Peterson v. Crown Financial Corp., Civ. A. No. 77-3115.

• Decision Date: 20 July 1979
• Docket Number: Civ. A. No. 77-3115.
• Citation: 476 F. Supp. 1155
• Parties: Charles R. PETERSON v. CROWN FINANCIAL CORPORATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

476 F. Supp. 1155

Charles R. PETERSON v. CROWN FINANCIAL CORPORATION.

Civ. A. No. 77-3115.

United States District Court, E. D. Pennsylvania.

July 20, 1979.

Michael M. Baylson, Duane, Morris & Heckscher, Philadelphia, Pa., for plaintiff.

Cozen, Begier & O'Connor, Philadelphia, Pa., for defendant.

POLLAK, District Judge.

This commercial law case, in which plaintiff claims that he was coerced into paying defendant $363,875.62 in excess interest, is before the Court on cross-motions for summary judgment.

I.

On December 12, 1969, plaintiff Charles R. Peterson, a citizen of Nevada, entered into a security agreement with defendant Crown Financial Corporation, a Pennsylvania corporation, pursuant to which Crown agreed to lend Peterson up to $1,450,000 within 180 days. That same day, Peterson borrowed $1,150,000 from Crown, executing a note payable in two years with interest at two and one-half percent above the prime commercial rate. On December 29, 1969, Peterson borrowed the remaining $300,000, executing a second note payable in two years at the same interest rate.

On July 6, 1970, Crown and Peterson expanded their agreement: Peterson (1) took an additional loan of $3,000,000, (2) pledged 1,100,000 shares of common stock of National Alfalfa Dehydrating and Milling Company as collateral, and (3) executed a third note in the amount of $4,450,000 given in exchange for the notes of December 12, 1969 and December 29, 1969. The interest rate was again set at two and one-half percent above the prime rate, with the first payment due on July 6, 1971, the second payment one year later, and the third payment on July 6, 1973, the date of the note's maturity. On December 29, 1970, before any interest was paid, a fourth note was executed. This note, also for $4,450,000, was given in exchange for the July 6, 1970 note; it was due on December 29, 1972, with payment of interest, at the same rate as before but, this time, with no interest due until maturity.

In October 1972, Henry S. Faus, Crown's president, wrote Peterson advising him that as matters stood "there was no recourse other than full payment of interest" when the note reached maturity at the end of December. The interest due was calculated at $860,837.57.

What transpired between October 1972 and December 1972 is unclear. In December, however, Peterson received a singlepage Crown document captioned "Peterson Loan Interest Due December 29, 1972," which showed $499,658.95 as the total of a column entitled "interest amount." This sum was $363,875.62 less than the $860,837.57 shown in the calculation which accompanied Faus' October 1972 letter. (It apparently was calculated by applying the prime rate to the Peterson loan.) Peterson was unable to pay this reduced sum from his own resources and, on December 21, 1972, with Crown's assistance, Peterson borrowed $500,000 from the First Pennsylvania Bank, which he then remitted to Crown to meet his interest obligation. That same day, F. X. Dalton, Crown's vice-president, wrote Peterson to report:

We have received in our account $500,000.00 which represents payment of interest due December 29, 1972 on your Note. The $341.15 will be applied to interest after the above date.

Wishing you and your family a very Merry Christmas and a Happy New Year.

The $341.15 mentioned in the Dalton letter is the difference between $500,000 and the $499,658.95 set forth as "Peterson Loan Interest Due December 29, 1972."

Also on December 21, 1972, Peterson executed a fifth note, again in the amount of $4,450,000, this one due in December 1975, with interest, at the same rate as before, and payable at maturity. Simultaneously, there was returned to Peterson the fourth note—the note of December 29, 1970—with the word "cancelled" written across its face.

In late 1975, as the December 21, 1972 note approached maturity, Peterson received from Crown a new computation of interest due. It totalled $1,899,312.05 and included, to Peterson's apparent dismay, $363,875.62 as interest still owed for the period prior to December 31, 1972 under the "cancelled" December 29, 1970 note. When no payment was received, Faus on December 22, 1975, sent Peterson a notice of default:

Under the terms of a loan and pledge agreement dated July 6, 1970 between you and us (as amended) and your note to us dated December 21, 1972 in the principal amount of $4,450,000, we hereby notify you that as a result of your failure to make the payments required under the note on December 21, 1975 you are in default under the agreement and the note. Accordingly, unless we receive the entire amount due us by January 11, 1976 we will on or after January 12, 1976 pursue all remedies available to us including without limitation (a) private sale of the collateral held under the agreement (terms of sale not yet fixed) and (b) confession of judgment against you and execution thereon.

