indesco International, Inc. ("Indesco") and its affiliate AFA Products, Inc. ("AFA"), reorganized debtor AFA objects to the claims of (1) Merit Abrasive Products, Inc. ("Merit") and (2) Waldock Limited ("Waldock").
In the first of the two objected-to claims, Merit asserts that an oral agreement (allegedly between former insiders Ariel Gratch and Yohechai Schneider) was entered into on AFA's part to indemnify Merit with respect to the costs of the termination of Merit's employment of one Peter Mancuso. AFA (which is now under the control of its former creditors, after the departure of the insiders) disputes the existence of the alleged oral agreement, and further argues that Merit's claim, even if such an oral agreement existed, is unenforceable under the statute of frauds.
In the second of the two objected-to claims, Waldock seeks payment for what Waldock now asserts is the unpaid portion of a loan to AFA. But AFA asserts that Waldock's claim is untimely.
The objections to the two claims present a common threshold issue — the extent to which AFA negotiated away the right to object to the Merit and Waldock claims on either substantive or procedural grounds.
With respect to the threshold issue, which the Court must address first, the Court determines that AFA agreed not to assert procedural defenses, but did not forfeit the right to raise substantive ones. And while the Court determines that AFA's objection to Waldock's late filed claim is a procedural objection that AFA waived the right to assert, AFA's objection that the alleged indemnification agreement is unenforceable under the statute of frauds a substantive one that AFA has the right to assert. Likewise, AFA may assert substantive defenses, but not procedural ones, with respect to the Waldock claim. AFA may contest the Waldock claim on the grounds that no loan was actually made, or that the amount claimed to be due is wrong, or that it is not due from AFA, or that the debt must be subordinated to other claims or satisfied in a different currency — but may not object on the ground that it was late filed.
While the Court would likely find excusable neglect for the late filing in any event, by reason of the failure to send Waldock notice of the Bar Date (as discussed below), the Court does not need to reach that issue, by reason of its determination that AFA waived the right to object to the Waldock claim for late filing. See Discussion Section I, infra.
On the merits, the Court disagrees with the contention underlying AFA's objection that Merit's claim is unenforceable under the Statute of Frauds. Thus the Court will continue the objection with respect to the factual issues that may then exist as to whether the alleged promise was in fact made, and supported by consideration. The Court will likewise continue the proceedings with respect to the Waldock claim to consider defenses to that claim other than its late filing.
The following are the Court's Findings of Fact (to the extent it now can make them) and Conclusions of Law in connection with its determinations.
Facts
In November 2000, involuntary chapter 11 petitions were filed in this Court against each of Indesco, AFA, and a third debtor, Continental Sprayers International, Inc. (collectively, the "Debtors") by several of Indesco's bondholders. In January 2001, the Debtors consented to the entry of an order for relief, and the case continued as a chapter 11 case with the Debtors remaining in possession. On January 11, 2002, a reorganization plan (the "Plan") sponsored by the Creditors' Committee was confirmed, and the Plan thereafter became effective on March 15, 2002.
The Merit Claim
In the course of the case, Merit filed a proof of claim against AFA for approximately $551,000. That proof of claim triggered the claims objection that is one of the two subjects of this contested matter.
As set forth in the claim (taken to be true for the purposes of this decision), Merit is a corporation engaged in the manufacture and distribution of various abrasive products. Merit Marketing Corp. ("MMC") is a subsidiary of Merit.
In July 1997, AFA entered into an employment agreement (the "Employment Agreement") with one Peter Mancuso. Under the terms of that agreement, Mancuso was to work as AFA's president for a four year term.
Debtors' Obj. Exh. A.
Thereafter, Indesco adopted a business plan to combine AFA's business with Continental Sprayers, AFA's sister company. Another individual was appointed to head up the operations of the two companies, and as a result, Mancuso's position became redundant.
If Mancuso had been terminated, he would have been entitled to significant severance payments, including his salary and benefits for the remainder of his contract's four year term. Thus, allegedly, "[i]n search of a solution to this problematic situation," AFA proposed to Merit that Mancuso be hired at Merit as a senior manager with sales and marketing skills. Accordingly, during April 1999, AFA and Indesco allegedly "agreed" to assign the Employment Agreement from AFA to MMC. MMC, "which agreed to accommodate AFA," allegedly agreed to assume AFA's obligations to Mancuso under Mancuso's Employment Agreement for as long as Merit was satisfied with Mancuso's services. AFA, in turn, allegedly agreed to indemnify Merit (or MMA) for any liabilities that Merit would bear if the match did not turn out favorably. In that event, it is alleged, AFA would effectively resume its obligation to Mancuso, and bear the expenses related to Mancuso's employ.
