U.S. v. Willis

• Citation: 593 F.2d 247
• Decision Date: 26 January 1979
• Docket Number: No. 76-2592,76-2592
• Parties: 25 UCC Rep.Serv. 1178 UNITED STATES of America, Plaintiff-Appellant, v. Duane G. WILLIS and Mary J. Willis, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 247

593 F.2d 247

25 UCC Rep.Serv. 1178

UNITED STATES of America, Plaintiff-Appellant, v. Duane G. WILLIS and Mary J. Willis, Defendants-Appellees.

No. 76-2592.

United States Court of Appeals, Sixth Circuit.

Argued June 13, 1978.

Decided Jan. 26, 1979.

William D. Beyer, U. S. Atty., Cleveland, Ohio, Daisy G. Collins, Cleveland, Ohio, Leonard Schaitman, Mark N. Mutterperl, Appellate Section, Civil Division, Dept. of Justice, Washington, D. C., Robert E. Kopp, Richard A. Olderman, Washington, D. C., for plaintiff-appellant.

Richard L. Phillips, Benesch, Friedlander, Coplan & Aronoff, Cleveland, Ohio, for defendants-appellees.

Before EDWARDS, Chief Judge, and CELEBREZZE and KEITH, Circuit Judges.

KEITH, Circuit Judge.

The Small Business Administration (SBA), an agency of the United States government, appeals from a judgment of the district court denying its claims against Duane G. Willis and Mary J. Willis. Plaintiff commenced this action on December 22, 1975, alleging that the defendants were liable to it pursuant to a guaranty executed in conjunction with an SBA loan. The guaranty was assigned to the SBA upon default of the primary debtor and performance by SBA pursuant to its own guaranty. Jurisdiction was invoked pursuant to 28 U.S.C. § 1345. The district court held that the SBA was not entitled to any monetary recovery because it had failed to dispose of collateral securing the loan in a commercially reasonable manner. We affirm Judge Robert B. Krupansky's decision.

FACTS

The facts are relatively straightforward. On March 22, 1972, Opticron, Inc., a Delaware Corporation, together with Opticron International, Inc., and Opticron of Pennsylvania, Inc., (hereinafter collectively referred to as Opticron) executed a $325,000 promissory note in favor of the Union Commerce Bank of Cleveland, Ohio (UCB). The note was guaranteed up to 90 percent by the SBA. In conjunction with Opticron's execution of the note and as an inducement for the extension of credit, defendants Duane G. and Mary Jayne Willis signed a separate instrument in favor of the UCB and its successors and assigns unconditionally guaranteeing the prompt payment when due of the principal and interest owed on the note. ¹ That same day, all the corporate signatories to the promissory note executed security agreements in favor of the UCB, collateralizing the $325,000 loan with all assets of the several corporations, except cash.

Opticron defaulted on the note. SBA loan officer Gordon Miller met on February 1, 1973, with representatives of Opticron, UCB and other interested parties regarding the financial position of Opticron. On February 7, 1973 the UCB requested payment from the SBA of 90 percent of the $325,000 loan pursuant to the SBA guaranty agreement.

The SBA subsequently took possession of the assets and operations of Opticron and placed a notice in the Business Opportunity Section of the Sunday Cleveland Plain Dealer, February 18, 1973, advertising a summary public auction sale to be held on Thursday, February 22, 1973, at the offices of Opticron. The notice contained a minimum bid requirement of $150,000.

On February 21, 1973, the SBA paid to the UCB the sum of $296,530, being payment in full of 90 percent of the $325,000 loan, plus 90 percent of the interest due on the loan. The February 22, 1973 auction did not take place as advertised. Apparently, questions were raised as to the legal sufficiency of the notice and so none of the parties present would place a bid. On March 13 and 14, and April 12, 1973, however, the public auction sales were held, and $47,456.63 was realized from the sale of Opticron's assets. Deductions from gross sales for rent, expenses and auctioneers' fees resulted in net proceeds of $41,115.47 from all auction sales.

In the meantime, Opticron had received two firm private offers to purchase its assets. On January 30, 1973, an offer from Will Ross, Inc. (Will Ross) to purchase all of the assets of Opticron as reflected on the latter's November 30, 1972 balance sheet for the sum of $200,000 cash was communicated by letter to Opticron's Board of Directors. On January 31, 1973, a prior offer from Marcrum Optical of Florida, Inc. (Marcrum) to purchase all assets as reflected on the January 30, 1973 balance sheet of Opticron for $210,000 was confirmed by letter. Marcrum offered to pay $100,000 in cash with the remaining $110,000 to be paid over a period of 10 years.