After that date, events proceeded rapidly. On December 29, 1975, Peterson entered into an agreement with Bass Brothers Enterprises, pursuant to which Peterson agreed to sell 1,304,350 shares of National Alfalfa Dehydrating and Milling Company stock (including the 1,100,000 shares held by Crown) for some eight million dollars. The closing was held on January 7, 1976. At that time Peterson paid off the December 29, 1972 note, including the full $1,899,312.05 in interest demanded on Crown's behalf, and the collateral held by Crown was released. Peterson, however, presented Faus the following letter of protest:

In connection with the closing of a sale of my shares of National Alfalfa Dehydrating and Milling Company, you have requested that I pay you, in addition to the amount of principal and interest due on the December 21, 1972 Note which the aforementioned stock secures, interest from the period prior to December 21, 1972 in the amount of $363,875.62 which I believe and contend is not due Crown Financial Corporation. However, you have advised me that the pledged stock will not be released until said amount is paid to you. I have advised you and hereby confirm that if the stock is not released at the closing on January 7, 1976, I will not be able to complete the sale or obtain the funds necessary to satisfy Crown Financial Corporation's loan to me.

In view of the fact that I will be unable to sell the National Alfalfa stock unless I obtain a release of the said stock from you, I have no alternative but to pay the $363,875.62 under duress, involuntarily, and under protest.

Crown contends that this letter was handed Faus after payment was tendered; Peterson contends that it was delivered at the same time as payment. Both parties, however, agree that Peterson objected orally to the interest calculation prior to the closing.

On September 8, 1977, Peterson instituted this action to recover "the sum of $363,875.62, together with interest from January, 1975 sic,¹ punitive damages, a reasonable attorney's fee and his costs."

II.

Crown bases its asserted entitlement to the $363,875.62 in interest on the December 29, 1970 note. Peterson argues, in response that this note was discharged in December 1972 when it was "cancelled" and returned to him. Section 3-605 of the Pennsylvania Uniform Code—which governs this diversity case—speaks to the discharge of negotiable instruments, and 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

The parties divide on the proper interpretation of this provision. Crown argues that Section 3-605 requires proof of "an intent to forgive"; Peterson argues that an "intent to cancel or surrender" is sufficient and that a failure to appreciate the legal consequences that flow from cancellation or surrender does not negative that intent.

Were Crown correct in its interpretation of Section 3-605, relevant issues of fact would still require resolution and therefore summary judgment would be unwarranted.³ But in a case in which the parties regularly deal in commercial paper, Crown's interpretation of Section 3-605 appears mistaken.

While no Pennsylvania court seems to have spoken to the issue, cases from other jurisdictions hold that "the purpose or intent of the holder beyond intent to destroy his evidence of indebtedness is immaterial." McDonald v. Loomis, 233 Mich. 174, 206 N.W. 348 (1925). Accord, Vanauken v. Hornbeck, 14 N.J.Law Rptr. 178 (1833); Wilkins v. Skoglund, 127 Neb. 589, 256 N.W. 31 (1934); Bryant v. Bowles, 108 N.H. 315, 234 A.2d 534 (1967); Beauvais v. Kishfy, 54 R.I. 494, 175 A. 826 (1934); In re Pardee's Estate, 240 Wis. 19, 1 N.W.2d 802 (1942). But see Fitzpatrick v. Nelson, 159 Or. 264, 79 P.2d 254 (1938); Gleason v. Brown, 129 Wash. 196, 224 P. 930 (1924). This standard does not disadvantage a lending institution. Had Crown, in the instant case, desired to condition renewal on the payment of interest still owing on the December 29, 1970 note, it could have insisted on some contemporaneous writing setting forth that understanding, or it could have demanded that the unpaid interest be added on to the principal before surrendering the old note. Moreover, while it may be hyperbolic to suggest that permitting a party to cancel and surrender a note and then to sue on it "opens the door to frauds without number," Vanauken, supra at 182, the present controversy at least provides clear evidence that such ambivalent conduct breeds misunderstanding and litigation.

Crown seeks to distinguish the cases which require only an "intent to cancel or surrender" on the ground that, unlike the case at bar, they do not involve a renewal of a pre-existing obligation. But the language of Section 3-605...