Gratch Affirm. ¶ 6.
As noted, MMA was a Merit affiliate. It appears that distinctions between Merit and MMA have been blurred, in no small part because Merit has referred to the two entities collectively as "Merit." Neither side has contended that distinctions between Merit and MMA are relevant to this controversy.
By a letter agreement dated April 16, 1999 (the "April 1999 Agreement"), Mancuso was notified of the assignment, and each of the signatories indicated his or its assent to various terms. The April 1999 Agreement stated that Mancuso would thereafter serve as MMC's president for the remaining 27 months of his employment contract's term (under the same terms and conditions of the original employment agreement), and that AFA was to be released from all its obligations to Mancuso under the Employment Agreement. AFA signed the April 1999 Agreement, under "AGREED (as to paragraphs 2 and 3)." But the April 1999 Agreement was silent with respect to the agreement between AFA and MMC that is now alleged to exist.
Debtors' Obj. Exh. B. Merit refers to this document as the "Notification," but it was plainly more than that. The April 1999 Agreement was signed by each of AFA, Merit and Mancuso, and had promises running in various directions. See infra note 6.
Paragraph 2 provided, in substance, that AFA assigned its rights under the Employment Agreement to MMC, and that MMC assumed the obligations thereunder for the remainder of the term, and that Mancuso agreed to be bound to AFA to honor confidentiality obligations.
Paragraph 3 provided for a release by Mancuso in favor of AFA with respect to all obligations under the Employment Agreement or otherwise, in connection with his employment by AFA or its termination.
Unfortunately, Merit was not satisfied with Mancuso's performance, and on January 22, 2001, Merit terminated Mancuso's employment. Merit took the position that Mancuso's termination was a termination "with cause," which would relieve Merit from liability for severance payments to Mancuso. But since there was a debatable issue as to whether Mancuso's behavior constituted "cause" under the employment agreement, Merit deemed it prudent to settle with Mancuso, and to pay Mancuso through the end of Mancuso's employment term.
Debtors' Obj. Exh. C.
In May 2001, Merit and Mancuso entered into a Settlement Agreement and Mutual Release (the "Settlement Agreement"). AFA's name was listed at the beginning of the Settlement Agreement as one of the parties to it, and AFA was typed at the end of the Settlement Agreement with a place for an AFA signature. AFA also was named, in the Settlement Agreement, as one of the members of the "Merit Group," a shorthand for those on the opposite side of Mancuso. But the Settlement Agreement was never signed by anyone on behalf of AFA. There is no evidence that AFA participated in the settlement discussions.
Debtors' Obj. Exh. D.
Having paid Mancuso, Merit now seeks indemnification for the amounts it so expended after Mancuso's termination.
Without dispute, the alleged promise on the part of AFA to indemnify was never reduced to writing, or otherwise confirmed in writing in any way. The only written documents — the April 1999 Agreement and the Settlement Agreement — did not purport to deal with the rights, if any, as between Merit and AFA themselves. The promise to indemnify is supported by the assertions of the former insiders Gratch and Schneider, but at this juncture nothing else.
Skeptical of the assertions of the two former insiders who say they made an undocumented deal with each other for which AFA's creditors are now left holding the bag, AFA disputes Merit's assertion as to the existence of the alleged oral agreement. But now, and here, AFA asserts that even if the alleged oral agreement had been made, it is unenforceable under the Statute of Frauds, and that Merit's claim must now be denied on that basis in any event, as a matter of law. The Waldock Claim
Waldock is a British Virgin Islands corporation and a wholly-owned subsidiary of S.F. Trust, a trust for the benefit of certain members of the Yehochai Schneider family. Schneider, a former Indesco insider, is also the chief executive officer of Merit.
In or about 1997, Waldock allegedly lent money to AFA. The loan was entered and shown on the books of AFA. A promissory note with respect to the loan has been produced. Allegedly, only a part of the balance (at most) was repaid by AFA to Waldock. The obligation to pay the unpaid principal was allegedly assigned to a non-debtor, Indesco Holdings, Inc. However, according to Waldock (in its present statement of the basis for its claim), AFA remains liable for the repayment of $116,919 on account of interest on the loan.
Debtors' Response Exh. C.
By contrast, Waldock's proof of claim for the $116,919, filed on Feb 5, 2002 (Chaffe Decl. Exh. A) makes no reference to a loan, or to a duty to pay principal or interest; does not check the box "Money loaned"; and attaches no supporting documents with respect to a loan (or, for that matter, anything else). Instead it describes, as the "Basis for Claim," "Services performed," and seemingly says "Unpaid compensation for services performed" "During 1997 and 1998."
