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WARNER LAMBERT PHARM. CO. v. SYLK

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


September 30, 1971

WARNER LAMBERT PHARMACEUTICAL COMPANY
v.
William H. SYLK

Ditter, District Judge.

The opinion of the court was delivered by: DITTER

ADJUDICATION

DITTER, District Judge.

 This case comes before the court on a suit by a creditor to require a guarantor to pay the debt of a bankrupt corporation. The parties have stipulated to the following facts:*

 1. Plaintiff is a Delaware corporation.

 2. Defendant, at all times pertinent hereto, was an officer, director and stockholder of Sun Ray Drug Company (a Pennsylvania corporation), which name shall refer to the corporation existing prior to the merger set forth in paragraph 3 below and the Sun Ray Drug Company (a Pennsylvania corporation) chartered in Pennsylvania on February 23, 1961, Consolidated Retail Stores, Inc. (a Delaware corporation), and Penrose Industries Corporation (a Delaware corporation).

 8. Sun Ray Drug Company, as a wholly-owned subsidiary of Consolidated Sun Ray, Inc., continued to operate the said chain of drug stores.

 9. (a) Plaintiff sold merchandise to Sun Ray Drug Company on purchase orders issued by it prior to the merger and name changes as aforesaid and continued to do so until approximately May of 1962.

 (b) At that time plaintiff concluded that the Sun Ray account was deemed by it to be insecure and seriously past due.

 (c) In the month of May, 1962, plaintiff requested, and on or about May 25, 1962, received the guarantee admittedly executed by defendant, A true and correct copy of which is appended hereto as Exhibit "A-1".

 11. In accordance with the aforesaid transactions, prior to May 11, 1965 plaintiff was owed the sum of $73,244.49 for goods sold and delivered.

 12. On March 18, 1965, plaintiff made demand on defendant for payment under defendant's guaranty.

 13. On May 11, 1965, the Honorable Francis L. VanDusen appointed Leon J. Obermayer as "Conservator", pursuant to a decree, a copy of which is hereto appended and marked Exhibit "A".

 14. (a) Pursuant to the Order appointing the Conservator, he was obliged to notify creditors of Sun Ray Drug Company and Penrose Industries Corporation requiring them to file proofs of claim setting forth the nature and amount of their claims and whether they claimed secured lien or priority status.

 (b) Under paragraph 12 of said decree all interested parties were enjoined from instituting or continuing suits or proceedings at law or in equity against the personal property which was the subject matter of a sales agreement between Sun Ray Drug Company and Marrud, Inc.

 15. The notice sent to creditors is appended hereto as Exhibit "B".

  16. On or about June 10, 1965, plaintiff filed its proof of claim for each of its divisions in the form as indicated by Exhibit "C-1" appended hereto, with the Conservator.

 17. On or about June 25, 1965, plaintiff advised defendant, by certified mail, that it had filed its proof of claim with the Conservator but that said filing was not a waiver of its rights against defendant. Defendant made no response to said letter. A copy of said letter and return receipt is appended hereto as Exhibit "D".

 18. (a) Under date of January 14, 1966, a Creditors' Committee, which included counsel for the plaintiff, (who at that time did not represent the plaintiff herein), sent to creditors of Sun Ray Drug Company and/or Penrose Industries Corporation, a proposal for settlement with general unsecured creditors by the payment of 32 1/2% of their claims in full settlement, a copy of which is hereto appended as Exhibit "E". The settlement was recommended by the Creditors' Committee and was to be payable as follows:

 

8 1/2% in cash on July 13, 1966

 

8% on January 13, 1967

 

8% on July 13, 1967

 

8% on January 13, 1968

 (b) A copy of the agreement with the Conservator and Penrose Industries and Sun Ray Drug Company providing for the foregoing proposal is hereto appended and marked Exhibit "F".

 19. Defendant participated in the aforesaid settlement negotiations and along with his brother, Harry, agreed to guarantee any deficiency in funds needed for the settlement, over and above the payment to be received by the Conservator from Marrud, Inc.

 20. A copy of the letter from the Conservator setting forth the above proposal is appended hereto as Exhibit "G".

 21. Plaintiff filed its acceptance of said proposal with the Conservator. Plaintiff did not use the acceptance form submitted by the Creditors' Committee, a copy of which is appended hereto and marked Exhibit "H-1", but submitted its acceptance on a form in which plaintiff specifically reserved its rights against the defendant. A copy of said acceptance is hereto appended and marked Exhibit "H". Plaintiff received no objection to the form of acceptance filed by it but no specific approval thereof was received.

