LaValley Bldg. Supply, Inc. v. Wallingford Plumbing & Heating, Inc., No. 187-3-11 Rdcv (Teachout, J., Oct. 13, 2011)

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                                                STATE OF VERMONT

SUPERIOR COURT                                                                                   CIVIL DIVISION
Rutland Unit                                                                                Docket No. 187-3-11 Rdcv



LAVALLEY BLDG. SUPPLY, INC.,
    Plaintiff

v.

WALLINGFORD PLUMBING & HEATING, INC., et al.
    Defendants



                                   DECISION
                   DEFENDANTS’ MOTION TO DISMISS, filed July 14, 2011


        This matter is before the court on the Motion to Dismiss filed on July 14, 2011, by
Defendant Margaret Brown. Ms. Brown is represented by Christopher P. Sullivan, Esq.
Plaintiff LaValley Building Supply, Inc. (“LaValley”) is represented by Ilerdon S. Mayer,
Esq.


                                                          Background

        LaValley’s Complaint alleges two theories of liability against Ms. Brown: breach
of contract and unjust enrichment. The breach of contract theory arises from a
commercial credit agreement between Mintzer Brothers, Inc. and Defendant Wallingford
Plumbing & Heating, Inc. (“Wallingford Plumbing”), signed in 1991. As part of this
agreement, Ms. Brown, along with her since-deceased husband, signed a personal
guaranty. She agreed to “individually … guarantee the prompt payment to Mintzer
Brothers, Inc., of all sums now or at any time hereafter due” from Wallingford Plumbing.
The contract is silent as to whether the personal guaranty is assignable. The contract is
also silent as to the duration of the personal guaranty.

       At the time of the agreement, Ms. Brown’s husband was the principal owner of
Wallingford Plumbing. He died in 1994. The Browns’ two sons then took over the
business until 1996 when one of Mr. Brown’s brothers became the principal owner.

       In 2001, LaValley acquired Mintzer Brothers. In 2009, Wallingford Plumbing
obtained building supplies from LaValley on credit. Wallingford Plumbing has not repaid
LaValley for these supplies, prompting LaValley to file this Complaint seeking to enforce
Ms. Brown’s personal guaranty.



                                          Analysis

       Ms. Brown moves to dismiss both the breach of contract count and the unjust
enrichment count. The question presented by the breach of contract count, whether Ms.
Brown’s personal guaranty was assignable, touches upon an unsettled area of the law,
which it is worth exploring in some detail.


                                    Vermont Case Law

        The issue turns on whether Ms. Brown’s personal guaranty was assignable and
can, therefore, be enforced by LaValley, Mintzer Brothers’ successor in interest. Ms.
Brown’s guaranty specifically named Mintzer Brothers as the obligee. This makes it what
is known as a “special guaranty.” There is a split in authority as to whether special
guaranties are assignable. No Vermont court has directly addressed this question.

        The leading recent Vermont Supreme Court decision addressing personal
guaranties is O’Brien Bros’s P’ship, LLP v. Plociennek, 2007 VT 105, 182 Vt. 409.
O’Brien is helpful because it lays out the background principles coloring the
interpretation of personal guaranties. Guaranties are interpreted according to the standard
contract rubric; if the guaranty is unambiguous as a matter of law, it will be given effect
according to its terms. Id. at ¶ 9. Guaranties are strictly interpreted in favor of the
guarantor. Id. at ¶ 11.

        The facts of O’Brien, however, are not directly on point here. O’Brien concerned
the renewal of a lease agreement originally secured by a personal guaranty. The guaranty
stated that it applied as to the terms and conditions of a specified lease and was silent as
to whether it applied to any extensions or modifications of that lease. Id. at ¶ 10. The
Vermont Supreme Court held “that a guaranty for a specific term does not apply to
extensions or renewals of the lease unless the continuing obligation of the guarantor is
expressly stated either in the personal guaranty, the original lease, or the subsequent lease
agreements.” Id. at ¶ 12. The guaranty here is for a continuing extension of credit to
Wallingford Plumbing by its supplier (first, Mintzer Brothers; then, LaValley). As the
agreement is of an ongoing nature, there is no issue as to any extension.

