Title: DULAN v MONTANA NAT L BANK OF ROUN

State: montana

Issuer: Montana Supreme Court

Document:

PETER A. DULAN, J R . , P l a i n i t f f and Appellant, Defendant and Respondent. Appeal from: District Court of t h e T h i r t e e n t h J u d i c i a l District, I n and f o r che County of Yellowscone, Tile Ifonorabie Charles Luedke, Judge p r e s i d i n g . Counsel of Record: For Appeliant: Terry L. S e i f f e r t , B i l l i n g s , Montana For Respondent: K. Robert F o s t e r , Lewistown, Montana Submitted: January 18, 1983 Decided : March 24, 1983 F i l e d : MAR 2 4 1983 @ - --- -- Clerk Mr. Chief J u s t i c e Frank I. Haswell d e l i v e r e d t h e Opinion of t h e Court. A p p e l l a n t bought Shanon S t u d i o s , a B i l l i n g s photogra- phy b u s i n e s s , i n 1964 and i n 1966 i n c o r p o r a t e d under Shanon S t u d i o s , I n c . On June 2, 1971, he executed a promissory n o t e f o r $7,500 with respondent and a s c o l l a t e r a l a s s i g n e d t h e s t o c k of t h e c o r p o r a t i o n . On May 22, 1972, a p p e l l a n t agreed t o s e l l Shanon S t u d i o s , I n c . , t o Gerald L. Wolfe f o r $18,000. his agree- ment c o n t a i n e d t h e following paragraph: "4. Unless o t h e r w i s e agreed i n w r i t i n g , upon f a i l u r e of Buyers t o make payments w i t h i n 90 days of t h e d a t e s due here- under, a l l amounts p a i d by Buyers on t h e above purchase p r i c e s h a l l be r e t a i n e d by S e l l e r s a s l i q u i d a t e d damages, and t h i s agreement s h a l l thereupon become v o i d , i f s a i d Buyers r e c e i v e w r i t t e n n o t i c e of the f a i l u r e t o make s a i d payment due b e f o r e - . t h e s a i d 9 0 t h d a v . B u v e r s h a v i n a a l l r i g h t s and o b l i g a t i o n s a c c r u i n g from s a i d s t o c k u n t i l s a i d e v e n t o c c u r s , i f a t a l l . " (Emphasis added.) Also, on May 22, 1972, t h e buyer and s e l l e r executed an escrow agreement which appointed t h e respondent a s escrow a g e n t and included t h e f o l l o w i n g p r o v i s i o n : "Upon r e c e i v i n g n o t i c e f r o m P e t e r A. Dulan, J r . , t h a t any o t h e r p a r t y h e r e undersigned h a s f a i l e d t o perform its p a r t of t h e agreement mentioned above, a s s e t o u t i n Paragraph Number Four, page f i v e of s a i d Agreement, t h e Escrow Agent a t t h e e x p i r a t i o n of t e n ( 1 0 ) days from t h e d a t e of r e c e i v i n g s a i d n o t i c e , s h a l l t r a n s f e r a l l s t o c k c e r t i f i c a t e s and docu- m e n t s h e l d i n t h i s e s c r o w t o P e t e r A . ---- --------- Dulan, J r . " (Emphasis added.) No r e p r e s e n t a t i v e of t h e respondent s i g n e d t h i s escrow agreement. On J u l y 22, 1972, a p p e l l a n t executed a renewal promis- s o r y n o t e f o r $7,500. The c o l l a t e r a l was l i s t e d a s "Assign. of n o t e of Shanon S t u d i o s s t o c k payments p e r s c h e d u l e a t t a c h e d . " On October 17, 1 9 7 2 , Wolie, t h e a p p e l l a n t , and t h e v l c e p r e s i d e n t of respondent executed an escrow r e c e l p t on t h e s t a n d a r d f o r m w h e r e i n t h e r e s p o n d e n t a c k n o w l e d g e d r e c e i p t of t h e agreement t o s e l l and t h e s h a r e s of s t o c k . The p r i o r escrow agreement was n o t l i s t e d a s being p a r t of t h e c o n t e n t s of t h e escrow. The October 17 escrow a l s o contained t h e following: " C r e d i t payments t o : P e t e r A. Uulan n o t e . " Thus, t h e arrangement was t h a t Wolfe made payments t o respondent t o d i s c h a r g e h i s o b l i g a t i o n s under t h e agreement t o s e l l t h e s t o c k and t h e s e payments were i n t u r n d i r e c t l y a p p l i e d t o p l a i n t i f f ' s o b l i g a t i o n under t h e $7,500 renewal promissory note. E a r l y i n 1973 p u r s u a n t t o correspondence between t h e p a r t i e s , a p p e l l a n t s i g n e d a f i n a n c i n g s t a t e m e n t g r a n t i n g respondent a s e c u r i t y i n t e r e s t i n t h e s t o c k h e l d i n