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Nature of Suit Code: 140
Nature of Suit: Negotiable Instruments
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

FILED 

United States Courc of Appeals 

T,..flth rir('.1't 

fiOV 21 1989 

ROBERT L. HOECKER 

Clerk 

UNITED STATES OF AMERICA, ) 

v. 

BARTON C. 

et al., 

v. 

FAIRLAWN 

) 

Plaintiff-Appellee, ) 

) 

) No. 85-1259 

) 

KELLEY and DONNA MARIE KELLEY, ) 

) 

) 

Defendants-Appellants, ) 

) 

) 

) 

PLAZA STATE BANK, ) 

) 

Third Party Defendant-Appellee. ) 

Appeal from the United States District Court 

for the District of Kansas 

(D.C. No. 80-4152) 

Frank M. Rice (Dan L. Wulz with him on the brief) of Schroer, 

Rice, Bryan & Lykins, Topeka, Kansas, for Defendants-Appellants. 

Alleen s. Castellani, Assistant United States Attorney 

(Benjamin L. Burgess, Jr., United States Attorney, with her on the 

brief), Topeka, Kansas, for Plaintiff-Appellee. 

Arthur E. Palmer of Goodell, Stratton, Edmonds & Palmer, Topeka, 

Kansas, filed a brief for Third Party Defendant-Appellee. 

Before*LOGAN and BALDOCK, Circuit Judges, and PHILLIPS, District 

Judge. 

LOGAN, Circuit Judge. 

* The Honorable Layn R. Phillips, United States District Judge 

for the Western District of Oklahoma, sitting by designation. 

Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 1 
Defendants Barton 

summary judgment in 

Administration (SBA) 

Fairlawn Plaza State 

and Donna Kelley appeal the grant of 

favor of plaintiff Small Business 

and the dismissal of third-party defendant 

Bank (Bank). The Kelleys personally 

guaranteed two $130,000 promissory notes of Kelley Aquarium and 

Pet Supplies Co., Inc., for SBA-guaranteed loans through the Bank. 

Both notes were secured by assets of the debtor. The debtor 

subsequently defaulted and the Bank liquidated the collateral 

securing the notes. The net proceeds of the liquidation sale were 

applied to reduce the amounts owing on .the notes. After 

liquidation, the Bank assigned its rights, title, and interest in 

the notes to the SBA. The SBA then filed this suit against the 

Kelleys and sought a deficiency judgment under the standard form 

SBA guaranty. The Kelleys joined the Bank as a third-party 

defendant and claimed that the liquidation sale was conducted in a 

commercially unreasonable manner in violation of the Kansas 

Uniform Commercial Code (UCC). 

The district court originally denied the dispositive motions 

of the SBA and the Bank, but later granted these motions in light 

of United States v. Lattauzio, 748 F.2d 559 (10th Cir. 1984). The 

issues on appeal are whether the Kelleys are entitled to raise the 

UCC defense of a commercially unreasonable sale, and, if so, 

whether they could and did waive that defense. 

The SBA agreement here is identical to the one we considered 

in Lattauzio. There, relying en United States v. Kimbell Foods-, 

Inc., 440 U.S. 715 (1979), and 13 C.F.R. § 101.l(d)(2) & (4), we 

held that federal law determines whether guarantors similarly 

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Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 2 
situated to the Kelleys are entitled to raise, and to waive, the 

commercial unreasonableness defense. 748 F.2d at 562. We then 

"assumed" that the governing federal rule would incorporate state 

law, and so proceeded to apply the UCC of New Mexico, the state 

involved. We further assumed that New Mexico UCC § 9-504 "inures 

to the benefit of guarantors," but predicted that the New Mexico 

Supreme Court would allow guarantors to waive the protections of 

that section. By signing the standard form SBA guaranty 

agreement, we held, the guarantors in Lattauzio "waived by 

contract the protections arguably afforded by[§ 9-504)." Id. We 

followed Lattauzio's "assumption" concerning incorporation of 

state law, and its interpretation of New Mexico law, in United 

States v. New Mexico Landscaping, Inc., 785 F.2d 843 (10th Cir. 

1986). 1 

In this case, no party has disputed the district court's 

determination that the Kansas UCC should serve as the applicable 

substantive federal law. The SBA and the Bank argue that, in the 

absence of Kansas case law on point,. our decisions in Lattauzio 

and New Mexico Landscaping control. We disagree. While the 

applicable UCC provisions in Kansas are identical to those in New 

Mexico, there is significant evidence that Kansas courts would. 

