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MOHASCO INDUS. v. GIFFEN INDUS.

December 30, 1971

MOHASCO INDUSTRIES, INC., Plaintiff,
v.
GIFFEN INDUSTRIES, INC., Defendant


Frederick van Pelt Bryan, United States District Judge.


The opinion of the court was delivered by: BRYAN

Plaintiff, Mohasco Industries, Inc. (Mohasco) sues on a written guaranty executed by defendant, Giffen Industries, Inc. (Giffen). Giffen guaranteed payment of amounts due and owing to Mohasco by Murray B. Marsh Company (Marsh) for goods sold and delivered. Mohasco is a New York corporation. Giffen is a Florida corporation with its principal place of business in Florida. Marsh is a Washington corporation with its principal place of business in California, and at the time the guaranty was executed was a wholly-owned subsidiary of Giffen.

Mohasco commenced the action in the Supreme Court, New York County, on December 10, 1970, by obtaining an order of attachment and the next day attaching property of Giffen in the hands of garnishees. By stipulation of the parties, a cash collateral account of Giffen with a balance of $ 1,390,000 was substituted for the property attached, since replaced by a certificate of deposit. Giffen then removed the action to this court on grounds of diversity of citizenship and Mohasco moved for summary judgment pursuant to Rule 56, Fed.R.Civ.P.

 On November 20, 1970, Marsh had commenced an action against Mohasco in the United States District Court for the Central District of California, seeking damages of $ 75,000,000 for alleged antitrust violations. On December 14, 1970, subsequent to the commencement of the instant action in New York, an amended complaint was served in the California action naming Giffen as an additional party plaintiff and asserting a claim for relief by Giffen against Mohasco for judgment declaring the Giffen guaranty of Marsh's obligation to Mohasco invalid and unenforceable on the ground that the guaranty was an instrumentality used by Mohasco to violate the antitrust laws. When Mohasco moved for summary judgment in this Court, Giffen moved to stay the instant action pending determination of the California action. Thereafter, Giffen's claim for relief against Mohasco in the California action was dismissed by the District Court in California, primarily on the ground of the pendency of the instant action in this district. Giffen's motion before this Court for a stay was thereupon denied and the Mohasco summary judgment motion is before the Court for determination.

 Mohasco is a manufacturer of carpet products distributed in various states under the trade name Mohawk. For many years prior to the fall of 1970, Mohasco sold Mohawk carpet products on open account to Marsh, a west coast wholesale distributor. The arrangement with Marsh was on an informal basis and was terminable by either party, at any time.

 In March, 1969, Marsh was acquired by Giffen. On July 21, 1969 Mohasco wrote to Giffen stating that if "the financial structure of your Marsh subsidiary has been altered to conform with general overall corporate practices of pooling subsidiary resources into home office coffers, so that maximum use of finances can be employed," Mohasco wished Giffen to guarantee Marsh's purchases from Mohasco. It enclosed its "usual guaranty document" for execution by Giffen. On August 29, 1969, Giffen returned the guaranty which it had executed, dated July 31, 1969, to Mohasco, enclosing a copy of resolutions of the Giffen board of directors authorizing the execution of guaranties requested by suppliers of its subsidiaries.

 Under the guaranty so executed, Giffen unconditionally guaranteed that Marsh would fully and promptly pay to Mohasco, when due, all amounts arising from any advance, loan or extension of credit made or to be made by Mohasco to Marsh, including amounts owing on open account transactions for the sale of carpet products by Mohasco to Marsh. Mohasco thereafter continued to extend large credits to Marsh for sales of carpet products on open account, until the fall of 1970. A dispute then arose between Marsh and Mohasco. Marsh ceased acting as a Mohawk distributor and then commenced the California action against Mohasco previously referred to. Marsh failed to make any further payments to Mohasco for goods sold on open account after October 26, 1970, and on November 27, 1970, advised Mohasco by telegram that any amounts due for goods theretofore delivered would be withheld pending the outcome of the California litigation.

 By letter dated December 7, 1970, Mohasco advised Giffen that Marsh had failed to make payment of amounts due and demanded immediate payment by Giffen of $ 904,723 then due from Marsh on open account, and payment promptly after January 5, 1971, of $ 587,727 owed by Marsh to Mohasco on open account transactions which would become due and payable on that day. Mohasco has received no payments on the Marsh indebtedness since then.

 On December 10, 1970, Mohasco commenced this action alleging extension of credit to Marsh in reliance upon the Giffen guaranty; Marsh's refusal to pay amounts due and owing on open account and Giffen's resulting obligation to make such payments pursuant to the guaranty.

 Giffen's answer admitted the execution of the guaranty but denied (1) that the amounts claimed were due and owing from Marsh, and (2) that it was liable under the guaranty. As a separate defense, Giffen alleged that it had been induced to enter into the guaranty by Mohasco's fraudulent failure to disclose that Mohasco then intended to terminate or was contemplating terminating the Marsh distributorship and had led Giffen to believe that it would continue Marsh as a distributor as long as Marsh continued to distribute Mohasco products.

 The following material facts have been firmly established on the record before me, and there are no genuine issues with respect thereto:

 
1. Giffen executed the guaranty of the obligations of its wholly owned subsidiary, Marsh, to Mohasco on August 29, 1969 dated July 31, 1969.
 
2. Mohasco sold carpet products to Marsh during 1970 on open account.
 
3. Under the terms of the guaranty, Giffen guaranteed that Marsh would punctually pay for goods sold and delivered to it by Mohasco.
 
4. There were accounts stated between Mohasco and Marsh as of October 30, November 10, and November 30, 1970, and the balance unpaid thereon ...

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