Court Opinion

ID: 4670170
Source: CourtListenerOpinion
Date Created: 2021-03-22 17:12:47.448987+00
Date Added: 2024-06-11T08:01:39.598750
License: Public Domain

J-S55037-20

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.0.P. 65.37
PNC BANK, N.A., CUSTODIAN FOR : IN THE SUPERIOR COURT OF
THE PETER J. FEDORKO, JR., : PENNSYLVANIA
INDIVIDUAL RETIREMENT ACCOUNT

Appellant

No. 501 WDA 2020

ANDREA LEHR

Appeal from the Order Entered March 19, 2020
In the Court of Common Pleas of Erie County Civil Division at No(s):
10592-2017

BEFORE: BOWES, J., MCCAFFERY, J., and COLINS, J.*
MEMORANDUM BY COLINS, J.: FILED: MARCH 22, 2021
Appellant, PNC Bank, N.A., custodian for the Peter J. Fedorko, Jr.,
individual retirement account, appeals from the order of March 19, 2020,
granting the motion for summary judgment of Appellee, Andrea Lehr,
dismissing Appellant’s case with prejudice, and denying Appellant’s motion for
summary judgment. We affirm.
In its opinions, the trial court fully and correctly set forth the relevant
facts and procedural history of this case. See Trial Court Opinion, dated
March 19, 2020, at 1-2; Trial Court Opinion, dated June 16, 2020, at 1-4.

Therefore, we have no reason to restate them at length here.

 

“ Retired Senior Judge assigned to the Superior Court.
J-S55037-20

For the convenience of the reader, we briefly note that, on March 9,
2007, Appellant and Knoxville Restaurant Ventures, LLC (“KRV”), entered into
a three-year commercial lease agreement for property located in Knoxville,
Tennessee. Trial Court Opinion, dated March 19, 2020, at 1; Trial Court
Opinion, dated June 16, 2020, at 1. Appellee and her spouse, Lance L. Lehr,
executed a lease guaranty in favor of Appellant for any and all liabilities due
under the lease agreement. Trial Court Opinion, dated March 19, 2020, at 1;
Trial Court Opinion, dated June 16, 2020, at 1. Mr. Lehr was a member of
KRV; Appellee was not. Exhibit A.

Without a written signed modification agreement and without

consent and notice to [Appellee], [Appellant] orally agreed to work

with KRV so that KRV could remain a tenant of the building and

property [after KRV began bankruptcy proceedings]. KRV began

making payments past due on the rent and real estate taxes. ...

[Appellant] filed a Complaint against only [Appellee] and sought

to recover damages in the amount of $2,317,681.60 against only
[Appellee].

Trial Court Opinion, dated March 19, 2020, at 2.
Both parties filed for summary judgment, and, on March 19, 2020, the

trial court found in favor of Appellee and against Appellant. On April 17, 2020,

Appellant filed this timely appeal.!

Appellant presents the following issue for our review:

 

1 Appellant filed its statement of errors complained of on appeal on May 13,
2020. The trial court had included an opinion with the order of March 19,

2020. It entered a second opinion, pursuant to Pa.R.A.P. 1925(a), on June 16,
2020.
J-S55037-20

Did the trial court commit an error of fact and/or law by granting
[Appellee]’s motion for summary judgment and _ dismissing
[Appellant]’s case, with prejudice?

Appellant’s Brief at vii (unnecessary capitalization omitted).

Appellant contends that “the trial court erred by granting Appellee’s
motion for summary judgment and by dismissing [Appellant]’s case with
prejudice.” Id. at 7 (unnecessary capitalization omitted). Appellee answers
that she was “completely discharged” from the lease guaranty, “because there
were material modifications to the terms of the lease agreement without her
consent.” Appellee’s Brief at 12.

Entry of summary judgment is governed by Rule 1035.2 of the Rules of
Civil Procedure:

After the relevant pleadings are closed, but within such time as
not to unreasonably delay trial, any party may move for summary
judgment in whole or in part as a matter of law

(1) whenever there is no genuine issue of any material fact
as to a necessary element of the cause of action or defense
which could be established by additional discovery or expert
report, or

(2) if, after the completion of discovery relevant to the
motion, including the production of expert reports, an
adverse party who will bear the burden of proof at trial has
failed to produce evidence of facts essential to the cause of
action or defense which in a jury trial would require the
issues to be submitted to a jury.

Pa.R.C.P. 1035.2. In addition:

Our standard of review of an appeal from an order granting
summary judgment is well settled: Summary judgment
may be granted only in the clearest of cases where the
record shows that there are no genuine issues of material
fact and also demonstrates that the moving party is entitled

-3-
J-S55037-20

to judgment as a matter of law. Whether there is a genuine
issue of material fact is a question of law, and therefore our
standard of review is de novo and our scope of review is
plenary. When reviewing a grant of summary judgment, we
must examine the record in a light most favorable to the
non-moving party.

Newell v. Montana West, Inc., 154 A.3d 819, 821-22 (Pa.
Super. 2017) (citations and internal quotation marks omitted).

Reason v. Kathryn’s Korner Thrift Shop, 169 A.3d 96, 100 (Pa. Super.

2017).

Furthermore, Pennsylvania courts have consistently differentiated
between gratuitous (uncompensated) sureties and sureties who
are compensated:

While we have held that in cases of corporate sureties the
bond is to be strictly construed in favor of the obligee, we
have also held that, when obligations of suretyship or
indemnity are assumed by individuals without pecuniary
compensation, their obligations are not to be extended by
implication or construction. Their liability is strictissimi
juris.2

Barratt v. Greenfield, 137 Pa.Super. 310, 9 A.2d 188, 189
(1939).

2“TT]o be interpreted in the strictest manner.” Black’s Law
Dictionary 1435 (7th ed.1999).