1 In Western Bank v. Aqua Leisure, Ltd., 105 N.M. 756, 737. P.2d 

537, 540 (1987}, the New Mexico Supreme Court held that 

unconditional guarantors have no right to a commercially . r.easonab-1e disposition of collateral. It ·is unclear whether the 

holding was based on unavailability of the defense to a guarantor 

generally, or on waiver by an unconditional guarantor. The court 

did not cite Lattauzio, New Mexico Landscaping, or any UCC 

provisions. 

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Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 3 
hold the opposite of our Lattauzio and New Mexico Landscaping 

rulings. 

We first consider the question of the availability to 

guarantors such as the Kelleys of Kansas UCC § 9-504(3), which 

establishes the commercial unreasonableness defense. The sectlon 

refers only to the "debtor," but the district court in the instant 

case determined that Kansas law would treat a guarantor as a 

debtor entitled to the defense. IR. at 112-14 (United States v. 

Kelley, 38 u.c.c. Rep. Serv. (Callaghan) 371, 375 (D. Kan. 1983)). 

That was also the holding of another Kansas district judge, in 

United States v. Hunter, 652 F. Supp. 774, 778 (D. Kan. 1987) (SBA 

guaranty case), and the view of the commentary to the Kansas ucc. 

Kan. Stat. Ann. § 84-9-105(l)(d) 1983 Kansas comment ("The 

definition of 'debtor' in subsection (l)(d) is broad enough to 

include continuing guarantors and co-makers, which can have a 

major impact in an Article 9 foreclosure"). See also Note, 

Commercially Unreasonable Foreclosure Sales in the Context of a 

Surety Relationship--United States v. Lattauzio, 34 Kan. L. Rev. 

175, 183-84 (1985) ("In line with Article 9's scheme of making 

distinctions along functional rather than formal lines, the 

context may require that a guarantor be considered a 'debtor' 

under Section 9-504(3).") (footnotes omitted). 

This result is in accord with almost all decisions that have 

considered the issue. See,~' First Nat'l Bank v. Cillessen, 

622 P •. 2d 598, 600=01 ((3-Qlo •. Ct. App. 1980); McEntit:e v. Indiana 

Nat'l Bank, 471 N.E.2d 1216, 1223 (Ind. Ct. App. 1984); United 

States v. Jensen, 418 N.W.2d 65, 66 (Iowa 1988) (SBA case); Dakota 

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Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 4 
Bank & Trust Co. v. Grinde, 422 N.W.2d 813, 817 (N.D. 1988); 

Rhoten v. United Va. Bank, 221 Va. 222, 269 S.E.2d 781, 784 

(1980); B. Clark, The Law of Secured Transactions Under the 

Uniform Commercial Code ,1 4.03[3][b] at 4-42 (2d ed. 1988) • 2 We 

thus turn to the issue of waiver. 

UCC § 9-501(3)(b) prohibits a "debtor" from waiving the 

commercial unreasonableness defense. There seems little doubt 

that Kansas courts would hold that this nonwaiver provision also 

inures to the benefit of a guarantor. See Hunter, 652 F. Supp. at 

778-79, 782; Note, supra, 34 Kan. L. Rev. at 188-89. Barkley 

Clark, the former Kansas University law professor who wrote the 

Kansas commentary and who is one of the nation's leading 

authorities on the UCC, has taken the position that "[a]ny other 

rule would encourage creditor misbehavior in the holding of a 

foreclosure sale, since the creditor would be safe in the 

knowledge that the guarantor would pick up the tab for any 

deficiency." B. Clark, supra~ 4.03[3][b] at 4-43. Clark's view 

2 Connecticut, Georgia, and New Jersey sometimes are cited as 

states that do not follow the majority rule. Recent decisions; 

however, indicate that these states ar~ firmly in the majority 

camp. See Connecticut Bank & Trust Co. v. Incendy, 207 Conn. 15, 

540 A.2d 32 (1988) (in a suit against guarantors for deficiency 

judgment, holding that UCC notice was insufficient and sale was 

not commercially reasonable); Reeves v. Habersham Bank, 254 Ga. 

615, 331 S.E.2d 589 (1985) (guarantors are debtors under UCC § 9-

504(3)); Branan v. Eguico Lessors, Inc., 255 Ga. 718, 342 S.E.2d 

671 (1986) (guarantors cannot waive UCC § 9-504); Ingersoll-Rand 

_ Fin. Corp. v. Miller Minin-g Co., 817 F. 2d 1424 ( 9th ~-i r. 1987) 

.,c;;. (allowing guarantor to raise defeflse of commercially unreasonable 

sale under New Jersey law); Tri-Continental Leasing Corp. v. 

