Court Opinion

ID: 9751732
Source: CourtListenerOpinion
Date Created: 2023-08-28 16:56:04.963391+00
Date Added: 2024-06-11T07:26:58.178868
License: Public Domain

HANDLER, J.,
dissenting.
This case presents the issue of whether, in an insurance-company liquidation proceeding, secured creditors may file claims for the full amount of promissory notes even though not all of the unpaid installments on the notes were actually due and owing on the date that the debt instruments terminated. The relevant statute, the language of the promissory notes, and hornbook concepts of suretyship allow such creditors to file claims only for promissory notes that are due and owing. However, the Court overrides this requirement by holding that “basic principles of contract law” entitle the banks to file claims for the full amounts of the notes. Because the Court deviates from the statute, the language of the notes, and sound principles of suretyship, I respectfully dissent.
I
The rights of claimants against an insolvent insurer are governed by statute. A creditor, such as Credit Lyonnais, may file a proof of claim for claims that “[became] absolute against the insurer on or before the last day fixed for filing proofs of claim.” N.J.S.A. 17:30C-28(a)(l). The trial court terminated the surety bonds before the deadline for filing proofs of claim. Credit Lyonnais contends that at the time the surety bonds terminated, Integrity owed the entire remaining amount covered by the bonds, including installment payments not yet due.
The parties and the courts below differed sharply over whether the provisions of the surety bonds dictated allowing claims for *146amounts not yet due. The issue calls initially for an analysis and interpretation of the terms of the surety bonds in the general framework of suretyship principles.
The legal principles governing suretyships, though fairly complex, are well-settled and generally well-understood. Suretyships involve three parties: the surety (also known as the secondary obligor), the principal (also known as the principal obligor), and the creditor (also known as the obligee). The primary obligation is between the principal and the creditors; it is based on a debt that the principal owes to the creditor. The suretyship is the contractual relation between the surety and the creditor. Under the suretyship agreement, the surety promises the creditor that it will discharge the principal’s obligation if the principal fails to do so. The extent of the surety’s obligation is ordinarily measured by the principal’s liability and cannot exceed it. The primary obligation that forms the basis for the surety’s undertaking with the creditor-obligee is between the principal and the creditor. Hence, the essential understanding is that the creditor looks first to the principal rather than the surety to perform the duties of the underlying obligation. Nevertheless, surety contracts can require that the creditor-obligee resort first to the surety for satisfaction of the principal obligation. The surety contract thus may provide that the surety’s obligation to the creditor is direct, primary, and absolute.
The suretyship contract itself defines the surety’s obligation to the creditor-obligee. According to the suretyship contract, the surety or secondary obligor will have an obligation to the creditorobligee whenever:
(i) the secondary obligor has a duty to effect, in whole or part, the performance that is the subject of the underlying obligation; or
(ii) the obligee has recourse against the secondary obligor or its property in the event of the failure of the principal obligor to perform the underlying obligation; or
(iii) the obligee may subsequently require the secondary obligor to purchase the underlying obligation from the obligee or incur the duties described in subparagraph (i) or (ii).
[Restatement (Third) of Suretyship § l(2)(b) (Tentative Draft No. 4, 1995) at 48 (hereinafter Restatement (Third)).]
*147According to these general principles, Integrity’s obligation to pay Credit Lyonnais does not arise until the investors fail to perform their underlying obligation of making the installment payments. The investors’ failure to perform is a condition precedent to Integrity’s obligation to pay.
It is also generally understood under suretyship principles that “to the- extent that the underlying obligation or the secondary obligation is performed the obligee is not entitled to performance of the other obligation.” Restatement (Third), supra, § l(2)(c) at 48. Further, a surety’s liability will accrue at the same time as the principal’s liability. Am.Jur. Surety § 141; C & L Rural Electric Co-op. Corp. v. American Casualty Co., 199 F.Supp. 220 (E.D.Ark.1961).
