Case Title: Am. Seaway Foods, Inc. v. Belden S. Assoc. L.P.

Citation: 1995-Ohio-59

Docket Number: 19940767

State: ohio

Court: Ohio Supreme Court

Date: 1995-07-26T00:00:00Z

Document:
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American Seaway Foods, Inc., Appellant, v. Belden South                          
Associates Limited Partnership, Appellee.                                        
[Cite as Am. Seaway Foods, Inc. v. Belden S. Assoc. L.P.                         
(1995),     Ohio St.3d    .]                                                     
A guarantor is a "debtor" within the meaning of R.C.                             
     1309.01(A)(4), and is therefore entitled under R.C.                         
     1309.47(C) to notice of the sale of collateral.                             
     (No. 94-767 -- Submitted April 19, 1995 -- Decided July                     
26,1995.)                                                                        
     Certified by the Court of Appeals for Stark County, No.                     
9260.                                                                            
     Appellant, American Seaway Foods, Inc. ("Seaway"), is a                     
wholesale distributor of foods and related merchandise to                        
various retail grocery establishments.  Appellee, Belden South                   
Associates Limited Partnership ("Belden"), is the owner and                      
landlord of a shopping center, which includes a supermarket and                  
certain supermarket equipment in Canton, Ohio.  In September                     
1991, Belden leased a portion of the shopping center to R.W.F.,                  
Inc. ("RWF") to operate a retail grocery store.  Subsequently,                   
Seaway began supplying food and merchandise inventory to RWF.                    
     In November 1991, RWF executed a Cognovit Promissory Note                   
with Seaway in the amount of $400,000 and a Security Agreement,                  
whereby Seaway retained a security interest in substantially                     
all of RWF's assets, including its food inventory.  On the same                  
day, to induce Seaway to provide inventory on credit to RWF,                     
Belden executed a Nonrecourse Guaranty and Security Agreement                    
("Guaranty Agreement") with Seaway, wherein Belden guaranteed                    
the prompt payment and performance of all the obligations owed                   
by RWF to Seaway. 1  Under the agreement, Belden had the option                  
to either cure a default by RWF or surrender the "Guarantor                      
Collateral," 2  which included the RWF inventory, the Belden                     
supermarket equipment, and all fixtures, within twenty-four                      
hours of Seaway's demand following default.  Furthermore,                        
Belden expressly waived notice of Seaway's disposition of the                    
Guarantor Collateral. 3                                                          
     In early March 1992, the store operated by RWF failed.                      
Seaway took possession of the supermarket to repossess and                       
dispose of the inventory, and notified Belden that RWF was in                    
default.  In total, RWF had three accounts in default with                       
Seaway for approximately $683,000: the guaranteed Note Account                   
with principal and interest payments due of approximately                        
$399,000, an open Line of Credit Account with principal and                      
interest due of $272,289.67, and an Engineering Account with an                  
unpaid balance of $11,613.89.  Only the Note Account, which was                  
later reduced to $381,065.09 outstanding, involves the                           
collateral at issue in this appeal.                                              
     Belden did not cure the default or relinquish the                           
collateral.  An independent auditing service determined the                      
retail value of the RWF inventory to be $356,586.31, of which                    
$53,398.86 of inventory was perishable food.  Although a                         
Belden's representative was present during the auditing, Seaway                  
failed to give Belden notice of its intention to sell the                        
collateral.  Seaway diligently tried, for one day, to find                       
other retailers to buy the inventory.  On March 9, 1992,                         
however, Seaway sold all the RWF inventory, both perishable and                  
nonperishable alike, in a commercially unreasonable private                      
sale for $142,634 to various retail subsidiaries of Seaway's                     
parent corporation.  In addition, Seaway demanded that Belden                    
surrender the supermarket equipment, which was valued at                         
$359,000.  When Belden refused, Seaway obtained an emergency                     
order of possession of the Belden equipment and posted the                       
required replevin bond.  Although Belden later consented to a                    
partial sale of the equipment for $43,000, Belden                                
counterclaimed for conversion, trespass, breach of lease, and                    
abuse of process, rent and right to proceed against Seaway's                     
bond.  After initially granting Seaway possession of the Belden                  
equipment, the trial court's final judgment found in favor of                    
Belden on Seaway's replevin complaint and exonerated Seaway on                   
Belden's counterclaims.                                                          
     The court of appeals affirmed in part the trial court's                     
judgment, holding that Belden was a "debtor" as defined in R.C.                  
1309.01(A)(4) and that pursuant to R.C. 1309.47(C) Belden had a                  
right to notice of the sale of the RWF inventory and the right                   
to a commercially reasonable disposition of the RWF inventory,                   
neither of which could be waived pursuant to R.C. 1309.44(C).                    
The court of appeals reversed in part the trial court's                          
judgment and remanded, holding that, pursuant to R.C 2737.10,                    
Belden had the right to elect to receive the value of the                        
Belden equipment or the replevin bond posted by Seaway.                          
Finding its decision on the issue of guarantor's rights to be                    
in conflict with the decision of the Ninth District Court of                     
Appeals in E. F. Hutton Credit Corp. v. Yarborough Leasing Co.                   
(Sept. 14, 1983), Summit App. No. 11136, unreported, 1983 WL                     
4215, the court of appeals certified the record of the case to                   
this court for review and final determination.                                   
                                                                                 
