Title: C. Bud Racicky Agency, Inc. v. Wood Gundy, Inc.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

C. Bud Racicky Agency, Inc. v. Wood Gundy, Inc.1989 WY 10767 P.2d 601Case Number: 88-60Decided: 01/09/1989Supreme Court of Wyoming
C. BUD 
RACICKY AGENCY, INC., APPELLANT (DEFENDANT),

 
 
v.

 
 
WOOD GUNDY, 
INC., APPELLEE (PLAINTIFF).

 
 
Appeal from 
the District Court, LaramieCounty, Gary P. Hartman, 
J.

 
 
Georg 
Jensen of Law Offices of Georg Jensen, Cheyenne, for appellant.

 
 
Peter G. 
Arnold of Peter G. Arnold, P.C., Cheyenne, for appellee.

 
 
Before CARDINE, C.J., and THOMAS, URBIGKIT, MACY 
and GOLDEN, JJ.

 
 

MACY, 
Justice.

 
 

[¶1.]     Appellant C. Bud 
Racicky Agency, Inc., as the holder of a prior and superior security interest in 
certain collateral, appeals a judgment in favor of appellee Wood Gundy, Inc., a 
junior secured creditor, in an action involving allocation of the proceeds from 
the repossession and sale of the collateral. Appellant contests the district 
court's grant of judgment to appellee for $6,364.02, representing certain 
interest charges and attorney's fees disallowed to appellant as not being 
expenses reasonably incurred in the disposition of the 
collateral.

 
 

[¶2.]     We affirm in part, 
reverse in part, and remand.

 
 

[¶3.]     Appellant states the 
issues in this manner:

 
 
            
1. Did the court err in finding and concluding that the defendant could 
not charge against the proceeds of the sale of collateral certain costs, 
expenses and fees, including:

 
 
            
(a) interest provided for under the purchase agreement and security 
agreement;

 
 
            
(b) attorney's fees incurred in the perfection, enforcement and 
protection of the defendant's liens;

 
 
            
(c) attorney's fees incurred in the repossession of the collateral; 
and

 
 
            
(d) interest on the repossession expense of the defendant provided for 
under the agreement?

 
 
            
2. What costs of a secured party can legally be contracted to be paid by 
the debtor in a security agreement and loan agreement, and do they include the 
charges above? 

 
 
            
3. What costs of a secured party can legally be charged and collected 
under the Uniform Commer[ci]al Code after default from the disposition of the 
collateral, and do they include the charges above?

 
 

[¶4.]     Appellee simplifies and 
reduces the issue to this statement:

 
 
            
Whether, in determining what expenses were "reasonable" in the 
disposition of repossessed collateral and in determining whether the secured 
party acted in good faith, the trial court may disallow expenses which are 
otherwise provided for by the security agreement.

 
 

[¶5.]     The relevant facts in 
this case are not in dispute and were largely stipulated to by the parties prior 
to trial. On February 11, 1984, appellant1 sold an Arabian horse named TR 
Leading Lady and a fur coat to Catherine Jacobs, who was at that time an 
employee of appellee.2 The purchase price for the horse 
was $59,500, and the purchase price for the coat was $7,500, for a total 
purchase price of $67,000. Pursuant to an installment sales contract, Ms. Jacobs 
made a down payment of $20,100 and agreed to pay the balance of $46,900, plus 
interest at the rate of ten percent per annum, in twelve quarterly installments, 
with the first installment being due on May 11, 1984.3 Ms. Jacobs executed a promissory 
note in favor of appellant for the balance of the purchase price. On the date of 
purchase, Ms. Jacobs and C. Bud Racicky, as representative of appellant, signed 
what the parties in this case refer to as a "so-called security agreement."4 After concluding the purchase of 
the horse, Ms. Jacobs apparently transported the animal to her home in 
Ontario, Canada.

 
 

[¶6.]     Ms. Jacobs failed to 
make any of the installment payments, including the first installment assertedly 
due on May 11, 1984. On May 18, 1984, appellant's Canadian counsel obtained an 
order from the Supreme Court of Ontario, Canada, permitting a late filing in 
that province of the financing statement with respect to TR Leading Lady, 
thereby perfecting appellant's security interest in the horse.5 Appellant repossessed the horse on 
July 31, 1984, and boarded it in Toronto until 
August 13, 1984, at which time appellant had the horse transported initially to 
Cheyenne, Wyoming, and thereafter to Arizona. On August 10, 1984, Ms. Jacobs 
assigned any interest she had in the horse, along with all her other 
possessions, to appellee by execution of a security 
agreement.

