Shire Realty Corp. v. Schorr

• Decision Date: 17 January 1977
• Citation: 55 A.D.2d 356,390 N.Y.S.2d 622
• Parties: SHIRE REALTY CORP. et al., Respondents, v. Seymour SCHORR et al., Appellants.
• Court: New York Supreme Court — Appellate Division

Page 622

390 N.Y.S.2d 622

55 A.D.2d 356

SHIRE REALTY CORP. et al., Respondents, v. Seymour SCHORR et al., Appellants.

Supreme Court, Appellate Division, Second Department.

Jan. 17, 1977.

Bernstein & Gallers, P.C., New York City (Richard S. Bernstein and Barry A. Wadler, New York City, of counsel), for appellants.

Lindenbaum & Young, Brooklyn (Irvin Boyd Green, Yonkers, of counsel), for respondents.

Before HOPKINS, Acting P.J., and COHALAN, SHAPIRO and SUOZZI, JJ.

SHAPIRO, Justice.

The defendants appeal from (1) an order of the Supreme Court, Kings County, dated December 2, 1975, which granted the plaintiffs' motion for summary judgment and denied their cross motion for leave to amend their answer and (2) the judgment entered thereon. We affirm.

THE ISSUES

(1) Are the individual guarantors (the defendants here) bound by the arbitration award which made a determination that their corporate principal had breached its contract with the plaintiffs?

(2) If they are, have they shown the existence of any triable issues which should serve to defeat the plaintiffs' claim against them on their personal guarantees of performance of that contract by their corporation?

THE FACTS

On February 15, 1968 the plaintiffs, Shire Realty Corp. (Shire) and Leighton Realty Corp. (Leighton), as owners of certain property in Queens County, entered into a standard A.I.A. contract with J. Schorr & Co., Inc., as contractor, for the performance of certain construction work. The contract provided for arbitration of any disputes between the parties by the American Arbitration Association. It also gave the owners (the plaintiffs) the right to require the contractor to furnish a surety company performance bond.

The contractor was unable to secure such a bond and, on May, 28, 1968, the defendants, the contractor's sole stockholders and officers, agreed to personally guarantee the contractor's performance of its contract and to increase the withholding of 'progress payments'.

When difficulties arose during construction in October, 1968, the contractor ceased work. It then instituted an arbitration proceeding Thereafter, the plaintiffs commenced this action on the defendants' guarantee of payment and moved for summary judgment. The defendants cross-moved for leave to amend their answer so as to include therein a counterclaim, for their own benefit, for sums allegedly retained by the plaintiffs. ^*

against the plaintiffs, who asserted counterclaims against both the contractor and the defendants, as guarantors. The arbitrators awarded the plaintiffs $35,000, plus interest, 'in full settlement of all claims and counterclaims submitted', but refused to make any determination as to the liability of the guarantors (the defendants) because they were not parties to the construction contract. The award was confirmed by an order of Special Term and judgment was entered against the contractor, which is now insolvent.

It is undisputed that the arbitration proceeding although processed in the name of J. Schorr & Co., Inc., was in fact filed on the corporation's behalf by the defendants who, during the several days of lengthy hearings, all appeared, testified on direct examination and were cross-examined. In addition, the three defendants cross-examined the plaintiffs' witnesses at great length, because, in the arbitration proceeding, the plaintiffs had counterclaimed against the defendants' corporation for its failure to perform under the contract.

THE CONTENTIONS OF THE PARTIES

The plaintiffs contended that '(s)ince Schorr, Inc. was liable in damages by unanimous award after its full representation, testimony, confrontation of witnesses and cross-examination of witnesses by the three individual guarantors, their liability immediately arose because the corporation whose performance they guaranteed, had failed to perform to the extent awarded against it, and it was insolvent.'

The defendants, in their affidavits in opposition to the plaintiffs' motion for summary judgment, contended that 'the 'Surety' Agreement does not purport to bind the defendants to the determination of the arbitrators and to the judgment entered thereon', that the original contract entered into between J. Schorr & Co., Inc. and the plaintiffs was altered and modified without the consent of the defendants and that the surety agreement was entered into without consideration and as a result of economic duress practiced by the plaintiffs.

The defendants also asserted that they should be entitled to present testimony at a trial to show the circumstances under which the guarantee was executed, noting that the arbitration award stated:

'No determination can be made with respect to the liability of Seymour Schorr a/k/a Sy Schorr, Ted Schorr and Harold Schorr * * * due to the fact that the above mentioned are not named Parties to the contract dated February 15, 1968.'

