WRS Inc v. Plaza Ent Inc

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
7-18-2008
WRS Inc v. Plaza Ent Inc
Precedential or Non-Precedential: Non-Precedential
Docket No. 07-1712
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 07-1712
____________
WRS INC,
d/b/a
WRS MOTION PICTURE LABORATORIES,
a corporation
v.
PLAZA ENTERTAINMENT, INC, a corporation;
ERIC PARKINSON, an individual;
CHARLES VON BERNUTH; JOHN HERKLOTZ, an individual
John Herklotz,
Appellant
____________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(No. 00-cv-2041)
District Judge: Hon. Arthur J. Schwab
Submitted Under Third Circuit LAR 34.1(a)
June 6, 2008
Before: AMBRO, CHAGARES, and COWEN, Circuit Judges.
____________
(Filed: July 18, 2008)
OPINION OF THE COURT
CHAGARES, Circuit Judge.
John Herklotz appeals two summary judgment decisions of the District Court. The
first found Herklotz liable under a surety agreement, while the second fixed the amount of
damages and attorneys’ fees due Herklotz’s opponent. We will affirm the District Court’s
decision on liability. We will remand the damages decision for further proceedings in
light of the District Court’s indication that it will, upon remand, grant Herklotz’s motion
for relief under Federal Rule of Civil Procedure 60(b)(6) regarding that decision.
I.
In 1996, Eric Parkinson formed Plaza Entertainment (Plaza), a company that
obtained the rights to movie titles and then duplicated, distributed, and otherwise
exploited those titles. Herklotz and Charles von Bernuth joined Parkinson as the three
shareholders in Plaza, and Herklotz served as Plaza’s C.E.O. from September 1997 to
April 1998. WRS engaged in film and video duplicating services, and also administered
the proceeds generated by distribution and duplication of films and videos.
Plaza initiated a business relationship with WRS in 1996. WRS often extended
Plaza credit in relation to Plaza’s orders, and Plaza eventually incurred a sizeable debt to
WRS. In April of 1998, Plaza sought to place an order for copies of a movie entitled
“The Giant of Thunder Mountain,” which Herklotz produced.1 Plaza still owed WRS a
significant amount of money from past orders, however, and WRS sought to obtain some
1
The eponymous Giant was played by Richard Kiel, famous for his memorable
portrayal of the steel-toothed Jaws in the James Bond thrillers The Spy Who Loved Me
and Moonraker.
2
security before extending Plaza further credit. On May 6, 1998, Herklotz provided that
security by signing an unconditional personal guarantee of Plaza’s debts to WRS (the
Herklotz Surety).
The Herklotz Surety contract stated, in part, that Herklotz:
unconditionally guarantees complete and prompt payment, when due, of any
indebtedness which may at the present time or at any time hereafter and
from time to time be owing to you by [Plaza]. . . . This guaranty is direct
and unconditional, and may be enforced without first resort to any other
right, remedy[,] or security which you have. The undersigned waives notice
of acceptance hereof, all prior notice of default and demand for payment.
You shall have the unrestricted right to renew, extend, modify[,] and/or
compromise any indebtedness and to accept, substitute, surrender or
otherwise deal with any collateral security or other guaranties, without
notice to the undersigned and without affecting the obligation of the
undersigned hereunder.
This guaranty shall continue at all times and shall remain in full force and
effect until such time as you receive from the undersigned, by registered
mail, written notification of revocation. . . .
Joint Appendix (JA) 36.
The Herklotz Surety was not the only such agreement entered into between the
parties. On October 12, 1998, WRS and Plaza signed a Services Agreement, which
provided, inter alia, that WRS would perform administrative services for Plaza, including
collecting Plaza’s accounts receivable; monitoring inventories; creating invoices; and
performing general accounting and record keeping functions. Moreover, as part of the
Services Agreement, Parkinson and von Bernuth entered into their own personal
guarantees of Plaza’s obligations to WRS.
3
The agreements did not work out as planned. Plaza never managed to satisfy fully
its obligations to WRS, and neither Herklotz, Parkinson, nor von Bernuth made good on
their personal guaranties. Accordingly, on October 13, 2000, WRS filed this action,
asserting breach of contract and numerous other counts.
The procedural history of this case is complex, but only a few of the more recent
events need to be discussed here – primarily those that touch upon the apportionment of
liability among Plaza’s principals. The District Court held a settlement conference on
March 9, 2006. At this conference, the attorney representing Plaza, Parkinson, and von
Bernuth (collectively, the Other Defendants) told the Court that he intended to withdraw
as counsel, but would file a summary judgment motion on von Bernuth’s behalf regarding
von Bernuth’s liability to WRS based on his personal guaranty.
The attorney, however, neither filed a motion for von Bernuth nor did he withdraw
as counsel for Plaza and Parkinson – indeed, he never took any other action in the case
whatsoever. WRS then filed summary judgment motions against Herklotz and pursued
defaults against the Other Defendants. In April 2006, the District Court ordered the Other
Defendants to show cause why defaults should not be entered against them for failure to
defend, and when they did not reply, ordered the clerk to enter the defaults. Their
attorney had never informed them of the show cause orders or of the defaults.
