Keystone Bank v. Flooring Specialists, Inc.

• Decision Date: 01 May 1987
• Citation: 513 Pa. 103,518 A.2d 1179
• Court: Pennsylvania Supreme Court
• Parties: , 3 UCC Rep.Serv.2d 1043 KEYSTONE BANK v. The FLOORING SPECIALISTS, INC., Philip E. McCosby and Virginia L. McCosby, his wife, and Anthony A. DeRubeis and Geraldine M. DeRubeis, his wife. Appeal of Anthony A. DeRUBEIS and Geraldine M. DeRubeis, his wife. Anthony A. DeRUBEIS and Geraldine M. DeRubeis, his wife, Appellants, v. Philip E. McCOSBY, Virginia L. McCosby, his wife, and Keystone Bank. Anthony A. DeRUBEIS and Geraldine M. DeRubeis, his wife, Appellants, v. Philip E. McCOSBY and Virginia L. McCosby, his wife. KEYSTONE BANK v. Anthony A. DeRUBEIS and Geraldine M. DeRubeis, his wife, Appellants.

Page 1179

518 A.2d 1179

513 Pa. 103, 3 UCC Rep.Serv.2d 1043

KEYSTONE BANK v. The FLOORING SPECIALISTS, INC., Philip E. McCosby and Virginia L. McCosby, his wife, and Anthony A.

DeRubeis and Geraldine M. DeRubeis, his wife.

Appeal of Anthony A. DeRUBEIS and Geraldine M. DeRubeis, his wife.

Anthony A. DeRUBEIS and Geraldine M. DeRubeis, his wife, Appellants, v. Philip E. McCOSBY, Virginia L. McCosby, his wife, and Keystone Bank.

Anthony A. DeRUBEIS and Geraldine M. DeRubeis, his wife, Appellants, v. Philip E. McCOSBY and Virginia L. McCosby, his wife.

KEYSTONE BANK v. Anthony A. DeRUBEIS and Geraldine M. DeRubeis, his wife, Appellants.

Supreme Court of Pennsylvania.

Argued March 5, 1986.

Decided Dec. 12, 1986.

Reargument Denied May 1, 1987

[513 Pa. 105] W. Thomas Laffey, Jr., Nernberg and Laffey, Pittsburgh, for appellants.

Richard Hosking, David R. Cohen, Kirkpatrick & Lockhart, Pittsburgh, for appellees.

Before NIX, C.J., and LARSEN, FLAHERTY, McDERMOTT, HUTCHINSON, ZAPPALA and PAPADAKOS, JJ.

OPINION

NIX, Chief Justice.

The issue in this appeal is whether the appellants, who were two of four co-guarantors on a negotiable promissory note, were discharged from their obligations because the creditor had released from the effect of its judgment lien certain property belonging to the other guarantors. ¹

In the years 1965 and 1966 the Keystone Bank of Pittsburgh ("Keystone") made various business loans to The Flooring Specialists, Inc. ("Flooring Specialists"), a corporation wholly owned by a Philip E. McCosby and his wife. During that period Mr. McCosby was president of the corporation and one Anthony A. DeRubeis, an appellant herein, was vice-president. The aforementioned loans were evidenced by three negotiable promissory notes executed respectively on December 28, 1965; January 7, 1966; and January 24, 1966.

On the face of each of the three notes appeared the name of "Flooring Specialists," as maker, followed by the signatures of "Philip E. McCosby, Pres." and "Anthony A. DeRubeis, V-Pres." All of the parties in this case agree that the signatures on the face of each note were made strictly in a corporate representative capacity. On the reverse side of each of the three notes there was a guaranty clause, by which each subscriber to the clause would undertake to "guarantee the payment" of the note at maturity. Each guaranty clause also included, inter alia, a cognovit provision, empowering Keystone to confess judgment against any or all of the signing guarantors. ² The guaranty clause on each of the three notes was signed by Mr. McCosby, in his personal capacity, and his wife. Mr. DeRubeis and his wife also joined personally as signatories to each of the guarantees. Not long after Keystone had been given the third of the three notes, Anthony DeRubeis terminated his association with Flooring Specialists.

Sometime in 1967 the corporation defaulted on the notes, leaving an unpaid debt of approximately Twenty-Three Thousand Dollars ($23,000.00). Consequently, in September of 1967, Keystone exercised its warrants of attorney and entered judgments by confession in the Court of Common Pleas of Allegheny County against the McCosbys and the DeRubeises, thereby obtaining a judgment lien against such real estate as each of those parties owned in the county.