 22. On September 2, 1966, plaintiff received a payment of $6,255.78 on account of the proposed settlement together with a letter of transmittal from the Conservator. The check in question contained a restrictive endorsement which was modified by the plaintiff prior to the deposit of the check. A true copy of said check, letter of transmittal and endorsement are appended hereto as Exhibits "I-a and I-b". The bracketed portion of the reverse side of the check denotes the modification made by the plaintiff. It was without any notice of any kind at the time to the Conservator or the defendant of said modification. Plaintiff received no objection to the aforesaid modification or any approval thereof.

 23. The total percentage sum of 32 1/2% was not paid.

 24. On or before November 16, 1967, plaintiff received an additional check from the Conservator dated October 10, 1967, together with a letter of transmittal dated October 11, 1967. This check was in the sum of $5,859.56 and contained no restrictive endorsement. True and correct copies of the second check, its envelope and letter of transmittal are appended hereto as Exhibits "J-a and J-b".

 25. (a) No further payments were tendered or received until July of 1970 when the sum of $5,859.56 was received from the Conservator. This sum was tendered by the Conservator in full and complete settlement against Penrose Industries, Sun Ray Drug Company, and Leon J. Obermayer, Conservator.

 (b) This final payment was only accepted by the plaintiff after an agreement was reached between counsel for plaintiff and counsel for defendant setting forth the effect of the acceptance of this sum. True and correct copies of the letter agreements between said counsel are appended hereto and marked Exhibits "K-a and K-b".

 26. Ten Thousand Dollars ($10,000.00) of the fund required to make the final payment in consummation of the settlement with the Conservator was contributed by the defendant and his brother, Harry Sylk.

 DISCUSSION

 Defendant, William H. Sylk, was a director, major stockholder, and the president of Consolidated Sun Ray, Inc., now known as Penrose Industries Corporation. Finding its account with Penrose to be past due, plaintiff obtained from Sylk a personal promise to pay Penrose's debt. Thereafter, plaintiff made demand upon defendant for payment, but received nothing.

 Penrose suffered financial difficulties and as a result of an action against it, a Conservator was appointed to protect the rights of all creditors. Having received instructions from the Conservator, plaintiff filed a proof of claim and at the same time notified Sylk that the filing of the claim did not relieve him from liability under his guarantee.

 After negotiations with the Conservator, Penrose proposed to settle the claims of its creditors by the payment of 32 1/2% of its obligations in four installments over an 18 month period. The defendant took part in the negotiations with the Conservator and executed the settlement agreement on behalf of Penrose and Sun Ray. In addition, he subordinated certain claims to the rights of creditors and with his brother, personally guaranteed the funds necessary to consummate the settlement.

 The plaintiff agreed to the settlement proposed by Penrose but specifically noted a reservation of its rights against Sylk based upon his guarantee to it. Plaintiff then received a Conservator's check which contained a restrictive endorsement. Plaintiff deposited this check after changing the endorsement to add a reservation of its rights against Sylk. This suit was then started to require Sylk to pay the remaining balance due from Penrose. After suit was commenced, a subsequent payment was made by the Conservator, the check containing no restrictive endorsement.

 More than three years after the second payment, a final payment was received by plaintiff in full and complete settlement of its claim against Penrose. This payment was not accepted, however, until counsel for Sylk agreed that it would in no way constitute a relinquishment of plaintiff's rights under the guarantee. The three payments to plaintiff totalled $17,974.90, approximately $5,600 less than the 32 1/2% called for in the agreement reached with Penrose.

 The defendant's agreement with plaintiff imposed upon him the liability of a surety: the Act of July 24, 1913, P.L. 971, 8 P.S. § 1. Thus, he was primarily liable to the plaintiff and it was not required to institute legal proceedings against Penrose, or even make demand upon Penrose, to be entitled to payment of the debt. The defendant contends, however, that he has been discharged from liability by plaintiff's accepting the composition with creditors proposed by Penrose through the Conservator. Under the defendant's theory, the plaintiff agreed to release Penrose in return for the promise to pay 32 1/2% of the claim, and the legal effect of releasing Penrose, the principal debtor, was to release Sylk, the surety.

 The ultimate decision in this case depends upon the following questions:

 

1. Did plaintiff enter into an agreement which released Penrose and thus discharged Sylk from his obligations as a surety?

 

2. When agreement was reached with Penrose and payment received from the Conservator, did the plaintiff's unilateral reservation of rights against Sylk prevent the discharge of his liability as surety?

 

3. Did Sylk's participation in negotiations with the Conservator amount to a consent to the terms under which plaintiff accepted the settlement proposed by Penrose?

  I shall consider each of these questions in turn.

 Plaintiff's agreement with Penrose is set forth in two documents, the agreement by and among Penrose, Sun Ray, and the Conservator dated January 3, 1966 (referred to as Exhibit "F" in paragraph 18 of the Stipulation of Facts) and plaintiff's acceptance of that agreement (Exhibit "H", paragraph 21).