 
 

[¶7.]     On August 20, 1984, 
appellee made a written demand upon appellant's Canadian counsel for any surplus 
proceeds that might remain after sale of the horse, and on September 5, 1984, 
appellee perfected its security interest in TR Leading Lady in Arizona. Appellant 
notified appellee on November 26, 1984, of its intention to sell the horse at an 
auction to be held on December 1, 1984. Appellant sold the horse for $90,000 at 
that auction, apparently held in Arizona.

 
 

[¶8.]     On April 14, 1986, 
appellee filed a complaint in the district court in Cheyenne, Wyoming, alleging 
essentially that appellant had retained surplus proceeds from the sale of the 
collateral in contravention of appellee's rights as a junior secured creditor 
and seeking a judgment against appellant for the amount of surplus proceeds. 
Discovery was conducted, and the parties eventually entered into a stipulation 
of the facts, including those set out above. In the stipulation, the parties 
agreed that, as of the date of repossession of the horse, July 31, 1984, Ms. 
Jacobs owed appellant $49,084.38 in principal and interest. The parties also 
agreed that $24,907.76 of the expenses itemized by appellant as costs for 
repossession, holding, preparing for sale, and sale were reasonable. The parties 
disagreed, however, as to the reasonableness of the remaining $17,063.71 in 
expenses incurred by appellant in the disposition of the collateral. The 
disputed expenses were listed in the stipulation as 
follows:

 
 


Interest 
      from 7/31/84 to 12/13/84

$ 
      1,721.90 

Canadian 
      Attorney's fees

$ 
      4,246.81

Attorney's 
      fees [Wyoming]

$ 
      2,607.81 

Discount 
      Installment note (December sale)

$ 
      7,200.00 

18% 
      interest on repo expenses to 12/13/84

$ 
      395.31 

C.M. 
      Racicky expense to attend Dec. sale

$ 
      891.88 

TOTAL

$17,063.71

 
 

[¶9.]     After an October 21, 
1987, bench trial,6 the district court took the matter 
under advisement, requesting memoranda from the parties. In a subsequent opinion 
letter, the district court concluded that the Canadian attorney's fees were 
incurred in perfection of appellant's security interest and that, therefore, 
they were not allowable as reasonable expenses incurred in the disposition of 
the collateral. The court additionally disallowed appellant the $1,721.90 in 
post-repossession interest and the $395.31 in interest on repossession expenses. 
The district court found the other disputed expenses claimed by appellant were 
reasonable for the disposition of the collateral. Thus, of the $17,063.71 in 
disputed expenses, the district court found $6,364.02 to be unreasonable, and 
appellee was granted a judgment in that amount. This appeal 
followed.

 
 

[¶10.]  As a preliminary matter, and one not 
raised by the parties, we note that the district court resolved this dispute by 
applying Wyoming law. The installment sales contract 
between appellant and Ms. Jacobs, however, provided that the buyer granted to 
seller a security interest in the horse pursuant to the Arizona Uniform 
Commercial Code and that, upon default, seller was entitled to all remedies 
available to a secured party under that Code. In the proceedings below the 
parties mentioned, in passing, the applicable Arizona statutes, but they primarily relied upon 
Wyoming 
statutes in making their respective arguments. The parties have continued to 
rely upon Wyoming law in their appellate 
arguments.

 
 

[¶11.]  Wyoming has adopted the 1972 amendments to the 
Uniform Commercial Code, which altered the choice-of-law provisions for Article 
9 from those in the 1962 version of the Code. See Van Baalen, Wyoming Adopts the "1972 Amendments" to 
Uniform Commercial Code Article 9 - The Revisions and Some Continuing Problems, 
19 Land & Water L.Rev. 581 (1984). Under the 1972 version of the Uniform 
Commercial Code, choice-of-law rules for nonperfection issues, such as 
procedures upon default, are governed by § 1-105 (Wyo. Stat. § 34-21-105 
(1977)), a general choice-of-law rule applicable to the entire Code. J. White 
and R. Summers, Uniform Commercial Code § 22-9 (2d ed. 1980).7 Section 34-21-105(a) 
provides:

 
 
            
Except as provided hereafter in this section, when a transaction bears a 
reasonable relation to this state and also to another state or nation the 
parties may agree that the law either of this state or of such other state or 
nation shall govern their rights and duties. Failing such agreement this act [§§ 
34-21-101 to -1002] applies to transactions bearing an appropriate relation to 
this state.

