particular investor to a level acceptable to Travelers, and therefore, Travelers agreed to bond those investors. Where Travelers anticipated additional documentation, the NPA indemnity was released when Travelers received the documentation. These indemnity agreements were given by NPA, not by the partnership or by the general partner. These NPA guarantees were given at the loan closing and well after the partnership closing. These NPA guarantees did not exist and the need for them could not have been known at the time the NCC XII private placement memorandum was distributed, at the time the investors made their investments or at the time the NCC XII partnership closed. There is no dispute as to the fact of these NPA guarantees.
Defendants argue that these NPA guarantees reduced the risk for which Travelers had bargained, and that the NPA guarantees exposed the partnerships and the limited partners to possible detrimental consequences.
Defendants further argue that the anticipated consequence of bonding investors who were not prime financial candidates was that they would default, jeopardizing the financial success of the investment vehicle. This argument is unreasonable and untenable. If an investor defaulted, Travelers, not the partnership or the project, had to pay. Simply because in those five instances, Travelers demanded indemnity agreements from the sponsor as a condition of bonding investors did no more than give Travelers additional security beyond its looking to the defaulting individual investor. Again, the sponsor NPA, and not the partnership or a general partner, gave the indemnity agreements.
If neither the investor nor NPA repaid Travelers, Travelers would be entitled to foreclose on the limited partner's partnership unit, but not on the partnership and not on the partnership property. See, NCC XI-A at 10-11; NCC XII at 10-12; Indemnification Agreement PP 1, 2, 6, 7. A foreclosure by Travelers on a partnership unit would have no effect on the partnership or on the other limited partners.
The purpose of bonding in the partnership transaction was to guarantee payment of the Notes so that the Notes would be purchased by a bank and the partnership would receive cash up front. The risk of non-payment of the Notes was thus assumed by the bonding company. So long as the investors' investments were bonded, the partnership was protected whether the individual investor happened to be financially sound or not, whether there was a default or not, and without regard to whether Travelers had selected to reduce its risk by obtaining indemnity from a third party.
Defendants defend against the Travelers' indemnification alleging that the Indemnification Agreement was part of a package of documents and that it is therefore unenforceable because of a fraud in other contracts of which it is a part, that the defendants were fraudulently induced to invest in the partnership, that Travelers' complaint fails to state a cause of action, that pursuant to the law of suretyship, they are entitled to assert against Travelers the defenses they have against the Note, and that because of the five NPA guarantees, Travelers got a fee for writing bonds without risk and therefore the Indemnification Agreements are void and unenforceable for lack of consideration. All of these defenses are without merit.
Travelers has by affidavit averred that it did not know of any fraud and defendants have neither identified the fraud in underlying documents nor alleged facts by affidavit or otherwise showing that Travelers actually knew of any fraud. For these reasons, the defenses are dismissed. Additionally, defendants have failed to allege, and have failed to prove in response to the summary judgment motion, that Travelers, their surety for an investment risk that they chose to accept, had any duty to them to investigate for them the financial projections of the partnership and to advise investors whether to invest or not. It is well settled law that a surety owes no duty to investors to disclose information to investors. National Union Fire Ins. Co. v. Turtur, 892 F.2d 199 (2d Cir. 1989); see also, Antinoff v. Laverell Reynolds Securities, 703 F. Supp. 1185 (E.D. Pa. 1989); Cairns v. Renneisen, 1987 U.S. Dist. LEXIS 7243, No. 85-2827, 1987 WL 15427 (E.D. Pa. August 6, 1987). Furthermore, in paragraph 13 of the Investor Bond Agreement, defendants acknowledged that the "Surety had not reviewed the merits of the Partnership's Investment or proposed investments and make no recommendations of any kind whatsoever with respect thereto." Defendants, then, were not only on actual notice but agreed in writing as sophisticated investors that they were not relying upon Travelers in any way for their investment decisions or evaluations of the financial projections.
Defendants next argue that non-disclosure of the five NPA guarantees for NCC XII was fraudulent, and that Travelers knew these guarantees were not disclosed in the PPM. It is undisputed that these guarantees came into existence substantially after the defendant investors had made their investments. Therefore, they could not have been disclosed and their subsequent existence is totally irrelevant to the prior investment decisions. Even fraudulent activity occurring after the purchase cannot form the basis for a securities fraud claim. See, Clinton Hudson & Sons v. Lehigh Valley Cooperative Farms, Inc., 73 F.R.D. 420, 425 (E.D. Pa. 1977), aff'd without opinion, 586 F.2d 834 (3d Cir. 1978).
Defendants further argue that Travelers' failure to disclose the five NPA guarantees when they came into existence perpetuated and assisted the fraud of the general partner because Travelers had to have known that if the investors who were not creditworthy were being accepted, the financial projections for the investment vehicle must have been so speculative as to have been fraudulently made. This argument is equally meritless and illogical as the foregoing proposition which was dismissed. An investor became qualified once there was bonding. Travelers bonded. That is all that the other investors had the right to require. Therein lay their protection. The partnership did not rely upon, and no investor relied upon, the individual creditworthiness of investors. They relied upon the bonding commitment and performance of Travelers. It is that that they received and cannot now be heard to complain. That NPA gave guarantees such that it, as sponsor, conceivably might become the owner of 4 1/2 units did not have to be disclosed. The investors understood and agreed through the NCC XII PPM that NDA could purchase outright as many as 12 units in order to close the deal. Nevertheless, defendants defiantly argue without factual foundation that the five indemnity agreements between Travelers and NPA reduced the financial viability of the investment vehicle. However defiantly stated, it defies reason for defendants in NCC XII to argue that NPA was more financially exposed by guaranteeing 5 investors' investments in 4 1/2 units than by purchasing 12 units outright.
An appropriate Order follows.
AND NOW, this 22nd day of October, 1993, upon consideration of plaintiff's motions for summary judgment in the above-captioned cases, and defendants' responses thereto, it is hereby ORDERED that:
1. Plaintiff's motions for summary judgment are GRANTED as to all counts of the complaints in both of the above-captioned cases.
2. Plaintiff shall submit, within ten (10) days of this Order, a form of final judgment.
BY THE COURT:
James T. Giles, J.