UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK CLARENDON NATIONAL INSURANCE COMPANY and

CLARENDON AMERICA INSURANCE COMPANY, Plaintiffs, vs. JAMES C. CULLEY and JAMES K. CULLEY, Defendants. Case No.: 11-CV-02629 (HB) (GWG)

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS JAMES C. CULLEY AND JAMES K. CULLEY'S MOTION FOR SUMMARY JUDGMENT

Rishi Bhandari Evan Mandel B. Rudolph Delson MANDEL BHANDARI LLP 11 Broadway, Suite 615 New York, NY 10004 T: (212) 269-5600 F: (646) 964-6667 rb@mandelbhandari.com

Attorneys for Defendants James C. Culley and James K. Culley

TABLE OF CONTENTS

INTRODUCTION .....................................................................................................................1 STATEMENT OF FACTS ........................................................................................................3 LEGAL STANDARD ................................................................................................................9 ARGUMENT ...........................................................................................................................10 I. CLARENDON'S CLAIMS ARE BARRED BY THE STATUTE OF LIMITATIONS ............................................................................................................10 A. Clarendon's Claims Are Time-Barred ........................................................10 B. The Purported Waiver Of The Statute Of Limitations Contained In the Guaranties Is Against Public Policy And Is Invalid ..............................................................................................................12 II. THE CLAIM AGAINST JIM CULLEY MUST BE DISMISSED BECAUSE THE DRAFT GUARANTEE IS NOT A VALID CONTRACT ................................................................................................................14 A. Clarendon And Jim Culley Never Formed a Contract ...............................15 B. The Draft Guarantee Fails for Lack of Consideration................................17 III. THE CLAIM AGAINST CHRIS CULLEY MUST BE DISMISSED BECAUSE THE ALLEGED OBLIGATIONS ARE OUTSIDE THE SCOPE OF THE GUARANTEE .................................................................................18 CONCLUSION ........................................................................................................................21

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TABLE OF AUTHORITIES Cases American Trading Co. v. Fish, 42 N.Y.2d 20 (1977) ....................................................................10 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ...................................................................9 Bayridge Air Rights, Inc. v. Blitman Constr. Corp., 80 N.Y.2d 777 (1992) .................................13 Clarendon Nat'l Ins. Co. v. GWTA Ins. Servs., 2002 U.S. Dist. LEXIS 18817 (S.D.N.Y. Aug. 1, 2002) ....................................................................................................14 Culver v. Parsons, 7 A.D.3d 931, 777 N.Y.S.2d 536 (3d Dept. 2004) ..........................................17 Davimos v. Halle, 35 A.D.3d 270, 826 N.Y.S.2d 61 (1st Dept. 2006)..........................................16 Erie R. Co. v. Tompkins, 304 U.S. 64 (1938)..................................................................................9 European American Bank & Trust Co. v. Boyd, 131 A.D.2d 629, 516 N.Y.S.2d 714 (1st Dept. 1987) ...................................................................................17 Fed. Ins. Co. v. Turner Constr. Co., 779 F. Supp. 2d 345 (S.D.N.Y. 2011) ..................................14 Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415 (1996) ...........................................................9 Hall & Co. v. Continental Casualty Co., 34 A.D.2d 1028, 310 N.Y.S.2d 950 (3d Dept. 1970) ...................................................................................16 John J. Kassner & Co. v. New York, 46 N.Y.2d 544 (1979) ........................................................12 Matsushita Elec. Industr. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) ....................................9 People v. Stuyvesant Ins. Co., 413 N.Y.S.2d 843, 98 Misc. 2d 210 (1979) ..................................18 Salomon v. Burr Manor Estates, Inc., 769 F. Supp. 2d 83 (E.D.N.Y. 2011) .................................17 Sovereign Bank v. Am. Elite Props. Inc., 2011 N.Y. Misc. LEXIS 4102, 2011 N.Y. Slip Op. 32248U (Sup. Ct. N.Y. County Aug. 17, 2011)..........................................................17 T & N PLC v. Fred S. James & Co., 29 F.3d 57 (2d Cir. 1994)....................................................11 Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114 (2d Cir. 1994)..............................................9 Walcutt v. Clevite Corp., 13 N.Y.2d 48, 191 N.E.2d 894 (N.Y. 1963) ...................................17, 18 Statutes New York General Obligations Law 17-103 ..............................................................................12 Other Authorities 63 N.Y. Jur.2d, Guaranty and Suretyship 89 (1987) ..................................................................18