J.F. Walker Co. v. Excalibur Oil Group, Inc., 792 A.2d 1269, 1274 (Pa.
Super. 2002). “Where, without the surety’s consent, there has been a
material modification in the creditor-debtor relationship, a gratuitous
(uncompensated) surety is completely discharged.” Id. (citation omitted).
See also Magazine Digest Publishing Co. v. Shade, 199 A. 190, 192 (Pa.
1938) (“A gratuitous or accommodation guarantor is discharged by any

change, material or not, and, even if he sustains no injury by the change, or
J-S55037-20

if it be for his benefit, he has a right to stand upon the very terms of his
obligation and is bound no further.”).

After a thorough review of the record, the briefs of the parties, the
applicable law, and the _ well-reasoned opinion of the Honorable
Stephanie Domitrovich, we conclude that Appellant’s issue merits no relief.
The trial court opinions comprehensively discuss and properly dispose of that
question. See Trial Court Opinion, dated March 19, 2020, at 5; Trial Court
Opinion, dated June 16, 2020, at 8-15 (trial court did not err by finding
Appellee was a gratuitous surety who was discharged from liability under the
lease guaranty after Appellant and KRV materially modified the lease
agreement by increasing the rent payments and extending the lease term
thereby substantially increasing her risk without her consent).

Accordingly, the trial court properly entered summary judgment in favor
of Appellee, and we affirm on the basis of the trial court’s opinions. The parties
are instructed to attach the opinions of the trial court in any filings referencing
this Court’s decision.

Order affirmed.

Judgment Entered.

     

Jeseph D. Seletyn, Es
Prothonotary

Date: 03/22/2021
Circulated 12/14/2020 11:08 AM

 

PNC BANK, N.A., CUSTODIAN FOR THE - IN THE COURT OF COMMON PLEAS
PETER J. FEDORKO, JR., INDIVIDUAL - OF ERIE COUNTY, PENNSYLVANIA
RETIREMENT ACCOUNT . : .CIVIL DIVISION
Plaintiff :
v. : 4 =
| : NO. 10592-2017 oo oS sz
ANDREA LEHR | a ee ee
Defendant Br wo ie
Gi, a Tt Sas
ie oe
Appearances: John C.-Melaragno, Esq., on behalf of Plaintiff a oS
Kurt L. Sundberg, Esq. on behalf of Defendant 2
| OPINION AND ORDER
Domitrovich, J., March 19, 2020

Procedurally, this matter was argued before this Trial Court regarding two Summaly
judgment motions: Plaintiff's Motion for Summary Judgment filed by John C. Melaragno, Esq. on
behalf of Plaintiff PNC Bank, N.A., and Defendant’s Motion for Summary Judgment filed by Kurt
L. Sundberg, Esq. on behalf of Defendant Andrea Lehr. Plaintiff in this case is PNC Bank, N.A.
[hereinafter Plaintiff] acting as custodian for. the Peter J. Fedorko, Jr., Individual Retirement
Account. Defendant is Andrea Lehr [hereinafter Defendant].

A commercial lease agreement for a three year term was entered into on March 9, 2007,
between Plaintiff and Knoxville Restaurant Ventures, LLC [hereinafter KRV] in Knoxville,
Tennessee. Defendant and her spouse Lance L: Lehr executed a Lease Guaranty in favor of Plaintiff
for any and all liabilities due under the lease agreement. Defendant was neither a member nor an
owner of KRV; Defendant was never involved in the operations of KRV at said property. Defendant

never visited thé leased property in Knoxville, Tennessee. However, Defendant’s husband, Lance L.

Lehr is a member and one of the owners of KRV.

Page 1 of 6
KRV made réntal peyments on the leased property to Plaintiff beginning April of 2007;
howeveé, KRV begat bankruptcy proceedings in Bankruptcy Court in December 2007, and.
operated as a debtor-in-possession under Chapter 11 of the Bankruptcy Code from December 2007
until January 19, 2010. On February 21, 2014, Lance L. Lehr filed Chapter 13 Bankruptcy, which
wag converted to Chapter 7 Bankruptcy on May 19, 2014 with a discharge being entered on
November 12, 2014.

Defendant wes never @ party to KRY"s Chapter 11 banktuptcy proceedings nor involved in .
her husband’s subsequent Chapter 7 bankruptcy proceedings. Both counsel, Attorney Melaragno
and Attomey Sundberg, agree that the written lease expired on March 9, 2010.

Without a written signed modification agreement and without consent and notice to
Defendant, Plaintiff orally agreed to work with KRV so that KRV could remain a tenant of the
building and property. KRV began making payments past due on the rent and real estate taxes.
Emails from Plaintiff's Counsel and Peter J. Fedorko [hereinafter Fedorko] indicate Plaintiff sought
rental and tax payment increases and modifications. The last date of occupancy by: the entity known
as KRV was December 31, 2013. On Juné 26, 2017, Plaintiff filed a Complaint against only the
Defendant and sought to fecover damages in the amount of $2,317,681.60 against only the Defendant.

