2001 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

11-26-2001

Garden State Tanning v. Mitchell Mfg Grp Inc

Precedential or Non-Precedential:

Docket 00-2432

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Recommended Citation

"Garden State Tanning v. Mitchell Mfg Grp Inc" (2001). 2001 Decisions. Paper 274.

http://digitalcommons.law.villanova.edu/thirdcircuit_2001/274
Filed November 23, 2001 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 00-2432 

GARDEN STATE TANNING, INC. 

v. 

MITCHELL MANUFACTURING GROUP, INC.; MITCHELL 

CORPORATION OF OWOSSO; THE LAMONT GROUP, 

INC.; MITCHELL MANUFACTURING GROUP, a LAMONT 

GROUP COMPANY, formerly known as LAMONT GROUP 

ACQUISITION CORP. 

 Mitchell Automotive, Inc. 

 f/k/a Mitchell 

 Manufacturing Group, Inc. 

 and Mitchell Corporation of 

 Owosso, Appellants. 

APPEAL FROM THE 

UNITED STATES DISTRICT COURT 

FOR THE EASTERN DISTRICT OF PENNSYLVANIA 

(D.C. No. 98-cv-04789 ) 

Trial Judge: Magistrate Judge Jacob P. Hart 

Argued September 24, 2001 

Before: ROTH, WEIS and GARTH, Circuit Judges 

(Filed: November 23, 2001) 
 Erik G. Chappell, Esquire 

 (ARGUED) 

 Daniel J. Dugan, Esquire 

 McHugh, DeNune & McCarthy 

 5580 Monroe Street 

 Sylvania, Ohio 43560 

 Attorneys for Appellants 

 Walter H. Flamm, Jr., 

 Esquire (ARGUED) 

 Robert E. Walton, Esquire 

 Brian W. Waering, Esquire 

 J. Bryan Tuk, Esquire 

 Flamm, Boroff & Bacine, P.C. 

 Union Meeting Corporate Center 

 925 Harvest Drive, Suite 220 

 Blue Bell, Pennsylvania 19422 

 Attorneys for Appellee 

OPINION OF THE COURT 

WEIS, Circuit Judge. 

In this diversity case arising under Pennsylvania law, 

defendant Mitchell Corporation of Owosso ("Owosso")

appeals from a judgment on a jury verdict based on a 

guaranty for payment of goods furnished to its subsidiary. 

Owosso argues that the guaranty was abrogated when the 

subsidiary was sold to another corporation. We will affirm. 

Owosso has been involved in the production of interior 

automotive trim for many years. In 1996, the company 

created a subsidiary called "Mitchell Manufacturing Group, 

Inc.," whose function was to process leather for use by auto 

manufacturers. Owosso's goal was ultimately to sell this 

subsidiary. 

Since its inception, the subsidiary had obtained leather 

from plaintiff Garden State Tanning, Inc. By 1997, Mitchell 

Manufacturing's account had become so delinquent that 

Garden State demanded Owosso's guaranty for payment of 

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its subsidiary's invoices. Owosso complied and, in a letter 

to Garden State dated September 8, 1997, stated: 

 "We, Mitchell Corporation of Owosso, the parent 

 company of Mitchell Manufacturing Group, Inc., do 

 promise to pay in full all monies owed to you for goods 

 received in the event Mitchell Manufacturing Group, 

 Inc. do not pay. 

 This letter is renewable in one year if needed." 

Soon thereafter, Owosso began discussing with the Lamont 

Group the possibility of its purchasing Mitchell 

Manufacturing. 

On March 3, 1998, Helen Malik, Secretary and Treasurer 

of both Owosso and Mitchell Manufacturing, wrote to

Garden State that Owosso was "in the process of closing on 

the sale of Mitchell Manufacturing Group, Inc. to a minority 

group. . . . We are requesting that we be removed from COD 

payment requirements as of February 27, 1998." The letter 

then recited the precise language of the September 8, 1997 

guaranty. 

Garden State responded in a letter dated March 6, 1998, 

that "with the continuing guarantee of [Mitchell 

Manufacturing parent] Owosso," the COD payment 

arrangements would be removed. The letter continued, 

 "There are several things on which we'll need to agree 

 as we put the change in place. When the sale of 

 [Mitchell Manufacturing] occurs I'll need to update our 

 credit files and will be sending you the necessary 

 paperwork. We'll need to know whether the guarantee 

 of [Owosso] will be affected by the sale and, if so, to 

 what extent? If the guarantee stays fully in place we 

 will not, at this time, set formalized credit limits for 

 [Mitchell Manufacturing]. However, since [Mitchell 

 Manufacturing] is already on `net prox 30' terms, we 

 reserve the right to set such limits should [Mitchell 

 Manufacturing's] account status fall more than thirty 

 (30) days past due and contact [Owosso] directly for 

 payment. We will get in touch with you personally, or 

 anyone else whom you designate, before either of these 

 takes place. 