At the above-mentioned meeting on February 1, 1973, defendant Duane Willis communicated these two offers to the interested parties then present, Viz., Gordon Miller of the SBA and a representative of the UCB. With the apparent concurrence of all present, a telegram dated February 2, 1973, was sent to Will Ross accepting its offer subject to the final agreement and concurrence of UCB.

Subsequent to the February 1, 1973 meeting, Miller informed Willis that a public sale was Necessary to dispose of the assets collateralizing the promissory note. Thereafter, the aforementioned advertisement of the summary public auction ran in the Cleveland Plain Dealer on February 18, 1973.

Notwithstanding the receipt of $41,115.47 from the auction sales, the SBA seeks by this action to recover from defendant guarantors the full amount of the loan principal outstanding plus accrued interest; a total of $297,174.66 plus daily interest of $43.9071 from December 27, 1974. At trial, defendants asserted that the sale of Opticron's assets was not conducted in a commercially reasonable manner and that plaintiff had the burden of establishing the commercial reasonableness of the sales. The plaintiff countered by asserting that the defense of commercial reasonableness was not available to defendants and that, in any case, the burden of proof on that issue rested with the defense. The district court found that the defense was available to the defendants and that once it had been raised, the burden of establishing the commercial reasonableness of the sales in question rested with the plaintiff. Additionally, the court found that the Government had failed to carry its burden.

The Government presents four issues for decision on appeal: 1) whether unconditional guarantors can avail themselves of the defense of commercial reasonableness to defeat its alleged federal right of recovery; 2) assuming the defense is available to unconditional guarantors, whether the defendants are estopped to assert it; 3) whether defendants proved at the trial below that the sale of Opticron's assets was commercially unreasonable; and, 4) whether the district court erred in denying SBA any monetary recovery. These issues will be addressed in the order in which they have been set out above.

I. Availability of the Defense of Commercial Reasonableness

The Government makes two arguments in support of its contention that the defense of commercial reasonableness is unavailable to the defendants in this action. First, the Government argues that this case is controlled by federal law, which does not recognize the defense. The Government's second argument is three-pronged. First, it focuses upon the fact that the guaranty executed by the defendants made them "unconditional guarantors" of the indebtedness secured by the guaranty. ² As such, contends the Government, defendants have an absolute contractual duty to repay the debt upon default by the primary obligor.

As a secondary component of the above argument, the Government urges that the agreement itself controls this case and that the fact of unconditional guaranty, coupled with other language contained in the agreement regarding the SBA's powers to deal with the collateral, conferred upon its discretion so broad that it placed upon defendants an absolute duty of repaying the loan regardless of any dereliction attributable to the SBA i. e., that it relieved the SBA of any and all duties whatsoever to defendants in dealing with the collateral.

Finally, the Government contends that general principles of commercial law precludes the availability of the defense of commercial reasonableness in the instant case.

A. Applicable Law

Emphasizing that the alleged right of recovery is a federal one, the Government argues that this case is controlled by federal law and that there is no basis in federal law for defeating the SBA's right of recovery. In support of this contention the Government points to the SBA's choice of Law regulation, 13 C.F.R. § 101.1(d)(2). This regulation provides:

Instruments evidencing a loan, obligation of security interest in real or personal property payable to or held by the Administration or the Administrator, such as promissory notes, bonds, guaranty agreements, mortgages, deeds of trust, and other evidences of debt or security shall be construed and enforced in accordance with applicable Federal Law.

Additionally, the Government points to the note guaranteed by defendants, which provides in Part :

This promissory note is given to secure a loan which SBA is making or in which it is participating and, pursuant to Part 101 of the Rules and Regulations of SBA (13 C.F.R. 101.1(d)), this instrument is to be construed and (where SBA is the holder or a party in interest) enforced in accordance with applicable Federal Law.

In opposition, appellees argue that Ohio law controls this case, ³ and that there is no compelling reason to apply federal law here to override state law requirements. Appellees argue further that, in any event, there is no federal substantive law to be applied here which differs from that upon which the district court based its decision. ⁴ We agree with appellant that, by virtue of the regulation pursuant to which this loan transaction was entered into and the specific language contained in the promissory note, federal law is controlling in this case. ⁵ However, while this conclusion establishes the confines within which the issues raised on this appeal must be decided, it does not dispose of them. For while the...