escrow. Respondent f i l e d t h i s document w i t h t h e s e c r e t a r y of s t a t e on March 1 4 , 1973. O r i g i n a l l y , assignment of t h e s t o c k was l i s t e d on t h e a c t u a l s t o c k c e r t i f i c a t e . The bank f e l t t h a t t h e assignment should be made on a s e p a r a t e document. T h i s t r a n s p i r e d even though on J u l y 22, 1972, a p p e l l a n t executed a renewal promissory n o t e i n which t h e c o l l a t e r a l was l i s t e d a s t h e assignment of t h e n o t e from Wolfe f o r h i s purchase of t h e b u s i n e s s . The assignment of t h e s t o c k and t h e assignment of t h e n o t e evidence two d i f f e r e n t t y p e s of c o l l a t e r a l . On May 6 , 1 9 7 4 , respondent s e n t a p p e l l a n t a l e t t e r a d v i s i n g a p p e l l a n t t h a t Wolfe had n o t made t h e Pliarch and A p r l l payments. Consequently, a p p e l l a n t ' s payments on h i s n o t e t o respondent were d e l i n q u e n t i n t h e amount of $558.88. The t o t a l amount s t l l l owing on t h e n o t e was $1,427.44. On August 21, 1974, respondent s e n t a n o t h e r l e t t e r t o a p p e l l a n t by c e r t i f i e d m a i l which s t a t e d t h e f o l l o w i n g : "This l e t t e r is t o a d v i s e you t h a t a demand is being p l a c e d on you i n t h e amount of $1,499.38 whicn is r e l a t i v e t o your n o t e of May 22nd, 1972, i n t h e o r i g i n a l . amount o f $ 7 , 5 0 0 . G O . T h i s i n c l u d e s p r i n c i p a l o f $ 1 , 4 2 7 . 4 4 and i n t e r e s t of $71.94. T h i s pays i n t e r e s t through August 3 1 s t , 1974, and i f n o t r e c e i v e d by t h a t ---- d a t e w e w i l l t h e n p r o - teed a g a i n s t t h e s t o c k c e r t i f i c a t e con- s i s t i n g of 4995 s h a r e s o f S h a n o n S t u d i o s t o c k w h i c h you a s s i g n e d t o t h e Montana N a t i o n a l Bank." (Emphasis added.) The record i n d i c a t e s t h a t a p p e l l a n t r e c e i v e d t h i s l e t t e r . lie responded w i t h a l e t t e r d a t e d September 1 0 , 1 9 7 4 , s u g g e s t i n g methods by which Wolfe could meet h i s payment o b l i g a t i o n s . A p p e l l a n t t e s t i f i e d t h a t i f t h e s e s u g g e s t i o n s p r o v e d i n e f f e c t i v e , t h e r e s p o n d e n t s h o u l d c o n t a c t him. On October 3 , 1974, respondent s e n t a n o t h e r l e t t e r t o a p p e l l a n t by c e r t i f i e d m a i l t o t h e a d d r e s s t h e p r e v i o u s l e t t e r had been s e n t t o , a d v i s i n g a p p e l l a n t t h a t t h e s t o c k would be a d v e r t i s e d and s o l d on October 1 7 , 1974. The p r o c e e d s would be a p p l i e d t o a p p e l l a n t ' s past-due l o a n . The record shows t h a t t h i s l e t t e r was r e t u r n e d unclaimed. There is con£ 1 i c t i n g testimony r e g a r d i n g whether t h e a p p e l l a n t n o t i f i e d t h e respondent of h i s change o f a d d r e s s . A p p e l l a n t t e s t i f i e d t h a t he had n o t i f i e d a n a t t o r n e y w i t h t h e f i r m t h a t r e p r e s e n t e d t h e respondent. On about November 1 4 , 1974, t h e s t o c k was s o l d t o Wolfe, t h e same p e r s o n who was buying t h e s t o c k under t h e o r i g i n a l c o n t r a c t , f o r t h e remaining amount due on appel- l a n t ' s n o t e t o respondent ( $ 1 , 5 9 0 ) . There was a b o u t $8,500 due on t h e o r i g i n a l c o n t r a c t between Wolfe and a p p e l l a n t . A p p e l l a n t indicated a t t r i a l t h a t had he known t h e s t o c k would be s o l d t o s a t i s f y t h e amount remaining on h i s n o t e he would have p a i d it i n f u l l . On December 7 , 1977, a p p e l l a n t f i l e d a c o m p l a i n t a l l e g i n g t h a t respondent breached i t s f i d u c i a r y d u t y t o a p p e l l a n t by f r a u d u l e n t l y f o r e c l o s i n g on t h e s t o c k w i t h o u t n o t i c e of such f o r e c l o s u r e . A p p e l l a n t s o u g h t $6,000 i n a c t u a l damages and $15,000 i n p u n i t i v e damages. Respondent answered denying any breach