                                                                                                                           Opinions of the United
2001 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


11-26-2001

Garden State Tanning v. Mitchell Mfg Grp Inc
Precedential or Non-Precedential:

Docket 00-2432




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Recommended Citation
"Garden State Tanning v. Mitchell Mfg Grp Inc" (2001). 2001 Decisions. Paper 274.
http://digitalcommons.law.villanova.edu/thirdcircuit_2001/274


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Filed November 23, 2001

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 00-2432

GARDEN STATE TANNING, INC.

v.

MITCHELL MANUFACTURING GROUP, INC.; MITCHELL
CORPORATION OF OWOSSO; THE LAMONT GROUP,
INC.; MITCHELL MANUFACTURING GROUP, a LAMONT
GROUP COMPANY, formerly known as LAMONT GROUP
ACQUISITION CORP.
       Mitchell Automotive, Inc.
       f/k/a Mitchell
       Manufacturing Group, Inc.
       and Mitchell Corporation of
       Owosso, Appellants.

APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. No. 98-cv-04789 )
Trial Judge: Magistrate Judge Jacob P. Hart

Argued September 24, 2001

Before: ROTH, WEIS and GARTH, Circuit Judges

(Filed: November 23, 2001)
       Erik G. Chappell, Esquire
        (ARGUED)
       Daniel J. Dugan, Esquire
       McHugh, DeNune & McCarthy
       5580 Monroe Street
       Sylvania, Ohio 43560

       Attorneys for Appellants

       Walter H. Flamm, Jr.,
        Esquire (ARGUED)
       Robert E. Walton, Esquire
       Brian W. Waering, Esquire
       J. Bryan Tuk, Esquire
       Flamm, Boroff & Bacine, P.C.
       Union Meeting Corporate Center
       925 Harvest Drive, Suite 220
       Blue Bell, Pennsylvania 19422

       Attorneys for Appellee

OPINION OF THE COURT

WEIS, Circuit Judge.

In this diversity case arising under Pennsylvania law,
defendant Mitchell Corporation of Owosso ("Owosso")
appeals from a judgment on a jury verdict based on a
guaranty for payment of goods furnished to its subsidiary.
Owosso argues that the guaranty was abrogated when the
subsidiary was sold to another corporation. We will affirm.

Owosso has been involved in the production of interior
automotive trim for many years. In 1996, the company
created a subsidiary called "Mitchell Manufacturing Group,
Inc.," whose function was to process leather for use by auto
manufacturers. Owosso's goal was ultimately to sell this
subsidiary.

Since its inception, the subsidiary had obtained leather
from plaintiff Garden State Tanning, Inc. By 1997, Mitchell
Manufacturing's account had become so delinquent that
Garden State demanded Owosso's guaranty for payment of

                                  2
its subsidiary's invoices. Owosso complied and, in a letter
to Garden State dated September 8, 1997, stated:

       "We, Mitchell Corporation of Owosso, the parent
       company of Mitchell Manufacturing Group, Inc., do
       promise to pay in full all monies owed to you for goods
       received in the event Mitchell Manufacturing Group,
       Inc. do not pay.

       This letter is renewable in one year if needed."

Soon thereafter, Owosso began discussing with the Lamont
Group the possibility of its purchasing Mitchell
Manufacturing.

On March 3, 1998, Helen Malik, Secretary and Treasurer
of both Owosso and Mitchell Manufacturing, wrote to
Garden State that Owosso was "in the process of closing on
the sale of Mitchell Manufacturing Group, Inc. to a minority
group. . . . We are requesting that we be removed from COD
payment requirements as of February 27, 1998." The letter
then recited the precise language of the September 8, 1997
guaranty.

Garden State responded in a letter dated March 6, 1998,
that "with the continuing guarantee of [Mitchell
Manufacturing parent] Owosso," the COD payment
arrangements would be removed. The letter continued,

       "There are several things on which we'll need to agree
       as we put the change in place. When the sale of
       [Mitchell Manufacturing] occurs I'll need to update our
       credit files and will be sending you the necessary
       paperwork. We'll need to know whether the guarantee
       of [Owosso] will be affected by the sale and, if so, to
       what extent? If the guarantee stays fully in place we
       will not, at this time, set formalized credit limits for
       [Mitchell Manufacturing]. However, since [Mitchell
       Manufacturing] is already on `net prox 30' terms, we
       reserve the right to set such limits should [Mitchell
       Manufacturing's] account status fall more than thirty
       (30) days past due and contact [Owosso] directly for
       payment. We will get in touch with you personally, or
       anyone else whom you designate, before either of these
       takes place.

