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. March 20, 2007

This is the Court’s second Memorandum and Order in this

case, which involves an attempt by the plaintiff to collect on a

note guaranteed by the defendants. The Court incorporates the

factual discussion from its prior opinion, which denied both

parties’ motions for summary judgment. (Mem. Op. of Sept. 26,

2005.) The parties have now filed renewed motions for summary

judgment, which the Court will deny because of the existence of

disputes of material fact.

I. Background

 In its prior Memorandum, the Court held that each

missed payment under the note until its acceleration should be

treated as a separate default, triggering a separate right to

demand payment under the guaranty. (Id. a 10.) The Court

further held that (1) the statute of limitations on the

plaintiff’s claim did not begin to run until a demand for payment

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 1 of 11
2

was put to the defendants and (2) the plaintiff was under an

obligation to make such a demand within a reasonable time after

each missed payment. (Id. at 10, 13.) 

The Court denied both motions for summary judgment

because neither party had briefed the issue of the reasonableness

of the plaintiff’s demand with respect to each missed payment. 

Further, the Court observed a dispute about the amount due under

the note. The plaintiff alleged that the note had a principal

balance of $249,470.92 when the complaint was filed, but the

defendants pointed to the note’s face-value, $194,000, and the

outstanding principal as listed in its payment history,

$174,608.90. 

The plaintiff has submitted a brief which asserts that

under the Court’s opinion, it is entitled to $149,936.92 in

principal and $134,133.73 in interest, plus $48.20 in interest

for each day beyond April 1, 2006. The sum assumes that all

payments were made through September 1, 1998 and none thereafter,

with interest compounded at the note’s 11.733 percent interest

rate. The defendants sent the plaintiff and the Court a letter

agreeing with this calculation. (Pl.’s Mem. of Law Regarding

Defs.’ Liability Ex. Q.)

The defendants, meanwhile, have filed a renewed motion

for summary judgment, which argues that recently-produced

documents from the Small Business Administration (“SBA”) show

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 2 of 11
The debenture guarantees its holder a certain rate of 1

return. In order to fulfil its guaranty, the SBA would have to

pay not only the principal and interest due as of the date of its

payment but an additional fee to ensure that the holder received

the guaranteed return. See Pl.’s Mem. Of Law Regarding Defs.’

3

that the note was accelerated in 1994. They argue that

consequently, the only issue for the Court is the reasonableness

of the delay between the acceleration in 1994 and the demand

under the guaranty in 2003. The plaintiff does not argue that a

nine-year lapse would be reasonable, but instead denies that the

evidence suggests that the note was accelerated.

II. The Evidence of Acceleration

In the first round of summary judgment motions, the

parties agreed that the note was transferred to the SBA in 1994,

but neither side explained the mechanics of the transaction. The

defendants maintain that SBA’s documents reveal that the

transferral was accomplished when the SBA was called upon to

honor its guarantee of a debenture issued by the Corporation for

Business Assistance in New Jersey (“CBANJ”) which financed the

Sandy Mac loan. 

According to the defendants, the SBA received the note

in consideration of $249,470.92 it paid to honor its guaranty of

the debenture. They assert that this figure represents the sum

of the accelerated principal and interest then due on the loan,

augmented by a prepayment fee. These conclusions are repeated 1

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 3 of 11
Liability Ex. B; Villios Dep. at 66.

A copy of Mr. Villios’s deposition is attached to the 2

Defendants’ Supplemental Brief in Support as Exhibit A and cited

herein as “Villios Dep. at __.”

4

by John Villios, district counsel for the SBA, in his declaration

filed by the defendants. (Defs.’ Supplemental Br. in Supp. Ex.

B.) 

