Case Title: Van Bibber v. Norris

Citation: 419 N.E.2d 115

Docket Number: 481S91

State: indiana

Court: Indiana Supreme Court

Date: 1981-04-03T00:00:00Z

Document:
419 N.E.2d 115 (1981)
Virgil VAN BIBBER, the Van Bibber Lakeside Retreat, Inc., and American Fletcher National Bank and Trust Company, Appellant,
v.
William C. NORRIS, Appellee.
No. 481S91.

Supreme Court of Indiana.
April 3, 1981.
*117 Terrill D. Albright, James M. Carr, Indianapolis, for American Fletcher National Bank and Trust Company.
Glenn E. Davis, Sr., Beech Grove, for Virgil Van Bibber and The Van Bibber Lakeside Retreat, Inc.
Robert J. Hoffman, Hugh G. Baker, Jr., Steven D. Allen, Indianapolis, for appellee.
DeBRULER, Justice.
This case is before us on a petition to transfer from the Court of Appeals, Fourth District. The opinion of that court is reported at 404 N.E.2d 1365 (Ind. 1980); reh'g den'd 408 N.E.2d 1302. We grant transfer and vacate the opinion of the Court of Appeals.
Plaintiff-appellee Norris brought this action against defendants-appellants Virgil Van Bibber, Van Bibber Lakeside Retreat, Inc., and American Fletcher National Bank for damages for the wrongful repossession of his mobile home and the loss of its contents. The trial court awarded damages of $5,000 for the home and $10,000 for the contents against all of the defendants, giving the Van Bibber defendants a setoff of $1,837.41 for their claims against Norris.
In addition, the trial court assessed punitive damages of $10,000 against American Fletcher National Bank (AFNB) and $30,000 in punitive damages jointly and severally against Virgil Van Bibber and Van Bibber Lakeside Retreat, Inc., (referred to collectively as Van Bibber). The Court of Appeals affirmed.
AFNB and Van Bibber separately appealed the decision, but because the issues raised by the separate appellants are interrelated we will treat them together.
We adopt the Court of Appeals' statement of the facts:
Because of our disposition of this case we will discuss first the issue of whether the *120 repossession was wrongful and then the question of liability for wrongful disposition of the repossessed collateral and loss of the contents of the mobile home.
AFNB argues that the trial court erred as a matter of law in determining that the repossession was wrongful, and claims that there were three separate bases for such repossession: Norris' failure to make a payment when due; insecurity as to the prospect of performance; and the existence of an encumbrance on the collateral.
It also argues, as a separate issue, that the trial court erroneously imposed a duty upon it to give notice of the acceleration and repossession.
We will first discuss the contention that the trial court erred in holding that AFNB had by its conduct waived its right to unconditional enforcement of the acceleration and repossession terms of the default section of the agreement, and that notice was required before these terms could be enforced.
The trial court found that AFNB, had by continual acceptance of late payments, waived its right to unconditional enforcement of the acceleration and repossession terms of the default section of the agreement, based on failure to make payments on time.
The trial court also made findings of fact that defendants did not give notice to Norris of the AFNB's intention to accelerate the balance due or of its intention of repossess the mobile home, or of the repurchase by Van Bibber. These facts supported the conclusion of law that the acceleration and repossession without notice were wrongful.
The trial court's conclusion that AFNB had waived default ignored the following language in the agreement:
We will refer to this clause as the "non-waiver" clause.
AFNB argues that the missed instalment payment of October 30, 1970, was a default enumerated in the agreement that triggered its rights to acceleration and repossession under the contract and under the Uniform Commercial Code, Ind. Code § 26-1-1-101, et seq.:
Norris argues initially that regardless of whether AFNB had waived its right to strict compliance with the terms of the contract, the trial court's determination that the repossession was wrongful was based in part on the fact that he was not in default on the date of the repossession because AFNB's own practice called for no action to be taken on a past-due account until it was ten days late. Even if we were to consider the grace period as binding and as superseding the express terms of the contract, we cannot agree that Norris was not in default. While AFNB made its decision to repossess on November 9, the tenth day after payment was due, the actual repossession was on November 20, beyond the grace period. Norris was in default on the October payment at the time the mobile home was repossessed.