If there was an explanation for the seeming inconsistency in Waldock's papers, this Court was unable to find it. The inconsistency raises some fairly substantial credibility issues in the Court's mind with respect to the underpinnings of this claim, which, in light of the disposition of the issues in this decision, the Court will need to explore in an evidentiary hearing.
Filing of Waldock Proof of Claim
This Court fixed the deadline, also referred to as the "Bar Date," for the filing of proofs of claims as July 16, 2001. Without dispute, the Waldock claim was filed on February 11, 2002, approximately seven months after the Bar Date, and after the Plan had been confirmed.
Notice of the Bar Date was not sent to Waldock as such. The Subordinated Note evidencing the indebtedness did not provide an address for Waldock, and there is no evidence in the record, or contention, that either the Debtors or their creditors focused on Waldock in any way or tried to serve it by serving notice on anyone on Waldock's behalf.
It does appear that Schneider was given notice of the Bar Date, but not in a way that mentioned Waldock, or that purported to be on behalf of Waldock.
Agreement Re Rights to Object to the Claims
As noted, the Plan for Indesco and its subsidiaries became effective on March 15, 2002. To permit the previously confirmed Plan to go effective, the creditors of Indesco, which relied in its business on technology controlled by Schneider and companies he controlled, had to reach a settlement with Schneider, which was obtained, with some difficulty (and with the ultimate assistance of a mediator) the day before, on March 14, 2002.
Schneider, who had been a major stakeholder in the Debtors and was the controlling person of Arbo Consult Nederlands, B.V. (Arbo), which in turn controlled a subsidiary that owned the rights to the technology, took the position, in the mediation and related discussions, that payment on the Waldock and Merit claims had to be part of any overall settlement. With what some might regard as an inconsistency, Schneider also stated that he had no control over either Merit or Waldock, and therefore could not include their claims in the releases given to the Debtors under the settlement.
In the negotiations, counsel for Indesco's creditors expressed its skepticism with respect to Schneider's stated independence from Merit and Waldock, expressing its clients' belief that Schneider was the ultimate beneficiary of their claims. Thus, the creditors' counsel argued, Schneider should not receive both the benefits of the settlement and the amounts claimed by Merit and Waldock. If, however, the creditors could be persuaded that Schneider would not benefit from the claims, the creditors agreed that the claims would be reviewed on their merits and be paid if otherwise valid. Schneider said he would be satisfied with this, as he was certain that on their merits, the claims would prove to be valid.
Presumably by reason of confidentiality desires, Schneider and/or his counsel elected not to simply turn over the relevant documents with respect to the beneficial ownership of Merit and Waldock, and instead an alternate mechanism of having a Swiss lawyer intermediary look at documents, make assumptions, and then render an opinion was established. A letter memorializing the agreement (the "March 2002 Agreement") was executed on March 14, 2002, the day before Indesco's reorganization plan became effective. Pursuant to the March 2002 Agreement, Schneider provided an opinion of a Swiss lawyer, dated May 7, 2002 with respect to the ownership issue. But that letter had a number of gaps, particularly by reason of its failure to address whether there was indirect ownership, and whether such indirect ownership, if any, was by Schneider's children or other relatives. Thereafter, on July 12, 2002, a supplemental letter, by the same Swiss lawyer, was prepared.
As previously noted, Waldock's claim was filed after the Bar Date (a fact that was known at the time of the execution of the March 2002 Agreement), and the Reorganized Debtors now take the position that its late filing precluded allowance and payment of the Waldock claim. But Waldock and its lawyers (who were also the lawyers for Schneider) take the position that Indesco's creditors' agreement, as part of the March 2002 Agreement, to review the Merit and Waldock claims "on the merits" foreclosed such a position.
The March 2002 Agreement is of course the starting point (and arguably the ending point) with respect to the parties' agreement as to the asserted waiver of the right to object to the Waldock and Merit claims. It stated, in relevant part:
The Debtors have advised us that they have not made any determination with respect to the merits of each of the Merit Claim and the Waldock Claim, including whether the Claims constitute Allowed Claims or Disputed Claims under the Plan. The Debtors have advised us that they will make that determination, with respect to each such claim, in good faith within sixty (60) days after the submission to the Reorganized Debtors by Merit and Waldock, respectively, of (i) all documentation supporting such claims and (ii) [the ownership opinion letter described above]. . . .
