J.F. Walker Company v. Excalibur Oil Group, Inc.

1 This is an appeal from a judgment entered January 19, 2001 following
the trial court's affirmance of its non-jury verdict in a breach of contract
case. For the reasons that follow, we vacate that judgment and remand for
entry of judgment in favor of appellant in an amount to be determined by
the trial court.

2 The factual and procedural history of this case can be briefly stated.
J.F. Walker Co., Inc. ("seller") is the successor-in-interest to Standard
Distributors, Inc. d/b/a/ Whitman Candy Company ("Standard Distributors").
In April of 1996, Standard Distributors entered into a confidential credit
application and agreement with Excalibur Oil Group, Inc. ("buyer"). This
agreement allowed buyer to establish an account with seller for the purchase
of sundries such as cigarettes, candy, and snack foods for the convenience stores buyer ran in connection with the gasoline service stations it leased
and operated. The agreement included a guaranty executed by James F.
Schons ("surety"), buyer's president and sole shareholder, personally and
unconditionally guaranteeing payment of any and all debts buyer owed to
Standard Distributors.

3 In July of 1996, Standard Distributors was dissolved and liquidated,
and its assets were distributed to its sole shareholder, seller, by way of an
assignment and transfer of all assets, including accounts receivable. From
July of 1996 through November of 1996, buyer continued to accept goods
delivered by seller instead of Standard Distributors, and paid seller's invoices
for the goods. In November of 1996, however, buyer began to experience
financial difficulties and stopped paying the invoices in full. By January 14,
1997, buyer owed seller $54,241.77 for goods delivered. As a result, seller
dealt with buyer only on a C.O.D. basis from January 1997 until some time
in early 1998, when buyer's stores closed.

4 On March 22, 1999, seller filed a three-count complaint against buyer
and surety: 1) breach of contract against buyer; 2) breach of contract
against surety; and 3) quantum meruit against buyer. The trial court, the
Honorable Richard G. Zeleznik, held a non-jury trial on September 20, 2000,
after which he entered an order on October 6, 2000 finding "for the
defendants." In response, seller filed a motion for post-trial relief.
Judge Zeleznik then filed an opinion on December 6, 2000 in which the only issue he addressed in any detail was surety's liability to seller under the
guaranty agreement, and stated, "The Non-Jury Verdict dated October 3,
2000 was a proper disposition." Seller timely filed this appeal on
December 19, 2000.1

5 Seller raises the following issues on appeal:

I. WHETHER THE HONORABLE TRIAL JUDGE
COMMITTED AN ERROR OF LAW AND/OR
ABUSED HIS DISCRETION WHEN RULING IN
FAVOR OF EXCALIBUR ON THE BREACH OF
CONTRACT CLAIM ASSERTED BY J.F. WALKER,
WHERE THE WEIGHT OF THE EVIDENCE
PRESENTED AT TRIAL ESTABLISHES THAT
EXCALIBUR BREACHED THE TERMS OF AN
AGREEMENT TO PAY FOR GOODS PROVIDED
IN ACCORDANCE WITH J.F. WALKER'S
INVOICES BY FAILING TO PAY J.F. WALKER'S
INVOICES FOR GOODS WHICH WERE
PROVIDED TO AND ACCEPTED BY EXCALIBUR?

II. WHETHER THE HONORABLE TRIAL JUDGE
COMMITTED AN ERROR OF LAW AND/OR
ABUSED HIS DISCRETION WHEN RULING IN
FAVOR OF EXCALIBUR ON THE QUANTUM
MERUIT CLAIM ASSERTED BY J.F. WALKER,
WHERE THE WEIGHT OF THE EVIDENCE
PRESENTED AT TRIAL ESTABLISHES THAT
EXCALIBUR RETAINED THE BENEFITS OF
GOODS PROVIDED BY J.F. WALKER WITHOUT
PAYING VALUE FOR SUCH GOODS?

