Court Opinion

ID: 9790435
Source: CourtListenerOpinion
Date Created: 2023-08-31 01:52:50.563796+00
Date Added: 2024-06-11T08:47:55.200578
License: Public Domain

BURNETT, Judge,
dissenting.
The dispositive issue — indeed, the only issue remaining after the first appeal in this case — is whether CIT Financial Services has acted in a commercially reasonable manner as required by I.C. § 28-9-504(3). To this question the district court answered “yes.” My colleagues have voted to affirm, yet they do not discuss the reasonableness issue directly. For reasons set forth below, I respectfully dissent.
I
Begging the reader’s indulgence, I will recount briefly the narrative and procedural facts framing the issue of commercial reasonableness. A retailer (Herb’s Indoor RV Center) sold a trailer to buyers (Rand and Deborah Hughes) who borrowed money from a commercial lender (CIT). The lender perfected a security interest in the trailer and obtained the retailer’s guaranty that the loan would be repaid. Because the trailer was a “vehicle” governed by the title provisions of title 49, chapter 5, of the Idaho Code,, the lender also received the certificate of title. See I.C. §§ 49-505, 510.
The buyers later found defects in the trailer, stopped making payments on the loan, and sued for rescission. Their suit was settled. Although the terms of the settlement are not spelled out in the record, the result seems to be that any claim or obligation of the buyers has been resolved; but the retailer’s obligation under the guaranty has not been extinguished.
While the buyers’ suit was pending, the retailer made several installment payments to the lender pursuant to the guaranty. Eventually, however, the retailer stopped paying and demanded that the lender repossess the trailer. This demand, of course, was contrary to the guaranty agreement, which provided unconditionally *190that the lender could look to the retailer for payment of the debt without first trying to collect directly from the buyers or selling the collateral.
Although the retailer’s demand for repossession was ill-founded, the lender did in fact repossess the trailer. The lender then placed the repossessed trailer on the retailer’s premises, but did not relinquish the certificate of title. Consequently, the retailer had no power to sell the trailer because it could not deliver the certificate. See I.C. § 49-502. The retailer’s role in disposing of the collateral was limited to contacting prospective new buyers and requesting the lender to participate in a sale by releasing the certificate.
That, precisely, is what the retailer attempted to do. It found a prospective new buyer at a price of $14,000, but the lender refused to release the certificate of title unless the retailer first paid a balance of approximately $14,200 on the underlying loan. The retailer subsequently found another buyer at a price of $10,000, but the lender again refused to release the certificate of title unless it was paid in full. The trailer eventually was sold for $6,000 at a sheriff’s sale after the lender sued the retailer under the guaranty. The lawsuit then focused on liability for the deficiency. The retailer resisted such liability, arguing that the lender had not disposed of the repossessed trailer in a commercially reasonable fashion.
The district court awarded the lender a deficiency judgment, but the judgment was reversed by a special panel of our Court. See CIT Financial Services v. Herb’s Indoor RV Center, 108 Idaho 820, 702 P.2d 858 (Ct.App.1985) (CITI). The special panel unanimously held that the lender, having repossessed the trailer and having retained the certificate of title, had a duty to make a commercially reasonable disposition of the trailer. The case was remanded specifically for “an inquiry into the commercially reasonable aspect of CIT’s disposition of the collateral.” Id. at 822, 702 P.2d at 860.
The district court on remand found that the lender had acted in a commercially reasonable manner. This finding, however, was based on an assumption — explicitly stated by the district judge — that the lender had a legal right to demand payment under the guaranty while simultaneously holding title to the repossessed trailer and refusing to sell it for any amount less than the total debt. That assumption, as we shall see, is critical to the outcome of this case.
II
Today my colleagues do not question the district court’s assumption, nor do they expressly hold that the lender acted reasonably under I.C. § 28-9-504(3). Rather, their opinion seems to declare that the lender merely acted within its rights under the guaranty agreement. The opinion also suggests that the lender did not actually refuse to sell the collateral; rather, its act of placing the trailer on the retailer’s lot constituted a “transfer of collateral” to the retailer within the meaning of I.C. § 28-9-504(5). Both of these approaches are, in my view, fatally flawed.
A
I turn first to the suggestion that a “transfer” occurred under subsection (5) of I.C. § 28-9-504. This subsection is part of the statute generally defining a secured party’s right to dispose of collateral after default and specifying the effect of such a disposition. The statute provides that a secured party may sell or otherwise dispose of the collateral; that the proceeds of the disposition must be applied to the debtor’s account; that the disposition may be made by public or private proceedings; and that such a disposition of the collateral “transfers to a purchaser for value all of the debtor’s rights therein [and] discharges the security interest____”
Subsection (5) sets forth an exception to this rule of discharge. It provides that if the person receiving the collateral is also liable to the secured party, then “[s]uch a transfer of collateral is not a sale or disposition of the collateral under this chapter.” The evident purpose of subsection (5) is to preserve the security interest for a trans*191feree who may proceed in subrogation to collect the underlying debt from the original debtor.
