This is an appeal from a deficiency judgment of $16,384.80 entered against appellant Ray Womack. On January 13, 1984, appellant’s son, Coy Womack, obtained a $31,301.00 loan from appellee First State Bank of Calico Rock (Bank). As security for the loan, he pledged a used 1974 Wilson trailer, a used 1973 White truck, a used 1974 Challenger mobile home, and another used 1974 Wilson trailer. Appellant Ray Womack also signed the note. Subsequently, the Bank and Coy agreed to substitute a used 1979 Ford tractor for the last listed Wilson trailer. Coy Womack defaulted on the note, the collateral was repossessed and sold, and suit was filed against both Coy and Ray Womack for the deficiency. When Coy filed for bankruptcy and moved to Texas, the Bank proceeded against Ray Womack.
Appellant first argues that the trial court erred in admitting into evidence a handwritten note purporting to establish that the sale of the collateral was conducted in a commercially reasonable manner. Appellee’s only witness was Danny Moser, vice-president of the Bank, who testified to the making of the note, the default, the repossession, the demand for payment, and the notice of sale published in a local newspaper. When Moser attempted to testify about the parties present at the sale, the bids made and the terms of the sale, appellant objected and, on voir dire examination, the witness disclosed that he had not been present at the sale and had learned everything he knew about the sale from the bank president, Davey Wyatt. Appellant’s objection to Moser’s testimony about what took place at the sale was sustained as inadmissible hearsay. Appellee then introduced two pieces of paper containing the bank logo at the top on which were notations handwritten in ink. Moser identified these as being written by Wyatt, who had been present at the sale, and contended they showed who attended the sale and what prices had been bid for each item. These two memos were admitted, under the business records exception to the hearsay rule, as evidence that the sale was commercially reasonable. Appellant argues that admission of this evidence was error and that without it there was no proof that the sale was conducted in a commercially reasonable manner. We agree with appellant that these notations did not meet the criteria necessary to be admissible under the business records exception to the hearsay rule.
A.R.E. Rule 801 defines hearsay as a statement, other than one made by the declarant while testifying at the trial, offered in evidence to prove the truth of the matter asserted. Rule 802 provides that hearsay is not admissible. Rule 803 sets out numerous exceptions to the hearsay rule where evidence is held admissible because of its innate reliability. One of these exceptions is known as the “business records exception.”
In Cates v. State,
When we apply the facts of the case at bar to these criteria, the memos fail to qualify as a business record for at least two reasons. Even if we accept the Bank’s assertion that these notes, jotted down on what appear to be loose pages taken from a memo or scratch pad, were intended by the president of the bank to preserve the terms of a sale of collateral which the Bank would later be required to prove was conducted in a commercially reasonable manner in order to collect a deficiency judgment, there is no evidence in the record to indicate that these notations were made at or near the time the sale took place. Moser simply testified that the notes were written on stationery from one of the bank’s note pads and that he recognized the handwriting as Wyatt’s. And, in the second place, the record is devoid of any evidence from which we can conclude that Moser was the custodian of the records or otherwise a qualified witness through which these papers could be introduced.
When these notes are excluded, the only evidence that the sale was conducted in a commercially reasonable manner is the notice published in the newspaper and that alone is insufficient to support a proper sale. Therefore, we reverse the award of a deficiency judgment. However, our ruling does not require dismissal. The general rule is to remand common law cases for new trial; it is only when the record affirmatively shows that there can be no recovery on remand that we dismiss. St. Louis Southwestern Railway Co. v. Clemons,
Because we are remanding this case, other issues that may arise on retrial will be discussed. First, we examine what constitutes a commercially reasonable sale. Ark. Stat. Ann. § 85-9-504(3) (Supp. 1985) of the Uniform Commercial Code provides:
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 parcels and at any time and place and on any terms but every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable.