The. standard of review: Pennsylvania Rule of Civil Procedure 1035.2 states that after the
_— pleadings are closed, but within such time ds not to delay unreasonably the trial, any party
‘may move for summary judgment in whole or in part as a inatter of law: (1) whenever there is no
genuine issue of any material fact ag to a necessary clement of the cause of action or defense which
could be established by additional discovery or expert report, or (2) if, after the completion of
discovery relevant to the motion, including the pioduetion of expert reports, an adverse party who
will bear the burden of proof et trial has failed to produce evidence of facts essential to tlic cause of

Page 2 of 6
action or defense which in a jury trial would require the issues to be submitted to the jury. See Pa.
R. Civ. P. 1035.2.
Summary Judgment is appropriate in cases where the record demonstrates no genuine issue
of material fact exists and the party moving for summary judgment is entitled to judgment as a.
matter of law. Truax v. Roulhac, 126 A.3d 991, 996 (Pa.Super. 2015). The party moving for
summary judgment bears the burden to prove no gettuine issue of material fact exists. Stimmler v.
Chestnut Hill Hosp., 981. A.2d 145, 159 Pa. 2009). . A trial court must consider all facts in. the
record and reasonable inferences therefrom in a light most favorable to the non-moving party. Zruax
at 996. “In doing so, the trial court must resolve-all doubts as to the existence of a genuine issue of °
material fact against the moving party.” Truax at 996 (citing Toy v. Metropolitan Life Ins. Co., 928 |
A.2a 186, 195 (2007). A grant of summary judgment is appropriate “where the right to stich
judgment is clear and free from all doubt.” Truax at 996 (citing Toy v. Metropolitan Life Ins. Co.,
“998 A.2d 186, 195 (2007).
Two issues are before this Trial Court:
1. wiisinér Defendant is an wncorpeaseted surety and if so, whether Defendant as sn
uncompensated surety: under the Guaranty Agreement is liable for material modifications of
the. underlying, lease. oF. contract made by the creditor arid debtor without the Defendant
ae" consent?
». Whether. the statute of Limitations applies baring Plaintifi's cause of action against
Defendait? |
Relevant case law: A suretyship agreement is present when 4 third party agrees to provide
iditional credit to a debtor for repayment of the debt by agreeing t0 undertake the debtor's
obligation to the creditor if the debtor fails to perform.: Continental Bank v. Axler, 510 A.2d 726,
729 (Pa.Super: 1986). Generally, a. suretyship represents a three-party agreement where a creditor is

Page 3 of 6
entitled to performance of a contract or contractual duty by the original debtor or the debtor’s surety
in-instances where the debtor defaults. Id.

‘The two. types of suretyships are gratuitous (uncompensated) eureties and comipctisated
sureties. Pesinsylvania. courts have consistently differentiated between these two types of sureties.
The Pennsylvania sapeeee court defines gratuitous (uncompensated) . sureti¢s as:. * ..when
obligations of suretyship or indemnity are assumed by individuals without pecuniary compensation,
Shei obligations are not to. be exterided by implication or, construction. Their liability i is strictissimi

juris? Barratt v. Greenfield, 9 A.2d 188, 189 (Pa.Super. 1939). Gratuitous sureties are those
sureties not receiving any pecuniary compensation whereas compensated guararitors are sureties by
— of their status as officers and owners of the corporation when making the guarantee. Mcintyre.
Square Associates v. Evans 807 A.2d 446, 452 n.8 (Pa.Super. 2003). In the instant case, Defendant.
was neither 4 member nor an owner of KRV; Defendant was never involved in the operations of
KRV at said property nor ever visited the leased property in Knoxville, Tennessee. Therefore, this
Trial-Court concludes as a matter of law that Defendant never received any direct pecuniary
compensation for being a surety, Defendant is a gratuitous uncompensated surety whereas Lance L.

Lehr is a compensated surety.

Case law indicates a creditor and debtor may rériegotiate the terms of the agreement and the
debtor’s obligation without obtaining the assent of the.surety to this new changed obligation. Axier
«i 709: However, where the surety does not consent, the suiety has no duty under ® reiegotiated
cbligation of the original debtor for new obligations renegotiated by the creditor and debtor. Jd.
spore a creditor and debtor “materially modify the térms of their relationship withovs obtaining the
surety’s assent thereto, the surety’s liability may be affected.” Id. A material modification tne
relationship of the creditor and debtor is “a significant change in the principal debtor’s obligation to
the creditor that in essence substitutes an agreement substantially different from the original

Page 4 of 6 Se
agreement on which the surety accepted liability.” Jd. Moreover, the Pennsylvania Supreme Court
holds gratuitous uncompensated guarantors aie discharged fom liability under a surety contract by
any change, materiel or not in thé underlying contract. Magazine Digest Pu. Co. v. Shade, 199 A.
190, 192 (1938). .

Plaintiff orally agreed to accept payments from KRV forreital and tax payment increases
and other modificatio ons. Upon making oral modifications to the ‘Lease Agreement, Plaintiff and
KRV never.entered into. new. written lease tegarding these modifications after expiration of the ©
written — year agreement on March 9, 2010. Plaintiff never contacted Defendant and never

“sought Defendant’s consent on modifications for increased rental and tax payments. Therefore,

aR ennkenaanen

with the foregoing Opinion, this Trial Court enters the following Order of Court:

Page 5 of 6
PNC BANK, N.A., CUSTODIAN FOR THE . IN THE COURT OF COMMON PLEAS

PETER J. FEDORKO, JR., INDIVIDUAL . OF ERIE COUNTY, PENNSYLVANIA
RETIREMENT ACCOUNT : : CIVIL DIVISION
Plaintiff/Appellant : 2 8 ‘3

: ow Sr Se

v. en S 2

» NO. 10592-2017 Bees me Bn

ANDREA LEHR cen ts
Defendant/Appellee : 501 WDA 2020 al Sts

‘po 2S &

Appearances: John C. Melaragno, Esq., on behalf of Appellant PNC Bank ee

Kurt L. Sundberg, Esq. on behalf of Appellee Andrea Lehr

1925(a) OPINION
Domitrovich, J., June 15, 2020
This Trial Court denied Appellant's [PNC Bank, N.A.’s] Motion for Summary Judgment and
granted Appellee’s [Ms. Andrea Lehr’s] Motion for Summary Judgment. On appeal, Appellant sets
forth five (5) paragraphs in Appellant’s 1925(b) Statement of Matters Complained of on Appeal,
which this Trial Court has combined into a single issue: whether this Trial Court erred by denying
| Appellant's Motion for Summary Judgement and granting Appellee’s Motion for Summary

