Springs Industries, Inc. v. Kris Knit, Inc.

Citation880 F.2d 1129
Decision Date26 July 1989
Docket NumberNo. 88-6326,88-6326
PartiesSPRINGS INDUSTRIES, INC., a South Carolina corporation, Plaintiff-Appellee, v. KRIS KNIT, INC., a California corporation, Defendant, and Jack Chambers, an individual, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Anthony Young, Santa Monica, Cal., for defendant-appellant.

John L. Flowers, Darling, Hall, & Rae, Los Angeles, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before POOLE, BEEZER and TROTT, Circuit Judges.

POOLE, Circuit Judge:

Appellee Springs Industries, Inc. ("Springs") manufactured "ultra-suede" fabric which it sold to Kris Knit, Inc. ("Kris Knit") for use in Kris Knit's manufacturing operation. In March 1977, appellant Jack Chambers, the director and principal shareholder of Kris Knit, signed an agreement to personally guarantee Kris Knit's commercial account with Springs. Chambers signed the agreement to enable Kris Knit to purchase ultra-suede on credit from Springs.

The guarantee agreement provided, in relevant part:

I the undersigned agree to be ... jointly and severally primarily and unconditionally liable to [Springs] for the due performance of [Kris Knit's] present and future agreements, contracts or purchase orders with [Springs], including any and all renewals, continuations, modifications, supplements and amendments thereof....

This is a continuing agreement and shall apply to future as well as present transactions, notwithstanding the death of any of the undersigned ... until actual receipt by [Springs] from the undersigned by registered mail of written notice of termination....

This instrument cannot be changed or terminated orally [and] shall be interpreted according to the laws of the State of New York....

Springs' Opposition Brief at 42.

In November 1977, Chambers withdrew from participation in Kris Knit and sold his interest therein to Lianne Von Fricht. Chambers contends that, upon selling his interest in Kris Knit, he orally informed a representative of Springs that he wished to terminate his guarantee agreement. After Chambers's departure, Springs continued to sell its products to Kris Knit. Springs and Kris Knit eventually modified their sales arrangement such that Kris Knit also purchased ultra-suede from Springs on a wholesale basis. Kris Knit's commercial indebtedness to Springs increased substantially as a result of the wholesale sales.

In 1986, Kris Knit became insolvent while owing Springs approximately $63,000. After Kris Knit failed to pay the balance due, Springs notified Chambers that he was liable for Kris Knit's debt. 1 Chambers refused to pay, and Springs instituted this action.

On December 12, 1986, Springs filed a complaint in the Central District of California against Kris Knit and Jack Chambers, seeking recovery for breach of contract. Kris Knit failed to answer the complaint. Chambers claimed that Springs was precluded from recovery under two separate theories. First, Chambers alleged that he had orally terminated the guarantee agreement in 1977. Second, Chambers contended that the material alteration in the course of dealing between Springs and Kris Knit had excused him from his guarantee. Springs countered that Chambers's guarantee was a fully-integrated, unambiguous agreement which, under New York law, could only be terminated by written notice as specified in the guarantee agreement. On July 12, 1988, the district court granted Springs's motion for summary judgment and entered a judgment of $91,280 against Chambers. Chambers now appeals the district court's grant of summary judgment.

DISCUSSION

In granting Springs' motion for summary judgment, the district court held that under New York law 2 the guarantee could be terminated only by written notice. Chambers quarrels with this conclusion and contends that he raised genuine issues of material fact concerning: (1) whether the guarantee was orally terminated in 1977; and (2) whether the material alteration in the course of dealing between Springs and Kris Knit discharged Chambers from his guarantee. This court reviews a grant of summary judgment de novo. Bonner v. Lewis, 857 F.2d 559, 561 (9th Cir.1988). This court also reviews a district court's interpretation of state law de novo. State Farm Fire and Casualty Co. v. Estate of Jenner, 856 F.2d 1359, 1362 (9th Cir.1988).

