The opinion of the court was delivered by: MCGLYNN
This action was commenced by the plaintiffs, The Paul Revere Protective Life Insurance Company, The Paul Revere Life Insurance Company and The Paul Revere Variable Annuity Insurance Company (herein collectively referred to as "Paul Revere Companies") to recover monies from defendants, Sigfried Weis and Robert F. Weis ("the Weises"), as guarantors of promissory notes issued in connection with a leveraged lease of railroad boxcars. Jurisdiction of the case is based on diversity of citizenship between the parties. See 28 U.S.C. § 1332 (1977). Presently before the court are plaintiffs' and defendants' cross-motions for summary judgment pursuant to Federal Rule of Civil Procedure 56. For the reasons set forth herein, plaintiffs' motion for summary judgment will be granted and defendants' motion will be denied.
A leveraged lease is an agreement whereby the lessee selects the type and cost of equipment to be leased. The equipment is then purchased by the lessor from the manufacturer and leased by the lessor to the lessee. The lessor pays part of the cost of the equipment with its own funds and finances the balance by the issuance of a note in favor of an institutional lender. The note is typically secured by a security interest in the equipment and by an assignment of the lease. A leveraged lease transaction is designed to provide maximum tax benefits
to the owner-lessor, and if, as in this case, the owner-lessor is a partnership, these benefits accrue to the general and limited partners.
In early 1979, NRUC had agreed to purchase 400 boxcars from Berwick Forge & Fabrication Company ("Berwick Forge"), a division of the Whittaker Corporation. In March 1979, Girard Leasing agreed to finance the purchase of eighty of the boxcars through a leveraged lease with S&R as the lessor. Accordingly, on March 28, 1979, NRUC assigned to S&R its obligation to purchase eighty boxcars from Berwick Forge at a cost of $ 3,058,240. S&R purchased the eighty boxcars on March 28, 1979 and then on the same date leased the boxcars to NRUC. S&R financed its purchase of the eight boxcars by a loan from Girard Leasing in the amount of $ 3,178,240.
The loan was evidenced by a promissory note dated March 28, 1979 executed by S&R in favor of Girard Leasing. The note was made subject to the terms of a security agreement dated March 28, 1979 which granted Girard Leasing a security interest in the eighty boxcars. The note was also secured by an assignment of the equipment lease. In accordance with the nonrecourse nature of the notes, the security agreement of March 28, 1979 provided that in the event of a default, plaintiffs may accelerate and obtain a judgment against S&R for the total balance due under the notes, but judgment cannot be satisfied from any partnership assets other than the boxcars.
In early April, 1979, the notes were paid in part when Girard Leasing as general partner and the Weises as limited partners made an additional contribution to the capital of S&R in the aggregate amount of $ 635,648.80. A new note dated April 16, 1979 in the amount of $ 2,606,156 was executed by S&R in favor of Girard Leasing. The note was subject to a security agreement dated April 16, 1979 which again provided that a judgment cannot be satisfied from any partnership assets other than the boxcars. The Weises executed guarantees dated April 13, 1979 in favor of Girard Leasing pursuant to which they guaranteed S&R's payment when due of all the obligations and liabilities under the notes.
By a Participation Agreement dated May 7, 1979, which both the plaintiffs and defendants signed, the Paul Revere Companies bought out Girard Leasing as the institutional lender, although Girard Bank agreed to act as their agent. Accordingly, on June 1, 1979, the plaintiffs paid to Girard Leasing the sum of $ 2,606,156, the principal amount of the promissory note dated April 16, 1979, held by Girard Leasing as the institutional lender. On June 1, 1979, S&R in turn executed three promissory notes in favor of the Paul Revere Companies in the aggregate amount of $ 2,606,156. The notes were made subject to a security agreement dated May 7, 1979 which granted Girard Bank, as agent of the Paul Revere Companies, a security interest in the eighty boxcars. The three notes were also secured by an assignment executed on May 7, 1979 of the equipment lease.
In conjunction with the Participation Agreement, the Weises executed guarantees dated June 1, 1979 in favor of the Paul Revere Companies limited to an aggregate liability of $ 1,335,557. Pursuant to paragraph one of these guarantees, the Weises again guaranteed the payment when due of the obligations and liabilities of S&R under the nonrecourse notes:
1. Guarantee. The undersigned absolutely, unconditionally and irrevocably guarantees the due and punctual payment when due of all of the Maker's obligations and liabilities to the Investors under the Maker's promissory notes .... dated June 1, 1979... (emphasis added).
The Guarantees further provided:
5. Default by Maker; No Set Off. In case of the failure of timely payment by the Maker on the Notes, for any reason whatsoever, the Guarantor shall pay the Notes on demand, and it shall not be necessary to take any further action against the Maker or otherwise in any respect; it being the intention of the Guarantor that the obligation herein set forth is a guarantee of performance, not merely collection.
In early 1980, the country's economic recession caused a dramatic decrease in the utilization rate of boxcars. This recession affected NRUC as well as every other user of the boxcars, and NRUC ceased making rental payments to S&R. Accordingly, during the three months prior to June 28, 1980, S&R received no rental income from NRUC on the boxcars. Since it had received no rental income from NRUC during the preceding three months, S&R did not make payment to the plaintiffs. The plaintiffs immediately declared the notes to be in default.
Three days later, on July 1, 1980, the plaintiffs commenced this action against the Weises. The plaintiffs did not commence suit against S&R as the principal debtor nor did they declare, as assignees of the equipment lease, a default under the equipment lease even though NRUC failed to make the rental payments required by the lease. The Paul ...