IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

PROPERTY ACCEPTANCE CORP., :

Plaintiff, : CIVIL ACTION

:

v. :

:

MERTON H. ZITIN, et al., :

Defendants : NO. 04-3920

MEMORANDUM AND ORDER

McLaughlin, J. September 26, 2005

This dispute stems from a 1984 loan agreement (the

“Note”) between the Sandy Mac Food Company and the Corporation

for Business Assistance in New Jersey (“CBANJ”) that was

guaranteed by Merton H. Zitin, Robert M. Zitin and Michael Zitin

(the “Zitins”). The Note called for Sandy Mac to make monthly

installment payments to CBANJ for a period of twenty-five years. 

Property Acceptance Corporation, a successor in interest to

CBANJ, seeks to recover the remaining balance of the Note plus

interest from the Zitins.

Both parties filed motions for summary judgment. The

Court will deny both motions.

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 1 of 15
1 A motion for summary judgment shall be granted where all

of the evidence demonstrates “that there is no genuine issue as

to any material fact and that the moving party is entitled to a

judgment as a matter of law.” Fed. R. Civ. P. 56(c). The moving

party has the initial burden of demonstrating that no genuine

issue of material fact exists. Once the moving party has

satisfied this requirement, the non-moving party must present

evidence that there is a genuine issue of material fact. The

non-moving party may not simply rest on the pleadings, but must

go beyond the pleadings in presenting evidence of a dispute of

fact. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). In

deciding a motion for summary judgment, the Court must view the

facts and all reasonable inferences derived therefrom in the

light most favorable to the non-moving party. Josey v. John R.

Hollingsworth Corp., 996 F.2d 632, 637 (3d Cir. 1993).

2

I. The Summary Judgment Record

Many of the background facts of this case are not in

dispute.1 During the 1980s, the Zitins were in business together

as principals in the Sandy Mac Food Company, which operated a

meat processing plant in Pennsauken, New Jersey. On October 4,

1984, Merton Zitin, on behalf of Sandy Mac, executed the Note in

the amount of $194,000 payable to CBANJ. Each of the Zitins

separately signed a guaranty agreement (the “Guaranty”) under

which they guaranteed the obligations of Sandy Mac.

Under the Note, Sandy Mac was obligated to pay monthly

installments of interest and principal of $2,106.12 from December

1, 1984 through November 1, 2009. Failure to pay any installment

was an event of default upon which CBANJ had the option to

accelerate all unpaid principal and interest. Under the

Guaranty, if Sandy Mac failed to pay any obligation when due,

whether by acceleration or otherwise, each of the defendants

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 2 of 15
2 S-M Acquisition made every payment until August of 1993. 

Following a missed payment in August, S-M made its September 1993

payment, but has not made a payment since. 

3 The exact date of the transfer to the SBA is not clear from

the current record. The defendants provide documentation showing

that this transfer happened in February of 1994. The plaintiff

does not take a position on precisely when the transfer happened,

but provided an exhibit implying that the transfer took place in

June of 1994. (Defs.’ Mot. Summ. J. Ex. C; Pl.’s Mot. Summ. J.

Ex. N).

3

agreed to pay CBANJ, upon written demand, the amount due and

unpaid. 

From December 1, 1984 until August of 1989, Sandy Mac

made monthly payments under the Note. In 1989, the assets of

Sandy Mac were sold to S-M Acquisition, Inc. S-M Acquisition

continued to make monthly payments under the Note until the

latter part of 1993.2 No payments have been made under the Note

since September 2, 1993, by S-M Acquisition, the defendants or

anyone else.

The Note was transferred to the United States Small

Business Association (the “SBA”) in 1994.3 From 1994 to August

31, 2000, no payments were recorded on the Note and the SBA never

made a demand for payment from Sandy Mac, S-M Acquisition, the

defendants or anyone else. On August 31, 2000, the plaintiff,

then known as Loan Participant Partners, Ltd., purchased the Note

from the SBA.

On October 6, 2000, Beal Bank, acting as servicing

agent for the plaintiff, notified Sandy Mac of the sale of the

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 3 of 15
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Note from the SBA to the plaintiff. On August 18, 2003, Beal

Bank sent a letter to the Zitins and Sandy Mac demanding payment

of the amount due under the Note. On September 23, 2003, Beal

Bank sent a second letter to the Zitins, as well as to Sandy Mac,

notifying them that the Note had been accelerated and requesting

$536,893.31 as the total amount due. 

On August 18, 2004, the plaintiff filed this lawsuit

alleging a single count of breach of the Guaranty and seeking the

unpaid principal and accrued interest as well as attorney’s fees

and costs.

