Memo Iso Summary Judgment (Culley)

7/30/2019 Memo Iso Summary Judgment (Culley)

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UNITED STATES DISTRICT COURT FORTHE SOUTHERN DISTRICT OF NEW YORK

CLARENDON NATIONAL INSURANCECOMPANY and CLARENDON AMERICA

INSURANCE COMPANY,

Plaintiffs,

vs.

JAMES C. CULLEY and JAMES K. CULLEY,

Defendants.

Case No.: 11-CV-02629 (HB) (GWG)

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS JAMES C. CULLEY AND

JAMES K. CULLEY'S MOTION FOR SUMMARY JUDGMENT

Rishi BhandariEvan MandelB. Rudolph Delson

MANDEL BHANDARI LLP11 Broadway, Suite 615New York, NY 10004T: (212) 269-5600F: (646) [email protected]

Attorneys for Defendants James C. Culley

and James K. Culley



ii

TABLE OF CONTENTS

INTRODUCTION .....................................................................................................................1

STATEMENT OF FACTS ........................................................................................................3

LEGAL STANDARD ................................................................................................................9

ARGUMENT ...........................................................................................................................10

I. CLARENDON'S CLAIMS ARE BARRED BY THE STATUTE OF

LIMITATIONS ............................................................................................................10

A. Clarendon's Claims Are Time-Barred ........................................................10

B. The Purported Waiver Of The Statute Of Limitations

Contained In the Guaranties Is Against Public Policy And Is

Invalid ..............................................................................................................12

II. THE CLAIM AGAINST JIM CULLEY MUST BE DISMISSED

BECAUSE THE DRAFT GUARANTEE IS NOT A VALID

CONTRACT ................................................................................................................14

A. Clarendon And Jim Culley Never Formed a Contract ...............................15

B. The Draft Guarantee Fails for Lack of Consideration ................................17

III. THE CLAIM AGAINST CHRIS CULLEY MUST BE DISMISSED

BECAUSE THE ALLEGED OBLIGATIONS ARE OUTSIDE THE

SCOPE OF THE GUARANTEE .................................................................................18

CONCLUSION ........................................................................................................................21



iii

TABLE OF AUTHORITIES

Cases

American Trading Co. v. Fish, 42 N.Y.2d 20 (1977) ....................................................................10

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ...................................................................9

Bayridge Air Rights, Inc. v. Blitman Constr. Corp., 80 N.Y.2d 777 (1992) .................................13

Clarendon Nat'l Ins. Co. v. GWTA Ins. Servs., 2002 U.S. Dist. LEXIS 18817

(S.D.N.Y. Aug. 1, 2002) ....................................................................................................14

Culver v. Parsons, 7 A.D.3d 931, 777 N.Y.S.2d 536 (3d Dept. 2004) ..........................................17

Davimos v. Halle, 35 A.D.3d 270, 826 N.Y.S.2d 61 (1st Dept. 2006)..........................................16

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938)..................................................................................9

European American Bank & Trust Co. v. Boyd, 131 A.D.2d 629,

516 N.Y.S.2d 714 (1st Dept. 1987) ...................................................................................17

Fed. Ins. Co. v. Turner Constr. Co., 779 F. Supp. 2d 345 (S.D.N.Y. 2011) ..................................14

Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415 (1996) ...........................................................9

Hall & Co. v. Continental Casualty Co., 34 A.D.2d 1028,

310 N.Y.S.2d 950 (3d Dept. 1970) ...................................................................................16

John J. Kassner & Co. v. New York, 46 N.Y.2d 544 (1979) ........................................................12

Matsushita Elec. Industr. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) ....................................9

People v. Stuyvesant Ins. Co., 413 N.Y.S.2d 843, 98 Misc. 2d 210 (1979) ..................................18

Salomon v. Burr Manor Estates, Inc., 769 F. Supp. 2d 83 (E.D.N.Y. 2011) .................................17

Sovereign Bank v. Am. Elite Props. Inc., 2011 N.Y. Misc. LEXIS 4102, 2011 N.Y. Slip

Op. 32248U (Sup. Ct. N.Y. County Aug. 17, 2011) ..........................................................17

T & N PLC v. Fred S. James & Co., 29 F.3d 57 (2d Cir. 1994) ....................................................11

Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114 (2d Cir. 1994) ..............................................9

Walcutt v. Clevite Corp., 13 N.Y.2d 48, 191 N.E.2d 894 (N.Y. 1963) ...................................17, 18

Statutes

New York General Obligations Law § 17-103 ..............................................................................12

Other Authorities

63 N.Y. Jur.2d, Guaranty and Suretyship § 89 (1987) ..................................................................18



1

INTRODUCTION

Plaintiffs Clarendon National Insurance Company ("CNIC") and Clarendon America

Insurance Company ("CLAM," and together with CNIC, "Clarendon") constitute a zombie

insurance company. In 2006 Clarendon stopped issuing insurance policies. Since then,

Clarendon has just been “running off the company,” meaning that the company’s only business

has been collecting receivables and paying off claims under its old insurance policies. Key

documents are stored in warehouses around the country and large chunks of Clarendon's

institutional memory have been lost as the vast majority of its employees were laid off or

defected to other firms.