The Debtors have advised me that they, for themselves and on behalf of the Reorganized Debtors, reserve any and all of their rights, and by this letter are not waiving any of their rights, in connection with proceedings concerning the allowance of the Claims, including, without limitation, the right to file an objection to one or both of the Claims.
Debtors' Response Exh. A (emphasis added).
Discussion
The parties agree, or at least do not dispute, that New York law governs this controversy.
See, e.g., Tehran-Berkeley Civil Envtl. Eng'rs v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989) ("The parties' briefs, however, rely on New York law. Under the principle that implied consent to use a forum's law is sufficient to establish choice of law, see Larsen v. A.C. Carpenter, Inc., 620 F.Supp. 1084, 1103 (E.D.N.Y. 1985) (collecting cases), affirmed, 800 F.2d 1128 (2d Cir. 1986) (mem.), we will apply New York law to this case.").
I.
The Court deals with the threshold issue first.
The Court must construe the March 2002 Agreement in accordance with its plain language, to the extent it can do so. On matters as to which that agreement was ambiguous or silent, the Court must ascertain the intent of the parties, based on the objective manifestations of their intentions, and not their secret desires. There being no indication that there are any communications of the former character that have not already been presented to the Court, there is no need for a further evidentiary hearing in that regard.
In determining the intent of the parties, the Court looks at the circumstances at the time, and the facts that were then known, along with what was actually stated by the parties.
As relevant to this controversy, the March 2002 Agreement stated:
The Debtors have advised us that they have not made any determination with respect to the merits of each of the Merit Claim and the Waldock Claim, including whether the Claims constitute Allowed Claims or Disputed Claims under the Plan. The Debtors have advised us that they will make that determination, with respect to each such claim, in good faith within sixty (60) days after the submission to the Reorganized Debtors by Merit and Waldock, respectively, of (i) all documentation supporting such claims and (ii) [the ownership opinion letter described above]. . . .
The Debtors have advised me that they, for themselves and on behalf of the Reorganized Debtors, reserve any and all of their rights, and by this letter are not waiving any of their rights, in connection with proceedings concerning the allowance of the Claims, including, without limitation, the right to file an objection to one or both of the Claims.
Debtors' Response Exh. A (emphasis added).
The reservation of the right to object to either claim on substantive grounds is plain. The first quoted paragraph makes clear that the Debtors had not yet come to a view as to the "merits" of the claims, and that means, at the least, their substantive merits, and matters that go to allowability as a substantive matter. That (as far as Merit is concerned) includes the Statute of Frauds, which is a rule of substantive statutory law that makes otherwise enforceable agreements voidable, and (as far as Waldock is concerned) goes to such matters as the existence of the debt, its amount, what it was really for, the consideration supporting it, and its priority. And the reservation of rights in the second paragraph is of course consistent with all of those things, though its interpretation is more debatable when it is considered in connection with the requested disallowance of the Waldock claim for late filing.
The right to object on procedural grounds — and for late filing of the Waldock claim, in particular — is more debatable. With respect to that, the Court is mindful of the reservation of rights provisions of the second-quoted paragraph, but is also mindful of the provisions in the first-quoted paragraph, and must try to construe the entire agreement so as to give meaning to each of its individual provisions, and avoid making it nugatory or its deal points meaningless. Significantly, at the time the March 2002 Agreement was drafted, the Bar Date had already come and gone, and the fact that the Waldock claim had been late-filed was already known. Yet the Waldock claim was specifically referred to in the first quoted paragraph, and it was expressly stated that the Debtors had not made a determination with respect to its "merits." A late filing, at least normally, is a classic basis for disallowance. It would have been disingenuous, to say the least, for AFA to have reserved the right to seek disallowance for late filing in the context of the language in the first paragraph without saying so, or to say that AFA would "make that determination," "in good faith," in the next 60 days, when AFA already was on notice of the late filing that would, as a general matter, compel disallowance. It would have been equally disingenuous for AFA's creditors to have reserved that right in addition to, or to the exclusion of, AFA, given their impending takeover of AFA under a Plan which had already been confirmed eight weeks earlier, and which merely had not yet gone effective. The Court notes this not to suggest that either AFA or its creditors was disingenuous; rather, the observation merely reinforces the Court's conclusion that assuming (as the Court does) that neither AFA nor its creditors was disingenuous, neither really intended to reserve the right to object on the basis of late filing — nor, more importantly, conveyed that intent to the other side. If that right had been reserved, it would have made the agreement nugatory as to Waldock, and undercut one of its material underpinnings.
