Fehr Bros., Inc. v. Scheinman

• Decision Date: 04 December 1986
• Citation: 509 N.Y.S.2d 304,121 A.D.2d 13
• Parties: , 55 USLW 2369 FEHR BROS., INC., Plaintiff-Appellant, v. Alan G. SCHEINMAN, Defendant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 304

509 N.Y.S.2d 304

121 A.D.2d 13, 55 USLW 2369

FEHR BROS., INC., Plaintiff-Appellant, v. Alan G. SCHEINMAN, Defendant-Respondent.

Supreme Court, Appellate Division First Department.

Dec. 4, 1986.

Michael H. Greenberg, of counsel (Graubard Moskowitz Dannett Horowitz & Mollen, New York City), for plaintiff-appellant.

Jeff Morgenstern, of counsel (Abel Jack Schwartz, of counsel; Schwartz, Sachs & Kami, P.C., Carle Place), for defendant-respondent.

Before MURPHY, P.J., and KUPFERMAN, ROSS, CARRO and KASSAL, JJ.

CARRO, Justice.

By agreement, dated January 28, 1980, which was incident to a contract to sell and deliver merchandise to S.A.L. Communications, Inc., plaintiff Fehr Bros., Inc., obtained a guaranty of indebtedness from defendant Alan G. Scheinman, the president of S.A.L. Communications, Inc. The agreement stated that defendant's liability for the corporation's debts was unconditional and absolute, and it provided for termination only upon defendant's submission of written notice to that effect to plaintiff. Pursuant to a June 1981 public offering of its stock to raise capital, S.A.L. Communications, Inc., filed an amendment to its certificate of incorporation, changing its name to S.A.L. Cable Communications, Inc., and increasing the number of authorized shares. In September 1984, S.A.L. Cable Communications, Inc., filed another amendment to its certificate of incorporation and resumed use of its original name, S.A.L. Communications, Inc.

By July 1985, S.A.L. Communications, Inc., owed plaintiff $151,881.50 for goods received. Scheinman never terminated his guaranty in writing. After demand was made upon the corporate debtor and the individual guarantor, this action was commenced, in October 1985, against the individual guarantor only, the corporate debtor having filed for bankruptcy.

The complaint seeks judgment on the $151,881.50 owed plaintiff and attorneys' fees as provided by the terms of the guaranty. Defendant asserted a number of affirmative defenses at this point, none of which merit review here. In response to plaintiff's motion for summary judgment, defendant raised the arguments that the parties had orally agreed to revoke the guaranty once the corporation became publicly held and that, irrespective of any agreement to revoke, the guaranty did not apply to the debts of the new publicly held corporation, S.A.L. Cable Communications, Inc. Special Term, concerned about the effect going public had on the corporation, requested additional submissions on this issue. By order entered May 23, 1986, Special Term denied plaintiff's motion for summary judgment. The court determined that issues of fact were raised by defendant's claim that the guaranty did not extend to the debts of a new corporate entity, the publicly held S.A.L. Cable Communications, Inc., the corporate structure of which had been altered.

Defendant has abandoned on appeal any argument that an oral agreement existed to relieve him of his obligations under the guaranty. This is understandable, given that it is well recognized that the terms of a guaranty, such as this one, requiring written notice of termination, cannot be modified by parol evidence or an asserted course of conduct. Chemical Bank v. Sepler, 60 N.Y.2d 289, 293, 469 N.Y.S.2d 609, 457 N.E.2d 714; Chemical Bank v. PIC Motors Corp., 87 A.D.2d 447, 450, 452 N.Y.S.2d 41, affd., 58 N.Y.2d 1023, 462 N.Y.S.2d 438, 448 N.E.2d 1349.

Rather, defendant's contention is that the changes in name and capital structure of the corporation, along with a change to a publicly held status, served to discharge his obligations under the guaranty as a matter of right, irrespective of the existence or not of any agreement to that effect with plaintiff, under the theory that a guaranty does not extend to bind the guarantor to satisfy the debts of a different entity. As this court has not had much occasion to determine under what circumstances alterations in the structure or formation of the principal obligor release the guarantor from his obligations under the guaranty and this case squarely presents us with that issue, we take this opportunity to review general principles of suretyship and guaranty law in order to provide a framework for determining this issue.

