The opinion of the court was delivered by: WEBER
This matter comes before the court on cross-motions for summary judgment on the question of liability. The parties have stipulated to uncontested facts as set forth herein.
This suit arises out of a contract for the sale of the Country Villa Restaurant on May 25, 1970, (Exhibit A)
between Sellers Cobuzzi and Country Villa, Inc. and Buyer Villa, Inc., a corporation of which plaintiff Fletcher was president. The sale included the land, buildings, good will, inventory, equipment, and the right to use the trade name "Country Villa, Inc." The terms of the original contract included a $ 180,000 sale price, a $ 10,000 down payment, $ 40,000 due in 60 days and the balance of $ 130,000 financed by a first mortgage on the Country Villa Restaurant at 7% interest, payable in monthly installments of $ 1,000.
Villa, Inc. was unable to make the $ 40,000 payment within 60 days and on July 25, 1970, plaintiff Fletcher joined the original parties in a Supplemental Agreement (Exhibit C), both as an officer of Villa, Inc. and also binding himself personally. The supplemental agreement extended the due date and pledged a stock collateral of 19,500 shares of Leggett and Platt (a publicly listed stock on the N.Y.S.E.) as well as a small quantity of other stocks all owned by Fletcher personally. The collateral was put up by plaintiff acting as an individual to secure the debt owed by Villa, Inc. Also under the agreement, Sellers took a second mortgage on the land, premises and fixtures of Country Villa, Inc., and a first mortgage on the land, fixtures, liquor license and all further assets of Villa, Inc. (a separate restaurant) in lieu of the first mortgage on the Country Villa Restaurant provided for in the original agreement. This was necessary because Villa, Inc. needed a clear title to the Country Villa, Inc. restaurant property to secure a first mortgage loan from a bank to finance the down payment on the Country Villa Inc. restaurant property.
Buyer defaulted on the $ 1,000 monthly installment due Jan. 12, 1971, and the parties (Villa, Inc., Country Villa, Inc., and plaintiff as debtors and guarantors; defendant Cobuzzi as creditor), then entered into a Supplemental Agreement on Feb. 11, 1971 (Exhibit D). This agreement provided for the sale of 1,000 shares of the Leggett & Platt collateral for $ 14,826 and the deposit of that amount in an escrow account to continue the $ 1,000/mo. payments to Seller.
On June 2, 1971, the same parties entered into a Supplemental Agreement (Exhibit E), which arranged for the sale of 2,733 shares of the Leggett & Platt collateral. Of the proceeds, $ 25,261 was used by Buyers for business improvements and $ 14,576 was applied to the escrow account as prepayment of the debt. The principal balance was thus reduced to $ 115,692.
The parties entered into a Supplemental Agreement on Feb. 17, 1972, (Exhibit F), after the value of Leggett & Platt stock had risen considerably. In light of that rise the collateral held by Seller-Cobuzzi was reduced from 15,868 shares to 8,900 shares, the balance returned to plaintiff. A further provision of the agreement allowed Cobuzzi to demand of Fletcher sufficient stock to maintain the collateral at 150% of the principal balance. The notice provision of the agreement allowed Cobuzzi to foreclose upon the collateral if, within thirty days of written demand, Fletcher failed to submit sufficient stock to maintain the 150% level. The agreement also required Villa, Inc. to make a yearly payment of $ 12,000 into escrow each Feb. 12 to further secure the uninterrupted payment of the monthly installments to Cobuzzi. A similar notice provision applied to Villa, Inc."s failure to make the yearly escrow payment. In return for these measures of greater security, Cobuzzi released the two mortgages provided for in the Supplemental Agreement of July 25, 1970 (Exhibit C), as satisfied without cash consideration.
Nearly a year later, Villa, Inc. failed to make the Feb. 12, 1973 escrow payment of $ 12,000 and Cobuzzi notified Fletcher of the omission by letter of that date (Exhibit G). In the same letter, Cobuzzi demanded additional stock because the market value of the collateral had dipped below the 150% quota. On March 14, 1973, plaintiff's attorney remitted $ 12,000 to the escrow account and certificates for an additional 1,000 shares of Leggett & Platt in plaintiff's name but without the necessary stock powers.
