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2001 PA Super 320
IN THE SUPERIOR COURT OF
TIMOTHY A. HOLSTEIN AND DONNA L.
No. 378 EDA 2001
Appeal from the Judgment entered December 29, 2000
In the Court of Common Pleas of Montgomery County
Civil, No. 98-18098
BEFORE: MCEWEN, P.J.E., JOYCE, and KELLY, JJ.
OPINION BY KELLY, J.:
Filed: November 15, 2001
Appellants, Timothy and Donna Holstein, ask us to determine whether
the trial court erred when it found them personally liable to Appellee, Ethan
Good, in the amount of $315,841.18. We hold that the trial court
improperly found Appellants personally liable and reverse the trial court's
The relevant facts and procedural history of this appeal are as follows.
On May 29, 1992, Appellants' corporation, Blue Mack, Inc., bought real
estate at 401 West High Street in Pottstown, Pennsylvania, from Mrs.
Smiths, Inc. (later "Eggo"). The parties executed a purchase money
mortgage to finance the conveyance in the amount of $340,000.00.
Appellants also executed a personal surety agreement with Mrs. Smith's for
the full amount of the mortgage.
In 1993, Blue Mack purchased the assets of Appellee's corporation,
Good Transport Ltd. In the transaction, Good Transport acquired a second
mortgage from Blue Mack on the 401 West High Street property. There was
no personal surety agreement between the parties concerning the second
mortgage. In May, 1995, Blue Mack defaulted on both mortgages. Mrs.
Smith's, now doing business as Eggo, did not sue on the default of the first
mortgage, but Good Transport did sue on the second mortgage and obtained
a writ of execution for the 401 West High Street property on June 4, 1998.
Appellee, Ethan Good, then purchased the first mortgage and note on the
property from Eggo on August 28, 1998 for $70,000.00. No mention was
made of the surety agreement during this transaction.
On September 29, 1998, Appellee filed a confession of judgment
against Appellants on the surety agreement. On November 18, 1998,
Appellee filed an action in assumpsit against Appellants seeking payment on
the surety agreement.
On January 20, 1999, pursuant to the writ of execution on the second
mortgage, the property was sold to Good Transport's attorney at a sheriff's
sale for $1,959.24. The attorney later assigned the bid to Appellee and his
wife. In accordance with the Deficiency Judgment Act, Appellee petitioned
the court to determine the fair market value of the property. The court set
the fair market value at $400,000.00. In its April 14, 1999 order, the trial
court applied the value of the property to the debt and costs attributable to
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the first mortgage, which Appellee had purchased from Eggo. The court
then applied the remaining balance of the fair market value ($59,120.70) to
the second mortgage on the same property. This allocation left a deficiency
of $325,021.18 on the second mortgage.
The confessed judgment and assumpsit action were consolidated and
the case went to trial on September 6, 2000. The trial court determined
that Appellants were personally liable to Appellee for $315,841.18. The
court arrived at this amount by subtracting the deficiency amount
($325,021.18) from the fair market value of the property ($400,000.00).
The court then took this number ($74,978.82) and subtracted it from the
debt on the first mortgage including interest and costs($390,820.00). Based
on the personal surety agreement created to secure the first mortgage, the
trial court found Appellants personally liable to Appellee in the amount of
Appellants filed post-trial motions, which the court denied by order
dated December 4, 2000. Judgment was entered on December 29, 2000.
Appellants filed this timely appeal on January 18, 2001.
Appellants present the following issues on appeal:
DID THE COURT ERR IN FAILING TO FIND THAT JUDGE
ALBRIGHT'S ALLOCATION OF THE FAIR MARKET VALUE TO
THE UNDISCHARGED FIRST MORTGAGE UNDER THE
DEFICIENCY JUDGMENTS [SIC] ACT IN THE ACTION FILED
1 We note that neither party alleges that a surety agreement was given on
the second mortgage, or that the surety on the first mortgage somehow
applies to the second mortgage specifically.
