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KITMITTO v. FIRST PENNSYLVANIA BANK

July 15, 1981

Tayseer D. KITMITTO
v.
FIRST PENNSYLVANIA BANK, N.A



The opinion of the court was delivered by: LUONGO

MEMORANDUM

In this diversity action, plaintiff Tayseer D. Kitmitto (Kitmitto), alleges that defendant, First Pennsylvania Bank, dN.A. (Bank), wrongfully sold certain United Parcel Securities pledged by Kitmitto as collateral for a loan made to a third party, Roy Hebebrand. Plaintiff contends that defendant (1) improperly applied the proceeds of the sale of the securities to satisfy additional advances made to Hebebrand, and (2) failed to give notice to plaintiff prior to the sale of the securities as allegedly required by the Uniform Commercial Code. Plaintiff further contends that the pledge agreement is voidable pursuant to 15 U.S.C. § 78cc(b) because defendant violated Regulation U of the Federal Reserve Board, 12 C.F.R. 222.3(a), by having plaintiff fill out two blank Regulation U-1 forms. *fn1" Defendant moves to dismiss on the ground that plaintiff has failed to state a claim upon which relief can be granted. F.R.Civ.P. 12(b)(6).

 I. The Scope of the Security Interest

 On July 26, 1978, plaintiff pledged 2,196 shares of United Parcel Service (UPS) stock with the Bank as collateral for a $ 12,000 real estate loan to Roy Hebebrand. At the time of the loan plaintiff executed a pledge document, a request for withdrawal of his shares for hypothecation, and three Regulation U-1 forms, two of which were in blank. Subsequently, on three occasions, the Bank advanced additional sums to Hebebrand. Upon Hebebrand's default the Bank sold the stock and applied the proceeds to all of Hebebrand's outstanding indebtedness. Plaintiff claims that he pledged his securities for the initial $ 12,000 real estate loan only, and that the Bank's action in selling the securities and applying the proceeds to the subsequent advances constituted a wrongful conversion of his property. Defendant's motion to dismiss is based on its contention that the pledge agreement executed on July 26, 1978, unambiguously authorized the application of plaintiff's shares to future advances to Hebebrand.

 Security agreements covering future advances are valid under Pennsylvania law. 13 Pa.Cons.Stat.Ann. § 9204(e), Beyer Estate v. Bank of Pennsylvania, 449 Pa. 24, 26, 295 A.2d 280 (1972). Whether a particular security agreement covers such advances depends on the intent of the parties. Id. Marine National Bank v. Airco, Inc., 389 F. Supp. 231, 234 (W.D.Pa.1975).

 
"Under Pennsylvania law, the intent of the contracting parties is exclusively determined from the written instrument if its words are "clear and unambiguous' .... However, when the language of the written contract is ambiguous, extrinsic or parol evidence is admissible to resolve the ambiguity.... Although the interpretation of a written contract that is clear and unambiguous is for the court ... once the court determines that parol evidence is pertinent to the construction of an ambiguous contract; (sic) it is for the jury to resolve the ambiguities and find the parties' intent."
 
Chuy v. Philadelphia Eagles Football Club, 595 F.2d 1265, 1271 (3d Cir. 1979) (footnote and citations omitted).

 A contract is ambiguous if, viewed as a whole, it is reasonably susceptible of differing constructions. Gerhart v. Henry Disston Sons, Inc., 290 F.2d 778, 782 (3d Cir. 1961); Walther and Cie v. U. S. Fidelity & Guaranty Co., 397 F. Supp. 937, 942 (M.D.Pa.1975). Therefore, once the non-moving party presents a reasonable reading of the contract which varies from that offered by the moving party "a question of fact as to the meaning of the contract exists which can only be resolved at trial." Landtect Corporation v. State Mutual Life Assurance Company of America, 605 F.2d 75, 80 (3d Cir. 1979). See Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1011 (3d Cir. 1980).

 Defendant contends that the pledge agreement is a security agreement which unambiguously covers future advances; that it is a conclusive indication of the parties' intent; and the parol evidence rule bars any evidence to the contrary. The pledge agreement does not contain an integration clause and I am satisfied that it was not an integrated contract. The peculiar nature of the U.P.S. stock at issue in the instant case, (see part II infra) made any pledge of the stock impossible unless Kitmitto executed a request for hypothecation of the shares to U.P.S. Further, the bank required Kitmitto to execute three U-1 forms prior to forwarding any sums to Hebrebrand. Accordingly, the scope of the agreement must be determined by all three documents. *fn2" After studying all of the documents it is not clear to me whether the parties intended the pledge of plaintiffs' stock to cover future advances.

 The pledge provides, in pertinent part:

 
"I (Tayseer D. Kittmito) hereby authorize you to receive, accept, or hold as security for all sums or debts now or hereafter owed to you by Roy Hebebrand the Borrower (including all extensions or renewals of the same), any and all of my property of any nature ... especially 2196 shares United Parcel Service stock ....
 
I expressly authorize you to treat my property and all other property held as collateral for such sums or debts in every respect as if it were the property of the Borrower and upon the release of any property to deliver the same to the Borrower, and I expressly declare all such property to be subject to all terms and any agreement made at any time with you by the Borrower and especially all terms of any collateral note executed by the Borrower."

 In the instant case the phrase "all sums or debts now or hereafter owed to you" is not unambiguous since a debt in existence at the time of the execution of the contract and not yet due would be "hereafter owed." This language falls far short of language used in Pennsylvania cases in which contracts have been held to cover future advances. In Beyer Estate v. Bank of Pennsylvania, 449 Pa. 24, 27, 295 A.2d 280, the document stated "said securities shall be collateral to secure any present or future advances, obligation or liability ...." (Emphasis supplied.) It is significant that the Beyer court did not hold that the language used in that case covered future advances as a matter of law. Rather, the court held that this language, when coupled with the parties' prior course of dealing, covered future advances.

 Similarly, in Heffner, supra, the court indicated that a clause covering "this or any other liability or liabilities to said holder hereof, due or to become due, or that may be hereafter contracted," (emphasis supplied), would be sufficient to cover advances of the same type. In Marine National Bank v. Airco, Inc., 389 F. Supp. 231, 234 (W.D.Pa.1975), the language held to be sufficient was "all other liabilities of Borrower to Bank now or hereafter incurred." (Emphasis supplied.) Unlike the language used in the instant case, all of the clauses quoted above unambiguously apply to debts created in the future.

 The language "all sums or debts now or hereafter owed to you" cannot, however, be construed in a vacuum. The intention of the parties must be gleaned from the contract as a whole. Robert F. Felte, Inc. v. White, 451 Pa. 137, 143, 302 A.2d 347 (Pa.1973). The language in the form pledge agreement which authorizes the bank to treat Kitmitto's property as if it was Hebebrand's and which provides that Kitmitto's property is subject to all agreements between the bank and Hebebrand seems to strongly indicate that the parties intended that the stock was pledged as security for future advances. However, as previously stated, other documents were executed as part of this transaction. The request for hypothecation, a form essential to consummation of the loan transaction, provided that the UPS shares were pledged as collateral for "a loan." Similarly, the only one of the three U-1 forms filled in on the same day as the pledge, notes that the credit extended for the collateral was $ 12,000. Construing the ...


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