     Benesch, Friedlander, Coplan & Aronoff, David W. Mellott,                   
David W. Neel and N. Victor Goodman, for appellant.                              
     Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A., and M.                       
Colette Gibbons, for appellee.                                                   
                                                                                 
     Moyer, C.J.     The sole issue certified to this court is                   
whether a guarantor may waive, pursuant to R.C. 1309.44(C) and                   
1309.01(A)(4), the defenses to a deficiency judgment available                   
under R.C. 1309.47(C) with respect to a private sale of                          
collateral owned by a debtor.  For the reasons that follow, we                   
answer that question in the negative.                                            
     R.C 1309.47(C), which governs a secured party's right to                    
dispose of collateral after default, provides:                                   
     "*** Unless collateral is perishable or threatens to                        
decline speedily in value or is of a type customarily sold on a                  
recognized market, reasonable notification of the time and                       
place of any public sale or reasonable notification of the time                  
after which any private sale or other intended disposition is                    
to be made shall be sent by the secured party to the debtor if                   
he has not signed after default a statement renouncing or                        
modifying his right to notification of sale.  ***"                               
     Prior to its amendment, and at all relevant times to the                    
instant case, compliance with the notice-of-sale requirement of                  
R.C. 1309.47(C) was a condition precedent to a secured party's                   
recovering any deficiency judgment.  Failure by the secured                      
party to provide the debtor with reasonable notice of the sale                   
of collateral created an "absolute bar" to the deficiency.                       
Kruse v. Voyager Ins. Cos. (1995), 72 Ohio St.3d 192, 197, 648                   
N.E.2d 814, 817-818.  The central purpose underlying this                        
section is to provide all persons having an interest in the                      
collateral with notice of the disposition of the collateral in                   
order that they will have an opportunity to bid at the sale or                   
otherwise take measures to reduce their potential liability in                   
the event of a deficiency.                                                       
     Furthermore, in addition to the debtor's rights and the                     
creditor's duties set out in R.C. 1309.47(C), R.C. 1309.44(C)                    
protects a debtor's right to notice of the collateral                            
disposition by even prohibiting the debtor from waiving the                      
right to notice prior to default. 4                                              
     Seaway argues that with regard to the RWF inventory,                        
Belden, as a guarantor, is not a debtor, and therefore is not                    
entitled to notice of the sale of the collateral.  Seaway                        
argues that because Belden is only a guarantor, R.C. 1309.44(C)                  
does not prohibit Belden from entering a pre-default waiver of                   
notice.  The determinative legal issue then is whether under                     
R.C. Chapter 1309 a guarantor can be a debtor.                                   
     R.C. 1309.01(A)(4) defines a "debtor" as "the person who                    
owes payment or other performance of the obligations secured,                    
whether or not he owns or has rights in the collateral, and                      
includes the seller of accounts or chattel paper.  Where the                     
debtor and the owner of the collateral are not the same person,                  
the term 'debtor' means the owner of the collateral in any                       
provision of sections 1309.01 to 1309.50 of the Revised Code                     
dealing with the collateral, the obligor in any provision                        
dealing with the obligation and may include both where the                       
context so requires." (Emphasis added.)                                          
     It is clear that under the first sentence of R.C.                           
1309.01(A)(4), Belden is a "debtor."  Although Belden did not                    
own the RWF inventory, Belden unconditionally guaranteed RWF's                   
debt and specifically owed "payment or other performance" to                     
Seaway pursuant to the Guaranty Agreement.  Under the                            
agreement, Seaway needed only to look to Belden for                              
satisfaction of the obligation.                                                  
     Belden falls within the second sentence of the statute, as                  
