Alaska Statebank v. Fairco
| Decision Date | 25 November 1983 |
| Docket Number | No. 6720,6720 |
| Citation | 674 P.2d 288 |
| Parties | 37 UCC Rep.Serv. 1782 ALASKA STATEBANK, Appellant, v. FAIRCO, a partnership d/b/a Clowntown, and James L. Dodson, Ronald M. Henry, and Andrew S. Warwick, Appellees. |
| Court | Alaska Supreme Court |
David W. Oesting, Davis, Wright, Todd, Riese & Jones, Anchorage, and Mary A. Nordale, Fairbanks, for appellant.
James A. Parrish and Lance C. Parrish, Parrish Law Office, Fairbanks, for appellees.
Before BURKE, C.J., RABINOWITZ, MATTHEWS and COMPTON, JJ., and TUNLEY, Superior Court Judge. *
In this case Fairco, the debtor, filed suit against Alaska Statebank (Statebank), the secured creditor, for damages allegedly sustained when Statebank proceeded against the collateral which secured Fairco's delinquent obligation to the bank. Fairco claimed that the course of negotiations between the parties had altered Statebank's rights under Alaska's version of the Uniform Commercial Code (UCC) and the written security agreement, precluding the bank from proceeding against the collateral without giving prior notice to Fairco. Statebank disputed Fairco's characterization of the effect of the negotiation process, relying upon the terms of the security agreement and the provisions of the Alaska UCC. After a nonjury trial the superior court ruled in favor of Fairco and this appeal followed.
Fairco is a partnership formed by James L. Dodson, Ronald M. Henry and Andrew S. Warwick. Fairco owns and runs a retail store in the Bentley Mall in Fairbanks, operating under the tradename "Clowntown."
On February 2, 1977, Statebank loaned Fairco $120,000 with interest at 10 1/4. 1 A year later, in February 1978, Statebank made a second loan, in the amount of $50,000, to Fairco. 2 The security agreement given in connection with this $50,000 loan contained the following standard provision:
If borrower shall fail to pay when due any amount payable on any of the loans made hereby or on any other indebtedness of Borrower's secured hereby, or shall fail to observe or perform any of the provisions of this agreement, Borrower shall be in default hereunder. When Borrower is so in default, all of such loans and other indebtedness secured hereby shall become immediately due and payable at Bank's option without notice to Borrower, and Bank may proceed to enforce payment of the same and to exercise any or all rights and remedies afforded to Bank by the Uniform Commercial Code of Alaska or otherwise possessed by Bank.
The $50,000 note stated it was payable on demand or in installments--$10,000 on June 15, 1978, $3,000 payments on September 15, October 15 and November 15, 1978, and the balance by December 15, 1978.
The June 15 payment on the $50,000 note was not made. A revision agreement, executed by the partners and Fosheim on June 30, 1978, provided that the $3,000 payments would be made as scheduled and that the balance would be due December 15, 1978. Thus, the $10,000 payment was postponed until the end of the year under the new contract but other provisions remained unaltered.
The September 15 payment on the $50,000 note was not made. On October 1, the delinquency came to the attention of John Houlihan, senior vice president of Statebank and Fosheim's supervisor regarding loan-making and collection. He arranged for transfer of the account to Anchorage.
The payment due on October 15, 1978 was not made. At this point, Houlihan obtained financial statements from Clowntown and discovered that it had insufficient income to pay its debts as they came due, that the original equity in the company had been eliminated by operating losses, and that the value of the collateral was diminishing more rapidly than the indebtedness to Statebank was being retired. Houlihan met with the partners on October 16 to discuss the delinquency. Fairco suggested that the Bank "roll" the note to delay repayment until after the Christmas selling season. Houlihan rejected the proposal and requested further financial information. 3
Responsibility for the Fairco loans was assigned to Gerald Lewis, vice president of credit administration at Statebank, shortly after October 16. 4 On November 3, 1978, Lewis presented Fairco with a written proposal for granting the extension it sought for payment of the $50,000 loan. It required the partners to provide Statebank with deeds of trust on their personal residences as collateral for the note, stated that the note was in default, and extended repayment, $20,000 being due on January 15, 1979 and the balance on June 30, 1979. The deeds of trust were to be released upon payment in full of the $50,000 sum, provided that at that time the value of Clowntown's inventory exceeded its outstanding indebtedness to Statebank by 20%. The offer stated that it would expire at 1:00 p.m. on November 8, 1978.