 
 
Here, 
although much of the pertinent information is lacking or unascertainable from 
the record, it would appear that the transactions in this case bear a reasonable 
relation to Wyoming - at least to the extent that Wyoming is the residence of 
appellant (seller/secured party) and all payments under the installment sales 
contract were to be made to appellant in Wyoming. Further, despite the original 
agreement between Ms. Jacobs and appellant, the consistent presentation of 
Wyoming law by the parties to this litigation 
indicates their agreement that Wyoming law 
should control the issues in this case, and neither party has contested the 
district court's application of Wyoming law. Finally, the controlling statute 
in this controversy, § 9-504 of the Uniform Commercial Code, is virtually 
identical in Wyoming and Arizona. See Wyo. Stat. § 
34-21-963 (1977) (as amended 1983) and Ariz. Rev. Stat. Ann. § 47-9504 (1988).8 Therefore, we will apply Wyoming law to this case, particularly Wyoming's version of the 
Uniform Commercial Code.

 
 

[¶12.]  The issues in this case concern the 
application of the proceeds resulting from the secured party's disposition of 
the repossessed collateral. Resolution of this controversy requires that we look 
to § 34-21-963(a) (U.C.C. § 9-504), which provides:

 
 
            
A secured party after default may sell, lease or otherwise dispose of any 
or all of the collateral in its then condition or following any commercially 
reasonable preparation or processing. Any sale of goods is subject to the 
article on sales (article 2). The proceeds of disposition shall be applied in 
the order following to:

 
 
                        
(i) The reasonable expenses of retaking, holding, preparing for sale or 
lease, selling, leasing and the like and, to the extent provided for in the 
agreement and not prohibited by law, the reasonable attorney's fees and legal 
expenses incurred by the secured party;

 
 
                        
(ii) The satisfaction of indebtedness secured by the security interest 
under which the disposition is made;

 
 
                        
(iii) The satisfaction of indebtedness secured by any subordinate 
security interest in the collateral if written notification of demand therefor 
is received before distribution of the proceeds is completed. If requested by 
the secured party, the holder of a subordinate security interest must seasonably 
furnish reasonable proof of his interest, and unless he does so, the secured 
party need not comply with his demand.

 
 

[¶13.]  Appellant first contends that the two 
items of interest disallowed by the district court were properly chargeable to 
the proceeds from the sale of the collateral. We agree.

 
 

[¶14.]  We first address the $1,721.90 in 
interest which accrued between the date of repossession and the date of sale. We 
observe that there was no evidence, nor any argument, that the time period 
between repossession and resale was unreasonable. Pursuant to subsection (d) of 
§ 34-21-963,9 the security interest remains in 
effect and is not discharged until the secured party disposes of the collateral 
after default. See 9 W. Hawkland, Uniform Commercial Code Series § 9-504:11 
(1986). Correspondingly, Wyo. Stat. § 34-21-965 (1977) (as amended 1983) (U.C.C. 
§ 9-506) provides that the debtor's (or other secured party's) right of 
redemption remains in effect until the secured party has (1) disposed of the 
collateral, (2) entered into a contract for disposition of the collateral, or 
(3) accepted the collateral in satisfaction of the obligation. See Rogers v. Associates Commercial Corporation, 129 Ariz. 499, 632 P.2d 1002, 
32 U.C.C.Rep. Serv. 635 (Ariz. App. 1981); and Sturdevant v. First 
Security Bank of Deer Lodge, 186 Mont. 91, 606 P.2d 525, 28 U.C.C.Rep.Serv. 569 
(1980). Additionally, if a deficiency remains after sale of the collateral, the 
debtor is liable for interest accruing on such deficiency. See 
United 
States ex rel. Small Business Administration v. 
Gore, 437 F. Supp. 344, 23 U.C.C.Rep.Serv. 256 (E.D.Pa. 1977). It is clear that, 
upon sale of the collateral, the secured party cannot recover unearned interest. 
Bostwick-Westbury Corp. v. Commercial Trading Company, Inc., 94 Misc.2d 401, 404 N.Y.S.2d 968 (1978); 9 R. Anderson, Uniform Commercial Code § 9-504:73 
(1985). It should be equally apparent, however, that, unless the collateral is 
accepted in satisfaction of the debt, interest continues to accrue on the 
underlying debt until the time of sale of the collateral and thereafter to the 
extent that a deficiency remains. Thus, upon sale of the collateral, the secured 
party is entitled to the unpaid balance and the matured interest up to the time 
of payment; i.e., sale. See Bostwick-Westbury Corp., 404 N.Y.S.2d 968. We hold, 
therefore, that appellant was entitled to charge the disputed $1,721.90 against 
the proceeds from the sale of the collateral as interest accruing between the 
date of repossession and the date of sale.

