Court Opinion

ID: 9480371
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:46:07.53324+00
Date Added: 2024-06-11T17:47:38.818333
License: Public Domain

KEARSE, Circuit Judge,
dissenting:
I respectfully dissent. It appears to me that there is, at the very least, a genuine issue of material fact as to whether the action of defendant PKFinans International Corporation (“PK”) in modifying a loan agreement without the consent of plaintiff United States Fire Insurance Company (“USF”) materially increased the risk of loss to USF under an insuring agreement between USF and PK.
As indicated in the majority opinion, PK entered into an agreement with CFG Aircraft II, Inc. (“CFG”), to lend CFG some $3 million (the “Loan Agreement”). USF and PK entered into an insuring agreement pursuant to which USF agreed to guarantee repayment of the loan in the event of a default by CFG. To the extent pertinent here, in the insuring agreement PK warranted that PK and CFG
shall not, without the prior consent of [USF] (a) amend or modify the Loan Agreement ... if the effect of such amendment or modification shall be to increase the aggregate amounts of principal payable under the Loan Agreement ... or advance the dates for payment of principal or interest under the Loan Agreement.
Thereafter, PK agreed, without the consent of USF, to increase the principal amount of its loan to CFG by some $200,000. PK thus breached its warranty.
New York law does not permit an insurance company to avoid an insurance contract because of breach of warranty “unless such breach materially increases the risk of loss ... within the coverage of the contract.” N.Y. Ins. Law § 3106(b) (McKinney 1985). The district court ruled, and the majority agrees, that the modification by PK and CFG did not entitle USF to avoid its agreement with PK because when the principal on CFG’s loan was increased, the interest rate was decreased, causing the total of principal plus interest to be reduced over the entire term of the loan.
The majority, though it correctly notes that the New York statute speaks in terms of “risk” of loss, not actual loss, appears to base its conclusion that there was no material increase in the risk of loss on the fact that, because of the timing of CFG’s default, there was no actual loss. See majority opinion ante, note 1. Further, one of the majority’s rationales for rejecting USF’s contention that the risk of loss had *172been materially increased in light of USF’s right of prepayment is that from the outset it was hypothetically possible for the timing of a default to result in no actual loss. See id,., text accompanying note 3.
In so reasoning, the majority has, I believe, transformed the test from risk of loss to actual loss. I think it indisputable that the modification agreed to by PK and CFG without USF’s consent increased USF’s risk of loss. As of that moment and for some time thereafter, if CFG defaulted, the unpaid amount of principal that USF would be required to pay was greater than the amount it would have had to pay under the original loan. As I read the insuring agreement, USF had the right, in the event of a default by CFG, to prepay the principal without penalty; but because of the increase in principal, the exercise of this option would have cost USF more under the modified agreement than under the original agreement.
The majority also declines to consider the prepayment factor on the ground that USF did not argue to the district court that it would have had the right to prepay. I believe we should exercise our discretion, see Singleton v. Wulff, 428 U.S. 106, 121, 96 S.Ct. 2868, 2885, 49 L.Ed.2d 826 (1976), to consider, or at least to allow a jury to consider, the effect of part of a contract that is the center of the controversy, instead of upholding summary judgment against a party on the basis of a questionable application of New York law.
In sum, it is not clear to me that USF is not entitled to judgment in its favor as a matter of law. It is clear to me that judgment should not have been entered against it as a matter of law. Accordingly, I dissent.