                               3
       Please let me know if this is acceptable."

Although that   letter was addressed to Ms. Malik, William F.
Mitchell, the   president of Owosso, wrote "OK W.F. Mitchell"
at the bottom   of the document. A copy of the letter with
this notation   was then faxed to Garden State.

On April 22, 1998, Owosso sold substantially all of
Mitchell Manufacturing's assets, along with the Mitchell
Manufacturing name, to the Lamont Group. Lamont then
changed its name to "Mitchell Manufacturing Group, a
Lamont Group Company." The Owosso subsidiary was
renamed "Mitchell Automotive, Inc."

Garden State asserted that it was not advised of the
exact date of the sale and so continued to ship goods to the
same company -- "Mitchell Manufacturing"-- at the same
address as it had previously. By April 22, 1998, Mitchell
Manufacturing had incurred more than $2,780,000 in
unpaid invoices for Garden State leather. After Owosso sold
its subsidiary, Garden State sent an additional $1,370,000
in goods, all on credit, to Mitchell-Lamont.

The record does not indicate when Garden State learned
of the Mitchell Manufacturing sale. On June 3, 1998,
however, its credit manager wrote Ms. Malik requesting a
corrected version of the guaranty. Specifically, he stated:

       "it would be helpful if you adjusted the [Owosso]
       guarantee to reflect the presence of the Lamont Group
       and the change in the relationship between Mitchell
       Manufacturing Group, Inc. and [Owosso] (no longer the
       "parent company"?)."

The following day, Ms. Malik responded that Mitchell
Manufacturing had been sold to the Lamont Group on April
22, 1998 and that Owosso was no longer the parent
company. She also represented that Lamont had assumed
the "liability of the payables of Mitchell Manufacturing
Group, Inc." when it purchased the company.

Owosso denied liability for any of the Mitchell debt, and
the dispute proceeded to litigation. Based on the"OK W. F.
Mitchell" notation on Garden State's March 6, 1998 letter,
along with other factors, including the text of the parties'
correspondence and deposition testimony, the District

                                 4
Court found the existence and extent of the guaranty
agreement ambiguous. Accordingly, the matter was
submitted to a jury presided over by a Magistrate Judge
pursuant to 28 U.S.C. S 636.

The jury returned a special verdict finding Owosso liable
for $2,783,391.10, the total cost of goods Garden State had
shipped to Mitchell Manufacturing before April 22, 1998.
The jurors also held Owosso responsible for $1,365,619.82
for the leather supplied to Mitchell-Lamont. The Magistrate
Judge then added prejudgment interest, bringing the total
judgment against Owosso to $4,636,515.59.1

Owosso's appeal raises a number of objections, none of
which amounts to reversible error.

Owosso contends that the Court erroneously failed to
require the jury to consider the doctrine of strictissimi juris
in interpreting the guaranty contract. We conclude that the
principle has no application here.

The difference between the interpretation and
construction of contracts is discussed in Ram Construction
Co., Inc. v. American States Insurance Co., 749 F.2d 1049
(3d Cir. 1984). When an ambiguity exists in the agreement,
the problem is one of interpretation. If, however, the terms
are clear, construction of the contract determines its legal
operation. 749 F.2d at 1052-53.

The paramount goal of contract interpretation is to
determine the intent of the parties. Meeting House Lane,
Ltd. v. Melso, 628 A.2d 854, 857 (Pa. Super. 1993)
(guaranty contracts subject to same rules of interpretation
as other agreements). There is no special standard of
interpretation for contracts creating secondary obligations.
Restatement (Third) of Suretyship & Guaranty S14 cmt. c
(1996). Therefore, to the extent that there was uncertainty
about the terms of the guaranty agreement, the issue was
properly submitted to the jury.

Owosso's argument supporting the application of
_________________________________________________________________

1. Judgments have also been entered against Mitchell Automotive, Inc.
and Mitchell-Lamont. Owosso is presently in bankruptcy and has
obtained leave to pursue this appeal.

