Peterson v. Crown Financial Corp.

• Decision Date: 10 November 1981
• Docket Number: No. 80-2663,80-2663,No. 80-2662,Nos. 80-2662,80-2662,s. 80-2662
• Citation: 661 F.2d 287
• Parties: 32 UCC Rep.Serv. 497 Charles R. PETERSON, Appellant inv. CROWN FINANCIAL CORPORATION, a corporation, Appellant in
• Court: U.S. Court of Appeals — Third Circuit

Page 287

661 F.2d 287

32 UCC Rep.Serv. 497

Charles R. PETERSON, Appellant in No. 80-2662 v. CROWN FINANCIAL CORPORATION, a corporation, Appellant in No. 80-2663.

Nos. 80-2662, 80-2663.

United States Court of Appeals Third Circuit.

Argued July 21, 1981.

Decided Oct. 20, 1981.

Rehearing and Rehearing In Banc Denied Nov. 10, 1981.

C. L. Robinson (argued), Fitzgerald, Brown, Leahy, Strom, Schorr & Barmettler, Omaha, Neb., Michael M. Baylson, Duane, Morris & Heckscher, Philadelphia, Pa., for Charles R. Peterson.

Stephen A. Cozen (argued), Richard C. Bennett, Cozen, Begier & O'Connor, Philadelphia, Pa., for Crown Financial Corp.

Before ADAMS, HUNTER and SLOVITER, Circuit Judges.

OPINION OF THE COURT

ADAMS, Circuit Judge.

In this diversity case the parties cross-appeal from a final judgment of $441,027.19 in favor of the plaintiff, Charles R. Peterson. This sum represents $363,875.62 in interest charges that Peterson disputed but paid, under protest, to defendant Crown Financial Corporation, together with prejudgment interest of six percent. On appeal, we are asked to resolve two questions of Pennsylvania law. ¹ First, is a financial institution that intentionally cancels a promissory note and returns it to the borrower in exchange for a new note, later entitled to collect interest on the first note if such interest is not explicitly "carried over" to the new note? Second, does the trial judge have discretion in a restitution action to award damages in the nature of prejudgment interest in an amount greater than the legal six percent rate?

I.

Charles R. Peterson is a farmer and rancher residing in Nebraska. ² On December 12, 1969, he entered into a security agreement with Crown Financial Corporation, a Pennsylvania corporation engaged in the business of installment sales financing, whereby Crown agreed to lend Peterson up to $1,450,000 within 180 days. On the same day, Peterson borrowed $1,150,000 from Crown and executed a promissory note to that effect. Interest on the note was to be calculated at two-and-one-half percent above the prime rate, and was due at maturity. On December 29, 1969, Peterson borrowed the remaining $300,000, at the same rate of interest, and executed a second note.

On July 6, 1970, Peterson and Crown entered into another security agreement, this time for an additional $3,000,000. Peterson borrowed the $3,000,000 and executed a third note for $4,450,000 in exchange for the notes of December 12, 1969 and December 29, 1969. In addition, Peterson pledged 1,100,000 shares of National Alfalfa Dehydrating and Milling Company common stock as collateral for the loan.

Peterson executed a fourth note on December 29, 1970, also for $4,450,000, in exchange for the note of July 6, 1970. Interest, calculated at two-and-one-half percent above the prime rate, was payable at maturity two years later. On October 3, 1972, Henry S. Faus, the president of Crown, sent a letter to Peterson reminding him that the fourth note would reach maturity on December 29, 1972 and advising him that "no further deferral of interest can be granted." The letter was accompanied by a statement of interest due totaling $860,837.57.

Ten days before the December 29 maturity date, Crown prepared a statement entitled "Interest Due December 29, 1972," which amounted to only $499,658.85. On December 21, Peterson, with Crown's assistance, borrowed $500,000 from First Pennsylvania Bank to pay the $499,658.85 then due. After signing the $500,000 check over to Crown, Peterson received a letter from F. X. Dalton, Crown's vice president, wishing him a "very Merry Christmas" and noting: "We have received in our account $500,000, which represents payment of interest due December 29, 1972 on your Note. The $341.15 (the difference between the $500,000 paid and the $499,658.85 due) will be applied to interest after the above date."

At the same time, Peterson executed yet another note evidencing his $4,450,000 debt to Crown. This new note matured on December 21, 1975; the previous note the fourth in the series was stamped "cancelled" and returned to Peterson.

Shortly before the fifth note came due, Crown advised Peterson that both the principal of $4,450,000 and interest of $1,899,312.05 would be due and payable on December 21, 1975. The latter figure included $363,875.62 in interest which had been due on the "cancelled" fourth note, but which Peterson claims had been forgiven. ³ No payment was received and Crown notified Peterson that he was in default.