 3 
 Please let me know if this is acceptable." 

Although that letter was addressed to Ms. Malik, William F. 

Mitchell, the president of Owosso, wrote "OK W.F. Mitchell" 

at the bottom of the document. A copy of the letter with 

this notation was then faxed to Garden State. 

On April 22, 1998, Owosso sold substantially all of

Mitchell Manufacturing's assets, along with the Mitchell 

Manufacturing name, to the Lamont Group. Lamont then 

changed its name to "Mitchell Manufacturing Group, a 

Lamont Group Company." The Owosso subsidiary was 

renamed "Mitchell Automotive, Inc." 

Garden State asserted that it was not advised of the 

exact date of the sale and so continued to ship goods to the 

same company -- "Mitchell Manufacturing"-- at the same 

address as it had previously. By April 22, 1998, Mitchell 

Manufacturing had incurred more than $2,780,000 in 

unpaid invoices for Garden State leather. After Owosso sold 

its subsidiary, Garden State sent an additional $1,370,000 

in goods, all on credit, to Mitchell-Lamont. 

The record does not indicate when Garden State learned 

of the Mitchell Manufacturing sale. On June 3, 1998, 

however, its credit manager wrote Ms. Malik requesting a 

corrected version of the guaranty. Specifically, he stated: 

 "it would be helpful if you adjusted the [Owosso] 

 guarantee to reflect the presence of the Lamont Group 

 and the change in the relationship between Mitchell 

 Manufacturing Group, Inc. and [Owosso] (no longer the 

 "parent company"?)." 

The following day, Ms. Malik responded that Mitchell 

Manufacturing had been sold to the Lamont Group on April 

22, 1998 and that Owosso was no longer the parent 

company. She also represented that Lamont had assumed 

the "liability of the payables of Mitchell Manufacturing 

Group, Inc." when it purchased the company. 

Owosso denied liability for any of the Mitchell debt, and 

the dispute proceeded to litigation. Based on the"OK W. F. 

Mitchell" notation on Garden State's March 6, 1998 letter, 

along with other factors, including the text of the parties' 

correspondence and deposition testimony, the District 

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Court found the existence and extent of the guaranty 

agreement ambiguous. Accordingly, the matter was 

submitted to a jury presided over by a Magistrate Judge 

pursuant to 28 U.S.C. S 636. 

The jury returned a special verdict finding Owosso liable 

for $2,783,391.10, the total cost of goods Garden State had 

shipped to Mitchell Manufacturing before April 22, 1998. 

The jurors also held Owosso responsible for $1,365,619.82 

for the leather supplied to Mitchell-Lamont. The Magistrate 

Judge then added prejudgment interest, bringing the total 

judgment against Owosso to $4,636,515.59.1 

Owosso's appeal raises a number of objections, none of 

which amounts to reversible error. 

Owosso contends that the Court erroneously failed to 

require the jury to consider the doctrine of strictissimi juris 

in interpreting the guaranty contract. We conclude that the 

principle has no application here. 

The difference between the interpretation and 

construction of contracts is discussed in Ram Construction 

Co., Inc. v. American States Insurance Co., 749 F.2d 1049 

(3d Cir. 1984). When an ambiguity exists in the agreement, 

the problem is one of interpretation. If, however, the terms 

are clear, construction of the contract determines its legal 

operation. 749 F.2d at 1052-53. 

The paramount goal of contract interpretation is to

determine the intent of the parties. Meeting House Lane, 

Ltd. v. Melso, 628 A.2d 854, 857 (Pa. Super. 1993) 

(guaranty contracts subject to same rules of interpretation 

as other agreements). There is no special standard of 

interpretation for contracts creating secondary obligations. 

Restatement (Third) of Suretyship & Guaranty S14 cmt. c 

(1996). Therefore, to the extent that there was uncertainty 

about the terms of the guaranty agreement, the issue was 

properly submitted to the jury. 

Owosso's argument supporting the application of 

_________________________________________________________________ 

1. Judgments have also been entered against Mitchell Automotive, Inc. 

and Mitchell-Lamont. Owosso is presently in bankruptcy and has 

obtained leave to pursue this appeal. 