Judgment, where Appellee was a “gratuitous guarantor” who was discharged from her liability under

a Lease Guaranty when Appellee was not provided notice and did not give her consent to material
modifications that substantially increased her risk made to the three year Commercial Lease
Agreement.

| The facts of this case are as follows: On March 9, 2007, Appellant and Knoxville Restaurant |
Ventures, LLC {hereinafter KRV, LLC], entered into a three-year Commercial Lease Agreement
‘hereinafter Lease Agreement] for property located in Knoxville, Tennessee. KRV, LLC signed the
lease to operate a “Quaker Steak and Lube” restaurant at the location. Also on March 9, 2007,
Appellee and her spouse, Lance L. Lehr, an owner of KRV, LLC, executed a Lease Guaranty in favor

of Appellant for any and all liability under this Lease Agreement. Appellee is the wife of Lance L.
Page 1 of 15
Lehr but is not associated with his business dealings in any way. Appellee was not a party to the
Lease Agreement. Appellee was neither a member nor an owner of KRV, LEC, and she was never
involved in any of KRV, LLC’s operations. Appellee never visited the property in Knoxville,
Tennessee.
The relevant terms of the Lease Agreement are clear and unambiguous. The Lease Agreement
provided for a strict three-year term: |
| 2 The Leased Property is leased to Lessee subject to all the terms, covenants and
conditions contained herein for a term of three (3) years commencing on March 9,

2007 (hereinafter “Commencement Date”) and through March 9, 2010, the Lease to
be fully complete and ended at the expiration of the period without notice.

See Plaintiff's Motion for Summary Judgment, Exhibit C, “TERM” (emphasis added). The

Lease Agreement provided for a strict rental payment schedule:

 

ANNUAL MONTHLY
Year 1 $150,000.00 $12,500.00
Year 2 $154,500.00 $12,875.00
Year 3 $159,135.00 $13,261.25
ADDITIONAL PAYMENT _
Year 3 $66,306.24 $5,525.52

See Plaintiff's Motion for Summary Judgment, Exhibit C, “RENT”. The Lease Agreement
also explicitly precluded any potential renewal or extension of the lease:
3. There are no renewal or extension options under the terms of this Lease.
Unless the Lessee has exercised its Option to Purchase as set forth in this Lease, any
occupancy or use of the Leased Property subsequent to the 3 year Term shall be at the
sole discretion of the Lessor and on such terms and conditions as are acceptable to
Lessor.
See Plaintiff's Motion for Summary Judgment, Exhibit B, “REWNEWAL OPTIONS” (emphasis
added). The Lease Agreement’s express and unambiguous terms set forth Appellee’s obligation,
secured under the Lease Guaranty, to a three-year Lease Agreement with a certain payment schedule

that terminated without the possibility of renewal or extension unless KRV, LLC purchased the

Page 2 of 15
property. Contrary to the firm obligations as stated in the Lease Agreement between KRV, LLC and
Appellant, both parties’ performance during KRV, LLC’s tenancy belied any intent of Appellant and
KRV, LLC to follow the Lease Agreement. KRV, LLC consistently failed to perform under the Lease .
Agreement, and Appellant consistently allowed KRV, LLC to remain as a tenant. Now, Appellant
seeks to hold Appellee liable not just under the Lease Agreement Appellant and KRV, LLC did not
adhere to themselves but to hold Appellee responsible for the material modifications Appellant and
KRV, LLC made to the Lease Agreement without her consent.

KRV, LLC began making the scheduled rental payments in April of 2007 but missed its first
payment by December of the same year. KRV, LLC simultaneously initiated bankruptcy ‘court
proceedings in December of 2007, becoming a Chapter 11 debtor-in-possession until December of
2009, when KRV, LLC filed a Motion to Dismiss this bankruptcy case. On January 19, 2010, KRY,
LLC’s case was dismissed by the U.S. Bankruptcy Court for the Western District of Pennsylvania.
On February 21, 2014, Lance L. Lehr filed Chapter 13 Bankruptcy, which was subsequently
converted to Chapter 7 Bankruptcy on May 19, 2014, and a Bankruptcy Court discharge was entered
on November 12, 2014. Appellee was never a party to KRV’s Chapter 11 bankruptcy proceedings
nor was she involved in her spouse’s subsequent Chapter 7 bankruptcy proceedings.

Despite KRV, LLC’s financial troubles, Appellant and KRV, LLC continued to maintain their
ongoing business relationship. KRV, LLC made payments on the property from January 2008 to
September 2008, albeit in amounts that deviated from the Lease Agreement, : after which time the.

Appellant and KRV, LLC began to exchange emails that described material modifications to o the

Lease Agreement. Both Appellant and KRV, LLC agree the Bankruptcy Court had rejected the lease

and structured a new weekly payment schedule, beginning in October of 2008. And while KRV, LLC

Page 3 of 15
fell chort ofits obligations here, making low and inconsistent payments, Appellant continued to allow
KRV, LLC to occupy the property. '

On March 27, 2009, however, Appellant sought rental payment increases from KRV, LLC:
“the winter months are over and it is time for a rental increase...In the meantime, advice [sic] what
the rent increase will be commencing in April so that the IRA can decide how it wishes to proceed.”
See Fedorko Depo., Exhibit 14. While KRV, LLC was making these 2009 payments, Appellant
discovered KRV, LLC had not been paying the required taxes on the property, and Appellant again
modified the payment terms to allow KRV, LLC to focus on paying the property taxes. All the while,
Appellant and KRV, LLC continued to meet and discuss extending the lease term and reasonable
rental payments for such extension, as shown by emails between Appellant and KRV, LLC. See
Fedorko Dep., Exhibits 16, 17, & 18. This ongoing negotiation was also demonstrated by Appellant
allowing KRV, LLC to remain Appellant’s tenant until December 31, 2013 without Appellant ever
filing a notice of default or suggesting a new lease was required.