Since Norris was delinquent, we must now consider whether the AFNB's pattern of accepting late payments amounted to a waiver of its rights to declare the default and proceed with remedies under the contract.
General rules of waiver are applicable to secured transactions and have been summarized as follows:
This generality, however, does not contemplate the impact on the secured party's rights of the insertion of a non-waiver clause, which has the specific purpose of avoiding the risk of waiver by notifying the debtor in a contract term that the secured party's acceptance of late payments cannot be relied on as treating the time provisions as modified or waived.
Some courts have considered it to be a jury question whether acceptance of late payments amounts to a waiver of the non-waiver clause. Smith v. General Finance, (1979) 243 Ga. 500, 255 S.E.2d 14. We consider this approach to be illogical, since the very conduct which the clause is designed to permit  acceptance of late payment  is turned around to constitute waiver of the clause permitting the conduct.
We believe the correct approach is that
See, e.g. McAllister v. Langford Investigators, Inc., (Ala.App. 1980) 380 So. 2d 299; General Grocer Co. v. Bachar, (1977) 51 Ill. App.3d 907, 8 Ill.Dec. 720, 365 N.E.2d 1106; Universal C.I.T. Corp. v. Middlesboro Motor Sales, Inc., (Ky. 1968) 424 S.W.2d 409.
The article on Secured Transactions contains the following provision:
Norris, by signing the retail instalment sale contract, agreed to the terms of the non-waiver clause.
If the security agreement is to be truly effective according to its terms, we must conclude that AFNB did not waive its rights to demand strict compliance and to pursue its contract and statutory remedies.
The question remains, however, whether, even though there was no outright waiver of the rights to declare a default, accelerate, and repossess, there was nevertheless a duty to notify Norris that the rights would be enforced and that the AFNB intended to repossess.
Jurisdictions are split on this question. One approach is to hold that although the non-waiver clause preserves the substantive rights of the secured party to declare a default and repossess the collateral in spite of continual acceptance of late payments, where the fact of such continual acceptance would lead a buyer to believe that his late payments would be accepted and that he would be allowed to catch up in his arrearages, notification of a change in this pattern should be given to the buyer before acceleration and/or repossession. See, e.g. Cobb v. Midwest Recovery Bureau Co., (1980) Minn., 295 N.W.2d 232, 28 UCC Rep. 941; Ford Motor Credit Co. v. Waters, (Fla., 1973), 273 So. 2d 96.
We note that the former case is not a sound decision, since it begs the question of validity of the non-waiver clause. The cases it cites all stand for the general proposition that notice is a prerequisite to exercise of the right to repossess after continual acceptance of late payments. None of the cases cited in Cobb involved a non-waiver clause.
*122 In short, this line of cases properly considers that the secured party has preserved strict compliance through the non-waiver clause, but imposes the duty of notice.
Another approach is to hold that since a security agreement is to be enforced according to its terms, an agreement containing a non-waiver and non-modification clause gives the secured party the right to take possession of the collateral without notice upon default. See Hale v. Ford Motor Credit Co., (Ala., 1979), 374 So. 2d 849; Wade v. Ford Motor Credit Co., (D.C.E.D. Mo., 1978), 455 F. Supp. 147.
We believe the latter approach better serves the purpose of Ind. Code § 26-1-9-503, and carries out the terms to which Norris agreed. If the non-waiver clause preserves the secured party's right to demand strict compliance, and the debtor's failure to comply with the terms would otherwise give rise to the secured party's right to repossession without notice, then, we believe, the right to repossess without notice is similarly preserved.
