American State Bank of Killdeer v. Hewson, 11419

• Decision Date: 28 July 1987
• Docket Number: No. 11419,11419
• Parties: 4 UCC Rep.Serv.2d 1268 AMERICAN STATE BANK OF KILLDEER, Plaintiff and Appellee, v. Dale HEWSON, Defendant and Appellant. Civ.
• Court: North Dakota Supreme Court

Page 57

411 N.W.2d 57

4 UCC Rep.Serv.2d 1268

AMERICAN STATE BANK OF KILLDEER, Plaintiff and Appellee, v. Dale HEWSON, Defendant and Appellant.

Civ. No. 11419.

Supreme Court of North Dakota.

July 28, 1987.

Mackoff, Kellogg, Kirby & Kloster, Dickinson, for plaintiff and appellee; argued by Claudette M. Abel.

Howe, Hardy, Galloway & Maus, Dickinson, for defendant and appellant; argued by Albert J. Hardy.

ERICKSTAD, Chief Justice.

Dale Hewson appeals from the summary judgment entered by the District Court for the Southwest Judicial District on December 1, 1986, finding that American State Bank of Killdeer as a secured party sold his tractor with dozer as collateral in a commercially reasonable manner. We reverse and remand for further proceedings.

On October 11, 1984, Hewson executed a promissory note to the Bank in the sum of $40,000 payable with interest at the rate of fourteen percent per annum. Hewson provided as security for the promissory note two fourteen foot drills ¹ and a 1976 Steiger bearcat tractor with dozer. After defaulting on the note, Hewson voluntarily surrendered the tractor with dozer to the Bank on November 5, 1985. ² The public sale of the tractor with dozer was published in The Advertiser and The Dickinson Press on November 13 and November 17, 1985, respectively. ³ On November 15, 1985, Hewson received a letter from the Bank informing him of the time and place of the public sale, of his option to redeem the tractor, and that he would "be liable for any deficiency resulting from the sale of the collateral." Hewson did not redeem the tractor and on November 20, 1985, the tractor with dozer was sold at public auction to the highest bidder for $8,700.00 The net proceeds of the sale of the tractor with dozer were credited to Hewson's loan balance.

On January 3, 1986, the Bank commenced suit to recover a deficiency remaining after crediting Hewson's account with the proceeds from the sale of the drills and tractor with dozer. In his answer, Hewson denied owing the amount of the deficiency asserting that the sale of the tractor was not conducted in a commercially reasonable manner and that the Bank had assured him that it would not sell the tractor with dozer for less than $20,000.00.

On February 25, 1986, the Bank moved for summary judgment. On March 17, 1986, the district court denied the motion for summary judgment.

On October 3, 1986, the Bank renewed its motion for summary judgment.

On October 9, 1986, Hewson moved to compel discovery asserting that the Bank's answers to certain interrogatories were evasive and incomplete. The district court did not rule on Hewson's motion to compel discovery believing the motion "was rendered moot because after application of the Law to the undisputed facts, the factual information sought in the interrogatories simply is not material or relevant."

On October 24, 1986, the district court entered its order granting the Bank's motion for summary judgment. The district court entered its amended order for summary judgment on November 19, 1986.

The dispositive issue on appeal is whether or not the district court erred when it granted summary judgment concluding that the tractor with dozer was sold in a commercially reasonable manner.

In Thiele v. Security State Bank of New Salem, 396 N.W.2d 295, 297 (N.D.1986), we recently summarized the application of our rule for summary judgment as follows:

"Summary judgment is a procedural device available for the prompt and expeditious disposition of a controversy without a trial if there is no dispute as to either the material facts or the inferences to be drawn from undisputed facts, or if only a question of law is involved. Herman v. Magnuson, 277 N.W.2d 445 (N.D.1979). If different factual inferences may be drawn, they must be drawn in favor of the party opposing summary judgment. Sigurdson v. Lahr & Lahr, Inc., 299 N.W.2d 792 (N.D.1980). However, even if factual disputes exist between the parties, summary judgment is appropriate if the law is such that the resolution of the factual dispute will not change the result. Sande v. City of Grand Forks, 269 N.W.2d 93 (N.D.1978)."

Hewson asserts that there are disputed issues of material fact and inferences to be drawn from undisputed facts as to whether or not the tractor with dozer was sold in a commercially reasonable manner. The Bank responds that it is entitled to a presumption that the tractor with dozer was sold in a commercially reasonable manner and that Hewson presented no evidence to show that the sale was not commercially reasonable and therefore he failed to overcome the presumption of a commercially reasonable sale.