The primary standard governing surety relations are the terms and contractual language of the surety bonds. “The duties of the secondary obligor to the obligee are determined by the contract creating the secondary obligation [subject to surety defenses].” Restatement (Third), supra, § 28(1). We thus look to the terms and conditions of the surety bonds issued by Integrity to determine whether they create an obligation to pay the full bond amount, including the unpaid balances not yet due on the underlying promissory notes.
The surety bonds each provide that:
Integrity Insurance Company ... as Surety (Surety) is held and firmly bound to [Credit Lyonnais] (Lender) in the amount of [Full amount of bond] for the payment whereof Surety binds itself by, and in accordance with, the conditions hereof. * * * sfi * * * ’ #
Now, therefore, the condition of this obligation is such that if the investors make all payments in accordance with the payment schedule set forth in each Note, then the obligation is null and void; otherwise, the parties agree as follows:
(l)(a) [If an investor misses a payment,] Lender shall notify Surety of such failure within thirty (30) days of the Payment Due Date. * * * * * * * *
(c) The Notice, signed by an officer of Lender, shall contain the following information:
*148(iv) Amount of Payment Due and not Paid (exclusive of any accelerated balance) ********
(d) Notice sent by Lender as above set forth shall constitute Lender’s claim and demand for payment, together with interest from date of default, hereunder and Surety shall be obligated to pay such amount to lender; provided, however, Surety shall have the right, at its sole option, to require Lender to accelerate the entire balance due under the Note(s), in which case the amount due from Surety shall be such amount, as accelerated. ********
(3) The obligation of Surety hereunder is primary, direct and unconditional, except as set forth herein____
(4) The Premium hereunder shall be payable upon the execution and delivery of this Bond and shall be fully earned and non-refundable from that time. ********
(7) Notice by Lender with respect to any one default by an Investor shall not exhaust Lender’s rights against Surety, and unless Surety shall have required Lender to accelerate a Note and shall have paid to Lender the full amount of the unpaid balance thereof (if accelerated) with accrued interest, Lender shall have the right to make successive claims against Surety on each succeeding due .date of an installment under a Note____
The surety bonds’ preamble states that Integrity is “firmly bound” for the full amount “in accordance with the conditions hereof.” Moreover, the succeeding paragraph of the preamble imposes a condition on the obligation that if the investors fully perform, “then the obligation is null and void; otherwise, the parties agree as follows.”
The intended meaning of the terms of the surety bond is that reflected in the trial court’s interpretation. The body of the surety bond, in section three, defines Integrity’s obligation as “primary, direct, and unconditional.” That, however, is only a part of the definition of the stirety’s obligation.. The definition ■includes “exceptions,” viz: “except as set forth herein.” Thus, while the definition initially provides that Integrity would be directly, primarily, and unconditionally bound to Credit Lyonnais to pay the promissory notes even if Credit Lyonnais did not first demand payment from the investors-obligors, the qualification of *149that obligation by “except as set forth herein” alters its nature and character.
The Appellate Division did not perceive the language of “except as set forth herein” to modify the apparently unconditional obligation of Integrity to pay Credit Lyonnais. Instead, it held that the first sentence of the preamble was conclusive of Integrity’s obligation, particularly when construing ambiguities against paid sureties. 281 N.J.Super. 364, 379-80, 657 A.2d 902 (1995). A consideration of all of the provisions of the surety bonds, however, reveals that their certain meaning is that Integrity’s obligation is conditioned on the investors’ actual default on installments as they come due.
The trial court held that the surety owed only the amounts already due. It found that the key to interpreting the extent of Integrity’s obligation was the surety bonds’ limitation of its obligation to installment amounts actually, defaulted. Section 1(d) of the surety bonds provides that “Notice sent by Lender ... shall constitute Lender’s claim and demand for payment, together with interest from date of default, hereunder and Surety shall be obligated to pay such amount to lender____” (emphasis added).
