No. 90-099 IN THE SUPREME COURT OF THE STATE OF MONTANA

WALEN F. LILLY, Plaintiff and Respondent,

FRED TERWILLIGER, CLARA TERWILLIGER, JAMES BONNETT, and DEBORAH BONNETT, Defendants and Appellants, and JAMES BONNETT and DEBORAH BONNETT, Defendants and Counter-plaintiffs, 

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## 41990 Appellants

-v- GLERKOFSUPREMECOURT STATE OF MONTANA WALEN F. LILLY, Counter-defendant/Respondent.

APPEAL FROM: District Court of the Eighteenth Judicial District, In and for the County of Gallatin, The Honorable Frank Davis, Judge presiding.

COUNSEL OF RECORD: For Appellant: Pierre L. Bacheller; Billings, Montana For Respondent: Donald E. White; Bozeman, Montana

Filed: Submitted on Briefs: June 7, 1990 Decided: July 24, 1990Justice John C. Harrison delivered the Opinion of the Court.

James and Deborah Bonnett, defendants and counter-plaintiffs below, appeal the judgment issued by Judge Frank Davis, sitting in the Eighteenth Judicial District, Gallatin County. The District Court held thatplaintiffand counter-defendantWalen ttBudll Lilly s sale of repossessedproperty was commercially reasonable and Lilly

was entitled to a deficiency judgment,but, because Lilly's notice of the sale to the Bonnetts did not comply with the strict requirements of foreclosure on collateral statutes, the District Court effected an adjustmentby way of set off as to thedeficiency judgment

# . We affirm. Three issues are presented for review: 1. Did thetrial court err in concludingthat theNotice of Repossession was defective? 2. Did the trial court err in concluding that the sale of repossessed collateralwas commercially reasonable? 3. Did the trial court err in calculating the dollar amount to which Lilly was entitled by judgment? In 1952, Walen ttBudtt Lilly started a fishing shop in West Yellowstone, Montana. Over the years "Bud ~illy'sTrout Shopv1 became knownnationallyand internationally. With this reputation thebusiness prospered, grossing over $600,000 in 1981. InJanuary of 1982, Bud Lilly and his family sold the shop to two couples, Fred and Clara Terwilliger and James and Deborah Bonnett, for $275,000, allocated as follows: 1. Inventory 2. Fixtures and Physical Assets 3. Covenants not to compete 4. Guide deposits5. Accounts receivable 6. Goodwill, consisting of Bud Lillyls Trout Shop, all guide licenses, all outfitters1licenses, all special use permits for the State of Montana, State of Idaho and Yellowstone National Park and the 1982 mailing list $ 145,000.00 TOTAL Each couple contributed $25,000 for a total down payment of $50,000. The balance of the purchase price of $225,000 plus interestat therate of 12%per annumwas tobepaid over a twentyyear period inmonthly installments of $2,477.52. An addendum to the contract raised the monthly payments to $2,599.62 to account for the interest accrued from the date the parties entered the agreement to the date of the first payment. The Terwilligers and Bonnetts executed apromissory note for thebalance of the contract along with a security agreement and financing statements. The financing statements were filed with the Secretary of State and subsequently the statementswere continued. Within a fewmonths, theTerwilligersand Bonnettsexperienced management differences. In October 1982, the Terwilligersbought out the Bonnettsl interest in the business for $34,100. James Bonnett testified that thedecisionto sell outwaspurely monetary because the business could not support both the Bonnetts and Terwilligers. At the time that the Terwilligers bought them out, the Bonnetts attempted to obtain a release of liability fromLilly. Lilly refused to grant the Bonnetts a release from liability without a pledge by the Terwilligers of additional collateral or provision of an alternative means of securing the unpaid balanceon the promissory note. Terwilligers stopped making payments in the fall of 1986. Lilly sent Notice of Default on December 9, 1986 and Notice of Acceleration on January 27, 1987 to both the Bonnetts and Terwilligers. Additionally Bud's son, Michael Lilly, a Montana attorney,wrote the Bonnetts a letter on February 2, 1987 stating that Fred Terwilliger had not responded to either notice and reminding the Bonnetts they had not been released from their obligation to Bud Lilly. Bud Lilly took thebusiness back inMarch, 1987. OnMarch 30, 1987, 

