Summary
denying motion for summary judgment on failure to mitigate defense hinging on allegation that Sara Lee failed to mitigate damages by continuing to ship product to Big Ten even though it knew big Ten was experiencing financial difficulties
Summary of this case from Spedag A. v. Petters Hospitality Entertainment GROpinion
No. 1:00CV001261
February 27, 2003
MEMORANDUM OPINION
The matter is before the Court on the Defendants' Motion for Summary Judgment [Doc. #291. For the reasons set forth below, the Defendants' Motion for Summary Judgment is DENIED.
I.
The facts in the light most favorable to the plaintiff are as follows: On October 1, 1981, Defendant William Silverman ("Silverman") executed a Guaranty Agreement in favor of Hanes Corporation. Defendant Max Habegger ("Habegger") executed an identical Guaranty Agreement on March 2, 1982. At the time the guaranties were executed, Silverman and Habegger were the owners and officers of Big Ten Productions, Inc. ("Big Ten"). The defendants executed the guaranty agreements in order to induce Hanes to extend credit to Big Ten. The language of the Guaranty Agreement is as follows:
FOR VALUABLE CONSIDERATION, the receipt whereof is hereby acknowledged, and to induce Hanes Corporation (hereinafter referred to as "Secured Party"), its successors and assigns, at any time or from time to time to give credit to or make advances or loans to Big 10 Productions, Inc. (hereinafter referred to as "Borrower"), and in consideration of any such extensions of credit, loans or advances, the undersigned does hereby absolutely and unconditionally guarantee the payment in full of all sums which are now or may hereafter be owing from the Borrower to the Secured Party and all renewals or extensions of any such sums. Notice of acceptance of this guaranty and of action taken by the Secured Party from time to time hereunder and notice of protest and demand of any accounts receivable are hereby waived. This is a continuing guaranty and shall cover and apply to all transactions entered into by the Borrower prior to the receipt by the Secured Party of written notice of the termination of this guaranty, but no such termination shall affect any obligations of the undersigned pursuant to this guaranty existing at the time such notice is received by the Secured Party, whether such obligation is direct or indirect, absolute or contingent, then due or thereafter to become due. The undersigned hereby authorizes the Secured Party to grant time or other indulgence to the Borrower and agrees that such granting of time or other indulgence shall not release or in any way modify the liability of the undersigned, whether or not notice thereof shall have been given to the undersigned, nor shall any failure of the Secured Party to realize upon any security or other rights which it may have in any way affect the liability of the undersigned, and, generally, the undersigned hereby waives any and all suretyship defenses and defenses in the nature thereof. (Underlining added for emphasis)
Periodically over the next 15 years, Big Ten purchased product from Hanes on an oral open account agreement. Under the terms of the open account agreement, Hanes would ship product to Big Ten, and Big Ten would pay for the product within 30 days of shipment. In 1985, Hanes Corporation merged with Consolidated Foods; the resulting corporation changed its name to Sara Lee Corporation ("Sara Lee").
On January 1, 1998, Big Ten entered into a Consignment and Security Agreement ("the consignment agreement") with Hanes Printables ("Hanes"), a division of Sara Lee. Under the consignment agreement, Hanes would ship product to Big Ten, which would warehouse the goods in a segregated area of its Texas facility. Once goods were transferred from the warehouse to a third party, Big Ten was required to notify Hanes of the transfer. Payment for those goods was due to Hanes within 30 days of the transfer notice. Silverman signed this Consignment and Security Agreement on January 12, 1998 as Vice President of Big Ten. Although Habegger did not sign the actual Consignment and Security Agreement, he signed a Letter of Agreement and Understanding that outlined the primary provisions of the Consignment and Security Agreement and made specific reference to the Consignment and Security Agreement.
Habegger and Silverman sold their interests in Big Ten to Patricia Waters in April 1998. Habegger and Silverman continued to work for Big Ten as consultants. In 2000, Big Ten began experiencing financial difficulties and became past due in its payments to Hanes. Hanes notified Big Ten that it was terminating the consignment agreement. In January 2001, Hanes recovered $133,895.50 worth of product through a sequestration action. The current past due amount on the unrecovered product totals $435,488.93. Sara Lee filed this action against Big Ten, Habegger, Silverman, and Waters to recover the past due amount. Default Judgment has been entered against Big Ten. Defendant Waters, appearingpro se, filed an answer in September 2001. [Doc. #16]. Waters has not filed any additional pleadings since that time. On December 2, 2002, Habegger and Silverman ("the defendants") filed the current motion for summary judgment.
II.
Summary judgment is proper only when, viewing the facts in the light most favorable to the non-moving party, there is no genuine issue of any material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986);Cox v. County of Prince William, 249 F.3d 295, 299 (4th Cir. 2001). An issue is genuine if a reasonable jury, based on the evidence, could find in favor of the non-moving party. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986); Cox, 249 F.3d at 299. The materiality of a fact depends on whether the existence of the fact could cause a jury to reach different outcomes. Anderson, 477 U.S. at 248; Cox, 249 F.3d at 299. Summary judgment requires a determination of the sufficiency of the evidence, not a weighing of the evidence. Anderson, 477 U.S. 242, 249 (1986). In essence, the analysis concerns "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Id. at 251-52.