As noted, the bonds specify that the obligation of the surety is to pay only the amounts of installments actually defaulted. Only those amounts may be included in the creditor’s notice of claim and demand for payment. Thus, at the time that the bonds were issued, Integrity was not obligated to pay the full amount of the bonds but only to pay “such amount,” namely, that which would be specified in the “Notice sent by Lender.” This interpretation is reinforced by the terms set forth in section l(c)(iv) of the surety bonds. It requires that the Notice list only the “Amount of Payment Due and not Paid (exclusive of any accelerated balance).” (emphasis added). Under the bonds, Integrity’s obligation to pay was limited to the amount of payments due and not paid, which excludes payments not yet due.
The surety bonds, in section 1(d), do provide that Integrity has an obligation to pay the full bond amount, including amounts not *150yet due, whenever Integrity invokes its right to require Credit Lyonnais to accelerate the debt. Thus, under the terms of the bonds, Credit Lyonnais did not have a right to accelerate the debt unilaterally. Under section seven, it had a right only to make successive claims for later missed installments as they came due. That right was extinguished (per section seven) only if “[Integrity] shall have required [Credit Lyonnais] to accelerate a Note and shall have paid to [Credit Lyonnais] the full amount of the unpaid balance thereof (if accelerated) with accrued interest.”
This interpretation conforms with the basic contract rule that in an installment contract, a new cause of action arises on the date on which each payment is missed, absent a repudiation. Metromedia Co. v. Hartz Mountain Assoc., 139 N.J. 532, 535, 655 A.2d 1379 (1995) (citing 4 Corbin on Contracts § 951 (1951 & Supp.1994)). An acceleration clause should not be the basis for finding that the entire debt became due on the first missed installment to the detriment of the party having the acceleration right without manifestation of the intent to accelerate the debt. FDIC v. Valencia Pork Store, Inc., 212 N.J.Super. 335, 339, 514 A.2d 1365 (Law Div.1986), rev’d on other grounds, 225 N.J.Super. 110, 541 A.2d 1098 (App.Div.1988).
The amount of the surety bonds also demonstrates that Integrity was not liable for the full bond amount. The bonds covered not only the investors’ initial debt at the time the bonds were issued but also the interest that would accumulate over the following months.3 Although the surety bonds do not cover the maximum interest amount that the investors would owe, it clearly covered *151more than the initial debt amount.4 It contravenes basic surety-ship principles to hold Integrity liable on the day it executed the surety bonds for the full bond amount even though at that time, the principals did not owe the full amount of the principal obligations. See 74 Am.Jur.2d Suretyship § 25 (“[T]he liability of the surety is ordinarily measured by the liability of the principal, and cannot exceed it.”).
The surety bonds, in section four, deem premiums paid as “fully earned and non-refundable.” Those provisions do not define the extent of Integrity’s obligation before the investors default.
Taken together, these terms and provisions of the suretyship contracts indicate that Integrity’s obligation was intended to be secondary and limited only to the amounts actually due and owing under the principal obligations. The interpretation derived from the language of the preamble that the surety is “firmly bound for the full- amount of the bond” is clearly qualified by substantive conditions: “in accordance with the conditions hereof.” By denominating the provisions contained in the rest of the surety bonds as “conditions hereof,” the surety bonds explicitly limit Integrity’s obligation otherwise to pay the entire outstanding bonds. The succeeding paragraph further indicates that the surety’s obligation is secondary. Only when the investors do not fully perform is the obligation enforceable. The bond provisions following the preamble define the obligation to pay. Those terms imposed an obligation on the surety only to pay installments not in default or otherwise due and owing if those amounts have been accelerated by the creditor. As noted, however, Integrity never invoked its right to require Credit Lyonnais to accelerate the debt.
