486 F.2d 987 (9th Cir. 1973), 72-2609, Teledyne Mid-America Corp. v. HOH Corp.

Docket Nº:72-2609.
Citation:486 F.2d 987
Party Name:TELEDYNE MID-AMERICA CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. HOH CORPORATION, a Hawaii corporation, et al., Defendants-Appellees.
Case Date:October 31, 1973
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 987

486 F.2d 987 (9th Cir. 1973)

TELEDYNE MID-AMERICA CORPORATION, a Delaware corporation, Plaintiff-Appellant,

v.

HOH CORPORATION, a Hawaii corporation, et al., Defendants-Appellees.

No. 72-2609.

United States Court of Appeals, Ninth Circuit.

October 31, 1973

Page 988

L. Richard Fried, Jr. (argued), John P. Gillmor, of Bortz, Case, Stack, Kay, Cronin & Clause, Honolulu, Hawaii, for plaintiff-appellant.

William M. Swope (argued), of Cades Schutte Fleming & Wright, Albert I. Moon, Jr., of Ashford & Wriston, Honolulu, Hawaii, for defendants-appellees.

Before KOELSCH, WRIGHT and TRASK, Circuit Judges.

Page 989

TRASK, Circuit Judge:

This is an appeal from a judgment of the District Court of Hawaii granting the motion of appellees C. W. Shafer and Jane Shafer to dismiss the plaintiff's complaint under Rule 12(b) of the Federal Rules of Civil Procedure, and granting the motion of appellee HOH Corporation for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The district court had jurisdiction under 28 U.S.C. § 1332, diversity of citizenship, and this court has jurisdiction under 28 U.S.C. § 1291.

Both motions were made in response to a suit brought by the appellant for the collection of trade payables totaling $39,499.65. The complaint charged the Shafers and HOH Corporation with joint and several liability as guarantors of the above-stated debt.

I. Teledyne's claim against the Shafers

On April 12, 1965, C. W. Shafer doing business as Shafer Distributing Company, a sole proprietorship, entered into a franchise agreement with Packard-Bell Sales Corporation giving Shafer the right to distribute Packard-Bell electronic products in Hawaii. Packard-Bell was the predecessor in interest of plaintiff-appellant Teledyne Mid-America Corporation (Teledyne). In connection with the franchise arrangements, C. W. Shafer and Jane Shafer executed a "Continuing Guaranty" dated April 12, 1965, whereby they jointly and severally guaranteed to pay the franchisor, ". . . any and all indebtedness of C. W. Shafer dba Shafer Distributing Co. . . ." Since C. W. Shafer was in effect guaranteeing his own obligation, the principal economic significance of the instrument was to add Jane Shafer as an obligor. 1 The instrument did not purport to bind the successors or assigns of the Shafers. The guaranty did purport to waive certain defenses such as the statute of limitations, need for presentment or protest, etc., and gave the creditor rights of enforcement against any security.

On November 9, 1965, C. W. Shafer incorporated the sole proprietorship pursuant to the laws of the Territory of Hawaii under the corporate name "Shafer Company, Inc." New shareholders thereafter acquired interests in the corporation. On April 5, 1970, all of the then stockholders of Shafer Company, Inc. transferred their shares of common stock to the appellee, HOH Corporation (HOH), in exchange for shares of stock in HOH. The trial court found that a statutory merger thereafter took place between the old corporation and HOH with the surviving corporation as a newly-formed "Shafer Company, Inc."; and that the former Shafer Company, Inc. had "ceased to exist as a matter of law." Packard-Bell (the predecessor of Teledyne) was notified on May 12, 1970, of the statutory merger, with Shafer Company, Inc. becoming a wholly owned subsidiary of HOH.

On May 21, 1970, Shafer by letter requested the return of his personal guaranty and repeated the request orally on at least two subsequent occasions. The requests were refused. In answer to the written request Shafer was told that it was the "company policy" to obtain the personal guaranties of the principals as well as the corporate guaranty. 2 In answer to one of the oral requests he was told that he would have to wait until the account was "more current." The continuing guaranty was never returned.

Page 990

On the basis of this continuing guaranty, Teledyne sought to collect $39,499.65 in alleged merchandising debts from the Shafers. 3 Appellant's contention is that the continuing guaranty executed by Mr. and Mrs. Shafer guaranteed the debts of the "business" irrespective of its type of legal organization, ownership, management, size or the essential nature of its operation. The principal cases upon which the appellants rely are D. N. & E. Walter Co. v. Zuckerman, 214 Cal. 418, 6 P.2d 251 (1931) and New York American Inc. v. Hub Advertising Agency, Inc., 136 Misc. 596, 240 N.Y.S. 367 (1930). In Zuckerman, a guarantor was held liable for the debts of a sole proprietorship after it was incorporated upon the ground that the corporation was the alter ego of the sole proprietor who owned all of the stock during the period in which the guaranteed obligation was incurred. Here, shortly after incorporation on November 9, 1965, other investors acquired stock and the essential nature of the business enterprise changed. 4 Shafer was no longer the holder of the majority of the shares issued and outstanding, even though he continued as the corporation's chief executive; moreover, as a guarantor the essential nature of his risk and his responsibility had changed. As an individual his personal financial risk was measured by whatever limitations he chose to effect and his own credit would support. With additional corporate capital for use in expanded operations, his liability became greatly expanded and his control diluted. Both he and his wife may well have declined to risk their personal fortunes to such an enlarged undertaking as guarantors of a corporate liability. Instead, they chose to operate as a corporation with personal liability limited to corporate investment. This permitted an expanded operation with limitations on risk to personal assets employed in the business. Shafer continued to operate as a corporation on a larger scale with the additional capital of new stockholders and then, by merger, became a subsidiary of HOH.

No fraud or misconduct is charged to Shafer in progressively enlarging and changing the character of the operation. His method of doing business was well known or could have been. The change of name and legal organization would have been readily apparent upon the checks of the business, reflected in the name and a matter of public record in the state.

New York American, Inc. v. Hub Advertising Agency, supra, relied upon by appellant is a case decided in the City Court of New York. It appears to be somewhat relevant but the facts stated are insufficient to determine its real materiality. No authorities are cited. The guaranty was on April 2, 1928; the incorporation of the three-man proprietorship was on July 19, 1928. What happened thereafter and when...

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