Despite the lack of institutional memory, or perhaps because of it, Clarendon seems not

to have done an investigation before filing this lawsuit against Defendants James K. Culley ("Jim

Culley") and James C. Culley ("Chris Culley," and together with Jim Culley, the "Culleys").

Plaintiffs allege that both Jim Culley and Chris Culley executed personal guarantees,

guaranteeing approximately $2.2 million in premiums due to Clarendon by a company named

Insurers Unlimited, Inc. ("IUI"). It is undisputed that these premiums were misappropriated by

third parties. Neither IUI nor the Culleys received any portion of the $2.2 million. Indeed, the

Culleys have spent hundreds of thousands of dollars helping Clarendon recover as much of this

money as possible directly from the third parties. Instead of thanks, the Culleys were served

with this meritless lawsuit that must be dismissed for three reasons.

First, it is undisputed that every penny of the $2.2 million owed to Clarendon by IUI was

due and payable prior to December 31, 2004. New York imposes a six-year statute of limitations

on enforcing any contractual right, including rights pursuant to a personal guarantee. This

lawsuit was filed on April 16, 2011 so it is barred by the statute of limitations.



2

Second, the lawsuit against Jim Culley does not have a colorable legal or factual basis

because Jim Culley never guaranteed any of IUI's obligations. The Jim Culley "guarantee" upon

which Clarendon's claims are based (the "Draft Guarantee") was only a draft. It never became a

valid contract; it was just attached to a draft general agency agreement (the "Draft GAA"). (See

Ex. A, pp. 41-42.)

The Draft GAA was never signed by Clarendon and was significantly revised before

another general agency agreement was fully executed by IUI and Clarendon (the "GAA") (See

Ex. B.) Indeed, when Clarendon was asked in its Rule 30(b)(6) deposition if the Draft GAA was

a valid contract, its answer was crystal clear: "From a legal point of view, no, [because] always

both parties signed [sic]." (See Ex. C, Transcript of Deposition of Nadja Stravenhagen, at 77:18-

24).

Finally, the claim against Chris Culley is equally baseless because Clarendon is

attempting to expand the scope of a guarantee. Chris Culley signed a guarantee that was

attached as Schedule 3 to the GAA (the "Operative Guarantee"). (See Ex. B, pp. 42-43.) In the

Operative Guarantee, Chris Culley guaranteed that IUI would remit premiums due to Clarendon

pursuant to the GAA dated October 1, 2003 ("Trust Funds"). Accordingly, it is undisputed that

the only premiums that Chris Culley guaranteed were premiums due under policies issued by IUI

on or after October 1, 2003. Remarkably, Clarendon is suing Chris Culley for approximately

$1.9 million in premiums that were due on policies issued on or before January 31, 2002.

Clarendon is also suing Chris Culley for $322,000 that Clarendon is owed pursuant to a

restitution order. However, the $322,000 is not covered by the Operative Guarantee because: (i)

money owed pursuant to a "restitution agreement" does not constitute Trust Funds as defined in

the Operative Guarantee or the GAA; and (ii) the $322,000 in premiums were originally due and



3

payable on or before December 31, 2004, making collection of the original obligation barred by

the statute of limitations.

Accordingly, Clarendon's claims must be dismissed.

STATEMENT OF FACTS

Marion and IUI's Relationship with Clarendon

In 1993, Clarendon contracted with Marion Insurance Agency, Inc. ("Marion") to act as

Clarendon's general agent for the issuance of insurance policies, primarily for physical damage to

trucks throughout the United States. (Ex. L, underwriting audit report, at Clarendon 2467; Ex. F,

Transcript of Deposition Jim Culley, at 19:11-13.) Marion was founded by Jim Culley. (Ex. F at

15:25-16:18.)

Marion and Clarendon entered into a General Agency Agreement in May 1993 (the

"Marion GAA") (Ex. G). The Marion GAA set forth the business relationship between Marion

and Clarendon. (Ex. F at 29:3-12.) Among other things, the Marion GAA detailed the limits on

Marion's underwriting authority, Marion's compensation and commissions, and expected

standards for record keeping and documentation of policies. (Ex. G.)

Jim Culley's son, Chris Culley, started working as an underwriter for Marion in 1998.

(Ex. H, Transcript of Deposition of Chris Culley, at 29:18-20.) They worked together at Marion

until 2001, when Chris Culley became the President of IUI. Chris Culley was President of IUI

from January 1, 2001 until February 1, 2011. (Ex. H at 15:6-9, 24:11-13.)

IUI began operating in 2000 or 2001. (Ex. F at 4621-47:4.) IUI was essentially an

offshoot of Marion and it continued to operate pursuant to the terms in the Marion GAA until

March 2005. (Ex. C at 135:23-136:8 ("Q: And the general agency agreement referred to [in a

2002 Claims Administration Agreement] is the Marion Agency general agency agreement,



4

correct? A: Correct. Q: That was the general agency agreement that was in force covering IUI

prior to the final and executed general agency agreement that was signed in March of 2005,

correct? A: Correct."))

