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KEYSTONE LEASING CORP. v. PEOPLES PROTECTIVE LIFE

April 28, 1981

KEYSTONE LEASING CORPORATION, Plaintiff,
v.
PEOPLES PROTECTIVE LIFE INSURANCE COMPANY and Continental Bankers Life Insurance Company of the South, Inc., Defendants



The opinion of the court was delivered by: COSTANTINO

MEMORANDUM OF DECISION AND ORDER

This is an action to enforce an alleged guaranty agreement. The plaintiff, Keystone Leasing Corporation ("Keystone") seeks to enforce a guaranty purportedly made by the defendant, Peoples Protective Life Insurance Company ("PPLIC") of the financial obligations of Preferred Development Corporation ("Preferred") incurred pursuant to certain equipment leases. Keystone contends that it justifiably relied upon the representations made by PPLIC and thus, the defendant must be estopped from denying the validity of the guaranty. The defendant denies that the guaranty is an enforceable obligation of PPLIC. In the alternative, the defendant denies that the guaranty, if deemed to be valid, is of a continuing nature. PPLIC asserts, inter alia, that, as a matter of law, the guaranty was illegal under state law; that the Board of Directors of PPLIC did not approve the making of the guaranty with Keystone; that Keystone could not reasonably have relied upon any purported representations made by PPLIC.

 The issues were presented to the court in a non-jury trial. Thereafter, the parties submitted their proposed findings of fact and conclusions of law. After examining the extensive record, the court finds that the defendant has established that the guaranty is not an enforceable obligation of PPLIC. Accordingly, the complaint must be dismissed. The basis for the conclusion follows.

 FINDINGS OF FACT

 The relevant dates and circumstances incident to the making of a guaranty dated July 8, 1971 ("guaranty") are hotly in dispute. The non-jury trial held before this court brought into perspective the degree of deception and scheming which surrounded the signing of the guaranty. Consequently, the court carefully scrutinized the credibility of each witness and then sought to discern the most logical and reasonable inferences and conclusions which could be drawn from the conflicting facts.

 Keystone is a domestic corporation of the State of New York and is engaged in the leasing of equipment. Specifically, under usual circumstances, once Keystone had approved the credit worthiness of a prospective lessee, it routinely would purchase specific equipment from third party vendors which had been selected by the lessee. It then would lease this equipment to the lessee pursuant to a lease agreement which provided for periodic rental payments. The obligation to pay such rental charges commenced once the lessee had received and approved of the equipment by executing a completion certificate.

 A linch pin to these lease arrangements often was provided by the independent lease broker. Independent lease brokers would attempt to locate prospective lessees, and thereafter, would solicit leasing companies, like Keystone, with this potential source of business. The broker then received a commission if a lease arrangement was effectuated. Keystone, aware of this mechanism for securing lessees, occasionally used the services of such independent brokers by advertising its interest in trade journals.

 During the relevant time, Preferred and PPLIC were wholly owned subsidiaries of Peoples Protective Corporation ("PPC"). All three corporations were duly organized under and pursuant to the laws of the State of Tennessee. PPLIC is a Tennessee life insurance company; Preferred was engaged in the development of a resort site in Tennessee known as English Mountain.

 According to the credited testimony of Billy Jack Goodrich, General Counsel to PPLIC and later PPC, the Smith family, particularly Robert B. Smith, III, exercised significant control over the three Tennessee companies. The Smiths were the majority shareholders of the parent company, PPC. Robert B. Smith, Jr. was the Chairman of PPC and his son, Robert B. Smith, III, served as a director and the President of both PPC and PPLIC. While Mr. Goodrich was unable to explain some of the events which transpired with regard to the guaranty, his testimony was credible. His explanation of the operations of the three companies reveals that the Smiths controlled Preferred and were the principal movers in developing the English Mountain project, which was managed by Preferred. In point of fact, the Smiths, as officers and directors of PPC, PPLIC and Preferred, were keenly interested in enabling Preferred to obtain equipment leases from a lessor such as Keystone.

 As for the interrelationship among the three companies, while it can be said that corporate ties existed between PPC and its various subsidiaries, it is also true that PPLIC functioned independently of PPC and the other affiliates. Mr. Goodrich testified that the functions of the parent company or its subsidiaries were not performed by the home office personnel of PPLIC. Conversely, the life insurance functions of PPLIC were not performed by either PPC or Preferred. It was acknowledged that some of the officers of PPC and PPLIC were common to both corporations. However, there were a significant number of officers, directors and home office personnel who acted solely with respect to one company or the other.

 Further, the potential opportunities occasioned by the formation of PPC in 1968 underlie the separate nature and the distinct powers exercised by the parent and the life insurance company. By way of example, PPC was formed, inter alia, so that there could be diversification of investment "not afforded an insurance company." In essence, many of the restraints which encumbered the life insurance company did not exist vis a vis the parent.

 With respect to the financial status of the various subsidiaries of PPC, it is beyond cavil that PPLIC appeared to be the most financially sound. Indeed, PPLIC had loaned approximately 600,000 dollars to Preferred prior to the lease transactions with Keystone. Mr. Goodrich conceded that he, and others at PPLIC, had knowledge of these specific loan arrangements with Preferred which the Smiths had engineered. However, it was also understood that such loans with Preferred were all fully secured by real estate mortgages and were not unsecured loans of working capital.

 In as much as a large percentage of the assets of Preferred were tied up in English Mountain, it could be said that PPLIC maintained an interest in the success of the resort. Most significantly, the Smiths, as majority shareholders of PPC and its affiliates, were keenly interested in the success of the resort complex and, as revealed by the testimony and records, used their positions as officers and directors of PPC and PPLIC to effectuate that end.

 The negotiations surrounding the lease arrangements between Preferred and Keystone were handled almost exclusively by W. R. Lichota. Lichota, an independent lease broker, introduced Preferred, as a potential lessee in need of financing, to Keystone, a lessor. The testimony indicated that Keystone made all arrangements through Lichota concerning the equipment leases with Preferred for the development of English Mountain. Lichota was neither an officer nor director of PPC, Preferred or PPLIC. According to the credited testimony of Mr. Goodrich, while Lichota dealt with Preferred, and to some extent with PPC, he did not work with, or act on behalf of, PPLIC.

 As the testimony developed, it became clear that the point in time at which Lichota began negotiations with Keystone and the date, if indeed one existed, on which the Board of Directors of PPLIC acted upon the proposed guaranty were the pivotal factual questions presented to the court. In seeking to prove the validity of the guaranty, Keystone, through its former President, Wallace C. Bernstein, contended the following, to wit: (1) that Keystone first dealt with Lichota during the first three months of 1971; (2) that before the execution of any lease with Preferred, Keystone had received the financial statements of Preferred, PPC and PPLIC and had determined that a guaranty from PPLIC would be necessary as a condition to the signing of any lease with Preferred; (3) that the April 26, 1971 corporate resolution of PPLIC effectively guaranteed several equipment leases between Keystone and Preferred.

 By using a measure of common sense in order to piece together the series of events in 1971, it became clear to the court, after reviewing the record, that Keystone's argument in general, and Bernstein's testimony in particular, could not be deemed credible and could not be credited with any degree of consistency. In a word, Bernstein's account of the ...


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