The inescapable conclusion is that with the claims not having yet been reviewed on the merits, AFA and its creditors reserved the right to do so (and to object to them on any substantive grounds), but AFA and its creditors did not likewise reserve the right to object on the procedural late filing ground that was already known to them.
For the foregoing reasons, the Court rules that AFA and its creditors did not waive their rights to raise substantive objections to the Merit and Waldock claims, but did waive their rights to raise procedural objections to it, or at least to procedural objections based on late filing.
II.
Having concluded that AFA can raise substantive defenses, the Court looks at the substantive defenses here, starting with the Merit claim.
New York Gen. Oblig. Law § 5-701 ("the Statute of Frauds"), provides, in relevant part, that:
a. Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking:
. . .
(2) is a special promise to answer for the debt, default or miscarriage of another person."
This Court refers to subsection (a)(2) of the Statute of Frauds (in contrast to other provisions of the Statute of Frauds that might be applicable in other cases) as "Subsection (a)(2)."
The parties joust over whether or not the relationship here should be deemed to have created a relationship to which the Statute of Frauds applies. Obviously, this is not a classic guaranty relationship — as it would be, for instance, if Mancuso had sued AFA, based on an AFA promise to Mancuso, for Merit's failure to pay him. It is a payment not to a creditor who has rights against both the primary obligor and the guarantor or indemnitor; it is a payment to the primary obligor itself. But here the relationship alleged has the same economic effect on the indemnitor that a classic guaranty relationship does, even though it is accomplished by an alleged pair of two-party relationships (one between Merit and Mancuso, and another between Merit and AFA), rather than the three-party relationship which is the classic guaranty relationship.
The Court has little doubt that after the execution of the April 1999 Agreement, Merit became the primary obligor. There is no indication in the April 1999 Agreement, which each of AFA and Merit executed, that Merit assumed only a secondary payor role. The April 1999 Agreement reads exactly to the contrary.
The ultimate issue, of course, is whether the alleged promise in question "is a special promise to answer for the debt, default or miscarriage of another person." The Court concludes, starting with the statutory language and then reviewing the caselaw, that it is not.
Subsection (a)(2).
In accordance with traditional practice, the Court starts with the words of the statute — here Subsection (a)(2). The key words are "answer for," "debt, default or miscarriage," and "of another person." When parsed, the most obvious meaning of those words — if not the only one — is to meet the obligations of ("answer for"), with respect to the unsatisfied obligation ("debt, default, or miscarriage") of a primary obligor ("another person"). In the guaranty situation, the language makes perfect sense. But the language does not lend itself well to satisfying a two-party obligation to pay another person or entity, even if the other person has made a payment and is seeking to be indemnified for it. In that event, the party sought to be bound (AFA here) would be neither "answer[ing] for" nor dealing with the "debt, default, or miscarriage" of the party seeking payment (Merit here) — as the party sought to be bound (AFA) would not be "answer[ing] for" the obligation (it having already been paid), or with respect to a "debt, default, or miscarriage" (since it had already been satisfied). If the statute had been intended to cover the latter situation, there would be a multitude of clearer ways to say it.
See, e.g., In re Ames Dep't Stores, Inc., 306 B.R. 43, 65 (Bankr. S.D.N.Y. 2004) (Gerber, J.) ("As usual, the Court starts with the words of the relevant statutory provisions."); In re PSINet, Inc., 271 B.R. 1, 12 (Bankr. S.D.N.Y. 2001) (Gerber, J.) ("The Court starts with the words of the statute.").
But while the reading for which AFA advocates is improbable, it is not impossible, and the Court then looks to the caselaw.
The caselaw addressed by the litigants — principally state law cases, with perfunctory discussions, which uniformly do not address the meaning of the words in Subsection (a)(2), and sometimes do not even mention it — is not dispositive.
See Kobre v. Instrument Sys. Corp., 54 A.D.2d 625, 387 N.Y.S.2d 617 (1st Dep't 1976), aff'd 374 N.E.2d 131 (1978); Int'l Fidelity Ins. Co. v. Robb, 159 A.D.2d 687, 553 N.Y.S.2d 436 (2d Dep't 1990); Altchek v. DiGennaro, 214 A.D.2d 527, 624 N.Y.S.2d 461 (2d Dep't 1995). The federal case is quite a bit more expansive in its analysis, but principally addresses other points, and is relevant here only for its dictum. See Gonzalez v. Rutherford Corp., 881 F.Supp. 829 (E.D.N.Y. 1995) (Raggi, J., then a district judge).