There were two primary reasons for Marion to transition to IUI. First, Jim Culley

thought IUI was a better name than Marion. He explained that "a lot of agents [] thought that

Marion Agency was competing with them rather than being a [general agent]. They thought it

was just like your homeowner's agency or auto agency. So to get away from that, we decided to

name it IUI." (Ex. F at 49:14-23.) Second, IUI's corporate structure made it easier for other

employees to become shareholders and to share in the company's profits. (Ex. F at 49:14-50:8.)

Clarendon was fully informed of the proposed transition from Marion to IUI. (Id.)

The Parties Negotiate a New General Agency Agreement

In January 2003, Clarendon decided to either execute a new general agency agreement

with IUI or to amend the Marion GAA "so it agrees with the reinsurance treaty renewal." (Ex. C

at 53:17-54:12.) Thus, between January 2003 and September 2003, Clarendon and IUI discussed

the potential terms of a new general agency agreement. (Ex. F at 75:13-17.)

Eventually, on September 16, 2003, Jim Culley went to Clarendon's offices in New York

to negotiate a new general agency agreement. On that day, Richard Wisely, one of Clarendon's

program managers, asked Jim Culley to sign the Draft Guarantee immediately, before the

negotiations began. It is undisputed that when Jim Culley protested, Wisely said that unless Jim

Culley signed the Draft Guarantee, Clarendon would stop negotiating with IUI. (Ex. F 124:9-

125:8.) It is also undisputed that, in order to appease Wisely, Jim Culley signed the Draft GAA

as a prelude to negotiations but clarified that it "only applies to the agreement that we get out

today, not anything else." (Ex. F at 67:4-21.).



5

The parties agree that no contract was ever entered into on September 16, 2003. (Ex. F

at 125:4-8; Ex. C at 122:5-10.) Thus, the Draft Guarantee was never valid.

The Draft GAA was never fully executed by IUI. Clarendon was asked whether the Draft

GAA was ever finalized or executed, and it responded by admitting that "It was never fully

executed." (Ex. C at 335:21-336:11.) Indeed, neither IUI nor Clarendon signed page 4 of the

Draft GAA. (Ex. A, p. 4.) This is consistent with the parties' intent to not be bound by the Draft

GAA or the Draft Guarantee.

Although Jim Culley did sign the Draft Guarantee on September 16, 2003, the undisputed

facts make clear that neither party ever believed it to be valid and binding. When Jim Culley left

Clarendon, he was told that he was given all copies of the Draft Guarantee. (Ex. F at 68:17-

69:14.) Moreover, Clarendon did not store a copy of the Draft Guarantee with the executed

GAA. In fact, Clarendon did not even know of its existence until September 2010: Stavenhagen

only discovered the Draft Guarantee in 2010 when she was reviewing documents in connection

with another litigation pending in Georgia. (Ex. C at 189:2-11.) Neither party relied upon, nor

intended to be bound by, the Draft Guarantee.

Perhaps most tellingly, between September 2003 and March 2005, Clarendon and IUI

continued to negotiate the terms of a general agency agreement. During this time, Clarendon

believed that IUI was operating in accordance with the Marion GAA, not the Draft GAA. (Ex. C

at 135:23-136:8 ("Q: And the general agency agreement referred to [in a 2002 Claims

Administration Agreement] is the Marion Agency general agency agreement, correct? A:

Correct. Q: That was the general agency agreement that was in force covering IUI prior to the

final and executed general agency agreement that was signed in March of 2005, correct? A:

Correct."))



6

After nearly two years of negotiation, the final GAA was fully executed sometime

between March 15, 2005 and March 22, 2005. (See Exs. D & E (correspondence indicating that

Clarendon received a copy of the GAA signed by IUI on March 15 and sent back a fully

executed copy of the GAA to IUI on March 22.))

The Draft GAA and the Final GAA Were Substantially Different

The final GAA, which was signed by Chris Culley, was substantially different than the

Draft GAA that Jim Culley was shown in September 2003. For example, here are some of the

differences between the two agreements:

• Clarendon reduced the commission payable to IUI for Motor truck Cargo policies

written on CNIC paper from 22.5% in the Draft GAA to 21% in the GAA.

(Compare Ex. A, p. 3, with Ex. B, p. 3.)

• Clarendon reduced the commission payable to IUI for Motor truck Cargo policies

written on CLAM paper from 25% in the Draft GAA to 24% in the GAA.

(Compare Ex. A, p. 3, with Ex. B, p. 3.)

• The Draft GAA prohibited IUI from offsetting premiums against return

premiums. The GAA permitted it. (Compare Ex. A, § 4.2(e), with Ex. B, §

4.2(e).)

• The Draft GAA required IUI to immediately deposit all premiums collected into

Clarendon's bank account. The GAA required IUI to deposit all premiums

collected into Clarendon's bank account within 90 days. (Compare Ex. A, §

4.2(b), with Ex. B, § 4.2(b).)

• The Draft GAA did not contain any provision to share profits but the GAA

provided IUI with a share of the profits. (See Ex. B, § 3.1(f); see also Ex. C at



7

251:17-20 ("Q: Now, [§ 3.1(f)] was not included in the draft agreement that is

Exhibit 3 to the Complaint, correct?" A: Correct."))