The critical interpretive determinations that we should make are that the condition that limits the obligation exclusively to *152amounts actually due and owing is in the nature of a condition precedent to the surety’s secondary obligation and that, in this case, the nature of that condition is itself controlled by the provisions for accelerating the amount of the debt not otherwise due and owing. Several cases involving surety bonds that mandated that the obligation to pay “shall remain in full force and effect” if the principal did not fully perform appear to reach a different result. Those cases are distinguishable or not persuasive on this point of interpretation. E.g. Amelco Window Corp. v. Federal Ins. Co., 127 N.J.Super. 342, 317 A.2d 398 (App.Div.1974) (holding contractor hable on construction surety bond where parties did not contest whether clause stating that the obligation “shall remain in full force and effect” created a condition precedent or condition subsequent); In re Liquidation of Wisconsin Surety Corp., 112 Wis.2d 396, 332 N.W.2d 860, 862-64 (Ct.App. 1983) (holding that language of replevin surety bond that provided that insurer and seller were “held and firmly bound unto [the buyer] for which payment [they] jointly and severally bind [themselves]” and that the obligation was “otherwise to remain in full force” was merely’ a condition subsequent, and was clearly influenced “by the purpose of the replevin bond: to insure that [the buyer] is reimbursed if the seizure, as here, is wrongful”); In re Liquidation of Wisconsin Surety Corp., No. 81-809, 1981 WL 139113 (Wis.Ct.App. Dec.28, 1981) (unpublished) (holding, in case of surety bond issued to bank covering obligation of corporate lender to repay loan, that bond provision that principal and surety were “held and firmly bound unto” the bank “jointly and severally, firmly by these presents” and that if principal paid the loan “then this obligation shall be null and void; otherwise it shall remain in full force and effect” for principal that had not been defaulted before bankruptcy, was condition precedent, thereby barring claim against insurance company). In contrast to these decisions, Integrity’s surety bonds do not provide that the obligation “remain in full force and effect.” Rather, they provide that “the parties agree as follows.”
*153We would not need to decide how to interpret the surety bonds had they provided that the obligation “shall remain in full force and effect.” A straightforward reading of the terms of the surety bonds, however, demonstrates that Integrity’s obligation to pay is conditioned on Credit Lyonnais’s providing notice of defaulted payments. The literal, though admittedly not plain, meaning of the surety bonds is that, absent acceleration of the debt, Integrity bound itself to pay only the amounts that investors had already failed to pay. Therefore, Credit Lyonnais’s claim for installment payments that were due after the bonds terminated should be denied.
II
In spite of the bond language and fundamental principles of suretyship, the Court concludes that Credit Lyonnais is entitled to the entire outstanding bond amount as a measure of contractual damages. The Court’s analysis is flawed, however, in that contract principles allow recovery only for claims that already exist, namely, claims that are currently due and owing. Moreover, by allowing Credit Lyonnais to recover in contract for amounts that were not due and owing on the date of the termination of the bonds, the Court greatly prejudices the legitimate contractual claims of other creditors, whose claims were due and owing on the termination date.
The trial court ruled that the appropriate damage award was a return of unearned premiums. That ruling was based on the court’s determination that Credit Lyonnais was entitled to recover under the surety bonds only the amount of defaulted installment payments and not the entire amount of the bonds representing the unpaid balance of those underlying obligations. The Appellate Division did not consider this issue when reversing on other grounds. Contrary to the Court’s analysis, the trial court was surely correct in determining that the proper award is a return of unearned premiums, not the cost of reinsurance.
*154The issue here is what damages are appropriate for Credit Lyonnais when the Liquidation Order terminated the surety bonds. Claims can be made “in the nature of damages for a breach of contract” only for claims that existed at the time that the insurance company was declared insolvent. 19A J. Appleman, Insurance Law and Practice § 10721 at 196 (rev. ed. 1982). As discussed previously, Integrity did not owe the full bond amount at the time of liquidation. See supra at 148-153, 685 A.2d at 1297-1299.
