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Sears, Roebuck and Co. v. Jardel Co.


decided: January 30, 1970.


Hastie, Chief Judge, and McLaughlin and Van Dusen, Circuit Judges.

Author: Van Dusen


VAN DUSEN, Circuit Judge.

This is an appeal from a District Court order entering summary judgment for the third-party defendant, Hirsch, Arkin, Pinehurst, Inc.

John A. Robbins Co., Inc. (Robbins, Inc.) is a Pennsylvania general construction corporation, wholly owned by John A. Robbins (Robbins) and his wife. In 1958 Robbins, Inc. formed Jardel Co., Inc. (Jardel), the appellant in this action, as a wholly owned Delaware subsidiary with principal offices in Pennsylvania. Robbins has at all times been the president and controlling figure in both corporations.

In 1962 Jardel began the development of Price's Corner Shopping Center on land it owned in Delaware. Jardel hired Robbins, Inc. as general contractor under a contract that prevented Robbins, Inc., and apparently its subcontractors, from securing a lien against Jardel's property, thus protecting the mortgagee's interest. Robbins, Inc. in turn subcontracted the plumbing, heating and air-conditioning work to Hirsch, Arkin, Pinehurst, Inc. (Hirsch), a Pennsylvania corporation and appellee in this action. Hirsch agreed to payment on a time and material basis, plus fixed fee.

When Hirsch completed its portion of the construction in the fall of 1963, it was still owed approximately $70,000. by Robbins, Inc. Robbins, Inc. refused to pay, demanding that Hirsch rectify certain errors in the construction. Hirsch made several attempts to correct the problems, but, feeling that it could not satisfy Robbins, finally instituted negotiations for a settlement. As a result of these negotiations, on January 7, 1964, Hirsch agreed to accept $36,000. in full payment of Robbins, Inc.'s obligation to it, in return for which Robbins, Inc. released Hirsch of all liability arising or to arise out of its Price's Corner contract. Jardel was not a party to the release, nor did it participate as a corporation in the negotiations.

On July 9, 1965, a substantial portion of one of the buildings in Price's Corner Shopping Center collapsed. The tenant, Sears, Roebuck and Co., demanded that Jardel rebuild the destroyed portion of the building, which Jardel did as required by the lease. In addition, Sears sued Jardel for $150,000., alleging that its loss of supplies, payroll and other expenses, equipment and profits was due to Jardel's breach of the construction provisions of the contract under which Sears had agreed to rent the building, as well as to Jardel's breach of its duty of maintenance and to negligence.*fn1 Jardel then sued Hirsch in a third-party action, alleging that "Hirsch breached its agreement with the contractor and was negligent" in failing to meet the Sears' specifications which had been incorporated into Hirsch's contract with Robbins, Inc. Judgment was asked against Hirsch to cover any judgment that Sears might recover against Jardel.*fn2

Hirsch filed an answer generally denying the allegations of the third-party complaint. After interrogatories were answered, it amended its answer to plead the release between it and Robbins, Inc. as an affirmative defense against Jardel's claim "because of the relationship between [Jardel] and [Robbins, Inc.]".*fn3 After depositions were taken, Hirsch moved for summary judgment.

The District Court granted the motion, holding*fn4 that (a) the general release was valid to bar Jardel's claim if the release bound Jardel as well as Robbins, Inc., and (b) the release bound Jardel because "justice" required the disregard of the corporate distinction between Jardel and its parent, Robbins, Inc. The appellant, Jardel, challenges both these findings.

It is undisputed that the parties negotiating the release did not specifically mention or consider the leaking pipe causing the collapse of the Sears' building, nor can it be disputed, for the purposes of a motion for summary judgment, that the pipe was not installed in accordance with the contract or that this breach was the cause of the building's collapse.*fn5 Because of these facts, Jardel argues that the release would not be binding even against Robbins, Inc.; it argues that there can never be an enforceable accord and satisfaction to claims that neither party discussed or knew existed at the time of settlement.