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INTRODUCTION Plaintiffs Clarendon National Insurance Company ("CNIC") and Clarendon America Insurance Company ("CLAM," and together with CNIC, "Clarendon") constitute a zombie insurance company. In 2006 Clarendon stopped issuing insurance policies. Since then, Clarendon has just been running off the company, meaning that the companys only business has been collecting receivables and paying off claims under its old insurance policies. Key documents are stored in warehouses around the country and large chunks of Clarendon's institutional memory have been lost as the vast majority of its employees were laid off or defected to other firms. Despite the lack of institutional memory, or perhaps because of it, Clarendon seems not to have done an investigation before filing this lawsuit against Defendants James K. Culley ("Jim Culley") and James C. Culley ("Chris Culley," and together with Jim Culley, the "Culleys"). Plaintiffs allege that both Jim Culley and Chris Culley executed personal guarantees, guaranteeing approximately $2.2 million in premiums due to Clarendon by a company named Insurers Unlimited, Inc. ("IUI"). It is undisputed that these premiums were misappropriated by third parties. Neither IUI nor the Culleys received any portion of the $2.2 million. Indeed, the Culleys have spent hundreds of thousands of dollars helping Clarendon recover as much of this money as possible directly from the third parties. Instead of thanks, the Culleys were served with this meritless lawsuit that must be dismissed for three reasons. First, it is undisputed that every penny of the $2.2 million owed to Clarendon by IUI was due and payable prior to December 31, 2004. New York imposes a six-year statute of limitations on enforcing any contractual right, including rights pursuant to a personal guarantee. This lawsuit was filed on April 16, 2011 so it is barred by the statute of limitations.

Second, the lawsuit against Jim Culley does not have a colorable legal or factual basis because Jim Culley never guaranteed any of IUI's obligations. The Jim Culley "guarantee" upon which Clarendon's claims are based (the "Draft Guarantee") was only a draft. It never became a valid contract; it was just attached to a draft general agency agreement (the "Draft GAA"). (See Ex. A, pp. 41-42.) The Draft GAA was never signed by Clarendon and was significantly revised before another general agency agreement was fully executed by IUI and Clarendon (the "GAA") (See Ex. B.) Indeed, when Clarendon was asked in its Rule 30(b)(6) deposition if the Draft GAA was a valid contract, its answer was crystal clear: "From a legal point of view, no, [because] always both parties signed [sic]." (See Ex. C, Transcript of Deposition of Nadja Stravenhagen, at 77:1824). Finally, the claim against Chris Culley is equally baseless because Clarendon is attempting to expand the scope of a guarantee. Chris Culley signed a guarantee that was attached as Schedule 3 to the GAA (the "Operative Guarantee"). (See Ex. B, pp. 42-43.) In the Operative Guarantee, Chris Culley guaranteed that IUI would remit premiums due to Clarendon pursuant to the GAA dated October 1, 2003 ("Trust Funds"). Accordingly, it is undisputed that the only premiums that Chris Culley guaranteed were premiums due under policies issued by IUI on or after October 1, 2003. Remarkably, Clarendon is suing Chris Culley for approximately $1.9 million in premiums that were due on policies issued on or before January 31, 2002. Clarendon is also suing Chris Culley for $322,000 that Clarendon is owed pursuant to a restitution order. However, the $322,000 is not covered by the Operative Guarantee because: (i) money owed pursuant to a "restitution agreement" does not constitute Trust Funds as defined in the Operative Guarantee or the GAA; and (ii) the $322,000 in premiums were originally due and

payable on or before December 31, 2004, making collection of the original obligation barred by the statute of limitations. Accordingly, Clarendon's claims must be dismissed. STATEMENT OF FACTS Marion and IUI's Relationship with Clarendon In 1993, Clarendon contracted with Marion Insurance Agency, Inc. ("Marion") to act as Clarendon's general agent for the issuance of insurance policies, primarily for physical damage to trucks throughout the United States. (Ex. L, underwriting audit report, at Clarendon 2467; Ex. F, Transcript of Deposition Jim Culley, at 19:11-13.) Marion was founded by Jim Culley. (Ex. F at 15:25-16:18.) Marion and Clarendon entered into a General Agency Agreement in May 1993 (the "Marion GAA") (Ex. G). The Marion GAA set forth the business relationship between Marion and Clarendon. (Ex. F at 29:3-12.) Among other things, the Marion GAA detailed the limits on Marion's underwriting authority, Marion's compensation and commissions, and expected standards for record keeping and documentation of policies. (Ex. G.) Jim Culley's son, Chris Culley, started working as an underwriter for Marion in 1998. (Ex. H, Transcript of Deposition of Chris Culley, at 29:18-20.) They worked together at Marion until 2001, when Chris Culley became the President of IUI. Chris Culley was President of IUI from January 1, 2001 until February 1, 2011. (Ex. H at 15:6-9, 24:11-13.) IUI began operating in 2000 or 2001. (Ex. F at 4621-47:4.) IUI was essentially an offshoot of Marion and it continued to operate pursuant to the terms in the Marion GAA until March 2005. (Ex. C at 135:23-136:8 ("Q: And the general agency agreement referred to [in a 2002 Claims Administration Agreement] is the Marion Agency general agency agreement,

