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, JUL 2 4 1990 

Appellants 

-v- GLERK OF SUPREME COURT 

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, 1990 
Justice 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 that plaintiff and counter-def endant Walen ttBudll Lilly s 

sale of repossessed property 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 adjustment by way of set off as to the deficiency 

judgment . We affirm. 

Three issues are presented for review: 

1. Did the trial court err in concluding that the Notice 

of Repossession was defective? 

2. Did the trial court err in concluding that the sale 

of repossessed collateral was 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's Trout Shopv1 

became known nationally and internationally. With this reputation 

the business prospered, grossing over $600,000 in 1981. In January 

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 deposits 
5. Accounts receivable 

6. Goodwill, consisting of Bud Lillyls 

Trout Shop, all guide licenses, all 

outfitters1 licenses, 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 

interest at the rate of 12% per annum was to be paid over a twentyyear period in monthly 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 a promissory note for the balance of the contract 

along with a security agreement and financing statements. The 

financing statements were filed with the Secretary of State and 

subsequently the statements were continued. 

Within a few months, the Terwilligers and Bonnetts experienced 

management differences. In October 1982, the Terwilligers bought 

out the Bonnettsl interest in the business for $34,100. James 

Bonnett testified that the decision to sell out was purely 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 from Lilly. 

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 balance 
on 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 the business back in March, 1987. On March 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 $60,000 was contemplated. either party made 

objection to the sale. However, the notice made no mention of the 

sale of the name "Bud Lillyls Trout Shop, Inc.,I1 the goodwill, the 

covenant not to compete, the mailing 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, 

asserting as an affirmative defense that Lillyts sale to Criner was 

commercially unreasonable because proper notice was not given that 

all assets would be sold, and Lilly was therefore not entitled to 

a deficiency judgment. 

Trial was had before Judge Davis, sitting without a jury. The 

Terwilligers, who filed for relief under Chapter 7 of the U.S. 
Bankruptcy Code, were dismissed from the suit by stipulation. The 

trial court found that Lillyls sale to Criner was commercially 

reasonable although flawed by a procedural technicality of proper 

notice. The trial court concluded Lilly was entitled to a 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, 

sent Notice of Default to both the Bonnetts and Terwilligers after 

they missed two monthly 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 Repossession which 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. James 
Krinner [sic] has offered to purchase said 

property for the sum of $60,000.00. You are 

requested to notify the undersigned's counsel, 

Michael J. Lilly, at 222 East Main Street, 

Suite 301, Bozeman, Montana, 59715, of your 

objection to said purchase of inventory, 

fixtures and equipment within 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 the proposed sale to Criner of the covenant not to compete, the 

goodwill, the name "Bud Lillyls Trout 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 

Lilly made 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 

seller and buyers, at $145,000! ! Bonnett knew 

of his potential liability for a deficiency. 

It was incumbent upon him to at the very least 

make an inquiry about a $145,000 asset. 

The Uniform Commercial Code addresses notice requirements for 

a sale at 5 30-9-504(3) (a), MCA: 

Disposition of the collateral may be by 

public or private 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 party 
to the debtor. 

This Court, quoting from the official U.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 interests by taking part in the sale or other disposition if 

they so desire." Wippert v. Blackfeet Tribe (1985), 215 Mont. 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 

requirements by including the name of the prospective buyer and the 

intended selling price. Moreover, the notice met its stated 

purpose, that is, to give the Bonnetts an opportunity to protect 

their interests by taking part in the sale if they so desired. 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. 

The promissory note executed by the Bonnetts and Terwilligers 

was secured by a security agreement. The security agreement 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 

statement were the licenses, covenant not to compete, 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 Sales Agreement. 

The Uniform Commercial Code specifies the conditions necessary 

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 Sales Agreement does not contain a description of 

the licenses, covenant not to compete, mailing list, goodwill, or 

name as collateral it fails to meet 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. Sellerls Security. It is understood 

and agreed that Buyer shall execute a 

promissory note and Security Agreement in 

favor of Seller and its assigns for the unpaid 
balance of the purchase price. Said Security 

Agreement shall designate the inventory and 

fixtures, and any additions thereto, as 

collateral for the unpaid purchase price. . . (Emphasis added.) 

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. 

The trial court's finding that the notice was flawed was erroneous. 

In light of the fact that Lilly does not contest the trial court's 

decision to effect an adjustment by way of a setoff, the error was 

harmless. 

Issue 2: Did the trial court err in concluding 

that the sale of repossessed collateral was 

commercially unreasonable? 

The trial court found that the Bonnetts' evidence that the 

Criner sale was not commercially reasonable was not persuasive. 

The Bonnetts presented two owners of fly fishing businesses in West 

Yellowstone who gave their expert opinions that the Bud 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 Lillyts Trout Shop it was in such a state 

that Gregory thought $60,000 was too much to pay. The trial court 

noted neither of Bonnetts' experts knew the distressed state of Bud 

Lilly's Trout Shop in April, 1987; only Lilly and Criner knew that 
in less than six years the business, through bad management and 

nonmanagement, had declined from a $600,000 annual gross income 

business to a point where the buyers could not even make relatively 

modest payments. The court found that under the circumstances the 

sale to Criner was commercially reasonable. 

Lilly, as the secured party, carries the burden of proving 

that his disposition of the collateral was 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 

Court will not disturb the findings of the trial court unless such 

findings are I1clearly erroneous. 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. 

Bonnetts were apprised of the private sale, including the identity 

of the buyer and the purchase price, well in advance of the sale. 

Bonnetts made no objection to the private 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 itself 
establish 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 Natll Bank 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 nonetheless be considered to be within 

the parameters of 5 30-9-504(3), MCA, and that the burden of 

proving that the price received was less than the fair market 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 

its burden. The Bonnetts were advised of the private sale yet made 

no objection. As to Lillyls failure 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 the price Lilly received for the business, 

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 agree with the trial court that Bonnetts' evidence that the 

Criner sale was not commercially reasonable was not persuasive. 
We hold that the Bonnetts did not prove 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 Criner was 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 (date of first 

Criner payment) (108 days) 

$220,700.85 + (108/365) ($220,700.85) (. 12) 228,573.24 
Credit 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 (date of 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