of f i d u c i a r y r e l a t i o n s h i p and a l l e g i n g t h a t a p p e l l a n t was n o t e n t i t l e d t o p u n i t i v e damages. The D i s t r i c t Court d i s m i s s e d a p p e l l a n t ' s c o m p l a i n t , f i n d i n g t h a t respondent a c t e d i n good f a i t h i n n o t i f y i n g a p p e l l a n t of t h e f o r e c l o s u r e and s a l e . From t h i s d i s m i s s a l , a p p e l l a n t b r i n g s t h i s a p p e a l . Three i s s u e s a r e p r e s e n t e d on a p p e a l : 1. Did t h e respondent breach a f i d u c i a r y d u t y when it f o r e c l o s e d on t h e s t o c k ? 2. Did t h e respondent g i v e p r o p e r n o t i c e of t h e s a l e of t h e s t o c k ? 3 . Was t h e f o r e c l o s u r e s a l e conducted i n a commer- c i a l l y r e a s o n a b l e manner? The a p p e l l a n t c o n t e n d s f i r s t t h a t t h e r e s p o n d e n t breached its f i d u c i a r y d u t y t o t h e a p p e l l a n t when it f o r e - c l o s e d on t h e s t o c k h e l d i n escrow. An escrow a g e n t is a f i d u c i a r y and cannot breach t h i s c o n f i d e n c e t o a c t for its own advantage. A p p e l l a n t a s s e r t s t h i s breach is c l e a r a s Wolfe bought t h e s t o c k i n t h e f o r e c l o s u r e s a l e f o r t h e amount i n d e f a u l t . T h i s was s u b s t a n t i a l l y less t h a n t h e amount remaining on t h e c o n t r a c t between a p p e l l a n t and Wolfe. The respondent c o n t e n d s t h a t it a c t e d c o m p l e t e l y w i t h i n t h e s t a t u t o r y a u t h o r i t y v e s t e d i n a s e c u r e d c r e d i t o r when a d e b t o r d e f a u l t s . A s e c u r i t y i n t e r e s t is d e f i n e d as an i n t e r e s t i n p e r s o n a l p r o p e r t y which s e c u r e s payment o r performance of a n o b l i g a t i o n . S e c t i o n 30-1-201(37), MCA. A s e c u r i t y i n t e r e s t a t t a c h e s b i n d i n g t h e c r e d i t o r and t h e d e b t o r when t h e r e is a n agreement between t h e p a r t i e s t h a t it a t t a c h , v a l u e is g i v e n t o t h e d e b t o r , and t h e d e b t o r h a s r i g h t s i n t h e c o l l a t e r a l . S e c t i o n 30-9-204(1), MCA. I n t h e p r e s e n t c a s e t h e s e c u r i t y i n t e r e s t a t t a c h e d on J u n e 2, 1971, when t h e s t o c k was pledged. There was c l e a r l y an agreement between t h e p a r t i e s t h a t t h e s e c u r i t y i n t e r e s t a t t a c h t o t h e s t o c k , t h e a p p e l l a n t was g i v e n c r e d i t o r an e x t e n s i o n t h e r e o f , and t h e a p p e l l a n t owned t h e s t o c k when a t t a c h m e n t o c c u r r e d . F u r t h e r , t h e s e c u r i t y i n t e r e s t c o n t i n u e d i n t h e c o l l a t e r a l n o t w i t h s t a n d i n g t h e s a l e t o Wolfe. S e c t i o n 30-9-306 ( 2 ) MCA. W e a l s o n o t e t h a t t h e s e c u r i t y agreement became bind- ing b e f o r e t h e p a r t i e s e n t e r e d i n t o t h e escrow arrangement. The s e c u r i t y i n t e r e s t a t t a c h e d on J u n e 2, 1971. The p a r t i e s e n t e r e d i n t o t h e escrow agreement on October 1 7 , 1972. Consequently, t h e s e c u r i t y i n t e r e s t would remain a t t a c h e d t o t h e s t o c k i n t h e escrow account. Thus, we h o l d t h e s e c u r i t y i n t e r e s t had a t t a c h e d and remained s o w h i l e t h e s t o c k w a s i n escrow. Upon d e f a u l t t h e r e s p o n d e n t a c t e d w i t h i n its s t a t u t o r y r i g h t s t o f o r e c l o s e on t h e c o l l a t e r a l t o s a t i s f y a p p e l l a n t ' s o b l i g a t i o n . S e c t i o n 30-9-504, MCA. The escrow arrangement was a c o n v e n i e n t means t o have payments from Wolfe, for the corporation, credited against appellant's original indebtedness to the respondent. It should not, however, create an obstacle for a secured party in exercising its statutory rights to foreclose on col- lateral when the debtor defaults. Moreover, the fiduciary duties respondent owed to the appellant, as an escrow agent, did not conflict with this right. The