correct? A: Correct. Q: That was the general agency agreement that was in force covering IUI prior to the final and executed general agency agreement that was signed in March of 2005, correct? A: Correct.")) There were two primary reasons for Marion to transition to IUI. First, Jim Culley thought IUI was a better name than Marion. He explained that "a lot of agents [] thought that Marion Agency was competing with them rather than being a [general agent]. They thought it was just like your homeowner's agency or auto agency. So to get away from that, we decided to name it IUI." (Ex. F at 49:14-23.) Second, IUI's corporate structure made it easier for other employees to become shareholders and to share in the company's profits. (Ex. F at 49:14-50:8.) Clarendon was fully informed of the proposed transition from Marion to IUI. (Id.) The Parties Negotiate a New General Agency Agreement In January 2003, Clarendon decided to either execute a new general agency agreement with IUI or to amend the Marion GAA "so it agrees with the reinsurance treaty renewal." (Ex. C at 53:17-54:12.) Thus, between January 2003 and September 2003, Clarendon and IUI discussed the potential terms of a new general agency agreement. (Ex. F at 75:13-17.) Eventually, on September 16, 2003, Jim Culley went to Clarendon's offices in New York to negotiate a new general agency agreement. On that day, Richard Wisely, one of Clarendon's program managers, asked Jim Culley to sign the Draft Guarantee immediately, before the negotiations began. It is undisputed that when Jim Culley protested, Wisely said that unless Jim Culley signed the Draft Guarantee, Clarendon would stop negotiating with IUI. (Ex. F 124:9125:8.) It is also undisputed that, in order to appease Wisely, Jim Culley signed the Draft GAA as a prelude to negotiations but clarified that it "only applies to the agreement that we get out today, not anything else." (Ex. F at 67:4-21.).

The parties agree that no contract was ever entered into on September 16, 2003. (Ex. F at 125:4-8; Ex. C at 122:5-10.) Thus, the Draft Guarantee was never valid. The Draft GAA was never fully executed by IUI. Clarendon was asked whether the Draft GAA was ever finalized or executed, and it responded by admitting that "It was never fully executed." (Ex. C at 335:21-336:11.) Indeed, neither IUI nor Clarendon signed page 4 of the Draft GAA. (Ex. A, p. 4.) This is consistent with the parties' intent to not be bound by the Draft GAA or the Draft Guarantee. Although Jim Culley did sign the Draft Guarantee on September 16, 2003, the undisputed facts make clear that neither party ever believed it to be valid and binding. When Jim Culley left Clarendon, he was told that he was given all copies of the Draft Guarantee. (Ex. F at 68:1769:14.) Moreover, Clarendon did not store a copy of the Draft Guarantee with the executed GAA. In fact, Clarendon did not even know of its existence until September 2010: Stavenhagen only discovered the Draft Guarantee in 2010 when she was reviewing documents in connection with another litigation pending in Georgia. (Ex. C at 189:2-11.) Neither party relied upon, nor intended to be bound by, the Draft Guarantee. Perhaps most tellingly, between September 2003 and March 2005, Clarendon and IUI continued to negotiate the terms of a general agency agreement. During this time, Clarendon believed that IUI was operating in accordance with the Marion GAA, not the Draft GAA. (Ex. C at 135:23-136:8 ("Q: And the general agency agreement referred to [in a 2002 Claims Administration Agreement] is the Marion Agency general agency agreement, correct? A: Correct. Q: That was the general agency agreement that was in force covering IUI prior to the final and executed general agency agreement that was signed in March of 2005, correct? A: Correct."))

After nearly two years of negotiation, the final GAA was fully executed sometime between March 15, 2005 and March 22, 2005. (See Exs. D & E (correspondence indicating that Clarendon received a copy of the GAA signed by IUI on March 15 and sent back a fully executed copy of the GAA to IUI on March 22.)) The Draft GAA and the Final GAA Were Substantially Different The final GAA, which was signed by Chris Culley, was substantially different than the Draft GAA that Jim Culley was shown in September 2003. For example, here are some of the differences between the two agreements: Clarendon reduced the commission payable to IUI for Motor truck Cargo policies written on CNIC paper from 22.5% in the Draft GAA to 21% in the GAA. (Compare Ex. A, p. 3, with Ex. B, p. 3.) Clarendon reduced the commission payable to IUI for Motor truck Cargo policies written on CLAM paper from 25% in the Draft GAA to 24% in the GAA. (Compare Ex. A, p. 3, with Ex. B, p. 3.) The Draft GAA prohibited IUI from offsetting premiums against return premiums. The GAA permitted it. (Compare Ex. A, 4.2(e), with Ex. B, 4.2(e).) The Draft GAA required IUI to immediately deposit all premiums collected into Clarendon's bank account. The GAA required IUI to deposit all premiums collected into Clarendon's bank account within 90 days. (Compare Ex. A, 4.2(b), with Ex. B, 4.2(b).) The Draft GAA did not contain any provision to share profits but the GAA provided IUI with a share of the profits. (See Ex. B, 3.1(f); see also Ex. C at