Lewis contacted Henry and Dodson on November 6, 1978 and was informed that the partnership had agreed to a counter-proposal. By its terms, Fairco's outstanding indebtedness to Statebank of $130,000 would be refinanced over a five-year period with monthly payments of $2,900 at 12% interest. The proposal offered no additional collateral. There is a conflict between the testimony of Lewis and Dodson regarding the verbal exchange which followed. Dodson testified that Lewis simply thanked Dodson and hung up. Lewis testified that he said "Is this the only thing that you are able to do?", indicated that the proposal would not be agreeable to Statebank, thanked him and hung up. The trial judge accepted Dodson's version, but concluded that neither account of the exchange constituted a notice of default or demand for payment.
It was at this point that Lewis decided to proceed against the collateral. On November 6 at 8 p.m., accompanied by Fosheim and two other representatives of the Fairbanks branch, a locksmith and a police officer, Lewis proceeded to Clowntown. He identified himself to the manager and informed him that the store was being closed. Customers were asked to leave, but were not informed why the store was being closed. According to two of the local Statebank representatives and two customers who were present, Lewis conducted himself with an air of self-importance and appeared to be "charged up" by the takeover. The locks on the store were changed and receipts and accounts secured. Statebank set off Fairco's checking account against the sum it owed the bank. Outstanding checks presented for payment were not accepted, and the payees were informed that the account had been "closed."
On the morning of November 7, Fairco retook possession of the collateral and opened the store. Statebank presented the partnership with a written demand for payment of the two notes. On November 8, the partners executed the agreement which had been proposed by Statebank on November 3. Fairco's account at Statebank was charged $822.45 for the title insurance policies purchased on the partners' residences which partially secured the new agreement. No notice was given to the partners that this sum would be deducted from their account.
Fairco refinanced the loan at another institution and paid its obligation to Statebank in full on January 16, 1979. On January 25, 1979, the deeds of trust on two of the residences were released. After repeated demands from Henry the encumbrance on his house was finally released on June 7, 1979, two weeks after the instant suit was filed. Henry testified that Lewis admitted to him that Statebank was holding the deed of trust because of difficulties he was experiencing in repaying unrelated obligations, and that the failure to release it earlier had been an "oversight on purpose."
Fairco filed suit against Statebank, alleging that the Bank had acted unreasonably in repossessing the collateral, damaging the partners' business and personal reputations and causing various unnecessary expenditures. Fairco argued that Statebank had breached the duty of good faith imposed by the Alaska UCC at AS 45.01.203 by closing the store in order to coerce the partners to put up additional security. Fairco sought both compensatory and punitive damages.
After a trial without a jury, the superior court concluded that by their course of dealing the parties had modified the contract to relieve Fairco of its obligation to pay sums due under the note. The court found that Fairco was not in default at the time Statebank took possession of its collateral and thus held that the breach did not give rise to remedies under the UCC and written security agreement. Alternatively, the superior court concluded that even if a default existed, Statebank had waived its right to seize the collateral or was estopped to assert this right until after the Christmas selling season without making a prior demand for payment and giving notice of default. In failing to provide prior notice of its intention to take possession of the store, Statebank had, the superior court found, violated its duty under the UCC to conduct itself in good faith in its dealings with Fairco. Statebank was held liable for defamation in publicizing Fairco's justified failure to pay its debts and wrongfully dishonoring checks drawn on its account. Finally, the superior court found that Statebank had converted funds in Fairco's account by charging it for title insurance without giving the partners prior notice of its intention to do so.
Plaintiffs Henry and Warwick were awarded $3,000 and $10,000 respectively as compensatory damages for harm to their business reputations, and Fairco was awarded $4,800 for labor expended in correcting problems arising from the repossession, $822.25 for sums withdrawn to pay for the title insurance and $35,000 in exemplary and punitive damages. The superior court also awarded costs and attorney's fees. This appeal followed.
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