particular instruction that appellant asserts would require the respondent to return possession of the stock certificate to appellant, if Wolfe defaulted on a payment, was in the May 22, 1972, escrow agreement between appellant and Wolfe. However, the respondent was merely appo~nted as depository. It had not legally accepted the escrow. Hence, this instruction did not bind the respondent. It was not until October 17, 1972, that respondent legally became the escrow depository. This is evidenced by the formal escrow receipt executed on that date. It acknowl- edged receipt of the agreement to sell and the shares of stock. The agreement was on a standard form and made no reference to the Nay 22, 1972, escrow. The appellant further asserts that the respondent did not comply with the Uniform Commercial Code in failing to give notice of the foreclosure sale. The respondent argues that in Montana such notice only needs to be sent and, moreover, that the August 21, 1974, letter apprised the appellant of respondent's intentions to proceed against the stock. Section 30-9-504(3), MCA, provides ". . . reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private s a l e or o t h e r intended d i s p o s i t i o n is t o be made s h a l l be s e n t by t h e secured p a r t y t o t h e d e b t o r . . . " (Emphasis added.) S e c t i o n 30-1-201(26), MCA, d e f i n e s n o t i c e a s : ". . . t a k i n g such s t e p s a s may be rea- sonably r e q u i r e d t o inform t h e o t h e r i n o r d i n a r y c o u r s e whether o r n o t such o t h e r a c t u a l l y comes t o know of it. A person ' r e c e i v e s ' n o t i c e or n o t i f i c a t i o n when: "(b) it is d u l y d e l i v e r e d . . . a t any o t h e r p l a c e h e l d o u t by him a s t h e p l a c e f o r r e c e i p t of such communication." I n James T a l c o t t , I n c . v. Reynolds ( 1 9 7 4 ) , 165 Mont. 4 0 4 , 529 P.2d 352, we s p e c i f i c a l l y h e l d t h a t according t o t h e UCC t h e r e is no requirement t h a t t h e d e b t o r r e c e i v e a c t u a l n o t i c e . I t r e q u i r e s t h e c r e d i t o r t o t a k e r e a s o n a b l e s t e p s t o a s s u r e t h a t t h e d e b t o r is n o t i f i e d . W e hold t h a t n o t i c e of t h e s a l e of t h e s t o c k was proper. Notice was s e n t t o t h e a p p e l l a n t . F u r t h e r , t h e s t e p s taken by t h e respondent were t h o s e r e a s o n a b l y re- q u i r e d t o n o t i f y t h e a p p e l l a n t of t h e f o r e c l o s u r e . Also, a c c o r d i n g t o t h e UCC, t h e a p p e l l a n t r e c e i v e d n o t i c e of t h e s a l e when it was d e l i v e r e d t o t h e a d d r e s s t h e August 21, 1974, l e t t e r was s e n t . By responding t o t h a t l e t t e r , t h e a p p e l l a n t h e l d t h e a d d r e s s of d e l i v e r y o u t a s a p l a c e f o r r e c e i v i n g com~nunications. F i n a i l y , t h e s t e p s taken by t h e respondent t o n o t i f y t h e a p p e l l a n t were s u c c e s s f u l i n g i v i n g a c t u a l n o t i c e . The August l e t t e r informed a p p e l l a n t of t h e r e s p o n d e n t ' s i n t e n - t i o n s t o d i s p o s e of t h e c o l l a t e r a l t o s a t i s f y t h e appel- l a n t ' s o b l i g a t i o n . F i n a l l y , t h e a p p e l l a n t c o n t e n d s t h e s a l e of t h e c o l l a t e r a l was n o t conducted i n a commercially r e a s o n a b l e manner a s mandated by s e c t i o n 30-9-504(3), MCA. The respondent merely sold the stock to the original purchaser for an amount substantially l e s s than i t s worth and the s a l e was not advertised. The respondent a s s e r t s that the price i t s e l f does not warrant a holding that a particular s a l e was commercially unreasonable. The appellant must prove t h a t the manner of the s a l e was commercially unreasonable. Under the UCC, every aspect of the foreclosure pro- ceedings, including method, manner, time, place and terms, m u s t be commercially reasonable. Section 30-9-504(3), M C k . The f a c t t h a t a better price could be obtained a t a d i f - ferent s a l e or a d i f f e r e n