251:17-20 ("Q: Now, [ 3.1(f)] was not included in the draft agreement that is Exhibit 3 to the Complaint, correct?" A: Correct.")) IUI and Clarendon Are Defrauded by Third Parties One key term in the GAA obligated IUI to remit to Clarendon "all premiums due to the Companywhich premiums shall be calculated from the effective date of coverage under the applicable policies." (Ex. B, 4.2(a).) IUI, however, was the victim of two separate frauds. First, between 1999 and 2002, the Wileys, owners of Insurance Interchange, one of IUI's wholesalers in Georgia, stole somewhere between $1.6 million and $1.9 million. The essence of the scheme was that the Wileys made their customers pay annual premiums but told IUI that they were collecting monthly premiums. The Wileys sold the assets of Insurance Interchange to IUI in a sale that was consummated in January 2002 but kept all the premiums for the months that had been prepaid. Thus, by January 2002 the Wileys had misappropriated all the premiums that were due and payable to Clarendon. (See Ex. C at 139:18-23 ("Q: So the approximately $1.6 million in premiums that are referenced in Paragraph 57 of the complaint are attributable to policies that were written sometime in or before January of 2002, correct? A: Correct.")) After the fraud was discovered in 2005, IUI sued the Wileys for fraud, conversion, and related causes of action in Georgia. Clarendon joined the lawsuit in 2008. On February 25, 2009, the Georgia court granted summary judgment in favor of the Wileys, primarily because the court held that the plaintiffs did not reasonably rely on the Wileys assurances regarding the finances of Insurance Interchange. Instead of appealing the decision, Clarendon filed a claim against Jim Culley for approximately $80,000. In October 2011, Clarendon sought leave to amend its claims against Jim Culley to mirror the claims filed against him in this case, for

approximately $2 million. Clarendon sought leave to amend its claim because it claimed that it had just found the Draft Guarantee in September 2010. (See Affidavit of Nadia Stavenhagen, Ex. M.) 1 In a totally separate fraud, between 2000 and 2004, the Cooks, owners of another wholesaler in Texas, misappropriated approximately $600,000 from IUI. (See Ex. C at 146:1416 ("Q: And when did the [Texas] misappropriation scheme take place, what years? A: Previous to 2005."); see also id. at 317:12-24.) The essence of the Texas fraud was that Cooks collected fees for policies that the Cooks never told IUI about and never even issued. For example, the Cooks might have sold a customer 100 policies for 100 different trucks. But instead of getting 100 policies issued by IUI, the Cooks told IUI that the customer only wanted 25 policies for 25 different trucks. Thus, IUI would issue 25 policies, collect premiums for 25 policies, and pass along the collected premiums to Clarendon. But the Cooks would pocket the premiums for 75 policies that were never ever issued. Then, if one of the uninsured trucks would get into an accident, the Cooks would either pay for the claim themselves or have an employee at IUIGA substitute the uninsured truck for a truck that was covered by one of the 25 policies. (Ex. H at 59:17 to 61:18.) It is undisputed that IUI did not collect any of the misappropriated money. (See Ex. C at 146:22-24 ("Q: Did IUI collect any premiums that were stolen by Richard Cook? A. Not that I am aware of."); see also Ex. H at 62:25-63:3 ("Q: Did IUI ever receive the premiums that Ms.

As discussed above and below, Clarendon's claims against Jim Culley are meritless. But Clarendon's motion for leave to amend the claims filed in Georgia is even more absurd since (i) it is duplicative of this lawsuit; and (ii) the Draft Guarantee states that "any action or proceeding arising out of or relating to this guaranteeshall be brought in the Supreme Court of the State of New Yorkor in the United States District Court for the Southern District of New York." In other words, Clarendon's Georgia filing seems calculated to do nothing except drive up Jim Culley's litigation costs.

Carlisle and Mr. Cook stole? A: No.") The Culleys discovered the Texas scheme in late 2004 and the Georgia scheme in early 2005. The Culleys went to New York in January or February 2005 to inform Clarendon of the Texas scheme. (Ex. H at 53:12-54:17.) And Jim Culley returned to New York in February or March 2005 to inform Clarendon about the Georgia scheme. LEGAL STANDARD Federal courts sitting in diversity apply the substantive law of the forum state on dispositive issues. Erie R. Co. v. Tompkins, 304 U.S. 64, 78-80 (1938); Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114, 119 (2d Cir. 1994). Each of the guarantees at issue states that "its validity, construction and performance shall be governed in all respects by the laws of the State of New York." (Ex. B, p. 43; Ex. A, p. 42.) Thus, New York law applies to both of Plaintiffs' claims. Procedural matters, however, are governed by federal law. See Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427 (1996). Summary judgment will be granted where there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c). Summary judgment is proper when, after drawing all reasonable inferences in favor of a non-movant, no reasonable trier of fact could find in favor of the non-movant. See Matsushita Elec. Industr. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986). Genuine issues of fact are not created by conclusory allegations. Moreover, there must be more than a scintilla of evidence in the non-movant's favor; there must be evidence upon which a fact-finder could reasonably find for the non-movant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).