IUI and Clarendon Are Defrauded by Third Parties

One key term in the GAA obligated IUI to remit to Clarendon "all premiums due to the

Company…which premiums shall be calculated from the effective date of coverage under the

applicable policies." (Ex. B, § 4.2(a).)

IUI, however, was the victim of two separate frauds. First, between 1999 and 2002, the

Wileys, owners of Insurance Interchange, one of IUI's wholesalers in Georgia, stole somewhere

between $1.6 million and $1.9 million. The essence of the scheme was that the Wileys made

their customers pay annual premiums but told IUI that they were collecting monthly premiums.

The Wileys sold the assets of Insurance Interchange to IUI in a sale that was consummated in

January 2002 but kept all the premiums for the months that had been prepaid. Thus, by January

2002 the Wileys had misappropriated all the premiums that were due and payable to Clarendon.

(See Ex. C at 139:18-23 ("Q: So the approximately $1.6 million in premiums that are referenced

in Paragraph 57 of the complaint are attributable to policies that were written sometime in or

before January of 2002, correct? A: Correct."))

After the fraud was discovered in 2005, IUI sued the Wileys for fraud, conversion, and

related causes of action in Georgia. Clarendon joined the lawsuit in 2008. On February 25,

2009, the Georgia court granted summary judgment in favor of the Wileys, primarily because the

court held that the plaintiffs did not reasonably rely on the Wileys assurances regarding the

finances of Insurance Interchange. Instead of appealing the decision, Clarendon filed a claim

against Jim Culley for approximately $80,000. In October 2011, Clarendon sought leave to

amend its claims against Jim Culley to mirror the claims filed against him in this case, for



8

approximately $2 million. Clarendon sought leave to amend its claim because it claimed that it

had just found the Draft Guarantee in September 2010. (See Affidavit of Nadia Stavenhagen,

Ex. M.)1

In a totally separate fraud, between 2000 and 2004, the Cooks, owners of another

wholesaler in Texas, misappropriated approximately $600,000 from IUI. (See Ex. C at 146:14-

16 ("Q: And when did the [Texas] misappropriation scheme take place, what years? A:

Previous to 2005."); see also id. at 317:12-24.) The essence of the Texas fraud was that Cooks

collected fees for policies that the Cooks never told IUI about and never even issued. For

example, the Cooks might have sold a customer 100 policies for 100 different trucks. But

instead of getting 100 policies issued by IUI, the Cooks told IUI that the customer only wanted

25 policies for 25 different trucks. Thus, IUI would issue 25 policies, collect premiums for 25

policies, and pass along the collected premiums to Clarendon. But the Cooks would pocket the

premiums for 75 policies that were never ever issued. Then, if one of the uninsured trucks would

get into an accident, the Cooks would either pay for the claim themselves or have an employee at

IUIGA substitute the uninsured truck for a truck that was covered by one of the 25 policies. (Ex.

H at 59:17 to 61:18.)

It is undisputed that IUI did not collect any of the misappropriated money. (See Ex. C at

146:22-24 ("Q: Did IUI collect any premiums that were stolen by Richard Cook? A. Not that I

am aware of."); see also Ex. H at 62:25-63:3 ("Q: Did IUI ever receive the premiums that Ms.

1 As discussed above and below, Clarendon's claims against Jim Culley are meritless. But Clarendon's motion for

leave to amend the claims filed in Georgia is even more absurd since (i) it is duplicative of this lawsuit; and (ii) the

Draft Guarantee states that "any action or proceeding arising out of or relating to this guarantee…shall be brought in

the Supreme Court of the State of New York…or in the United States District Court for the Southern District of

New York." In other words, Clarendon's Georgia filing seems calculated to do nothing except drive up Jim Culley's

litigation costs.



9

Carlisle and Mr. Cook stole? A: No.")

The Culleys discovered the Texas scheme in late 2004 and the Georgia scheme in early

2005. The Culleys went to New York in January or February 2005 to inform Clarendon of the

Texas scheme. (Ex. H at 53:12-54:17.) And Jim Culley returned to New York in February or

March 2005 to inform Clarendon about the Georgia scheme.

LEGAL STANDARD

Federal courts sitting in diversity apply the substantive law of the forum state on

dispositive issues. Erie R. Co. v. Tompkins, 304 U.S. 64, 78-80 (1938); Travelers Ins. Co. v. 633

Third Assocs., 14 F.3d 114, 119 (2d Cir. 1994). Each of the guarantees at issue states that "its

validity, construction and performance shall be governed in all respects by the laws of the State

of New York." (Ex. B, p. 43; Ex. A, p. 42.) Thus, New York law applies to both of Plaintiffs'

claims.

Procedural matters, however, are governed by federal law. See Gasperini v. Ctr. for

Humanities, Inc., 518 U.S. 415, 427 (1996). Summary judgment will be granted where there is

“no genuine issue as to any material fact” and “the moving party is entitled to a judgment as a

matter of law.” Fed.R.Civ.P. 56(c). Summary judgment is proper when, after drawing all

reasonable inferences in favor of a non-movant, no reasonable trier of fact could find in favor of

the non-movant. See Matsushita Elec. Industr. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88

(1986). Genuine issues of fact are not created by conclusory allegations. Moreover, there must

be more than a “scintilla of evidence” in the non-movant's favor; there must be evidence upon

which a fact-finder could reasonably find for the non-movant. Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 252 (1986).