Claims that arise after insolvency are not recoverable. “When an insurance company is adjudicated insolvent!,] ■ • • its right to continue business ceases and all of its outstanding liability is canceled by operation of law, except claims of its policyholders for unearned premiums and cash surrender values of policies.” Appleman, supra, § 10729 at 260. The surety bonds in this case do not have any cash surrender value. Credit Lyonnais’s appropriate remedy, therefore, is a return of unearned premiums. Neuman v. Hatfield Wire & Cable Co., 113 N.J.L. 484, 174 A. 491 (E & A 1934); Broadway Bank & Trust Co. v. New Jersey Property-Liability Ins. Guaranty Ass’n, 146 N.J.Super. 80, 368 A.2d 983 (Law Div.1976); State v. American Bonding & Casualty Co., 206 Iowa 988, 221 N.W. 585 (1928); Moren v. Ohio Valley Fire & Marine Ins. Co.’s Receiver, 224 Ky. 643, 6 S.W.2d 1091 (1928); Green v. American Life & Accident Ins. Co., 112 S.W.2d 924 (Mo.App.1938); cf. Tuttle v. State Mut. Liability Ins. Co., 2 N.J.Misc. 973, 127 A. 682 (Ch. Ct.1924) (applying same principle to mutual insurance company where policy so provided). Return of unearned premiums is the appropriate award even if the policy does not appear to provide for such refunds. See Johnson v. Button, 120 Va. 339, 91 S.E. 151 (1917). Even if some loss “occurs following the dissolution proceedings, the recovery of the policyholder will be limited to a return of unearned premiums.” Appleman, supra, § 10729 at 264; see Smith v. National Credit Ins. Co., 65 Minn. 283, 68 N.W. 28 (1896) (noting same in dicta in credit insurance case).
*155The appropriate remedy, therefore, is to refund the unearned premiums as determined by the formula set out in the proceedings below. Such a remedy, in addition to being legally correct, reflects the risk for which the various creditors contracted and does not award Credit Lyonnais a windfall by drastically reducing its risk as embodied in the language of the promissory notes.
Ill
Although the Court claims to champion “basic principles of contract law,” it does nothing of the sort. Instead, it allows one creditor to file claims for amounts not due and owing on the date of termination while ensuring that other creditors will collect far less on their claims for amounts that were due and owing. To skew the allocation of risk reflected in the bond language deviates from the creditors’ reasonable expectations in entering into relationships with Integrity. The Court’s emphasis on Credit Lyonnais’s inability to procure replacement insurance for less than the full amount of the debt is misplaced because creditors who assume a risk (as per the language of the bond instrument) are not entitled to be reimbursed for replacement insurance when that risk does not pan out.
Moreover, while “basic principles of contract law” do not support the Court’s conclusion, basic principles of suretyship decidedly point to an opposite conclusion, namely, that a surety is liable only for a debt that is already owing.
For the foregoing reasons, I respectfully dissent.
O’HERN, J., joins in this opinion.
PORITZ, C.J., and POLLOCK, J., did not participate.
For affirmance and remandment■ — Justices GARIBALDI, STEIN, COLEMAN, SHEBELL and LONG — 5.
Opposed — Justices HANDLER and O’HERN — 2.

 For example, each Keswick partner promised to repay Credit Lyonnais for a loan of $150,000 at 14% interest per annum in four installment payments: $37,500 for the first three years and the remainder by the fourth anniversary of the loan. Integrity's surety bond for the Keswick promissory note was $2,418,-800.04, or $201,566.67 for each of twelve investors. Integrity thereby promised to cover not only the amount that the investors owed at the time they made the bond ($150,000) but additional interest that could accrue over time.

 The surety bonds provided coverage for up to $201,566.67. Interpreting the investor's promissory note as accruing interest from August 31, 1984, suggests that the maximum amount owed was $218,801.12. Interpreting the promissory note as accruing interest from the date that it was signed (August 8, 1984), suggests that the maximum amount owed was $234,765.22.