All of the negotiations between Appellant and KRV, LLC regarding rental payments and the
extension of the Lease Agreement occurred unbeknownst to Appellee. Appellee was never informed :
of any of these new items and never gave her consent or approval to any of these new items. And —
while Appellant and KRV, LLC parted ways in December of 2013, it was not until June 26, 2017 that
Appellant filed a Complaint against Appellee to recover $2,317,681.60 in damages, covering KRV,

LLCs tenancy from April of 2007 to December of 2013.

 

1 As this factual pattern demonstrates, Appellant was aware of KRV, LLC’s material defaults of the Lease Agreement
beginning in December of 2007. KRV, LLC consistently did not meet its rental payment obligations under the Lease
Agreement. This is discussed further in footnote 3, infra., which addresses the applicable statute of limitations.

Page 4 of 15
1. This Trial Court did not err by granting Appellee’s Motion for Summary Judgment and
Denying Appellant’s Motion for Summary Judgment.

a. Summary Judgment

The legal standard for granting a Motion for Summary Judgment in Pennsylvania is as
follows. Rule 1035.2 of the Pennsylvania Rules of Civil Procedure states in relevant part: “...any
party may move for summary judgment...as a matter of law: (1) whenever there is no genuine issue
of any material fact as to a necessary elemen ement of the cause of action or defense which could be
established by additional discovery or expert report, or (2) if, after the completion of discovery
relevant to the motion, including the production of expert reports, an adverse party who will bear the
burden of proof at trial has failed to produce evidence of facts essential to the cause of action or

defense which in a jury trial would require the issues to be submitted to the jury.”

A grant of summary judgment is appropriate “where the tight to such judgment is clear and

free from all doubt.” Toy v. Metropolitan Life Ins. Co., 928 A2d 186, 195 (2007). Summary
judgment may be granted when [pleadings, depositions, interrogatories, etc.] show that there is no
genuine issue as to any material facts and that the moving party is entitled to judgment as a matter of
law, Coleman v. Coleman, 663 A.2d 741 (Pa. Super. 1995). Where the non-moving party bears the
burden of proof on an issue, they may not merely rely on their pleadings or answers to survive
summary judgment. Thompson v. Ginkel, 95 A.3d 900, 904 (Pa. Super. 2014) (quoting JP Morgan
Chase Bank, N.A. v. Murray, 63 A3d 1258, 1261-62 (Pa. Super. 2013). To defeat a summary
_ judgment motion, the adverse — must come forth with evidence showing the existence of the facts

essential to the cause of action or defense. See Pa.R.Civ.P. 1035.2, Note.

b. Suretyship Agreements

Relevant case law on suretyship agreements ig summarized as follows. A suretyship

agreement is present when. a third party agrees to provide additional credit to a debtor for repayment

of the debt by agreeing to undertake the debtor’s obligation to the creditor if the debtor fails to

Page 5 of 15
perform. See Continental Bank v. Axler, 510 A.2d 726, 729 (Pa. Super. 1986). Goals, a suretyship
agreement represents a three-party arrangement where a creditor is entitled to performance of a
contract or contractual duty by the original debtor or the debtor’s surety in instances where the debtor
defaults. Id.

A surety agreement is a contract. and the language of the surety agreement determines the
antag rights and liabilities. Beckwith Machinery Co. v. National Union Fire Ins. Co. of Pittsburgh,

809 A.2d 403, 406 (Pa.Super. 2005). Under Pennsylvania law, sureties are divided into two classes:

gratuitous sureties and compensated sureties. Pennsylvania courts distinguish between a gratuitous

and compensated surety based on whether said surety received any pecuniary a" from their status
as surety. McIntyre Square Associates 827 A.2d at 452 2.8. For example, in the case of JF. Walker
Co., Inc. v. Excalibur Oil Group, Inc., the Pennsylvania Superior Court held the sole shareholder in
a corporation was a compensated surety where the shareholder’s guarantee secured a line of credit to
his corporation, despite not receiving direct compensation for the guaranty. 792 A.2d 1269, 1272 (Pa.
Super. 2002). Pennsylvania courts protect gratuitous sureties from having their obligations extended
by implication or by construction. Id, (citing Barratt v. Greenfield, 9 A.2d 188, 189 (Pa. Super. 1939).
Their liability is “strictissimi juris.” Id.

A surety may be discharged from liability depending on both modifications to the underlying

agreement being secured and on whether the surety is compensated or gratuitous. Our Supreme Court

has explained: “...Pennsylvania courts have uniformly recognized that where: the creditor and the —

debtor materially modify the terms of their relationship without obtaining the surety’s assent thereto,

the surety’s liability may be affected. Where, without the surety’s consent, there has been a
material modification in the creditor-debtor relationship, a gratuitous (uncompensated) surety
is completely discharged. ” Mcintyre Square Assoc. v. Evans, 827 A.2d 446, 452 (a. Super. 2003)
(quoting Reliance Ins. y. Penn Paving, Inc., 734 A.2d 833, 838 (Pa. 1999)) (emphasis added). The

Page 6 of 15
presence of a material modification in the creditor-debtor relationship is sufficient to discharge a
gratuitous surety from their obligation if it is made without the surety’s consent.