ARGUMENT I. CLARENDON'S CLAIMS ARE BARRED BY THE STATUTE OF LIMITATIONS A. Clarendon's Claims Are Time-Barred As discussed in Section II below, Jim Culley's Draft Guarantee was never a valid contract therefore there can be no cause of action against him regardless of the statute of limitations. Even if one were to assume for a moment that the Draft Guarantee somehow became a valid contract, any claim based on that contract would be barred by the statute of limitations. The statute of limitations with respect to guarantees is "the six-year period applicable to contracts generally under CPLR 213." American Trading Co. v. Fish, 42 N.Y.2d 20, 26-27 (1977). Both the Draft Guarantee and the Operative Guarantee state that each "Guarantor hereby unconditionally guaranteesprompt payment of Trust Funds as and when they are due and payable pursuant to the Agency Agreement." (Ex. B, p. 42-23; Ex. A, p. 41-42.) In this case, Clarendon seeks to recover approximately $2.2 million in premiums that Clarendon asserts were never paid to Clarendon. (Ex. I, 82, 88) Clarendon concedes that the premiums attributable to the Georgia scheme (Ex. I, 57, 58) were past due and unpaid on or before January 31, 2002. (See Ex. C at 139:18-23 ("Q: So the approximately $1.6 million in premiums that are referenced in Paragraph 57 of the complaint are attributable to policies that were written sometime in or before January of 2002, correct? A: Correct.")) Similarly, between 2000 and 2004, Clarendon alleges that approximately $622,933 was stolen by the Cooks in the Texas Misappropriation Scheme. It is undisputed that IUI did not collect any of these premiums. (See Ex. C at 146:22-24 ("Q: Did IUI collect any premiums that

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were stolen by Richard Cook? A. Not that I am aware of."; see also Ex. H at 62:25-63:3 ("Q: Did IUI ever receive the premiums that Ms. Carlisle and Mr. Cook stole? A: No.")) It is also undisputed that the money was stolen by the Cooks sometime on or before December 31, 2004. (See Ex. C at 147:14-16 ("Q: And when did the misappropriation scheme take place, what years? A: Previous to 2005.") Clarendon tries to muddy the waters by alleging that it was not informed about the Georgia misappropriation scheme until 2007 and that IUI's first-in-first-out accounting method meant that it did not learn about the misappropriation until after October 1, 2003. (Ex. I 57, 59.) While neither of these things is true, for statute of limitations purposes it is immaterial when Clarendon learned about the misappropriation scheme. "Knowledge of the occurrence of the wrong on the part of the plaintiff is not necessary to start the Statute of Limitations running in a contract action." T & N PLC v. Fred S. James & Co., 29 F.3d 57, 60 (2d Cir. 1994). It is black letter law that "a cause of action for breach of contract accrues and the statute of limitations commences when the contract is breached." T & N, 29 F.3d at 59. In this case, it is undisputed that all the breaches occurred on or before December 31, 2004 and were discovered by IUI in late 2004 or early 2005. (See Ex. H at 53:22-25 ("Q: When did you and your father advise Clarendon of the [Texas Misappropriation Scheme]? A: January or February 2005."); see also Ex. F at 183:25-184:4 (learned about Georgia fraud in late 2004 or early 2005); Ex. C at 139:18-23 ("Q: So the approximately $1.6 million in premiums that are referenced in Paragraph 57 of the complaint are attributable to policies that were written sometime in or before January of 2002, correct? A: Correct.") Thus, if IUI had an obligation to pay Clarendon any portion of the $2.2 million that Clarendon is seeking in this lawsuit, that obligation would have accrued on or before December

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31, 2004. The liabilities under the Draft Guarantee and/or the Operative Guarantee would have arisen at the same time because the guaranties did not contain any notice provisions. To the contrary, the guaranties provided that the guarantors would pay Clarendon any Trust Funds "as and when they are due and payable" and explicitly waived "notice of any non-performance or, or default." (Ex. B, p.42; Ex. A, p. 41.) Accordingly, to comply with New York's statute of limitations, Clarendon had to file the instant lawsuit on or before December 31, 2010. But Clarendon filed this lawsuit on April 16, 2011. (See Ex. I.) Consequently, the claims must be dismissed. B. The Purported Waiver Of The Statute Of Limitations Contained In the Guaranties Is Against Public Policy And Is Invalid Clarendon will doubtless argue that the Draft Guarantee and the Operative Guarantee each contain language that waives any defense based on the statute of limitations. This argument is meritless. The Statute of Limitations is not just a defense "to afford protection to defendants against defending stale claims," it also expresses a societal interest or public policy "of giving repose to human affairs." John J. Kassner & Co. v. New York, 46 N.Y.2d 544, 550 (1979). Accordingly, "because of the combined private and public interests involved, individual parties are not entirely free to waive or modify the statutory defense." (Id.) Indeed, an agreement to extend the Statute of Limitations that is made before the inception of liability is invalid. (Id.) That being said, an agreement to extend the statute of limitations can be enforceable, if (i) the agreement is made after the accrual of the cause of action; and (ii) the agreement "according to its terms" extends the limitations from the date the agreement is signed for a period of time equal to or shorter than the original statute of limitations. See New York General Obligations Law 17-103.