On July 21, 2006, the District Court granted WRS’s motion for summary judgment
regarding Herklotz’s liability to WRS for Plaza’s obligations. Then, on February 20,
2007, the District Court entered two relevant orders: it granted WRS’s motion for
4
summary judgment against Herklotz on the issue of damages, entering judgment in the
amount of $2,584,749.03; and it granted WRS’s motions for default judgments in the
same amount against the Other Defendants. Again, the attorney who nominally
represented the Other Defendants did not notify them of the default judgments.
The Other Defendants eventually learned of the default judgments. After
obtaining new counsel, they filed motions for relief of the default judgments entered
against them, pursuant to Federal Rule 60(b)(6). On March 13, 2008, the District Court
granted these motions. It based its decision on the woefully inadequate performance of
the Other Defendants’ counsel and on a showing that the Other Defendants had a
“potentially meritorious defense to at least of part of WRS’s claim for damages,” because
they submitted evidence in support of their Rule 60(b) motions “which, if presented at a
trial, may result in a substantial reduction in the amount of damages recoverable by WRS”
from Plaza. WRS, Inc. v. Plaza Entm’t, Inc., Civ. A. No. 00-2041, 2008 WL 686773, at
*12, *13 (W.D. Pa. Mar. 13, 2008). Of course, as sureties, Parkinson and von Bernuth
had liability coextensive with Plaza’s, and any reduction in Plaza’s liability would also
reduce the amount recoverable from them.
Meanwhile, on March 8, 2007, Herklotz appealed the District Court’s July 21,
2006 liability ruling and its February 20, 2007 damages determination. After learning of
the District Court’s March 13, 2008 decision to vacate the default judgments against the
Other Defendants, however, Herklotz filed his own Rule 60(b) motion regarding the
February 20, 2007 decision.
5
On June 5, 2008, the District Court issued a memorandum and order stating that it
would grant Herklotz’s motion pursuant to Rule 60(b)(6) if we remanded the February 20,
2007 decision to it.2 It would do so because the Other Defendants raised a “substantial
likelihood” in their successful Rule 60(b) motions that their respective liabilities to WRS
would be less than the $2,584,749.03 judgment entered against Herklotz, but “as a surety
for Plaza Entertainment, Herklotz’s liability to WRS cannot be greater than the amount of
Plaza Entertainment’s obligations to WRS (or the liability of Parkinson and von Bernuth
who also executed personal guaranties of Plaza Entertainment’s obligations to WRS).”
WRS, Inc. v. Plaza Entm’t, Inc., Civ. A. No. 00-2041, 2008 WL 2323991, at *4 (W.D.
Pa. June 5, 2008). The inconsistency of an undiminished judgment against Herklotz
standing alongside a reduced judgment against the other defendants “would be an obvious
injustice.” Id. The District Court was careful to note that its prospective grant of Rule
60(b) relief applied only to the February 20, 2007 damages decision, and not to the July
21, 2006 liability decision. See id. at *2 n.6. Herklotz filed a motion to remand in short
order, on June 10, 2008.
II.
The District Court had jurisdiction pursuant to 28 U.S.C. § 1332. We have
jurisdiction pursuant to 28 U.S.C. § 1291.
2
During the pendency of an appeal, a district court is without the power to grant a
Rule 60(b) motion – it may only indicate that it would grant such a motion should the
Court of Appeals decide to remand. See Venen v. Sweet, 758 F.2d 117, 123 (3d Cir.
1985).
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When reviewing an order granting summary judgment, “[w]e exercise plenary
review . . . and we apply the same standard that the lower court should have applied.”
Farrell v. Planters Lifesavers Co., 206 F.3d 271, 278 (3d Cir. 2000). A federal court
should grant summary judgment “if the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a judgment as a matter
of law.” Fed. R. Civ. P. 56(c). In making this determination, “a court must view the facts
in the light most favorable to the nonmoving party and draw all inferences in that party’s
favor.” Farrell, 206 F.3d at 278. “There must, however, be sufficient evidence for a jury
to return a verdict in favor of the nonmoving party; if the evidence is merely colorable or
not significantly probative, summary judgment should be granted.” Armbruster v. Unisys
Corp., 32 F.3d 768, 777 (3d Cir. 1994). “A disputed fact is ‘material’ if it would affect
the outcome of the suit as determined by the substantive law.” Gray v. York Newspapers,
Inc., 957 F.2d 1070, 1078 (3d Cir. 1992).
III.
A.
We deal first with Herklotz’s appeal of the July 21, 2006 liability decision.
Herklotz asserts that he is not liable for Plaza’s debts to WRS because subsequent events
rendered the Herklotz Surety inoperable. He claims that he was a gratuitous surety, and
that the Services Agreement materially modified the creditor-debtor relationship between
WRS and Plaza without Herklotz’s consent. Therefore, the Herklotz Surety should have
7
been discharged. But even if he was not a gratuitous surety, Herklotz argues, the Services
Agreement materially increased Herklotz’s risk when it modified the WRS-Plaza
relationship, and this increase in risk should have led the District Court to discharge the
Herklotz Surety.