At this point, we call attention to the recent case of First State Bank of Morrilton v. Hallett,
Whether a sale was conducted in a commercially reasonable manner is a fact question to be determined from the facts of the particular case under consideration. Becknell v. Quinn,
Other situations in which a sale has been held not to have been commercially reasonable include when the creditor removed the motor from a repossessed combine and lent it to another customer for several months, thus rendering the combine unsalable for that period of time, Henry v. Trickey,
While a low price is not conclusive proof that a sale has not been commercially reasonable, a large discrepancy between sales price and fair market value “signals a need for close scrutiny” of the sale procedures. Connex Press, supra; Ark. Stat. Ann. § 85-9-507(2) (Supp. 1985). In White & Summers, Uniform Commercial Code, § 26-11 (2d ed. 1980), the authors suggest that even in cases which cite the failure to give proper notice as the reason for holding that a sale was not commercially reasonable, the true, though unarticulated reason, may be an insufficiency of the sale price. Footnote 117 states:
Although courts frequently rely on lack of notice, they seldom mention any causal connection between the debtor’s injury and his failure to receive notice; there is no suggestion that he would have redeemed or have been otherwise moved to action by receipt of a notice. Hidden among the facts are some interesting data on the resale prices. See, e.g., Norton v. National Bank of Commerce,240 Ark. 143 ,398 S.W.2d 538 , 3 UCC 119 (1966) (car purchased for more than $350 in September resold for $75 in January); Baber v. Williams Ford Co.,239 Ark. 1054 ,396 S.W.2d 302 , 3 UCC 83 (1965) (car purchased in August for at least $882, including interest but not including downpayment, and resold, apparently in December, for $210); Braswell v. American Nat’l Bank,117 Ga. App. 699 ,161 S.E.2d 420 , 5 UCC 420 (1968) (car purchased for $2,195, excluding interest but including downpayment, and resold, apparently after only a few months, for $850); Central Budget Corp. v. Garrett,48 A.D.2d 825 ,368 N.Y.S.2d 268 , 17 UCC 327 (1975) (car purchased for over $1,600 sold at auction three months later for $300).
The authors conclude that given an unusually low sale price little more is needed for the courts to find the sale commercially unreasonable.
Sale price was recently discussed by the Arkansas Supreme Court in Thrower v. Union Lincoln-Mercury, Inc.,
[Section] 85-9-507(2) states in part: “The fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the secured party is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner.” Also, whether the collateral is sold wholesale instead of retail is not necessarily determinative of commercial unreasonableness. . .Any difference between the fair market value and the price actually received, however, is ordinarily a material consideration, but this fact must be examined in light of all aspects of the sale to determine commercial reasonableness.
We next discuss the appellant’s argument that the trial court erred in refusing to hold that he was discharged from liability because the promissory note sued upon had been materially altered. It was undisputed that after appellant had signed the note the Bank and Coy Womack agreed to delete the last item of collateral, a used 1974 Wilson trailer, and substitute a used 1979 Ford tractor, without appellant’s knowledge or consent. It was also undisputed that the Bank discovered when it was repossessing the collateral that this Ford tractor had a prior lien against it for $22,000. Appellant contends that this alteration on the face of the note discharged him. He relies on Merchants National Bank of Fort Smith v. Blass,
Appellant continues this argument, in a different vein, by contending he should be released from liability under Ark. Stat. Ann. § 85-3-606(1 )(b) (
(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.
Appellee responds to these arguments by insisting that appellant was not a guarantor but a comaker and thus jointly liable on the note. It also argues that appellant cannot be discharged from liability unless the alteration of the note was both material and fraudulent. And appellee contends that, in any event, the appellant would be discharged only to the extent of the value of the collateral released by appellee.
As to the guarantor versus comaker issue, we do not agree with appellee’s argument that Ark. Stat. Ann. § 85-3-416 (
Under the Code the word “surety” includes all “guarantors” and all “accommodation parties.” A “guarantor” differs from an “accommodation party” only because he has added some words to his signature and has so altered (slightly or greatly) the liability he would have had if he had simply put his signature on the instrument as a mine-run accommodation party. Section 3-415(1) defines an accommodation party as “one who signs the instrument in any capacity for the purpose of lending his name to another party to it.” Section 3-415(2) tells us that an accommodation party “is liable in the capacity in which he has signed.” Thus an accommodation party may appear on the instrument as a maker, acceptor, drawer or indorser and his liability is governed by the Code sections on the contracts of parties who sign in these capacities.
The question of whether one is an accommodation signer was discussed in Riegler v. Riegler,
In the instant case, we hold that the question of whether appellant was an accommodation signer is an issue of fact to be decided on the evidence presented in the retrial of this case. We do not agree with appellant’s contention that the doctrine of judicial estoppel is involved here or that the doctrine prevents the guarantor versus comaker issue from being decided in the new trial.
