Federal Deposit Ins. Corp. v. Lanier

• Decision Date: 18 March 1991
• Docket Number: No. 90-2650,90-2650
• Citation: 926 F.2d 462
• Parties: 14 UCC Rep.Serv.2d 346 FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee, v. Joseph P. LANIER, et al., Defendants, and Bill D. Whittington and Thomas J. O'Grady, Defendants-Appellants. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 462

926 F.2d 462

14 UCC Rep.Serv.2d 346

FEDERAL DEPOSIT INSURANCE

CORPORATION, Plaintiff-Appellee, v. Joseph P. LANIER, et al., Defendants, and Bill D. Whittington and Thomas J. O'Grady, Defendants-Appellants.

No. 90-2650

Summary Calendar.

United States Court of Appeals Fifth Circuit.

March 18, 1991.

Rehearing Denied April 11, 1991.

Jack D. Hicks, Robert T. Cain, Jr., Zeleskey, Cornelius, Hallmark, Lufkin, Tex., for Whittington and O'Grady.

Preston C. Goodwin, Spring, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before JOHNSON, SMITH, and WIENER, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Defendants guaranteed notes made by D-1 Enterprises, Inc., and its three subsidiaries. The Federal Deposit Insurance Corporation (FDIC), acting in its corporate capacity for the failed bank that had extended the loan, obtained a deficiency judgment against two of the guarantors. Because the bank gave proper notice of its intent to sell the inventory, we affirm the judgment in favor of the FDIC.

I.

Defensive Security Southwest, Inc. (Defensive Security), Defensive Fire Control, Inc. (Defensive Fire), and Unisec, U.S.A., Inc. (Unisec), were distributors and installers of fire alarm and security systems. In 1982, Defensive Security executed a promissory note for $350,000 payable to Commercial State Bank and gave the bank a security agreement covering its accounts receivable and inventory. In addition, Bill Whittington, Joseph Lanier, James Devlin, and Thomas O'Grady contemporaneously gave the bank a continuing guaranty. Defensive Security soon executed another promissory note for $200,000, which was cross-collateralized with the prior note.

Subsequently, with the bank's approval, the shareholders of Defensive Security, Defensive Fire, and Unisec reorganized their companies under a single holding company named D-1 Enterprises, Inc. (D-1), with the three former corporations becoming wholly-owned subsidiaries of D-1. This new corporation then received a revolving line of credit from the bank, evidenced by a promissory note for $1,000,000 (the D-1 note). As collateral, the bank received a security interest in the accounts receivable and inventory of D-1, Defensive Security, and Defensive Fire, and a pledge of stock in D-1. In addition, O'Grady, Whittington, Devlin, and Thomas W. Crafton executed a new, continuing guaranty; Lanier did not guarantee this note.

At this time, D-1 arranged to pay off the $200,000 note and the remainder owing on the $350,000 note. Any remaining principal amounts on these notes were incorporated as part of the revolving credit, and at the end of 1982 the outstanding principal balance on the D-1 note was $907,669.74.

The revolving line of credit was renewed several times, the last time being on February 4, 1984. This final note is the subject of the instant suit. The bank decided to foreclose its security interest by calling the D-1 note. D-1 and its subsidiaries then filed chapter 11 bankruptcy petitions.

The bank obtained an order from the bankruptcy court authorizing it to foreclose its security interest against the collateral. The bank then sent notice to the parties, stating that it intended to sell the collateral at either a public or private sale ten days after the letter was sent. Four months later, the inventory was sold for $100,000 at a private sale.

The bank brought a deficiency judgment in state court against the guarantors. The FDIC, in its corporate capacity as purchaser and liquidator of the bank's assets, later intervened and removed the case to federal court. The FDIC filed a motion for summary judgment, seeking recovery against all defendants as guarantors. Lanier and Whittington opposed the motion, stating that the bank did not dispose of the collateral in accordance with Texas law. Lanier filed a motion for summary judgment, asserting that the only notes that he had guaranteed had been paid and discharged.

The district court entered an interlocutory order granting Lanier's motion and granted the FDIC's motion against Whittington, Devlin, and O'Grady as to liability only. Following a bench trial to determine damages, the court granted the FDIC final judgment against the three guarantors for $347,686.51, plus costs, attorneys' fees, and post-judgment interest.

Whittington and O'Grady now appeal. The FDIC has not appealed the judgment denying it relief against Lanier. Whittington and O'Grady challenge only whether they owe any money at all and do not dispute the district court's calculation of the amount still deficient.

