WRS Inc. v. Plaza Entertainment, 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Precedential or Non-Precedential: Non-Precedential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 NOT PRECEDENTIAL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.

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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.

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 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.

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 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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