Kobre, the first of them, is not on point. While Kobre considered an effort to superimpose an alleged oral indemnification promise on a written agreement that failed to include it, the parties did not dispute that the "alleged agreement" (which presumably meant the entire agreement, including the indemnification promise that was alleged to exist) was subject to the Statute of Frauds. And the "Statute of Frauds" there referred to, which was not quoted, was cited only as "General Obligations L. § 5-701(1)" (which, as the statute read at the time, dealt with contracts that could not be performed within a year) and the now-repealed UCC § 8-319(a) (which dealt with sales of certificated securities). The brief Kobre discussion did not discuss present Subsection (a)(2), or its predecessor, § 5-701(2), or what it means to "answer for" the debt of another.
See Kobre, 54 A.D.2d at 626, 387 N.Y.S.2d at 618.
See Lauter v. W J Sloane, Inc., 417 F.Supp. 252, 257 (S.D.N.Y. 1976) (Lasker, J.) (quoting § 5-701(1) as it existed at the time). Subsection (1) then provided:
"Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking:
1. By its terms is not to be performed within one year from the making thereof or the performance of which is not to be completed before the end of a lifetime."
Altchek is in the same category. It involved a written agreement (which apparently was within the statute of frauds, for there-unexplained reasons) with respect to which a litigant argued that the written agreement's indemnification provision was, by reason of an oral agreement, broader than the written language indicated. The court rejected that contention, and likewise rejected a contention that apparently separate shareholder agreements constituted valid indemnification agreements. Because these "did not contain all of the material terms of an indemnification agreement," the Altchek court held that they "thus did not satisfy the statute of frauds." But the Altchek court did not quote, or even cite, Subsection (a)(2) or its predecessor, and it is not clear whether it even regarded Subsection (a)(2) as the applicable Statute of Frauds.
See Altchek, 214 A.D.2d at 528, 624 N.Y.S.2d at 462.
Id.
Id.
The third case, International Fidelity Insurance, somewhat more strongly supports AFA, but even then only weakly and inferentially. There the Second Department effectively reversed a decision of the trial court that had denied summary judgment to a defendant sued on an indemnification agreement that he did not sign. The International Fidelity Insurance court, citing Subsection (a)(2) but not quoting it or explaining why it applied, held that since the defendant's name did not appear on the particular agreement in question (which had been signed only by his co-defendants), he was entitled to summary judgment dismissing the cause of action against him. The International Fidelity Insurance decision, like the other Appellate Division decisions discussed above, was brief and perfunctory, and did not discuss a possible alternative basis for the ruling which would have been an equally valid (and perhaps more appropriate) basis for reaching the plainly correct result that it did — that the one and only agreement presented to the court was a written one, as to which there was no basis for a finding that the moving defendant had bound himself to it.
See Int'l Fidelity Ins. Co., 159 A.D.2d at 688, 553 N.Y.S.2d at 437.
Id.
Likewise, in Gonzalez, the last of the cases referred to by the parties, Judge Raggi (then a district judge), in dictum, expressed considerable concerns as to whether a contractual indemnification obligation would exist where the argued indemnitor had not signed a document evidencing its obligation. She observed that a document had not been signed by the argued indemnitor, and noted that it "raise[d] significant questions as to its enforceability in an action for contract." She cited the Statute of Frauds' Subsection (a), but not any of its subdivisions, and did not articulate (perhaps because she did not have to) the underlying basis on which the Statute of Frauds was applicable — which would then explain why the asserted obligation failed to satisfy the Statute of Frauds. She cited Kobre, but there is no basis for a conclusion that any more should be derived from her citation of Kobre than can be derived by review of Kobre itself.
See Gonzalez, 881 F.Supp. at 846.
Those observations plainly were dictum; a few lines thereafter, she noted that the claims that were before her were being asserted on a wholly different theory. She thus did not have to substantively address her concerns.
By the same token, a case cited by Merit, Barclays Bank v. Goldman, 517 F.Supp. 403, 414-415 (S.D.N.Y. 1981) (Cannella, J.) is partly, but only partly, on point. To be sure, Judge Cannella there found the predecessor to Subsection (a)(2) to be inapplicable to an alleged oral agreement to indemnify individuals for their payments to another (as here). But he did so when the indemnitees were guarantors of an obligation and he thus was acting in accordance with a decision of the New York Court of Appeals that was directly on point. See id. at 414 ("In Jones v. Bacon, 145 N.Y. 446, 449, 40 N.E. 216 (1895), the Court of Appeals held that the "promise by one person to indemnify another for becoming a guaranty for a third is not within the statute (of frauds) and need not be in writing."). Here Merit was not a "guaranty" [or as we would now say, a guarantor] of the obligation to Mancuso, but rather was the primary obligor.