        General principles of assignability, derived from contract law, may also shade the
interpretation of this guaranty. In determining whether a contract is assignable, the
intention of the parties to the original transaction is the controlling factor. Smith, Bell &
Hauck, Inc. v. Cullins, 123 Vt. 96, 100 (1962). This is determined by examining the
entire contract. Id. The absence of words such as “heirs, successors, and assigns” in the
contract is not controlling but is relevant. H.P. Hood & Sons v. Heins, 124 Vt. 331, 339



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(1964). The assignability of agreements for an unlimited duration is disfavored so as to
avoid projecting “the obligation through successive assignments into perpetuity.” Id.
Contractual obligations that are “inherently personal” to the contracting parties are
generally not assignable. Smith, Bell & Hauck, Inc., 123 Vt. at 101-02.


                                 Out-of-State Case Law

        Here, Ms. Brown gave a personal guaranty to Mintzer Brothers. Because Mintzer
Brothers was a named party to be benefited by this guaranty, it is a “special guaranty.” 38
Am Jur. 2d Guaranty § 14. A special guaranty may ordinarily only be enforced by the
named party. Id. This case presents the thorny question of whether special guaranties are
assignable and enforceable by a corporate successor. In the words of the ALR author
addressing this issue: “Whether a guaranty given to a corporation may be enforced by a
successor to the corporation has resulted in conflicting decisions by the courts.”
Annotation, Who May Enforce Guaranty, 41 A.L.R. 2d 1213 (originally published in
1955); see also Kraft Foodservice, Inc. v. Hardee, 457 S.E.2d 596, 598 (N.C. 1995)
(“State courts have split on the issue of whether a guaranty addressed to a corporation
may be enforced by the corporation's successor.”).

                                 Common-Law Approach

        Traditionally, special guaranties could not be assigned, absent some specific
indication that the original parties intended the guaranty to be assignable. One example of
this approach is the Wyoming Supreme Court’s decision in Flying J, Inc. v. Booth, 773
P.2d 144 (Wyo. 1989). There, the court held that a personal guaranty was not enforceable
by the original obligee’s successor in interest, at least as to debts incurred after the
assignment. Id. at 148. The Booths signed a personal guaranty on behalf of a corporation
that operated a truck stop in order to allow for an extension of credit from Husky Oil Co.
to be used for the purchase of fuel and other supplies. Id. at 145. Husky Oil supplied the
truck stop under this agreement for almost ten years before Husky was acquired by
Flying J. Id. at 146. Credit continued to be extended after the assignment of the guaranty
to Flying J. Id. Ultimately, the corporation operating the truck stop defaulted, and Flying
J looked to enforce the guaranty against the Booths. Id.

        The Wyoming Supreme Court applied what it called “the common law rule” in
finding Husky’s assignment of the Booths’ special guaranty in favor of Husky to be
invalid. Id. at 147. It held that “when a written instrument names only a specific creditor,
there is no demonstration of an intent to make the instrument enforceable by someone not
named within it.” Id. The court concluded that contracts involving creditors, debtors, and
guarantors are inherently “personal,” and thus not assignable, because the guarantor will
have relied on the “circumstances and terms of the agreement between the debtor and the
creditor” as well as “their respective financial positions” in making the guaranty. Id. For
this reason, the court concluded that guaranties are generally not enforceable by the
successor in interest of the original obligee for debts incurred after the assignment even if
the business relationship continues as before. Id. at 148.



