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NIKIMIHA SECS. LTD. v. TREND GROUP

August 19, 1986

NIKIMIHA SECURITIES LTD.
v.
THE TREND GROUP LTD. and JEFFREY K. RAFSKY



The opinion of the court was delivered by: SHAPIRO

NORMA L. SHAPIRO, J.

 FINDINGS OF FACT and CONCLUSIONS OF LAW

 Plaintiff Nikimiha Securities Ltd. ("Nikimiha") filed this complaint to recover on bills of exchange and promissory notes from defendant The Trend Group Ltd. ("Trend") and guarantees from defendant Jeffrey K. Rafsky ("Rafsky"). Following denial of defendants' motion to transfer pursuant to 28 U.S.C. § 1404(a) and plaintiff's motions for default judgment and summary judgment, a bench trial was held on October 17-18, 1985. The court's findings of fact and conclusions of law required by Fed.R.Civ.P. 52 follow.

 Findings of Fact

 Plaintiff Nikimiha is a corporation organized and existing under the laws of England with its principal place of business in London, England.

 Defendant Trend is a corporation organized and existing under the laws of the State of Delaware with its principal place of business in Valley Forge, Pennsylvania.

 Defendant Rafsky is a citizen of the Commonwealth of Pennsylvania.

 On August 9, 1983, Trend, through its president, Rafsky, executed a four-page Letter Agreement known as the Facility Agreement. (Ex. N-2). The Facility Agreement, which was prepared by Nikimiha, established a 700,000 Pounds Sterling line of credit for the financing of imports and purchases. The Agreement provided that the resulting debt would be evidenced by bills of exchange. The Facility Agreement also required:

 
a. Nikimiha to pay Trend's supplier upon the shipment of goods to Trend;
 
b. Trend to pay Nikimiha 180 days after Nikimiha's payment to Trend's supplier;
 
c. Trend to bear the risk of currency fluctuation unless Nikimiha was instructed to cover the risk on Trend's behalf;
 
d. Trend to purchase insurance to cover transactions under the Facility Agreement; and
 
e. Trend's shareholders to guarantee Trend's indebtedness to Nikimiha.

 Since Trend intended to purchase three racehorses, Nikimiha asked that Trend accept three blank bills of exchange. Rafsky, on behalf of Trend, signed an endorsement "Accepted Payable at for The Trend Group Ltd." on each of the bills. (Reply to Request for Admissions, para. 9).

 On August 26, 1983, and again on September 2, 1983, pursuant to the Facility Agreement, shareholders of Trend -- defendant Rafsky, Donald C. Whirley, and Weld Monde Ltd. -- executed a guarantee securing Trend's commitments. (Request for Admissions, para. 14; Ex. N-3, N-4).

 Mossvend Ltd. ("Mossvend"), a limited liability company under the laws of England, was formed in 1979 by Trend through its English solicitors. (Tr. 1.42).

 Business was transacted between Mossvend and Trend from 1980 and 1983; "there was a continuing interrelationship . . . between the two companies." (Tr. 1.44).

 Trend imported racehorses from England. On several occasions, Trend purchased racehorses from Mossvend. On August 25, 1983, Trend and Mossvend executed three contracts; each contract provided for the sale of a certain horse by Mossvend to Trend. The three horses and the corresponding purchase prices are:

 
What Lake, 273,000 Pounds Sterling (Ex. D-B);
 
First Groom, 208,200 Pounds Sterling (Ex. D-D); and
 
Bold Foil, 192,000 Pounds Sterling (Ex. D-G).

 On August 28, 1983, these three horses were shipped from England to New York by air transport; on August 31, 1983, they were received in New York by Trend's agent. (Reply to Request for Admissions, para. 18). Rafsky acknowledged receipt of each horse by separate letter. (Ex. N-11, What Lake; Ex. N-24, First Groom; Ex. N-25, Bold Foil).

 Trend instructed Nikimiha to pay Mossvend upon shipment 273,000 Pounds Sterling for the racehorse What Lake, 208,200 Pounds Sterling for the racehorse First Groom, and 192,000 Pounds Sterling for the racehorse Bold Foil. (Reply to Request for Admissions, para. 10; Ex. N-5).

 Nikimiha paid Mossvend 273,000 Pounds Sterling for What Lake and 400,200 Pounds Sterling for First Groom and Bold Foil in accordance with the instructions received previously from Trend.

 On September 5, 1983, Nikimiha, having advanced 673,200 Pounds Sterling to Mossvend on Trend's behalf, completed two bills of exchange. It completed one Bill of Exchange previously executed in blank by inserting the amount of 281,913.80 Pounds Sterling and a due date of February 24, 1984, 180 days from the date of shipment of What Lake. The amount represented the funds advanced to Mossvend for the racehorse What Lake, commissions and other expenses allowed by the Facility Agreement. The amount is consistent with Invoice 1148, received by Trend on or about September 5, 1983. (Replies to Request for Admissions paras. 25 and 26).