10

ARGUMENT

I. CLARENDON'S CLAIMS ARE BARRED BY THE STATUTE OF

LIMITATIONS

A.

Clarendon's Claims Are Time-Barred

As discussed in Section II below, Jim Culley's Draft Guarantee was never a valid contract

therefore there can be no cause of action against him regardless of the statute of limitations.

Even if one were to assume for a moment that the Draft Guarantee somehow became a valid

contract, any claim based on that contract would be barred by the statute of limitations.

The statute of limitations with respect to guarantees is "the six-year period applicable to

contracts generally under CPLR 213." American Trading Co. v. Fish, 42 N.Y.2d 20, 26-27

(1977).

Both the Draft Guarantee and the Operative Guarantee state that each "Guarantor hereby

unconditionally guarantees…prompt payment of Trust Funds as and when they are due and

payable pursuant to the Agency Agreement." (Ex. B, p. 42-23; Ex. A, p. 41-42.) In this case,

Clarendon seeks to recover approximately $2.2 million in premiums that Clarendon asserts were

never paid to Clarendon. (Ex. I, ¶¶82, 88)

Clarendon concedes that the premiums attributable to the Georgia scheme (Ex. I, ¶¶ 57,

58) were past due and unpaid on or before January 31, 2002. (See Ex. C at 139:18-23 ("Q: So

the approximately $1.6 million in premiums that are referenced in Paragraph 57 of the complaint

are attributable to policies that were written sometime in or before January of 2002, correct? A:

Correct."))

Similarly, between 2000 and 2004, Clarendon alleges that approximately $622,933 was

stolen by the Cooks in the Texas Misappropriation Scheme. It is undisputed that IUI did not

collect any of these premiums. (See Ex. C at 146:22-24 ("Q: Did IUI collect any premiums that



11

were stolen by Richard Cook? A. Not that I am aware of."; see also Ex. H at 62:25-63:3 ("Q:

Did IUI ever receive the premiums that Ms. Carlisle and Mr. Cook stole? A: No."))

It is also undisputed that the money was stolen by the Cooks sometime on or before

December 31, 2004. (See Ex. C at 147:14-16 ("Q: And when did the misappropriation scheme

take place, what years? A: Previous to 2005.")

Clarendon tries to muddy the waters by alleging that it was not informed about the

Georgia misappropriation scheme until 2007 and that IUI's first-in-first-out accounting method

meant that it did not learn about the misappropriation until after October 1, 2003. (Ex. I ¶¶ 57,

59.) While neither of these things is true, for statute of limitations purposes it is immaterial

when Clarendon learned about the misappropriation scheme. "Knowledge of the occurrence of

the wrong on the part of the plaintiff is not necessary to start the Statute of Limitations running in

a contract action." T & N PLC v. Fred S. James & Co., 29 F.3d 57, 60 (2d Cir. 1994).

It is black letter law that "a cause of action for breach of contract accrues and the statute

of limitations commences when the contract is breached." T & N, 29 F.3d at 59. In this case, it

is undisputed that all the breaches occurred on or before December 31, 2004 and were discovered

by IUI in late 2004 or early 2005. (See Ex. H at 53:22-25 ("Q: When did you and your father

advise Clarendon of the [Texas Misappropriation Scheme]? A: January or February 2005."); see

also Ex. F at 183:25-184:4 (learned about Georgia fraud in late 2004 or early 2005); Ex. C at

139:18-23 ("Q: So the approximately $1.6 million in premiums that are referenced in Paragraph

57 of the complaint are attributable to policies that were written sometime in or before January of

2002, correct? A: Correct.")

Thus, if IUI had an obligation to pay Clarendon any portion of the $2.2 million that

Clarendon is seeking in this lawsuit, that obligation would have accrued on or before December



12

31, 2004. The liabilities under the Draft Guarantee and/or the Operative Guarantee would have

arisen at the same time because the guaranties did not contain any notice provisions. To the

contrary, the guaranties provided that the guarantors would pay Clarendon any Trust Funds "as

and when they are due and payable" and explicitly waived "notice of any non-performance or, or

default." (Ex. B, p.42; Ex. A, p. 41.)

Accordingly, to comply with New York's statute of limitations, Clarendon had to file the

instant lawsuit on or before December 31, 2010. But Clarendon filed this lawsuit on April 16,

2011. (See Ex. I.) Consequently, the claims must be dismissed.

B.

The Purported Waiver Of The Statute Of Limitations Contained In theGuaranties Is Against Public Policy And Is Invalid

Clarendon will doubtless argue that the Draft Guarantee and the Operative Guarantee

each contain language that waives any defense based on the statute of limitations. This argument

is meritless.