“A material modification in the creditor-debtor relationship consists of a significant change in
the principal debtor’s obligation to the creditor that in essence substitutes an agreement substantially
different from the original agreement on which the surety accepted liability.” JF. Walker Co., Inc.,
792 A.2d at 1274 (citing Continental Bank, 510 A.2d at 729; Restatement (First) of Security § 128,
cmt. d). Material modifications occur when the principal debtor and creditor insert new obligations

an agreement or replace current obligations with new obligations. See Restatement (First) of
Security § 128, cmt. d, Illustrati ions. For example, altering the specifications and timetable in a
construction contract for the building of a home or extending a lease and increasing the rent are both
considered material modifications to the principal debtor-creditor relationship. Jd. This was the case
in McIntyre Square Assoc. 827 A.2d 446, where the Pennsylvania Superior Court held the doubling
of the lease term and the significant increase in the rent were not only material modifications, but

| material modifications that substantially figtaned the surety’s risk. Jd. at 452.

Moreover, Pennsylvania law discharges gratuitous sureties from liability following any
alteration, material or not, to the underlying agreement between the parties: “[a] gratuitous or
sccviomanatatian guarantor is discharged by any change, material or not, and, even if he sustains
no injury by the change, or if it be for bis benefit, he has a right to stand upon the very terms of his
obligation and is bound no further.” Magazine Digest Pub. Co. v. Shade, 199 A. 190, 192 Pa. 1938)
(emphasis added).

While material inodifications made without the surety’s consent will discharge a gratuitous
surety from liability under an agreement, a surety can give prior consent to such material
_ modifications in the surety agreement itself. “. ..[Mlaterial modifications in the creditor-debtor
relationship will not serve to discharge the surety where the surety has given prior consent to such

Page 7 of 15
material modifications as part of the suretyship contract.” Reliance Ins. Co. v. Penn Paving, Inc., 734
A.24 833, 838 (Pa. 1999). “In determining whether a surety has consented to a material modification,
the suretyship seontract must be given effect according to its own expressed intention as gathered
from all the words and clauses used, taken as a whole, due regard being had also to the surrounding
- Groumstances.’” Id. (quoting Continental Bank, 510 A.2d at 730). The suretyship agreement must be
interpreted, in light of the surrounding circumstances of the agreement, to determine whether a party
consented to the material modification in question. |

Furthermore, to determine a patty gave prior consent to a material modification that
substantially increased the surety’s risk, the suretyship agreement must contain express and
specific language indicating the surety gave prior consent to such a material modification. Reliance
ns. Co., T34 A.2d ot 838-39 (onaphasis added). Otherwise, the Trial Court must discharge the surety
- from the surety’s liability if the material modifications substantially increase the surety’s risk. |

c. This Trial Court did not err by finding Appellee was a gratuitous surety who was

discharged from liability under the Lease Guaranty after Appellant and KRV, LLC
materially modified the Lease Agreement by imereasing the rent payments and
extending the lease term thereby substantially increasing her risk without her
consent.

This Trial Court found that Appellee, as a gratuitous surety, was discharged from her liability
under the Lease Guaranty after Appellant and KRV, LLC materially modified the Lease Agreemetit
by increasing the rent payments and by extending the lease term. Furthermore, this Trial Court found
the modifications made by Appellant and KRV, LLC to the rent payments and lease term were
material modifications that substantially increased Appellee’s risk. This Trial Court, after examining
the Lease Guaranty, giving due regard to the surrounding circumstances of the transaction, and
finding the Lease Guaranty did not include express or specific language contemplating waiver of
material modifications that su! ially increased Appellee’s risk, found Appellee did not give prior
consent to material modifications of the Lease Agreement that substantially increased Appellee’s risk.

Page 8 of 15
Appellee was a gratuitous surety. Appellee was not compensated in any recognized manner

for her guaranty of the Lease Agreement. She was not directly compensated for her guaranty, nor did
she have any ownership interest in KRV, LLC. Appellee was not involved in KRV, LLC’s

| management of the property; in fact, she never visited the property located in Knoxville, Tennessee.
Appellant alleges Appellee is a compensated surety solely through here status as Lance L. Lehr’s

spouse.” Extending Appellee’s obligations under the Lease Guaranty by such implied compensation,

however, is improper. No such “compensation via marriage” doctrine exists in Pennsylvania law.

Therefore, this Trial Court concluded, as a matter of law, Appellee was a gratuitous surety, and the

issue then became whether Appellee gave her consent to modifications made to the Tease Agreement.

It is undisputed that Appellee was never notified of any modifications to the Lease Agreement

nor did she give her consent to any modifications to the Lease Agreement. Appellee stated in her

deposition she never received notice concerning any modifica’ ion of the Agreement, to which

Appellant’s counsel agreed during this Trial Court's Hearing on Summary Judgment. (N.T.: Motion

for Summary Judgment Hearing, February 25, 2020, p.25: 9-13; 14-20). It is also undisputed no

modified agreement in writing was ever produced or presented to Appellee memorializing any of the

modifications Appellant and KRY, LLC made to the Agreement. Given that Appellee was never

notified of any discussions or negotiations between Appellant and KRV, LLC concerning the Lease

Agreement, Appellee could never have given her consent to any modification made to the Lease

Agreement.

 

2 Compensated sureties are not discharged from their liability under a surety agreement as easily as gratuitous sureties.
The only instance where a material modification, made without the surety’s consent, will not discharge a gratuitous surety
from liability is if the material modification is entirely to the surety’s benefit. On the other hand, the only material
modification, made without the surety’s consent, that will discharge a compensated surety from liability is if the material
modification substantially increases the surety’s risk. See Restatement (First) of Security § 128. Appellant argues both
sides of this distinction: that Appellee was a compensated surety compensated by her marriage to Lance Lehr; and that
even if she was a gratuitous surety, the modifications were entirely to the benefit of Appellee. However, this Trial Court
found Appellant’s arguments unconvincing. Appellee is a gratuitous surety, and even if she were a compensated surety,
she would be discharged from liability as the material modifications substantially increased her risk.