### illy sent a Notice of Repossession to both couples, informing them that a sale of I1inventory,fixtures,and equipmentu to James Criner for $60,000was contemplated. either party made objection to the sale. However,the noticemade nomention of the sale of the name "Bud LillylsTrout Shop, Inc.,I1the goodwill, the covenant not to compete,themailing list,and the outfitter's and guide's licenses. Lilly sold the business to Criner for $60,000. Lilly then filed a complaint on May 26, 1987 in an effort to collect the amount remaining unpaid by the Bonnettsl and Terwilligers' breach of contract. The defendants answered, assertingasanaffirmative defense thatLillytssaleto Criner was commercially unreasonablebecause proper noticewas not given that all assets would be sold, and Lilly was therefore not entitled to

a deficiency judgment. Trialwashad beforeJudge Davis, sitting without a jury. The Terwilligers, who filed for relief under Chapter 7 of the U.S.Bankruptcy Code,were dismissed from the suitby stipulation. The trial court found that Lillylssale to Criner was commercially reasonable although flawed by a procedural technicality of proper notice. Thetrial court concluded Lillywas entitled toa judgment of $217,000 less an offset of $145,000 for the value of the business1 goodwill, for an aggregate judgment of $72,000 with interest. Defendants James and Deborah Bonnett now appeal from this judgment

# . Issue 1: Did the trial court err in concluding that the notice of repossession was defective? Lilly, in accordance with the terms of the sales agreement, sentNotice of Default toboth the Bonnetts and Terwilligersafter theymissed twomonthly payments in the fall of 1986. When neither of the buyers cured the default, Lilly, again according to terms of the agreement, sent them both a Notice of Acceleration which provided the Terwilligers and Bonnetts fifteen days to pay the entire balance owing of $220,700.85. Receiving no response to either the Notice of Default or the Notice of Acceleration, Lilly finally sent each buyer a Notice of Repossessionwhich stated: PLEASE TAKE NOTICE and you are hereby notified that on the 21st day of March, 1987, the undersigned took possession of all inventory, fixtures and equipment conveyed by that certain Sales Agreement dated the 30th day of January, 1982, wherein The Trout Shop, Inc. is named as seller and you are named as buyer, and pursuant to Section 30-9-502 MCA. The sale of said inventory, fixtures,and equipment is contemplated by the undersigned pursuant to Section 30-9-504 MCA. JamesKrinner [sic] has offered to purchase said property for the sum of $60,000.00. You are requested tonotify theundersigned's counsel, Michael J. Lilly, at 222 East Main Street, Suite 301, Bozeman, Montana, 59715, of your objection to said purchase of inventory, fixturesand equipmentwithin five (5)days of the date of this notice. DATED this 30th day of March, 1987. /s/ WALEN F. LILLY The Bonnetts contend that they made no objection to the proposed sale because the Notice of Repossession made no mention of theproposed sale to Criner of the covenant not to compete, the goodwill, the name "Bud LillylsTrout Shop, Inc.

### ,"licenses, and mailing list. The notice advised only that Lilly contemplated a sale of the l'inventory,fixtures and equipment1'for $60,000.00. The trial court found that Lillymade little or no effort to find a buyer other than Criner, but he advised Bonnett as to that potential, e.g.

### , a sale of only the "inventory, fixtures and equipment." There was no evidence that Bonnett would have objected to the proposed sale as being commercially unreasonable, or any inquiry as to what was to be done with the principal asset--the goodwill, valued in 1982 by both sellerand buyers, at $145,000! ! Bonnett knew of his potential liability for a deficiency. Itwas incumbent uponhim to at thevery least make an inquiry about a $145,000 asset. TheUniform Commercial Code addresses notice requirements for

a sale at 5 30-9-504(3) (a), MCA: Disposition of the collateral may be by public orprivate proceedings