We do not believe that the law of Pennsylvania*fn6 goes this far. A general release, by its terms discharging a party of "all manner of actions and causes of action, suits, debts, dues, accounts, bonds, covenants, contracts, agreements, judgments, claims and demands whatsoever in law or equity arising or to arise from a contract between the parties,"*fn7 will ordinarily be enforced absent a showing that the parties did not intend what they wrote:

"It is well settled that where the terms of a release and the facts and circumstances existing at the time of its execution indicate the parties had in mind a general settlement of accounts, the release will be given effect according to its terms. * * *"

Brill's Estate, 337 Pa. 525, 528, 12 A.2d 50, 52 (1940); see Cockcroft v. Metropolitan Life Ins. Co., 125 Pa.Super. 293, 299, 189 A. 687, 689 (1937) (dictum).

The facts leading to the release were related in depositions by two of the three principals of Hirsch, and their statements have not been refuted by Jardel. After completing the plumbing, heating and air-conditioning work at the Price's Corner project, Hirsch demanded payment from Robbins, Inc. It was met with a series of alleged defects that Hirsch corrected, while denying that the defects were its responsibility. Hirsch again demanded payment, and again it was met with a different list of defects that, once again, it corrected. Finally, upon once again demanding payment and once again being met with a different list of defects, Hirsch asked to negotiate a settlement. Hirsch's purpose in these negotiations was clear -- it wished to terminate its relationship with the Robbins organization completely.*fn8 The negotiations took place at the office of Robbins, Inc.'s (and Jardel's) attorney in Philadelphia; both parties were represented by counsel. Although it does not appear that the principals of Hirsch were directly involved, both Robbins and Mr. Anglin*fn9 were present for Robbins, Inc. The principals of Hirsch deposed that it was told to their attorney that if Hirsch signed the release, "at no future time would we even hear the name John A. Robbins." And it was on this basis that they accepted:

"We wanted to make sure we would not be responsible for anything else when we signed this and accepted the final payment; that we would not be responsible for anything else.

"Our attorney came out and said, 'Will you accept this? This is what they offer.'

"We said, 'We will accept it on the condition that we are released of all possible claims that come out of it [the Price's Corner project],' and he went back in and apparently, obviously they agreed on it and this is what came out of it."

The release, as signed by Robbins and attested to by the secretary of Robbins, Inc., stated that Robbins, Inc. released all its claims against Hirsch in exchange for $34,000.*fn10

Jardel now seeks to challenge the release by the allegation that Hirsch "failed to disclose" the defects of the piping.*fn11 Even if it were true that Hirsch knew of the alleged defects,*fn12 this fact would not defeat the validity of the general release. Under Pennsylvania law, the only question open to challenge is whether the parties intended the release to be honored according to its terms.*fn13 There is ample evidence in the record supporting the conclusion that the parties intended so to honor the release, and there is no evidence to the contrary. Since it was Jardel's burden to refute the explicit language of the instrument and the corroborating testimony of the Hirsch principals, and since it made no attempt to do so, summary judgment on this issue, against Jardel, was proper. See, e.g., First Nat'l. Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289-290, 88 S. Ct. 1575, 20 L. Ed. 2d 569 (1968); Doff v. Brunswick Corp., 372 F.2d 801, 805 (9th Cir. 1966), cert. den. 389 U.S. 820, 88 S. Ct. 39, 19 L. Ed. 2d 71 (1967); Lundeen v. Cordner, 356 F.2d 169, 170 (8th Cir. 1966).

Having correctly found the release to cover the claim involved here as to Robbins, Inc., the District Court held the release binding upon Jardel by disregarding the separate entities of the two corporations. While finding that "some efforts are made at the management level to maintain separate entities,"*fn14 the court held that disregarding the parentsubsidiary structure in this case*fn15 was "necessary to do justice and prevent a serious inequity which would otherwise follow." Jardel argues that the corporate entities should not be disregarded, and that since Jardel was not a party to the release, the release should not bar its present action.

