107 B.R. 1 | D. Mass. | 1989
OPINION
First Agricultural Bank (the “Bank”) seeks in Count I of its complaint to obtain judgment against James C. Replogle (“Re-plogle”) for a foreclosure deficiency allegedly due under Replogle’s guaranties of indebtedness of Hillsdale Packing Company, Inc. (“Hillsdale Packing”), and in Count II to set aside as fraudulent a transfer of real estate made in 1984 by Replogle to his wife. The case began in Massachusetts state court and was then removed here by the Replogles. Thereafter the Bank filed an amended complaint in this Court. The Court then issued a pretrial order bifurcating the trial in order to first hear and determine the issue of liability, including primarily the question of whether the Bank’s foreclosure sale was conducted in a commercially reasonable manner. This was done in recognition that a ruling against' the Bank on this issue could be dispositive of the entire case. That aspect of the trial is now completed, and I set forth here findings of fact and conclusions of law.
Many of the facts are undisputed. Pres-cinding from the question of the commercial reasonableness, the Bank is owed $605,880.54 for monies advanced to Hills-dale Packing under two industrial development revenue bonds, a demand note and a time note. The debt is secured by a real estate mortgage on Hillsdale Packing’s
On June 11, 1987, Hillsdale Packing terminated operations because of financial difficulties; on the following day it surrendered possession of its real and personal property to the Bank. Shortly thereafter, Replogle and Morelli had separate discussions with the Bank about the possibility of starting up the business again with other investors. Neither presented the Bank with any specific plan, and the discussions terminated without the Bank being asked to make any decision concerning a new venture to be started by either. The Bank soon received a telephone call from a government meat inspector informing it that the federally-authorized meat stamp would have to be surrendered. Ms. Kelley, the Bank officer handling the foreclosure, obtained a 120 day extension of this stamp until the following October, when the stamp was surrendered. Other permits necessary for the slaughtering operations expired about the same time. The Bank made no effort to ascertain the need for retention of these other permits; nor did it try to obtain an extension of their effectiveness. The Bank also made no effort to sell the business assets as an entity, either through private or public sale. It contacted no operators of slaughterhouses, and it did not seek to employ a business broker. It placed no advertising seeking a sale of the entire business assets. It did not take an inventory of the equipment until February of 1988 when its auctioneer did so in anticipation of a public auction. By that time some items were missing — an automatic meat slicer and a tractor with a manure spreader. The Bank’s efforts were confined to arranging the separate and uncoordinated auctions of real and personal property described below.
The Bank instituted proceedings in the New York Supreme Court for foreclosure of the plant and other real estate of Hills-dale Packing, joining Hillsdale Packing, Re-plogle and Morelli (and others) as defendants. Although we are informed that Re-plogle and Hillsdale Packing unsuccessfully opposed the action, the parties have furnished us with no details concerning these defenses or any court rulings thereon, other than an intimation in questions by the Bank’s counsel that the New York court acted on some party’s motion for summary judgment. On September 30, 1988, a referee appointed by the New York Supreme Court conducted an auction of the real estate at the courthouse for the County of Columbia, New York. The Bank was the highest bidder, purchasing the company’s three parcels for a total price of $257,000. Upon the referee’s motion for confirmation of his report of the sales, the New York Supreme Court confirmed the sales and entered a $653,275.28 judgment against Hillsdale Packing. It declined to enter judgment against Replogle or Morelli, without prejudice to a renewal of the request for judgment against them. It knew that Replogle was then a debtor in the bankruptcy case pending here, and presumably it declined to enter judgment against him because the automatic stay was then in effect against such action, pursuant to 11 U.S.C. § 362.
On November 1, 1988, a month after the real estate auction, a professional auctioneer hired by the Bank conducted an auction of the equipment of Hillsdale Packing at the company’s plant. Items of equipment were sold to various bidders for a total price of $32,830.50.
When a secured party forecloses upon and subsequently disposes of personal property, “every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable.” Mass.Ann.Laws ch. 106, § 9-504 (Law. Co-op. 1984 & Supp.1989).