II. The Defendants’ Motion for Summary Judgment

The Court must determine whether the plaintiff’s demand

for back payments on August 18, 2003, and its demand for the

entire balance of the Note on September 23, 2003, are

enforceable. The defendants’ argue that these demands are not

enforceable because they were made an unreasonably long time

after the initial default in late 1993. The Court concludes that

the plaintiff was under an obligation to make a demand for

payment from the defendants within a reasonable time following

each default. However, the plaintiff was not under an additional

obligation to demand payment of the entire balance of the Note

following the initial default in late 1993.

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 4 of 15
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Under the Guaranty, two separate events must take place

before the plaintiff has an enforceable right against the

defendants. First, there must have been a failure to pay an

obligation under the Note by S-M Acquisition. Second, the

plaintiff had to demand payment, in writing, from the defendants. 

(Pl.’s Mot. Summ. J. Ex. H; Defs.’ Mot. Summ. J. Ex. E). 

Accordingly, the Court will analyze the defendants’

summary judgment motion in two steps. First, should the missed

payments by S-M Acquisition be viewed as a single default that

started in 1993 and continues to this day or, alternatively,

should each missed payment be treated as a separate and

independent default? Second, was the plaintiff under an

obligation to demand payment from the defendants within a

reasonable time following each default by S-M Acquisition? 

Before beginning this analysis, there is an initial

matter of whether state or federal law should apply. Both

parties have agreed that federal law should govern because the

plaintiff is an assignee of the SBA. (Summ. J. Hr’g Tr. 4-5,

July 22, 2005). Due to that agreement, the Court will apply

federal law.

A. Timing of Default Under the Note

As an initial step, it is necessary to characterize the

missed payments under the Note. The defendants view the missed

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 5 of 15
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payments as a single default that started in late 1993. The

defendants argue that the plaintiff was under an obligation to

demand the entire amount due under the Note following the initial

missed payment in 1993. The plaintiff argues that each missed

payment should be treated as a separate default until the

plaintiff exercises its option to accelerate the debt. The Court

concludes that Board of Trustees of District No. 15 Machinists’

Pension Fund v. Kahle Engineering Corp., 43 F.3d 852 (3d Cir.

1994) [hereinafter Kahle] answers this question in favor of the

plaintiff.

Kahle involved a dispute over missed payments by an

employer under a payment plan pursuant to the Multiemployer

Pension Plan Amendment Act (“MPPAA”). The employer, Kahle

Engineering Corp., was assessed withdrawal liability by the

pension fund it contributed to in 1984. The pension fund

determined that Kahle would need to make quarterly payments over

a period of about ten years to satisfy its liability. 

Kahle did not make any payments after December of 1984. 

Almost four years elapsed before the pension fund demanded past

due payments in August of 1988. It was not until September of

1993 that the pension fund filed suit in federal court. Despite

this delay, the United States Court of Appeals for the Third

Circuit held that the pension fund could recover payments due

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 6 of 15
4 The court in Kahle applied a six-year statute of

limitations running from the time of each missed installment

payment. Kahle, 43 F.3d at 857.

7

within the six year period prior to the filing of the lawsuit.4

Kahle, 43 F.3d at 857. 

In reaching this conclusion, the court in Kahle held

that “[i]n an installment contract, a new cause of action arises

from the date each payment is missed.” Id. (citing 4 A. Corbin,

Corbin on Contracts § 951 (1951)). The Kahle Court went on to

reason:

Consider, for example, a mortgage with a twentyyear payout in a jurisdiction with a six-year

statute of limitations. If, for some reason, the

mortgage company fails to sue the mortgagor for

more than six years after the mortgagor fails to

pay the first and succeeding payments, would it be

seriously argued that the mortgage company is

precluded thereafter from suing for those payments

due within the six years preceding the lawsuit or

from exercising the acceleration clause as to the

remaining fourteen years? 

 

Id. at 858. The broad language used by the court in Kahle

supports the plaintiff’s argument that each missed payment under

the Note should be considered a separate and independent default. 

The United States Supreme Court, also in the context of

the MPPAA, has adopted the reasoning in Kahle. Bay Area Laundry

& Dry Cleaning Pension Trust Fund v. Ferbar Corp. of Cal., Inc.,

522 U.S. 192, 208 (1997) [hereinafter Bay Area Laundry]. In

adopting the rule that each missed installment payment is a

separate cause of action, the Supreme Court noted that “[t]hat is

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 7 of 15
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the standard rule for installment obligations.” Bay Area

Laundry, 522 U.S. at 208.

The defendants attempt to distinguish Kahle on the

grounds that it did not involve a guaranty arrangement and that

it did not deal with an SBA loan. Although Kahle did not involve

a dispute identical to the one in this case, it did lay out broad

principles of contract law that are applicable here.