A suretyship relation exists whenever a person becomes responsible for the debt of another. Anti-Hydro Company, Inc., v. Castiglia, 92 A.D.2d 741-742, 461 N.Y.S.2d 87; Duport v. First National Bank of Glens Falls, 262 App.Div. 267, 271, 29 N.Y.S.2d 729; revsd., 288 N.Y. 261, 43 N.E.2d 34. A guaranty is distinguishable from other forms of surety contracts in that it is a separate, independent contract between the guarantor and the creditor-obligee and is collateral to the contractual obligation between the creditor-obligee and the principal-obligor. Kings County Sav. Bank v. Fulton Sav. Bank, 268 App.Div. 452, 454, 52 N.Y.S.2d 47.

Being a contract, a guaranty agreement is to be construed like other contracts so as to give effect to the parties' intentions. In particular, the obligations of the guarantor must be strictly construed according to the terms of the agreement and cannot be altered, extended or enlarged by the creditor or debtor without the guarantor's consent, since he cannot be held responsible to guarantee a performance different from that which he intended or specified in the guaranty. Becker v. Faber, 280 N.Y. 146, 148-150, 19 N.E.2d 997; Richardson v. County of Steuben, 226 N.Y. 13, 19, 122 N.E. 449; People v. Backus, 117 N.Y. 196, 201, 22 N.E. 759; Page v. Krekey, 137 N.Y. 307, 313-314, 33 N.E. 311.

For example, when the guarantor has bound himself to satisfy an obligation of a specified debtor, he may not be held liable for the debt of another debtor, unless the contract clearly discloses such an intent. Bennel Co. v. Simons, 198 N.Y.S.2d 700, affd., 12 A.D.2d 797, 210 N.Y.S.2d 79.

It is also argued that changes in the entity, the debts of which are guaranteed, which alter the composition, structure or form of the principal-obligor, can also serve to release the guarantor under the theory that such changes have the effect of creating a new obligation to which the guarantor never intended to become liable; that is, the changes create a new principal. Difficulties have arisen not in accepting the logic of this argument, but in determining when the changes are significant enough to justify releasing the guarantor of his obligations.

While New York courts have addressed this issue in a number of cases, there has not yet been developed any systematic method of determining the effect changes in the entity, the performance of which is guaranteed, have on the guarantor's obligation. The case law, is useful however, in emphasizing certain factors of which we must take note. At one extreme are those cases where the changes in the composition, structure or form of the principal-obligor are so minimal as not to affect the guarantor's obligation at all. In People v. Backus, supra, for instance, the Court of Appeals upheld the liability of the guarantors with respect to a deposit of state funds in a national bank despite the fact that the existence of the bank, which had been due to terminate by operation of law, was extended through renewal of its charter pursuant to an amendment to the National Bank Act. Id. 117 N.Y. at 202-203, 22 N.E. 759. The court noted that all that had occurred was a mere prolongation of the same corporation and that the guarantors had entered into their contract with knowledge that the bank was subject to the banking laws, which could at any moment be amended. Id. at 203-204, 22 N.E. 759. The focus there was on the identity of the debtor.

In Richardson v. County of Steuben, supra, the Court of Appeals determined that the guarantor, in specifically insuring the responsibility of the George W. Hallock Bank as a continuing institution, was not released of that obligation when a change occurred in the membership of the partnership owning the bank. Id. 226 N.Y. at 29, 122 N.E. 449. The court made mention of the fact that banking houses ordinarily continue their identity for generations and can only do so through a constant succession of partners. Id. at 22, 122 N.E. 449. It distinguished other partnership cases where the surety undertook to obligate itself to the responsibilities of a particular partnership, which partnership dissolved upon the introduction of a new partner or the withdrawal of a partner, a change not contemplated by the guarantor. Id. at 23, 122 N.E. 449. In Richardson the primary focus of the court was on the intent of the parties, with regard to which the court took into account the common business customs of banking houses.

A more substantial change in the form of the business of the principal-obligor occurred in N.Y. American, Inc., v. Hub Advertising Agency, Inc., 136 Misc. 596 240 N.Y.S. 367, when the principal-obligor, a partnership, incorporated itself after one of the partners executed a guaranty to ensure payment to plaintiff of all bills for advertising placed by the partnership. In nevertheless upholding the guarantor's liability, the court emphasized the following facts: the partner-guarantor participated in the decision to incorporate; he became a stockholder and director of the newly formed Hub Advertising Agency, Inc.; the board of directors of the corporation consisted of the members of the prior partnership; the guarantor never informed the plaintiff-creditor of the change; and the business relation between plaintiff and the principal continued unaffected. Id. at 597, 240 N.Y.S. 367. The court concluded that the guarantor was "estopped from using the cloak of a corporate entity, to which he himself was a party, to relieve him of any liability under his written business agreement." Id. While not specifically stated, it is readily apparent that the basis for the court's decision was a determination that the identity of the corporation in terms of...