 The relevant part of the agreement among Penrose, Sun Ray, and the Conservator provides:

 

"Such payments, made to the Conservator, will be distributed by him in full settlement to the creditors entitled thereto. Upon payment of the 32 1/2% settlement as provided hereunder, all claims of the general unsecured creditors shall be discharged." (Emphasis added)

 Plaintiff's acceptance of this agreement states in part:

 

". . . the undersigned, . . . hereby agrees with the debtor [Sun Ray and Penrose], . . . to receive and accept from the debtor, in full satisfaction of his or its claim . . ., 32 1/2% thereof payable in the manner set forth in the agreement. . . dated January 3, 1966, and subject to the conditions stated therein." (Emphasis added)

 This language demonstrates clearly that actual payment of the 32 1/2% was required in order to discharge claims such as plaintiff's, as contrasted with a discharge of such claims in exchange for a mere promise to pay 32 1/2%.

 This conclusion is further supported by the terms of the restrictive endorsement which was placed on the initial check mailed by the Conservator (Exhibit I-b, paragraph 22). It states in part:

 

". . . the payee agrees that endorsement of this check shall constitute full acceptance of the offer of settlement and on condition that the additional payments still due under the settlement are made when due, shall constitute a full discharge and satisfaction . . . (Emphasis added).

 An executed composition between a debtor and his creditors settles the claims and extinguishes the debts included within it, and the rights and remedies of the parties depend thereafter on the new agreement. On the other hand, an inchoate composition merely suspends the rights of action on the original claims while it remains in force, and a breach of the composition will revive them. If the discharge of a debtor is made conditional on payment, he may sue on the original cause of action if payment is not made: 15A C.J.S. Compositions with Creditors § 11d, pp. 140-141.

 The cause of action for breach of an agreement between the debtor and his creditors varies according to the nature of the agreement. If that agreement does not contemplate the release of the debtor until full performance, a breach for default voids the composition and revives the original debt. The creditor may then sue for the remaining portion of the debt: 15A C.J.S. Compositions with Creditors § 10b, p. 135.

 The terms of the agreement among Penrose, Sun Ray and the Conservator, plaintiff's acceptance of that agreement, and the endorsement on the Conservator's check to plaintiff all indicate that the payment of the full 32 1/2% was a condition precedent to the discharge of Penrose. Since it is admitted that the full 32 1/2% was not paid, neither Penrose nor the defendant was discharged.

 Defendant contends, however, that subsequently Penrose was in fact discharged by plaintiff's acceptance of the final payment of 8% and that plaintiff therefore has no further claim against Penrose. This is true, but overlooks the agreement which preceded plaintiff's acceptance of this payment. Exhibits "K-a" and "K-b" make it clear that by receiving this payment, plaintiff did not relinquish any of its rights against the defendant and that the receipt of the money in question did not alter the legal position of the parties.

 There is a second reason why defendant was not released by the composition proposed by Penrose and accepted by the plaintiff. Plaintiff specifically reserved its rights against Sylk. Therefore, plaintiff's acceptance of Penrose's plan was conditional and did not have the legal effect of releasing Sylk, the surety.

 It is hornbook law that the release of a principal debtor with a surety's consent does not discharge the surety. Indeed, even without such consent, if the creditor reserves its rights against a surety, the surety is not discharged: Standard Brands, Inc. v. Straile, 23 A.D. 2d 363, 260 N.Y.S. 2d 913 (1965). See also 15A C.J.S. Compositions with Creditors § 11c, p. 140.

 The creditor's release of the principal debtor with a reservation of rights against the surety, notifies the debtor that in spite of the release, the surety might be required to pay the debt and could be expected then to seek reimbursement from the principal. Therefore, the principal enters into an arrangement with his creditor fully aware of the fact that the liability still may be enforced against him through action of the surety: Restatement of Security, Section 122, Comment d. Of course the surety is not harmed by such arrangement since he can always protect himself by paying the debt when due and proceeding against the principal for immediate reimbursement.

 The defendant contends that plaintiff's reservation of its rights on the first check was ineffective, citing cases which deal with the alteration of a release contained in an endorsement on a check. When such endorsements refer to an unliquidated amount or to a disputed debt, they may not be changed. The payee-claimant is either required to accept the check and accede to the condition under which it is offered, or else refuse to accept it and avail himself of his legal rights. The rationale of those cases is not applicable here. The check in question (see Exhibit "I(b)", paragraph 22) was forwarded by the Conservator, not the defendant-surety. Since neither Penrose nor the Conservator have made any objection to plaintiff's reservation of its rights against the defendant, the cases cited by defendant are not in point.

 There is a third reason why defendant cannot claim any benefit from the composition proposed by Penrose and accepted by the plaintiff.