The Statute of Limitations is not just a defense "to afford protection to defendants against

defending stale claims," it also expresses a societal interest or public policy "of giving repose to

human affairs." John J. Kassner & Co. v. New York, 46 N.Y.2d 544, 550 (1979). Accordingly,

"because of the combined private and public interests involved, individual parties are not entirely

free to waive or modify the statutory defense." (Id.) Indeed, an agreement to extend the Statute

of Limitations that is made before the inception of liability is invalid. (Id.)

That being said, an agreement to extend the statute of limitations can be enforceable, if (i)

the agreement is made after the accrual of the cause of action; and (ii) the agreement "according

to its terms" extends the limitations from the date the agreement is signed for a period of time

equal to or shorter than the original statute of limitations. See New York General Obligations

Law § 17-103.



13

The Operative Guarantee fails to satisfy the requirements of Section 17-103 for two

reasons. First, the text of the Operative Guarantee does not contain a permissible six-year

extension of the statute of limitations; it contains an unenforceable waiver of the statute of

limitations. It is well established that extensions pursuant to GBL §17-103 "should not be

indefinite" and "an agreement that cannot be enforced according to its terms is ineffective to

extend the limitations period." Bayridge Air Rights, Inc. v. Blitman Constr. Corp., 80 N.Y.2d

777, 779-780 (1992). The Operative Guarantee states that Chris Culley waived "any right to

interpose a defense based upon any statute of limitations." (Ex. B, p.42.) The Operative

Guarantee does not contain any extension of the statute of limitations whatsoever. As a result,

the language purporting to waive the statute of limitations defense is invalid. See Bayridge Air

Rights, 80 N.Y.2d at 779-80 (holding waiver of statute of limitations contained in guarantee was

invalid).

Second, even if it were possible to read an extension into the Operative Guarantee, the

extension would have to be longer than the six years permitted by G.O.L. § 17-103 in order to

save Clarendon's claims. Here, it is undisputed that the Operative Guarantee was fully executed

between March 15, 2005 and March 22, 2005. (See Exs. D, E.) The maximum extension

allowed under Section 17-103 would be six years from the date that the agreement was signed:

March 22, 2011. But, as illustrated above, Clarendon's Complaint was filed on April 16, 2011.

Thus, even the maximum allowable extension of the statute of limitations would not save

Clarendon's claims.

In other words, regardless of the triggering event, as illustrated by the chart below, the

last day that Clarendon could have filed a lawsuit in connection with non-payment of money

supposedly owed to it by IUI was March 22, 2011.



14

Event Triggering Statute of

Limitations

Date of Event Latest Possible

Expiration of

Statute of

Limitations

$1,909,525.15 in premiums due toClarendon on policies issued by IUIwholesaler, Insurance Interchange.

On or before January 31, 2002 January 31, 2008

Jim Culley Draft Guarantee signed. September 16, 2003 September 16, 2009

$622,933 in restitution for moneystolen by Richard Cook in theTexas misappropriation scheme.

On or before December 31, 2004 December 31, 2010

Chris Culley Operative Guaranteesigned.

On or before March 22, 2005 March 22, 2011

II. THE CLAIM AGAINST JIM CULLEY MUST BE DISMISSED BECAUSE THE

DRAFT GUARANTEE IS NOT A VALID CONTRACT

It is black letter law that "[t]he interpretation of a contract of suretyship is governed by

the standards which govern the interpretation of contracts in general." Fed. Ins. Co. v. Turner

Constr. Co., 779 F. Supp. 2d 345, 353 (S.D.N.Y. 2011). To prevail on a claim for breach of

contract under New York law, Plaintiff must prove "(1) the existence of an agreement between

the plaintiff and defendant; (2) due performance of the contract by the plaintiff; (3) breach of the

contract by the defendant; and (4) damages resulting from the breach." Clarendon Nat'l Ins. Co.

v. GWTA Ins. Servs., 2002 U.S. Dist. LEXIS 18817, at *8 (S.D.N.Y. Aug. 1, 2002).

It is undisputed that the contract that was the subject of the Draft Guarantee – the Draft

GAA – was never valid or enforceable. Accordingly, the Draft Guarantee was never, and is not,

valid or enforceable.



15

A. Clarendon And Jim Culley Never Formed a Contract

There was, quite simply, never any agreement between Clarendon and Jim Culley

regarding the contractual obligations he was supposedly guaranteeing. It is undisputed that the

Draft GAA was "never fully executed" and "was never a final agreement." (Ex. C at 122:5-10.)

It is also undisputed that the Draft Guarantee was a schedule to the unexecuted, non-final Draft

GAA. Stavenhagen also admitted that the Draft Guarantee was never attached to any other

contract. (Ex. C at 336:21-337:3.)

Perhaps realizing that this is fatal to Clarendon's claims, Stavenhagen hypothesizes that

the Draft Guarantee was also meant to guarantee the final, fully-executed GAA. (Ex. C at

123:11-124:11.) But this is impossible. There are four undisputed facts that completely

undermine Stavenhagen's hypothesis.

