Pagounis v. Pendleton

Decision Date26 January 1999
Docket NumberP-1439
Citation753 N.E.2d 808,52 Mass. App. Ct. 270
Parties(Mass.App.Ct. 2001) GEORGE PAGOUNIS vs. LESLIE PENDLETON 96-
CourtAppeals Court of Massachusetts

County: Suffolk.

Present: Armstrong, Smith, & Dreben, JJ

Contract, Novation, Lease of real estate. Practice, Civil, Standing. Corporation, Dissolution, Stockholder. Negotiable Instruments, Note, Payment.

Civil action commenced in the Superior Court Department on July 26, 1994.

The case was heard by Maria I. Lopez, J.

Raymond Jacoub for the plaintiff.

Joseph I. Schindler for the defendant.


After a jury-waived trial, the Superior Court entered judgment for the defendant Leslie Pendleton on claims of the plaintiff, George Pagounis, for payment under two promissory notes, and against Pendleton on his counterclaim for Pagounis's alleged breach of a lease held by a corporation of which Pendleton was a principal. Both parties claimed appeals.

The parties do not disagree with the judge's findings of subsidiary fact. Pendleton and one Kevin Foley1 were the sole shareholders, officers, and directors of Mission Park Superette, Inc., a Massachusetts corporation doing business as Huntington Markets. The corporation rented business premises in Boston from Pagounis under a lease that allowed it to assign its interest therein with the consent of Pagounis, who was obliged not to withhold such approval unreasonably. In December of 1984, Pendleton executed, jointly and severally with Foley, a promissory note for $15,000 in favor of Pagounis, to be paid by June 7, 1986. In November of 1985, Pendleton and Foley executed a second note payable to Pagounis, this time for $50,000 and due by December 1, 1987. Pendleton and Foley failed to make payment to Pagounis on the two notes.

In April, 1988, with business deteriorating, Pendleton and Foley decided to sell their interests in the corporation and assign the corporate lease to Genaro DiCenzo, for a sum equaling the corporation's debts at the time. The deal fell through when Pagounis refused to consent to the lease assignment unless he was paid $10,000 above the amounts still owed by Pendleton and Foley under the promissory notes. On May 2, 1988, the corporation filed a voluntary petition for relief under Chapter 11 of the Federal Bankruptcy Code. In papers filed in that proceeding, the corporation identified Pagounis as an unsecured creditor to whom it owed $65,000. In turn, Pagounis filed a proof of claim in the amount of $65,000 against the corporation's bankruptcy estate. No direct evidence appears as to whether Pendleton and Foley used the $65,000 for corporate or personal purposes; we assume, however, from the fact that Pagounis was accepted as a corporate creditor in the bankruptcy proceeding, that the Pendleton-Foley notes were intended as security for the corporation's debt to Pagounis.

On October 6, 1989, at a closing as part of the bankruptcy proceedings, the corporation again attempted to sell its assets, including its leasehold interest, to DiCenzo for the same price negotiated the prior year. Pagounis refused to consent to the lease assignment to DiCenzo unless Pendleton and Foley signed a document stating: "We, Leslie Pendleton, Jr. and Kevin Foley acknowledge that the total amount due to George Pagounis as of this date is seventy thousand dollars (70,000). Said sum is due and payable on or about April 6, 1990." The $70,000 figure was the sum of the $65,000 owed under the promissory notes and $5,000 that Pagounis sought in exchange for his consent to the assignment. Having been advised by Richard McKenzie, the corporation's counsel in the bankruptcy proceedings, that signing the document was vital to the sale, Pendleton signed the so-called "acknowledgment."