# ...reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured partyto the debtor. This Court, quoting from the officialU.C.C. comment to 5 30- 9-504,MCA, previously recognized that the purpose of the notice requirement is to ensure that "[plersons entitled to receive it will have sufficient time to take appropriate steps to protect their interestsby taking part in the sale or other disposition if they so desire." Wippert v. Blackfeet Tribe (1985), 215Mont. 85, 89, 695 P.2d 461, 464. The notice that Lilly sent to the Bonnetts met all the requirements of 5 30-9-504, MCA, giving the Bonnetts reasonable notification of the time after which the private sale was to have been made. In fact, the notice went beyond the statutory requirementsby includingthename of theprospective buyer and the intended selling price. Moreover, the notice met its stated purpose, that is, to give the Bonnetts an opportunity to protect their interestsby taking part in the sale if they sodesired. As the trial court noted, Bonnetts knew of their potential liability for a deficiency and should have inquired about the $145,000 goodwill asset when they received the Notice of Repossession. Thepromissory note executed by the Bonnetts and Terwilligers

was securedby a securityagreement. The securityagreement listed inventory, fixtures and equipment as the collateral pledged. The financing statement filed with the Secretary of State listed the covered collateral as "All inventory and fixtures, and additions thereto." Nowhere in either the security agreement or financing statementwere the licenses, covenantnot tocompete,mailing list,goodwill, or the name "Bud Lillyls Trout Shopw listed as collateral. The trial court agreed that the licenses, covenant not to compete, mailing list, goodwill and name were not specifically secured by the security agreement and financing statement. The trial court did find, however, that such property was secured collateral under the SalesAgreement. TheUniformCommercialCodespecifiestheconditionsnecessary to a security interest: (1) 

# . a security interest is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless: (a) the collateral is in the possession of the secured party pursuant to agreement or the debtor has signed a security agreement which contains a description of the collateral (b)value has been given; and (c) the debtor has rights in the collateral. Section 30-9-203(1), MCA. Because the SalesAgreement does not contain a description of the licenses, covenant not to compete, mailing list, goodwill, or

name as collateral it fails tomeet the requirements of subsection

(1)(a), of S 30-9-203, MCA, for creating a security interest. A provision in the Sales Agreement clearly identifies Lillyls security as the seller: 9. SellerlsSecurity. It is understood and agreed that Buyer shall execute a promissory note and Security Agreement in favor of Seller and its assigns for the unpaidbalance of the purchase price. Said Security Agreement shall designate the inventory and fixtures, and any additions thereto, as collateral for the unpaid purchase price. 

# ..

(Emphasisadded.) The licenses, covenant not to compete,mailing list, goodwill, and name "Bud Lilly's Trout Shopw are not collateral under the U.C.C. and are, therefore,not subject to the notice requirements of 5 30-9-504(3) (a), MCA. We find that the Notice of Repossession was not defective. Thetrial court's findingthat thenoticewas flawedwas erroneous. In light of the fact that Lilly does not contest the trial court's decision to effect an adjustmentby way of a setoff, the error was harmless. Issue 2: Did the trial court err in concluding that the sale of repossessed collateral was commerciallyunreasonable? The trial court found that the Bonnetts' evidence that the Criner sale was not commercially reasonable was not persuasive. The Bonnettspresented two owners of fly fishing businesses inWest Yellowstone who gave theirexpert opinionsthat theBud Lilly Trout Shop was worth more than the $60,000 Criner paid for it. Lilly presented testimony from his son, Gregory, who operates a similar business in Bozeman. Gregory testified that although he had earlier expressed an interest in the business, at the time his father repossessed Bud LillytsTrout Shop it was in such a state that Gregory thought $60,000 was toomuch topay. The trial court noted neitherof Bonnetts' expertsknew thedistressed stateof Bud Lilly's Trout Shop in April, 1987; only Lilly and Criner knew thatin less than six years the business, through bad management and nonmanagement, had declined from a $600,000 annual gross income business toa point where thebuyers could not evenmake relatively modest payments. The court found that under the circumstances the sale to Crinerwas commercially reasonable. Lilly, as the secured party, carries the burden of proving thathisdispositionof thecollateralwas commercially reasonable. Bank of Sheridan v. Devers (1985), 217 Mont. 173, 176, 702 P.2d 1388, 1390 (quoting Farmers State Bank v. Mobile Homes Unlimited (1979), 181 Mont. 342, 347, 593 P.2d 734, 737). However, this Courtwill not disturb the findings of the trial court unless such findings are I1clearlyerroneous. Rule 52, M.R.Civ.P. ; Farmers State Bank, at 350, 593 P.2d at 738. Bonnetts argue that the sale was commercially unreasonable because Lilly held a private rather than a public sale, Lilly did not advertise the sale or solicit bids, Lilly did not have the business appraised, and the $60,000 sale price was inadequate. Bonnettswere apprised of theprivate sale, including the identity of the buyer and the purchase price, well in advance of the sale. Bonnettsmade no objection to theprivate sale after receiving the notice. The U.C.C. dictates that every aspect of the disposition of collateral, including the method, manner, time, place and terms must be commercially reasonable. Section 30-9-504(3)

