Court Opinion

ID: 5868099
Source: CourtListenerOpinion
Date Created: 2022-01-13 01:39:18.797891+00
Date Added: 2024-06-11T08:44:37.609581
License: Public Domain

Milonas, J. (dissenting).
The question here is whether guarantors may assert an independent cause of action belonging to their principal as a defense or counterclaim against a creditor on the principal contract when they are sued alone on the guarantee. The fact that in the instant matter, defendants have, as third-party plaintiffs, brought into the case General Motors Corporation, Pontiac Division, a subsidiary of plaintiff, as a third-party defendant does not alter the situation that what defendants Marvin and Bernice Kalkstein are attempting to do is allege fraud and misrepresentation as defenses to the action commenced by plaintiff General Motors Acceptance Corporation to recover on the Kalksteins’ guarantee.
*107Defendants and third-party plaintiffs, Marvin and Bernice Kalkstein, allege fraud and misrepresentation on the part of the third-party defendant General Motors Corporation, Pontiac Division, specifically:
“a. That Blair’s term under the Dealer Sales Service Agreement (‘the Agreement’) would be for a term of five years, with said term commencing upon signing of a Dealer Agreement.
“b. That Blair would receive at least 4 - 5 ‘X-body’ motor vehicles per week;
“c. That the ‘large body’ slow selling motor vehicles located at Page would be removed as quickly as possible;
“d. That motor vehicles would not be shipped to Blair unless ordered by it;
“e. That the Kalksteins’ investment and financial statements were in accordance with G.M. and GMAC guidelines;
“f. That G.M. and GMAC were extremely anxious to have Page cease being a G.M. dealer;
“g. That G.M. and GMAC would provide Blair with sufficient financial support.”
There is a long-established doctrine which holds that “a guarantor when sued alone by the creditor cannot avail himself of an independent cause of action existing in favor of his principal as a defense or counterclaim” (Walcutt v Clevite Corp., 13 NY2d 48, 55; see, also, Ettlinger v National Sur. Co., 221 NY 467; Elliott v Brady, 192 NY 221; Lasher v Williamson, 55 NY 619; and Gillespie v Torrance, 25 NY 306). According to the Court of Appeals in Walcutt v Clevite Corp., (supra, p 55): “The reasons underlying this rule * * * may be summarized by the proposition that a guarantor may not take upon himself the election of remedies which rightfully belongs solely to his principal. Thus, a guarantor may not interpose his principal’s defense of fraud since by so doing he would deprive the principal of his independent right to affirm or disaffirm * * * Likewise, he may not assert his principal’s claim of breach of warranty since ‘he might thus bar a large claim in canceling a small one’ ”.
*108The only exception to this proposition is that a guarantor may always claim a failure of consideration. In the view of the court in Walcutt (supra), this is because the guarantor is only bound when, and to the extent that, the principal is bound. As the Court of Appeals has declared, where “the consideration fails, either partially or entirely, neither the principal nor the guarantor is accountable for anything which has not been received.” (Walcutt v Clevite Corp., supra, p 56.) Further, the various Appellate Division departments, when confronted with such a situation, have almost consistently followed the foregoing rule. (H.H. & F.E. Bean, Inc. v Travelers Ind. Co., 67 AD2d 1102; Taylor & Jennings v Bellino Bros. Constr. Co., 57 AD2d 42; Rhodia, Inc. v Nat Steel, 32 AD2d 753.) This department, on the other hand, in two relatively recent cases, has inexplicably cited Walcutt v Clevite Corp. (supra), as authority for the statement that a guarantor or surety is “entitled to assert any defenses or counterclaims that were available to the principal obligor” (Durable Group v De Benedetto, 85 AD2d 524; see, also, Milliken & Co. v Gans, 82 AD2d 781).
The claims urged by the Kalksteins do not involve a failure of consideration and would not, as a matter of law, be available to them as defenses or counterclaims to their obligation under the guarantee if these claims belonged to the principal, Blair Pontiac, Inc., rather than to defendants personally. However, in Walcutt v Clevite Corp. (supra, pp 56-57), the court, after concluding that the codefendant therein, Frederick Richmond, the president and sole stockholder of Walco Electronics Company, which ultimately purchased the assets of plaintiffs’ former corporations from defendant Clevite Corporation, was entitled to raise the defense of partial failure of consideration, went on to state: “We need not, however, rest our determination solely upon the above ground. All the papers submitted to us leave little doubt that Richmond and Walco are truly one and the same. It was Richmond who took part in every step of the negotiations leading to the purchase of the phonograph needle business from Clevite. Walco was merely a corporation formed at the last minute to take title to the assets. Richmond was and still is its president and sole stockholder. Any fraud which was committed on Walco to induce *109its purchase must perforce have been committed on Richmond. And, by the same token, any defense interposed by Richmond must be deemed to have been the implied consent of Walco. When the principal’s defense is asserted against the creditor under these same conditions, it is perfectly proper (Restatement, Security, § 133).”
Marvin Kalkstein was at all times the president and sole shareholder of Blair Pontiac. Like Richmond in Walcutt (13 NY2d 48, supra), he participated in every step of the negotiations which culminated in the extension of credit by General Motors Acceptance Corporation for the purchase and subsequent operation of Blair Pontiac. Any representations made to Blair Pontiac were of necessity made to Kalkstein as well, and any fraud committed against one was also committed against the other. None of the purported fraudulent misrepresentations were made to Kalkstein in his individual capacity; rather, they were all made to him in his role as president and sole shareholder of Blair Pontiac. Moreover, the contract between Kalkstein and General Motors specifically provided that the agreement “be construed as being in the nature of a personal service agreement” and that the continuation of the business relationship between General Motors and the dealership was conditioned upon Blair Pontiac being managed and owned by Kalkstein. It is, therefore, evident that Marvin Kalkstein and Blair Pontiac were, in effect, one and the same entity. Thus, under the principle enunciated in Walcutt v Clevite Corp. (supra), the defenses or counterclaims raised by defendants third-party plaintiffs would ordinarily have been sufficient to defeat a motion to dismiss.
However, in April of 1980, Blair Pontiac, operated and wholly owned by Marvin Kalkstein, executed a general assignment for the benefit of creditors. The validity of the assignment is undisputed, and in it, Blair Pontiac assigned away all “claims, demands, property and effects of every description”. Since Kalkstein and Blair Pontiac were one and the same, and the alleged fraud was not committed against Kalkstein personally, Kalkstein/Blair Pontiac’s defenses or counterclaims arising out of the supposedly fraudulent inducement of the third-party defendant, General Motors Corporation, and the latter’s failure to honor *110certain commitments, passed to the assignee. (See Emergency Beacon Corp. v Polish, 71 AD2d 995.) Consequently, the claims recited by the Kalksteins on their amended third-party complaint are no longer available to them, and the third-party complaint should be dismissed.
Kupferman, Sandler and Alexander, JJ., concur with Murphy, P. J.; Milonas, J., dissents in an opinion.
Order, Supreme Court, New York County, entered on July 11, 1983, modified, on the law, by striking all claims from the complaint except the Kalksteins’ individual claim based upon fraud to the extent to which they seek to recover from General Motors whatever amount they may be required in the main action to pay to General Motors Acceptance Corporation on their guarantee, and as modified, the order is affirmed, without costs and without disbursements.