The majority of the defendants' defenses involve the Guaranty Agreements executed by Habegger and Silverman. In these agreements, the parties specified that, "[t]his guaranty and all rights hereunder shall be governed by the laws of the State of Texas." [Doc. #30, ex. 1, schedule 1]. The North Carolina Supreme Court has held that "where parties to a contract have agreed that a given jurisdiction's substantive law shall govern the interpretation of the contract, such a contractual provision will be given effect." Tanglewood Land Co., Inc. v. Byrd, 299 N.C. 260, 262, 261 S.E.2d 655, 656 (1980). Therefore, when considering each of the party's arguments with respect to the guaranty agreements, the law of Texas will be applied.
III.
Habegger and Silverman assert that Sara Lee is not a proper plaintiff because the Guaranty Agreements were executed in favor of Hanes. The defendants claim that they are entitled to summary judgment because Sara Lee has not presented any evidence "to prove the legal transfer or assignment of [the guarantees] from Hanes to Plaintiff Sara Lee." (Br. Supp. Summ. J. at 14).
The language of each guaranty provides that it is a "continuing guaranty" that can be enforced by the "successors and assigns" of Hanes Corporation. Under Texas law, the term successor in the corporate context means "corporations becoming invested with the rights and assuming the burdens of another corporation by amalgamation, consolidation, or duly authorized legal succession." Proctor v. Foxmeyer Drug Co., 884 S.W.2d 853, 861 (Tex.App. 1994). Generally, "when one business entity is acquired in its entirety by another, in the absence of specific terms to the contrary, both the liabilities and assets of the acquired company are transferred to the purchaser." Duke Energy Field Servs. Assets, L.L.C. v. Nat'l Union Fire Ins. Co. of Pittsburgh. PA, 68 S.W.3d 848, 851 (Tex.App. 2002). Contracts of guaranty are assets of an acquired company.Thompson v. North Texas Nat'l Bank, 37 S.W.2d 745 (Tex. Comm'n App. 1931) (holding that acquiring bank was a "successor" entitled to enforce continuing guaranties issued in favor of acquired bank).
Furthermore, under Texas law, "the mere change of name has no effect whatever upon the identity of a corporation, or upon its property rights or liabilities." Nelson v. Detroit Sec. Trust Co., 56 S.W.2d 860, 862 (Tex.Com.App. 1933); see also Drennan v. Community Health Inv. Corp., 905 S.W.2d 811, 818, (Tex.App. 1995) (change of the name of a corporation does not change liability). In the response to the defendants' motion for summary judgment, Sara Lee provided documentation that after Hanes and Consolidated Foods merged, the name of the new corporation was changed to Sara Lee Corporation through Articles of Amendment. Neither Habegger nor Silverman have offered evidence or pointed to evidence in the record to dispute this. Because Sara Lee Corporation is the successor to Hanes Corporation, and thus has acquired all the assets and liabilities of Hanes Corporation. Sara Lee Corporation is entitled to enforce the guaranties at issue in this case. Defendants' motion for summary judgment on this basis is denied.
IV.
Habegger and Silverman also claim that they are entitled to summary judgment because they contend that the guaranty agreements are not enforceable. First, they assert that the guaranty agreements are not enforceable because of a material alteration. Second, they assert that the guaranty agreements are unenforceable because the underlying open account agreement ceased to exist when Big Ten did not purchase product from Hanes for a period of time in the mid 1980s and again in 1993. Each of these arguments will be addressed in turn.
A.
Habegger and Silverman contend that a change in the extension of credit from the open account in use when the guaranty was executed to the Consignment and Security Agreement constituted a material alteration of the underlying agreement and, thereby, discharged them from liability. A material alteration is an alteration of the underlying debt that either injures or enhances the risk of injury to the guarantor. United Concrete Pipe Corp. v. Spin-Line Co., 430 S.W.2d 360, 365 (Tex. 1968). In order to assert the defense of material alteration, a defendant must prove three elements: (1) a material alteration of the underlying contract; (2) made without his consent; (3) which is to his detriment or prejudicial to his interest. Austin Hardwoods, Inc. v. Vanden Berghe, 917 S.W.2d 320, 326 (Tex.App. 1995). Habegger and Silverman assert that the change in the agreement between Big Ten and Hanes from an open account to a consignment account constitutes a material alteration.