II.

The parties spend the majority of their briefs arguing about whether the federal holder in due course doctrine applies to bar this claim and about who has the burden of proof on the issue of commercial reasonableness. We do not today reach either issue, for we hold that the guarantors had adequate notice of the sale, regardless of the party who carries the burden. Because the bank gave proper notice, all other arguments the parties raise are irrelevant.

The sole restraints on a seller disposing of collateral pursuant to Tex. Bus. & Comm.Code Ann. Sec. 9.504 (Tex.UCC) is that the disposition be commercially reasonable and that the creditor give the debtor proper notice. Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769, 771 (Tex.1982). Before a creditor can sell the collateral underlying a secured loan, section 9.504(c) requires that the creditor give the debtor "reasonable notification of the time after which any private sale or other intended disposition is to be made." The purpose of this notification is to give the debtor an opportunity to discharge the debt, arrange for a friendly purchaser, or to oversee the sale to see that it is conducted in a commercially reasonable manner. 2 J. White & R. Summers, Uniform Commercial Code Sec. 27-12 at 598-99 (3d ed. 1988). Under Texas law, a guarantor also is entitled to notice. Adams v. Waldrop, 740 S.W.2d 32, 33 (Tex.App.--El Paso 1987, no writ).

The guarantors challenge the notice given in this case. The notice sent by the bank provided,

[The Bank] will sell the [property] at either a public or private sale ten (10) days after the date of this communication. The Bank fully intends to give reasonable notice of such sale, but circumstances attendant to the property are such that the value of the property threatens to decline speedily, therefore the sale may take place immediately.

Proceeds from such sale shall be applied as provided by Section 9.504, Vernon's Annotated Statutes. There may be a deficiency due and owing the Bank on the debt after the application of the proceeds.

The guarantors contend that the sale of the inventory for $100,000 was commercially unreasonable because the distributor's cost for the equipment was $500,000 and the dealer's cost approximately $800,000 to $900,000. In addition, the guarantors assert that their notice was defective because the letter sent to them did not state whether the disposition of the collateral would be by public or private sale and because the sale took place four months, rather than ten days, after the letter was sent. Finally, the guarantors aver that the letter did not purport to be the notice of a sale and, owing to its failure to identify the guaranty or to notify the addressee of his status as a debtor personally liable for any deficiency, did not give the guarantors adequate notice of their obligations following a section 9.504(c) sale. We reject each of these contentions and hold that the guarantors received adequate notice under section 9.504(c).

Although the goods were sold at a private sale, the bank's letter did not indicate the type of sale at which the goods would be sold. This was not a fatal defect. We follow the lead of the Texas courts in rejecting this as a reason to declare the notice inadequate. As one such court has stated,

We are aware of decisions by courts in other states that have held that the notice of intent to sell or otherwise dispose of collateral must state whether the sale is to be private or public. See, e.g., General Motors Acceptance Corp. v. Carter, 290 S.C. 216, 349 S.E.2d 342 (S.C.Ct.App.1986). However, Sec. 9.504(c) does not so require. We hold the evidence was sufficient to establish the [collateral] was sold by private sale. As such, the Notice of Intent to Sell did not need to state the time and place of sale.

Hall v. Crocker Equip. Leasing, Inc., 737 S.W.2d 1, 3 (Tex.App.--Houston [14th Dist.] 1987, writ denied). Because the notice sent by the bank was adequate to "inform reasonable business persons" that their property would be sold within ten days or more, Siboney Corp. v. Chicago Pneumatic Tool Co., 572 S.W.2d 4, 6 (Tex.Civ.App.--Houston [1st Dist.] 1978, writ ref'd n.r.e.), the notice was sufficient to allow the bank to proceed with its planned sale of the goods. The notice is not defective simply because it does not specifically state that the goods would be sold privately. ¹

The guarantors also argue that their notice was invalid because the sale took place four months, rather than ten days, after the letter was sent. This argument ignores the different treatment that Texas law affords creditors who proceed by private rather than public sale. While section 9.504 provides that a secured creditor must provide both the time and place of any public sale, to allow the debtor the chance to show up at the public sale, the requirements for a private sale are less stringent. For a private sale, the creditor only need provide notice "of the time after which any private sale or other intended disposition is to be made." Sec. 9.504(c) (emphasis added). The commentary to this section provides that " '[r]easonable notification' is not defined in this Article; at a minimum it must be sent in such time that persons entitled to receive it will have sufficient time to take appropriate steps to protect their interests by taking part...