Appellants Barry and Leslie Axler appeal the denial of their petition to open a judgment confessed against them under a surety agreement by which they became cosureties for a Continental Bank (Continental) loan to North Broad Distributors, Inc. (North Broad), a corporation which the Axlers and two other couples formed. Primarily, the Axlers contend on appeal that their surety obligation was discharged by a material modification in the relationship between North Broad (the principal debtor) and Continental (North Broad’s creditor), namely, the sale of North Broad to
In 1976, North Broad was formed by three couples — the Axlers, the Paul Lipschutzes and the Paul Freedmans. One member of each couple was given a one-third interest in North Broad. On August 19, 1976, North Broad, through its president Paul Lipschutz, executed a nondiscount note to Cоntinental in accordance with a North Broad corporate loan resolution which authorized either North Broad’s president or North Broad’s secretary (then Leslie Axler) to borrow money for North Broad. In connection with this note, the Axlers, the Lipschutzes and the Freedmans each personally signed identical surety agreements obligating thеm to pay North Broad’s debt to Continental in the event North Broad defaulted.
On November 2, 1977, North Broad obtained another loan from Continental on the same terms as the first note. As of January 12, 1978, there remained a balance of $75,443.09 on the first note and $25,000 on the second note.
On January 12, 1978, the Axlers sold their interest in North Broad to Paul Freedman and to anothеr individual who was not an originator of North Broad. By a letter dated February 1, 1978, the Axlers informed Continental that they were no longer owners of North Broad and requested that they be released as cosureties of North Broad’s debt to Continental. By a letter dated February 9, 1978, Continental advised the Axlers that they would not be released as cosureties unless North Broad’s indebtedness was fully paid or satisfactory substitute security for the indebtedness was pledged. 1
By September 21, 1981, the balance on the consolidation note was $46,057.24. On that date, North Broad renegotiated a five-year note with Continental for the amount of $49,868.62 which constituted the outstanding principal on the consolidation note plus аccrued interest thereon. A Time and Demand Loan Memorandum of Continental indicates that the purpose of the five-year note was to pay the balance on the consolidation note from North Broad’s “cash flow of business, which in turn services buyout by Barry [Friedman] to [Lipschutz] and [Paul] Freedman.” After the five-year note was executed, Lipschutz and Paul Freedman (the remaining original North Broad shareholders) sold their interest in North Broad to Joseph Barry “Buddy” Friedman.
North Broad made regular payments on the five-year note for a period of six months and then failed to make payments for the next three months. Consequently, on July 8, 1982, Continental confessed judgment against the Axlers, the Paul Lipschutzes and thе Paul Freedmans as cosureties for North Broad’s debt to Continental. At the time judgment was confessed, none of the cosureties were still involved in North Broad’s business operations inasmuch as all the cosureties had previously sold their shares in North Broad.
On September 21, 1982, the Axlers filed a petition to open the confessed judgment. After oral argument, the Axlers’
Since the decision whether to open a confessed judgment involves an exercise of the equitable power of a court of common pleas, our scope of appellate review of such a decision is limited.
Lalumera v. Nazareth Hospital,
To have a confessed judgment opened, the petitioner “must act promptly, allege a meritorious defense, and present sufficient evidence of that defense to require submission of the issues to a jury.”
Lazzarotti,
In their petition to open, the Axlers alleged as a meritorious defense that the sale of North Broad to Joseph Barry “Buddy” Friedman materially altered the relationship between North Broad and Continental and thereby discharged the Axlers from their оbligation as cosureties for North Broad’s debt to Continental. The common pleas court ruled that the change in ownership of North Broad did not, under the facts of this case, constitute a material alteration which would discharge the Axlers as cosureties. For the following reasons, we agree.
Usually, suretyship problems arise because the three-party structure of a suretyship becomes dynamic rathеr than remaining static. After the signing of a suretyship contract, the creditor and the principal debtor may renegotiate the terms of the debtor’s obligation to the creditor without obtaining the surety’s assent to the changed obligation. When the debtor defaults, the creditor then seeks to have the surety perform the debtor’s renegotiated obligatiоn. Commonly, the surety asserts as a defense that he does not have a duty to perform the renegotiated obligation of the principal debtor since he did not consent to be liable for that new obligation.
See, e.g., Jacob Sall Building & Loan Association v. Heller,
Cognizant of the problems posed by the three-party composition of suretyships, Pennsylvania courts have uniformly recognized that whеre the creditor and the debtor materially modify the terms of their relationship without obtaining the surety’s assent thereto, the surety’s liability
The record in the case sub judice does not clearly establish whether the Axlers were gratuitous sureties or compensated sureties for North Broad. Nevertheless, the nature of the Axlers’ suretyship is not dispositive of the рresent appeal. As explained hereinafter, we conclude that the Axlers have not made a threshold showing of a material modification, without their consent, in the creditor-debtor (Continental-North Broad) relationship and hence cannot be discharged whether they are gratuitous sureties or compensated sureties.