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TO NO. 95-21745 CONSTITUTED PAYMENT IN FULL OF
THE FIRST MORTGAGE, UPON WHICH THESE JUDGMENTS
DID THE COURT ERR IN ALLOWING [APPELLEE] TO
PROCEED WITH THESE ACTIONS BASED UPON
[APPELLANTS'] SURETY AGREEMENT WHEN THE
[APPELLEE] MADE NO ALLEGATION IN THE PLEADINGS
THAT THE SURETY AGREEMENT HAD BEEN ASSIGNED TO
HIM, AND [APPELLEE] OFFERED NO DOCUMENTARY
EVIDENCE OR TESTIMONY AT TRIAL TO PROVE THAT THE
SURETY AGREEMENT HAD BEEN ASSIGNED TO HIM, OR
THAT THERE WAS ANY CONSIDERATION FOR AN
ASSIGNMENT OF THE SURETY AGREEMENT?
DID THE COURT ERR IN REFUSING TO ADMIT INTO
EVIDENCE EXHIBITS RELATIVE TO THE INTENTION OF THE
EGGO COMPANY NOT TO ASSIGN THE SURETY
DID THE COURT ERR IN FAILING TO FIND THAT THE FIRST
MORTGAGE WAS MERGED INTO THE FEE WHEN THE
PREMISES WERE ACQUIRED BY THE [APPELLEE] AND
THAT THEREFORE THE FIRST MORTGAGE WAS
(Appellants' Brief at 4) (emphasis in original).
Our standard of review of the trial court's denial of a motion for a new
trial is deferential and limited to a determination of whether the trial court
abused its discretion or committed an error of law. Collins v. Cooper, 746
A.2d 615 (Pa.Super. 2000). Furthermore, "[o]ur standard of review in a
non-jury trial is clear. We must determine whether the findings of the trial
court are supported by competent evidence and whether the trial judge
committed error in the application of law. Additionally, findings of the trial
judge in a non-jury case must be given the same weight and effect on
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appeal as a verdict of a jury and will not be disturbed absent error of law or
abuse of discretion." Stonehedge Square Ltd. v. Movie Merchants, Inc.,
685 A.2d 1019, 1022 (Pa.Super. 1996), appeal allowed in part , 548 Pa. 228,
696 A.2d 805 (1997), affirmed, 552 Pa. 412, 715 A.2d 1082 (1998).
¶10 For ease of disposition we combine Appellants' issues one and four, as
our treatment of these arguments together controls the outcome of the
instant appeal. In these issues, Appellants argue that Good Transport, Inc.
is the alter ego of Appellee, Ethan Good. Appellants contend that after Good
Transport purchased the subject property at a sheriff's sale and Ethan Good
purchased the first mortgage from Eggo, one entity held both mortgages as
well as the mortgaged property. Appellants further maintain that by
allowing Appellee to proceed against the junior mortgage first, leaving the
senior mortgage unsatisfied, the trial court permitted Appellee to manipulate
the mortgage priority rules. Appellants, as sureties of the first mortgage,
aver that Appellee had a duty to discharge the liens on the subject property
in order of their seniority. Appellants allege that failure to recognize such a
duty would expose sureties to greater liability than could be anticipated by,
in effect, applying a surety on a senior mortgage to all junior mortgages held
by a single entity. Appellants conclude that the judgment of the trial court
should be reversed. We agree.
¶11 "[T]here is a strong presumption in Pennsylvania against piercing the
corporate veil.... Also, the general rule is that a corporation shall be
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regarded as an independent entity even if its stock is owned entirely by one
person." Lumax Industries, Inc. v. Aultman, 543 Pa. 38, 41-42, 669
A.2d 893, 895 (1995). Nevertheless, "a court will not hesitate to treat as
identical the corporation and the individuals owning all its stock and assets
whenever justice and public policy demand and when the rights of innocent
parties are not prejudiced thereby nor the theory of corporate entity made
useless." Kellytown Co. v. Williams, 426 A.2d 663, 668 (Pa.Super. 1981).