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                Pre-Assignment Debt vs. Post-Assignment Debt Approach

       This final piece of the Flying J court’s reasoning, concerning the difference
between credit extended before an assignment and credit extended after an assignment, is
supported by New Holland, Inc. v. Trunk, 579 So. 2d 215 (Fla. Dist. Ct. App. 1991). The
New Holland court noted that under the common law “a special guaranty is generally not
assignable because extending credit constitutes the exercise of discretion and a guaranty
agreement naming a particular creditor as promisee implies special trust and confidence
placed by the guarantor in the named creditor and the assignment of the guaranty to
another prospective creditor materially alters the guarantor's undertaking.” Id. at 217.

The court, after surveying various approaches to this issue, explicitly drew a contrast
between debt that is outstanding at the time of an assignment and new extensions of
credit after the assignment. Id. at 218. It concludes that an assignee should be able to
stand in the original obligee’s shoes and collect on debt that already existed at the time of
the assignment. Id. Conversely, the guarantor should not be liable for any new extensions
of credit made by the assignee. Id. This approach has the benefit of applying a bright line
rule to the question of when an assignee may or may not enforce a special guaranty.

                                  Restatement Approach

        In opposition to the common-law approach, a modern trend is to allow a successor
in interest such as LaValley to enforce a special guaranty made to its predecessor. The
trend is evidenced by the approach taken in the Restatement (Third) of Suretyship and
Guaranty. The Restatement begins from the position that guaranties are generally
assignable. Restatement (Third) of Suretyship & Guaranty § 13; see also 38 Am Jur. 2d
Guaranty § 23 (“As a general rule, a guarantee is assignable absent express language in
the document to the contrary.”) It then goes on to outline three situations where
guaranties are not assignable:
       (a) the substitution of a right of the assignee for the right of the obligee
       would materially change the duty of the secondary obligor or materially
       increase the burden or risk imposed on it by its contract
       (b) the assignment is forbidden by statute or is otherwise ineffective as a
       matter of public policy; or
       (c) the assignment is validly precluded by the contract.

Id. Several state courts follow the Restatement approach. See, e.g., B.S.G. Foods,
Inc. v. Multifoods Distribution Grp., Inc., 54 S.W.3d 553, 559 (Ark. Ct. App.
2001); Kraft Foodservice, Inc. v. Hardee, 457 S.E.2d 596, 598 (N.C. 1995);
Niederer v. Ferreira, 234 Cal. Rptr. 779, 788 (Ct. App. 1987). The Restatement
contends that its view of guaranties as contractual obligations that may be freely
assigned under modern contract law, subject only to the three exceptions noted
above, is “the dominant view.” Restatement (Third) of Suretyship & Guaranty §
13, comment a.


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        The North Carolina Supreme Court case Kraft Foodservice, Inc. v. Hardee, 457
S.E.2d 596, 598 (N.C. 1995) is a leading example of the Restatement approach. It
succinctly articulates the advantages of this approach: it is “consistent with the common
law of contracts, accommodates modern business practices, and fulfills the intent of
parties to ordinary business agreements.” Id. at 598-99.

         The facts in Kraft Foodservice are quite similar to those in Flying J. Kraft
Foodservice involved an open account on which Quick Fill, the operator of a
convenience store, purchased provisions from a supplier. Id. at 597. Hardee executed a
personal guaranty of the open account in favor of the supplier. Id. Approximately a year
later, the supplier sold and assigned all of its assets to Kraft. Id. In the next several years,
Kraft underwent a series of corporate reorganizations whereby the guaranty was
ultimately assigned to Kraft Foodservice. Id. Meanwhile, Quick Fill continued to operate
its business as before. Id. The corporate changes of the obligee did not affect Quick Fill’s
ability to buy supplies on the open account. Id. Quick Fill ultimately filed for bankruptcy
while owning money to Kraft Foodservice on the open account. Id. Kraft Foodservice
then sued Hardee on the personal guaranty. Id.

        The North Carolina Supreme Court, reversing the Court of Appeals, concluded
that the personal guaranty was enforceable by Kraft Foodservice against Hardee. Id. at
599. The court acknowledged that a guaranty executed on the basis of a personal
confidence in the obligee is not assignable, but it determined that there was no evidence
that Hardee executed the personal guaranty out of personal confidence in the original
supplier. Id. Rather, it appeared the guaranty was executed simply as a means of gaining
credit to allow for standard commercial transactions. Id. For this reason, the court
concluded that Hardee was ultimately indifferent as to who would be Quick Fill’s payee
and, therefore, the special guaranty could be freely assigned like any other contract
provision. Id.