 Nikimiha completed the second Bill of Exchange by inserting the amount of 413,263.29 Pounds Sterling and a due date of February 24, 1984, 180 days from the date of shipment of First Groom and Bold Foil. The amount represented the funds advanced to Mossvend for the racehorses First Groom and Bold Foil, commissions and other expenses under the Facility Agreement. The amount is consistent with Invoice 1149, received by Trend on or about September 5, 1983. (Replies to Request for Admissions paras. 31 and 32).

 On February 24, 1984, Nikimiha by Telex demanded immediate payment of the bills of exchange by Trend. (Ex. N-30).

 Trend, responding to Nikimiha's demand by Telex, acknowledged its obligation to Nikimiha and offered to pay Nikimiha by March 9, 1984. (Ex. N-31).

 When Trend failed to pay Nikimiha by March 9, 1984, as it had promised, representatives of Nikimiha, Drummond Millis and Neil Donnelly, visited Trend's offices in Valley Forge, Pennsylvania to discuss payment of the defaulted bills with Rafsky and William H. Klein, Vice-President of Trend. As a result of that meeting, Trend executed two promissory notes, one in the principal amount of 413,623.29 Pounds Sterling with interest thereon at 12.5% and the other in the principal amount of 218,913.80 Pounds Sterling with interest thereon at 13%. The promissory notes, by their express terms, arise out of and are subject to the terms of the Facility Agreement. (Ex N-34; N-35).

 William Klein, Vice-President of Trend, testified that the parties intended the notes to effect a novation. His testimony was not credible.

 Stephen E. Rogers, Director of International Relations for Trend, testified on behalf of defendants with respect to their affirmative defenses. His testimony was not credible.

 The parties did not intend the notes to effect a novation; the parties intended the notes to supplement rather than replace the bills of exchange.

 Nikimiha reserved its rights against Rafsky in the event of a novation; Rafsky consented to this reservation of rights.

 Trend delivered two checks concurrently with the execution of the notes: the first, in the amount of $ 100,000, was payment of the first installment on each of the notes; and the second in the amount of $ 70,225.54, was payment of aggregate accrued interest. (Reply to Request for Admissions, para. 41; Ex. N-33).

 Trend informed Nikimiha by letter dated March 12, 1984 that Trend's failure to give consent to the deposit of these checks by March 28, 1984 would be considered a default under the notes. (Ex. N-33).

 On March 12, 1984, Nikimiha delivered to Rafsky letters addressed to Weld Monde, Whirley and Rafsky, dated March 13, 1984, that notified them of its agreement to negotiate a rescheduling of the debt, their obligation of full reimbursement of the debt under the guarantee and their continuing liabilities on the guarantees executed pursuant to the Facility Agreement should Trend default on the promissory notes. (Reply to Request for Admissions, para. 42; Ex. N-38).

 Trend failed to give its consent to the deposit of the two checks prior to the close of business on March 28, 1984. (Ex. N-46; Rafsky's Deposition, p. 78).

 No payments have been made on the bills of exchange or the promissory notes to Nikimiha by Trend, Weld Monde, Rafsky or Whirley. (Reply to Request for Admissions, para. 44).

 Nikimiha received partial payment of approximately 630,000 Pounds Sterling on the Trend obligation on September 30, 1984 from Export Credit Guarantee Department ("ECGD") under a policy insuring Nikimiha against default by Trend. ECGD is a Department of the Secretary of State for Trade for the United Kingdom. (Tr. 2.99-102).

 Trend is liable to Nikimiha on the bills of exchange.

 Rafsky is liable to Nikimiha on his guarantee.

 Discussion

 I. Liability and Novation

 A. Bills of Exchange

 The first issue is whether Pennsylvania or English law applies. This is a diversity case, so Pennsylvania's choice of law rules govern. Klaxon Co. v. Stentor Electric Manufacturing Co., Inc., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941); Melville v. American Home Assurance Co., 584 F.2d 1306, 1308 (3d Cir. 1978). Under Pennsylvania conflicts law, "the place having the most interest in the problem and which is the most intimately concerned with the outcome is the forum whose law should be applied." Complaint of Bankers Trust Company, 752 F.2d 874, 882 (3d Cir. 1985). The Facility Agreement does not contain a choice of law provision. But whether Pennsylvania or English law applies is here immaterial because under both English and Pennsylvania law, Trend's acceptance of the bills of exchange created an obligation on its part to pay Nikimiha the sums stated therein. A Bill of Exchange is a negotiable instrument evidencing a debt on the part of the acceptor. 4 Halsbury's Laws of England para. 356 (4th Ed. 1973); 13 Pa.C.S.A. 3413(a). *fn1"

 B. Promissory Notes

 The promissory notes executed March 12, 1984 each state that they "shall in all respects be interpreted in accordance with the laws of England." (Emphasis supplied). (Ex. N-34, N-35). Nikimiha contends that in view of this language, English law controls whether or not the execution of these notes constituted a novation of the bills of exchange and the guarantee. Defendants argue whether or not there was a novation depends on the effect of the execution of the promissory notes on the bills of exchange and not on their interpretation; the notes were executed in Pennsylvania so defendants argue that Pennsylvania law controls.