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The Operative Guarantee fails to satisfy the requirements of Section 17-103 for two reasons. First, the text of the Operative Guarantee does not contain a permissible six-year extension of the statute of limitations; it contains an unenforceable waiver of the statute of limitations. It is well established that extensions pursuant to GBL 17-103 "should not be indefinite" and "an agreement that cannot be enforced according to its terms is ineffective to extend the limitations period." Bayridge Air Rights, Inc. v. Blitman Constr. Corp., 80 N.Y.2d 777, 779-780 (1992). The Operative Guarantee states that Chris Culley waived "any right to interpose a defense based upon any statute of limitations." (Ex. B, p.42.) The Operative Guarantee does not contain any extension of the statute of limitations whatsoever. As a result, the language purporting to waive the statute of limitations defense is invalid. See Bayridge Air Rights, 80 N.Y.2d at 779-80 (holding waiver of statute of limitations contained in guarantee was invalid). Second, even if it were possible to read an extension into the Operative Guarantee, the extension would have to be longer than the six years permitted by G.O.L. 17-103 in order to save Clarendon's claims. Here, it is undisputed that the Operative Guarantee was fully executed between March 15, 2005 and March 22, 2005. (See Exs. D, E.) The maximum extension allowed under Section 17-103 would be six years from the date that the agreement was signed: March 22, 2011. But, as illustrated above, Clarendon's Complaint was filed on April 16, 2011. Thus, even the maximum allowable extension of the statute of limitations would not save Clarendon's claims. In other words, regardless of the triggering event, as illustrated by the chart below, the last day that Clarendon could have filed a lawsuit in connection with non-payment of money supposedly owed to it by IUI was March 22, 2011.

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Event Triggering Statute of Limitations

Date of Event

Latest Possible Expiration of Statute of Limitations January 31, 2008

$1,909,525.15 in premiums due to Clarendon on policies issued by IUI wholesaler, Insurance Interchange.

On or before January 31, 2002

Jim Culley Draft Guarantee signed.

September 16, 2003

September 16, 2009

$622,933 in restitution for money stolen by Richard Cook in the Texas misappropriation scheme.

On or before December 31, 2004

December 31, 2010

Chris Culley Operative Guarantee signed.

On or before March 22, 2005

March 22, 2011

II.

THE CLAIM AGAINST JIM CULLEY MUST BE DISMISSED BECAUSE THE DRAFT GUARANTEE IS NOT A VALID CONTRACT It is black letter law that "[t]he interpretation of a contract of suretyship is governed by

the standards which govern the interpretation of contracts in general." Fed. Ins. Co. v. Turner Constr. Co., 779 F. Supp. 2d 345, 353 (S.D.N.Y. 2011). To prevail on a claim for breach of contract under New York law, Plaintiff must prove "(1) the existence of an agreement between the plaintiff and defendant; (2) due performance of the contract by the plaintiff; (3) breach of the contract by the defendant; and (4) damages resulting from the breach." Clarendon Nat'l Ins. Co. v. GWTA Ins. Servs., 2002 U.S. Dist. LEXIS 18817, at *8 (S.D.N.Y. Aug. 1, 2002). It is undisputed that the contract that was the subject of the Draft Guarantee the Draft GAA was never valid or enforceable. Accordingly, the Draft Guarantee was never, and is not, valid or enforceable.

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A. Clarendon And Jim Culley Never Formed a Contract There was, quite simply, never any agreement between Clarendon and Jim Culley regarding the contractual obligations he was supposedly guaranteeing. It is undisputed that the Draft GAA was "never fully executed" and "was never a final agreement." (Ex. C at 122:5-10.) It is also undisputed that the Draft Guarantee was a schedule to the unexecuted, non-final Draft GAA. Stavenhagen also admitted that the Draft Guarantee was never attached to any other contract. (Ex. C at 336:21-337:3.) Perhaps realizing that this is fatal to Clarendon's claims, Stavenhagen hypothesizes that the Draft Guarantee was also meant to guarantee the final, fully-executed GAA. (Ex. C at 123:11-124:11.) But this is impossible. There are four undisputed facts that completely undermine Stavenhagen's hypothesis. First, Jim Culley was never the intended signatory of a guarantee of the obligations detailed in the GAA. According to the plain terms of the Draft Guarantee, "the General Agent is obligated to cause the principal shareholder(s) and the president of the General Agent to guarantee payment." (Ex. A, p. 41.) Moreover, according to Section 9.4(b) of the GAA, "the General Agent shall cause the principal shareholder(s) and the president of the General Agent to execute and deliver to the Company a guarantee of payment of the Trust Funds. The guarantee shall be in the form attached as Schedule 3." (Ex. B, p. 32.) It is undisputed that Jim Culley was neither the president nor a shareholder (let alone the "principal shareholder") of IUI. (See Ex. C at 127:23-128:11 ("He was not a president. I'm not sure if he was a shareholder."); Ex. F at 76:21-22 ("Q: Were you ever a shareholder of IUI? A: No.")) Thus, Jim Culley was never the intended signatory of a guarantee in favor of Clarendon.

