Wheeler v. Blumling , 521 F.3d 1 ( 2008 )

United States Court of Appeals
For the First Circuit
No. 07-1992
D. BRUCE WHEELER,
Plaintiff, Appellee,
v.
RYAN T. BLUMLING,
Defendant, Appellant,
PARSONS 4E, LLC; TERRY EBELS; FRANK ZARRELLI;
RABON WOLFORD, SR.; THOMAS G. POLANSKY,
Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Torruella, Circuit Judge,
John R. Gibson, Senior Circuit Judge,*
and Lipez, Circuit Judge.
Mitchell J. Rotbert, with whom Rotbert Law Group, LLC,
was on brief for appellant.
Laurence M. Johnson, with whom Davis, Malm & D'Agostine,
P.C., was on brief for appellee.
March 25, 2008
*
Of the Eighth Circuit, sitting by designation.
JOHN R. GIBSON, Senior Circuit Judge. Ryan T. Blumling
appeals from the district court's entry of summary judgment against
him in favor of D. Bruce Wheeler, on Wheeler's claim for breach of
a guaranty agreement. Blumling contends that he has two defenses
to liability on the guaranty: frustration of purpose of the
contract and modification of the guaranty by oral agreement. We
affirm the judgment of the district court.
Blumling is a loan broker. In March 2004, Frank Zarrelli
of Parsons 4E, LLC, contacted Blumling for help in finding a short-
term loan to supply money Parsons needed to buy a financial
guaranty bond from Allianz, A.G. Parsons needed the bond to enable
it to get bank financing for coal mining operations in Kentucky.
Blumling went to work and located Wheeler as a possible lender for
the short-term loan. The note was to be secured by a security
interest in various coal properties and by guaranties from the
principals of Parsons, but Wheeler insisted on getting a guaranty
from Blumling as well. Blumling states that he told Wheeler,
I did not think that it was appropriate for me to
guarantee the Note, as I was merely a broker for the
loan, but Mr. Wheeler insisted that, unless I guaranteed
the loan, he would not lend to Parsons 4E . . . .
Without any alternative, and being under pressure to
perform quickly to satisfy the reported needs of Allianz,
I advised Mr. Wheeler that I would execute a guarantee,
provided that Mr. Wheeler understood and agreed that I
would not thereby become liable for an amount greater
than the principal amount loaned and that I would not be
called upon to pay any amounts before Mr. Wheeler had
exhausted his remedies under the assignment by
foreclosing on his security interest as stated in the
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Collateral Assignment I had arranged. Mr. Wheeler agreed
. . . . In reliance on Mr. Wheeler's representations,
I signed the guaranty.
The note itself called for a rather breathtaking interest
rate--the loan was for $625,000 to be disbursed on March 12, 2004,
to be repaid with interest for a total of $1.4 million due on April
24, 2004. Though the parties dared not name the interest rate at
oral argument, we calculate it at over 1000% per annum. The
guaranty Blumling signed, however, did not make him liable for that
rate of interest, but instead provided:
[I]n no event shall the amounts due Lender under this
Guaranty exceed the sum of $625,000 plus interest from
the date hereof until paid in full at 2% per month (or
such lesser amount as shall be the maximum amount allowed
by law) plus reasonable attorneys fees and expenses in
connection with enforcement of this Guaranty . . . .
There were several other clauses in the guaranty of
particular interest in this litigation:
(1) The guaranty recited that Blumling had a personal interest
in the success of Parsons, that Wheeler would not make the desired
loan to Parsons without Blumling's guaranty, and that the guaranty
was executed to induce Wheeler to make the Parsons loan.
(2) The guaranty also said that Wheeler might "at [his]
option, proceed against [Blumling] without ever commencing any
action, or ever obtaining any judgment against [Parsons] or any
collateral for the obligations guaranteed hereunder." A later
clause similarly provided, "This Guaranty . . . is in no way
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conditioned upon any requirement that [Wheeler] first attempt to
collect or enforce any of the obligations under the Note from or by
[Parsons] or any other party primarily or secondarily liable with
respect thereto, or resort to any security or other means of
obtaining payment or satisfaction of any of the obligations of
[Parsons] to [Wheeler]. . . ."
(3) "No provision of this Guaranty may be changed, waived or
discharged except by an instrument in writing signed by [Wheeler]
and [Blumling] and expressly referring to the provision of this
Guaranty to which such instrument relates . . . ."
(4) The guaranty stated that it would be governed and
construed in accordance with the law of Kentucky.
Upon execution of the note and the guaranties, Wheeler
disbursed the $625,000 as Parsons directed, including wiring
$562,500 directly to Parsons' bond broker Wayne Price, who was
supposed to be arranging the purchase of the bond from Allianz.
Blumling states that although the "Allianz bond was issued in April
2004, . . . it was not financed . . . [and] Allianz and its
subsidiaries would not recognize it as a legitimate instrument
issued by one or more of them." Wayne Price and his associates
were indicted in the Southern District of New York on charges of
conspiracy and wire fraud. In particular, they were accused of
appropriating for themselves moneys their clients had paid to
obtain bonds from a subsidiary of Allianz, A.G. Parsons tried
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without success to obtain the return of its premium.