"[T]he corporate form will be disregarded only when the entity is used to
defeat public convenience, justify wrong, protect fraud or defend crime."
First Realvest, Inc. v. Avery Builders, Inc., 600 A.2d 601, 604
(Pa.Super. 1991) (quoting Kellytown, supra, at 668). However, "there
appears to be no clear test or well settled rule in Pennsylvania...as to exactly
when the corporate veil can be pierced and when it may not be pierced."
Kellytown, supra at 668 (quoting Barium Steel Corp. v. Wiley, 379 Pa.
38, 47, 108 A.2d 336, 341 (1954). "The alter ego theory is applicable where
the individual or corporate owner controls the corporation to be pierced and
the controlling owner is to be held liable." Miners, Inc. v. Alpine
Equipment Corp., 722 A.2d 691, 695 (Pa.Super. 1998) (emphasis
omitted). This rule, however, does not limit application of the alter ego
theory to cases in which a party seeks to hold the corporation owner liable
for personal injuries. See generally id. Rather, the alter ego theory is
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available whenever one party seeks to hold the corporation owner liable for
any claim or debt. Id.
¶12 Additionally, "[t]he law has recognized a special relationship between
the principal debtor and his surety based upon reciprocal duties and mutual
confidence. The core of this special relationship is the surety's obligation to
repay the debt of the principal debtor if the latter defaults due to inability to
repay the creditor." Etter v. Industrial Valley Bank and Trust Co., 515
A.2d 6, 8 (Pa.Super. 1986), appeal denied, 514 Pa. 647, 524 A.2d 494
(1987) (internal citaitons omitted). Attendant to this special relationship are
duties of the creditor to the surety. First Federal Savings & Loan v.
Reggie, 546 A.2d 62 (Pa.Super. 1988). A creditor has a duty to a surety to
discharge liens on the mortgaged property in order of seniority. Id. In
First Federal Savings & Loan, a case similar to the instant matter, the
Reggies signed as sureties on a mortgage taken by their son and daughter-
in-law to allow the couple to purchase a home on Spring Street, in Luzerne
County. This mortgage constituted the first lien on the Spring Street
property. One year later, the Reggies' son and daughter-in-law purchased a
home on Luzerne Avenue. The Reggies also signed as sureties on the
Luzerne Avenue mortgage. This mortgage was the first lien on the Luzerne
Avenue property. One year later, in 1975, the son and daughter-in-law
refinanced the Luzerne Avenue mortgage. In so doing, the first mortgage on
that property was marked satisfied, and the refinanced mortgage ("1975
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mortgage") became the first lien on the Luzerne Avenue property and a
second lien on the Spring Street property.
¶13 In 1978, the bank foreclosed on the 1975 mortgage. The total
indebtedness of that mortgage was $58,377.00. At a subsequent sheriff's
sale, the bank bought the Spring Street and Luzerne Avenue properties. The
bank then sold the Spring Street property for $29,900.00 and the Luzerne
Avenue property for $18,000.00.
¶14 Instead of applying the proceeds of the Spring Street property to
discharge the first lien on that property (on which the Reggies were
sureties), the bank deducted the proceeds from the combined indebtedness
of the 1975 mortgage, leaving a deficiency of $12,682.86. Thus, the 1975
mortgage on the Luzerne Avenue debt was satisfied first from the sale of the
Spring Street property. This included the satisfaction of the second lien on
the Spring Street property (created when the son and daughter-in-law
refinanced in 1975), before the first lien on that property (on which the
Reggies were sureties).