WRS contends that the Services Agreement did not materially modify the WRS-
Plaza relationship; that even if it did, Herklotz consented to any such modification in the
Herklotz Surety contract; and finally that Herklotz was a compensated surety, and the
Services Agreement – even if a material modification, and even if not consented to by
Herklotz – did not substantially increase Herklotz’s risk as a surety.
“In general terms, a suretyship represents a three-party association wherein a
creditor is entitled to performance of a contractual duty by the principal debtor or
alternatively, if the debtor defaults, by the debtor’s surety.” Cont’l Bank v. Axler, 510
A.2d 726, 729 (Pa. Super. 1986); see also R ESTATEMENT OF S ECURITY § 82 (1941).
Sureties come in two varieties: compensated and gratuitous.
Gratuitous sureties are “motivated by selfless generosity” in guaranteeing
another’s debt, and so “enter[] into guaranty agreements for reasons involving familial or
neighborly affection and [do] not benefit financially from the transaction.” Garden State
Tanning, Inc. v. Mitchell Mfg. Group, Inc., 273 F.3d 332, 336 (3d Cir. 2001). In other
words, gratuitous sureties are not “otherwise interested in the transaction leading up to the
suretyship contract.” First Nat’l Bank of East Conemaugh v. Davies, 315 Pa. 59, 64
(1934). Gratuitous sureties are typically discharged “[w]here, without the surety’s
8
consent, there has been a material modification in the creditor-debtor relationship.”
Reliance Ins. Co. v. Penn Paving, Inc., 557 Pa. 439, 450 (1999) (quoting Axler, 510 A.2d
at 729); see also McIntyre Square Assocs. v. Evans, 827 A.2d 446, 452 (Pa. Super. 2003).
A “material modification” in this context “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.” Axler, 510
A.2d at 729.
Compensated sureties, by contrast, guarantee payment to the creditor because they
have an interest in the transaction that led to the suretyship contract, and therefore are
discharged only when there has been a material modification without the surety’s consent
and that modification substantially increases the surety’s risk. See J.F. Walker Co., Inc.
v. Excalibur Oil Group, Inc., 792 A.2d 1269, 1274 (Pa. Super. 2002).
But, critically, material modifications only have the capacity to affect suretyship
contracts if the surety has not consented to the modification. See Penn Paving, 557 Pa. at
450 (“material modifications in the creditor-debtor relationship will not serve to discharge
the surety where the surety has given prior consent to such material modifications as part
of the suretyship contract”). This is true even for gratuitous sureties: “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.” Garden State Tanning, 273 F.3d at 336 (citation omitted).
We determine whether the surety has granted such consent by examining the contract
9
creating the suretyship. This examination gives effect to the contract “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 circumstances.” Penn Paving, 557
Pa. at 450 (quotation marks omitted).
We hold that Herklotz consented to material modifications of the WRS-Plaza
relationship. Indeed, the Herklotz Surety contract explicitly contemplated, and
encompassed, the modifications of the kind effected by the Services Agreement. The
contract stated plainly that Herklotz “unconditionally guarantees complete and prompt
payment, when due, of any indebtedness which may at the present time or at any time
hereafter” be owed to WRS by Plaza. (JA 36). Moreover, the contract provided WRS
with “the unrestricted right to . . . modify . . . any indebtedness and to accept, substitute, .
. . or otherwise deal with any collateral security or other guaranties, without notice to the
undersigned and without affecting the obligation of” Herklotz. (Id.) (emphasis added).
Thus, even assuming that the Services Agreement materially altered the business
relationship between Plaza and WRS, this kind of alteration came squarely within the
extremely broad language of the Herklotz Surety contract. “[I]t is well settled that a
surety’s consent to material modifications in the creditor-debtor relationship may be
obtained as part of the suretyship contract. Where the surety has given such prior
consent, the surety is contractually bound to accept the material modifications in the
creditor-debtor relationship.” Axler, 510 A.2d at 730. This is exactly the case here, and
requires that Herklotz be held a surety for Plaza’s debt to WRS. Accordingly, we need
10
not reach the issues of whether Herklotz was a compensated or gratuitous surety, whether
the Services Agreement was a material modification, or whether the Services Agreement
increased Herklotz’s risk, to hold that the Herklotz Surety contract obligates Herklotz for
Plaza’s debts to WRS.
B.
While Herklotz is liable to WRS for some amount of damages, that amount
obviously cannot be larger than the total amount owed by Plaza to WRS, and may be
apportioned among all of the parties who executed sureties for Plaza’s debt – Parkinson,
von Bernuth, and Herklotz. Accordingly, we will grant Herklotz’s motion to remand the
February 20, 2007 damages decision, and permit the District Court to grant Herklotz’s
Rule 60(b) motion regarding that decision.
IV.
For the foregoing reasons, we will affirm the July 21, 2006 judgment of liability
and remand the February 20, 2007 judgment of damages.
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