 
 

[¶15.]  We also agree with appellant's contention 
that it was entitled to retain the $395.31 in interest on its repossession 
expenses. The district court determined that this interest was not a reasonable 
expense of repossession and resale. We observe, however, that the security 
agreement provided for payment of such interest. The security agreement stated 
that, should the debtor fail to perform any of its obligations to the secured 
party, i.e., default, the secured party

 
 
            
may, in addition to any other remedy, take whatever action may be 
necessary to remedy such failure and should such action require the expenditure 
of monies to protect and preserve Secured Party's interest in the collateral * * 
* then the amount of such expenditures 
shall become forthwith due and payable by Debtor with interest at the rate of 
eighteen percent (18%) per annum.

 
 
(Emphasis 
added.)

 
 

[¶16.]  C.M. "Bud" Racicky, in an affidavit, 
stated that the $395.31 figure reflected the interest on the costs of 
repossession, excluding attorney's fees, up to the time of sale. In the 
stipulation of the parties, appellee agreed that this expense was incurred, 
disagreeing only as to its reasonableness. In 9 R. Anderson, supra, § 9-504:72 
at 770 (quoting General Finance Corporation of Georgia v. Sprouse, 577 F.2d 989, 
992, 24 U.C.C.Rep.Serv. 960 (5th Cir. 1978)), the author states: "`It is clear 
that under Article 9 . . . a security agreement may impose various charges, not 
found in the promissory note, in the event of default.'" Thus, we conclude that, 
under the security agreement, this interest expense became part of the 
obligation and was allowable as part of the "indebtedness secured by the 
security interest" pursuant to § 34-21-963(a)(ii). It must be remembered that 
appellee took its security interest in the collateral subject to and with 
knowledge of appellant's prior security interest. We hold that the district 
court erred in not allowing appellant to charge this interest against the 
proceeds of the sale.

 
 

[¶17.]  Appellant also contends that the district 
court erred in not allowing the Canadian attorney's fees as an expense 
chargeable against the proceeds from the sale of the collateral. We do not 
agree.

 
 

[¶18.]  Appellant argues, in what is essentially 
an evidentiary challenge although not presented as such, that the Canadian 
attorney's fees were a reasonable expense of retaking and holding under § 
34-21-963(a)(i). The district court determined, however, that the Canadian firm 
was retained in order to perfect appellant's security interest and that the fees 
were largely incurred in that endeavor. The evidence in the record generally 
supports this conclusion by the district court.

 
 

[¶19.]  It is undisputed that, in order to 
perfect appellant's security interest in the horse, the Canadian firm had to 
petition the Supreme Court of Ontario to obtain permission to file appellant's 
financing statement in Ontario beyond a deadline imposed by 
provincial law. While there is some record evidence indicating that part of the 
Canadian attorney's fees may have involved retaking expenses, such as stable 
fees, we are unable to ascertain with any certainty the basis for the charges 
billed by the Canadian firm. Copies of the firm's billings contained in the 
record do not clearly delineate the source of the various charges. In addition, 
appellant did not include a transcript of the trial, apparently containing 
testimony on this issue, as part of the record on appeal. The district court 
heard the testimony at trial and reviewed the affidavits and other materials 
submitted by the parties in making its determination. On this record we cannot 
say that the district court's finding that these fees were primarily incurred in 
the perfection of appellant's security interest was clearly erroneous, 
inconsistent with the evidence, or contrary to the great weight of the evidence. 
O's Gold Seed Company v. United Agri-Products Financial Services, Inc., 761 P.2d 673 (Wyo. 
1988).

 
 

[¶20.]  Appellant further contends, nevertheless, 
that, even if the fees were incurred in perfection of its security interest, 
such action was required in order to repossess the collateral and was therefore 
an expense of retaking. As to this contention, it is sufficient to say that § 
34-21-963(a)(i) cannot reasonably be read as envisioning attorney's fees 
incurred in perfection as being recoverable as expenses of repossession or 
resale. The Canadian attorney's fees were not recoverable under § 
34-21-963(a)(i) as reasonable attorney's fees for the retaking and sale of the 
collateral.