       Under an almost identical scenario, the Arkansas Court of Appeals adopted the
reasoning from Kraft Foodservice and the Restatement. B.S.G. Foods, Inc. v. Multifoods
Distribution Grp., Inc., 54 S.W.3d 553 (Ark. Ct. App. 2001) also involved a personal
guaranty of an open account whereby a supplier extended credit to a manufacturer. The
guaranty was subsequently assigned to the supplier’s successor. After the assignment,
purchases on the open account continued until the manufacturer defaulted on its
indebtedness. Id. at 556. The assignee then brought suit seeking to enforce the personal
guaranty. Id.

        The court ultimately concluded that the guaranty was properly assignable because
the assignment did not materially alter the guarantor’s obligation. Id. at 559. Again, the
court concluded that under this scenario it was irrelevant to the guarantor who the payee
was. Id. He executed his personal guaranty in exchange for an extension of credit on the
open account, and this arrangement continued even after the assignment. Id. These facts
did not show that the guaranty was executed based on the guarantor’s personal
confidence in the supplier. Id.



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                                  Fact-Specific Approach

        The Idaho Supreme Court in Sinclair Marketing., Inc. v. Siepert, 695 P.2d 385
(Idaho 1985) followed another approach. Again, the case involved an assignment of a
personal guaranty of an open account. Id. at 386. Once again, the supplier was replaced
by another closely-related corporation who continued to extended credit to guarantors’
closely-held corporation. Id. at 387. Once the account became seriously delinquent, the
successor supplier brought suit claiming the personal guaranty had been assigned to it. Id.

        The Idaho Supreme Court began by critiquing the traditional common law
formulation that general guaranties may be assigned while special guaranties may not. Id.
at 387-88. The court decided that the better approach is to examine the original parties’
intent as to whether or not a special guaranty may be assigned. Id. at 388. The court
denied the guarantor’s motion for summary judgment because it concluded that the
factual situation and the language of the guaranty, which included a reference to the
obligee’s “assigns,” “support a legitimate inference that an assignee could enforce the
guaranty for future credit.” Id. The guarantors’ awareness of and consent to the change in
supplier as principals in the closely-held debtor corporation also supported the inference
of assignability. Id. at 389.

        The Sinclair Marketing court ultimately remanded the case back to the trial court
to examine the factual issues. It stated that the trial court’s “critical focus should be on
whether the initial guaranty contract would allow for such an assignment and whether the
alleged assignment resulted in an increased risk to the guarantor.” Id. It gave the lower
court guidance by articulating three factual questions that needed to be answered: 1) Did
the original supplier actually assign the guaranty to the successor supplier?, 2) Did the
original parties to the guaranty intend such an assignment to be effective, and 3) Was the
position of the personal guarantors prejudiced or injured as result of the assignment? Id.
at 390. Sinclair Marketing, therefore, demonstrates a very fact-specific approach to the
question of the assignability of personal guaranties.


                                        Conclusion

        The cases discussed above illustrate the major approaches to this issue. To
summarize, the traditional common-law approach treats all special guaranties as not
assignable. This approach presumes that any extension of credit is necessarily based on
“personal” factors and thus any assignment of a special guaranty will materially alter the
guarantor’s position. A variant on the common-law approach, meanwhile, would allow
the assignee to enforce the guaranty as to debt incurred before the assignment but would
not allow enforcement with regard to credit that was extended after the assignment. Both
of these approaches would reach the same result in this case; LaValley only seeks to
enforce the guaranty as to post-assignment credit. These approaches would hold the
guaranty to be unenforceable in this scenario.