III. WHETHER THE HONORABLE TRIAL JUDGE
COMMITTED AN ERROR OF LAW AND/OR
ABUSED HIS DISCRETION WHEN
DETERMINING THAT THE GUARANTY SIGNED
BY SCHONS WAS NOT ENFORCEABLE BY
J.F. WALKER AGAINST SCHONS, WHERE THE
GUARANTY WAS TRANSFERRED TO
J.F. WALKER BY WAY OF A CORPORATE
DISTRIBUTION AND/OR ASSIGNMENT, WHERE
THE GUARANTY DID NOT STATE THAT IT WAS
NOT ASSIGNABLE AND DID NOT REQUIRE
SCHONS' CONSENT TO THE ASSIGNMENT,
AND WHERE THERE WAS NO MATERIAL
MODIFICATION IN THE CREDITOR-DEBTOR
RELATIONSHIP WHICH DISCHARGED SCHONS
OF HIS OBLIGATIONS UNDER THE GUARANTY?

Appellant's brief at 4.

6 We review a claim that the verdict is against the weight of the
evidence by asking whether the trial court abused its discretion. A challenge
to the weight of the evidence requires the assessment of the credibility of
testimony offered by the verdict winner, and requires that the verdict be so
contrary to the evidence as to shock one's sense of justice.
Commonwealth v. Thompson, 538 Pa. 297, 316, 648 A.2d 315, 324
(1994). In addition, this court has held that "We are not free to answer the
underlying question of whether we believe that the verdict is against the
weight of the evidence. . . ." Commonwealth v. Ragan, 653 A.2d 1286,
1287 (Pa.Super. 1995).

7 "Three elements are necessary to plead properly a cause of action for
breach of contract: ‘[(1)] the existence of a contract, including its essential
terms, (2) a breach of a duty imposed by the contract and (3) resultant damages.'" Williams v. Nationwide Mut. Ins. Co., 750 A.2d 881, 884
(Pa.Super. 2000), quoting Corestates Bank Nat'l. Assn. v. Cutillo, 723
A.2d 1053, 1058 (Pa.Super. 1999). Additionally, it is axiomatic that a
contract may be manifest orally, in writing, or as an inference from the acts
and conduct of the parties. John Edward Murray, Jr., Cases and Materials on
Contracts 184 (3rd ed. 1983) (citation omitted).

8 In this case, in addition to the evidence of a written credit application
and agreement between Standard Distributors and buyer, seller presented
its invoices for goods buyer accepted following Standard Distributor's
dissolution. Surety, as president and sole shareholder of buyer, admitted
that buyer received invoices and goods from seller with seller's name on the
invoices, and that buyer continued to accept and pay for seller's goods, in
whole or in part. (Notes of testimony, 9/20/00 at 46-48.) Seller also
introduced into evidence statements showing amounts due and owing for
goods delivered to two of buyer's convenience stores in the amounts of
$25,184.74 and $29,057.03, and surety admitted he was aware buyer had
not made those payments. (Id. at 48-49.) Seller's agent testified that in
his meetings with surety, surety never indicated that the goods had not
been delivered or were unsatisfactory, or that buyer did not owe the
amounts reflected on the invoices and statements. (Id. at 37-38.) Thus,
the verdict winners, buyer and surety, presented absolutely no evidence
challenging seller's claims for breach of contract. As a result, we find the trial court abused its discretion when it found in favor of buyer and surety on
the breach of contract counts.

9 Similarly, buyer and surety presented absolutely no evidence
challenging seller's claim for damages under its theory of quantum meruit
or unjust enrichment. To establish such a claim, seller was required to
prove a benefit conferred on the defendant by the plaintiff, appreciation of
such benefit by the defendant, and acceptance and retention of such benefit
under circumstances that would create an inequity if defendant retained the
benefit without payment. Mitchell v. Moore, 729 A.2d 1200, 1203
(Pa.Super. 1999) (citation omitted). "In determining whether the doctrine
applies, our focus is not on the intention of the parties, but rather on
whether the defendant has been unjustly enriched." Id. at 1204.