Citing Pure Oil Co., the Axlers argue that they should be discharged as sureties because the sale of North Broad to a nonsurety (Joseph Barry “Buddy” Friedman) of North Broad’s debt materially modified the creditor-debtor relationship between Continental and North Broad. We find Pure Oil Co. distinguishable from the case sub judice.
As part of the suretyship contract, the surety in
Pure Oil Co.
agreed to be bound by any subsequent extensions of time for debt repayment which the Pure Oil Company as creditor might give the principal debtor. After the signing
However, it is well settled that a surety’s consent to material modifications in the creditor-debtor relаtionship may be obtained as part of the suretyship contract.
Central-Penn National Bank of Philadelphia v. Tinkler,
In contrast to the suretyship contract in
Pure Oil Co.,
the Axlers have signed a suretyship contract which provides not only that Continental may “grant extensions of time and other indulgences of any kind to [North Broad]” but also,
Even if we were to assume arguendo, as the Axlers assert, that the sale of North Broad to Joseph Barry “Buddy” Friedman — a nonsurety of North Broad’s debt— created a new entity which replaced North Broad, such a material modification in the creditor-debtor relationship would not discharge the Axlers as sureties. By the very terms of their suretyship contract, the Axlers consented to be obligated for the “Liabilities of any partnership, firm, corporation or other company which may be a successor to” North Broad. Thus, the suretyship contract in the present case, unlike the suretyship contract in Pure Oil Co., fully encompassеs the modification that occurred in the creditor-debtor relationship, and the Axlers remain contractually liable for the debtor’s obligation.
Citing Stolar, the Axlers collaterally contend that the sale of North Broad should result in their discharge as sureties because Joseph Barry “Buddy” Friedman impaired their security for North Broad’s debt by liquidating North Broad’s inventory but nоt applying any liquidation proceeds to repayment of North Broad’s debt to Continental. We deem Stolar inapposite.
After the signing of the suretyship contract, the creditor and the debtor in
Stolar
renegotiated the terms of the
Rather than having asserted the creditor’s impairment of security for North Broad’s debt, the Axlers have complained that the sale of North Broad by the Axlers’ co-sureties (the Lipschutzes and the Paul Freedmans) to a nonsurety of North Broad’s debt (Joseph Barry “Buddy” Friedman) has increased their risk of loss and should discharge them as sureties. Specifically, the Axlers have alleged that North Broad’s new owner (“Buddy” Friedman) has failed to preserve the security for North Broad’s debt to Continental by liquidating North Broad’s assets.
Our reading of the suretyship contract signed by the Axlers persuades us that the Axlers remain contractually liable as sureties despite the actions by North Broad’s new owner (Mr. Friedman) which resulted in North Broad’s defaulting on its debt to Continental. The Axlers’ surety-ship contract fully anticipates the potential sale of North Broad to persons other than the North Broad originators who were also surеties of North Broad’s debt to Continental. The suretyship contract not only binds the Axlers for the liabilities of both North Broad and its successors but also states that the Axlers have waived notice of “any ... fact which might materially increase [their] risk” as the sale of North Broad to a nonsurety might be expected to do. Therefore, in signing the detailed suretyship cоntract out
In summation, we conclude that the Axlers have failed to offer sufficient evidence that the sale of North Broad to a nonsurety of North Broad’s debt discharges them as sureties either becаuse there was a material modification, without their consent, in the creditor-debtor relationship between Continental and North Broad or because the creditor (Continental) impaired the security for North Broad’s debt. Accordingly, the Axlers are not entitled to have the confessed judgment opened on these grounds.
As an alternative ground fоr opening the confessed judgment, the Axlers assert the improper execution of the five-year note on which judgment was confessed against them. The note was signed on behalf of North Broad by “Paul Lipschutz, consultant.” While the Axlers do not dispute the authenticity of Mr. Lipschutz’s signature on the note, they contest the capacity in which Mr. Lipschutz executed the note.
North Broad’s corporate loan resolution required the signature of either North Broad’s president or North Broad’s secretary as binding authorization for loans to North Broad. Since the Axlers do not contend that Mr. Lipschutz was no longer North Broad’s president when he signed the five-year note, we hold that the Axlers have not presеnted adequate evidence of a defect which would invalidate the note and require the opening of the judgment confessed against them on the five-year note.
Lebowitz v. Keystone Insurance Agency, Inc.,
Since the Axlers have not proffered sufficient evidence of a meritorious defense to the confessed judgment,
Order affirmed.
Notes
. In the interest of completeness, we note that the Axlers may have other forms of relief available to them. Whеre a surety has performed upon the default of the principal debtor, the surety has a right to reimbursement from the principal debtor and is subrogated to the rights of the creditor against the principal debtor. Restatement of Security §§ 104 and 141; see also J. White & R. Summers, Uniform Commercial Code § 13-16 (2d ed. 1980). Additionally, "[a] surety who in the performance of his own obligation discharges more than his proportionate share of the principal’s duty is entitled to contribution from a cosurety.” Restatement of Security § 149.