First, although there are differences between a payment

plan under the MPPAA and a loan agreement involving the SBA, that

distinction is not relevant here. The Kahle Court itself did not

limit its discussion to the specifics of the MPPAA but, instead,

laid out broader principles applicable to any contract involving

installment payments. Furthermore, in support of the proposition

that, absent acceleration, each missed installment payment is a

separate default, the Kahle Court cited with approval United

States v. LaFrance, 728 F. Supp. 1116 (D. Del. 1990), a case

which dealt with missed installment payments under an SBA loan. 

Kahle, 43 F.3d at 857. 

Second, it is true that Kahle, and for that matter Bay

Area Laundry, involved only a debtor-creditor relationship, and

did not deal specifically with a guaranty agreement. However, at

this stage in the analysis, the Court is simply considering the

issue of how to characterize the defaults by the debtor, S-M

Acquisition, under the Note. Kahle speaks directly to this

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 8 of 15
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initial issue of whether the missed installment payments by S-M

Acquisition under the Note should be treated as a single default,

or separate and independent defaults. 

Furthermore, it would be inconsistent with the general

structure of a guaranty to hold that a creditor, although not

under an obligation to demand the entire amount due under a note

following an initial default, is under an obligation to make such

a demand under the guaranty. Such a rule could potentially have

the effect of voiding a guaranty while at least part of the

obligation under the note was still enforceable. 

The defendants do point to one case, Curry v. United

States, 679 F. Supp. 966 (N.D. Cal. 1987), for the proposition

that a creditor is under an obligation to accelerate a note and

demand the entire amount due following an initial default. 

Curry, 679 F. Supp. at 970. However, Curry is inconsistent with

Kahle. The Kahle Court stated that in the context of a note with

installment payments due over time, a creditor should not lose

its right to collect payments due within the limitations period

simply because the creditor failed to demand payments due outside

of the limitations period. Kahle, 43 F.3d at 858. The Curry

Court held almost the opposite. It stated that a creditor

forfeits all ability to enforce a note by failing to demand the

entire amount due in a reasonable time. Curry, 679 F. Supp. at

970. 

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 9 of 15
5 The issue of the reasonableness of the plaintiff’s demand

is a separate issue from the statute of limitations. Under

federal law, the applicable statute of limitations is six years. 

28 U.S.C. § 2415(a). Both parties agree that the statute of

limitations did not begin to run with respect to any claim under

the Guaranty until a written demand was made. (Summ. J. Hr’g Tr.

5, July 22, 2005). 

The defendants did cite FDIC v. Hinkston, 848 F.2d 432 (3d

Cir. 1988) in support of their argument that the plaintiff’s

cause of action accrued when the SBA acquired the Note. 

Hinkston held that where a federal agency acquires a note in

default, the six-year federal statute of limitations begins to

run on the date the note was acquired, as opposed to the date of

default. Hinkston, 848 F.2d at 435. In other words, under

Hinkston, when a federal agency acquires a note on which the

statute of limitations has already started to run, but has not

yet expired, the limitations period is restarted on the date of

acquisition and the federal agency has six years to bring suit. 

10

The Court concludes that each missed payment under the

Note, from late 1993 until September 23, 2003 (when Beal Bank

sent a letter on behalf of the plaintiff accelerating the Note)

should be treated as a separate default. Thus, under the

Guaranty, each missed installment payment triggered a separate

right to demand payment from the defendants. The next question

to be determined is whether the plaintiff was under an obligation

to make a demand within a reasonable time following the numerous,

separate events of default under the Note beginning in 1993.

B. The Plaintiff’s Demand

The next issue is whether the plaintiff was under an

obligation to make a demand under the Guaranty within a

reasonable time of each default under the Note.5 The defendants

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 10 of 15
The analysis in Hinkston is not relevant to this case

though. Here, no demand was ever made on the defendants by

CBANJ. Thus, when the SBA acquired the Guaranty in 1994, the

statute of limitations had not started to run. The first demand

made on the defendants was on August 18, 2003 by the plaintiff. 

The plaintiff brought a timely suit one year later.

11

rely on United States v. Gordon, 78 F.3d 781 (2d Cir. 1996) to

argue that such an obligation exists. The Court finds the

reasoning in Gordon persuasive and concludes that the plaintiff

was under an obligation to make a demand under the Guaranty

within a reasonable time following each separate default under

the Note.

Gordon involved a loan from the Economic Development

Administration of the United States Department of Commerce (the

“EDA”) to Tableau Company, Inc. That loan was guaranteed by

Tableau’s president, Carl Gordon and his wife. The loan called

for monthly installment payments to be made by Tableau from March

of 1980 through January of 1990. 

Tableau never made an installment payment on the loan. 