The defendants also sought leave to amend their answer to interpose a counterclaim in the amount of $28,485 (plus interest), representing payments ('retainage') which the plaintiffs allegedly withheld from the defunct corporation.

THE DECISION AT SPECIAL TERM

The Special Term granted the plaintiffs' motion for summary judgment and denied the defendants' cross motion for leave to amend their answer, saying:

'Although the guarantors may not meet the textbook definition of privies, the court considers that:

'1. the fact that the contractor was a close corporation and the guarantors were the sole stockholders and principals thereof;

'2. their guaranty of performance of a contract which required arbitration of all disputes;

'3. their initiation and prosecution of the arbitration including testifying on direct and cross-examination and cross-examining the creditors;

'4. the attempt to bring them in by way of counterclaim, and

'5. their prosecution of the arbitration both for their own benefit and the benefit of their corporation (the conduct of which, they at all times, controlled), all taken together constitute sufficient participation in the prior proceeding to entitle them to be bound thereby.'

THE LAW

A guaranty is an agreement to pay a debt owed by another which creates a secondary liability and thus is collateral to the contractual obligation. The principal debtor is not a party to the guaranty and the guarantor is not a party to the principal obligation (57 N.Y.Jur., Suretyship and Guaranty, § 15).

'Where the parties to the principal contract agree therein that certain questions arising thereunder which affect the liability of the principal obligor are to be determined by the award of arbitrators appointed in a specified manner, an arbitration award made pursuant thereto is as conclusive on a surety for the performance of the contract as is a judgment in a case where the surety makes his liability depend upon the result of a litigation between the parties' (57 N.Y.Jur., Suretyship and Guaranty, § 289).

Thus, in Binsse v. Wood, 37 N.Y. 526, in which the contract required that arbitrators fix the date upon which rent was to commence, the guarantor contended that he was not bound by the award since he had no notice of the proceeding or of the award and took no part in the arbitration proceeding. The court, in noting that the guarantor stood in his principal's shoes, held that the guarantor was bound by the arbitration award. In so holding the court did state, however (at p. 531), that although the award was binding upon the guarantor, he was nevertheless 'at liberty to show fraud, collusion, and perhaps that there was a good defense which the party neglected to interpose.'

In the leading case of Matter of Shea, 309 N.Y. 605, 132 N.E.2d 864, the Surrogate dismissed the heirs' objections to an intermediate account in the decedent's estate, filed by the respondent fiduciary, a manager in decedent's theater business, and a cofiduciary. The Surrogate also sustained the validity of the manager's employment contract. Thereafter, the manager commenced an action in the Supreme Court against the corporations and sought to compel arbitration as to the computation of his bonus and the propriety of his discharge. The court held that the corporations were estopped by the earlier proceeding from relitigating the validity of the manager's employment contract.

The following language by the court is instructive (309 N.Y. at p. 617, 132 N.E.2d at p. 868):

"Privity' is usually defined as 'mutual or successive relationships to the same rights of property.' Haverhill v. International Ry. Co., 217 App.Div. 521, 522, 217 N.Y.S. 522, 523, affd. 244 N.Y. 582, 155 N.E. 905; Litchfield v. Goodnow, 123 U.S. 549, 551, 8 S.Ct. 210, 211, 31 L.Ed. 199. 'The ground * * * upon which persons standing in this relation to the litigating party are bound by the proceedings to which he was a party is, that they are identified with him in interest'. Litchfield v. Goodnow, supra, 123 U.S. 549, 551, 8 S.Ct. 210, 211, 31 L.Ed. 199. A clearer case for application of the doctrine could hardly be imagined than one involving successive attempts to litigate the same question by a corporation and by its owner or owners. Such attempts have been barred on principles of Res judicata or collateral estoppel where all of the corporation's stock was owned by In Lesser v. Migden, 2 Cir., 328 F.2d 47, the bankrupt was the president and sole stockholder of the corporation. When the corporation issued a series of promissory notes to Lesser, the bankrupt signed the notes, on their face, as president, and personally endorsed them on the back, prior to delivery. Upon delivery, Lesser endorsed the notes and assigned them to a third party. Upon default, the assignee brought an action against the corporation and the bankrupt. The latter was not served and did not appear in his individual capacity, but he did appear as a witness for the corporation and controlled its defense. The complaint was dismissed after a trial. Thereafter, Lesser reacquired the notes and brought suit...