Court Opinion

ID: 9641236
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:26:05.910674+00
Date Added: 2024-06-11T18:10:35.937120
License: Public Domain

OPINION ON MOTION FOR REHEARING
KINKEADE, Justice.
We withdraw that portion of this Court’s opinion entered on August 15, 1989, to the extent that this Court held that BancTexas Quorum, N.A., could not seek a deficiency judgment on the March 29, 1985 promissory note. The following is now the opinion of this Court only with regard to that note.
All parties to this appeal have filed motions for rehearing. In its motion for rehearing, BancTexas contends that this Court erred in its opinion and judgment by holding that BancTexas’s failure to provide adequate notice pursuant to the Texas Business and Commerce Code precludes it from seeking a deficiency judgment against the Van Brunts for the unpaid balance of one of the five promissory notes executed by Labels Unlimited. Specifically, BancTexas contends that Labels Unlimited’s personal property, sold by BancTexas in February 1987, did not secure the $200,-000 note executed by Labels Unlimited on March 29,1985, and guaranteed by the Van Brunts. The trial court found that the unpaid principal balance of this note was $145,549.50, and the unpaid accrued interest was $8,837.81. BancTexas contends that all parties concede, and the record *127confirms, these facts. We disagree with BancTexas’s contention that personal property did not secure the $200,000 note. In a case of first impression in Texas, we find that, as both real and personal property secured the note, BancTexas had the option under section 9.501(d) of the Texas Business & Commerce Code1 to proceed under that Code as to the personal property, and later proceed under the Texas Property Code as to the real property, without being adversely affected by any defects in its personal property foreclosure proceedings. See Tex.Prop.Code Ann. § 51.002 (Vernon 1984).
When executed in March 1985, the $200,000 note listed as security a deed of trust on the four-acre tract located in Collin County, the same property involved in the homestead dispute. When BancTexas notified the Van Brunts of its intention to sell Labels Unlimited’s collateral under the terms of its security agreements, BancTex-as included the $200,000 note as one of the notes in the notice. BancTexas also stated in that notice that it intended to conduct the sale pursuant to its rights under those security agreements, including one dated November 30, 1985. That security agreement, executed subsequent to the $200,000 note, provided that the security interest created, secured “all obligations and indebtedness owed to [BancTexas] direct or indirect, now existing or hereafter arising.” Paragraph two of that security agreement described as security all of Labels Unlimited’s personal property. Accordingly, the record reflects that both real and personal property secured the $200,000 note.
The Code defines a “security interest” as an interest in personal property or fixtures, and “collateral” as property subject to a security interest. See §§ 1.201(37), 9.105(a)(3). By its very terms, the Code’s provisions setting forth procedures regarding “collateral” or “security interests” apply solely to personal property. The Code does not apply to the cre-
ation or transfer of an interest in or lien on real estate:
§ 9.104 Transactions Excluded From Chapter
This chapter does not apply
[[Image here]]
(10) except to the extent that provision is made for fixtures ..., to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder.
§ 9.104(10).
Section 9.501(d) states:
§ 9.501 Default; Procedure When Security Agreement Covers Both Real and Personal Property
[[Image here]]
(d) If the security agreement covers both real and personal property, the secured party may proceed under this subchapter [the subchapter entitled “Default”] as to the personal property or he may proceed as to both the real and the personal property in accordance with his rights and remedies in respect of the real property in which case the provisions of this subchapter do not apply.
§ 9.501(d).
Comment 5 to section 9.501 states:
5. The collateral for many corporate security issues consists of both real and personal property. In the interest of simplicity and speed subsection [d] permits, although it does not require, the secured party to proceed as to both real and personal property in accordance with his rights and remedies in respect of the real property. Except for the permission so granted, this Act leaves to other state law all questions of procedure with respect to real property. For example, this Act does not determine whether the secured party can proceed against the real estate alone and later proceed in a separate action against the personal property in accordance with his rights and remedies against the real estate. By such separate actions the secured party “proceeds as to both,” and this Part does not *128apply in either action. But subsection [d] does give him an option to proceed under this Part as to the personal property.
§ 9.501, comment 5.
