221 Conn. 530 | Conn. | 1992
The principal issue in this appeal is the scope of a secured lender’s obligation to participate in
The facts concerning the commercial arrangements between the parties are undisputed. On March 11,1987, the bank agreed to lend $550,000 to Jefferson Pine, which was in the business of manufacturing and selling consumer furniture. To memorialize and secure this loan, Jefferson Pine signed a loan and security agreement that gave the bank a security interest in Jefferson Pine’s inventory, equipment and other collateral. Contemporaneously, Jefferson Pine executed two instruments with respect to the underlying debt payable to the bank, a term note in the principal amount of $300,000 and a demand grid note for a line of credit in the amount of $250,000. The bank continues to be the holder of these notes.
As a part of the loan negotiations, Nelson and the other individual defendants agreed to assure the payment of Jefferson Pine’s obligations to the bank. Each manifested his or her obligation as guarantor: by a guaranty contained in the security and loan agreement; by an endorsement on the face of the two promissory
Jefferson Pine encountered difficulties in meeting its financial obligations. On April 28,1988, in order to continue to operate its business and to pay off its debts, it submitted to the bank a proposal for a workout plan, which the bank rejected. The details of that plan have not, however, been presented to this court. Nelson’s pleadings allege that the plan contemplated that, under certain unspecified conditions, the Phoenix Northeast Corporation might advance new funds to Jefferson Pine. On May 2, 1988, shortly after the bank’s rejection of the plan, Jefferson Pine ceased doing business and eleven days thereafter it invoked the protection of the federal bankruptcy laws. It first filed a voluntary petition for protection from creditors under chapter 11 of the Bankruptcy Code. After another unsuccessful attempt at a workout plan, the bankruptcy filing was converted into a liquidation proceeding under chapter 7 of the Bankruptcy Code and the assets of Jefferson Pine were sold. The bank received a partial payment and then initiated the present action to recover the remainder of the unpaid indebtedness from the defendants.
The dispute between the parties on this appeal does not directly challenge the trial proceedings that led to the verdict in the bank’s favor. Nelson maintains instead that he is entitled to a new trial because two of the trial court’s procedural rulings improperly limited the scope of the issues that he was able to present at trial. He contends that the trial court incorrectly (1) granted the bank’s motion to strike his first, sec
I
The bank filed its motion to strike in response to Nelson’s second revised and amended answer, special defenses, counterclaim and cross complaint. It asked the trial court to strike the first six of Nelson’s special defenses,
In its ruling on the bank’s motion to strike, the trial court recognized its obligation to take the facts to be those alleged in the special defenses and to construe the defenses in the manner most favorable to sustaining their legal sufficiency. Warner v. Konover, 210 Conn. 150, 152, 553 A.2d 1138 (1989); Michaud v. Wawruck, 209 Conn. 407, 408, 551 A.2d 738 (1988); Amodio v. Cunningham, 182 Conn. 80, 82, 438 A.2d 6 (1980). Even viewed from this generous perspective, the special defenses are notable for what they do not allege. Nelson has not asserted that the bank impaired Jefferson Pine’s own authority to sell its inventory in the ordinary course of its business; see General Statutes § 42a-9-307 and § 42a-9-306 (1) and (2).
A
The linchpin of Nelson’s argument to sustain his first special defense is that the bank constructively took possession of Jefferson Pine’s inventory when it failed to agree to the conditions of the plan that would have given Jefferson Pine access to new funding from the Phoenix Northeast Corporation. This contention has two flaws, one procedural and one substantive.
As a procedural matter, the factual allegations on which Nelson relies expressly complain of the bank’s refusal “to take possession.” As the bank has noted, it is inconsistent simultaneously to charge the bank with having refused to take possession and with having
As a substantive matter, the bank’s alleged failure to agree to a workout plan does not, without more, constitute the taking of constructive possession of Jefferson Pine’s inventory.
We therefore conclude that, in order to state a cause of action charging the bank with constructive possession, Nelson would have had to allege, as a minimum, that the bank had the power and the manifested intent to displace Jefferson Pine’s control over its inventory or somehow to render that inventory commercially unmarketable. Nelson’s allegations, with their focus on the bank’s purported misconduct in refusing to renegotiate the terms of the security agreement with Jefferson Pine, do not state such a cause of action. On the facts alleged, the trial court therefore correctly determined, as a matter of law, that the bank was not in constructive possession of Jefferson Pine’s inventory before its bankruptcy.