Section 41-09-50(3), N.D.C.C. (U.C.C. Sec. 9-504), ⁴ imposes a twofold obligation upon a secured party seeking to recover a deficiency to conduct the sale of the collateral in a commercially reasonable manner and to provide "reasonable notification of the time and place of any public sale." See Page, A Secured Party's Right to a Deficiency Judgment after Non-compliance with the Resale Provisions of Article 9, 60 N.D.L.Rev. 531, 533 (1984). Section 41-09-50(3) further requires that every aspect of the disposition be commercially reasonable. Wallwork Lease & Rental Co. v. Schermerhorn, 398 N.W.2d 127, 130-31 (N.D.1986). Whether or not a sale of collateral was conducted in a commercially reasonable manner is essentially a factual question. United States v. Conrad Publishing Company, 589 F.2d 949, 954 (8th Cir.1978); Advanced Irrigation, Inc. v. First National Bank of Fargo, 366 N.W.2d 783, 786 (N.D.1985).

There is a split of authority on the question of which party has the burden of proving the commercial reasonableness or unreasonableness of the disposition of collateral when a deficiency judgment is sought. See Fedders Corp. v. Taylor, 473 F.Supp. 961, 971 (D.Minn.1979); Vic Hansen & Sons, Inc. v. Crowley, 57 Wis.2d 106, 203 N.W.2d 728, 731-32 (1973); 9 Anderson, Uniform Commercial Code, Sec. 9-504:13, at 703-08 (3d ed. 1985); 59 A.L.R.3d 369 (1974).

One line of authority holds that the secured party makes out a case for deficiency judgment by proving the debt and security agreement and that a credit of a stated amount has been allowed as the result of the sale of the collateral, and that the burden then shifts to the debtor to show why the creditor should not recover the deficiency. Fryer & Willis Drilling Co. v. Oilwell, Division of United States Steel Corp., 472 S.W.2d 857 (Tex.Civ.App.1971); Ekman v. Mountain Motors, Inc., 364 P.2d 998 (Wyo.1961).

Other authorities have held that the secured party has the burden to establish that every aspect of the sale was commercially reasonable. Fedders Corp., supra; Vic Hansen & Sons, Inc., supra; United States v. Willis, 593 F.2d 247 (6th Cir.1979); Comfort Trane Air Conditioning Co. v. Trane Co., 592 F.2d 1373 (5th Cir.1979); Chemlease Worldwide Inc. v. Brace, Inc., 338 N.W.2d 428 (Minn.1983); Farmers State Bank v. Mobile Homes Unlimited, 181 Mont. 342, 593 P.2d 734 (1979); Vines v. Citizens Trust Bank, 146 Ga.App. 845, 247 S.E.2d 528 (1978).

We agree with the United States District Court in Fedders Corp., 473 F.Supp. at 972, that "the better rule would place the burden of proof on the secured party to show the commercial reasonableness of the disposition of collateral where the commercial reasonableness is challenged and the secured party seeks a deficiency judgment." The shifting burden of persuasion is explained by that court as follows:

"Assuming the secured party makes a prima facie case indicating the commercially reasonable disposition of collateral, the burden of persuasion--though not the burden of proof--shifts to the debtor to elicit specific evidence of commercial unreasonableness in order to avoid entry of the requested deficiency judgment." 473 F.Supp. at 972. See also Chemlease Worldwide Inc., 338 N.W.2d at 437.

To determine whether or not the Bank has met its burden of showing that it sold the tractor with dozer in a commercially reasonable manner, we need to ascertain the effect of Hewson's signed statement that he would "be responsible for the deficiency balance, if any." We note in accordance with Section 41-01-02, N.D.C.C. (U.C.C. Sec. 1-102), ⁵ a secured party's duty to act in good faith with due diligence, reasonableness and care may not be disclaimed by agreement except that "the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable." See Federal Deposit Insurance Corp. v. Forte, 94 A.D.2d 59, 463 N.Y.S.2d 844, 850 (N.Y.App.Div.1983). This principle is also espoused in Section 41-09-47(3), N.D.C.C. (U.C.C. Sec. 9-501(3)), which reads:

"To the extent that they give rights to the debtor and impose duties on the secured party, the rules stated in the subsections referred to below may not be waived or varied except as provided with respect to compulsory disposition of collateral (subsection 3 of section 40-09-50) and with respect to redemption of collateral (section 41-09-52) but the parties may by agreement determine the standards by which the fulfillment of these rights and duties is to be measured if such standards are not manifestly unreasonable:

"a. Subsection 2 of section 41-09-48 and subsection 2 of section 41-09-50 insofar as they require accounting for surplus proceeds of collateral.

"b. Subsection 3 of section 41-09-50 and subsection 1 of section 41-09-51 which deal with disposition of collateral.

"c. Subsection 2 of section 41-09-51 which deals with acceptance of collateral as discharge of obligation.

"d. Section 41-09-52 which deals with redemption of collateral.

"e. Subsection 1 of section 41-09-53 which deals with the secured party's liability for failure to comply with this part." See also Liberty Bank v. Honolulu Providoring Inc., 65 Hawaii 273, 650 P.2d 576 (1982).

Accordingly, especially in light of subsections 3(b) and (c) above,...