Courts of Pennsylvania and Delaware*fn16 do not easily pierce the corporate veil. In both states the corporate entity is disregarded only in the rarest of cases:

"The corporate entity or personality will be disregarded only when the entity is used to defeat public convenience, justify wrong, protect fraud or defend crime." Sams v. Redevelopment Auth., 431 Pa. 240, 244, 244 A.2d 779, 781 (1968).

"[The corporate entity may be disregarded] only in the interest of justice, when such matters as fraud, contravention of law or contract, public wrong, or equitable considerations among members of the corporation require it, are involved." Pauley Petroleum, Inc. v. Continental Oil Co., 43 Del. Ch. 516, 239 A.2d 629, 633 (Del.1968).

We need not pass on the District Court's conclusion in this case that the corporate distinction between Jardel and Robbins, Inc. should be disregarded,*fn17 since we believe the District Court order must be affirmed for another reason.

Even if the corporate veil of Jardel were not disregarded, it cannot entirely separate itself, for the purpose of this suit, from the activities of Robbins, Inc. Jardel's claim against Hirsch is based upon Hirsch's duties arising out of Robbins, Inc.'s subcontract with it. In its third-party complaint, Jardel alleged the contract as the basis for its suit: "Defendant is informed and believes and thereon alleges that Hirsch breached its agreement with the contractor [Robbins, Inc.] * * *." But just as Jardel did not sign the release, so too it was not a signatory to the underlying Robbins, Inc.-Hirsch contract.

Because the contract explicitly contemplated the provision of services by Hirsch to Jardel,*fn18 Jardel has rights under the contract as a third-party creditor beneficiary. See, e.g., Van Cor, Inc. v. American Cas. Co., 417 Pa. 408, 413, 208 A.2d 267, 269 (1965). Professor Williston defines a third-party creditor beneficiary contract as one in which:

"'no purpose to make a gift appears from the terms of the promise in view of the accompanying circumstances and performance of the promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary * * *.'

"The promisee's object in the contract to discharge his debt must always be primarily, and generally solely, to secure his own advantage. He wishes to be relieved from liability, and he exacts a promise to pay the third person only because that is a way of relieving himself."

2 S. Williston, Law of Contracts, § 361, at 863 (3rd Ed., 1959) [quoting Restatement of Contracts § 131(1) (b) (1932)] (footnotes omitted).*fn19 As general contractor, Robbins, Inc. had a duty to provide Jardel with certain specified services; it chose to fulfill part of that duty by subcontracting with Hirsch, Hirsch thereby promising to complete the plumbing, heating and air-conditioning work. Because courts have "instinctively recogniz[ed] the creditor's [Jardel's] interest in such a promise," Williston, supra, § 361, at 864-65, the third-party creditor beneficiary can sue the promisor (in this case, Hirsch) directly.*fn20

Once a third-party beneficiary contract has been made however, the beneficiary's rights are not unlimited.*fn21 In this case, the terms of § 143 of the Restatement of Contracts require the conclusion that the release satisfied the promisor's obligation to the creditor beneficiary (Jardel) as well as to the promisee (Robbins, Inc.):

"A discharge of the promisor by the promisee in a contract or a variation thereof by them is effective against a creditor beneficiary if,

(a) the creditor beneficiary does not bring suit upon the promise or otherwise materially change his position in reliance thereon before he knows of the discharge or variation, and

(b) the promisee's action is not a fraud on creditors."*fn22

Professor Williston has adopted the Restatement rule, distinguishing the creditor beneficiary situation from that of the donee beneficiary,*fn23 reasoning that the creditor beneficiary's right "is purely derivative." Williston, supra, § 397, at 1074.*fn24