(Exhibit H). Fletcher was then notified by letter of April 5, 1973, (Exhibit J), that the deficiencies of Feb. 12 would be considered satisfied if the stock powers for the 1,000 added shares were forwarded. Cobuzzi also demanded by that same letter, 1,800 additional shares of Leggett & Platt to remedy an undercollateralization caused by a further drop in stock values. Cobuzzi warned that failure to provide the stock powers and the additional 1,800 shares would be considered a default under the terms of the Supplemental Agreement of Feb. 17, 1972 (Exhibit F).
On March 20, 1973, Villa, Inc., the primary obligor of the debt, filed for bankruptcy under Chapter XI. The Bankruptcy Court entered an order staying any action against Villa, Inc. by its creditors. Seller, Cobuzzi, was notified of the stay by letter of April 4, 1973, (Exhibit I), and was warned by plaintiff's attorney not to take any foreclosure action against the stock collateral. Cobuzzi did threaten foreclosure by letters of April 5, May 3, and May 16, 1973 (Exhibits J, K, L), for failure to supply stock powers and/or maintain the collateral at the appropriate level. While the stay order would prevent any action against the assets of Villa, Inc., it did not preclude a creditor from proceeding against a collateral pledged by an individual guarantor.
On May 23, 1973, after a number of threats to foreclose, Cobuzzi had the collateral of 8,900 originally pledged shares of Leggett & Platt transferred to his name through a Dallas bank. The value of the stock on the following day was $ 11.50 per share, or $ 98,122 for the 8,900 shares. If Cobuzzi had made a sale of the stock on that date it would have left a deficit of about $ 13,000 on the obligation price. Defendant Cobuzzi treated the transfer as a foreclosure and stated in an affidavit dated May 24, 1973, that he considered the debt to be cancelled by the foreclosure, despite the remaining deficit. This affidavit, however, was not communicated to the other parties until plaintiff received a copy after the institution of this suit. Plaintiff denies any knowledge of the claimed foreclosure and defendant does not contradict this with any evidence of notice.
During the latter half of 1973, defendant pressed plaintiff for payment of an IRS refund check received by Country Villa, Inc. after the sale of the restaurant in 1970. The refund was on taxes over-paid by Country Villa, Inc. while it was Cobuzzi's corporation, but the check was cashed by plaintiff's corporation Villa, Inc. despite Cobuzzi's protests.
The Bankruptcy Court held the hearing on Villa, Inc. on December 26, 1973. On that date the parties' attorneys reached an agreement for their clients, the terms of which are embodied in a letter from plaintiff's attorney on that date (Exhibit M). Villa, Inc. agreed to withdraw any objection to Cobuzzi's claims before the Bankruptcy Court. The plaintiff Fletcher as guarantor agreed to pay the entire principal and interest due Seller Cobuzzi as well as $ 1,500 in attorney's fees and the long disputed IRS refund check. In return, Cobuzzi agreed to forego the 150% requirement and allow the stock to rebound on the market. Plaintiff Fletcher was also given the opportunity to redeem the collateral at any time by, at Cobuzzi's option, satisfying the debt with cash or substituting a cash collateral of 110% of principal balance. Also, Villa, Inc."s attorney forwarded a 15% bankruptcy dividend to Cobuzzi on March 4, 1974 under the debtor's Chapter XI plan, to be applied against the balance of the debt. The monthly installments from the escrow account continued uninterrupted through this entire period.
By letter of Aug. 27, 1974, (Exhibit O), Cobuzzi communicated his intention to sell the remaining 8,000 shares of the original collateral to partially satisfy the debt unless 10,000 additional shares were submitted by plaintiff to better secure the debt. Plaintiff objected to this foreclosure in a letter of Sept. 4, 1974, (Exhibit P), as inappropriate under the original and supplemental agreements, and stated his intention to submit no additional collateral nor immediately satisfy the debt. On that same date, the administrator of the escrow account, and former attorney for both parties, submitted an accounting of the escrow account showing a balance of $ 8,141, indicating an intention to distribute the funds. Cobuzzi forwarded this accounting to plaintiff's attorney and stated his intention not to sell the collateral on Sept. 13, 1974 as threatened earlier.
Each March of the years 1975-79, plaintiff informed defendant's attorneys that he had paid the income taxes on the dividends of the stock held as collateral which were being received by ...