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Second, the plain language of the GAA makes it clear that only a single guarantee was required by Clarendon. See Ex. B, p. 32 ("The guarantee shall be in the form attached as Schedule 3." (emphasis added)). Here, it is undisputed that Chris Culley executed and delivered The guarantee that was required by Clarendon. He was IUI's president and held 25% of IUI's shares. (Ex. H at 16:8-17.) Third, Section 9.1 of the GAA is a merger clause, which states that "[t]his Agreement, and the Schedules attached, sets forth the entire understanding of the parties with regard to its subject matter, and supersedes and merges all prior discussions, agreement, promises, representations, warranties, and arrangements between them with regard to such subject matter." (Ex. B, p. 33.) It is undisputed that the Draft Guarantee was not attached as a schedule to the GAA. (See Ex. C at 336:25-337:3 ("Q: Is this schedule 3 attached to any other agreements [besides the Draft GAA]? A: No.") Fourth, as detailed in the Statement of Facts, Jim Culley's undisputed testimony is that the Draft Guarantee would only have applied to a general agency agreement that was finalized and executed on September 16, 2003. In order for a creditor to be able to recover on a guarantee, the creditor must prove that the contract that is the subject of the guarantee is valid and enforceable: "A surety bond attaches to the principal contract and must be construed in conjunction therewith, so that, if no underlying agreement ever came into existence, there is nothing to which the surety's obligation can attach and it is, therefore, a nullity." Hall & Co. v. Continental Casualty Co., 34 A.D.2d 1028, 1029, 310 N.Y.S.2d 950, 952 (3d Dept. 1970) (internal citation omitted), aff'd 30 N.Y.2d 517, 330 N.Y.S.2d 64 (1972). See also Davimos v. Halle, 35 A.D.3d 270, 272, 826 N.Y.S.2d 61, 62 (1st Dept. 2006) (In order to recover on a guarantee, "the creditor must prove the existence of the

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guaranty, the underling debt and the guarantor's failure to perform under the guaranty."); Sovereign Bank v. Am. Elite Props. Inc., 2011 N.Y. Misc. LEXIS 4102, at *13, 2011 N.Y. Slip Op. 32248U, at *8 (Sup. Ct. N.Y. County Aug. 17, 2011) ("[A] plaintiff establishes a prima facie claim on a guarantee by demonstrating the existence of the guarantee, a default on the underlying obligation secured by the guaranty, and the defendant's failure to honor the guaranty.") It is undisputed that no agreement on the Draft GAA was ever reached on September 16, 2003. (Ex. F at 125:4-8; Ex. C at 122:5-10.) Indeed, no agreement was reached until March 2005. Thus, the Draft Guarantee could not have been valid. B. The Draft Guarantee Fails for Lack of Consideration "In order for a guarantee to be binding upon a guarantor there must be consideration given at or about the time of the execution of the instrument." European American Bank & Trust Co. v. Boyd, 131 A.D.2d 629, 629, 516 N.Y.S.2d 714, 715 (1st Dept. 1987). "In other words, the guarantor may always assert a total failure of consideration. This is because the guarantor is not liable unless the principal is bound." Walcutt v. Clevite Corp., 13 N.Y.2d 48, 56, 191 N.E.2d 894, 897 (N.Y. 1963) (citing Williston on Contracts). See also Salomon v. Burr Manor Estates, Inc., 769 F. Supp. 2d 83, 88 (E.D.N.Y. 2011) (denying summary judgment to enforce guarantee, applying Walcutt); Culver v. Parsons, 7 A.D.3d 931, 933, 777 N.Y.S.2d 536 (3d Dept. 2004) (reversing summary judgment enforcing guarantee, applying Walcutt). Here, while the Draft Guarantee is replete with obligations purportedly imposed upon Jim Culley and purported waivers of Jim Culley's rights, it contains not a single reciprocal obligation undertaken or right waived by Clarendon. Rather, Jim Culley's purported promises under the Draft Guarantee were made only "in consideration of the mutual promises exchanged in the [Draft GAA]." (See Ex. A, p. 41.) As explained above, the parties' discussions concerning the Draft GAA never gave rise to a valid and binding contract. There were no "mutual promises exchanged" and the parties never entered into the Draft GAA. In short, Clarendon gave no

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consideration for Jim Culley's purported guarantee, and therefore the guarantee is not binding. Walcutt, 13 N.Y.2d at 56.

III.