In Chemical Bank v. Sepler, 60 N.Y.2d 289, 457 N.E.2d 714, 469 N.Y.S.2d 609 (1983), an officer of a closely-held corporation (Sepler), signed an agreement to guarantee the corporation's obligations to Chemical Bank. The agreement provided that Sepler was liable to the bank for all existing and future obligations of the corporation to the bank and that the guarantee could be terminated only by written notice sent by registered mail. Id., 60 N.Y.2d at 293, 457 N.E.2d 714, 469 N.Y.S.2d 609. The bank made a loan to the corporation which was repaid within two years. After the loan was repaid, several of the corporation's suppliers sold to the bank their accounts receivable due from the corporation. The corporation eventually defaulted on these obligations and the bank brought suit against Sepler. Sepler argued that he should not be liable to the bank because he guaranteed only particular loans of the corporation which had already been repaid. The New York Court of Appeals disagreed and held that:

Where, as here, a guarantee is continuing, applicable to after-acquired obligations and terminable only by writing, it may not be said to have terminated due to lack of further consideration, or cessation of what one party may have regarded as the 'business relationship.' A single, unlimited, continuing guarantee, supported by consideration given once and for all time, is not automatically terminated by a change in the parties' relationship.

Id. at 294, 457 N.E.2d 714, 469 N.Y.S.2d 609 (footnote omitted).

Under Chemical Bank, neither Chambers's attempted oral termination nor the modified course of dealing between Springs and Kris Knit excused Chambers from his guarantee agreement. Chambers's attempted oral termination in 1977 was ineffective because the guarantee agreement expressly provided that it could not be orally terminated and that it would remain in force until Springs received written notice of termination by registered mail. In the face of these express contractual provisions, any attempt to orally terminate the contract was "at odds with both the terms of the [guarantee] and the applicable law." Id.

The modification in the course of dealing between Springs and Kris Knit was also insufficient to excuse Chambers from his guarantee. Chambers cites Becker v. Faber, 280 N.Y. 146, 19 N.E.2d 997 (1939), for the proposition that an alteration in the underlying contractual agreement excuses the guarantor of his obligation. However, where the guarantee agreement unambiguously states that the guarantee applies to any modification of terms, the guarantor is not excused by subsequent modifications. See Machinery Funding Corp. v. Stan Loman, Inc., 91 A.D.2d 528, 456 N.Y.S.2d 401, 402 (N.Y.App.Div.1982). The guarantee agreement stated that Chambers would be liable to Springs for Kris Knit's present and future obligations including any and all renewals and modifications. Although enforcement of the guarantee against Chambers may be inequitable in light of the subsequent modifications in Springs' and Kris Knit's course of dealing, Chambers at all times "had the power to extinguish any perceived inequity: [he] could simply have served a written notice of termination upon [Springs]. [His] failure to do so cannot give rise to an equitable claim." Chemical Bank, 60 N.Y.2d at 294-95, 457 N.E.2d 714, 469 N.Y.S.2d 609.

A fair reading of the New York Court of Appeals' decision in Chemical Bank requires us to hold that Chambers remained liable under the guarantee agreement, notwithstanding his attempted oral termination and the modified course of dealing between Springs and Kris Knit. 3 While application of Chemical Bank may seem to produce a harsh result, we are bound by the determination of the New York Court of Appeals in this diversity case. Because Chambers has alleged no facts which, under New York law, would terminate his liability under the guarantee agreement, the district court properly granted summary judgment to Springs.

AFFIRMED.

TROTT, Circuit Judge, dissenting:

In March 1977, Jack Chambers executed in favor of Springs Industries, Inc. ("Springs") a personal guarantee which provided that "[i]n consideration of ... accepting orders from, entering into contracts and agreements with or extending credit or making sales of goods and merchandise to Kris Knit," Chambers would unconditionally guarantee payment of all existing or future extensions of credit by Springs to Kris Knit. In addition, the guarantee stated that it could not be terminated without written notice to Springs.

Subsequently, but only for a very short time, Springs proceeded to conduct business with Kris Knit on a credit basis. Periodically, Chambers was required to submit personal financial statements to Springs in order to maintain the viability of his personal guarantee.

In mid-1977, Chambers suffered a major heart attack, and, based upon medical advice, he withdrew from any active role in the operation of Kris Knit, selling his entire interest in the corporation to Lianne Von Fricht. During his hospitalization and recuperation, Chambers was contacted by agents of Springs, including its president, Abe Waters, and credit manager, Jay Smith. They were made aware by him of the seriousness of his condition and the fact that he was withdrawing from participation in the operation of Kris Knit. They were further informed by Chambers that, while he would remain responsible for any debts existing at the time of his sale of the business to Ms. Von Fricht, he would not be liable for any...

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