10 In this case, surety, as buyer's president, admitted that buyer
accepted seller's goods and did not pay for them, and seller presented
evidence that it expected to be paid for the goods. (Notes of testimony,
9/20/00 at 33-34.) Furthermore, the trial transcript contains nothing
indicating buyer believed it was not obligated to pay for the goods. Thus,
we find the trial court abused its discretion when it found in favor of buyer
on the quantum meruit count.

11 In its third issue, seller claims the trial court committed an error of law
when it found surety's guaranty unenforceable by seller. According to the
trial court, the guaranty was a "special guaranty," which ran solely to Standard Distributors and therefore could not be enforced by seller. (Trial
court opinion, 12/6/00 at 2.) Furthermore, according to the trial court,
surety was an uncompensated, gratuitous guarantor, whose obligations were
not to be extended by implication or construction. (Id.) We have reviewed
the cases both parties cite, and agree with seller that the trial court
committed an error of law under the facts of this case.

12 "Customarily, a suretyship arrangement arises when a creditor refuses
to extend credit to a debtor unless a third party (the surety) agrees to
provide additional security for repayment of the debt by undertaking the
debtor's obligation to the creditor if the debtor fails to perform."
Continental Bank v. Axler, 510 A.2d 726, 729 (Pa.Super. 1986) (citations
omitted). "Usually, suretyship problems arise because the three-party
structure of a suretyship becomes dynamic rather than remaining static."
Id. "Cognizant of the problems posed by the three-party composition of
suretyships, Pennsylvania courts have uniformly recognized that where the
creditor and the debtor materially modify the terms of their relationship
without obtaining the surety's assent thereto, the surety's liability may be
affected. Id. (citations omitted).

13 As the Continental Bank court continued, "A material modification in
the creditor-debtor relationship consists of a significant change in the
principal debtor's obligation to the creditor that in essence substitutes an
agreement substantially different from the original agreement on which the surety accepted liability." Id., citing Koch v. Moyer & Burkhart, 158 A.
198 (1931); Restatement of Security § 128, cmt. d. Furthermore,
Pennsylvania courts have consistently differentiated between gratuitous
(uncompensated) sureties and sureties who are compensated:

While we have held that in cases of corporate
sureties the bond is to be strictly construed in favor
of the obligee, we have also held that, when
obligations of suretyship or indemnity are assumed
by individuals without pecuniary compensation, their
obligations are not to be extended by implication or
construction. Their liability is strictissimi juris.[2]

Barratt v. Greenfield, 9 A.2d 188, 189 (Pa.Super. 1939). More recently,
this court stated, "Where, without the surety's consent, there has been a
material modification in the creditor-debtor relationship, a gratuitous
(uncompensated) surety is completely discharged." Continental Bank, 510
A.2d at 729 (citations omitted). In contrast, "[a] compensated surety is
discharged only if, without the surety's consent, there has been a material
modification of the creditor-debtor relationship and said modification has
substantially increased the surety's risk." Id., citing Restatement of
Security § 128(b) (other citation omitted); accord Reliance Ins. Co. v.
Penn Paving, Inc., 557 Pa. 439, 448-449, 734 A.2d 833, 837-838 (1999).
14 Our review of the testimony in this case compels us to conclude that
surety was not, as the trial court found, a gratuitous (uncompensated) surety. While it is true that surety testified he had not been compensated
for signing the guaranty, we do not agree that the sole shareholder in a
corporation is "uncompensated" when, in exchange for his guarantee, a
creditor extends a line of credit to the corporation in which he owns all
shares. We rely on First National Bank of East Conemaugh v. Davies,
315 Pa. 59, 172 A. 296 (1934), in reaching this conclusion.

15 In Davies, "defendants, who were all but two of the directors of the
Navy Smokeless Coal Company, a corporation, became sureties for the
payment of obligations issued or assumed by the corporation and, at that
time, held by the plaintiff bank." Id. at 60-61, 172 A. at 296-297. Some of
these obligations, in the form of certificates, were treated by both the bank
and the sureties as the corporation's lines of credit. Id. at 63, 172 A. at
298.