As this Court said in analyzing the general concept of waiver:
*123 Since the secured party here is in the same position, by virtue of the non-waiver clause, as one who never accepted a late payment, we conclude that no notice was required before it could proceed with its contract remedies.
Norris appears to argue that the trial court's conclusion that the repossession was wrongful was based on its findings that strict enforcement of the terms of the agreement would offend the code's pervasive requirement of good faith, and would be unconscionable.
The code provides that "[e]very contract or duty within this act imposes an obligation of good faith in its performance or enforcement." Ind. Code § 26-1-1-203. "Good faith" is defined as "honesty in fact in the conduct or transaction." Ind. Code § 26-1-1-201(19). This requirement applies to secured transactions through Ind. Code § 26-1-9-105(4).
Norris reaches into the article governing sales for an additional obligation imposed on merchants: "Good faith in the case of merchants means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade." Ind. Code § 26-1-2-103(1)(b). This provision would apply to the original sale between Van Bibber and Norris, but since we are not confronted with any claim of lack of good faith in that transaction, we do not see its relevance here. AFNB is not a merchant:
We note, however, that the absence of a similar burden of observing "reasonable commercial standards" on a secured party reflects the code drafters' recognition that sales transactions are more amenable to establishment of "reasonable commercial standards" than are the relations between secured parties and debtors.
In any event, Norris claims that good faith requires that notice should have been given before repossession.
Since the security agreement here closely tracks the Uniform Commercial Code's provisions authorizing repossession upon default unless the parties have otherwise agreed, and since those provisions are not predicated on the giving of notice, we cannot say that there could be lack of good faith based on the secured party's doing that which the code clearly authorizes it to do.
Norris claims that the trial court's determination that the repossession was wrongful could have been based on its determination that the provision allowing acceleration and repossession without notice was unconscionable.
The article on Sales provides:
And according to § 26-1-9-201, a security agreement is valid to the extent it is not unconscionable, or in some other way offensive to the code.
In support of his claim that the provision is unconscionable, Norris cites three cases which he claims hold that similar provisions were unconscionable particularly where late payments had been accepted.
Reliance on Fontaine v. Industrial National Bank of Rhode Island, (1973) 111 R.I. 6, 298 A.2d 521, is misplaced. The secured party in that case had accepted late instalment payments in August and September, and had received timely payment in October, but then repossessed the collateral before the November payment was past due based on the August default. There was a non-waiver clause similar to the one in this case. The Rhode Island Supreme Court said that enforcement of such a clause so as to permit a secured party to declare a default retroactively would be unconscionable. The debtor would be subject to the peril of repossession for the duration of the security agreement, despite timely subsequent payments, based on a past default. But the Fontaine court was not faced with the question whether under the security agreement before it a default in November would have given rise to the right to repossess in November.
Kosches v. Nichols, (1971) 68 Misc.2d 795, 327 N.Y.S.2d 968, is not on point. It dealt with the constitutionality of a prejudgment attachment statute, which the court held unconstitutional in light of Sniadach v. Family Finance, (1969) 395 U.S. 337, 89 S. Ct. 1820, 23 L. Ed. 2d 349. It is well-settled that self-help provisions authorized by Ind. Code § 26-1-9-503, do not involve state action invoking constitutional protection. See, e.g. Gibson v. Dixon, 579 F.2d 1071 (7th Cir., 1978); Adams v. So. Calif. First National Bank, 492 F.2d 324 (9th Cir., 1973), cert. den'd., (1974) 419 U.S. 1006, 95 S. Ct. 325, 42 L. Ed. 282.
Chrysler Credit Corp. v. Barnes, (1972) 126 Ga. App. 444, 191 S.E.2d 121, did not involve the problem of acceptance of late payments, but did involve the validity of an acceleration clause. The Georgia Court of Appeals held that the language of the particular clause precluded the secured party from exercising the option to declare the entire balance due on default unless notice was communicated to the debtor. The court did not decide whether by other language the acceleration provision could have been made to be selfexecuting.
