Opinion
June 14, 1971.
September 21, 1971.
Sureties — Impairment of security by creditor — Negligence in collection of accounts receivable assigned to creditor.
1. Plaintiff sought to recover on surety agreements executed by each of the defendants. These agreements in relevant part provided that defendants become "`surety' to plaintiff for . . . all liabilities . . ." contracted by A corporation. The suretyship agreements further authorized plaintiff to exchange or surrender any property pledged by A, renew or change the terms of any of A's liabilities, or waive any of its rights or remedies against A.
A filed a voluntary petition in bankruptcy. Subsequently, plaintiff, pursuant to its own creditor's position, received for collection the company's accounts receivable. Plaintiff wrote off a substantial portion of these accounts as being uncollectible and then, asserting the surety agreements, sued defendants. Summary judgment was entered for plaintiff.
On appeal by defendants, it was Held that (a) plaintiff, by accepting the accounts receivable held security for the principal debtor, and had the duty to preserve it for the benefit of the sureties (who had no way of ensuring that such accounts would be collected in a reasonable and non-negligent manner); (b) if plaintiff wasted this security then the obligations of the sureties should be reduced to the extent that they were injured; and (c) the case should be remanded for a trial to be limited to the issue of whether plaintiff was negligent in its collection of the assigned accounts receivable.
Before WRIGHT, P.J., WATKINS, MONTGOMERY, JACOBS, HOFFMAN, SPAULDING, and CERCONE, JJ.
Appeals, Nos. 796, 797, 798 and 799, Oct. T., 1971, from judgment of Court of Common Pleas of Montgomery County, Nov. T., 1969, Nos. 69-15899, 69-15941, 69-15942, and 70-4779, in case of Girard Trust Bank v. Bernard J. O'Neill and Theresa O'Neill, Edward J. O'Neill, Robert J. O'Neill and Joan B. O'Neill, and Timothy J. O'Neill and Elizabeth A. O'Neill. Case remanded for trial with issue limited; reargument refused October 12, 1971.
Assumpsit.
Motion by plaintiff for summary judgment granted, opinion by TREDINNICK, J. Defendants appealed.
Joseph G. Manta, with him James M. Marsh, and LaBrum and Doak, for appellants.
Michael O'S. Floyd, with him Jack B. Justice, and Drinker, Biddle Reath, for appellee.
WATKINS and MONTGOMERY, JJ., dissented.
Argued June 14, 1971.
This case concerns appellee's Girard Bank and Trust Company (Girard) attempt to recover on surety agreements executed in 1958 by each of the appellants. These agreements in relevant part provided that appellants become "`surety' to (Girard) for . . . all liabilities . . ., now or hereafter contracted or acquired by (their family corporation, Soap Specialties, Inc.)."
In 1968, Soap Specialties filed a voluntary petition in bankruptcy. Subsequently, Girard, pursuant to its own creditor's petition received for collection the company's accounts receivable. Girard wrote off a substantial portion of these accounts as being uncollectible and then asserting the surety agreements sued appellants. Summary judgment in this action was entered for Girard. This appeal followed.
Appellants argue that the lower court incorrectly ruled that they could not challenge Girard's exercise of reasonable diligence and care in the collection of the assigned accounts receivable.
The lower court found that "according to the terms of the Suretyship Agreements, defendants authorized Bank to exchange or surrender any property pledged by Soap, renew or change the terms of any of Soap's liabilities, or waive any of its rights or remedies against Soap. By these provisions, Bank was authorized to surrender completely its lien upon Soap's accounts receivable. Therefore, assuming arguendo that Bank was negligent in collecting Soap's accounts receivable, defendants cannot now complain thereof."
In support of its position the lower court relied upon Continental Leasing Corp. v. Lebo, 217 Pa. Super. 356, 272 A.2d 193 (1970). In Continental the creditor brought suit against sureties after the debtor became bankrupt. The sureties defended on the basis that the creditor had impaired its security by failing to perfect certain security interests pursuant to the Uniform Commercial Code. The lower court relying upon Section 132 of the Restatement of the Law of Security permitted this defense notwithstanding that the surety agreement provided that the sureties' liability shall not be reduced by any releases of security.
Section 132 of the Restatement provides:
"SURRENDER OR IMPAIRMENT OF SECURITY BY CREDITOR
"Where the creditor has security from the principal and knows of the surety's obligation, the surety's obligation is reduced pro tanto if the creditor (a) surrenders or releases the security, or (b) wilfully or negligently harms it, or (c) fails to take reasonable action to preserve its value at a time when the surety does not have an opportunity to take such action."
On appeal, we recognized the general applicability of Section 132 of the Restatement. We found, however, that the surety failed to protect himself as he did not request the creditor to perfect the security interest, the effect of which would have been to release the surety of the ultimate liability. Section 132 of the Restatement, therefore, was found not to apply.
Similarly in Joe Heaston Tractor Implement Company v. Securities Acceptance Corporation, 243 F.2d 196 (10th Cir. 1957) and Nation Wide, Inc. v. Scullin, 256 F. Supp. 929 (D.N.J. 1966) which are both cited in Continental the sureties were held liable after the creditor had failed to perfect security interests pursuant to the Uniform Commercial Code. In Nation Wide the court in rejecting the claim of the surety that the creditor had wasted the assets of the debtor stated "it overlooks the fact that defendants, as well as plaintiff, had a substantial interest in protection of the security, as against third parties, in light of their guaranty. They, as well as plaintiff, could have seen to the filing under the (Uniform Commercial) Code." 256 F. Supp. at 934. The same was true in Joe Heaston despite conclusory language therein concerning "unconditional guaranty." In the instant case, however, once Girard took control of the accounts receivable, the sureties had no way of ensuring that such accounts would be collected in a reasonable and nonnegligent manner. Girard, by accepting the accounts receivable held security for the principal debtor and had the duty to preserve it for the benefit of the sureties. If Girard wasted this security then the obligation of the sureties should be reduced to the extent that they were injured. First National Bank Trust Co. of Ford City v. Stolar, 130 Pa. Super. 480, 197 A. 499 (1938) and Robbins v. Robinson, 176 Pa. 341, 35 A. 337 (1896). See also cases cited in 35 P.L.E. Suretyship, Section 80.
The case is remanded for a trial to be limited to the issue of whether Girard was negligent in its collection of the assigned accounts receivable.
WATKINS and MONTGOMERY, JJ., dissent.