It was not until June of 1984 that the EDA demanded payment from

the Gordons and accelerated the note. The Gordons never

responded and in October of 1986, the EDA made another demand,

which the Gordons also ignored. Finally, in June of 1990, almost

six years after the initial demand, the government sued the

Gordons on the guaranty. 

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 11 of 15
6 As in this case, the applicable statute of limitations in

Gordon was six years. Gordon, 78 F.3d at 783. Gordon stated

that the cause of action accrued in June of 1984 when the first

demand was made. Because the case was brought within six years

of the accrual date it was held to be timely. 

12

The court in Gordon held that following a default by a

debtor, a creditor cannot unreasonably delay making a demand on a

guarantor. Gordon, 78 F.3d at 785. Although Gordon did not

explicitly define how long a reasonable time was, it did conclude

that “a delay between default and demand that does not exceed the

applicable limitations period is ordinarily regarded as

reasonable.” Id. at 786. Because the EDA’s 1984 demand was

within six years of the initial default in 1980 the court held

that the EDA’s demand was presumptively reasonable as to all

payments due under the note.6 The Gordon Court then considered

whether any special circumstances might apply that would make the

demand unreasonable and found none. 

The Court finds Gordon’s reasoning persuasive. The

parties agree that making a demand is a condition precedent to

the running of the statute of limitations. (Summ. J. Hr’g Tr. 5,

July 22, 2005). Without a requirement that such a demand be made

in a reasonable time following a default, the plaintiff could

postpone the running of the limitations period indefinitely. See

Gordon, 78 F.3d at 785. Recognizing this potential problem,

courts in at least the Eighth, Ninth and D.C. Circuits have

adopted similar rules requiring a demand to be made in a

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 12 of 15
13

reasonable time. See, e.g., United States v. Garan, 12 F.3d 858,

860 (9th Cir. 1993); United States v. Vanornum, 912 F.2d 1023,

1027 n.5 (8th Cir. 1990); Nyhus v. Travel Mgmt. Corp., 466 F.2d

440, 452-53 (D.C. Cir. 1972).

The Court holds that with respect to each separate

default under the Note, the plaintiff was under an obligation to

make a demand under the Guaranty within a reasonable amount of

time. The plaintiff made a demand for back payments on August

18, 2003. About a month later, the plaintiff accelerated the

Note and made a demand for the entire balance on September 23,

2003. 

The next issue to be considered is the reasonableness

of the plaintiff’s demand with respect to each missed installment

payment. The Court does not have a complete enough record on

which to decide this issue. The parties did not discuss at any

length the test the Court should use to determine reasonableness. 

Nor did the parties set forth the undisputed facts that are

relevant to a test of reasonableness. The Court will conduct a

conference with counsel to determine how the parties would like

to proceed in light of the Court’s decision.

III. The Plaintiff’s Motion for Summary Judgment

The plaintiff has also moved for summary judgment. The

Court will deny the plaintiff’s motion for two independent

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 13 of 15
14

reasons. First, there is uncertainty regarding the

reasonableness of the plaintiff’s demand. Second, there is a

factual dispute concerning the defendants’ obligation under the

Note.

The plaintiff alleges that at the time the complaint

was filed, there was an unpaid principal balance of $249,470.92

and accrued interest of $313,773.80. The defendants dispute this

figure, noting that the face amount of the Note was only $194,000

and that the Transcript of Account and Payment History shows the

unpaid principal balance to be only $174,608.90. (Pl.’s Mot.

Summ. J. 6; Defs.’ Opp’n Br. 2-3). 

The dispute over the amount due on the Note, combined

with the uncertainty as to the reasonableness of the plaintiff’s

demand, leads the Court to deny the plaintiff’s motion for

summary judgment.

An appropriate Order follows.

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 14 of 15
IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

PROPERTY ACCEPTANCE CORP., : CIVIL ACTION

Plaintiff, :

:

v. :

:

MERTON H. ZITIN, et al., :

Defendants : NO. 04-3920

ORDER

AND NOW, this 26th day of September, 2005, upon 

consideration of the plaintiff’s Motion for Summary Judgment

(Docket No. 17), the defendants’ Opposition and the plaintiff’s

Reply as well as the defendants’ Motion for Summary Judgment

(Docket No. 16), the plaintiff’s Opposition and the defendants’

Reply, and arguments presented at a hearing held on July 22,

2005, IT IS HEREBY ORDERED that for the reasons set out in a

memorandum of this date, the plaintiff’s Motion for Summary

Judgment is DENIED and the defendants’ Motion for Summary

Judgment is DENIED.

BY THE COURT:

/s/ Mary A. McLaughlin

MARY A. McLAUGHLIN, J.

Case 2:04-cv-03920-MAM Document 27 Filed 09/26/05 Page 15 of 15