Page 9 of 15 |
The modifications KR'V and Appellant made to the Lease Agreement were not only material
but substantially increased Appellant’s risk under the Lease Agreement as well. The terms of the
Lease Agreement Appellee signed on March 9, 2007 stipulated a three-year term complete with a
consistent payment schedule to conclude on March 9, 2010. See Appellant’s Motion for Summary
Judgment, Exhibit C, “TERM”. This Lease Agreement did not contain any extension or renewal
provisions. Id. at “RENEWAL OPTIONS”. The Lease Agreement called for monthly payments of
$12,500.00 in year 1; $12,875.00 in year 2; and $13,261.25 in year 3; for a total of $463,635 over
three years. Id. at “EXHIBIT B”. The Agreement only provided for a month-to-month holdover
tenancy should KRV remain on the premises past the three-year term. Jd: at “HOLDING OVER”.

Due to the financial difficulties KRV, LLC experienced during its tenancy, however,
Appellant and KRV, LLC engaged in a series of: material modifications to the Lease Agreement to
ensure the continued tenancy of KRV, LLC. Appellant and KRV, LLC more than doubled the initial
Lease Agreement term, extending it from three to over six years, and increased the monthly rental
payments. See Fedorko’s Depo., Exhibit 14. Appellee was obligated to secure three-year lease with

rental payments to total $463,635 plus various other expenses such as property taxes. The degree to

which these material modifications increased Appellee’s risk is shown by Appellant’ s initial .

complaint extablishing KRV, LLC’s last date of tenancy was December 31, 2013, resulting in over
$2 million in damages. The obligations under the initial Lease Agreement had clearly been substituted
for substantially different and riskier obligations. The initial Lease Agreement was substituted fora
new agreement Appellee never secured, similar to the surety in McIntyre Square Assoc. 827 A.2d at
452 (see supra). The Pennsylvania Superior Court found the surety’s lease was materially myaditied
the surety’s risk increased. Id. 7

Asa gratuitous surety, Appellee was entitled to give her consent to material modifications

Page 10 of 15
risk. Altematively, assuming arguendo Appellee was a peal surety, she would still be
sischarged from her lability, s compensated sureties are discharged from all liability if material
changes that substantially increase their risk are made without their consent. See McIntyre Square .
Assoc., 827 A.2d at 452. Since she was never notified, she could not have given her consent at the
time Appellant and KRV, LLC made these material modifications. Moreover, the Lease Guaranty
itself, giving due regard to the surrounding circumstances of the transaction, cannot be interpreted to
have granted prior consent to Appellant and KRV, LLC’s material modifications that substantially
increased Appellee’s misk. The Lease Guaranty did not contain any provision -that expressly, or
specifically contemplated granting material modifjcations that substantially increased Appellee’s
risk. Appellee, as a gratuitous surety, who secured an express and unambiguous three-year lease,
could not have contemplated or predicted the modifications in question. A review of the relevant case
law guides this Trial Court’s analysis as the facts of the instant case are very similar to the facts in
Reliance Ins. Co. and McIntyre Square Assoc.
in Reliance, the Pennsylvania Supreme Court, following the reasoning of the Superior Court
in Continental Bank, held the party in question did not waive notice of material modifications that
substantially increased the surety’s risk because no express or specific language was in the agreement
demonstrating the surety gave prior consent to such modifications. Reliance Insurance Company, 734
A.2d at 451. The surety had its risk in a payment bond agreement increased from $200,000 to $5
-¢nillion, which substantially incteased the surety’s risk, and the bond insurer, Reliance Insurance Co.,
‘claimed the surety gave prior consent to future loans in the surety’s indemnification agreement. Id. at
833-34, The Supreme Court disagreed: “[plursuant to the twelfth paragraph, [surety] waived the right
to notice of an assent, assignment, change in — or manner of payment, or other change or extension
in the terms ofa bond approved by Reliance. The excerpted provisions do not contain any language
constituting consent to a material increase in the risk of liability to [surety] or language

Page 11 of 15
expressly waiving notice of a material modification in the risk of liability. Nor do the provisions
expressly refer to a material modification of the bonding line.” Jd. at 452-53 (emphasis added).
5 Continental Bank, the Pennsylvania Superior Court ruled the surety was still bound to the
underlying agreement since their surety agreement stipulated they were bound to the liabilities of
successor entities. 510 A.2d at 729-30. The surety claimed they were discharged from liability by the
debtor company’s sale to a third party. Id. Key to the Pennsylvania Superior Court’s analysis, as |
explained by the Pennsylvania Supreme Court, is the specific language contained in the surety
agreement itself: “[t]he suretyship contract signed by [sureties] specifically provided that [sureties ;
had waived notice of any fact which might materially increase their risk, that [creditor] had the
right without notice to or consent of [sureties] to modify, change or supplement any indebtedness
without affecting or discharging [sureties’] liabilities, and that [sureties] would be obligated for the
liabilities of any partnership, firm, corporation or other company which may be a successor to
{debtor].” Id; Reliance, 734 A.2d at $38-39.

Finally, in McIntyre Square Assoc., the Pennsylvania Superior Court held the doubling of a
lease term and a significant rental increase to be material modifications that substantially increased
the surety’s risk. 827 A.2d at 453. The Superior Court then examined the surety agreement,
specifically the “No Discharge of Guaranty” provision to determine if the surety gave prior consent

to material modifications that substantially increased the surety’s risk. Id. at 453-54. The Court held

the provision’s language that the liability of the Guarantor hereunder shall not be discharged

notwithstanding “any amendment or modification of the provisions of the Lease Agreement”
vic without notice was not, under Reliance, a grant of prior consent to material modifications
that substantially increase the surety’s risk. Jd, While the Pennsylvania Superior Court found the
language “any act, thing, omission or delay to do any act or thing that may, in any manner, or to any
extent, vary the risk of Csgeaiets..” would have been sufficient to give prior consent to material

Page 12 of 15
modifications that substantially increase the surety’s risk, the language vcocitaieerd within the ees
sentence “or that would otherwise operate as a discharge of any Guarantor as a matter of law. ..” made
the language ambiguous. Id.

