Appeal from the Order of October 9, 1984, in the Court of Common Pleas of Montgomery County, Civil Division, at No. 82-11613.
Charles G. Milner, Norristown, for appellants.
George J. Meng, Norristown, for appellee.
Wickersham, Beck and Cercone, JJ.
[ 353 Pa. Super. Page 411]
Appellants Barry and Leslie Axler appeal the denial of their petition to open a judgment confessed against them under a surety agreement by which they became cosureties for a Continental Bank (Continental) loan to North Broad Distributors, Inc. (North Broad), a corporation which the Axlers and two other couples formed. Primarily, the Axlers contend on appeal that their surety obligation was discharged by a material modification in the relationship between North Broad (the principal debtor) and Continental (North Broad's creditor), namely, the sale of North Broad to
[ 353 Pa. Super. Page 412]
an individual who was not a cosurety of North Broad's debt to Continental. We hold that the sale of North Broad to a non-surety did not discharge the Axlers, and we affirm the order of the court of common pleas.
In 1976, North Broad was formed by three couples -- the Axlers, the Paul Lipschutzes and the Paul Freedmans. One member of each couple was given a one-third interest in North Broad. On August 19, 1976, North Broad, through its president Paul Lipschutz, executed a nondiscount note to Continental in accordance with a North Broad corporate loan resolution which authorized either North Broad's president or North Broad's secretary (then Leslie Axler) to borrow money for North Broad. In connection with this note, the Axlers, the Lipschutzes and the Freedmans each personally signed identical surety agreements obligating them to pay North Broad's debt to Continental in the event North Broad defaulted.
On November 2, 1977, North Broad obtained another loan from Continental on the same terms as the first note. As of January 12, 1978, there remained a balance of $75,443.09 on the first note and $25,000 on the second note.
On January 12, 1978, the Axlers sold their interest in North Broad to Paul Freedman and to another individual who was not an originator of North Broad. By a letter dated February 1, 1978, the Axlers informed Continental that they were no longer owners of North Broad and requested that they be released as cosureties of North Broad's debt to Continental. By a letter dated February 9, 1978, Continental advised the Axlers that they would not be released as cosureties unless North Broad's indebtedness was fully paid or satisfactory substitute security for the indebtedness was pledged.*fn1
[ 353 Pa. Super. Page 413]
On March 3, 1978, North Broad executed a consolidation note with Continental in order to aggregate the outstanding balances on North Broad's first and second notes with Continental. The consolidation note was executed in the amount of $100,075.42 representing the remaining balance of $75,075.42 on North Broad's first note of August 19, 1976, and $25,000 on North Broad's second note of November 2, 1977.
By September 21, 1981, the balance on the consolidation note was $46,057.24. On that date, North Broad renegotiated a five-year note with Continental for the amount of $49,868.62 which constituted the outstanding principal on the consolidation note plus accrued interest thereon. A Time and Demand Loan Memorandum of Continental indicates that the purpose of the five-year note was to pay the balance on the consolidation note from North Broad's "cash flow of business, which in turn services buyout by Barry [Friedman] to [Lipschutz] and [Paul] Freedman." After the five-year note was executed, Lipschutz and Paul Freedman (the remaining original North Broad shareholders) sold their interest in North Broad to Joseph Barry "Buddy" Friedman.
North Broad made regular payments on the five-year note for a period of six months and then failed to make payments for the next three months. Consequently, on July 8, 1982, Continental confessed judgment against the Axlers, the Paul Lipschutzes and the Paul Freedmans as cosureties for North Broad's debt to Continental. At the time judgment was confessed, none of the cosureties were still involved in North ...