First, Jim Culley was never the intended signatory of a guarantee of the obligations

detailed in the GAA. According to the plain terms of the Draft Guarantee, "the General Agent is

obligated to cause the principal shareholder(s) and the president of the General Agent to

guarantee payment." (Ex. A, p. 41.) Moreover, according to Section 9.4(b) of the GAA, "the

General Agent shall cause the principal shareholder(s) and the president of the General Agent to

execute and deliver to the Company a guarantee of payment of the Trust Funds. The guarantee

shall be in the form attached as Schedule 3." (Ex. B, p. 32.)

It is undisputed that Jim Culley was neither the president nor a shareholder (let alone the

"principal shareholder") of IUI. (See Ex. C at 127:23-128:11 ("He was not a president. I'm not

sure if he was a shareholder."); Ex. F at 76:21-22 ("Q: Were you ever a shareholder of IUI? A:

No.")) Thus, Jim Culley was never the intended signatory of a guarantee in favor of Clarendon.



16

Second, the plain language of the GAA makes it clear that only a single guarantee was

required by Clarendon. See Ex. B, p. 32 ("The guarantee shall be in the form attached as

Schedule 3." (emphasis added)). Here, it is undisputed that Chris Culley executed and delivered

The guarantee that was required by Clarendon. He was IUI's president and held 25% of IUI's

shares. (Ex. H at 16:8-17.)

Third, Section 9.1 of the GAA is a merger clause, which states that "[t]his Agreement,

and the Schedules attached, sets forth the entire understanding of the parties with regard to its

subject matter, and supersedes and merges all prior discussions, agreement, promises,

representations, warranties, and arrangements between them with regard to such subject matter."

(Ex. B, p. 33.) It is undisputed that the Draft Guarantee was not attached as a schedule to the

GAA. (See Ex. C at 336:25-337:3 ("Q: Is this schedule 3 attached to any other agreements

[besides the Draft GAA]? A: No.")

Fourth, as detailed in the Statement of Facts, Jim Culley's undisputed testimony is that

the Draft Guarantee would only have applied to a general agency agreement that was finalized

and executed on September 16, 2003.

In order for a creditor to be able to recover on a guarantee, the creditor must prove that

the contract that is the subject of the guarantee is valid and enforceable: "A surety bond attaches

to the principal contract and must be construed in conjunction therewith, so that, if no underlying

agreement ever came into existence, there is nothing to which the surety's obligation can attach

and it is, therefore, a nullity." Hall & Co. v. Continental Casualty Co., 34 A.D.2d 1028, 1029,

310 N.Y.S.2d 950, 952 (3d Dept. 1970) (internal citation omitted), aff'd 30 N.Y.2d 517, 330

N.Y.S.2d 64 (1972). See also Davimos v. Halle, 35 A.D.3d 270, 272, 826 N.Y.S.2d 61, 62 (1st

Dept. 2006) (In order to recover on a guarantee, "the creditor must prove the existence of the



17

guaranty, the underling debt and the guarantor's failure to perform under the guaranty.");

Sovereign Bank v. Am. Elite Props. Inc., 2011 N.Y. Misc. LEXIS 4102, at *13, 2011 N.Y. Slip

Op. 32248U, at *8 (Sup. Ct. N.Y. County Aug. 17, 2011) ("[A] plaintiff establishes a prima facie

claim on a guarantee by demonstrating the existence of the guarantee, a default on the underlying

obligation secured by the guaranty, and the defendant's failure to honor the guaranty.")

It is undisputed that no agreement on the Draft GAA was ever reached on September 16,

2003. (Ex. F at 125:4-8; Ex. C at 122:5-10.) Indeed, no agreement was reached until March

2005. Thus, the Draft Guarantee could not have been valid.

B.

The Draft Guarantee Fails for Lack of Consideration"In order for a guarantee to be binding upon a guarantor there must be consideration

given at or about the time of the execution of the instrument." European American Bank & Trust

Co. v. Boyd, 131 A.D.2d 629, 629, 516 N.Y.S.2d 714, 715 (1st Dept. 1987). "In other words,

the guarantor may always assert a total failure of consideration. This is because the guarantor is

not liable unless the principal is bound." Walcutt v. Clevite Corp., 13 N.Y.2d 48, 56, 191 N.E.2d

894, 897 (N.Y. 1963) (citing Williston on Contracts). See also Salomon v. Burr Manor Estates,

Inc., 769 F. Supp. 2d 83, 88 (E.D.N.Y. 2011) (denying summary judgment to enforce guarantee,

applying Walcutt); Culver v. Parsons, 7 A.D.3d 931, 933, 777 N.Y.S.2d 536 (3d Dept. 2004)

(reversing summary judgment enforcing guarantee, applying Walcutt).

Here, while the Draft Guarantee is replete with obligations purportedly imposed upon Jim

Culley and purported waivers of Jim Culley's rights, it contains not a single reciprocal obligation

undertaken or right waived by Clarendon. Rather, Jim Culley's purported promises under the

Draft Guarantee were made only "in consideration of the mutual promises exchanged in the

[Draft GAA]." (See Ex. A, p. 41.) As explained above, the parties' discussions concerning the

Draft GAA never gave rise to a valid and binding contract. There were no "mutual promises

exchanged" and the parties never entered into the Draft GAA. In short, Clarendon gave no



18

consideration for Jim Culley's purported guarantee, and therefore the guarantee is not binding.

