MBP Collection LLC v. Everest National Insurance Co.

          ORDER

          G. Murray Snow Judge

         Pending before the Court are Plaintiff MBP Collection, LLC's Motion for Partial Summary Judgment (Doc. 16), and Defendant Everest National Insurance Company's Motion for Summary Judgment (Doc. 17). For the following reasons, the Court will grant MBP's Motion for Partial Summary Judgment.

         BACKGROUND

         In 2012, MBP Collection LLC (“Metro Bank”) loaned 3.6 million dollars to Global Medical Equipment of America, Inc. (“Global Medical”). (Doc. 18, ¶ 13). Global Medical obtained this loan to purchase two other medical equipment companies-JCare Medical and A&A Medical-and to pay off an existing loan with a different bank. (Doc. 18, ¶ 8). Because the loan amount did not cover the entire purchase price of the two other medical equipment companies, Metro Bank required that Global Medical would not make any additional payments to other creditors during the first four years of the repayment plan. (Doc. 18, ¶ 21).

         At the time, Metro Bank thought it had also obtained Standby Creditor's Agreements (“SC Agreements”) from Michael Trahktman, who was selling A&A Medical Stock, and Debra Sloan, who was selling the JCare Medical stock. (See Doc. 18, Exs. 5, 6). These two agreements required Michael Trahktman and Debra Sloan (“the creditors”) to refuse any payments from Global Medical during the first four years of the loan repayment period. (Doc. 18, ¶ 23). Notably, the agreements required the creditors to pay to Metro Bank any payments made from Global Medical to the creditors during this four-year period. (Doc. 18, ¶ 24).

         Between 2013 and 2017, Everest National Insurance Company (“Everest”) issued Metro Bank two financial institution bonds: one for 2013-2014 (“2013-2014 Bond”, and one for 2014-2017 (“the Bond”). (See Doc. 18, Exs. 1, 2). Insurance Agreement (E) of the Bond provides coverage for a “Loss resulting directly from [Metro Bank] having, in good faith, for its own account or for the account of others, . . . acquired sold or delivered or given value, extended credit or assumed liability on the faith of, any Written, Original . . . personal Guarantee. . . or Security Agreement.” (See Doc. 18, Ex. 1 at 7, Ex. 2 at 5). Under the Bond, a “Guarantee” is defined as a “[w]ritten undertaking obligating the signer to pay the debt of another, to the Insured . . . if the debt is not paid in accordance with its terms.” (See Doc. 18 Ex. 1 at 12, Ex. 2 at 10). A “Security Agreement” is defined as a “[w]ritten agreement which creates an interest in personal property or fixtures and which secures payment or performance of an obligation.” (Id.). Both bonds specifically apply to losses that are first discovered during the Bond period. (Doc. 18, Ex. 2, at 14). The bonds further require that Metro Bank notify Everest of any discovered loss within thirty days, and to provide proof of the loss within six months. (Doc. 18, ¶ 31).

         In 2014, Metro Bank exercised its right of receivership under the loan agreement with Global Medical. After the receivership was in place, Metro Bank discovered that Global Medical had not been truthful in its loan application. (Doc. 18, ¶ 16). In addition to misrepresenting the selling prices of A&A Medical and JCare, Metro Bank also discovered that the S.C. Agreements with the creditors were forged. (Doc. 18 ¶ 14).

         In March 2016, Metro Bank notified Everest of a claim resulting from the forged S.C. Agreements. And then, in April, Metro Bank provided Everest with proof of loss, which requested that Everest consider the claim under both the 2013-2014 Bond and the 2014-2017 Bond. (Doc. 18 ¶ 19).

         There are two issues in this order: (1) whether the S.C. Agreements are covered by the Bond as either a “security” or a “guarantee”, and if so, (2) whether the notice-prejudice rule applies to the Bond.

         DISCUSSION

         I. The S.C. Agreements are “Guarantees” Under the Terms of the Bond

         In Arizona, “[p]rovisions of insurance policies are to be construed in a manner according to their plain and ordinary meaning.” Sparks v. Republic Nat. Life Ins. Co., 132 Ariz. 529, 534647 P.2d 1127, 1132 (1982). Under the Bond, Metro Bank was insured for forged guarantees. (Doc. 18, Ex. 2 at 5). A “Guarantee” is defined as a “[w]ritten undertaking obligating the signer to pay the debt of another, to the Insured . . . if the debt is not paid in accordance with its terms.” (Doc. 18, Ex. 1, at 7).

         The Loan Agreement required Global Medical to forgo any payments to the creditors during the first four years of the loan repayment period. (Doc. 18, ¶ 21). If Global Medical made payments to the creditors during this four-year period, that would plainly violate the terms of the debt agreement. And in that event, under the S.C. Agreements, the creditors would be obligated to pay to Metro Bank any such funds the creditors received from Global Medical that did not exceed the amount that Global Medical owed Metro Bank. Because the purported agreements between the bank and the creditors obligated them to pay to the bank any amounts paid to the creditors by Global Medical that violated the terms of its agreement with MBP, those S.C. Agreements meet the terms of a “Guarantee” under the Bond.^[1] Notably, a guarantee agreement does not have to create an obligation to pay the entire debt. See Tenet Healthsystem Inc. v. Silver, 203 Ariz. 217, 219, 52 P.3d 786, 788 (App. 2002) (“The nature and extent of a guarantor's liability depends upon the terms of the guaranty contract.”).

         Everest cites to case law from courts outside this Circuit to argue that the S.C. Agreements are not guarantees. ...