This argument fails, however, because the guaranty was not limited to credit extended under the "open account." The agreement expressly provided that "Hanes may give credit or make advances or loans" "at any time or from time to time" and that Habegger and Silverman each were personally guaranteeing "payment in full of all such sums which are now or may hereafter be owing" for "all transactions entered into" until he gave written notice that he would no longer be responsible for any future extension of credit to Big Ten. The plain wording of the agreement is not subject to a reasonable interpretation that the guaranty was limited to credit extended in any particular form or at any particular time; it plainly anticipated extensions of credit, advances, or loans that could be made at any time and from time to time. As such, the extension of credit under the consignment agreement was within the reasonable expectation of the parties and would not constitute a material alteration of an underlying agreement. Moreover, Habegger and Silverman had the right, simply by giving written notice, to withdraw from personally guaranteeing any future credit extension, and each was aware that credit was being extended under the consignment agreement. The defendants' motion for summary judgment on the basis of material alteration is denied.
As stated earlier, Silverman signed the Consignment and Security Agreement on January 12, 1998 as Vice President of Big Ten. Habegger signed a Letter of Agreement and Understanding that outlined the primary provisions of the Consignment and Security Agreement and made specific reference to the Consignment and Security Agreement.
B.
Next, Habegger and Silverman assert that the guaranties are unenforceable because they claim that the open account agreement, the underlying agreement upon which the guaranties were initially based, was terminated. Defendants assert that the open agreement was the principal obligation of the Guaranty Agreements and that this principal obligation was terminated in the 1980s and also in 1993 when Big Ten ceased buying product from Hanes.
As just discussed, the guaranty agreement in question was not limited to any particular loan, advance, or other credit extension. The contract expressly provides that it is a "continuing guaranty." Under Texas law, a continuing guaranty "contemplates a future course of dealing between the lender and debtor and is intended to apply to other liabilities as they accrue." Sonne v. FDIC, 881 S.W.2d 789, 793 (Tex.App. 1994). The wording of the agreement plainly expresses the expectation that credit in different forms might be extended over an expanse of time and that the guarantor would be fully responsible until giving written notice that he no longer wished to be bound. Specifically, the language of the guaranty agreements provides. "This is a continuing guaranty and shall cover and apply to all transactions entered into by the Borrower prior to the receipt by the Secured Party of written notice of the termination of this guaranty."
Under the express language of the contract, Habegger and Silverman guaranteed payment for debts incurred by Big Ten at any time in the future for credit extended by Hanes or its successors. The defendants' motion for summary judgment on the basis that the underlying agreement was terminated is denied.
V.
Finally, Habegger and Silverman assert that even if the court were to enforce the guaranty agreements, Sara Lee should not recover any damages because (1) Sara Lee should have mitigated its damages by refusing to ship goods to Big Ten; and (2) Sara Lee impaired the collateral by not recovering the goods immediately upon Big Ten's failure to pay. As support for each of these arguments Habegger and Silverman have cited Texas law for the general propositions that a nonbreaching party has a duty to mitigate damages and that generally a creditor cannot impair collateral.
The consignment agreement specifies the application of North Carolina law. The defendants have not cited any North Carolina law on these propositions.
The defendants have not, however, explained how these general propositions are applicable to this case. For example, the defendants have asserted that Sara Lee failed to mitigate its damages by continuing to ship product to Big Ten even though Sara Lee knew that Big Ten was experiencing financial difficulties. This argument is premised on the assumption that "any prudent vendor of goods would have not sold" goods to a company that was experiencing financial difficulties. [Doc. 30]. The defendants have not cited any authority to support the assumption that as a matter of law Sara Lee should have ceased shipping product to Big Ten. As a matter of simple risk assessment, Habegger and Silverman were better positioned than Sara Lee to be aware of Big Ten's financial situation. Each was aware that credit was being extended, that he was personally obligated to repay and that, at all times, he had the right to remove himself from future obligation under the guaranty. Each allowed Sara Lee to continue shipping under the consignment agreement with a reasonable expectation that the guaranty would be fully performed until it received written notice otherwise. The defendants' motion for summary judgment that Sara Lee recover nothing for failure to mitigate of damages is denied.
The defense of impairment of collateral is "based on the creditor's obligation to use ordinary care to secure and preserve collateral in its possession from waste, injury, or loss." T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 223 (Tex. 1992) (holding that a guarantor may assert the common law defense of impairment of collateral). This defense is subject to waiver by the guarantor. Id. As has been discussed, the guaranty agreements at issue specifically waived all suretyship defenses. See IV.A. supra. In addition the general waiver language discussed previously, the guaranty agreements specifically provide that "any failure of the Secured Party to realize upon any security or other rights which it may have in any way affect the liability of the undersigned." Habegger and Silverman expressly waived any right to assert the defense of impairment of collateral. The defendants' motion for summary judgment on impairment of collateral is denied.
VI.
For the reasons stated above, Defendants Habegger and Silverman's Motion for Summary Judgment is DENIED.
ORDER
For the reasons stated in a contemporaneously filed Memorandum Opinion, Defendants Habegger and Silverman's Motion for Summary Judgment [Doc. #29] is DENIED.