16 When the corporation defaulted on its obligations, the bank sought
payment from the co-sureties. As the Davies court noted, "Defendants, in
their brief, contend that, by surrendering the trade acceptances and
accepting the note of the corporation for the balance due without their
consent, the bank released the sureties." Our supreme court disagreed,
however, opining:

If defendants had been gratuitous sureties
(American Trust Co. v. Louderback, 220 Pa. 197,
69 A. 673, 16 L.R.A. (N.S.) 775), the contention
would merit consideration; but they, as directors of
the coal company and otherwise interested in the
transaction leading up to the suretyship contract, are in a different class. As was said in Cancelmo's
Estate, 308 Pa. 178, 162 A. 454, in such
circumstances the rule strictissimi juris does not
apply.

Davies, 315 Pa. at 64, 172 A. at 298.

17 Surety in this case, like the co-sureties in Davies, was "otherwise
interested in the transaction leading up to the suretyship contract[.]" Id.;
therefore, the rule strictissimi juris does not apply. As a result, surety's
obligation could only be discharged if a material modification in the creditordebtor
relationship substantially increased his risk. See Continental Bank,
510 A.2d at 729. Clearly, such is not the case under the facts before us.
18 Even assuming arguendo that surety in this case was a gratuitous
surety, we would find, as did the court in Continental Bank, that surety
has not made a threshold showing of a material modification, as this court
defined that term in Continental Bank. While it is true that the guaranty
named Standard Distributors, not seller, as the creditor, seller was the sole
shareholder in Standard Distributors, whose assets, including accounts
receivable, were assigned to seller when Standard Distributors was
dissolved. Nothing in the guaranty precluded its assignment. Furthermore,
buyer's obligations and surety's liability remained exactly the same after the
assignment as they had been before: to pay for the same sorts of goods Standard Distributors had previously delivered within ten days of delivery by
seller. (Confidential Credit Application and Agreement, Plaintiff's Exhibit A.)3

19 While we have found no Pennsylvania cases directly addressing
whether a creditor's assignment of a debt to another creditor constitutes a
material modification, we find the analysis in Continental Bank helpful. In
that case, co-sureties, the Axlers, contended that their co-suretyship was
discharged when they sold their interest in the debtor corporation, North
Broad, to a non-surety. Continental Bank, 510 A.2d at 727. This court
found, however, that the co-sureties were not discharged because the
suretyship agreement they signed provided that the co-sureties waived all
notices of North Broad's adverse change of financial condition and any other
fact that might materially increase their risk, and that they would be
obligated for the liabilities of any other company that might be a successor
to North Broad. The agreement further provided that the co-sureties'
suretyship would continue until the co-sureties paid all of debtor
corporation's liabilities. Id. at 730.

20 Similarly, in this case, the unconditional guaranty surety signed
provided that it "shall continue notwithstanding any change in the form of
such indebtedness or renewals or extensions granted by Standard
Distributors, Inc, without the necessity of obtaining [surety's] consent." The guaranty also waived notice of acceptance of the guaranty by Standard
Distributors, and waived notice of default or non-payment. While the
guaranty did not contain language obligating surety for the liability of a
successor corporation as did the Continental Bank guaranty, we do not
find this distinction critical. In Continental Bank, the co-sureties were
assuming the liability of the debtor corporation's successors, a material
modification that could increase the co-sureties' risk and would therefore
require express consent. In this case, in contrast, the surety was not asked
to assume the liability of a successor corporation; he was merely asked to
honor the same liability he originally assumed on behalf of debtor to the
creditor corporation's successor. Thus, this case, unlike the facts in
Continental Bank, does not present "a significant change in the principal
debtor's obligation to the creditor that in essence substitutes an agreement
substantially different from the original agreement on which the surety
accepted liability." Continental Bank, 510 A.2d at 727.

* * *

Click the case caption above for the full text of the Court's opinion.

¶21 For all of the foregoing reasons, we are constrained to vacate the
judgment and remand for entry of judgment in favor of seller in an amount
to be determined by the trial court.

¶22 Judgment in favor of appellees is vacated. Case is remanded for entry
of judgment in favor of seller in an amount to be determined by the trial
court. Jurisdiction is relinquished.

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