Under section 9.501(d), if the security agreement covers both real and personal property, the secured party may proceed as to both in accordance with his rights and remedies in respect of the real property. The Code default rules then become inapplicable. Alternatively, the secured party may proceed under the Code as to the personal property. 1A Coogan, Hogan, and Vagts, Bender’s UCC Service (MB) § 8.07[5] (1984). Comment 5 to section 9.501(d) states that separate actions may be considered proceeding “as to both” real and personal property. Section 9.501(d) provides an option to proceed separately under the Code as to the personal property. See § 9.501(d), comment 5. Section 9.501(d) and comment 5 exclude any mention of proceeding under the Code as to the real property.
Several courts in other jurisdictions that have enacted the Uniform Commercial Code have construed provisions with language identical to section 9.501(d) and comment 5. The Illinois Supreme Court held that the language of section 9.501(d) and its comment indicate that when both real and personal property secure a debt, secured creditors have the option upon the debtor’s default to proceed against both the real and personal property collateral in separate actions, whether concurrently or successively. If the secured creditor chooses to proceed in separate actions, the default provisions of the Uniform Commercial Code apply only with regard to the personal property. Kramer v. Exchange National Bank of Chicago, 118 Ill.2d 277, 113 Ill.Dec. 248, 252, 515 N.E.2d 57, 61 (1987); see also Brenton State Bank of Jefferson v. Tiffany, 440 N.W.2d 583, 587 (Iowa 1989); State Bank v. Hansen, 302 N.W.2d 760, 764 (N.D.1981); Bank of Spring Valley v. Wolske, 144 Wis.2d 762, 424 N.W.2d 744, 747 (App.1988).
Through the enactment of section 9.501, the drafters of the Uniform Commercial Code intended to broaden the options available to a secured creditor upon a debtor’s default. Kramer, 113 Ill.Dec. at 252, 515 N.E.2d at 61. Courts must interpret section 9.501(d) in light of the overall policy of the Uniform Commercial Code to expand creditors’ remedies with respect to personal property collateral. Courts cannot interpret the section to reduce the rights of secured creditors with respect to personal property in cases where both real property and personal property secure a debt. Wiley v. Bank of Fountain Valley, 632 P.2d 282, 285 (Colo.App.1981). The creditor may choose either to proceed as to both the real and personal property in accordance with real property law in one action or in separate actions. See § 9.501(d), comment 5. The creditor may also opt to proceed against the personal property under the Code, but has no option to proceed as to the real property under the Code. See §§ 1.201(37), 9.105(a)(3), 9.104(10), 9.501(d).
Under the reasoning of the dissent to this opinion on motion for rehearing, Banc-Texas can foreclose on its real and personal property liens but cannot seek a deficiency in either proceeding. In its original opinion, the majority holds that BancTexas’s failure to provide adequate notice precludes it from seeking a deficiency judgment against the Van Brunts, citing Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769 (Tex.1982). However, the Tanenbaum Court found that the legislature, in enacting two sections of the Code governing disposition of collateral, intended to put the creditor to an election either to sell the repossessed collateral pursuant to section 9.504 or to retain the collateral in complete satisfaction of the debt pursuant to section 9.505. The Court held that, because the creditor had not complied with the notice provisions of section 9.504, it, in effect, had elected to retain the collateral in complete satisfaction of the debt. Tanenbaum, 628 S.W.2d at 771. If, as alleged by the dissent to this opinion, failure to give adequate notice precludes BancTexas from seeking a deficiency as to both the real and personal property, it also precludes Banc-Texas from foreclosing on its real property *129lien because the sale of the personal property would have satisfied all indebtedness. See, e.g., Hildner v. Fox, 17 Ill.App.3d 97, 308 N.E.2d 301, 303 (1974). The Hildner court suggested that a secured creditor’s failure to comply with the Code and notify the debtor of a foreclosure on personal property requires cancellation of a real estate mortgage taken as additional security. However, the Illinois Supreme Court implicitly rejected the Hildner court’s suggestion when it concluded that section 9.501(d) gives a secured creditor the option to proceed against both the real and personal property collateral in separate actions. Kramer, 113 Ill.Dec. at 252, 515 N.E.2d at 61. Further, according to one commentator who expressly disapproved the Hildner court’s comment, the language of section 9.501(d) “would seem to cut the other way, driving a wedge between any defect in the Code foreclosure and rights under a real estate mortgage.” Clark, The Law of Secured Transactions Under the Uniform Commeroial Code § 4.03(4), n. 159 (2d ed. 1988).