In the absence of either actual or constructive possession by the bank, Nelson cannot prevail on his claim that the bank violated his rights under part 5 of article 9 of the Uniform Commercial Code. While article 9 permits a secured party, upon default, to take possession of the secured collateral, it does not compel such a course of action. General Statutes §§ 42a-9-501,
Our conclusion that the bank, on the facts alleged, had no duty to take any action with respect to Jefferson Pine’s inventory before its bankruptcy necessarily means that the bank had no such duty after its bankruptcy. As Professors White and Summers point out, the secured debtor’s bankruptcy may impair, but does not enlarge, the secured lender’s access to the secured collateral. 2 J. White & R. Summers, supra, § 25-12, pp. 471-72. We are unpersuaded that the bank’s alleged refusal to allow inventory to be sold free and clear of its security interest is tantamount to the bank’s taking constructive possession of the inventory.
Because the bank had neither actual nor constructive possession of Jefferson Pine’s inventory, either before or after its bankruptcy, we conclude that Nelson has not alleged a breach of any duty by the bank in its refusal to agree to Jefferson Pine’s plan for refinancing. Accordingly, we conclude that the trial court correctly struck Nelson’s first special defense.
B
Nelson’s second and third special defenses alleged that the bank’s conduct had impaired the secured collateral in such a way as to discharge him as guarantor, either under article 3 of the Uniform Commercial Code, General Statutes § 42a-3-606 (1) (b), or under the common law rules governing the relationship between creditors and guarantors. See 1 J. White & R. Summers, supra, § 13-15. The trial court concluded that these defenses were untenable as a matter of law for three independent reasons: (1) Nelson could not invoke § 42a-3-606 because that section only applied to negotiable instruments and the variable interest rate provision in the notes violated the requirement of General Statutes §§ 42a-3-104 and 42a-3-106
The documents that memorialize Nelson’s guaranty of Jefferson Pine’s indebtedness demonstrate, on their face, that Nelson expressly waived any right he might otherwise have had to complain of the impairment of his right to be subrogated to the bank’s interest in the secured collateral in the possession of Jefferson Pine. Each of these documents contains an express waiver of the right to assert any claim with regard to any action the bank might take, or not take, with regard to Jefferson Pine’s collateral. Nelson signed the loan
Although this court has not had the occasion to consider the extent to which a guarantor may expressly waive claims relating to a secured creditor’s alleged impairment of collateral, cases in other states uniformly recognize the enforceability of such a waiver if the language of guaranty is sufficiently specific. See, e.g., Salter v. AmSouth Bank, N.A., 487 So. 2d 927, 929-30 (Ala. Civ. App. 1985); First National Bank of Arizona v. Bennett Venture, Ltd., 130 Ariz. 562, 565-66, 637 P.2d 1065 (Ariz. App. 1981); American Security Bank v. Clarno, 151 Cal. App. 3d 874, 882-84, 199 Cal. Rptr. 127 (1984); Sadler v. Trust Co. Bank of South Georgia, N.A., 178 Ga. App. 871, 872-73, 344 S.E.2d 694 (1986); In re Estate of Williams, 109 Ill. App. 3d 828, 833, 441 N.E.2d 412 (1982); Kansas State Bank & Trust Co. v. DeLorean, 7 Kans. App. 2d 246, 255-57, 640 P.2d 343 (1982); Etelson v. Suburban Trust Co., 263 Md. 376, 379, 283 A.2d 408 (1971); Federal Deposit Ins. Corporation v. Hill, 13 Mass. App. 514, 518, 434 N.E.2d 1029 (1982); Price v. First National Bank of the South, 477
Although we recognize that General Statutes § 42a-9-501 (3)
We conclude, therefore, that Nelson cannot prevail on his second and third special defenses because the guaranties that he signed expressly waived his right to assert any claims about the bank’s alleged misconduct with respect to its security interest in Jefferson Pine’s inventory. The trial court, accordingly, correctly granted the bank’s motion to strike these defenses.
II
Nelson asked the court for permission to file a third revised and amended answer, special defenses, counter
In its review of Nelson’s request for leave to amend, the trial court found that the amended pleading would have added lengthy new allegations of fact and law. While Nelson’s earlier pleading had challenged the bank’s refusal to approve a specific business plan, proposed by Jefferson Pine on April 28,1988, that sought to facilitate future advances from the Phoenix Northeast Corporation, the amended pleading added allegations about the bank’s refusal to approve a different plan, with a different company, on a different date. The court weighed the bank’s objection that it would be prejudiced if a trial proceeded as scheduled without affording the bank an opportunity to explore the implications of Nelson’s expanded new pleadings. Despite Nelson’s contention that his factual contentions had been raised in his memorandum of law objecting to the bank’s motion for summary judgment, the court denied the request to amend.