On December 29, 1975, Peterson agreed to sell 1,304,350 shares of National Alfalfa Dehydrating and Milling Company stock including the 1,100,000 shares pledged as collateral for Crown's loan to Bass Brothers Enterprises. Peterson planned to use the proceeds of the sale to pay off his debt to Crown. Crown, however, agreed to release the collateral only if Peterson paid the full amount of principal and interest that Crown claimed was due including the $363,875.62 in interest on the "cancelled" fourth note. Peterson, acknowledging that "I will be unable to sell the National Alfalfa stock unless I obtain a release of the said stock from you," paid the $363,875.62 "under duress, involuntarily, and under protest." He then filed this lawsuit in the Eastern District of Pennsylvania, seeking judgment in the amount of $363,875.62, plus interest and attorney's fees.

The district court determined that, under section 3-605 of the Uniform Commercial Code, ⁴ Crown's intentional cancellation of the fourth note discharged Peterson's obligation to pay the $363,875.62 in interest as a matter of law. The intent of the parties to extinguish or continue the debt was not, in the view of the district court, relevant. Thus the court granted Peterson's motion for summary judgment on this issue. 476 F.Supp. 1155 (E.D.Pa.1979). ⁵ In a subsequent opinion, the court held that, although there was "logic" in plaintiff's argument that he was entitled to prejudgment interest in an amount greater than six percent, it nonetheless was bound by Pennsylvania law to limit prejudgment interest to the prescribed six percent "legal" rate. 498 F.Supp. 1177 (E.D.Pa.1980). We will affirm the district court's order compelling Crown to return the $363,875.62 in excess interest to Peterson. Because we hold, however, that the district court has discretion to award damages in the nature of prejudgment interest in an amount greater than six percent, we will remand the case for reconsideration of the prejudgment interest award.

II.

Section 3-605 of the Uniform Commercial Code provides:

(1) The holder of an instrument may even without consideration discharge any party

(a) in any manner apparent on the face of the instrument or the indorsement, as by intentionally cancelling the instrument or the party's signature by destruction or mutilation, or by striking out the party's signature; or

(b) by renouncing his rights by a writing signed and delivered or by surrender of the instrument to the party to be discharged.

(2) Neither cancellation nor renunciation without surrender of the instrument affects the title thereto.

13 Pa.Cons.Stat.Ann. § 3605 (Purdons 1980).

Peterson argues that, under § 3-605, Crown's intentional cancellation of the December 29, 1979 note and intentional delivery of the note to him in exchange for a new note constituted a discharge of Peterson's indebtedness as a matter of law. The district court, believing that no Pennsylvania court had addressed the issue, accepted this position. It reasoned that parties such as Crown, which deal regularly in negotiable instruments, "ought to be held, as a matter of law, to an understanding of the implications which normal business practice assigns to 'intentionally cancelling (an) instrument'...." 476 F.Supp. at 1159. The court thus held that subjective intent not to discharge was irrelevant; mere intent to cancel was sufficient.

We find this reasoning persuasive. Under both traditional common law principles and the Uniform Commercial Code.

a negotiable instrument is regarded as the debt itself. This conception is due, in part, to the similarity, in form and function, of commercial paper to that of government currencies and bank notes. The unitary concept of a debt fused into the written evidence of it, leads readily to the further concept that destruction of the physical res itself by its owner destroys the legal relations which it induces. Consideration is thus not necessary. Cancellation then becomes a sort of constructive tearing up of the instrument.

Danville UAW-CIO Local No. 579 Credit Union v. Randle, 58 Ill.App.2d 84, 206 N.E.2d 253, 257 (1965) (quoting W. Britton, Handbook of the Law of Bills and Notes 650 (2d ed. 1961)). Because evidence of the debt merges into the debt itself, intentional cancellation of the instrument works both to destroy the evidence of indebtedness and to discharge the debt. See State Street Trust Co. v. Muskogee Electric Traction Co., 204 F.2d 920, 922 (10th Cir. 1953) ("intentional destruction of a negotiable instrument is the highest evidence of an intention to discharge and cancel the debt represented thereby.... In determining whether there has been an intentional cancellation, 'The purpose or intent of the holder beyond intent to destroy his evidence of indebtedness is immaterial.' "); Bryant v. Bowles, 108 N.H. 315, 234 A.2d 534 (1967) (note stamped "paid" and delivered to defendant; court holds that "(s)tatutory law makes cancellation or holding by the principal debtor after maturity a discharge of the instrument."). A cancellation made unintentionally, or as the result of a mistake, however, would not effect a discharge of the underlying obligation. See, e. g., Peoples Bank of South Carolina, Inc. v. Robinson, 272 S.C. 155, 249 S.E.2d 784 (1978) (debt not discharged when, due to bank's clerical error, promissory note and security agreement were marked "Paid and Satisfied" and were returned to borrowers); First Galesburg...