PETER A. DULAN, JR., Plainitff andAppellant,

Defendant and Respondent.

Appeal from: DistrictCourtof the ThirteenthJudicialDistrict, Inand for che County of Yellowscone, Tile Ifonorabie CharlesLuedke, Judgepresiding.

Counsel of Record: ForAppeliant: TerryL. Seiffert, Billings, Montana For Respondent: K. Robert Foster, Lewistown, Montana

Submitted: January 18, 1983 Decided: March 24, 1983

Filed: 

## MAR

## 2

## 41983

@ - ---



### -- ClerkMr. Chief JusticeFrank I. Haswell delivered the Opinion of the Court. Appellant bought Shanon Studios, a Billingsphotography business, in 1964 and in 1966 incorporated under Shanon Studios, Inc. On June 2, 1971, he executed a promissory note for $7,500 with respondent and as collateral assigned the stock of the corporation. On May 22, 1972, appellant agreed to sell Shanon Studios, Inc., toGerald L. Wolfe for $18,000. his agreement contained the following paragraph: "4. Unless otherwise agreed in writing, upon failure of Buyers to make payments within 90 days of the dates due hereunder, allamounts paid by Buyers on the above purchase price shallbe retained by Sellers as liquidated damages, and this agreement shallthereupon become void, if saidBuyers receivewritten noticeof 

### the failuretomake saidpayment duebefore

-. the said 90thdav. Buvers havina all rights and obligations accruing from said stock until said event occurs, if at all." (Emphasisadded.) Also, on May 22, 1972, the buyer and seller executed an

escrow agreement which appointed the respondent as escrow agent and included the followingprovision: "Upon receiving notice from Peter A. Dulan, Jr., that any other party here undersigned has failed to perform 

### its part of theagreementmentioned above, as set out in Paragraph Number Four, page five of said Agreement, theEscrowAgent at the expiration of ten (10) days from the date of receiving said notice, shall transfer allstockcertificatesand documents held inthisescrow toPeter A. 

## ---- --------- Dulan, Jr." (Emphasisadded.) No representative of the respondent signed this escrow agreement. On July 22, 1972, appellantexecuted a renewal promissory note for $7,500. The collateralwas listed as "Assign. of note of Shanon Studios stock payments per scheduleattached." On October 17, 1972, Wolie, the appellant, and the vlce president of respondent executed an escrow recelpt on the standard form wherein the respondent acknowledged receipt of the agreement to sell and the shares of stock. The prior escrow agreement was not listed as being part of the contents of the escrow. The October 17 escrow also contained the following: "Credit payments to: Peter A. Uulan note." Thus, the arrangement was that Wolfe made payments to respondent to discharge his obligations under the agreement to sell the stock and these payments were in turn directly applied to plaintiff's obligation under the $7,500 renewal promissory note. Early in 1973 pursuant to correspondence between the parties, appellant signed a financing statement granting respondent a security interest inthe stock held inescrow. Respondent filed this document with the secretary of state

on March 14, 1973. Originally, assignment of the stock was listed on the actual stock certificate. The bank feltthat the assignment should be made on a separatedocument. This transpired even though on July 22, 1972, appellant executed

a renewal promissory note inwhich thecollateralwas listed

asthe assignment of thenote fromWolfe forhispurchase of thebusiness. The assignment of the stock and the assignment of the note evidence

## twodifferent types of collateral. On May 6, 1974, respondent sent appellant a letter advising appellant that Wolfe had not made the Pliarch and Aprll payments. Consequently, appellant's payments on his note torespondent were delinquent inthe amount of $558.88. The total amount stlll owing on the note was $1,427.44. OnAugust 21, 1974, respondent sentanother lettertoappellant by certifiedmail which statedthe following: "This letter 

### is to advise you that a demand 

### is being placed on you in the amount of $1,499.38 whicn 

### is relative to your note of May 22nd, 1972, in the original. amount of $7,500.

### GO. This includes principal of $1,427.44 and interest of $71.94. This pays interest through August 31st, 1974, and if not received by that 