Our review of a trial court’s denial of a belated request for amendment of the pleadings is limited to an inquiry into whether the trial court abused its discretion. “We have not previously found an abuse of discretion when a trial court, on the eve of trial, concluded that prejudice and delay would result from a substantial amendment to the [pleadings], and we decline to
The judgment is affirmed.
In this opinion the other justices concurred.
Nelson’s seventh special defense, to which the bank did not object, asked the bank to reduce its claim by the amount that it had recovered in the liquidation of the assets of the corporate debtor.
The trial court left standing, for subsequent trial to the jury, two sets of contentions that were raised by Nelson’s special defenses and counterclaim. The court permitted Nelson to go forward with his contention, in his fourth and fifth special defenses and in counts two and three of his counterclaim, that the bank’s refusal to cooperate with the corporate defendant’s plan for a workout constituted a breach of the bank’s implied covenant of good faith and fair dealing. General Statutes §§ 42a-l-203,42a-l-106; 2 Restatement (Second), Contracts § 205 (1979). The trial court also saved for trial the first count of Nelson’s counterclaim, which alleged that the bank’s conduct constituted an unfair or deceptive trade practice under the Connecticut Unfair Trade Practices Act, General Statutes § 42-110 (b). Nelson has not pursued on appeal any challenge to the adverse verdict on these claims.
The merits of the trial court’s ruling on the bank’s motion to strike are properly before us because, on May 2,1990, within the time period specified by Practice Book § 4002 (a), Nelson filed a notice of appeal and reservation of appeal with respect thereto.
Nelson has not pursued on appeal the merits of his sixth special defense that the bank’s conduct constituted an unfair or deceptive act or practice in the conduct of any trade or commerce in violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110b. A similar claim
Nelson withdrew his cross complaint against the defendants Zbell and Paradis on July 26, 1991.
General Statutes § 42a-9-507 (1) provides: “If it is established that the secured party is not proceeding in accordance with the provisions of this part disposition may be ordered or restrained on appropriate terms and conditions. If the disposition has occurred the debtor or any person entitled to notification or whose security interest has been made known to the secured party prior to the disposition has a right to recover from the secured party any loss caused by a failure to comply with the provisions of this part. If the collateral is consumer goods, the debtor has a right to recover in any event an amount not less than the credit service charge plus ten per cent of the principal amount of the debt or the time price differential plus ten per cent of the cash price.”
General Statutes § 42a-3-606 (1) (b) provided, at the time of this case: “(1) The holder discharges any party to the instrument to the extent that without such party’s consent the holder . . . (b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.”
General Statutes § 42a-9-307 provides in pertinent part: “protection of buyers OF GOODS. (1) A buyer in ordinary course of business as defined by subsection (9) of section 42a-l-201 . . . takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.”
General Statutes § 42a-9-306 provides: “ ‘proceeds’; secured party’s rights ON disposition of collateral. (1) ‘Proceeds’ includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. . . . (2) Except where this article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.”
In Nelson’s answers to interrogatories propounded by the bank, he acknowledged that he did “not claim that Jefferson Pine was prevented or disabled from selling its inventory due to the failure or neglect of the [bank] to authorize the sale of said inventory.”
Article V of the loan and security agreement, entitled “Negative Covenants” provided that, until payment in full of the borrower’s obligation, “unless the Bank otherwise consents in writing, the Borrower shall not . . . Section 5.2 Limitation on Indebtedness. Create or incur any indebtedness or obligation for borrowed money, or issue or sell any obligations of the Borrower, excluding, however, from the operation of this covenant: (a) the loan hereunder and all other liabilities of the Borrower to the Bank; and (b) indebtedness subordinated in payment and priority to all indebtedness of the Borrower to the Bank in writing and in form and substance satisfactory to the Bank.”
Despite probing interrogatories by the bank, Nelson never clarified whether he claimed that the bank had wrongfully refused to permit Jefferson Pine to sell its inventory in bulk or in some other commercial manner not in the ordinary course of business; see General Statutes § 42a-9-307 and section 5.3 of the loan and security agreement; or whether he claimed that the bank had wrongfully refused to relinquish its security interest in the proceeds of the sale of the inventory. See General Statutes § 42a-9-306 (2) and section 1.9 of the loan and security agreement.
In his reply brief, Nelson suggests for the first time that “[m]uch of the inventory was machinery.” Article 9 of the Uniform Commercial Code, on which Nelson relies for this claim, makes a sharp distinction between inventory and equipment. See General Statutes § 42a-9-109. For Jefferson Pine, which was engaged in the business of selling furniture, its machinery was equipment and not inventory. A defense charging the bank with misconduct with respect to inventory therefore does not encompass a claim with respect to machinery.
