Opinion ID: 2156635
Heading Depth: 2
Heading Rank: 3

Heading: Allen's claim of entitlement to an offset.

Text: Under the terms of the promissory Notes, Allen was personally liable to Yates in the event of a default by AAI. It is undisputed that AAI did in fact default, and we have concluded that Allen's obligation as a secondary obligor was not automatically extinguished by Yates' settlement with AAI. Accordingly, to the extent that Yates has not recovered on the Notes (but only to that extent), Allen is liable for the amount of the outstanding debt. Alger Corp. v. Wesley, 355 A.2d 794, 797-98 (D.C.1976) (affirming summary judgment in favor of obligee where secondary obligor neither denied the execution of the promissory note reflecting the loan nor raised any defense challenging the validity of the underlying obligation). Yates claims that Allen is liable for the full amount of the Notes, without offset, because, according to Yates, the settlement agreement did not discharge any part of Allen's obligation. Allen counters that his liability should be reduced by payments and other consideration received by Yates pursuant to the settlement. It is undisputed, and indeed indisputable, that Allen's liability on the Notes is limited to amounts not paid by or on behalf of the defaulting obligor. Under the terms of the Notes, see supra page 42 n. 1, Allen guarantees payment to Lender of the total indebtedness evidenced by the ... `Notes'... remaining unpaid following Maker's default.... (Emphasis added.) These provisions mirror the rule in the RESTATEMENT, which provides in pertinent part: § 19. Suretyship Status  Defenses of Secondary Obligor Against Obligee Suretyship status gives the secondary obligor a defense to its duties pursuant to the secondary obligations to the extent that: (a) the underlying obligation has been discharged by performance in accordance with its terms or other satisfaction by the principal obligor.... [9] Moreover, any consideration, whether monetary or otherwise, received by the obligee from the principal obligor in payment of the obligation reduces the creditor's entitlement against the secondary obligor: When the underlying obligation is the payment of money, and the consideration for the release is monetary, the consideration is indistinguishable from partial performance by the principal obligor, and ought to be treated as such. Even when the consideration for the release is not in the same form as the underlying obligation, it would reduce the obligee's claim against the principal obligor to the same extent and, therefore, should also be treated as partial performance. Partial performance by the principal obligor discharges the secondary obligor to the extent of that performance. RESTATEMENT § 39 cmt. e (emphasis added). In this case, application of the foregoing principles is complicated by the fact that Yates made multiple claims against the settling defendants. In his complaint, Yates requested two categories of damages against these defendants: (1) actual damages in the amount of $310,000, with additional interest as calculated to the day of judgment, together with costs and counsel fees as provided in the promissory Notes; and (2) punitive damages in the sum of $2,500,000. Thus, unless the payments and other consideration received by Yates in conformity with the settlement agreement represent resolution solely of Yates' claim for punitive damages, recovery by Yates of amounts not attributable to punitive damages would be contrary to the terms of the contract and deny Allen the offset to which he is entitled pursuant to the principles articulated in the RESTATEMENT. The determination of the extent to which Yates' recovery under the terms of the settlement agreement constitutes payment of AAI's obligation under the Notes, rather than a resolution of the claim for punitive damages, presents questions both of fact and of law. On its face, the settlement agreement does not resolve the issue. The agreement does not purport to relate to one claim rather than another, nor does it state what, if any, part of the settlement is supposed to represent a resolution of Yates' claim for punitive damages. Rather, the agreement contains boilerplate language discharging the settling defendants from any and all claims, causes of action, costs, fees, damages, derivative claims, controversies and demands of whatsoever kind or nature, whether or not actually raised or asserted, either in law or in equity, including or relating directly or indirectly to the Principal Action or the Supplemental Action, or otherwise available to Plaintiff from the beginning of time to the date of this