Appeal from the United States District Court for the Northern District of Illinois, Eastern Division - No. 71 C 1054 Richard W. McLaren, Judge.
Fairchild, Pell and Tone, Circuit Judges.
The plaintiff-appellee Packard Bell Electronics Corporation (Packard Bell) brought this action for breach of contract against its former franchise wholesale distributor, Elliott Ets-Hokin. In its complaint, Packard Bell alleged two alternative theories: (1) that payment was due on two promissory notes executed by Ets-Hokin in favor of Packard Bell (Count I) and, (2) that Ets-Hokin was liable for the sum under a Continuing Guaranty which he had signed (Count II). Jurisdiction is based on diversity of citizenship.*fn1
Following a bench trial, the district court, finding that the promissory notes in question had been paid, dismissed Count I. The court, however, found in favor of Packard Bell on Count II on the ground that Ets-Hokin was equitably estopped from denying his liability under the guaranty. Judgment was entered against Ets-Hokin in the amount of $379,599.55 plus plaintiff's costs and attorney's fees. Ets-Hokin appeals from the district court's decision on Count II.
The principal issue on appeal is whether the doctrine of equitable estoppel was properly applied in this case.
On February 24, 1961, the plaintiff and the defendant entered into a franchise agreement, pursuant to which the Elliott Company, a sole proprietorship, became a wholesale distributor of the products of Packard Bell, a California corporation. The Elliott Company was to operate in specified counties of Arizona. On the same date that the distributor agreement was signed, Elliott Ets-Hokin and his then wife, Michele Ets-Hokin, executed a Continuing Guaranty, whereby they jointly and severally guaranteed to pay to Packard Bell "any and all indebtedness of Elliott Ets-Hokin dba The Elliott Company." Elliott Ets-Hokin was, by this instrument, merely guaranteeing his own obligation and, therefore, the principal significance of the document was to add Michele Ets-Hokin as obligor although the Guaranty did provide for collection costs and attorney's fees.
Renewal distributor agreements, substantially identical to the original agreement, were subsequently executed by the parties. The last such agreement was executed in 1964 and provided for automatic extension from year to year absent written notice of termination prior to the end of any annual year. In the 1964 agreement, the distributor was identified as "Elliott Ets Hokin dba The Elliott Company."
In August 1968, Ets-Hokin caused an Arizona corporation to be formed to take over and carry on the business of the sole proprietorship. The corporation, operating under the name "Elliott Distributing Company, Inc.," commenced doing business on January 1, 1969. In March 1969, a second corporation, Elliott Distributing Company of Tucson, Inc., was established by Ets-Hokin to take over and carry on the business of the distributorship in the Tucson area. The first-formed corporation thereafter handled only the business in the Phoenix area.*fn2 The evidence clearly indicated that Packard Bell, through some of its agents and employees, knew of both Ets-Hokin's plans to incorporate and the actual incorporations.
No franchise distributor agreement was ever entered into between Packard Bell and either the Phoenix corporation or the Tucson corporation.
Packard Bell maintained several accounts for the distributorship. Merchandise was shipped by Packard Bell and billed to an "open" account upon which no interest was charged. A "note account," upon which interest was charged, was established for the defendant as a means of handling overdue balances.*fn3 When payment was in arrears, Packard Bell would periodically clear the open accounts by means of bookkeeping entries: Packard Bell would credit the open accounts and would debit, by a corresponding amount, the note account. Generally Packard Bell obtained a signed personal demand note from Ets-Hokin for the debits in the note account. Some transfers, however, were made to the note account without Ets-Hokin having signed a personal note and ultimately he declined to sign further personal notes although under pressure to do so by the threat that the distributorships would be terminated.
At the close of business of the sole proprietorship at the end of 1968, the distributorship was indebted to Packard Bell in the amount of $929,237, which including $212,000 then outstanding on the note account. The notes sued upon in Count I of this litigation were two personal notes signed by Ets-Hokin in January and March of 1969 to cover amounts in the accounts due from the sole proprietorship. These notes totalled $640,000 and were the last personal notes signed by Ets-Hokin.
When the Elliott Distributing Company, Inc. commenced the business of the distributorship in January 1969, the corporation did not disavow the debts of the sole proprietorship. Rather, it received statements of this indebtedness from Packard Bell and made payments toward the accounts. Subsequent to the incorporations, Packard Bell sold approximately $2,000,000's worth of merchandise to the corporations, with over one million dollars being transferred to the note accounts, despite the fact that Ets-Hokin did not sign additional personal ...