Mr. Villios’s assertion that the $249,470.92 figure

represents an acceleration is not based on any firsthand

knowledge of the Sandy Mac loan, but a review of the computer

printouts that were produced in response to the defendants’

request for documents. (Villios Dep. at 40-41, 48. ) He 2

testified that (1) the SBA’s records show that shortly after it

acquired the note, it opened a new loan account with a balance of

$249,470.92 with Sandy Mac listed as the debtor; (2) the note had

a loan number of 173-644-3010, while the account number on the

newly-opened loan was 173-633-3500; (3) the substitution of “35"

in a loan number occurs when a loan enters default; and (4)

generally, when a loan defaults, the entirety becomes due and

payable. (Id. at 38, 44, 56.) 

Several documents support the contention that following

the SBA’s acquisition of the note, it believed that it was owed

$249,470.92 in principal from Sandy Mac. A July 7, 2000 document

prepared by the SBA in anticipation of the sale of the loan

calculates interest based on this figure. The principal of the

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 4 of 11
5

loan sold to the plaintiff was similarly listed as $249,470.92. 

(Defs.’ Br. in Supp. Exs. A-F.) 

III. Analysis

The plaintiff does not dispute that its demand for

payment in 2003 would be unreasonable if the note were

accelerated in 1994. Conversely, if the note was not accelerated

in 1994, the parties agree on the amount owed by the defendants

under the Court’s prior Memorandum. The sole question,

therefore, is whether there is a dispute of material fact about

whether the note was accelerated. The Court concludes that a

dispute of material fact exists. 

The loan agreement provides that the entire unpaid

principal and interest on the note shall become immediately due

and payable upon the written demand of the lender if the borrower

fails to cure a default within 15 days. (Pl.’s Mem. of Law

Regarding Defs.’ Liability Ex. A.) Supporting the defendants’

contention that a demand for immediate payment was sent is the

fact that acceleration would explain the increase in principal

due under the note from the time it was transferred to the SBA to

the time it was sold to the plaintiff. The SBA’s records suggest

that it believed that Sandy Mac owed principal of $249,470.92,

and the plaintiff has not provided an alternate explanation for

how the outstanding principal could be greater than the face

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 5 of 11
The Transcript of Account and Payment History reveals 3

that as of February 1994, when the loan was allegedly

accelerated, it had an outstanding balance of $184,626.42

($174,608.90 in principal and $10,017.52 in interest). (Pl.’s

Mem. of Law Regarding Defs.’ Liability Ex. F.) The amount paid

by the SBA in excess of this amount presumably represents

prepayment fees. 

6

value of the note unless the loan was accelerated. 

Further, Mr. Villios testified that he believed that

the $249,470.92 figure represented accelerated principal,

interest, and fees, and that the new loan account originated by

the SBA suggested that there was an acceleration. Although Mr.

Villios did not have personal involvement with the Sandy Mac

loan, his testimony may be an appropriate illumination of the

SBA’s ordinary business practices. 

The case for acceleration might also be supported by

the note’s prepayment provision, which states that if a debtor

pays the balance of the loan in advance of the 25-year payment

schedule, it must pay an additional fee to ensure that the

debenture holder receives its guaranteed return. (Pl.’s Mem. of 3

Law Regarding Defs.’ Liability Ex. B.) If the prepayment

provision applies when the note is accelerated, then upon

acceleration, the SBA would be entitled to recoup from Sandy Mac

what it had paid to honor its guaranty of the debenture –-

principal, interest, and prepayment fees. The fact that the

SBA’s records indicate that it had a loan of this sum outstanding

would be circumstantial evidence that it had, in fact,

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 6 of 11
7

accelerated the note.

Nonetheless, there are several weaknesses in the

defendants’ argument that there was an acceleration that prevent

a resolution of the issue. The defendants’ contention that the

note was accelerated is based on the supposition that if the

debenture was accelerated, the note would have been accelerated,

and there are problems with this inferential chain.