No cogent argument is presented in support of the claim that the trial court determined that the clause permitting acceleration and repossession without notice was unconscionable. Indeed, no evidence was presented at the trial on this issue and the trial court made no findings of fact or conclusions of law that any part of the security agreement was unconscionable. In dealing with a claim that an acceleration clause of a contract was unconscionable, the New Jersey Supreme Court, after scrutinizing *124 the factual record and finding nothing that would justify it in declaring such a clause (which it noted is universally accepted in the business world) to be unconscionable on its face or as applied in the particular facts, said:
We decline to hold the acceleration and repossession clause unconscionable.
The trial court erred in holding that there was no basis for repossession based on the October 30 delinquency and in holding that notice was required before the acceleration clause could be enforced.
Appellants argue that the trial court erred in concluding that the bank was not "insecure" at the time of the repossession and could not in good faith have deemed themselves insecure, and that Norris established by a preponderance of the evidence that the bank acted in bad faith.
The bank argues that the trial court applied incorrect standards as to what constitutes good faith insecurity.
The code provides:
Insecurity may be found either as to the debt itself or as to the collateral. Univ. C.I.T. Credit Corp. v. Shepler, (1975) 164 Ind. App. 516, 329 N.E.2d 620.
The basis for the trial court's conclusion is summarized in the following findings of fact:
We agree that reliance on these facts is erroneous. The relevant facts of this case lead unerringly to the conclusion that Norris did not establish lack of good faith.
Norris' claim of lack of good faith was based in his theory that Van Bibber, motivated by personal animus, prevailed upon the bank to repossess. We do not need to examine this claim, since the evidence clearly supports the conclusion that the bank had valid reasons for deeming itself insecure.
*125 First, the bank had had a continuing problem of collecting from Norris, and he was delinquent on the current payment due. His arrest certainly impaired his prospects of making the current and subsequent payments. The bank did not have an obligation to await the outcome of the criminal proceedings against him. In addition, insecurity existed as to the collateral. The arrest meant that the mobile home would be unoccupied for an indefinite period, placing it in jeopardy. Moreover, the action by Imperial Estates Mobile Homes Park owners imperiled the collateral and was a valid basis for insecurity. This last factor was in itself an independent basis for default which we will discuss below.
Norris did not meet his burden of proving that the bank did not in good faith deem itself insecure.
The bank urges that the trial court erred in ignoring the existence of another basis for acceleration and repossession, Imperial Estates' lien.
Norris answers that trial court did not err because the temporary restraining order did not constitute a lien but was merely an order restraining him from removing the trailer. Even if Imperial Estates had a lien for unpaid rent, Norris continues, such a lien could not reasonably be the form of encumbrance referred to in the security agreement, because this would allow unscrupulous creditors to repossess collateral with impunity whenever the lot rental was overdue.
Norris' concern is unnecessary since the provisions of Ind. Code § 26-1-9-504 regarding notice of resale and the obligation to account to the debtor for any surplus effectively remove any incentive for arbitrary repossessions.
The temporary restraining order did not, as Norris points out, declare a lien in favor of Imperial Estates. There was, however, an already existing statutory lien pursuant to Ind. Code § 13-1-7-33 (Burns 16-9-2B-33) (lien on property of guest). This lien is perfected by mere possession, and has a priority over a perfected security interest under Ind. Code § 26-1-9-310. The temporary restraining order, therefore, protected the mobile home park owner's statutory lien. A lien is an encumbrance.
The trial court erred in ignoring the attachment of a superior lien which was an independent basis for acceleration and repossession.
Finally Norris argues that overshadowing the entire question of the wrongfulness of appellant's repossession and acceleration is the fact that at all material times the bank was fully protected against loss by the repurchase terms of the assignment. This argument supports his theory that no genuine basis for repossession was present and that it was based entirely on malice. This contention has no merit, since Van Bibber's obligation to repurchase was contingent upon the bank's repossession of the collateral.