¶15 This Court decided that,
Since the Reggies were sureties with the bank's
knowledge, certain duties were imposed upon the bank
with respect to the Reggies. Stolar, 130 Pa.Super. at
485, 197 A. at 501. The well-settled rule is that, if a
creditor surrenders or impairs collateral which serves as
security for the principal's debt, the surety is discharged
from his obligation to the extent that the collateral would
have produced sufficient funds to pay the debt in whole or
in part. Keystone Bank v. Flooring Specialists, Inc.,
513 Pa. 103, 114, 518 A.2d 1179, 1185 (1986). By
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applying the proceeds of the sale of the Spring Street
property to another unrelated loan in which the Reggies
had no part, the bank improperly subordinated the senior
lien (which was concomitant to the lien on the Reggies
home) to the junior one. The collateral was impaired in
the sense that the risk which the Reggies agreed to
assume when they became sureties was substantially
increased by the bank's actions. The Reggies rightfully
expected that the mortgage instrument which they signed
as sureties constituted a senior mortgage on the Spring
Street property and that the senior lien would be satisfied
before foreclosure could begin on their home. Stolar, 130
Pa.Super. 480, 197 A. 499 (action of bank in subordinating
prior lien without consent of surety released and
In addition, by paying off the junior lien, which related to a
transaction to which the Reggies were not a party, the
bank extended the Reggies' liability to an unrelated loan.
To sanction the actions of the bank in this case would be to
extend the liability of the surety in one transaction to any
number of subsequent transactions. The principal
borrower would need only to pledge as collateral in
subsequent obligations the property subject to a mortgage
to which a surety is a party.
Id. at 65-66.
¶16 In the instant case, Appellee's corporation, Good Transport, Ltd., was
a trucking company until 1993 when it sold its rigs and trucking equipment
to Blue Mack. (N.T. 9/6/00, at 28). Presently, Good Transport's only asset
is the mortgage it took from Blue Mack. (Id. at 35, 41-42). It is unclear
from the record what business, if any, Appellee's corporation has conducted
since 1993. Appellee has been the only officer and president of his
corporation since its inception. (Id. at 32). While Appellee testified that his
corporation files a tax return each year, the corporation has not had any
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money in its bank account since 1993. (Id. at 35-36). Thus, for purposes
of this appeal, we consider Appellee and his corporation to be one and the
same entity. See Kellytown, supra. In support of this conclusion, we note
that when Good Transport's attorney purchased the property at the sheriff's
sale, he assigned the bid to Appellee and his wife personally. To recognize
the corporate formality in this case would promote injustice, as Appellee
would be permitted to collect the property through the junior mortgage and
maintain a claim against the surety on the senior mortgage. See id.; First
¶17 Once Appellee purchased the property at the sheriff's sale, he had a
duty to Appellants, as sureties on the senior lien, to satisfy the senior
mortgage first. See First Federal Savings & Loan supra. However, by
suing on the junior lien first, Appellee impaired the sureties collateral,
exposing them to greater liability than they could have reasonably
anticipated. See id. Appellee cannot subordinate the senior lien by virtue
of his possession of both liens. Id. Thus, the surety on the first mortgage
was satisfied when the property was attributed a fair market value sufficient
to cover the entire amount of the surety agreement. Id. The fact that
Appellee proceeded against the junior lien before he obtained the senior lien
does not absolve his duty to the surety of the senior lien to discharge the
liens in order of their priority. Id.
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¶18 Appellee should not be permitted to manipulate the mortgage priority
rules to extend a surety agreement on a senior mortgage to an unrelated
junior mortgage. Id. Moreover, Appellee may not purport to operate under
a defunct corporation at the same time he maneuvers as a private
speculator to avoid merging mortgages. See generally Kellytown, supra;
First Realvest, supra. Appellee purchased the first mortgage from Eggo to
protect his interest in the second mortgage, as the second mortgage was
subordinate to the first. This goal was accomplished when Appellee
purchased 401 West High Street without the need to satisfy the first
mortgage in full. Additionally, Appellee still has a claim against Blue Mack
for the deficiency remaining on the second mortgage. However, we will not
permit Appellee to preserve a claim against Appellants personally based on
the surety agreement where Appellee disregarded his duty to the sureties to
discharge the senior lien in order of priority. See First Federal saving &
¶19 Based upon the foregoing, we hold that the trial court erred when it
found Appellants personally liable to Appellee for the deficiency remaining on
the second mortgage. Accordingly, we reverse the judgment of the trial
¶20 Judgment reversed.
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