So understood, subsection (5) does not serve the purpose ascribed to it by the majority opinion in the present case. The opinion seems to say that the lender’s placement of the repossessed trailer on the retailer’s lot was a “transfer” under this subsection, leaving the retailer in a position to dispose of the trailer without the lender’s participation. But subsection (5) does not give a transferee any greater power of sale than the secured party enjoyed. As noted above, no one could sell the trailer under title 49, chapter 5, Idaho Code, without delivering a certificate of title. Here, the lender held the certificate and refused to relinquish it. The lender thereby retained control over any sale of the collateral. Physical placement of the trailer on the retailer’s lot, unaccompanied by the certificate of title, did not constitute a genuine “transfer” of the collateral.
My colleagues assert that a “transfer” could occur without passage of an instrument of title. They rely upon the general language of I.C. § 28-9-202, which provides that “[e]ach provision of this chapter with regard to rights, obligations and remedies applies whether title to collateral is in the secured party or in the debtor.” My colleagues’ reliance is misplaced. Section 28-9-202 was included in the Uniform Commercial Code to avoid a conceptual dispute under pre-Code law as to whether a secured party has title to the collateral or merely a lien upon it. It also gives a secured party flexibility in disposing of repossessed property — e.g., by long-term lease rather than sale. See generally First City Bank-Farmers Branch v. Guex, 659 S.W.2d 734 (Texas Dist.Ct.App.1983). But section 28-9-202 cannot be read fairly to authorize an illusory “transfer” under I.C. § 28-9-504(5), in which the transferor retains control over the collateral and its eventual disposition. Neither can section 28-9-202 be read to mean that a purported transferee could re-sell a “vehicle” without delivering a certificate of title as required by other provisions of state law. The Uniform Commercial Code does not displace such other provisions. See I.C. § 28-1-103.
Where, as here, the collateral is a “vehicle” for which a certificate of title is required, it can be sold or transferred by a secured party only when the certificate is delivered. See Sunnyland Employees’ Federal Credit Union v. Fort Wayne Mortgage Co., 182 Ga.App. 5, 354 S.E.2d 645 (1987). Here, there was no genuine transfer by the lender under I.C. § 28-9-504(5). The lender effectively retained control of the collateral until the sheriff’s sale occurred.
B
Thus, the proper focus in this case, as noted by the special panel in CIT I, is upon the commercial reasonableness of the lender’s actions after repossessing the trailer. The majority opinion skirts this issue, apparently holding that the lender had no duty to make a commercially reasonable disposition because it could insist upon full payment pursuant to the unconditional guaranty. Concededly, the agreement says that the lender is not required to proceed against the debtors or the collateral before collecting from the guarantor. But there is no language in the guaranty agreement saying that if the lender does repossess the collateral, it may refuse to sell or may sell in an unreasonable manner.
Guaranty instruments are strictly construed. A guarantor’s obligations are limited to those expressly recited in the guaranty instrument. McGill v. Idaho Bank & Trust Co., 102 Idaho 494, 632 P.2d 683 (1981); Johnson Equipment, Inc. v. Nielson, 108 Idaho 867, 702 P.2d 905 (Ct.App.1985); Gulf Chemical Employees Federal Credit Union v. Williams, 107 Idaho 890, 693 P.2d 1092 (Ct.App.1984). Here, the guaranty instrument contains no waiver of the right to insist upon a commercially reasonable sale if repossession occurred. No such waiver can be implied. See Walter E. Heller & Co., Inc. v. Wilkerson, 627 P.2d 773 (Colo.Ct.App.1980).
In any event, the special panel in CIT I observed that a secured party’s duty to dispose of collateral in a commercially rea*192sonable manner is not waiveable by a debt- or. See I.C. § 28-9-501(3)(b). By applying this nonwaiver statute to the instant case, the special panel implicitly held that the retailer, as a guarantor, was entitled to the same protection as a debtor under I.C. § 28-9-501(3)(b). This implicit holding is consistent with I.C. § 28-9-105(l)(d), which broadly defines a “debtor” as a person “who owes payment or other performance of the obligation secured____”
It is well settled in most jurisdictions that a guarantor is a “debtor” entitled to notice of any proposed sale of the collateral. See generally Sachs and Belgrad, Liability of the Guarantor of Secured Indebtedness After Default and Repossession under the Uniform Commercial Code: A Walk on the Wild Side by the Secured Party, 5 U. BALT. L. REV. 153 (1976). The courts are divided on whether the guarantor also is entitled to a commercially reasonable sale. The better reasoned cases, however, recognize such an entitlement unless the guaranty is wholly unrelated to the debtor’s pledge of collateral. 9 R. ANDERSON, UNIFORM COMMERCIAL CODE § 9-504:94 (1985). Here, the guaranty was an integral part of the transaction in which the trailer was sold and the lender’s security interest was created. Consequently, the special panel in CIT I was on solid ground in treating the retailer-guarantor as a debtor entitled to a commercially reasonable sale when the lender repossessed the trailer.