The Bank’s only witness was its workout officer, Ms. Kelly. She was unfamiliar with the advertising and promotional efforts made on the equipment auction. The Bank offered no admissable evidence on the value of the equipment or of any other personal property constituting its collateral. Thus, essential evidence on the issue of commercial reasonableness was missing. The Bank appeared to rely upon the order of the New York Supreme Court affirming the referee’s report of his sale. But that order is relevant only to the real estate sold by the referee. It has no bearing upon the commercial reasonableness of the auction sale of equipment or the disposition of any other personal property included in the Bank’s security agreement.
The Bank has the burden of proof concerning the commercial reasonableness of its disposition of collateral. Shawmut Worcester County Bank v. Miller, 398 Mass. 273, 282, 496 N.E.2d 625, 630-31 (Mass.1986); Poti Holding Company v. Piggott, 15 Mass.App.Ct. 275, 444 N.E.2d 1311 (Mass.App.Ct.1983) (court failed to disagree with master’s ruling on burden); K.B. Oil Co. v. Ford Motor Credit Co., Inc., 811 F.2d 310, 314 (6th Cir.1987); United States v. Willis, 593 F.2d 247, 258 (6th Cir.1979); Federal Deposit Ins. Corp. v. Rodenberg, 571 F.Supp. 455, 461 (D.Md.1983); United States v. Champion Sprayer Co., 500 F.Supp. 708, 709 (E.D.Mich.1980); Dynalectron Corp. v. Jack Richards Aircraft Co., 337 F.Supp. 659, 662-63 (W.D.Okla.1972). Clearly, it has not sustained that burden in light of its failure to furnish any evidence of the advertising and promotion of the auction sale, or of the equipment’s value, and in light also of its various omissions previously discussed. I therefore find that the Bank’s disposition of the collateral was not commercially reasonable.
II. EFFECT UPON BANK’S DEFICIENCY CLAIM
There remains the issue of what effect this disposition lacking commercial reasonableness has upon the Bank’s claim for the balance of its indebtedness. In In re Nardone, 70 B.R. 1010 (Bankr.D.Mass.1987), this Court discussed that general legal issue at some length. In Nardone, however,
The Uniform Commercial Code (“U.C.C.”), enacted in Massachusetts and elsewhere, holds a debtor liable for a foreclosure deficiency. Mass.Ann.Laws ch. 106, § 9-504(2) (Law. Co-op.1984 & Supp.1989). It also gives the debtor the right to recover from the secured party any loss caused by a commercially unreasonable disposition of collateral. Mass.Ann.Laws ch. 106, § 9-507(1) (Law. Co-op.1984 & Supp.1989). The U.C.C., however, contains no provision dealing with the effect of a commercially unreasonable disposition upon the secured party’s right to recover a deficiency. This was an oversight, according to Professor Gilmore, one of the U.C.C. draftsmen. He suggests that the solution may be found in case law under the Uniform Conditional Sales Act whose similar provisions were construed by the courts as denying a right to a deficiency in these circumstances. 2 G. Gilmore, Security Interests in Personal Property, § 44.9.4 at 1264 (1965).
Not all decisions under the U.C.C. have followed their forebears under the Uniform Conditional Sale Act. Three theories have developed: one absolutely precludes recovery of the deficiency, a second creates a rebuttable presumption that the value of the collateral equaled the debt, and the third requires the obligor to establish his damages and then set them off against the debt. Uniform Commercial Code § 26-15 (2d ed. 1980); 1A P. Coogan, W. Hogan & D. Vaghts, Secured Transactions Under the Uniform Commercial Code § 8.06[2]; 9 R. Anderson, Uniform Commercial Code § 9-504:90 to § 9-5-4:93 (3d ed. 1985); Annotation, Failure of Secured Party to Make “Commercial Reasonable” Disposition of Collateral Under UCC § 9-504(3) as Bar to Deficiency Judgment, 10 A.L.R. 4th 413 (1981).