Walcutt, 13 N.Y.2d at 56.

III. THE CLAIM AGAINST CHRIS CULLEY MUST BE DISMISSED BECAUSETHE ALLEGED OBLIGATIONS ARE OUTSIDE THE SCOPE OF THE

GUARANTEE

A cardinal rule of guaranties is that "the liability of a surety cannot be extended beyond

the plain and explicit language of the contract." 63 N.Y. Jur.2d, Guaranty and Suretyship § 89

(1987). It is very well established that the obligations of a guarantor or surety are construed

strictissimi juris, and that "the court must protect the surety against a liability which is not

strictly within the terms of the contract [of suretyship]." People v. Stuyvesant Ins. Co., 413

N.Y.S.2d 843, 846-47, 98 Misc. 2d 210 (1979). See also Fed. Ins. Co. v. Turner Constr. Co., 779

F. Supp. 2d 345, 354 (S.D.N.Y. 2011) ("after the meaning of the language used has been thus

ascertained, the responsibility of the surety is not to be extended or enlarged by implication or

construction, and is strictissimi juris.") In other words, "[a] surety or guarantor is not liable for

moneys owed by his principal to the creditor on a contract other than the contract guaranteed."

63 N.Y. Jur.2d, Guaranty and Suretyship § 113 (1987).

There are two limitations on the Operative Guarantee that are relevant here. First, the

Operative Guarantee only guaranteed Trust Funds, which are defined as "premiums or return

premiums or other funds due the Company…under the Policies covered by the Agency

Agreement." (Ex. B, p. 42 (emphasis added).)

Second, the Operative Guarantee only guaranteed Trust Funds that were due to

Clarendon on or after October 1, 2003. (See Ex. B at 42 (the "General Agency Agreement [is]

dated October 1, 2003 (the "Agency Agreement"); see also Ex. C at 117:21-118:6. ("Q: The

guarantee that is supposedly a valid guarantee with regard to Chris Culley, that guarantee



19

covered premiums that were due to Clarendon on or after October 1, 2003; is that correct? A:

Correct. Q: Did they cover premiums that were due to Clarendon before October 1, 2003? A:

Chris Culley's personal guarantee? No, I don't think so."))

Clarendon is seeking approximately $2.2 million from Chris Culley based on two alleged

breaches. However, each of the breaches fall outside the scope of the Operative Guarantee.

First, Clarendon alleges that IUI failed to remit somewhere between $1,647,289.65 and

$1,909,525.15 for Clarendon insurance policies for which IUI was the managing general agent

and IUI of Georgia, Inc. ("IUIGA") and/or its predecessor, Insurance Interchange, Inc., was the

wholesale agent. (Ex. I ¶¶ 57, 58.)

But those premiums were due and payable on or before January 31, 2002. (See Ex. C

139:18-23 ("Q: So the approximately $1.6 million in premiums that are referenced in Paragraph

57 of the complaint are attributable to policies that were written sometime in or before January of

2002, correct? A: Correct.")) Thus, the $1.6 million to $1.9 million that Clarendon alleges it is

owed as a result of the Georgia scheme are not covered by the Operative Guarantee, which only

guarantees premiums due and payable on under policies issued after October 1, 2003.

Accordingly, Chris Culley cannot be liable for the payment of premiums that were due before

October 1, 2003.

Clarendon is also seeking $322,988.29 from Chris Culley, which "represents the

minimum amount of premiums that remain unpaid to Clarendon as a result of the Texas

misappropriation scheme." (Ex. I ¶ 67.)

To the extent that Clarendon is claiming that Chris Culley must pay Clarendon an amount

outstanding on a restitution order issued by a Texas court against the Cooks, this argument fails

because money payable pursuant to a restitution order or a settlement agreement do not



20

constitute Trust Funds. Trust Funds are funds due to Clarendon "under the Policies covered by

the Agency Agreement." (Ex. B at 42 (emphasis added).)

To the extent that Clarendon is claiming that the restitution order simply calculates the

amount of premiums it was owed in the past, it is barred by the statute of limitations. The claim

for unpaid premiums accrued more than six years before the April 16, 2011 filing of this action.

It is undisputed that the only funds due to Clarendon pursuant to any insurance policies related to

the Texas scheme were due and payable to Clarendon on or before December 31, 2004. (See Ex.

C at 147:14-16 ("Q: And when did the [Texas] misappropriation scheme take place, what years?

A: Previous to 2005."); see also id. at 317:12-24.))

In short, Clarendon is seeking to extend either (i) the statute of limitations or (ii) the

scope of the Operative Guarantee. Neither one is allowed. Accordingly, Clarendon's claims

must fail.



CONCLUSION

For the foregoing reasons, Defendants Jim Culley and Chris respectfully summary

judgment on both of Clarendon's claims.

Dated: New York, New York

March 9, 2012

BY:Rishi BhandariEvan MandelB. Rudolph DelsonMANDEL BHANDARI LLP11 Broadway, Suite 615New York, NY 10004T: (212) 269-5600F: (646) [email protected]@[email protected]

Attorneys for Defendants James C. Culley

and James K. Culley

Memo Iso Summary Judgment (Culley)

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