 5 
strictissimi juris relies on a passage from the case of Pure 

Oil Co. v. Shlifer, 175 A. 895 (Pa. Super. 1934). In that 

action on a suretyship contract, the Pennsylvania Superior 

Court quoted the trial court: 

 "It is well settled that, after the intention of the parties 

 or the scope of the guarantor's undertaking has been 

 determined by the ordinary rules of construction 

 [interpretation] either from the instrument itself or 

 from the instrument and the surrounding 

 circumstances, the rule of strictissimi juris applies, that 

 is, that the guarantor is entitled to have his 

 undertaking as thus determined strictly construed, and 

 that it cannot be extended by construction or 

 implication beyond the precise terms of his contract 

 . . . ." 

175 A. 895, 898. 

Although this rule of construction in suretyship is

accurate with regard to gratuitous guaranties assumed by 

individuals, the Pennsylvania Supreme Court has long held 

that the principle of strictissimi juris does not apply to 

"corporate compensated sureties." Fiumara v. Am. Sur. Co. 

of New York, 31 A.2d 283, 287 (Pa. 1943); City of 

Philadelphia v. Nat'l Sur. Co., 173 A. 181, 182 (Pa. 1934) 

("[T]he rule of strict construction applied to individuals as 

sureties does not apply to paid sureties."). Cf. Meyer v. 

Indus. Valley Bank & Trust Co., 239 A.2d 371, 373 (Pa. 

1968) (material alteration in surety agreement made

without consent of gratuitous surety operates as complete 

discharge of surety's obligation). 

The rationale underlying this distinction is easily

understood: corporate suretyship, "an undertaking for 

money consideration by a company chartered for the 

conduct of such business, . . . is essentially an insurance 

against risk." Brown v. Title Guar. & Sur. Co., 81 A. 410, 

410-11 (Pa. 1911). These guarantors "may call themselves 

`surety companies,' [but] their business is in all essential 

particulars that of insurance. Their contracts are usually in 

the terms prescribed by themselves, and should be 

construed most strictly in favor of the obligee." Id. at 411; 

see also Fiumara, 31 A.2d at 288 (in Pennsylvania, 

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corporate compensated surety is considered practical 

equivalent of insurance company). 

The distinction drawn between compensated and 

gratuitous suretyship is significant, particularly because 

the Pennsylvania Supreme Court has not yet had occasion 

to rule on the application of strictissimi juris to a guaranty 

similar to that now before us. 

Moreover, the Superior Court appears increasingly 

reluctant to apply that principle to guaranty agreements 

entered into for profit. Compare, e.g. , Robert Mallery Lumber 

Corp. v. B. & F. Assocs., Inc., 440 A.2d 579, 582 (Pa. Super. 

1982) (language of guaranty contract was not ambiguous, 

but if it were, it would be strictly construed against the 

guarantor-bank), with Continental Bank v. Axler , 510 A.2d 

726, 729 (Pa. Super. 1986) ("A compensated surety is 

discharged only if, without the surety's consent, there has 

been a material modification in the creditor-debtor

relationship and said modification has substantially 

increased the surety's risk.") (emphasis added), and Meeting 

House Lane, 628 A.2d at 857. 

The Pennsylvania Superior Court is not alone in its

reluctance to apply the strictissimi juris principle. The 

United States Supreme Court stated nearly a century ago 

that the doctrine is "a stringent one, and . . . . one which 

ought not to be extended to contracts not within the reason 

of the rule, particularly when the bond is underwritten by 

a corporation which has undertaken for a profit to insure 

the obligee." United States ex rel. Hill v. Am. Sur. Co. of New 

York, 200 U.S. 197, 202 (1906). 

The Restatement articulates the modern antipathy 

toward the doctrine: "Older cases applied very strict rules 

. . . . As time passed, courts became unsatisfied with a rigid 

application of this doctrine" and began to retreat from it, 

particularly in cases involving more sophisticated corporate 

guarantors. Restatement (Third) Suretyship & Guaranty 

S 37 cmt. a. 

The courts' disillusionment with strictissimi juris is not 

difficult to understand. The doctrine protected secondary 

obligors who entered into guaranty agreements for reasons 

involving familial or neighborly affection and who did not 

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profit financially from the transaction. But the rule was 

problematic when applied to those secondary obligors who 

were in the business of underwriting debt for monetary 

benefit. 

Rigid application of the doctrine allowed secondary

obligors to avoid substantial secondary obligations solely on 

the basis of minor, immaterial changes in the relationship 

between the principal obligor and obligee. The 

consequential windfalls inuring to those secondary obligors 

often exceeded any harm caused by the obligee's acts. Id. 