t method or manner of disposition does not establish t h a t the s a l e was commercially unreason- able. Section 30-9-507(2), MCA. T h i s Court interpreted these two sections of the UCC in the Talcott case, supra. W e held t h a t the reasonableness of the s a l e is not determined by price but the manner i n which the s a l e was conducted. In other words, i f the s a l e is considered commercially reasonable, then the price is reasonable. However, P r o f e s s o r s White and Summers i n t h e i r t r e a t i s e on the UCC place some importance on the price t h a t was actually received for the c o l l a t e r a l . They s t a t e : l l . . . Notwithstanding the statement i n 507-(2) that low resale price alone is not enough, the crucial issue which one gleans from the 'method, manner, time1 language and from t h e s e v e r a l c a s e s interpreting 9 - 5 0 4 ( 3 ) is j u s t that--was the price s u f f i c i e n t ? The debtor who asks a court to ignore 9-507 ( 2 ) probably expects too much, but the cases suggest t h a t given an unusually low resale price l i t t l e more is needed for the courts t o find the sale commercially unreasonable . . . " White and Summers, Uniform Com- mercial Code 2d Ed., § 26-11 at 1116 (1980). Some recent cases recognize that the resale price should be a factor in determining the commercial reasonable- ness of a sale. In Mercantile Financial Corporation v. Miller (E.D. Pa. 1968), 292 F.Supp. 797, 7 UCC 402, the court recognized that: "Although S 9-507(2) clearly provides that a discrepancy between a price received by a creditor disposing of assets pursuant to 9-504 and an isolated price later shown to have been obtainable, is not alone sufficient to grant a debtor affirmative relief under 9-507(1), certainly such a discrepancy, if substantial, is relevant to a deter- mination of whether a challenged sale was 'commercially reasonable'. [citing cases] The evidence here established that the price received for the goods sold by the plaintiff [secured party] was substan- tially less than both the price original- ly paid for them by G.F.&M. and the price which the purchaser of the assets subse- quently received for them on resale, i.e., approximately $57,000.00. This evidence strongly suggested that the plaintiff did not obtain the fair market value for these goods at the time of the sale, and the plaintiff did not rebut this inference." 292 F.Supp. at 801. Thus, in light of the above authority and the fact that "reasonable price" is the objective of a commercially reasonable disposition, we hold that a large discrepancy in price can be considered within the parameters of section 30- 9-504(3), MCA. We also conclude that the complaining party has the burden of proving the price received was less than the fair market value of the collateral. In this case, besides the evidence regarding the value of the stock, the appellant made little effort to prove the actual sale was commercially unreasonable. The record is replete with speculations of the value of the stock when it was d i s p o s e d . The a p p e l l a n t a s s e r t e d t h a t t h e a s s e t s of t h e c o r p o r a t i o n were valued a t $22,279.79 t h e year b e f o r e t h e s a l e of t h e c o l l a t e r a l . However, t h e r e was a l s o t e s t i m o n y t h a t Wolfe d i d n o t do w e l l w i t h t h e b u s i n e s s a f t e r t h e a p p e l l a n t s o l d it t o him. Moreover, Wolfe f i l e d c o r p o r a t e bankruptcy approximately two and one-half y e a r s a f t e r it was s o l d . Thus, we hold t h a t t h e a p p e l l a n t d i d n o t prove t h a t t h e s a l e was conducted i n a commercially unreasonable manner p u r s u a n t t o s e c t i o n 30-9-504(3), MCA. W e f u r t h e r hold t h a t t h e r e is s u b s t a n t i a l e v i d e n c e t o s u p p o r t t h e lower c o u r t ' s c o n c l u s i o n t h a t a p p e l l a n t d i d n o t meet h i s burden o f e s t a b - l i s h i n g t h a t t h e s t o c k was worth an amount g r e a t e r t h a n t h a t f o r which it was s o l d . Af f irmed. =344nat wcw&@Jp Chief J u s t i c e W e concur: --.+," .*As , - x , J J u s t i c e s