Thereafter, the corporation consummated the sale and assignment to DiCenzo. In conjunction with the sale and pursuant to the corporation's plan for reorganization, Pagounis accepted as partial satisfaction of his claim against the corporation, in lieu of a cash distribution, a promissory note payable by DiCenzo in the amount of $25,000. Pagounis also agreed to take a pro rata share, along with other unsecured corporate creditors, of any future distributions from the bankruptcy estate.2 There is no evidence of further distributions, and there was unrefuted testimony that the corporate debts exceeded the sale price, such that the claims of the unsecured creditors stood not to be fully met.3

An action by Pagounis against Pendleton on the Pendleton-Foley notes resulted in a judgment in the Boston Municipal Court for Pagounis on the notes, but the action was retried in the Superior Court by way of retransfer under G. L. c. 231, § 102C. At issue were Pagounis's claim for the unpaid amount under the notes4 and Pendleton's counterclaim against Pagounis for unreasonably withholding his consent to the lease assignment in 1988, which allegedly deprived the corporation of a chance to avoid bankruptcy. The judge concluded that Pagounis's claims failed because the actions of the parties worked a novation whereby the corporation was substituted for Pendleton for purposes of the debt. As to the counterclaim, the judge found that Pendleton personally lacked standing to assert what was in essence a claim belonging to the corporation.

1. Novation. Without the agreement of the parties to an extinguishment of the prior contract and to a substitution of the new contract, there can be no novation. See Larson v. Jeffrey-Nichols Motor Co., 279 Mass. 362, 366 (1932). Although "a substituted contract or novation may be inferred despite a lack of express language to that effect," Lipson v. Adelson, 17 Mass. App. Ct. 90, 94 (1983), and may be based solely on the circumstances and conduct of the parties, Clark v. General Cleaning Co., 345 Mass. 62, 64 (1962), a finding of an intent to discharge the preexisting indebtedness should rest on a "clear and definite indication" of such intent. Lipson v. Adelson, supra at 92-93, citing 58 Am. Jur. 2d Novation § 20, at 534 (1971). Whether the parties intended a novation was a factual question, see Fauci v. Denehy, 332 Mass. 691, 697 (1955), and cases cited, as to which Pendleton, asserting it as an affirmative defense, bore the burden of proof. Clark v. General Cleaning Co., supra at 64.

Reviewing the judge's finding under the "clearly erroneous" standard, see Mass.R.Civ.P. 52(a), as amended, 423 Mass. 1402 (1996); Kendall v. Selvaggio, 413 Mass. 619, 620-621 (1992), we conclude that the judge's finding that Pagounis intended to discharge Pendleton from personal liability on the promissory notes cannot stand. The judge based her finding of novation on Pagounis's having filed a proof of claim against the corporation's bankruptcy estate, his acceptance of $25,000 from the estate in partial satisfaction of Pendleton's obligation, and his agreement to share future distributions pro rata with other unsecured creditors. Those facts, even viewed in isolation, suggest no reason why Pagounis would want to relinquish his collateral security for the debt.5

Significantly here, none of the three witnesses at trial (Pagounis, Pendleton, and McKenzie) affirmatively testified to the existence of any agreement, oral or written, that Pagounis would look to the corporation rather than Pendleton and Foley for payment of the full debt. The only witness to speak on the issue was Pagounis, and his unrefuted testimony was that he at no time released Pendleton from personal responsibility to honor the notes.

In considering the parties' intent to enter a novation, the trial judge disregarded what was possibly the most probative evidence, the "acknowledgment." The judge's reason for discounting the acknowledgment is perhaps reflected in her observation that the document failed to identify precisely who it was that owed the $70,000 to Pagounis. Picking up on this thread, Pendleton argues in essence that the acknowledgment has no significance because it could be read as indicating that the corporation now owed the money to Pagounis. Clumsy drafting aside, several factors make it more likely that the acknowledgment expressed Pagounis's intent that Pendleton and Foley personally continue to owe the sum in question. First, the body of the document stated that "[w]e, Leslie Pendleton, Jr. and Kevin Foley acknowledge" that the debt was owing to Pagounis, and there was a separate signature block for each person with no mention anywhere of the corporation. Moreover, for Pagounis to insist on the full $70,000 from the corporation as sole debtor would have been flatly inconsistent with his agreement to accept whatever pro rata share might come to him from future bankruptcy distributions, especially in light of the uncontradicted testimony that the corporation's debts were in excess of the sale value of its business assets to DiCenzo.

Although some evidence may have supported a finding of intent on the...

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