A. Absolute Preclusion Theory
Courts adopting the so-called “absolute preclusion” theory regard the secured party’s compliance with his obligation to conduct a commercially reasonable disposition as a condition precedent to his ability to recover any deficiency. They deal with the question in either one of two factual contexts. In some cases the secured party has failed to notify the debtor of the sale; in others he has given notification but has failed to conduct a commercially reasonable sale. Where no notice-has been given, the courts reason that the secured party should be denied any recovery because the debtor has been denied the ability either to redeem the collateral or to attack its commercial reasonableness based upon his own observations made at the sale. See, e.g., Wells Fargo Bank v. Carter (In re Carter), 511 F.2d 1203, 1204 (9th Cir.1975) (applying California law); Camden National Bank v. St. Clair, 309 A.2d 329, 13 U.C.C.Rep.Serv. 199 (Me.1973); First National Bank of Bellevue v. Rose, 197 Neb. 392, 249 N.W.2d 723, 20 U.C.C.Rep. 1413 (Neb.1977). It has been observed that this same reasoning is not present where notice has been given but the sale lacks commercial reasonableness. See, Ford Motor Credit Co. v. Jackson, 126 Ill.App.3d 124, 81 Ill.Dec. 528, 466 N.E.2d 1330, 39 U.C.C.Rep.Serv. 743 (Ill.App.Ct.1984).
B. Rebuttable Presumption Theory
Perhaps a greater number of courts take a less rigid position, but one which nevertheless places a substantial burden upon the secured party. This view, sometimes called the “rebuttable presumption” theory, holds that the secured party’s failure to live up to his foreclosure obligations creates a rebuttable presumption that the value of the collateral equaled the debt. In order for the presumption to be dispelled, these courts require the secured party to sustain the burden of proving that the collateral was worth less than the debt. They reject the absolute preclusion theory as a windfall to the debtor and a penalty to the secured party. They adopt the presumption and impose this burden of proof upon
C. Damage Setoff Theory
The “damage setoff” theory has been adopted by the smallest number of courts. These courts view the secured party’s claim to a deficiency and the debtor’s claim for damages as independent rights which must be separately established, with the debtor having the burden of proving his damages; once that is done, they permit the debtor to set off his damages against the deficiency claim. They, too, point to the windfall that a debtor can realize from the absolute preclusion approach. They read the provisions of U.C.C. § 9-504 and § 9-507 as creating only separate deficiency and damage claims. They contrast these statutes with U.C.C. § 2-706, which provides that a seller who resells after the buyer’s breach may recover his damages from the buyer only if he resells in a commercially reasonable manner. Some of these decisions also rely upon the policy declaration in U.C.C. § 1-106 against penal damages. See, e.g., Barbour v. United States, 562 F.2d 19 (10th Cir.1977) (applying federal rule of decision); Valley Mining Corp., Inc. v. Metro Bank, 383 So.2d 158, 28 U.C.C.Rep.Serv. 1231 (Ala.1980); Beneficial Finance Co. v. Young, 612 P.2d 1357, 29 U.C.C.Rep.Serv. 359 (Okla.1980); Zions First National Bank v. Hurst, 570 P.2d 1031, 22 U.C.C.Rep.Serv. 1071 (Utah 1977).