First, it is unclear whether the debenture was, in

fact, accelerated. The text of the statute under which the note

and debenture were issued states that the SBA shall take all

necessary steps to purchase or accelerate the debenture not later

than the 65th day after a payment is missed on the loan. 15

U.S.C. 697(h)(2) (2006). The statute thus implies that

acceleration and purchase of the debenture are two separate

processes. When a party defaults on the note, the SBA can pay

off the debenture (“purchase”) or it can demand that the

debenture issuer (here CBANJ) pay its obligation in full

immediately (“accelerate”). In this case, the SBA appears to

have chosen the former.

Second, even if there was an acceleration of the

debenture, the defendants have not shown that any action with

respect to the debenture would affect the underlying note. The

debenture and the note are related instruments in that the funds

raised by the issuing of the debenture were used to fund the loan

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 7 of 11
8

made under the note. (Their relatedness is also illustrated by

the fact that the statute requires the SBA to take action on the

debenture when a party defaults on the note.)

But the two instruments are governed by separate

agreements, with separate payment schedules, guaranteed by

separate parties. The defendants have not explained how any

action that the SBA took regarding its debenture guaranty would

necessarily affect its actions as the holder of the note. 

The plaintiff, for its part, argues that there could

not have been an acceleration, regardless of what is suggested by

the SBA’s records, because no notice of the acceleration was sent

to the defendants or Sandy Mac. The plaintiff is correct that

the critical question in determining if the note was accelerated

is whether the SBA sent a letter to the debtor demanding

immediate payment of the principal and interest due under the

note. The treatment of the loan in the SBA’s records is an

indirect way of addressing this question. 

But the plaintiff has not explained, given the absence

of any provision in the note or the loan agreement requiring that

guarantors be notified of acceleration, why lack of notice to the

defendants is relevant. Further, the significance of the

plaintiff’s assertion that Sandy Mac did not receive notice is

not clear for several reasons. 

First, payments under the note from 1989 until 1993

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 8 of 11
9

were made by S-M Acquisition, which purchased Sandy Mac’s assets

in 1989. Neither party has shed light on whether notice of

acceleration was sent to S-M Acquisition, despite the fact that

notice of the acceleration of the loan would seem most naturally

sent to the party which had been regularly making payments.

Second, according to Merton Zitin, Sandy Mac was not in

business in 1993 when the note was allegedly accelerated. He

further testified that Sandy Mac could not be contacted at its

address after its assets were sold. (Pl.’s Mem. of Law Regarding

Defs.’ Liability Ex. D at 41-43, 88-89.) The weight to be

accorded to the fact that no notice was received by a party that

could not be contacted and did not exist at the time of the

alleged acceleration is far from certain.

This uncertainty is reinforced by the lack of context

surrounding the absence of any records of acceleration. For

instance, do the parties have records of loan notices sent to

Sandy Mac after its assets were sold in 1989 or after 1994 when

the note was allegedly accelerated? The significance of the

defendants’ failure to produce a notice of acceleration would be

clearer depending on the answer to this question.

Because these issues –- why the SBA listed the

principal owed by Sandy Mac as $249.470.92, whether the SBA would

have been entitled to demand $249,470.92 from Sandy Mac under the

prepayment clause, and where notice of acceleration would have

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 9 of 11
10

been sent and whether and by whom it would have been received –-

are unresolved, summary judgment for either party is not

appropriate. Because neither party has requested a jury trial,

the parties shall prepare for a bench trial on the disputed

issues outlined above.

An appropriate order follows. 

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 10 of 11
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

ORDER

AND NOW, this 20th day of March, 2007, upon

consideration of the parties’ motions for summary judgment

(Docket Nos. 38, 39, and 51), and all opposition and reply

briefs, IT IS HEREBY ORDERED that the motions are DENIED for the

reasons stated in the accompanying memorandum.

IT IS FURTHER ORDERED that the parties shall confer and

report to the Court by March 30, 2007 a time by which they will

be prepared for a bench trial.

BY THE COURT:

/s/ Mary A. McLaughlin

MARY A. McLAUGHLIN, J.

Case 2:04-cv-03920-MAM Document 56 Filed 03/21/07 Page 11 of 11