This brings us, at last, to the dispositive issue on which the special panel remanded this case: whether the lender complied with the commercial reasonableness requirement. As noted earlier, the district judge answered this question in the affirmative; but his answer was based upon an assumption that the lender, having repossessed the trailer, was legally entitled to insist upon full payment of the secured indebtedness before participating in any sale. In essence, the district court allowed the lender to proceed in part against the collateral — repossessing it without selling it — while simultaneously proceeding against the debtor-guarantor on the debt itself. On this point, I believe the district court erred.
The Uniform Commercial Code provides that a secured party may proceed directly against an obligor on the debt or may seek to collect the debt by disposing of the collateral. These remedies are described as “cumulative.” I.C. § 28-9-501(1); Snake River Equipment Co. v. Christensen, 107 Idaho 541, 691 P.2d 787 (Ct.App.1984) (review denied). It is one thing, however, to say that a secured party may employ more than one remedy in order to collect a debt; it is quite another to say that the creditor may employ multiple remedies simultaneously. The principle of commercial reasonableness is offended when a secured creditor grabs property, not to satisfy the debt or to credit the debtor’s account, but simply to hold the property as leverage while demanding full payment. As noted by two distinguished commentators on the Uniform Commercial Code:
The remedies may be “cumulative,” but at some point the secured creditor must choose which remedy he will utilize and pursue that route to fruition. In other words, a secured creditor may first attempt to enforce his rights by one method and if that proves unsuccessful follow another one, but we think he should not be permitted to harass the debtor by simultaneously pursuing two or more of the several avenues of attack open to him.
J. WHITE & R. SUMMERS, UNIFORM COMMERCIAL CODE 572 (3d ed.1988) (footnotes omitted).
Thus, the secured creditor has an array of available remedies which he may choose to employ in any sequence. But once the creditor repossesses the collateral, he cannot refuse to sell it; he must take it in satisfaction of the debt or dispose of it in a commercial reasonable manner and credit the debtor’s account. Insurance Company of North America v. General Electric Credit Corp., 119 Ariz. 97, 579 P.2d 601 (Ct.App.1978); Ayares-Eisenberg Perrine Datsun, Inc. v. Sun Bank of Miami, 455 So.2d 525 (Fla.Dist.Ct.App.1984); ITT Terryphone Corp. v. Modems Plus, Inc., 171 *193Ga.App. 710, 320 S.E.2d 784 (Ct.App.1984); Keller v. La Rissa, Inc., 60 Haw. 1, 586 P.2d 1017 (1978). A commercially reasonable disposition may include a judicial sale after the collateral has been repossessed, so long as the sale is not unduly delayed and the repossession has been undertaken for the legitimate purpose of preserving the property for sale. See generally Native Alaskan Reclamation and Pest Control, Inc. v. United Bank Alaska, 685 P.2d 1211 (Alaska 1984); Kimura v. Wauford, 104 N.M. 3, 715 P.2d 451 (1986).
Regardless of whether the sale is private or judicial, the policy of the Uniform Commercial Code is to produce the maximum recovery from disposition of any collateral that has been repossessed. 1A P. COO-GAN, SECURED TRANSACTIONS UNDER THE UNIFORM COMMERCIAL CODE § 8.04[2][a] (Hogan rev. ed.1986). In the present case, it appears that such recovery was not maximized. After foregoing apparent opportunities to sell the trailer for $14,000 or $10,000, the lender finally caused it to be sold for $6,000.
I cannot determine from the record, however, whether this failure to maximize was entirely the fault of the lender. For example, when the retailer found a buyer at $14,000, and the outstanding debt was approximately $14,200, the lender might have insisted on payment of the entire debt from the retailer’s funds before any sale could be closed; on the other hand, the lender might have been willing to participate in a three-way closing at which the retailer could have discharged the debt by simply adding $200 to the sale proceeds. In either event, the lender would have been wrong to refuse a sale; but in the latter instance, the lender’s misconduct would have been matched by the retailer’s obduracy.
Consequently, although I regret prolonging this case with a second remand, I would send the case back with an instruction that the district court determine — in factual detail — whether the lender acted unreasonably and, if so, whether the retailer suffered any compensable damage. This, in substance, is what the special panel told the district judge to do on remand in CITI. The special panel’s directive was not followed because the district judge erroneously believed the guaranty agreement absolved or altered the lender’s duty to dispose of the repossessed trailer in a commercially reasonable manner. Unfortunately, the majority opinion today perpetuates that error.