We hold that the trial judge misapplied the law in this case. There were three independent grounds justifying acceleration of payment and repossession of the collateral without notice: 1) the delinquent October 30 payment; 2) insecurity in good faith; and 3) the existence of an encumbrance.
We therefore vacate the judgment of the trial court against AFNB and enter judgment for the bank on all claims. We vacate the judgment of the trial court against the Van Bibber defendants to the extent that it was based on the determination that the repossession was wrongful and malicious.
Regarding Norris' claim against the Van Bibber defendants for conversion of the mobile home and for loss of its contents, we remand the case for a new trial. We cannot determine from the trial court's findings *126 to what extent the damages assessed against the Van Bibber defendants were based on the wrongful repossession as opposed to the claimed wrongful disposition of the collateral.
As to the claim of wrongful disposition of the repossessed collateral and of loss of the contents of the mobile home, the Van Bibber defendants are in a different posture from AFNB.
The Van Bibber defendants argue on appeal that they have no liability arising from the resale of the mobile home. They claim that they are actually three separate entities: the Van Bibber partnership which sold the trailer to Norris; the Corporation, which purchased the mobile home from the bank after repossession; and the natural person, Virgil Van Bibber.
According to this theory, if the repossession was wrongful none of the Van Bibber entities could be liable since whichever one was involved was merely an agent of the bank. Since we hold that the repossession was not wrongful, we need not consider this claim.
Under this theory, however, the Van Bibber corporation claims to have been a stranger to the initial sale and to the repossession, and to have entered the picture only as a purchaser in an outright sale by the bank of the repossessed collateral. Van Bibber, Inc., argues that it was never under any obligation to Norris, citing, Ind. Code § 26-1-9-504(4):
Van Bibber, Inc., argues that the trial court's finding of fact that defendant Van Bibber did not dispose of the mobile home in a commercially reasonable manner is based on error as to the nature of the transaction between the bank and Van Bibber, Inc., and as to the status of Van Bibber, Inc., in the transaction.
The Van Bibber defendants did not disclose this theory in their answer or during the trial, but raised it for the first time in the motion to correct errors. Their answer and trial strategy focused solely on the propriety of the repossession and the propriety of their possession of the collateral.
They are barred from raising this claim this late in the proceedings. Even if we were to entertain this claim, we find the evidence to be quite clear that the same Van Bibber entity sold the mobile initially, repurchased the collateral from the bank. Van Bibber, Inc.'s position in its pleadings was that the repossession was proper and that its possession of the mobile home was pursuant to the bank's right of full recourse against it under the terms of the assignment of the security agreement. In his trial testimony Virgil Van Bibber repeatedly referred to the transaction between himself and the bank as a repurchase pursuant to the terms of the assignment. The amount paid by Van Bibber, Inc., for the mobile home was for the exact amount of the balance due from Norris, and the check for the payment contained the notation, "Payoff on Wm. C. Norris Repo."
The transaction was a repurchase. Indiana Code § 26-1-9-504(5) provides that "a person who is liable to a secured party under a... repurchase agreement ... and who receives a transfer of the collateral from the secured party ... has thereafter the rights and duties of the secured party."
Indiana Code § 26-1-9-504(3) provides that "[u]nless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized *127 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... ."
Since the parties in their stipulations agreed that the debtor had paid 60% of the cash price, an additional duty was on the secured party pursuant to Ind. Code § 26-1-9-505:
Indiana Code § 26-1-9-507, provides in pertinent part:
We remand this cause for a new trial on the sole issue of whether the Van Bibber defendants complied with the provisions of Ind. Code § 26-1-9-504 and § 26-1-9-505, and whether they are liable for the loss of the contents, noting that the record reveals that the bank, prior to the repurchase by Van Bibber, Inc., sent a notice of resale to Norris by certified mail to his Imperial Estates address.
Reversed in part and remanded for new trial in accordance with this opinion.
GIVAN, C.J., and HUNTER, PRENTICE and PIVARNIK, JJ., concur.