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        The more modern position adopted by the Restatement is to treat personal
guaranties as presumptively assignable. If that approach were to be applied here, Ms.
Brown would have to point to some sort of special circumstances in order to overcome
the presumption. She argues that the change to a new creditor (LaValley) increased her
risk under the contract. Courts applying the modern approach have tended to reject this
argument under the theory that a payee is a payee and the obligation to make payment on
the guaranty is not the kind of “personal” obligation that is unassignable under standard
contract law.

        A final approach is one heavily grounded in the factual circumstances of the
assignment. Applying this approach here would certainly require the court to deny Ms.
Brown’s Motion to Dismiss because the necessary factual record has not yet been
established to answer questions such as what the original parties intended when the
executed this very brief guaranty agreement and whether the assignment from Minzler
Brothers to LaValley prejudiced or injured Ms. Brown’s interest.

        The court is faced with the question of what approach to apply. Turning back to
the Vermont case law provides some guidance. Although it is not directly on point, the
O’Brien decision emphasizes that guaranties are to be strictly construed in favor of the
guarantor. While this general principle is not necessarily dispositive, it bolsters Ms.
Brown’s argument. The very short form contract at issue here says nothing about whether
anyone other than Mintzer Brothers can enforce the guaranty. There is no reference to
assignment or to “heirs, successors, and assigns.” Finally, the guaranty has no specified
duration. Allowing its assignment would run the risk that Ms. Brown could continue to be
liable into perpetuity.

        Keeping these factors in mind, the court finds it sensible to apply the common-
law approach in this case. In Vermont, business relationships, especially of the sort seen
here between a contractor and its supplier, are necessarily personal. By signing the
guaranty, Ms. Brown expressed her willingness to be liable to Mintzer Brothers in
exchange for the extension of credit to Wallingford Plumbing. The contract gave no
indication that she could be liable to another entity almost twenty years later. In this
situation, the view of the Flying J and New Holland courts is well-reasoned; this type of a
relationship between a small business, its creditor, and its owner-guarantor is inherently
personal. Therefore, Ms. Brown’s special guaranty to Mintzer Brothers was unassignable
and cannot be enforced by LaValley.

        Even if the court were to adopt the Restatement here, the assignment of Ms.
Brown’s special guaranty likely increased her risk under the contract, which is a
circumstance that can render an assignment unenforceable. Ms. Brown and her husband,
then owner of Wallingford Plumbing, signed the guaranty in 1991. After Mr. Brown’s
death, Wallingford Plumbing came under new ownership in 1996. The assignment of the
guaranty occurred in 2001. This case is based on credit extended by LaValley to
Wallingford Plumbing in 2009. Other than the continued corporate existence of
Wallingford Plumbing, the relevant transaction, therefore, involved none of the original
parties to the 1991 agreement. These changes demonstrate the drawbacks of continuing to



                                            7
enforce Ms. Brown’s special guaranty into perpetuity. As the parties to a credit
agreement such as this one change, the risk of default necessarily changes. Because of
this increased risk, Ms. Brown should not be held liable for LaValley’s 2009 extension of
credit. Ms. Brown’s Motion to Dismiss is granted as to the breach of contract claim.

       Finally, Ms. Brown also moves for dismissal of the unjust enrichment claim. As
alleged in LaValley’s Complaint, the unjust enrichment claim is based solely on Ms.
Brown’s nonpayment of the debt owed to LaValley by Wallingford Plumbing. Ms.
Brown’s only potential liability for this debt is by virtue of the special guaranty. As the
court has determined that LaValley is not entitled to enforce the special guaranty, Ms.
Brown is not liable for this debt and thus has not been unjustly enriched. Ms. Brown’s
Motion to Dismiss is also granted as to the unjust enrichment claim.



                                          ORDER

       For the foregoing reasons, Defendant’s Motion to Dismiss is granted.

       Dated at Rutland, Vermont this 12th day of October, 2011.



                                                              ________________________
                                                                Hon. Mary Miles Teachout
                                                                          Superior Judge




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