Nevertheless, another observation Judge Cannella made in the course of his analysis (based on analysis in Gilinsky v. Klionsky, 140 Misc. 724, 251 N.Y.S. 570 (Sup.Ct. Broome Co. 1931)), tends to support Merit in its contention that Subsection (a)(2) does not apply. Quoting Gilinksy, Judge Cannella focused on timing, noting that the indemnity promise:
was not to pay the indebtedness of his brother . . . to the banks; his promise was to pay an indebtedness not then in existence, but which would come into existence if and when these plaintiffs as guarantors of the banks' indebtedness were required to pay and did pay that indebtedness.
517 F.Supp. at 414 (quoting Gilinsky, 140 Misc. at 725-726, 251 N.Y.S. at 571-572) (emphasis added). Here too, the alleged promise on the part of AFA was to pay an indebtedness (the subject of the indemnification) that was not in existence at the time the alleged indemnification promise was made (or coming into existence contemporaneously with that), but rather would come into existence, if at all, only at a later time when Merit terminated Mancuso and suffered losses in connection with the termination.
By contrast, a different line of cases, not addressed by either AFA or Merit, is in this Court's view much more closely on point. In Marriott, which is most extensive in its discussion, Chief Judge Mukasey of the district court in this district discussed at some length the issue present here, but not addressed in the cases discussed above — what it takes "[t]o fall within New York's statute of frauds." In Marriott (a diversity action decided under New York law), plaintiff Marriott — which had been paid only in part for the services Marriott had provided to the Downtown Athletic Club ("DAC") in connection with the Heisman Trophy award event in 2001 — sued Wendy's International and a Wendy's affiliate (together, "Wendy's") and DAC seeking payment for the rest of its charges. Marriott alleged in its complaint that DAC had promised to pay Marriott for those services, and Marriott further alleged that Wendy's, one of the sponsors of the Heisman Trophy that year, had promised DAC — not Marriott — that Wendy's would pay the amount DAC owed to Marriott. Thus one of Marriott's several causes of action was in contract against Wendy's, alleging that Wendy's breached "its direct promise to DAC" to pay Marriott the remaining sum due. Wendy's moved to dismiss under Rule 12(b)(6), asserting that its alleged promise was unenforceable under the Statute of Frauds.
See Walter E. Heller Co. v. Video Innovations, Inc., 730 F.2d 50, 53 (2d Cir. 1984); Marriott Int'l, Inc. v. Downtown Athletic Club of New York City, Inc., No. 02 CIV. 3906, 2003 WL 21314056, at *4(S.D.N.Y. June 9, 2003) (Mukasey, C.J.); Van Brunt v. Rauschenberg, 799 F.Supp. 1467, 1471-1472 (S.D.N.Y. 1992) (Martin, J.); Steinberger v. Steinberger, 252 A.D.2d 578, 676 N.Y.S.2d 210 (2d Dep't 1998); G. Carver Rice, Inc. v. Crawford, 84 A.D.2d 866, 444 N.Y.S.2d 748 (3d Dep't 1981). See also Rosenheck v. Calcam Assocs. Inc., 233 A.D.2d 553, 554-555, 649 N.Y.S.2d 247, 249 (3d Dep't 1996) ( dictum).
2003 WL 21314056, at *4.
Id. at *3.
Thus Judge Mukasey considered the applicability of the Statute of Frauds in the context of an alleged promise rather similar to the one here — where the alleged promise was made by the promissor being sued (there Wendy's, and here AFA) to the primary obligor (there the Downtown Athletic Club, and here Merit), rather than to the ultimate obligee (there Marriott, and here Mancuso). As here, the alleged promise was not a guaranty, but had the same economic effect — subjecting the alleged promissor (Wendy's/AFA) to liability for the unpaid obligation.
There, however, it was at least arguably a stronger case for applying the Statute of Frauds since the primary obligor (the DAC, the counterpart to Merit) had not paid the ultimate obligee (Marriott, the counterpart to Mancuso) at all, and thus there was an unpaid debt, which Wendy's (the counterpart to AFA) was being asked to "answer for."
Moving for dismissal under the Statute of Frauds, Wendy's argued (with an argument corresponding exactly to that which AFA makes here) that if any promise to pay DAC's debt was made, it was a promise to answer for the debt of another that had to be evidenced by a signed writing, and thus was unenforceable under the Statute of Frauds. Judge Mukasey disagreed.