well.  R.C. 1309.44(C) and 1309.47(C) are both "provision[s] of                  
sections 1309.01 to 1309.50 *** dealing with the obligation                      
***" to which Belden was the obligor.  Thus, the mere fact that                  
Belden was not the owner of the RWF inventory does not exclude                   
Belden from the definition of "debtor" under R.C.                                
1309.01(A)(4).  Moreover, Belden did own the supermarket                         
equipment included in the Guaranty Agreement definition of the                   
"Guarantor Collateral," and pledged to secure RWF's debt.                        
Thus, Belden satisfies the entire second sentence of R.C.                        
1309.01(A)(4), by being both an "owner" and "obligor" whose                      
obligation to Seaway is tied inextricably to the sale of the                     
RWF inventory.                                                                   
     An excellent statement for rationale supporting our                         
conclusion is found in 2 White & Summers, Uniform Commercial                     
Code (3 Ed.1988) 604, Section 27-12:                                             
     "'Guarantors' and 'sellers' of chattel paper with recourse                  
have a financial stake in the creditor's disposition or sale of                  
the collateral that is identical to the debtors'                                 
interest--liability for a deficiency.  Consequently, these                       
parties deserve the same notice protection that the Code gives                   
the debtor, at least where the secured party has knowledge of                    
the non-owner debtor's potential liability if the primary                        
debtor defaults.  ***"                                                           
     Nearly all courts that have addressed this issue have                       
deemed a guarantor to be a debtor for purposes of state                          
commercial code provisions requiring notice and prohibiting                      
waiver of defenses.  Annotation (1981), 5 A.L.R. 4th 1291.  The                  
majority rule that has emerged recognizes that the interests of                  
guarantors and debtors on matters affecting the disposition of                   
collateral are so similar that "simple fairness requires that                    
the term 'debtor' to whom notice is required include one who is                  
responsible for payment upon default of the principal                            
obligor."  Hallmark Cards, Inc. v. Peevy (Ark. 1987), 739                        
S.W.2d 691, 693.                                                                 
     In addition, holding that a guarantor is a "debtor" within                  
the meaning of R.C. 1309.01(A)(4) and entitled to notice of the                  
sale of the collateral is consistent with the underlying                         
purpose of R.C. 1309.47(C) discussed previously -- to give all                   
persons with an interest in the collateral notice of the                         
disposition.  A guarantor is liable for any deficiency                           
remaining after the sale of the collateral and, as such, has a                   
substantial interest in achieving the best possible disposition                  
of the collateral.  Allowing a secured party to disregard the                    
guarantor's interest could encourage a hasty and commercially                    
unreasonable sale at the convenience of the creditor, because                    
the creditor would be secure in the knowledge that the                           
guarantor would cover the deficiency.  This is precisely what                    
the notice requirement of R.C. 1309.47(C) seeks to prevent.                      
     In view of the above, we hold that a guarantor is a                         
"debtor" within the meaning of R.C. 1309.01(A)(4), and is                        
therefore entitled under R.C. 1309.47(C) to notice of the sale                   
of collateral.  Consequently, R.C. 1309.44(C) prohibits a                        
guarantor from waiving or varying the notice requirement until                   
after default.  It follows that Belden's pre-default waiver of                   
notice is unenforceable.  Seaway's failure to provide Belden                     
with notice of the sale of the RWF inventory prevents Seaway                     
from looking to Belden to satisfy the deficiency.                                
     For the foregoing reasons we affirm the judgment of the                     
court of appeals.                                                                
                                 Judgment affirmed.                              
     Wright, Resnick, F.E. Sweeney, Pfeifer and Cook, JJ.,                       
concur.                                                                          
     Douglas, J., dissents.                                                      
                                                                                 