In August, 1972, Keystone instituted proceedings to revive the judgment liens it had obtained against the guarantors. However, in November of that year, while the revival proceedings were still pending, the bank released from its lien of judgment certain realty owned by the McCosbys, to enable the couple to sell it. In return for the release the McCosbys paid the bank Five Thousand Dollars ($5,000.00) from the proceeds of the sale, as partial satisfaction of the judgment debt. The DeRubeises had not been given any advance notice of the bank's release of the McCosby property. On January 26, 1973, a judgment of revival was entered against all the guarantors, the proceedings having been uncontested by any party. ³

The matter lay dormant until December of 1976, when Keystone filed a praecipe for a writ of execution against the residence of Mr. and Mrs. DeRubeis. Having been served with notice that their home was to be exposed to sheriff's sale to satisfy Keystone's judgments against them, they petitioned the Court of Common Pleas for the issuance of a rule against Keystone to show cause why the judgments should not be opened and the sale stayed. The petition asserted that Keystone's act of releasing the judgment lien on the McCosby property had the legal effect of discharging the DeRubeises from their obligation on all of the promissory notes. For that proposition the petitioners cited section 3606 of the Uniform Commercial Code--Commercial Paper ("UCC"), 13 Pa.C.S. § 3606, which provides as follows:

Impairment of recourse or of collateral

(a) General rule.--The holder discharges any party to the instrument to the extent that without the consent of such party the holder:

(1) without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest or notice of dishonor is effective or unnecessary; or

(2) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.

(b) Express reservation of rights by holder.--By express reservation of rights against a party with a right of recourse the holder preserves:

(1) all his rights against such party as of the time when the instrument was originally due;

(2) the right of the party to pay the instrument as of that time; and

(3) all rights of such party to recourse against others.

(Emphasis added.)

Although the DeRubeises' petition was not as artfully drawn as it might have been, its averments obviously implied that the petitioners' claim of discharge was based exclusively on subsection (a)(2) of the above provision. The petition averred, in substance, that the McCosby realty had represented collateral to secure the payment of the promissory notes, that the bank's release of the property was done without the consent of the petitioners, and that such release impaired the petitioners' right of recourse against the McCosbys. In connection with these averments, the petition further alleged that the McCosbys, upon the sale of their property following the release of the lien, realized net proceeds sufficient to satisfy the entire underlying debt. Following the filing of an answer by the bank, the Court of Common Pleas denied the DeRubeises' petition on the ground that it had not been promptly filed. The petitioners appealed that order to the Superior Court, and also applied for a supersedeas. When that application for a stay was rejected, they paid over to Keystone a sum of money sufficient to satisfy the judgments against them for the balance of the debt, and received assignment of the bank's judgments against the other obligors on the notes. Efforts by the DeRubeises to reduce their losses by means of the assigned judgments were unsuccessful. Later, the Superior Court reversed the trial court's decision regarding the petition for a rule to show cause, and remanded with a direction that the rule should issue. Keystone Bank v. Flooring Specialists, Inc., 259 Pa.Super. 25, 393 A.2d 698 (1978).

When the matter was returned to the Court of Common Pleas, the DeRubeises and Keystone entered into a court-approved stipulation that the rule to show cause on the petition to open should issue nunc pro tunc. Thereafter the DeRubeises, in conjunction with the proceedings on the rule and based on their reading of the Superior Court's reversal, filed a written motion requesting the trial court to order Keystone to return to them the moneys they had paid to satisfy the judgments against them. ⁴

In addition to the proceedings on the rule, as supplemented by the prayer for the return of funds, the DeRubeises commenced an action in trespass against Keystone and the McCosbys, charging conspiracy, wrongful execution and malicious prosecution. Proceedings on that action were consolidated with those on the rule to show cause, and both matters were heard by the court in a non-jury trial.

After receiving evidence and hearing argument, the trial court decided that the DeRubeises had not established a legal basis for opening the judgments and, consequently, had no right to a return of funds from the bank. In so deciding, the court concluded that the DeRubeises, as guarantors within the meaning of section 3416 of the UCC, 13 Pa.C.S. § 3416, had incurred an obligation to pay each promissory note according to its tenor if such was not paid at maturity by the maker, Flooring Specialists. From that premise the court further reasoned that the legal force of the DeRubeises' obligation to Keystone was in no way diminished by the bank's release of the McCosby property from the lien of judgment. In short, the trial court determined that section 3606(a)(2) of the UCC did not apply to the case. Besides discharging the rule to show cause and dismissing the motion for the return of moneys, the trial court also entered an order dismissing the tort action on the ground that a case had not been made out. When their exceptions were overruled by a court en banc, the DeRubeises appealed to the Superior Court, asserting the discharge claim they had raised below.

By a memorandum opinion the Superior Court affirmed the trial court's orders, and held that because the appellants were guarantors within the definition in section 3416 of the UCC, "and not accommodation parties," t...