Opinion ID: 1132344
Heading Depth: 2
Heading Rank: 3

Heading: Surplus from Resale of the Vessel STARBURST

Text: When the Browns returned the STARBURST to the Bakers, $200,000 was owing on the promissory note. The Bakers then sold the STARBURST for $240,000. Claiming entitlement to this $40,000 surplus, the Browns sought summary judgment, arguing that the Uniform Commercial Code was applicable and that AS 45.09.503-05 supported their claim. The trial court denied this motion.
When the Browns said they could not make the payments, the Bakers voluntarily took the boat back. Was this a repossession within the terms of the Uniform Commercial Code, or a foreclosure action under the Ship Mortgage Act? The Browns argue that AS 45.09.104 [2] does not preclude the application of AS 45.09.503, AS 45.09.504 and AS 45.09.505 in the instant case. They further contend that the Ship Mortgage Act is inapplicable here even though there was a $200,000 preferred mortgage agreement. We agree. Generally, the U.C.C., as adopted in Alaska, applies to security interests in vessels ( see, e.g., Blumenstein v. Phillips Insurance Center, Inc., 490 P.2d 1213 (Alaska 1971)), unless the area has been preempted by federal law. The Ship Mortgage Act, 46 U.S.C. § 951, is such a preemptive statute. In J. Ray McDermott Co., Inc. v. Vessel Morning Star, 457 F.2d 815, 818 (5th Cir.1972), cert. denied, 409 U.S. 948, 93 S.Ct. 271, 34 L.Ed. 218 (1972), the court stated: The Ship Mortgage Act, when read together with the statutes delineating the judicial sale procedure in the federal courts forms a comprehensive procedure for the foreclosure of a preferred ship's mortgage, the sale of the vessel and any resulting deficiency adjudged against the debtor in personam. [3] In Reedsburg Bank v. Apollo, 508 F.2d 995 (7th Cir.1975), the court also described the exclusive jurisdiction of the federal court in regard to the Ship Mortgage Act. Only the jurisdiction to foreclose the lien of the mortgage and to determine its priority in relation to that of other liens in a proceeding in rem is made exclusive by the Act. (46 U.S.C. § 951). The Act confers federal jurisdiction over an action in personam in admiralty to obtain a deficiency judgment against the mortgagor (46 U.S.C. § 954(a); see also Supplemental Rules for Fed.R.Civ.P. for Certain Admiralty and Maritime Claims, Rule C(1)(b), but leaves the state court with concurrent jurisdiction over such an action. Cf. Madruga v. Superior Court, supra, 346 U.S. [556] at 560-561, 74 S.Ct. 298 [300-301, 98 L.Ed. 290]. There is no suggestion anywhere in the Act that issues other than those necessarily arising in the foreclosure action and issues concerning the enforceability of other maritime liens are within the exclusive jurisdiction of the federal court or must be adjudicated in the foreclosure action. Id. at 999 (emphasis added; footnote omitted). In the instant case, upon default there was no foreclosure action and therefore the Ship Mortgage Act is inapplicable. The Bakers have not directed the court to any other federal statute that would preclude the application of AS 45.09.503-.505 and we are unaware of any. Thus we conclude the state law is applicable here.
The Browns argue that according to AS 45.09.503 the Bakers repossessed the collateral (the boat) and that following repossession the Bakers had either the option (1) to resell the collateral which would entitle the Browns to any surplus (AS 45.09.504); or (2) to retain the collateral in satisfaction of the entire debt (AS 45.09.505). The Browns argue that the Bakers are precluded now from arguing that they took the boat back in satisfaction of the debt under AS 45.09.505 because the Bakers never gave written notice of that intent as required by the statute. The Browns assert that because the Bakers sold the boat, they are entitled to the surplus under AS 45.09.504. The Bakers argue that there was never a repossession or foreclosure of the marine mortgage and thus AS 45.09.101 et seq. is inapplicable. Under AS 45.09.503, the secured party may take possession of collateral upon default without judicial process. That statute states in part: Unless otherwise agreed, a secured party has on default the right to take possession of the collateral. In taking possession, a secured party may proceed without judicial process... . No judicial process was used in this case. In Minnesota State Bank of St. Paul v. Batcher, 263 Minn. 71, 116 N.W.2d 77, 81 (1962), and Greer v. Zurich Insurance Company, 441 S.W.2d 15, 27 (Mo. 1969), repossession is defined (by reference to Webster's Dictionary) as the act of resuming the possession of property when the purchaser fails to keep up payments on it. Here, the Bakers did resume possession of the property when the Browns could not make payments. Once repossession has occurred, the creditor has two possible remedies: AS 45.09.504 and AS 45.09.505. AS 45.09.504 reads in pertinent part: (a) A secured party after default may sell, lease, or otherwise dispose of any or all of the collateral in its then condition or following a commercially reasonable preparation or processing. Any sale of goods is subject to AS 45.02.101-45.02.725. The proceeds of disposition shall be applied in the order following to (1) 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 fees and legal expenses incurred by the secured party; (2) the satisfaction of indebtedness secured by the security interest under which the disposition is made; .... (b) If the security interest secures an indebtedness, the secured party must account to the debtor for a surplus, and, unless otherwise agreed, the debtor is liable for a deficiency. But if the underlying transaction was a sale of accounts, contract rights, or chattel paper, the debtor is entitled to a surplus or is liable for a deficiency only if the security agreement so provides. (c) Disposition of the collateral may be by public or private proceedings and may be made by way of one or more contracts... . Unless collateral is perishable or threatens to decline speedily in value... reasonable notification of the time and place of a public sale or reasonable notification of the time after which a private sale or other intended disposition is to be made shall be sent by the secured party to the debtor... . It is clear that under AS 45.09.504 the creditor retains the right to a deficiency unless otherwise agreed. Thus, the right to a deficiency may be waived. However, the debtor may not waive his right to a surplus if the creditor proceeds under AS 45.09.504. See AS 45.09.501(c)(1); 4 R. Anderson, Uniform Commercial Code § 9501:10, at 584 (1971); 69 Am.Jur.2d Secured Transactions § 582, at 472 (1973); 79 C.J.S. Supp., Secured Transactions § 100, at 116 (1974). [4] AS 45.09.505 provides in pertinent part: AS 45.09.505. Compulsory disposition of collateral; acceptance of the collateral as discharge of obligation... . (b) In any other case involving consumer goods or any other collateral, a secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of the proposal shall be sent to the debtor. ... If the debtor ... objects in writing within 30 days from the receipt of the notification ... the secured party must dispose of the collateral under AS 45.09.504. In the absence of this written objection, the secured party may retain the collateral in satisfaction of the debtor's obligation. (Emphasis added). Under AS 45.09.505 the creditor retains the collateral in satisfaction of the debt; however, the creditor must give written notice to the debtor that he intends to retain the collateral in lieu of resale in satisfaction of the debt. In the instant case, the Bakers did not give written notice of any intent to retain the collateral in satisfaction of the debt. Thus they are precluded from asserting that AS 45.09.505 is applicable here. [5] However, AS 45.09.504 as a matter of law applies to the facts of the instant case because after repossession the Bakers did sell the collateral. Therefore, the Browns are entitled to the surplus, if any, after deductions for the Bakers' set-off claims for vessel damages, repairs, or other necessary and related expenses incurred in the repossession and sale of the vessel. [6] REVERSED and REMANDED for further proceedings in accordance with this opinion.