FOOTNOTES:                                                                       
     1   Belden's Guaranty Agreement with Seaway provided:                       
     "2. Except [for the twenty-four-hour cure provision],                       
Creditor shall not be required, as a condition to the liability                  
of Guarantor, to make any demand upon, or to pursue any of its                   
rights against, Guarantor, any other person responsible for the                  
payment of all or part of any Obligation, or any other person                    
or to pursue any rights which may be available to it under any                   
document other than this Guaranty or with respect to any other                   
person who may be liable for the payment of any indebtedness or                  
for the performance of any other obligation of Guarantor to                      
Creditor.                                                                        
     "***                                                                        
     "7. This is a guaranty of payment and performance and not                   
a guaranty of collection; provided, however, that the                            
obligations of Guarantor hereunder shall be limited to the                       
surrender, within 24 hours of Creditor's demand, of the                          
Guarantor Collateral (as hereinafter defined) and the                            
Collateral, as defined in the Security Agreement, in the event                   
of any default with respect to the Obligations, or any of                        
them.  ***"                                                                      
     2   The Guaranty Agreement defines the property included                    
as "Guarantor Collateral" as:                                                    
     "a.  All inventory (as defined in the Uniform Commercial                    
Code) used by Tenant in its business now or hereafter located                    
at 4645 Fulton Road, Canton, Ohio 44718-2333 (such location                      
being referred to herein as the 'Premises'), all goods,                          
merchandise, products and commodities acquired, manufactured or                  
processed by Tenant and intended for sale, and all raw                           
materials, goods in process, finished goods, all materials and                   
supplies of every material used or usable in connection with                     
such manufacture, processing, packaging, shipping and sale of                    
products, whether now owned or hereafter acquired by Tenant or                   
Guarantor.                                                                       
     "b.  All equipment (as defined in the Uniform Commercial                    
Code), whether now or hereafter owned by the Tenant or                           
Guarantor which is now or hereafter located at the Premises.                     
     "c.  All fixtures (as such term is described in the                         
Uniform Commercial Code), whether now or hereafter owned by the                  
Tenant, and all trade fixtures whether now or hereafter owned                    
by Tenant or Guarantor, which, in either case, is now or                         
hereafter located at the Premises.                                               
     "The parties intend that said Collateral shall secure the                   
payment or the performance of the Obligations as defined in the                  
Security Agreement."                                                             
     3  "In consideration of creditor's extension of credit to                   
tenant, and with the express understanding that without the                      
special waivers and covenants herein contained, said extension                   
of credit would not be made and continued, guarantor hereby                      
agrees that in the event of a default by tenant which is not                     
timely cured, guarantor hereby specifically and knowingly                        
waives, except as otherwise provided in section 7 hereof, all                    
rights to any notice prior to creditor's exercise of any of its                  
rights hereunder or with respect to the guarantor collateral,                    
including, without limitation, the entry of an order in any                      
court proceeding which shall have the effect of foreclosing                      
upon or replenishing the guarantor collateral.  guarantor                        
expressly and knowingly waives any notice to any hearing on any                  
such final order.  it is expressly agreed that creditor shall                    
have the right, in addition to those rights under the uniform                    
commercial code, to sell the guarantor collateral held by                        
guarantor at a private sale to satisfy the obligations due and                   
payable."                                                                        
     4  R.C. 1309.44(C) provides:                                                
     "To the extent that they give rights to the debtor and                      
impose duties on the secured party, the rules stated in the                      
code references below may not be waived or varied except as                      
provided with respect to compulsory disposition of collateral                    
as provided in division (C) of section 1309.47 or division (A)                   
of section 1309.48 of the Revised Code and with respect to                       
redemption to collateral as provided in section 1309.49 of the                   
Revised Code, but the parties may by agreement determine the                     
standards by which the fulfillment of these rights and duties                    
is to be measured if such standards are not manifestly                           
unreasonable[.]"