As a result of its bond fiasco, Parsons defaulted on its
obligation to pay Wheeler $1.4 million on April 24, 2004. In
December 2004, the various parties and guarantors to the
Parsons/Wheeler note executed a "Forbearance Agreement." In
exchange for an extension of time to pay, Parsons acknowledged its
indebtedness on the note and, in Section 3 of the Forbearance
Agreement, agreed to waive any possible defenses on the note or
counterclaims. Although the body of the Forbearance Agreement
related only to Parsons's obligations, Blumling signed an attached
signature page with the following statement: "The undersigned
consents to the foregoing, joins in the release under Section 3
above, and agrees that his Guaranty remains in full force and
effect." Parsons did not make any of the payments in accordance
with the terms of the Forbearance Agreement.
Wheeler brought this suit against Parsons, the other
guarantors, and Blumling. Parsons and the other guarantors
settled, but Blumling did not.2 Wheeler moved for summary judgment
against Blumling, which the district court granted.
We review de novo the district court's grant of summary
judgment. Plumley v. S. Container, Inc., 303 F.3d 364, 369 (1st
Cir. 2002).
2
Blumling stated, both in an affidavit and in his brief to
this court, that Wheeler has not executed in any way on the
judgment he obtained against Parsons and the other guarantors.
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Blumling contends that under the applicable Kentucky law,
he should be excused from performing his obligations under the
guaranty because the misappropriation of the proceeds by the bond
broker frustrated the purpose of the contract or rendered
impossible Blumling's performance. Blumling's argument is properly
characterized as one of frustration of purpose rather than of
impossibility,3 for he argues that the value to him of the loan
secured by the guaranty was destroyed by the defalcations of the
bond broker.
Actually, the value of the loaned money was not affected,
but the proceeds of the loan were lost by the borrower. Suffice it
to say, none of the authorities cited by Blumling stands for the
rule that a borrower's (or his guarantor's) obligation to repay
borrowed money depends on the success of the venture on which he
spent the money. The only precedential Kentucky case on which
Blumling relies, Frazier v. Collins, 187 S.W.2d 816 (Ky. 1945),
3
The doctrine[s] of commercial frustration and
impracticability [i.e., impossibility] both
concern the effect of supervening
circumstances upon the rights and duties of
the parties; however, with commercial
frustration, performance remains possible, but
the expected value of performance to the party
seeking to be excused has been destroyed by
the fortuitous event which supervened to cause
an actual, but not literal, failure of
consideration.
30 Richard A. Lord, Williston on Contracts § 77.95, at 596 (4th ed.
2004).
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rejected the frustration defense in the case before it and held
that "when a party engages without qualification to do an act, his
performance is not excused because it becomes onerous or
unprofitable. It is deemed his own fault if he does not expressly
provide against contingencies and exempt himself from
responsibility in certain events." Id. at 818-19 (internal
quotation marks omitted). The district court did not err in
rejecting Blumling's frustration of purpose defense.
Second, Blumling argues that he and Wheeler orally
modified their contract, including the provision in the contract
that required modifications to be in writing. He contends that the
modified terms were that "Blumling would not be liable on his
guaranty until such time as Wheeler had executed against Parsons
4E's assets" and that "in any event, Blumling would not be liable
for more than the principal amount that Wheeler had loaned to
Parsons." The problem with this theory is that there is no
evidence of a modification after the guaranty was executed.
Blumling's own affidavit alleges that he negotiated these two
conditions with Wheeler before executing the guaranty:
I advised Mr. Wheeler that I would execute a guarantee,
provided that Mr. Wheeler understood and agreed that I
would not thereby become liable for an amount greater
than the principal amount loaned and that I would not be
called upon to pay any amounts before Mr. Wheeler had
exhausted his remedies under the assignment by
foreclosing on his security interest as stated in the
Collateral Assignment I had arranged. Mr. Wheeler agreed
. . . . In reliance on Mr. Wheeler's representations, I
signed the guaranty.
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However, the guaranty as executed contradicts both the conditions,
expressly providing that Blumling's liability did not depend on
Wheeler first proceeding against the debtor, any other guarantor,
or the collateral, and that Blumling would be liable for the
principal amount plus two percent interest and reasonable
attorneys' fees. Blumling's affidavit says that he later
"reconfirmed" the two putative conditions with Wheeler's agent, but
he steadfastly contends that those were the terms negotiated before
the contract was memorialized, rather than being changes negotiated
afterwards. Moreover, his affidavit only states that he
"reconfirmed" his understanding of the contract, not that Wheeler's
agent agreed to any change.
Thus, Blumling's evidence does not support a modification
of the agreement, but rather consists of assertions of prior oral
negotiations that contradict the written instrument he executed.
The parol evidence rule is a rule of substantive law under which,
[w]here the parties put their engagement in writing all
prior negotiations and agreements are merged in the
instrument, and each is bound by its terms unless his
signature is obtained by fraud or the contract be
reformed on the ground of fraud or mutual mistake, or the
contract is illegal.
Childers & Venters, Inc. v. Sowards, 460 S.W.2d 343, 345 (Ky.
1970). Blumling does not argue that the whole contract was
obtained by fraud or that the parties meant it as a sham contract;
instead, he only wants to contradict particular terms of a contract
which has already been performed on Wheeler's side and of which
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Blumling has already enjoyed the benefits (fleeting though they
were). This is exactly what the parol evidence rule forecloses.
See Lewis v. Owens, 338 F.2d 740, 742 (6th Cir. 1964) (Kentucky
law).
Since we conclude that Blumling's defenses are
unavailing, we need not consider the arguments regarding whether he
waived such defenses in the Forbearance Agreement.
We AFFIRM the judgment of the district court.
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