                               5
strictissimi juris relies on a passage from the case of Pure
Oil Co. v. Shlifer, 175 A. 895 (Pa. Super. 1934). In that
action on a suretyship contract, the Pennsylvania Superior
Court quoted the trial court:

       "It is well settled that, after the intention of the parties
       or the scope of the guarantor's undertaking has been
       determined by the ordinary rules of construction
       [interpretation] either from the instrument itself or
       from the instrument and the surrounding
       circumstances, the rule of strictissimi juris applies, that
       is, that the guarantor is entitled to have his
       undertaking as thus determined strictly construed, and
       that it cannot be extended by construction or
       implication beyond the precise terms of his contract
       . . . ."

175 A. 895, 898.

Although this rule of construction in suretyship is
accurate with regard to gratuitous guaranties assumed by
individuals, the Pennsylvania Supreme Court has long held
that the principle of strictissimi juris does not apply to
"corporate compensated sureties." Fiumara v. Am. Sur. Co.
of New York, 31 A.2d 283, 287 (Pa. 1943); City of
Philadelphia v. Nat'l Sur. Co., 173 A. 181, 182 (Pa. 1934)
("[T]he rule of strict construction applied to individuals as
sureties does not apply to paid sureties."). Cf. Meyer v.
Indus. Valley Bank & Trust Co., 239 A.2d 371, 373 (Pa.
1968) (material alteration in surety agreement made
without consent of gratuitous surety operates as complete
discharge of surety's obligation).

The rationale underlying this distinction is easily
understood: corporate suretyship, "an undertaking for
money consideration by a company chartered for the
conduct of such business, . . . is essentially an insurance
against risk." Brown v. Title Guar. & Sur. Co., 81 A. 410,
410-11 (Pa. 1911). These guarantors "may call themselves
`surety companies,' [but] their business is in all essential
particulars that of insurance. Their contracts are usually in
the terms prescribed by themselves, and should be
construed most strictly in favor of the obligee." Id. at 411;
see also Fiumara, 31 A.2d at 288 (in Pennsylvania,

                               6
corporate compensated surety is considered practical
equivalent of insurance company).

The distinction drawn between compensated and
gratuitous suretyship is significant, particularly because
the Pennsylvania Supreme Court has not yet had occasion
to rule on the application of strictissimi juris to a guaranty
similar to that now before us.

Moreover, the Superior Court appears increasingly
reluctant to apply that principle to guaranty agreements
entered into for profit. Compare, e.g. , Robert Mallery Lumber
Corp. v. B. & F. Assocs., Inc., 440 A.2d 579, 582 (Pa. Super.
1982) (language of guaranty contract was not ambiguous,
but if it were, it would be strictly construed against the
guarantor-bank), with Continental Bank v. Axler , 510 A.2d
726, 729 (Pa. Super. 1986) ("A compensated surety is
discharged only if, without the surety's consent, there has
been a material modification in the creditor-debtor
relationship and said modification has substantially
increased the surety's risk.") (emphasis added), and Meeting
House Lane, 628 A.2d at 857.

The Pennsylvania Superior Court is not alone in its
reluctance to apply the strictissimi juris principle. The
United States Supreme Court stated nearly a century ago
that the doctrine is "a stringent one, and . . . . one which
ought not to be extended to contracts not within the reason
of the rule, particularly when the bond is underwritten by
a corporation which has undertaken for a profit to insure
the obligee." United States ex rel. Hill v. Am. Sur. Co. of New
York, 200 U.S. 197, 202 (1906).

The Restatement articulates the modern antipathy
toward the doctrine: "Older cases applied very strict rules
. . . . As time passed, courts became unsatisfied with a rigid
application of this doctrine" and began to retreat from it,
particularly in cases involving more sophisticated corporate
guarantors. Restatement (Third) Suretyship & Guaranty
S 37 cmt. a.

The courts' disillusionment with strictissimi juris is not
difficult to understand. The doctrine protected secondary
obligors who entered into guaranty agreements for reasons
involving familial or neighborly affection and who did not

                                7
profit financially from the transaction. But the rule was
problematic when applied to those secondary obligors who
were in the business of underwriting debt for monetary
benefit.

Rigid application of the doctrine allowed secondary
obligors to avoid substantial secondary obligations solely on
the basis of minor, immaterial changes in the relationship
between the principal obligor and obligee. The
consequential windfalls inuring to those secondary obligors
often exceeded any harm caused by the obligee's acts. Id.