Agreement. This is language of absolute release, and it does not resolve the question whether or not, or to what extent, the payments and other consideration to be received by Yates operated to, or did, discharge AAI's indebtedness, or any part of that indebtedness, generated by the promissory Notes. Accordingly, the language of the release cannot serve as the basis for a grant of summary judgment in Yates' favor. Especially when the record is viewed in the light most favorable to the non-moving party, here Mr. Allen, the release cannot be construed as compensating Admiral Yates solely for anything other than his contractual damages. See, e.g., McCoy v. Quadrangle Dev. Corp., 470 A.2d 1256, 1258 (D.C.1983). A further complication arises because, under the terms of the settlement agreement, some of the consideration for the release came from TIG and HOI, and not from AAI, the principal obligor. Technically, any part of the consideration which did not come from AAI, the principal obligor, or from persons in privity with AAI, did not reduce the secondary obligor's liability. See RESTATEMENT § 19, quoted at page 11, supra. But the obligations of TIG and HOI under the agreement do not negate the existence of a genuine issue of material fact. According to the allegations in Yates' own complaint, AAI was controlled by the other settling defendants, and had been divested of all of its assets. If consideration contributed by the settling defendants was in reality paid on AAI's behalf, then it constitutes partial performance by the principal obligor and discharges the secondary obligation to that extent. To hold that it does not would enable the obligee to recover more than one aggregate performance, contrary to the RESTATEMENT and to common sense. See RESTATEMENT § 19 cmt.a, supra note 9; cf. Berg v. Footer, 673 A.2d 1244, 1248-49 (D.C.1996). Further, in our view, any assertion by Yates that the payments and other consideration received by him resolved only his claim for punitive damages, and were not payments of any part of Allen's indebtedness under the Notes, requires careful scrutiny. One element of the claim for punitive damages is entirely spurious; Yates has cited no authority, and we know of none, for the proposition that a debtor owes a fiduciary duty to a creditor, or that parties in privity with the debtor owe the creditor such a duty. Moreover, the claims of fraud and of fraudulent transfer are closely related to the breach of the underlying contract; Yates asserts, in effect, that AAI and other settling defendants contrived to make it impossible for AAI to perform its obligations under the promissory Notes by stripping AAI of the assets that would have enabled AAI to pay Yates. In other words, the gravamen of Yates' allegation is that AAI (together with parties in privity with AAI) intentionally breached a contractual obligation by deliberately destroying AAI's ability to carry it out. An intentional breach of contract; i.e., here, a breach allegedly accompanied by a bad motive and by deceptive conduct, would sustain an award of punitive damages only if the breaching party's conduct assumes the character of a willful tort. Sere v. Group Hospitalization, Inc., 443 A.2d 33, 37 (D.C.1982). [10] Finally, even if Yates and the settling defendants structured the settlement in such a way that, on its face, it had resolved Yates' demand for punitive damages but had left intact his claim for compensatory damages, this would not necessarily be binding on Allen. Although, in the present case, any assessment of the intentions of the parties would be premature in the absence of an evidentiary record, this court has noted that a plaintiff might collude with a potentially liable settling defendant to impose the greater liability on another defendant who had greater resources or against whom the plaintiff had more spiteful feelings. Berg, 673 A.2d at 1249. To paraphrase Chicago Title Insurance Co. v. Lumbermen's Mutual Casualty Co., 120 Md.App. 538, 707 A.2d 913, 925 (1998) (quoting Kramer, 494 A.2d at 228) (phrases in brackets reflect alterations): If we were to accept [Yates'] argument, then double recovery would hinge upon the skill of the person drafting the release. If the release attributed nothing to the underlying indebtedness, the debt would still be recoverable in addition to the amount of the settlement. Neither case law nor fundamental fairness supports such a theory. As we see it, attributing [the settling defendants'] entire... payment to [punitive damages], and attributing nothing to the indebtedness of [Allen], can only be seen as a patent attempt to maximize [Yates'] recovery from [Allen].