The dissent stops short of the Hildner court’s suggestion that a secured creditor’s failure to comply with the Code when foreclosing on personal property requires cancellation of a real estate mortgage taken as additional security. The dissent simply treats the real property collateral as additional personal property collateral, and then applies the Tanenbaum rule to preclude BancTexas from seeking a deficiency in either proceeding.
Application of a rule must advance the policy that gives rise to the rule in the first instance. This concept is fundamental to our system of jurisprudence, as well as to a proper application of the Uniform Commercial Code. Barclays Bank D.C.O. v. Mercantile National Bank, 481 F.2d 1224, 1230 (5th Cir.1973). The Code does not provide for the elimination of a deficiency because of a secured creditor’s failure to comply with its default provisions. Rather, the Code provides that a secured creditor may hold a debtor liable for a deficiency. § 9.504(b). Because the secured creditor’s loss of its right to seek a deficiency is judicially imposed, we must closely examine the Tanenbaum Court’s rationale for eliminating that right. See Barclays Bank D.C.O., 481 F.2d at 1230. In Tanenbaum, a creditor with a security interest only in personal property sought to hold a debtor liable for a deficiency after seizing and destroying that collateral. The Tanenbaum Court, in seeking to prevent a secured creditor’s abuse, found that the creditor’s failure to give proper notice to the debtor when disposing of the collateral under section 9.504 of the Code resulted in an election to retain the collateral in full satisfaction of the debt, an option available under section 9.505 when a secured party takes possession of the debtor’s personal property after default. The election is triggered by an irrebuttable presumption that the creditor has proceeded under section 9.505 rather than under section 9.504. The result comports with section 1.106 of the Code, which provides that the remedies provided under the Code “shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed.” When the debt is also collateralized by real property, however, as to which section 9.505 is inapplicable, the basis for the irre-buttable presumption addressed in Tanen-baum is absent. Application of the Tanen-baum rule under these differing circumstances is not warranted because of the additional penalty damages which the secured creditor thereby suffers with respect to the real property interest. The Code prohibits interpretation of its provisions to impose penalty damages. See § 1.106.
The Van Brunts agreed to provide both real and personal property to secure the $200,000 note, and to provide only personal property to secure the other four promissory notes. In its original opinion, the majority applied the Tanenbaum rule to preclude BancTexas from seeking a deficiency in the personal property foreclosure proceedings, thus providing the Van Brunts with the benefit of the rule. If, as the dissent to this opinion contends, the Tanen-baum rule applies to the real property foreclosure proceedings, the dissent must conclude, as the Hildner court did, that Banc-*130Texas’s foreclosure on the personal property satisfied the debt, eliminating any deficiency and requiring cancellation of the real estate mortgage. The only other rationale available to the dissent is to treat the real property as personal property, a remedy prohibited by the terms of the Code, which excludes real property as collateral. See §§ 1.201(37), 9.105(a)(3). We hold that any defect in BancTexas’s foreclosure under the Code has no effect on its rights under the real property mortgage, including its right to seek a deficiency.
We vacate this Court’s August 15, 1989 judgment to the extent that it precluded BancTexas from seeking a deficiency judgment on the March 29, 1985 promissory note. We affirm the portion of the trial court’s judgment awarding BancTexas a deficiency judgment on the March 29, 1985 promissory note in the amount of $145,-549.50, together with accrued interest in the amount of $8,837.81. We reverse the portion of the trial court’s judgment awarding BancTexas a deficiency judgment for principal or interest amounts due under the other four promissory notes and render judgment that BancTexas take nothing on those four notes. In all other respects, we affirm the trial court's judgment.

. Unless otherwise stated, all section and code references are to the Texas Business and Commerce Code. See Ti-x.Bus. & CoM.Corm Ann. §§ 1.106, 1.201, 9.104, 9.105, 9.501, 9.504, 9.505 (Tex.UCC) (Vernon 1989).