Cicerchia, 664 F. Supp. 635 (D. Mass. 1987) (predicting New Jersey 

would allow guarantor· to raise UCC § 9-504(3) defenses and would 

prohibit waivers of these defenses). 

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Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 5 
is likely to be very influential with the Kansas courts. See 

Hunter, 652 F. Supp. at 779. 

This position, too, is consistent with the holdings of "the 

overwhelming majority of courts ••• that a guarantor is a debtor 

within the meaning of Section 9-501(3) •• II In re Kirkland, 

91 Bankr. 551, 553 (Bankr. 9th Cir. 1988) (quoting Connolly v. 

Bank of Sonoma County, 18~ Cal. App. 3d 1119, 1124, 229 Cal. Rptr. 

396 (1986)) (California law). See,~, united States v. Conrad 

Publishing Co., 589 F.2d 949, 952-53 (8th Cir. 1978) (SBA guaranty 

under North Dakota law); United States v. Friesz, 690 F. Supp. 

843, 844 (E.D. Mo. 1988) (SBA guaranty under Missouri law); TriContinental Leasing Corp. v. Cicerchia, 664 F. Supp. 635, 638 (D. 

Mass. 1987) (New Jersey law); Shapex Corp. v. United States, 629 

F. Supp. 751, 752 (M.D. Ala. 1985) (SBA guaranty under Alabama 

law); United States v. Lang, 621 F. Supp. 1182, 1184 (D. Vt. 1985) 

(SBA guaranty under Vermont law); United States ex rel. Small 

Business Admin. v. Chatlin's Dep't Store, Inc., 506 F. Supp. 108, 

112 (E.D. Pa. 1980) (SBA guaranty under Pennsylvania law); 

Prescott v. Thompson Tractor Co., 495 So. 2d 513, 517 (Ala. 1986); 

Branan v. Eguico Lessors, Inc., 255 Ga. 718, 342 S.E.2d 671, 674 

(1986); Liberty Bank v. Honolulu Providoring, 65 Haw. 273, 650 

P.2d 576, 579-80 (1982); Jensen, 418 N.W.2d at 65, 67 (SBA 

guaranty under Iowa law); Shawmut Worcester County Bank v. Miller, 

398 Mass. 273, 496 N.E.2d 625, 629 (1986); Chemlease Worldwide, 

Inc. v. Broce, Inc., 338 N.:;;;W.2d 428, 433 (Minn. 1983) (New ~York 

law);. Borg-Warner. Acceptance Corp~ v. Watton, 215 Neb. 318, 338 

N.W.2d 612, 616 (1983); Grinde, 422 N.W.2d at 818. 

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Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 6 
We note also that while there are federal court decisions 

other than Lattauzio and New Mexico Landscaping holding that the 

standard SBA guaranty form waives the commercial unreasonableness 

defense under applicable state UCC provisions, many of these 

interpretations of state law have been rejected by the courts 'of 

the involved state. Compare,~, United States v. Meadors, 753 

F.2d 590, 594 (7th Cir. 1985) (SBA guaranty waives § 9-504(3) 

defenses under Indiana law) with McEntire v. Indiana Nat'l Bank, 

471 N.E.2d 1216, 1224-25 (Ind. Ct. App. 1984) (guarantors cannot 

waive § 9-504(3) defenses; distinguishes Indiana Article 3 cases 

cited in Meadors); United States v. Kukowski, 735 F.2d 1057, 1059 

(8th Cir. 1984) (SBA guaranty waives§ 9-504(3) defenses under 

North Dakota law) with Dakota Bank & Trust Co. v. Grinde, 422 

N.W.2d 813, 816-18 (N.D. 1988) (guarantors cannot waive§ 9-504(3) 

defenses); United States v. Jones, 707 F.2d 1334 (11th Cir. 1983) 

(per curiam) (SBA guaranty waives§ 9-504(3) defenses under 

Georgia law) with Branan v. Eguicor Lessors, Inc., 255 Ga. 718, 

342 S.E.2d 671, 674 (1986) (guarantor cannot waive§ 9-504{3) 

defenses). 

There are sufficient numbers of circuit level decisions 

holding that the SBA guaranty waives the commercial reasonableness 

defense, 3 despite near unanimity to the contrary in state cases 

3 In addition to those cases cited above, see United States v. 

H & S Realty Co., 647 F. Supp. 415 (D. Me. 1986), aff'd, 837 F.2d 

1 (1st Cir. 1987) (Maine law); United States ex rel. Small 

.Business . Admin. v •. Kur.tz, 525· F •.. Sc11pp. 734, 745-:-46 (E.D. Pa. 

