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. e du/thir dc ir c uit_2001/274Filed 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 l aw, 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 subs idiary. 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 inter ior automotive trim for many years. In 1996, the compan y created a subsidiary called "Mitchell Manufacturing Group, Inc.," whose function was to process leather for us e by auto manufacturers. Owosso's goal was ultimately to sell this subsidiary.

Since its inception, the subsidiary had obtained le ather from plaintiff Garden State Tanning, Inc. By 1997, Mitchell Manufacturing's account had become so delinquent th at Garden State demanded Owosso's guaranty for payment of

2its subsidiary's invoices. Owosso complied and, in a letter

to Garden State dated September 8, 1997, stated:

"We, Mitchell Corporation of Owosso, the par ent company of Mitchell Manufacturing Group, Inc ., do promise to pay in full all monies owed to yo u for goods received in the event Mitchell Manufacturing Group, Inc. do not pay.

This letter is renewable in one year if need ed."

Soon thereafter, Owosso began discussing with the L amont Group the possibility of its purchasing Mitchell Manufacturing.

On March 3, 1998, Helen Malik, Secretary and Treasu rer of both Owosso and Mitchell Manufacturing, wrote to Garden State that Owosso was "in the process of clo sing on the sale of Mitchell Manufacturing Group, Inc. to a minority group. . . . We are requesting that we be removed f rom 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, 1 998, 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 nee d 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 nec essary paperwork. We'll need to know whether the gu arantee 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 credi t limits for [Mitchell Manufacturing]. However, since [Mi tchell Manufacturing] is already on `net prox 30' t erms, we reserve the right to set such limits should [Mitchell Manufacturing's] account status fall more th an thirty (30) days past due and contact [Owosso] dire ctly for payment. We will get in touch with you perso nally, or anyone else whom you designate, before eithe r of these takes place.

3Please let me know if this is acceptable."

Although that letter was addressed to Ms. Malik, Wi lliam F. Mitchell, the president of Owosso, wrote "OK W.F. M itchell" 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 Mit chell Manufacturing name, to the Lamont Group. Lamont the n 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 th e exact date of the sale and so continued to ship goo ds to the same company -- "Mitchell Manufacturing"-- at the s ame address as it had previously. By April 22, 1998, Mi tchell Manufacturing had incurred more than $2,780,000 in unpaid invoices for Garden State leather. After Owo sso 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 lear ned of the Mitchell Manufacturing sale. On June 3, 1998
, however, its credit manager wrote Ms. Malik request ing a corrected version of the guaranty. Specifically, he stated:

"it would be helpful if you adjusted the [Ow osso] guarantee to reflect the presence of the Lam ont Group and the change in the relationship between M itchell Manufacturing Group, Inc. and [Owosso] (no l onger the "parent company"?)."

The following day, Ms. Malik responded that Mitchel l 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 assum ed the "liability of the payables of Mitchell Manufact uring Group, Inc." when it purchased the company.

Owosso denied liability for any of the Mitchell deb t, and the dispute proceeded to litigation. Based on the"O K 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 Distri ct

4Court found the existence and extent of the guarant y

agreement ambiguous. Accordingly, the matter was submitted to a jury presided over by a Magistrate J udge 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 S tate 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 Ma gistrate 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 t o require the jury to consider the doctrine of strict issimi 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 Const ruction Co., Inc. v. American States Insurance Co., 749 F.2 d 1049 (3d Cir. 1984). When an ambiguity exists in the agr eement, 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 interp retation as other agreements). There is no special standard of interpretation for contracts creating secondary obl igations. Restatement (Third) of Suretyship & Guaranty S14 cm t. c (1996). Therefore, to the extent that there was unc ertainty about the terms of the guaranty agreement, the issu e was properly submitted to the jury.

Owosso's argument supporting the application of

___________________________________________________ ______________

1. Judgments have also been entered against Mitchel l Automotive, Inc. and Mitchell-Lamont. Owosso is presently in bankrup tcy and has obtained leave to pursue this appeal.

5strictissimi juris relies on a passage from the cas e of Pure

Oil Co. v. Shlifer, 175 A. 895 (Pa. Super. 1934). I n that action on a suretyship contract, the Pennsylvania S uperior Court quoted the trial court:

"It is well settled that, after the intentio n of the parties or the scope of the guarantor's undertaking has been determined by the ordinary rules of construc tion [interpretation] either from the instrument itself or from the instrument and the surrounding circumstances, the rule of strictissimi juri s applies, that is, that the guarantor is entitled to have h is undertaking as thus determined strictly cons trued, and that it cannot be extended by construction o r 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 assum ed by individuals, the Pennsylvania Supreme Court has lon g held that the principle of strictissimi juris does not a pply to "corporate compensated sureties." Fiumara v. Am. Su r. 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 indi viduals as sureties does not apply to paid sureties."). Cf. Me yer 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 co mplete discharge of surety's obligation).