### ---- date

### wewillthenproteed against the stock certificateconsistingof 4995 sharesof Shanon Studio stock which you assigned totheMontana NationalBank." (Emphasisadded.) The record indicates that appellant received this letter. lie responded with 

### a letter dated September 10, 1974, suggesting methods by which Wolfe could 

### meet his payment obligations. Appellant testified that if these suggestions proved ineffective, the respondent should contacthim. On October 3, 1974, respondent sent another letter to appellant by certified mail to the address the previous letter had been sent to, advising appellant that the stock would be advertised and sold on October 17, 1974. The proceedswould be applied toappellant'spast-due loan. The record shows thatthisletterwas returned unclaimed. There 

### is con£1 icting testimony regarding whether the appellant notified therespondent of hischange of address. Appellant testified that he had notified an attorney with the firm thatrepresented therespondent. On about November 14, 1974, the stock was sold to Wolfe, the same person who was buying the stock under the original contract, for the remaining amount due on appellant's note to respondent ($1,590). There was about $8,500 due on the original contract between Wolfe and appellant.Appellant indicated at trial that had he known the stock would be sold to satisfythe amount remaining on hisnote he would havepaid it infull. On December 7, 1977, appellant filed a complaint alleging that respondent breached 

### its fiduciary duty to appellant by fraudulently foreclosing on the stock without notice of such foreclosure. Appellant sought $6,000 in actual damages and $15,000 in punitive damages. Respondent answered denying any breach of fiduciary relationship and alleging that appellant was not entitled to punitive damages. The District Court dismissed appellant's complaint, finding that respondent acted in good faith in notifying appellant of the foreclosureand sale. From thisdismissal, appellantbrings thisappeal. Three issuesarepresented on appeal: 1. Did therespondent breach a fiduciarydutywhen it foreclosed on the stock? 2. Did the respondent giveproper notice of the sale of the stock? 3. Was the foreclosure sale conducted in a commerciallyreasonablemanner? The appellant contends first that the respondent breached 

### its fiduciary duty to the appellant when it foreclosed on the stock held in escrow. An escrow agent is a fiduciary and cannot breach this confidence to act for its

own advantage. Appellant asserts this breach 

### is clear as Wolfe bought the stock in the foreclosure sale for the amount in default. This was substantially less than the amount remaining on the contract between appellant and

### Wolfe. The respondent contends that it 

### acted completely within the statutory authority vested ina secured creditor when a debtor defaults. A 

### security interest is 

### defined as an interest in personal propertywhich securespayment orperformance of an obligation. Section30-1-201(37), MCA. A 

### securityinterest attaches binding the creditor and the debtor when there is



### an agreement between the parties that it 

### attach, value is 

### given to the debtor, and the debtor has rights in the collateral. Section 30-9-204(1), MCA. 

### Inthepresent case the security interest attached on June 2, 1971, when the stock was pledged. There 

### was clearly an agreement between the parties that the securityinterest attachtothe stock, the appellant

### was given creditor an extension thereof, and the appellant owned the stock when attachment occurred. Further, the security interest continued in the collateral notwithstanding the sale to Wolfe. Section 30-9-306 (2) MCA. 

### We 

### alsonote that the security agreement became binding before the parties entered intothe escrow arrangement. The securityinterestattachedonJune 2, 1971. Theparties entered into the escrow agreement on October 17, 1972. Consequently, the securityinterestwould remain attachedto the stock intheescrowaccount. Thus, we hold the security interest had attached and remained sowhile the stockwas 

### inescrow. Upon defaultthe respondent actedwithin its 

### statutoryrightstoforecloseon the collateral to satisfy appellant's obligation. Section 30-9-504, MCA. 

### The escrow arrangementwas a 

### convenientmeans tohave

### 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 collateral when the debtor defaults. Moreover, the fiduciary duties respondentowed 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 instructiondid not bind the respondent. Itwas 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 acknowledged 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 privatesale or other intended disposition is to be made shall be sent by the secured party to the debtor 

# .. ." (Emphasis added.) Section 30-1-201(26), MCA, defines notice as: 

# ".



# . . taking such steps asmay be reasonably required to inform the other in ordinary coursewhether or not such other actually comes to know of it. A person 'receives' noticeor notificationwhen:

"(b) it 

### is duly delivered 

# ... at any other place held out by him asthe place for receipt of such communication." In James Talcott, Inc. v. Reynolds (1974), 165Mont. 404, 529 P.2d 352, we specifically held that according to the UCC there 

### is no requirement that the debtor receive actual notice. It requires the creditor to take reasonable stepstoassure that thedebtor 

### is notified. We hold that notice of the sale of the stock was proper. Notice was sent to the appellant. Further, the steps taken by the respondent were those reasonably required to notify the appellant of the foreclosure. Also, according tothe UCC, the appellant received notice of the sale when it was delivered to the address the August 21, 

### 1974, letter was sent. By responding to that letter, the appellant held the address of delivery out as a place for receiving com~nunications. Finaily, the steps taken by the respondent to notify the appellant were successful in giving actual notice. The August letter informed appellant of the respondent's intentions to dispose of the collateral to satisfy the appellant's obligation. Finally, the appellant contends the sale of the collateral was not conducted in a commercially reasonable

### manner as mandated by section 30-9-504(3), MCA. 

### The respondent merely sold the stock to the original purchaser for an amount substantiallylessthan its

### worth and the sale

was not advertised. The respondent asserts that the price itself does not warrant a holding that a particular sale was commercially unreasonable. The appellant 

### must prove that the manner 

### of the salewas commercially unreasonable. Under the UCC, 

### every aspect of the foreclosure proceedings, including method, manner, time, place and terms, 

### must be commercially reasonable. Section 30-9-504(3), MCk. The fact that 

### a better price could be obtained at a different sale or a different method or manner of disposition does not establish that the salewas commercially unreasonable. Section30-9-507(2), MCA. This 

### Court interpreted these two sections of the UCC 

### intheTalcottcase, supra. We held that the reasonableness of the sale is not determined by price but the manner 

### in which the salewas conducted. In other words, if the sale is 

### considered commercially reasonable, then the price 

### is reasonable. However, Professors White and Summers in 

### their treatise on the UCC 

### place some importance on the price that

was actually received for the collateral. They state:

ll. 

# .

# . Notwithstanding the statement 

### in 507-(2) that low resale price alone is 

### not enough, the crucial issue which one gleans from the 'method, manner, time1 language and from the several cases interpreting 9-504(3) is 

### just 

### that--was the price sufficient? The debtor who asks a court to ignore 9-507(2)

### probably expects too much, but the cases suggest that given an unusually low resale price little more is needed for the courts to find the sale commercially unreasonable

# ... " White and Summers, Uniform Commercial Code 2d Ed., § 

### 26-11 at 1116

(1980). Some recent cases recognize that the resale price should be a factor indetermining the commercial reasonableness 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 adebtor affirmative relief under 9-507(1), certainly such a discrepancy, if substantial, is relevant to a determination of whether a challenged salewas

'commercially reasonable'. [citingcases] The evidence here established that the price received for the goods sold by the plaintiff [secured party] was substantially less than both theprice originally paid for them by G.F.&M. and theprice which the purchaser of the assets subsequently 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 theparameters 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 

### fairmarket value of the collateral. In this case, besides the evidence regarding thevalue 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 disposed. The appellant assertedthattheassetsof the corporation were 

### valued at 

### $22,279.79 the year before the saleof the collateral. However, there was also testimony that Wolfe did not do well with the business after the appellant sold it 

### to him. Moreover, Wolfe filed corporate bankruptcy approximately two and one-half yearsafter it

### was sold. Thus, we hold that the appellant did not prove that the salewas conducted ina commerciallyunreasonable manner pursuant 

### tosection30-9-504(3), MCA. We 

### further hold that there is 

### substantial evidence to support the lower court's conclusion that appellant didnotmeet 

### hisburden of establishingthatthe stockwas worth anamount greater than that forwhich it

### was sold. Affirmed. 

# =344nat 

# wcw&@Jp Chief Justice

We concur:

--.+,"



# .*As

,-x, J 

### Justices