In the instant case, the Lease Guaranty does not contain any express or specific language such
as “any act, thing, omission or delay to do any act or thing that may, in any manner, or to any extent,
vary the risk of Guarantor...” that could be interpreted as the surety’s grant of prior consent to material
modifications that substantially increase the surety’s risk. The instant Lease Guaranty is thus
distinguishable from the agreements analyzed in Continental Bank and Mcintyre Assoc., that were _
found to have given or would have given, respectively, prior consent to material capdigienions that
substantially increase the surety’s isk.

The instant Lease Guaranty contains only one provision that contemplates waiver of
notification. See Appellant’s Motion for Summary Judgment, Exhibit A, “Waiver of notices.” The
waiver provision states: “[w]ithout notice to or further assent from the Guarantor, the Landlord may
-” waive or modify any of the terms or conditions of the Lease...” (emphasis added). This term, as
the agreement examined in Reliance, does not contain express or specific language regarding miaterial
modifications that substantially increase Appellee’s tisk. The Lease Guaranty also contains a
discharge of liability provision; however, the Evie in the instant case does not contain any
language contemplating a variance in the risk of the surety based on the actions of the principal debtor-
creditor. |

Moreover, when. you consider the circumstances surrounding the transaction between
Appellee, Appellant, and KRV, LLC, it becomes even clearer Appellee had no intention of waiving
her right to notification and consent to material modifications that would substantially increase her
risk. Appellee is not a commercial party nor was she connected in any, way to the subject of the

transaction, She was not a member of KRV, LLC, and she did not benefit financially, either directly

Page 13 of 15
or indirectly, in any way from the restaurant or from KRV, LLC’s tenancy on the property. Appellee
was a gratuitous surety who guaranteed her spouse’s company’s initial three-year Lease Agreement.

The instant Lease Agréement itself in the instant case denotes a strict payment schedule and
states multiple times its term is for three years. This Lease Agreement did not contain an extension
- renewal provision but rather expressly forbade any extension or renewal. Appellee could not have
been put on notice to expect such modifications; and, of course, Appellant and KRV, LLC did not
notify her of any modification or any default. Given Appellee did not have any direct connection to
the business dealings of KRV, LLC, Appellant, or the restaurant itself, Appellee could not have been
expected to become informed of the financial status between the Appellant and KRV, LLC. In fact,
Appellant never communicated with Appellee in any manner and continuously granted KRV, LLC
the opportunity to remain on the premises instead of claiming default. Appellant is now suing
Appellee over four years after KRV, LLC last occupied the property and approximately ten years
after KRV, LLC missed its first rental payment. Appellant’s behavior clearly indicates Appellant did
not consider Appellee as having given prior consent to the material modifications that Appellant and
KRV, LLC made to the Lease Agreement.

After reviewing the instant Lease Guaranty, giving due regard to the surrounding
circumstances of the transaction, this Trial Court found Appellee did not give prior consent to material
modifications of the Agreement that substantially increased Appellee’s risk. Appellant was required
to obtain Appellee’s consent to any material modifications that substantially increased her risk before
Appellant and KRV, LLC made the material modifications in order to maintain Appellee’s liability
under the Lease Guaranty. Since Appellant failed to obtain her consent and since the extension of the
lease term and the increase in rental payments were material modifications that substantially increased
her risk, Appellee was discharged of her liability under the Lease Guaranty. Moreover, Appellee was
discharged whether the modifications were material or not, as Pennsylvania law still holds gratuitous

Page 14 of 15
guarantors are discharged from liability following any modification to the Lease Agreement, as
gratuitous guarantors have the right to stand on the terms to which they initially agreed.

7 For all of the above reasons, this Trial Court granted Appellee’s motion for Summary
Judgment and denied Appellant’s Motion for Summary Judgment. This Trial Court also found the
issue of the statute of limitations to be moot after finding Appellee was discharged of any liability
under the lease guaranty. 3 Therefore, this Trial Court respectfully requests the Pennsylvania Superior
Court affirm this Trial Court’s Order dated March 19, 2020, denying Appellant’s Motion for
Summary Judgment and granting Appellee’s Motion for Summary Judgment, thereby dismissing
Appellant’s civil action with prejudice.

BY THE COURT,

 

 

cc: John C. Melaragno, Esq., 502 West 7 Street, Erie, PA 16502
Kurt L. Sundberg, Esq., 300 State Street, Suite 300, Erie, PA 16507

 

3 This Trial Court notes the statute of limitations would have barred Appellant's cause of action. The Superior Court
stated in Leedom v. Spano, 647 A.2d 221, 224-29 (Pa. Super. 1994), “ijt is a fundamental principle of surety law that
upon default by the principal, both principal and surety thereupon become liable on the original undertaking... Thus, the
creditor’s cause of action against the surety accrues upon material default by the debtor.” In the instant case, as
demonstrated in the facts listed above, Appellant was well aware of KRV, LLC’s material defaults under the Lease
Agreement beginning in December of 2007. Rather than declare KRV, LLC in default, Appellant began a sefies of
material modifications to the Lease Agreement to allow KRV, LLC to remain in the property. And even assuming
arguendo Appellee is liable for KRV, LLC's material defaults for the Lease Agreement’s full three-year term — that term
ended on April 9, 2010. Appellant did not declare default on KRV, LLC during this period and did not attempt to hold
Appellee liable under the Lease Guaranty until it filed its cause of action on June 26, 2017, well after the expiration of
the four year statute of limitations. See 42 Pa.C.S. § 5525(a)(8) (Surety agreement is a contract. See Beckwith Machinery
Co., 809 A.2d at 406 (supra)).

Page 15 of 15