Owosso asserts that it was a gratuitous guarantor and,
therefore, the jury was required to strictly construe the
agreement. Nothing in the circumstances, however,
suggests that the guaranty here was motivated by selfless
generosity. On the contrary, the record indicates that
Owosso was negotiating for the sale of Mitchell
Manufacturing as early as autumn of 1997. Certainly, it
was in Owosso's best financial interest to maintain or
increase the subsidiary's value by keeping it in operating
condition. It can hardly be said that the guaranty, without
which Mitchell Manufacturing would have lost its raw
material supply, was wholly munificent in nature.

We are confident that the Pennsylvania Supreme Court
would reject Owosso's claim to gratuitous guarantor status
and would instead follow the modern trend away from the
doctrine of strictissimi juris. See, e.g., Northern Ins. Co. v.
Aardvark Assocs., 942 F.2d 189, 193 (3d Cir. 1991)
("Although we are not bound in a diversity case to follow
decisions of a state intermediate appellate court, we are
instructed that such decisions are not to be disregarded by
a federal court unless it is convinced by other persuasive
data that the highest court of the state would decide
otherwise.") (internal quotations omitted).

Even if this guaranty were held to be gratuitous,
Owosso's claim to strict construction would fail. The
Pennsylvania Supreme Court has indicated that it will not
discharge gratuitous guarantors on the basis of
modifications in the creditor-debtor relationship where the
guarantor's consent to these changes has been obtained.
See Meyer, 239 A.2d at 373. Here there is no question of

                               8
consent to changes in the agreement, because the
guarantor itself was the driving force in bringing about the
revision. It was Owosso that sold the assets of Garden
State's debtor; the former parent company cannot now
claim surprise or ignorance of the resulting effect on its
interests.

Owosso has misinterpreted the rule of strictissimi juris to
apply to interpretation as well as to construction of the
agreement. As noted above, we predict that Pennsylvania
would not apply that doctrine in this case and in any event
the question for the jury was one of interpretation.
Owosso's contention that the guaranty applied only to
invoices pending at the time it was issued is unconvincing.
The jury had ample reason to interpret the letters of
September 8, 1997 and March 3, 1998 as effective
continuing guarantees of Mitchell Manufacturing's
obligations to Garden State. Particularly in light of the
September 8, 1997 letter, which stated that the guaranty
would be renewable in one year if needed, it is doubtful
that the jury could have concluded otherwise.

The findings on the Mitchell-Lamont invoices rest on
somewhat different grounds. Essentially, the claim for debts
accrued after the sale to the Lamont Group is based on the
"OK" of Owosso's President Mitchell, affixed to Garden
State's letter of March 6, 1998. The jury was entitled to
consider this notation as evidence that Owosso would
adhere to its guaranty after the sale, at least until it
notified Garden State otherwise.

At first glance, it would appear unusual for Owosso to
maintain the guaranty after the sale to Lamont. Garden
State, however, did not know the details of the transfer,
and the company to which it continued to ship its goods
after the sale bore the same name and mailing address.
Garden State could reasonably have surmised that Owosso
sold less than all of Mitchell Manufacturing's assets, or
perhaps exchanged stock, or that under the terms of the
arrangement, it was important to Owosso that Lamont
continue to receive leather supplies. The jury might also
have considered it highly significant that Owosso never
communicated its intent to revoke the guaranty until
contacted by Garden State in June 1998.

                               9
In addition, we note that the jurors might well have been
impressed with the fact that Garden State, relying on
Owosso's guaranty, shipped substantial amounts of leather
to Mitchell-Lamont, a course of action it likely would not
have followed in the absence of the guaranty.

Owosso also complains that the District Court erred in
refusing to admit evidence that Garden State ignored pre-
set credit limits although the unpaid invoices of Mitchell
Manufacturing and Mitchell-Lamont were rapidly
burgeoning. Although Garden State had set an internal
credit limit of $1 million on Mitchell Manufacturing, this
information was never conveyed to Owosso. Accordingly,
there was no basis on which the guarantor could invoke
that limit. The ruling excluding that evidence is not
reversible.

Owosso also argues that the imposition of prejudgment
interest was in error. We find no merit to that issue, nor to
Owosso's remaining contentions, which, we find, do not
warrant discussion.

Accordingly, the judgment of the District Court will be
affirmed.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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