This is the rule that Pennsylvania would adopt. Not only do Pennsylvania courts rely upon the Restatement and Professor Williston in establishing the law of third-party beneficiary contracts, e.g., Williams v. Paxson Coal Co., 346 Pa. 468, 470, 471, 472, 31 A.2d 69, 70, 71 (1943),*fn25 but they apparently have adopted § 143. In Clardy v. Barco Construction Co., 205 Pa.Super. 218, 224-225, 208 A.2d 793, 796 (1965), the court found that a release did not bar the third-party creditor beneficiary's claim by reason of § 143, because the creditor had relied on the contract in completing his duties. In Miller v. Travelers Insurance Co., 143 Pa.Super. 270, 17 A.2d 907 (1941), the court adopted the rule of § 143, although it actually cited § 140*fn26 as authority. Plaintiff's husband contracted with his employer to have deductions taken from his wages to support a group life insurance policy that the employer took out with the defendant insurance company. After giving notice to the employees, the employer cancelled the policy. Upon her husband's death, the plaintiff sued the insurance company as a third-party beneficiary, arguing that the contract between the employer and the insurance company could not have been cancelled without her husband's consent. The court held:

"The insured employee or his beneficiary have no greater rights than are provided in the policy, certainly no vested right which would prevent cancellation by mutual agreement between the insurer and the employer, especially where reasonable notice of cancellation is given to the employee. A third party beneficiary in an ordinary contract is subject to the limitation of its terms as he has no greater rights under it than are provided in the contract itself: Restatement of the Law, Contracts, § 140 * * *."

Id. at 273, 17 A.2d at 908.*fn27

Application of § 143 to this case bars not only the recovery by Jardel under a contractual theory, but its suit in negligence as well. Under § 143 the release was also a "variation," expressly precluding "all, and all manner of, actions and causes of action" arising from the contract between Robbins and Hirsch. Pennsylvania courts have uniformly honored such contractual provisions where they are entered into by "free bargaining agents," Galligan v. Arovitch, 421 Pa. 301, 304, 219 A.2d 463, 465 (1966), holding them to bar recovery in tort as well as contract. E.g., Cannon v. Bresch, 307 Pa. 31, 160 A. 595 (1932), cited with approval, Galligan v. Arovitch, supra ; Dohm v. Ponderosa Riding Stables, 41 Pa.Dist. & Co.R.2d 307 (C.P.York 1966); see Mayo v. McCloskey & Co., 200 F. Supp. 7 (E.D.Pa.1961); Shafer v. Reo Motors, 108 F. Supp. 659 (W.D.Pa.1952), aff'd 205 F.2d 685 (3rd Cir. 1953); Charles Lachman Co. v. Hercules Powder Co., 79 F. Supp. 206 (E.D.Pa.1948).

Applying the above-stated rule to Jardel would not work an "injustice," as Jardel has argued.*fn28 Should Jardel not have an actionable claim against Hirsch, it can still sue the general contractor, Robbins, Inc., whose obligation to Jardel remained unchanged by the subcontract or the release. See, e.g., National Fire Ins. Co. of Hartford v. Westgate Constr. Co., 227 F. Supp. 835 (D.Del.1964). Indeed, Jardel's separate existence was justified in part by the necessity of keeping its assets apart from those of its parent, and thus suit against its parent would be more than a futile gesture in this instance.*fn29

Accordingly, we hold that Jardel is bound by the release, since the record does not show any material change of position by it in reliance on the promise prior to the variation of the contract by the release.*fn30 See Morstain v. Kircher, 190 Minn. 78, 250 N.W. 727, 728 (1933),*fn31 where the court said:

"* * * [The plaintiff] paid no consideration for defendant's agreement to pay the mortgage debt, nor had she in reliance on the assumption contract placed herself in a position from which she could not retreat without loss. [citing § 143] * * *"

For the foregoing reasons, the District Court order of December 9, 1968, will be affirmed.

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