 In response to a notice from the Conservator, plaintiff filed its proof of claim against Penrose. At the same time, plaintiff notified defendant by certified mail that it was filing this claim but that it was not releasing him from the liability created by his personal guarantee. Thereafter, Sylk participated in the negotiations with the Conservator, executed the agreement of January 3, 1966, on behalf of Sun Ray and Penrose, subordinated individual claims to those of the creditors, and guaranteed funds to consummate the agreement. In view of his interest and his activities, I find he consented to the terms under which plaintiff accepted the arrangements which Penrose proposed: Philco Distributors, Inc. v. Edler, 288 F. Supp. 910 (N.D. Texas 1968). See also 72 C.J.S. Principal and Surety § 159, p. 645.

 I find no merit in the contentions of the defendant. It follows that judgment must be entered in favor of the plaintiff in the full amount of its claim, less payments on account, plus interest.

 CONCLUSIONS OF LAW

 1. This Court has jurisdiction over the parties.

 2. By agreement dated May 25, 1962, the defendant, William H. Sylk, became surety as to the existing and future indebtedness of various corporations (now known as Penrose Industries Corporation) to the plaintiff, Warner-Lambert Pharmaceutical Company.

 3. Any release of claims against Penrose Industries Corporation based upon a composition of creditors by and among Penrose, Sun Ray Drug Company, and Leon J. Obermayer, Esquire, Conservator, dated January 3, 1966, was conditioned upon the payment of 32 and 1/2 per cent of the amount due to the creditors of Penrose, including plaintiff.

  4. Payment under the agreement dated January 3, 1966, not having been made, the claims of general creditors, including that of plaintiff, were not released.

 5. Plaintiff's reservation of its rights against the defendant, William H. Sylk, were legally effective and prevented the discharge of his liability as a surety for the debts of Penrose.

 6. The participation of the defendant, William H. Sylk, in negotiations with the creditors of Penrose, his agreements in connection therewith, and his execution of the composition dated January 3, 1966, amounted to an assent to the terms under which plaintiff accepted the proposals of Penrose for the settlement of claims against it.

 7. The acceptance by plaintiff of the final payment of eight per cent from Leon J. Obermayer, Esquire, Conservator, in July, 1970, is irrelevant to the present litigation, except with regard to the mitigation of damages.

 8. The defendant, William H. Sylk, has not been discharged as a surety for the debts of Penrose Industries Corporation to plaintiff, Warner-Lambert Pharmaceutical Company, and to the contrary, he remains liable thereon.

 9. The defendant, William H. Sylk, is liable to the plaintiff, Warner-Lambert Pharmaceutical Company, in the sum of $72,613.26, less payments on account by Leon J. Obermayer, Esquire, Conservator, of $17,974.90, plus interest to September 30, 1971, $26,056.00, or a total of $80,694.36.

 APPENDIX

 EXHIBIT A-1

 Warner-Lambert Pharmaceutical Company

 201 Tabor Road

 Morris Plains, New Jersey

 Gentlemen:

 In consideration of the extension of credit to Consolidated Sun Ray, Inc., its Sun Ray Division, and/or any of its other Divisions and Subsidiaries, hereinafter called the debtor, I, William H. Sylk hereby guarantee the payment of any indebtedness of said debtor to Warner-Lambert Pharmaceutical Company and any of its Divisions and Subsidiaries, hereinafter referred to as the creditor, whether such indebtedness now exists or is incurred hereafter, and in whatever form it may be evidenced.

 I hereby waive notice of the goods and merchandise sold to said debtor. Any agreement between debtor and creditor, expressed or implied, to extend the time of payment, shall not invalidate the guaranty, whether or not the guarantor is notified of any such extension or of any delinquency in payment.

 This guaranty shall not be revoked by the death of the guarantor, but shall remain in force until the undersigned or the executor or administrator of the undersigned shall have given notice in writing by registered mail to extend no further credit to said debtor on the security of this guaranty.

 In witness hereof, I have hereunto set my hand and seal at Philadelphia, State of Pennsylvania, this 25th day of May, 1962.

 (s)

 (William Sylk)

  EXHIBIT A IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA MODART, INC. and ) PARK & TILFORD, ) (a corporation) ) On behalf of themselves and ) all other creditors, secured ) and unsecured, of Penrose ) Industries Corporation ) (a Delaware corporation) et al. ) Plaintiffs ) CIVIL ACTION vs. ) No. 37995 PENROSE INDUSTRIES CORPORATION, ) (a Delaware corporation), ) SUN RAY DRUG CO., ) (a Pennsylvania corporation), ) MARRUD INCORPORATED, ) (a Massachusetts corporation), ) NEW SUN RAY DRUG CO. INC., ) (a Pennsylvania corporation), ) Defendants )

19710930

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