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FIREMAN'S FUND INS. CO. v. JOSEPH J. BIAFORE

November 1, 1974

FIREMAN'S FUND INSURANCE COMPANY
v.
JOSEPH J. BIAFORE, INC. and BIDI, INC. and JOSEPH J. BIAFORE and HELEN S. BIAFORE



The opinion of the court was delivered by: TROUTMAN

 TROUTMAN, J.

 In this action, plaintiff is a California corporation engaged in the business of writing surety bonds and defendant corporations are Pennsylvania corporations engaged in the business of concrete construction. The individual defendants, Joseph and Helen Biafore, are president and secretary-treasurer, respectively, of the corporate defendants. The jurisdiction of this Court is based upon diversity of citizenship and an amount in controversy in excess of $10,000 on a cause of action seeking enforcement of an indemnity contract entered into between plaintiff and defendants on May 19, 1965. Specifically, plaintiff, pursuant to the terms of the contract, seeks to recover from the indemnitors for losses, expenses, and attorney's fees incurred by reason of the bankruptcy of Bethlehem Concrete Corporation and plaintiff's subsequent liability, as surety, under certain Performance and Labor and Materials Bonds executed by Bethlehem Concrete.

 In their answer, defendants set forth essentially two affirmative defenses. First, defendants assert that the claims set forth in the complaint are barred by the statute of limitations. Defendants now have abandoned this defense, properly conceding that the indemnity agreement in issue is a "specialty" contract or a contract under seal and, accordingly, is governed by a twenty-year limitation period. Secondly, defendants assert that the claims set forth in the complaint should be reduced by the value of the accounts receivable and other assets of Bethlehem Concrete Corporation in which plaintiff at one time held a security interest. Plaintiff's security interest in the accounts receivable and other assets was invalidated by order of the referee in bankruptcy, which was affirmed by the District Court. In the Matter of Bethlehem Concrete Corporation, 306 F. Supp. 1047 (E.D. Pa. 1969). Presently before the Court is plaintiff's motion for summary judgment.

 The relevant facts are not in dispute and are as follows: On May 19, 1965, plaintiff and defendants entered into an indemnity agreement, whereby defendants agreed to indemnify plaintiff against all liability, loss, costs, damages, fees of attorneys and other expenses plaintiff might incur or sustain in consequency of the execution of the bond. Thereafter, plaintiff, as surety, executed a series of three Performance and Labor and Materials Bonds for Bethlehem Concrete Corporation. First, plaintiff was named as surety on Performance and Labor and Materials Bonds involving concrete construction at Heath Village, New Jersey and naming Bethlehem Concrete as principal and the Robert Chuckrow Construction Company as obligee. [Chuckrow Construction Contract.] Secondly, plaintiff was named as surety on Performance and Labor and Materials Bonds involving concrete construction at Freedom High School, Bethlehem, Pennsylvania, and naming Bethlehem Concrete as principal and Belmont Contracting Company as obligee. [Belmont Construction Contract]. Finally, plaintiff was named as surety on Performance and Labor and Materials Bonds involving concrete construction at the Lehigh Valley Industrial Park and naming Bethlehem Concrete as principal and Allen Bros. and O'Hara as obligee.

 Upon learning that Bethlehem Concrete was in financial distress, plaintiff on July 27, 1966, dispatched a letter to defendants advising them that it had set up reserves in the amount of $25,000 and called upon defendants to deposit an equal sum, pursuant to paragraph three of the indemnity agreement. *fn1" According to plaintiff, no deposit was ever made by defendants. Thereafter, on August 1, 1966, Bethlehem Concrete executed an assignment of certain accounts receivable and certain assets *fn2" to plaintiff.

 On August 9, 1966, plaintiff filed financing statements with the Secretary of the Commonwealth and the Recorder of Deeds of Northampton County. Thereafter, tax liens were filed against Bethlehem Concrete by the Commonwealth of Pennsylvania and by the Federal government. Upon the filing of the federal tax lien on October 13, 1966, Bethlehem Concrete ceased performance of its contracts. Thereafter, Joseph J. Biafore, Inc., pursuant to its obligation under the indemnity agreement completed the work initiated by Bethlehem Concrete in the Chuckrow Construction Contract and the Belmont Construction Contract.

 On July 27, 1967, Bethlehem Concrete was adjudicated a bankrupt. In the course of the bankruptcy proceedings, the referee entered an order invalidating plaintiff's security interest in the accounts receivable and equipment of Bethlehem Concrete by reason of its failure to perfect its security interest by properly filing a financing statement with the Prothonotary of Northampton County rather than the Recorder of Deeds as required by 12A P.S. § 9-401(1)(c). This order was affirmed by the District Court. In addition, the equipment sold by Biafore, Inc., to Bethlehem Concrete was sold by the trustee in bankruptcy for $6,957.50.

 As a result of the failure of Bethlehem Concrete to perform its contract and make payment for labor and materials, plaintiff paid the following claims, for which plaintiff now seeks recovery under the agreement:

 First, plaintiff paid $13,365.04 to United Materials Company under the Allen Brothers and O'Hara Construction Contract. Upon recovery of $576.55, plaintiff now claims $12,788.49. Secondly, plaintiff paid sums totaling $32,503.66 for labor and materials furnished under the Chuckrow Construction Contract. Upon recovery of $9,250, plaintiff now claims $23,253.66. In addition, plaintiff seeks attorney's fees incurred in connection with its liability as surety under the Labor and Materials and Performance Bonds in the amount of $3,227.97.

 While defendants do not dispute their liability under the indemnity agreement, they argue that plaintiff's uncontroverted failure to perfect its security interest in the accounts receivable of Bethlehem Concrete precludes the entry of summary judgment in its favor and requires the reduction of their ultimate liability by such amount. In so arguing, defendants rely on Section 132 of the Restatement of Law of Security, involving the surrender or impairment of security by a creditor and providing as follows:

 
"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."

 This provision of the Restatement has been adopted by the courts of Pennsylvania. See Girard Trust Bank v. O'Neill, 219 Pa. Super. 363, 281 A.2d 670 (1971), on which defendants rely. Accordingly, defendants argue that plaintiff's failure to take proper steps to preserve the value of the accounts receivable by properly filing a financing statement to perfect its security interest mandates the pro tanto reduction of their obligation. Plaintiff, on the other hand, argues that the language of paragraph ten of the indemnity agreement constitutes an "unconditional guarantee", rendering defendants liable under the indemnity agreement for the full amount claimed, notwithstanding its failure to perfect its security interest in the accounts receivable of Bethlehem Concrete Corporation. In support of its argument that the language of paragraph ten creates an unconditional guarantee and removes this case from the purview of Section 132 of the Restatement, plaintiff relies on Continental Leasing Corp. v. Lebo, 217 Pa.Super. 356, 272 A.2d 193 (1970); Joe Heaston Tractor & Implement Co. v. Securities Acceptance Corp., 243 F.2d 196 (10th Cir. 1957); and Nation Wide, Inc. v. Scullin, 256 F. Supp. 929 (D.N.J. 1966), aff'd, 377 F.2d 554 (3d Cir. 1967). Thus, we are concerned with the language of paragraph ten of the indemnity agreement and Section 132 of the Restatement.

 It is axiomatic that the expressed intent of the parties as manifested in words actually employed controls the Court's interpretation of a contract. Turning to the pertinent language of the ...


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