## Facts

- An industrial development agency (IDA) financed a facility for Major Building Products Wholesalers, Inc. through a $1.1 million nonrecourse bond purchased by a bank later merged into Chemical Bank.
- To secure the bond obligations, the IDA granted the bank a first mortgage on the facility and assigned a lease under which Major’s rent payments matched the bond’s debt service; after payoff, Major could buy the facility for $1.
- A written guaranty was executed by Major, its principal, and Bruce G. Meltzer (Major’s president), jointly and severally guaranteeing payment upon default; the guaranty included language stating liability “as a primary obligor and not merely as a surety.”
- In 1991, the bank made a separate second loan to Major secured by a second mortgage; Meltzer did not guarantee this later debt.
- After Major defaulted on lease payments in 1993, the IDA defaulted on the bond; the bank sued Meltzer on the guaranty.
- Meltzer offered to pay the bond debt in full if the bank would assign to him its rights in the bond, first mortgage, and related security, asserting a common-law subrogation right; the bank refused.
- The trial court and Appellate Division treated Meltzer as a guarantor/co-obligor (not a surety) and denied subrogation; the Court of Appeals granted review.

## Issues

1. Whether Meltzer’s obligation, though labeled a “guaranty” and stating he was a “primary obligor,” was in substance suretyship when the transaction documents are read together.
2. If Meltzer was a surety, whether paying the bond debt entitled him to equitable subrogation to the bank’s rights in the first mortgage and related security.

## Decision

- The Court of Appeals reversed.
- The court held that the guaranty was part of an integrated financing transaction and had to be read with the bond purchase agreement, lease, assignment, and mortgage.
- In substance, Meltzer’s obligation was secondary and contingent on default; he therefore qualified as a surety rather than a co-principal debtor.
- As a surety, Meltzer was entitled upon satisfaction of the bond debt to equitable subrogation to the bank’s rights, remedies, and securities supporting that debt, including the first mortgage and related collateral.

## Legal Principles

- Where a guaranty is an integrated component of a multi-document financing arrangement, the instruments should be construed together to determine the parties’ true obligations.
- Suretyship status turns on the substance of the transaction and allocation of performance risk, not isolated labels or boilerplate characterizations such as “primary obligor.”
- Absent a clear and effective waiver, a surety who pays the principal’s debt is equitably subrogated to the creditor’s rights in the collateral and security for that debt.
- Subrogation prevents a creditor from receiving full payment while retaining the benefit of security in a manner that would be inequitable to the paying surety.

## Conclusion

The court treated Meltzer as a surety based on the integrated transaction documents and held that, upon paying the bond debt, he could compel assignment through equitable subrogation of the bank’s first-mortgage security and related rights supporting the original bond financing.


Chemical Bank v. Meltzer, 93 N.Y.2d 296, 712 N.E.2d 656 (N.Y. 1999)