General Statutes § 42a-9-501 provides in relevant part: “default; procedure WHEN SECURITY AGREEMENT COVERS BOTH REAL AND PERSONAL PROPERTY. (1) When a debtor is in default under a security agreement, a secured party has the rights and remedies provided in this part and except as limited by subsection (3) those provided in the security agreement. He may reduce his claim to judgment, foreclose or otherwise enforce the security interest by any available judicial procedure. If the collateral is documents the secured party may proceed either as to the documents or as to the goods covered thereby. A secured party in possession has the rights, remedies and duties provided in section 42a-9-207. The rights and remedies referred to in this subsection are cumulative. . . . (5) When a secured party has reduced his claim to judgment the lien of any levy which may be made upon his collateral by virtue of any execution based upon the judgment shall relate back to the date of the perfection of the security interest in such collateral. A judicial sale, pursuant to such execution, is a foreclosure of the security interest by judicial procedure within the meaning of this section, and the secured party may purchase at the sale and thereafter hold the collateral free of any other requirements of this article.”
General Statutes § 42a-9-503 provides: “secured party’s right to take possession after default. 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 if this can be done without breach of the peace or may proceed by action. If the security agreement so provides the secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties. Without removal a secured party may render equipment unusable, and may dispose of collateral on the debtor’s premises under section 42a-9-504.”
General Statutes § 42a-9-504 provides in relevant part: “secured party’s RIGHT TO DISPOSE OF COLLATERAL AFTER DEFAULT; EFFECT OF DISPOSITION. (1) A secured party after default may sell, lease or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation or processing. . . . (3) Disposition of the collateral may be by public or private proceedings and may be made by way of one or more contracts. Sale or other disposition may be as a unit or in
General Statutes § 42a-9-505 provides: “compulsory disposition of COLLATERAL; ACCEPTANCE OF THE COLLATERAL AS DISCHARGE OF OBLIGATION. (1) If the debtor has paid sixty per cent of the cash price in the case of a purchase money security interest in consumer goods or sixty per cent of the loan in the case of another security interest in consumer goods, and has not signed after default a statement renouncing or modifying his rights under this part a secured party who has taken possession of collateral must dispose of it under section 42a-9-504 and if he fails to do so within ninety days after he takes possession the debtor at his option may recover in conversion or under section 42a-9-507 (1) on secured party’s liability. (2) 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 such proposal shall be sent to the debtor if he has not signed after default a statement renouncing or modifying his rights under this subsection. In the case of consumer goods no other notice need be given. In other cases notice shall be sent to any other secured party from whom the secured party has received, before sending his notice to the debtor or before the debtor’s renunciation of his rights, written notice of a claim of an interest in the collateral. If the secured party receives objection in writing from a person entitled to receive notification within twenty-one days after the notice was sent, the secured party must dispose of the collateral under section 42a-9-504. In the absence of such written objection the secured party may retain the collateral in satisfaction of the debtor’s obligation.”
General Statutes § 42a-3-104 provides in relevant part: “form of NEGOTIABLE INSTRUMENTS; ‘DRAFT’; ‘CHECK’; ‘CERTIFICATE OF DEPOSIT’; ‘NOTE.’ (1) Any writing to be a negotiable instrument within this article
General Statutes § 42a-3-106 provides in relevant part: “SUM certain. (1) The sum payable is a sum certain even though it is to be paid (a) with stated interest or by stated instalments; or (b) with stated different rates of interest before and after default or a specified date; or (c) with a stated discount or addition if paid before or after the date fixed for payment; or (d) with exchange or less exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney’s fee or both upon default; or (f) with provision for payment by the maker of taxes levied or assessed upon the instrument or the indebtedness evidenced thereby.”
Section 8.1 of the loan and security agreement further provided that “[t]he bank shall have no duty . . . as to the preservation of rights against prior parties, nor as to the preservation of any rights pertaining thereto beyond the safe custody thereof. ... No delay or omission on the part of the Bank in exercising any right shall operate as a waiver of such right or any other right. ...”
General Statutes § 42a-9-501 provides in relevant part: “default; procedure WHEN SECURITY AGREEMENT COVERS BOTH REAL AND PERSONAL PROPERTY. ... (3) To the extent that they give rights to the debtor and impose duties on the secured party, the rules stated in the subsections referred to below may not be waived or varied except as provided with respect to compulsory disposition of collateral by subsection (3) of section 42a-9-504 and section 42a-9-505 and with respect to redemption of collateral by section 42a-9-506 but the parties may by agreement determine the standards by which the fulfillment of these rights and duties is to be measured