Owosso asserts that it was a gratuitous guarantor and, 

therefore, the jury was required to strictly construe the 

agreement. Nothing in the circumstances, however, 

suggests that the guaranty here was motivated by selfless 

generosity. On the contrary, the record indicates that 

Owosso was negotiating for the sale of Mitchell 

Manufacturing as early as autumn of 1997. Certainly, it 

was in Owosso's best financial interest to maintain or 

increase the subsidiary's value by keeping it in operating 

condition. It can hardly be said that the guaranty, without 

which Mitchell Manufacturing would have lost its raw 

material supply, was wholly munificent in nature. 

We are confident that the Pennsylvania Supreme Court 

would reject Owosso's claim to gratuitous guarantor status 

and would instead follow the modern trend away from the 

doctrine of strictissimi juris. See, e.g., Northern Ins. Co. v. 

Aardvark Assocs., 942 F.2d 189, 193 (3d Cir. 1991) 

("Although we are not bound in a diversity case to follow 

decisions of a state intermediate appellate court, we are 

instructed that such decisions are not to be disregarded by 

a federal court unless it is convinced by other persuasive 

data that the highest court of the state would decide 

otherwise.") (internal quotations omitted). 

Even if this guaranty were held to be gratuitous, 

Owosso's claim to strict construction would fail. The 

Pennsylvania Supreme Court has indicated that it will not 

discharge gratuitous guarantors on the basis of 

modifications in the creditor-debtor relationship where the 

guarantor's consent to these changes has been obtained. 

See Meyer, 239 A.2d at 373. Here there is no question of 

 8 
consent to changes in the agreement, because the 

guarantor itself was the driving force in bringing about the 

revision. It was Owosso that sold the assets of Garden 

State's debtor; the former parent company cannot now 

claim surprise or ignorance of the resulting effect on its 

interests. 

Owosso has misinterpreted the rule of strictissimi juris to 

apply to interpretation as well as to construction of the 

agreement. As noted above, we predict that Pennsylvania 

would not apply that doctrine in this case and in any event 

the question for the jury was one of interpretation. 

Owosso's contention that the guaranty applied only to 

invoices pending at the time it was issued is unconvincing. 

The jury had ample reason to interpret the letters of 

September 8, 1997 and March 3, 1998 as effective 

continuing guarantees of Mitchell Manufacturing's 

obligations to Garden State. Particularly in light of the 

September 8, 1997 letter, which stated that the guaranty 

would be renewable in one year if needed, it is doubtful 

that the jury could have concluded otherwise. 

The findings on the Mitchell-Lamont invoices rest on 

somewhat different grounds. Essentially, the claim for debts 

accrued after the sale to the Lamont Group is based on the 

"OK" of Owosso's President Mitchell, affixed to Garden 

State's letter of March 6, 1998. The jury was entitled to 

consider this notation as evidence that Owosso would 

adhere to its guaranty after the sale, at least until it 

notified Garden State otherwise. 

At first glance, it would appear unusual for Owosso to 

maintain the guaranty after the sale to Lamont. Garden 

State, however, did not know the details of the transfer, 

and the company to which it continued to ship its goods 

after the sale bore the same name and mailing address. 

Garden State could reasonably have surmised that Owosso 

sold less than all of Mitchell Manufacturing's assets, or 

perhaps exchanged stock, or that under the terms of the 

arrangement, it was important to Owosso that Lamont

continue to receive leather supplies. The jury might also 

have considered it highly significant that Owosso never 

communicated its intent to revoke the guaranty until 

contacted by Garden State in June 1998. 

 9 
In addition, we note that the jurors might well have been 

impressed with the fact that Garden State, relying on 

Owosso's guaranty, shipped substantial amounts of leather 

to Mitchell-Lamont, a course of action it likely would not 

have followed in the absence of the guaranty. 

Owosso also complains that the District Court erred in 

refusing to admit evidence that Garden State ignored preset credit limits although the unpaid invoices of Mitchell 

Manufacturing and Mitchell-Lamont were rapidly 

burgeoning. Although Garden State had set an internal 

credit limit of $1 million on Mitchell Manufacturing, this 

information was never conveyed to Owosso. Accordingly, 

there was no basis on which the guarantor could invoke 

that limit. The ruling excluding that evidence is not 

reversible. 

Owosso also argues that the imposition of prejudgment 

interest was in error. We find no merit to that issue, nor to 

Owosso's remaining contentions, which, we find, do not 

warrant discussion. 

Accordingly, the judgment of the District Court will be 

affirmed. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

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