1981), aff'd mem., 688 F.2d 827 (3d err.), cert. denied, 459 U.S. 

991 (1982) (California law); First National Bank v. Johnson, 553 

F.2d 559, 602 (9th Cir. 1977) (Montana law). Contra United States 

v. Willis, 593 F.2d 247 (6th Cir. 1979) (Ohio law); United States 

Continued to next page 

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Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 7 
not involving the SBA, that one leading commentator has suggested 

the result can only be explained by the presence of the SBA as 

plaintiff. See Clark, UCC Survey: Secured Transactions, 42 Bus. 

Law. 1333, 1343 n.38 (1987). Applying Kimbell Foods, the federal 

courts unanimously determine that federal law applies to SSA 

contract cases. They then easily conclude that the relevant 

state's UCC should serve as the applicable law, apparently in part 

because the uniformity of the state codes largely eliminates 

concerns about subjecting the SBA program to inconsistent state 

laws. What these courts appear not to consider is the possibility 

that different states will interpret identical UCC provisions 

differently, and thus reintroduce the problem of nonuniformity. 

In fact what has happened is that the majority of federal courts, 

purportedly interpreting state law, have adopted an interpretation 

of UCC § 9-501(3) that is directly contrary to that of virtually 

all state courts. 

This alignment of cases suggests the possibility that a 

majority of the federal courts are not adopting any particular 

state's law in these cases, however they characterize their 

decision, but are instead merely adopting the text of the UCC and 

attempting to create a uniform federal interpretation of its 

provisions. The propriety of such an approach must be determined 

by reference to Kimbell Foods. There the Supreme Court stated 

that in determining whether to incorporate state law as the 

Continued from previous page 

v. Conrad Publishing Co., 589 F.2d 949 (8th Cir. 1978) (North 

Dakota law); United States v. Terrey, 554 F.2d 685 (5th Cir. 1977} 

(Texas law). 

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Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 8 
federal rule of decision, we must consider (1) the need for a 

uniform federal rule, (2) whether "application_of state law would 

frustrate specific objectives" of the federal program, and 

(3) whether formulation of a federal rule would "disrupt 

commercial relationships predicated on state law." 440 U.S. · at 

728-29. 

The best argument for a uniform federal rule regarding waiver 

by guarantors of the commercial unreasonableness defense is that 

the same government SBA contract, utilized in all of the s~ates, 

should not have different meanings depending upon how different 

state courts would interpret uniform UCC sections. Although the 

majority of states do not allow waiver by guarantors, some states 

have not considered the question, and some, like New Mexico, do 

not follow the majority. 

The best argument for a uniform rule permitting waiver 

appears to be that such a rule avoids conflicts between the debtor 

and the guarantors as to what is a commercially reasonable 

disposition. Theoretically, at least, the debtor has an interest 

in urging the defense under UCC § 9-501(3), and if guarantors may 

enter into the action it simply complicates the matter. Of 

course, the debtor may be so insolvent that it cares not what the 

lender does to the collateral, in which case the guarantor would 

seem to be the real party in interest. But the guarantors of 

nearly all SBA loans will be individuals who are the principal 

stockholders of the debtor corporation .. It- would be no gre..at 

stretch to require them to assert their interest in the 

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Appellate Case: 85-1259 Document: 010110135891 Date Filed: 11/21/1989 Page: 9 
disposition of the collateral through the debtor rather than in 

their capacity as guarantors. 

Nevertheless, Kimbell Foods itself, whibh also involved a 

defaulting debtor under an SBA program, seems to have resolved 

this matter for us when it decl~red, 

"[w]e are unpersuaded that, in the circumstances 

presented here, nationwide standards favoring claims of 

the United States are necessary to ease program 

administration or to safeguard the Federal Treasury from 

defaulting debtors. . • . Incorporating state law to 

determine the rights of the United States as against. 

private creditors would in no way hinder administration 

of the SBA ••• loan program[]." 

Id. at 729. 

We hold that the state's interpretation of its UCC provisions 

should control. Because we are convinced the Kansas Supreme Court 

would hold that guarantors are to be treated as debtors under Kan. 

Stat. Ann. SS 84-9-504(3) and 89-9-501(3), and would not be 

permitted to waive the commercial unreasonableness defense, we 

REVERSE and REMAND for further proceedings consistent with this 

opinion. 

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