THE CLAIM AGAINST CHRIS CULLEY MUST BE DISMISSED BECAUSE THE ALLEGED OBLIGATIONS ARE OUTSIDE THE SCOPE OF THE GUARANTEE A cardinal rule of guaranties is that "the liability of a surety cannot be extended beyond

the plain and explicit language of the contract." 63 N.Y. Jur.2d, Guaranty and Suretyship 89 (1987). It is very well established that the obligations of a guarantor or surety are construed strictissimi juris, and that "the court must protect the surety against a liability which is not strictly within the terms of the contract [of suretyship]." People v. Stuyvesant Ins. Co., 413 N.Y.S.2d 843, 846-47, 98 Misc. 2d 210 (1979). See also Fed. Ins. Co. v. Turner Constr. Co., 779 F. Supp. 2d 345, 354 (S.D.N.Y. 2011) ("after the meaning of the language used has been thus ascertained, the responsibility of the surety is not to be extended or enlarged by implication or construction, and is strictissimi juris.") In other words, "[a] surety or guarantor is not liable for moneys owed by his principal to the creditor on a contract other than the contract guaranteed." 63 N.Y. Jur.2d, Guaranty and Suretyship 113 (1987). There are two limitations on the Operative Guarantee that are relevant here. First, the Operative Guarantee only guaranteed Trust Funds, which are defined as "premiums or return premiums or other funds due the Companyunder the Policies covered by the Agency Agreement." (Ex. B, p. 42 (emphasis added).) Second, the Operative Guarantee only guaranteed Trust Funds that were due to Clarendon on or after October 1, 2003. (See Ex. B at 42 (the "General Agency Agreement [is] dated October 1, 2003 (the "Agency Agreement"); see also Ex. C at 117:21-118:6. ("Q: The guarantee that is supposedly a valid guarantee with regard to Chris Culley, that guarantee

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covered premiums that were due to Clarendon on or after October 1, 2003; is that correct? A: Correct. Q: Did they cover premiums that were due to Clarendon before October 1, 2003? A: Chris Culley's personal guarantee? No, I don't think so.")) Clarendon is seeking approximately $2.2 million from Chris Culley based on two alleged breaches. However, each of the breaches fall outside the scope of the Operative Guarantee. First, Clarendon alleges that IUI failed to remit somewhere between $1,647,289.65 and $1,909,525.15 for Clarendon insurance policies for which IUI was the managing general agent and IUI of Georgia, Inc. ("IUIGA") and/or its predecessor, Insurance Interchange, Inc., was the wholesale agent. (Ex. I 57, 58.) But those premiums were due and payable on or before January 31, 2002. (See Ex. C 139:18-23 ("Q: So the approximately $1.6 million in premiums that are referenced in Paragraph 57 of the complaint are attributable to policies that were written sometime in or before January of 2002, correct? A: Correct.")) Thus, the $1.6 million to $1.9 million that Clarendon alleges it is owed as a result of the Georgia scheme are not covered by the Operative Guarantee, which only guarantees premiums due and payable on under policies issued after October 1, 2003. Accordingly, Chris Culley cannot be liable for the payment of premiums that were due before October 1, 2003. Clarendon is also seeking $322,988.29 from Chris Culley, which "represents the minimum amount of premiums that remain unpaid to Clarendon as a result of the Texas misappropriation scheme." (Ex. I 67.) To the extent that Clarendon is claiming that Chris Culley must pay Clarendon an amount outstanding on a restitution order issued by a Texas court against the Cooks, this argument fails because money payable pursuant to a restitution order or a settlement agreement do not

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constitute Trust Funds. Trust Funds are funds due to Clarendon "under the Policies covered by the Agency Agreement." (Ex. B at 42 (emphasis added).) To the extent that Clarendon is claiming that the restitution order simply calculates the amount of premiums it was owed in the past, it is barred by the statute of limitations. The claim for unpaid premiums accrued more than six years before the April 16, 2011 filing of this action. It is undisputed that the only funds due to Clarendon pursuant to any insurance policies related to the Texas scheme were due and payable to Clarendon on or before December 31, 2004. (See Ex. C at 147:14-16 ("Q: And when did the [Texas] misappropriation scheme take place, what years? A: Previous to 2005."); see also id. at 317:12-24.)) In short, Clarendon is seeking to extend either (i) the statute of limitations or (ii) the scope of the Operative Guarantee. Neither one is allowed. Accordingly, Clarendon's claims must fail.

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CONCLUSION For the foregoing reasons, Defendants Jim Culley and Chris respectfully summary judgment on both of Clarendon's claims.

Dated: New York, New York March 9, 2012

BY: Rishi Bhandari Evan Mandel B. Rudolph Delson MANDEL BHANDARI LLP 11 Broadway, Suite 615 New York, NY 10004 T: (212) 269-5600 F: (646) 964-6667 rb@mandelbhandari.com em@mandelbhandari.com delson@mandelbhandari.com

Attorneys for Defendants James C. Culley and James K. Culley

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