The rationale underlying this distinction is easily understood: corporate suretyship, "an undertaking f or money consideration by a company chartered for the conduct of such business, . . . is essentially an i nsurance against risk." Brown v. Title Guar. & Sur. Co., 81 A. 410, 410-11 (Pa. 1911). These guarantors "may call thems elves `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." I d. at 411; see also Fiumara, 31 A.2d at 288 (in Pennsylvania,

6corporate compensated surety is considered practica l

equivalent of insurance company).

The distinction drawn between compensated and gratuitous suretyship is significant, particularly because the Pennsylvania Supreme Court has not yet had occa sion to rule on the application of strictissimi juris t o a guaranty
similar to that now before us.

Moreover, the Superior Court appears increasingly reluctant to apply that principle to guaranty agree ments entered into for profit. Compare, e.g. , Robert Mal lery Lumber Corp. v. B. & F. Assocs., Inc., 440 A.2d 579, 582 ( Pa. Super. 1982) (language of guaranty contract was not ambigu ous, but if it were, it would be strictly construed agai nst the guarantor-bank), with Continental Bank v. Axler , 5 10 A.2d 726, 729 (Pa. Super. 1986) ("A compensated surety is discharged only if, without the surety's consent, t here has
been a material modification in the creditor-debtor relationship and said modification has substantiall y increased the surety's risk.") (emphasis added), an d Meeting House Lane, 628 A.2d at 857.

The Pennsylvania Superior Court is not alone in its reluctance to apply the strictissimi juris principl e. 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 th e reason of the rule, particularly when the bond is underwri tten 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 stri ct rules . . . . As time passed, courts became unsatisfied w ith a rigid application of this doctrine" and began to retreat from it, particularly in cases involving more sophisticated corporate guarantors. Restatement (Third) Suretyship & Guaran ty
S 37 cmt. a.

The courts' disillusionment with strictissimi juris is not difficult to understand. The doctrine protected sec ondary obligors who entered into guaranty agreements for r easons involving familial or neighborly affection and who did not

7profit financially from the transaction. But the ru le was

problematic when applied to those secondary obligor s who were in the business of underwriting debt for monet ary benefit.

Rigid application of the doctrine allowed secondary obligors to avoid substantial secondary obligations solely on the basis of minor, immaterial changes in the relat ionship between the principal obligor and obligee. The consequential windfalls inuring to those secondary obligors often exceeded any harm caused by the obligee's act s. Id.

Owosso asserts that it was a gratuitous guarantor a nd, therefore, the jury was required to strictly constr ue the agreement. Nothing in the circumstances, however, suggests that the guaranty here was motivated by se lfless generosity. On the contrary, the record indicates t hat 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 op erating condition. It can hardly be said that the guaranty, without which Mitchell Manufacturing would have lost its ra w material supply, was wholly munificent in nature.

We are confident that the Pennsylvania Supreme Cour t 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., Norther n 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 disreg arded by a federal court unless it is convinced by other per suasive data that the highest court of the state would deci de otherwise.") (internal quotations omitted).

Even if this guaranty were held to be gratuitous,
Owosso's claim to strict construction would fail. T he Pennsylvania Supreme Court has indicated that it wi ll not discharge gratuitous guarantors on the basis of modifications in the creditor-debtor relationship w here the guarantor's consent to these changes has been obtai ned. See Meyer, 239 A.2d at 373. Here there is no questi on of

8consent 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 Gar den State's debtor; the former parent company cannot no w 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 Pennsylv ania would not apply that doctrine in this case and in a ny 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 uncon vincing. 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 gua ranty would be renewable in one year if needed, it is dou btful that the jury could have concluded otherwise.

The findings on the Mitchell-Lamont invoices rest o n 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 Gar den State's letter of March 6, 1998. The jury was entit led to
consider this notation as evidence that Owosso woul d adhere to its guaranty after the sale, at least unt il it
notified Garden State otherwise.

At first glance, it would appear unusual for Owosso to maintain the guaranty after the sale to Lamont. Gar den State, however, did not know the details of the tra nsfer, and the company to which it continued to ship its g oods after the sale bore the same name and mailing addre ss. Garden State could reasonably have surmised that Ow osso sold less than all of Mitchell Manufacturing's asse ts, 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 migh t also have considered it highly significant that Owosso n ever communicated its intent to revoke the guaranty unti l contacted by Garden State in June 1998.

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

impressed with the fact that Garden State, relying on Owosso's guaranty, shipped substantial amounts of l eather to Mitchell-Lamont, a course of action it likely wo uld 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 ignore d preset credit limits although the unpaid invoices of M itchell Manufacturing and Mitchell-Lamont were rapidly burgeoning. Although Garden State had set an intern al credit limit of $1 million on Mitchell Manufacturin g, this information was never conveyed to Owosso. According ly, there was no basis on which the guarantor could inv oke that limit. The ruling excluding that evidence is n ot
reversible.

Owosso also argues that the imposition of prejudgme nt
interest was in error. We find no merit to that iss ue, nor to Owosso's remaining contentions, which, we find, do not
warrant discussion.

Accordingly, the judgment of the District Court wil l be
affirmed.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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