D. Massachusetts Law
Massachusetts law is unsettled on the relationship between the secured party’s obligation of commercial reasonableness and his right to a deficiency. There is disagreement among decisions of the appellate division of the District Court Department on the question of whether lack of notice bars the deficiency claim. Compare Abbott Motors, Inc. v. Ralston, 28 Mass.App.Dec. 35, 5 U.C.C.Rep.Serv. 788 (1964) with One Twenty Credit Union v. Darcy, 40 Mass.App.Dec. 64, 5 U.C.C.Rep.Serv. 792 (1968). The Massachusetts Appeals Court, a higher intermediate appellate court, has dealt with the more general issue of commercial unreasonableness, but under unusual circumstances. In Poti Holding Company, Inc. v. Piggott, 15 Mass.App.Ct. 275, 444 N.E.2d 1311, 35 U.C.C.Rep.Serv. 337 (Mass.App.Ct.1983), the debtor had admitted in discovery that the foreclosure sale brought the collateral’s fair market value. Yet a master had found that the sale was not made in a commercially reasonable manner. The master based this finding on his subsidiary finding that the secured party had not sustained its burden of proof in failing to submit evidence on such matters as the auctioneer’s experience and the areas of circulation of the newspapers in which advertisements had been placed. The court reviewed the division in the case law, and concluded that the most appropriate analysis was one which balanced the equities between the parties so as to adjust the remedy to the
More recently, the Supreme Judicial Court of Massachusetts, the Commonwealth’s highest court, decided Shawmut Worcester County Bank v. Miller, 398 Mass. 273, 496 N.E.2d 625, 2 U.C.C.Rep.Serv.2d 383 (Mass.1986). The trial judge had granted the bank’s motion for summary judgment on its deficiency claim based upon affidavits setting forth an allegedly reasonable sales effort and a sales price which was 92% of the value arrived at by the bank’s appraiser. Opposing affidavits of the defendant guarantors asserted a number of allegedly unreasonable actions on the part of the bank, including removal of equipment collateral to a warehouse from a modern plant where its operation could have been demonstrated in connection with the sale. The court ruled that summary judgment was improperly granted because of the existence of material issues of fact on the question of commercial reasonableness, and it remanded the case for trial. The court observed that if the bank was unsuccessful in demonstrating that it had disposed of the collateral in a commercially reasonable manner, the bank would still be entitled to obtain a deficiency judgment in the amount of its debt less any loss resulting from its default, citing Poti and U.C.C. § 9-507(1), the statutory provision granting a debtor the right to damages.
I conclude from these Massachusetts decisions that the absolute preclusion theory is not the law of the Commonwealth. But still unsettled is the question of which of the other two theories the Massachusetts courts would adopt — the rebuttable presumption theory or the damage setoff theory. Poti Holding expressly refused to adopt one over the other. It did not have to do so in view of the debtor’s judicial admission that the sale had brought fair market value. The Supreme Judicial Court also did not have to make the choice in Miller because, being a summary judgment case, the issue was not presented. Its observation concerning the bank’s right to a deficiency cannot be viewed as even an obiter dictum adoption of the damage set-off theory. In light of the bank’s affidavit concerning fair market value, that observation was presumably based upon the assumption that the value of the collateral had been established by evidence. It should also be borne in mind that Miller referred approvingly to Poti, which had expressly refrained from adopting the absolute preclusion theory.
I further conclude that the Massachusetts courts would adopt the rebuttable presumption theory over the damage setoff theory if the question were squarely presented to them. I am therefore in agreement with Judge Gabriel of this District who regards the rebuttable presumption theory as expressive of the law of Massachusetts because of its consistency with the balancing of the equities approach utilized in Poti. See In re Travis, 67 B.R. 406, 409 (Bankr.D.Mass.1986). The rebut-table presumption theory is a flexible middle position between the other two theories. It appears to have found favor with the largest number of courts partly because of this middle ground and partly because it takes into account the practical consideration that the secured party is often the only one in the position to introduce evidence concerning the collateral’s value.
That was the situation here. Only the Bank had this evidence. The evidence could easily have been introduced; counsel for Replogle had previously agreed to allow the Bank to obtain an extension of this portion of the bifurcated trial in order to do so through witnesses not present. And yet, the Bank chose to rest its case after
Replogle’s indebtedness to the Bank has therefore been satisfied. Because only a creditor or a creditor's representative may complain of an allegedly fraudulent conveyance, it follows that the Bank’s fraudulent conveyance cause of action also fails.
A separate judgment has issued dismissing the complaint.
. The auctioner had previously furnished the Bank with a written “liquidation” appraisal of the equipment. Upon objection by counsel to Replogle, this appraisal was excluded as inadmissible hearsay.
. Although the equipment was in Hillsdale Packing’s plant in Hillsdale, New York, the Bank is located in Massachusetts and its form of security agreement signed by the parties specifies that Massachusetts law applies.