 
 

[¶21.]  Appellant additionally suggests, however, 
that, even if not allowable under paragraph (i) of § 34-21-963(a), the Canadian 
attorney's fees should be allowed as part of the "indebtedness secured" under § 
34-21-963(a)(ii) because, under the security agreement, the debtor was 
responsible for perfection expenses. Although we found appellant's similar 
argument persuasive with respect to the interest on repossession expenses, we 
cannot accept it in connection with these extraordinary attorney's fees. The 
security agreement provided that the debtor "will reimburse Secured Party upon 
demand for all expenses incurred in connection with perfecting the security 
interest granted herein." We initially note that there is no evidence in the 
record of a demand by appellant upon Ms. Jacobs for reimbursement of perfection 
expenses. More importantly, even where a contract provides for attorney's fees, 
the trial court may disallow them in its discretion. In Combs v. Walters, 518 P.2d 1254, 1255 (Wyo. 1974), we stated:

 
 
While the 
general rule is that a valid provision for attorney's fees in a note is as much 
an obligation of the contract as any part of it, the trial court still has 
discretion in exercising its equitable control to allow only such sum as it 
thinks reasonable. A trial court in its discretion may properly disallow 
attorney's fees altogether on the basis that such recovery would be 
inequitable.

 
 
See also 
State Surety Company v. Lamb Construction Company, 625 P.2d 184 (Wyo. 1981). As the 
district court noted in its decision letter, it is not clear whether or not 
appellant was aware that the horse would be taken to Canada. Ms. 
Jacobs, however, did list an Ontario address on the installment sales 
contract. Also, it can reasonably be assumed that appellant did not contemplate 
the filing deadline imposed under Canadian law. Nevertheless, the inordinate 
legal expenses incurred in perfecting appellant's security interest primarily 
resulted from appellant's failure to timely perfect. We conclude therefore that, 
even though perfection expenses were provided for by contract, the district 
court, in its discretion, could properly disallow such fees as unreasonable. The 
district court was not in error in disallowing the Canadian attorney's fees. 

 
 

[¶22.]  In conclusion, we reverse the judgment of 
the district court to the extent that it disallowed appellant to apply the 
proceeds from the sale of the collateral to the interest accruing from the date 
of repossession to the date of sale and to the interest on the repossession 
expenses. We affirm the disallowance of the Canadian attorney's 
fees.

 
 

[¶23.]  Affirmed in part, reversed in part, and 
remanded for entry of judgment consistent with this 
opinion.

 
 
FOOTNOTES

 
 

1 C. Bud Racicky, as an 
officer, director, stockholder, and employee of appellant, acted on appellant's 
behalf in the transactions involved in this case.

 
 

2 We cannot ascertain 
from the contents of the record on appeal, including the sale and security 
documents, where the sale transactions occurred. It appears that delivery of the 
horse to Ms. Jacobs may have taken place in Arizona.

 
 

3 The installment sales 
contract and the promissory note indicate the first payment was due on June 11, 
1984. The stipulation of facts, however, indicates the first installment was due 
May 11, 1984, and this date is reiterated by the parties in their briefs. 
Additionally, we note that May 11, 1984, represents the end of the first quarter 
after the sale. The discrepancy in dates does not affect the issues in this 
appeal.

 
 

4 The parties' 
designation of the security agreement reflects understandable doubt as to the 
validity of the agreement, although the validity of the agreement is not raised 
as an issue on appeal. The copy of the security agreement contained in the 
record is signed by the parties, but it does not describe the collateral as 
required by Wyo. Stat. § 34-21-922(a) (1977) (as amended 1983). The agreement, 
as found in the record, appears to be a standardized security agreement in which 
none of the applicable blanks have been filled in by the 
parties.

 
 

5 Apparently, as 
asserted by the parties but not directly shown in the record, under the law of 
Ontario, a 
deadline is fixed for filing the financing statement required to perfect a 
security interest. The Uniform Commercial Code, and Wyoming's version 
thereof, does not contain such a deadline, although the date of filing obviously 
affects priorities.

 
 

6 A transcript of the 
trial was not included in the record on appeal.

 
 

7 Choice-of-law rules 
regarding perfection of security interests and the effect of perfection or 
nonperfection continue to be governed by the specific Article 9 provision found 
in Wyo. Stat. § 34-21-903 (1977) (as amended 1983) (U.C.C. § 9-103). See Van 
Baalen, supra at 582, and J. White and R. Summers, supra.

 
 

8 Corresponding 
subsections (c) and C of the two statutes vary slightly, in a manner not 
pertinent to this case, relating to notification to other parties of the 
proposed sale of the collateral.

 
 

9 Section 34-21-963(d) 
provides in pertinent part:

 
 
            
When collateral is disposed of by a secured party after default, the 
disposition transfers to a purchaser for value all of the debtor's rights 
therein, discharges the security interest under which it is made and any 
security interest or lien subordinate thereto.