### , MCA. The fact that a better price could have been obtained by a sale at a different time or in a different method does not in itselfestablish that the sale was commercially unreasonable. Section 30-9-507(2)

### ,MCA. This Court has previously interpreted these two sections to

mean that the "reasonableness of the sale is not determined by price but the manner in which the sale was conducted. In other words if the sale is considered commercially reasonable, then the price is reasonable.I1 Dulan v. Montana NatllBank of Roundup

(1983), 203 Mont. 177, 185, 661 P.2d 28, 32. After some discussion the Dulan Court went on to state that a discrepancy in price can nonethelessbe considered to be within the parameters of 5 30-9-504(3), MCA, and that the burden of proving that theprice receivedwas less than the fairmarket value of the collateral falls on the complaining party. Dulan at 186, 661 P.2d at 32. The evidence of the complaining party herein falls short of itsburden. The Bonnetts were advised of theprivate sale yetmade

no objection. As to Lillylsfailure to advertise, solicit bids,

or secure an appraisal, testimony indicated that because the fishing season was imminent, it was important for Lilly to act quickly. Finally,as to theprice Lilly received forthebusiness,

as the trial court noted, the state of business was such that the Terwilligers could not even make relatively modest payments. In light of this evidence, the $60,000 price Criner paid is reasonable. We agreewith the trial court thatBonnetts' evidence that the Criner sale was not commercially reasonable was not persuasive.We hold that the Bonnettsdid notprove that the sale was conducted in a commercially unreasonable manner pursuant to 5 30-9-504(3), MCA. There is substantial evidence to support the trial court's conclusion that Bonnett did not meet his burden of establishing that Bud Lillyls Trout Shop at the time of sale to Crinerwas worth

more than the price for which it was sold. Issue 3: Did the trial court err in calculating the amount to which Lilly was entitled by judgment. The trial court concluded that the amount of deficiency judgment should be determined as follows: Amount due on unpaid portion of promissory note: $217,000 Less offset for price of goodwill: ($145,000) Total amount of deficiency judgment: $72,000 Bonnetts take issue with the trial court's calculations in two respects. First, Bonnetts assert that the amount remaining unpaid

on the promissory note as reflected in the escrow ledger is $214,000 rather than $217,000. Secondly, Bonnetts suggest that the court failed credit them for the amount Lilly received for resale of the assets to Criner. Lilly notes that he does not agree with the offset for goodwill, but elected not to appeal that issue. The amount of the deficiency judgment appears to have been arrived at as follows: Amount due 01-27-87 $220,700.85 Amount Due on 04-13-87 (dateof first Criner payment) (108 days) $220,700.85 

### + (108/365) ($220,700.85) (.12) 228,573.24Credit for First Criner Payment ($20,000.00) (20,000.00) Amount Due After First Criner Payment 208,573.24 Amount Due on 10-01-87 (dateof second Criner payment) (170 days) $208,573.24

## + (170/365) ($208,573.24) (.12) 220,230.48 Credit for Second Criner Payment ($10,000.00) (10,000.00~ Amount Due on 10-01-88 (date of third Criner payment (365 days) $210,230.48

### + (365/365) ($210,230.48) (.12) 235,458.13 Credit for Third Criner Payment ($30,000.00) (30,000.00) Total Due After Third & Final Criner Payment 205,458.13 Total Due on 04-21-89 (171 days) $205,458.13 

## + (171/365) ($205,458.13) (.12) 217,008.81

Thus, the price paid by Criner has been credited and $217,000 the correct starting figure. We find no error in the trial court's calculations. We affirm. 

# Ltbv-~uT?h Justice

We concur:

# A& J Justices