 But both parties agree that Pennsylvania and English law are identical on whether the execution of the promissory notes effected a novation of the prior debt evidenced by the bills of exchange and guarantee so that the court need not determine whether the law of Pennsylvania or England applies. Under Pennsylvania and English Law, the essential elements of a novation are displacement and extinction of a prior contract, substitution of a new contract, sufficient consideration therefor, and consent of the parties. First Pennsylvania Bank N.A. v. Triester, 251 Pa. Super 372, 380 A.2d 826 (1977); 9 Halsbury Laws of England para. 580-584 (4th Ed. 1974).

 Each of the promissory notes explicitly preserves the obligations arising under the Facility Agreement:

 
This note evidences an obligation arising under the terms of the certain Facility Agreement dated August 9, 1983, between the undersigned and Nikimiha Securities Ltd., and is subject to all the terms and provisions and is entitled to all the benefits and security thereof.

 (Ex. N-34, N-35). This demonstrates lack of intent to extinguish.

 The bills of exchange were not surrendered to Trend or otherwise cancelled or satisfied. This also demonstrates lack of intent to extinguish.

 On March 12, 1984, Nikimiha delivered to Rafsky letters dated March 13, 1984, addressed to Weld Monde, Whirley and Rafsky that expressly stated Nikimiha's expectation of full reimbursement under their guarantee and their continuing liabilities under the guarantee in the event that Trend defaulted on the promissory notes:

 
At the request of the Trend Group Ltd. we have agreed to negotiate a re-scheduling of this debt, however [sic] should such negotiations prove abortive we will look to you for immediate full reimbursement of our debt under the aforementioned guarantee . . . . Should the re-scheduling be agreed and then subsequently be defaulted under by the Trend Group Ltd. We remind you of your continuing liabilities under the aforementioned guarantees . . . .

 (Ex. N-38). Rafsky failed to deny or contradict its terms.

 William Klein, Vice-President of Trend, testified that Trend intended the promissory notes to constitute a novation. On direct examination, Klein testified that Trend intended the promissory notes to supercede the bills. (Tr. 2.61). On cross-examination, he claimed that he did not know of the existence of the bills of exchange. (Tr. 2.68). This inconsistency was not explained satisfactorily. (Tr. 2.69). Although the witness repeatedly declared his honesty (Tr. 2.73-74), as the immortal Bard observed, it would appear the witness doth protest too much.

 Klein also testified that the notes were intended to replace the bills of exchange because of defects with respect to insurance. (Tr. 2.64). If so, the insurance defense would have been raised at the outset of this litigation rather than belatedly in response to plaintiff's motion for summary judgment. Klein's testimony as a whole is not credible.

 Defendants also argued a novation was intended because of certain differences between the terms of the bills and notes (repayment dates, interest rates, commissions, delinquency charges, and so on). (Tr. 1.92-94). The notes do differ from the bills, but it does not follow that the parties intended them as substitutes. A subsequent agreement may supplement rather than replace a prior agreement with differing terms. The differences between the terms of the bills and the notes do not manifest an intent to effect novation and the manifest intent of the parties must govern.

 Defendants may have subjectively intended the promissory notes to effect a novation. But this intention was not communicated to or agreed to by Nikimiha. (Tr. 2.73). The notes cannot be effective in accordance with defendants' alleged subjective intent when that intent is inconsistent with the clearly manifested intent of both parties.

 But even if the promissory notes effected a novation, Rafsky would remain liable on his guarantee to Nikimiha. Nikimiha contends English law controls; under English law a novation does not discharge a guarantor where the creditor reserves his rights against him with or without the consent or knowledge of the guarantor; 20 Halsbury's Laws of England § 266 (4th Ed. 1978). Defendants contend that Pennsylvania law controls and that under Pennsylvania law a novation would discharge the guarantor unless the guarantor consented to Nikimiha's reservation of rights against him; 74 AmJur 2d. Suretyship para. 60. But whether Pennsylvania law or English law applies is immaterial because Rafsky did consent to Nikimiha's reservation of rights against him.

 Nikimiha's rights against Rafsky were expressly reserved in the guarantee Rafsky signed:

 
It is agreed . . . that you [Nikimiha] shall be at liberty without affecting in any way or waiving your rights hereunder against me/us [Rafsky] without notice to me/us to realise securities and to give time or to compound or make other arrangements with or grant other indulgence to the debtor . . . .

 (Ex. N-3). Rafsky, as signatory to the guarantee, consented to its terms. Nikimiha also reserved its rights against Rafsky in its letter to Rafsky of March 13, 1984, in which Nikimiha notified Rafsky of its intent to seek reimbursement on the guarantees in the event of Trend's default on the note. (Ex. N-38). Rafsky's consent to the guarantee and the term expressed therein, including the reservation of rights against him, ...


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