On the issue of appellant’s discharge from liability because of alteration of the note, we think the law needs to be put in proper focus in order to reveal the factual issues to be presented to the fact finder. First, we look at Ark. Stat. Ann. § 85-3-407, which deals with the alteration of an instrument. Section (1) of that statute provides that any alteration is material if it changes the contract in any respect, and section (2) provides that against any person other than a subsequent holder in due course, an alteration by the holder that is both material and fraudulent discharges any party whose contract is thereby changed unless that party assents or is precluded from asserting the defense; and section (2)(b) provides “no other alteration discharges any party.” Also, Comment (3)(b) to the statute states that a material alteration does not discharge any party unless it is made for a fraudulent purpose. Moreover, in the Merchants National Bank of Fort Smith v. Blass case, supra, the court said:
We agree with the Appellant that the alterations on the face of the note in question, when taken alone, did not discharge Appellee from liability. Ark. Stat. Ann. § 85-3-407(2)(a) (Add. 1961 ), expressly provides that to discharge a party to the contract an alteration must be both fraudulent and material. Here, there is no evidence of fraud.
Of course, we do not know what evidence will be presented in the retrial of this case but even if there is no evidence of a fraudulent alteration, the question of appellant’s discharge is not completely answered. We must now look at Ark. Stat. Ann. § 85-3-606 (
Section 3-606( 1)(a) specifies changes in the legal relationship between debtor and creditor that discharge the surety. When, without the surety’s consent the holder “releases or agrees not to sue ... or agrees to suspend the right to enforce ... the instrument or collateral or otherwise discharges” the principal debtor, the surety is discharged
Under section 3-606(l)(b) the surety is also discharged when, without his consent, the creditor “unjustifiably impairs any collateral for the instrument.”
The case of Bank of Ripley v. Sadler,
The impairment issue mainly involved the bank’s release of the title to a pickup truck, so that it could be sold by makers of the note, plus a check from an insurance company received by the makers for the fire loss of another vehicle. These vehicles were part of the collateral securing the note to the bank. The proceeds of the sale and the check were given to the bank for application on the note. Sadler argued that this “unjustifiably” impaired the collateral for the note as it affected the assets of the business and his right of subrogation against the collateral. The court made two findings that have special significance in the instant case. One, it was held that the test of whether a secured party has unjustifiably impaired collateral not in his possession is “that of reasonable care under all the relevant circumstances of the case.” Two, it was held that if impairment does occur the discharge of the surety is pro tanto only. This last holding is in keeping with section 3-606 which provides that a party’s discharge is “to the extent” that the collateral is unjustifiably impaired. This was also the view taken by the court in Farmers State Bank of Oakley v. Cooper,
We pause here to note that Van Balen discussed a point that appears sure to arise in another trial of the instant case. The opinion refers to a case where impairment of the collateral (failure to perfect a lien on pledged corporate stock) did not effect a discharge upon a guarantor because it was shown that the stock had no value. This is significant in the present case both on the question of extent of the impairment and its pro tanto discharge, and as to the reasonableness of the Bank’s action, under all the circumstances, in substituting the Ford tractor for the Wilson trailer as collateral on the note in this case.
We also point out that we have carefully considered the cases of National Bank of Eastern Arkansas v. Collins,
The effect of the impairment upon one secondarily liable may or may not be translatable into dollars. There may be clear prejudice without precisely calculable loss. This will normally result in the discharge of the surety.
Finally, appellant argues the trial court erred in not setting aside the judgment after it was learned that another attorney from the firm which represented the Bank at trial (different attorneys represent the Bank in this appeal) had represented Coy Womack when repossession of the collateral first began. The appellant, Coy’s father, only discovered this previous relationship some two months after the entering of the judgment against him. He then filed a motion to have the judgment set aside for this reason. The motion was denied. Appellant contends Rules 1.7 and 1.9 of the Model Rules of Professional Conduct, see
Rule 1.7 provides that a lawyer shall not represent a client if the representation will be directly adverse to another client unless he reasonably believes the representation will not adversely affect the relationship with the other client. The appellee submits that this rule has not been violated as its trial counsel never represented appellant and the representation of Coy Womack ceased long before trial counsel accepted representation of the Bank in this case.
Rule 1.9 prohibits a lawyer of a former client from subsequently representing another person in the same or substantially related matters. Appellee contends this rule has not been violated because it was not in effect at the time of this trial and that the introduction to the rules states their purpose will be subverted if they are invoked by opposing parties as procedural weapons. Under the circumstances, we cannot say that the trial court’s refusal to set aside the judgment in this case was erroneous. Since the attorneys who represented appellee at the trial have now been permitted to withdraw, this issue should not arise in the retrial of this case.
Because of the error in admitting into evidence the written notes alleged to have been made by the president of the appellee Bank at the time of the sale of the collateral, the judgment is reversed and the case remanded for a new trial. We have attempted to fully discuss the law with respect to the issues which we think may arise in a new trial. We remand for a new trial consistent with the law set out in this opinion.
Reversed and remanded.