In deciding the motion, Judge Mukasey first quoted, and then analyzed, the predecessor to Subsection (a)(2). In analysis that would be no different under the present Subsection (a)(2), Judge Mukasey observed:
New York's Statute of Frauds, Gen. Oblig. Law § 5-701, was amended to add a new subsection (b), and the provision that used to be § 5-701(2) became § 5-701(a)(2), i.e., Subsection (a)(2). The language of the provision itself was not changed.
To fall within New York's statute of frauds, a promise to pay a third party's debts must be made to the obligee. If the promise to pay is made direct to the principal rather than to the obligee, the statute does not apply, and either the principal or the obligee may sue to enforce the promise.
2003 WL 21314056, at *4.
Other authority cited by Judge Mukasey was to the same effect.
See Steinberger, n. 28 supra, 252 A.D.2d at 579, 676 N.Y.S.2d at 211 ("Since the promise allegedly made by the third-party defendant to be primarily liable on the mortgage obligation was made to the third-party plaintiff rather than to the creditor bank, it was not a promise to answer for the debt of another within the meaning of the Statute of Frauds, and is not barred by any alleged failure to comply therewith."); G. Carver Rice, n. 28 supra, 84 A.D.2d at 867, 444 N.Y.S.2d at 749 ("The promise here was allegedly made by a party (Fanning) directly to the debtors (Crawfords) to answer for an existing debt that the Crawfords owed to plaintiff. This is clearly not a promise to pay the debt of a third party as contemplated by the statute.").
Cf. also two other authorities cited in Marriott: 2 E. Allan Farnsworth, Farnsworth on Contracts § 6.3, at 114 (2d ed. 1998) (explaining that "if A owes a debt to C and B orally promises A that B will pay that debt to C, B's promise is not within the suretyship provision [of the statute of frauds], even though C can enforce B's promise as an intended beneficiary"); 4 Caroline N. Brown, Corbin on Contracts § 15.12, at 281-84 (rev'd ed. 1997) (explaining that a promise to a debtor to pay his debts is not within the statute of frauds, and noting that the creditor may sue as a beneficiary on the contract).
This Court recognizes that there is an arguable factual distinction between the facts here and in Marriott, Steinberger, G. Carver Rice, and especially the treatises. Using Professor Farnsworth's terminology, here, the promise, while by B to the primary debtor-obligor A, is to indemnify the primary obligor A for a payment already made to C, rather than to pay C directly. But it seems to this Court that the general principle articulated in Marriott, Steinberger, G.Carver Rice and the treatises is exactly the same, and that, indeed, the basis for applying the statute of frauds here is weaker, rather than stronger, because here the relationship is only a two-party one, and the debt has already been "answer[ed] for."
Here, as in Marriott, the alleged promise was "made direct to the principal" — Merit. Under these circumstances, the alleged promise, as in Marriott, is not subject to the Statute of Frauds.
Accordingly, deeming AFA's Statute of Frauds contention to be a demurrer to the Merit claim, the demurrer is denied, without prejudice to AFA's rights to contest the claim on the basis of any other factual or legal substantive grounds for the denial of the claim.
III.
The Court has ruled that AFA has contractually waived the late filing of the Waldock claim as a basis for objection to it. But the Court is not confident that AFA has had the necessary discovery, or other access to information, to examine the substantive basis for the Waldock claim — and in particular, the consideration originally provided for it, and the computation of the amount said to be due. As importantly, by reason of the inconsistency between Waldock's proof of claim and its present explanation of the basis for its claim, the Court will need to hear much more before it considers allowance of the Waldock claim to be proper. In the interests of the integrity of the claims process and due process, and with the concern that up to this point, AFA may have focused solely on the late filing defense, without comparable attention to the substantive merits of the claim, the Court will afford AFA notice and opportunity to be heard with respect to the merits, and reasonable discovery in connection therewith, before allowing the Waldock claim. The Court will then need to have an evidentiary hearing with respect to the claim.
The Court notes, in this connection, that while a promissory note said to relate to the Waldock claim has been provided, no cancelled check, wire transfer confirmation or similar proof of the original loan has yet been produced.
Conclusion
Deeming AFA's objections to the Merit and Waldock claims, on AFA's Statute of Limitations and late-filing grounds, respectively, as demurrers to the Merit and Waldock claims, both demurrers are denied. Counsel for AFA and for Merit and Waldock are to confer with respect to any necessary discovery (or informal exchanges of information) and any other matters necessary to resolve remaining open issues consensually or, if necessary, by litigation. If the issues with respect to these claims are not consensually resolved, the Court will determine open issues in an evidentiary hearing, with respect to which the Court's procedures for evidentiary hearings in contested matters, as set forth in its current Case Management Order, will apply.
SO ORDERED.