Bank of Hawaii v. Davis Radio Sales & Service, Inc.

• Decision Date: 30 October 1986
• Docket Number: No. 11039,11039
• Citation: 6 Haw.App. 469,727 P.2d 419
• Court: Hawaii Court of Appeals
• Parties: , 2 UCC Rep.Serv.2d 1459 BANK OF HAWAII, a Hawaii corporation, and United States of America, Plaintiffs- Appellees, v. DAVIS RADIO SALES & SERVICE, INC., a Hawaii corporation; Davis Radio Corporation, a Hawaii corporation; Ross Alan Davis and Noriko Davis, Defendants-Appellants, and Radio Specialists, Inc., a Hawaii corporation; Hugh J. Campbell; Nancy I. Campbell; Philip W. Bridges; Akiko K. Bridges; Wallace S. Tao; Miwako Tao; Gibralter Savings and Loan Association, a California corporation; Jason A. McCree; First Federal Bank of Connecticut, fka First Federal Savings and Loan Association of New Haven, a Connecticut corporation; and Association of Apartment Owners of Ridgecrest-Melemanu Woodlands by its Board of Directors, Defendants-Appellees, and John Does 2-10, and Doe Partnerships, Corporations and Other Entities 4-10, Defendants.

Page 419

727 P.2d 419

6 Haw.App. 469, 2 UCC Rep.Serv.2d 1459

BANK OF HAWAII, a Hawaii corporation, and United States of

America, Plaintiffs- Appellees, v. DAVIS RADIO SALES & SERVICE, INC., a Hawaii corporation;

Davis Radio Corporation, a Hawaii corporation;

Ross Alan Davis and Noriko Davis,

Defendants-Appellants,

and

Radio Specialists, Inc., a Hawaii corporation; Hugh J.

Campbell; Nancy I. Campbell; Philip W. Bridges; Akiko K.

Bridges; Wallace S. Tao; Miwako Tao; Gibralter Savings

and Loan Association, a California corporation; Jason A.

McCree; First Federal Bank of Connecticut, fka First

Federal Savings and Loan Association of New Haven, a

Connecticut corporation; and Association of Apartment

Owners of Ridgecrest-Melemanu Woodlands by its Board of

Directors, Defendants-Appellees,

and

John Does 2-10, and Doe Partnerships, Corporations and Other

Entities 4-10, Defendants.

No. 11039.

Intermediate Court of Appeals of Hawai'i.

Oct. 30, 1986.

Syllabus by the Court

1. A motion for summary judgment is properly granted under Rule 56(c), Hawaii Rules of Civil Procedure (1980), if the record shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

2. Where a secured creditor has disposed of personal property pledged as security without complying with the notice to debtor requirement of Hawaii Revised Statutes (HRS) § 490:9-504(3) (Supp.1984), the fair market value of the collateral at the time of disposition and any damages that the debtor may have suffered from the lack of notice are issues of material fact, and where they have not been determined summary judgment is not proper.

3. When there is a change in the law by court decision between the time of the trial court ruling and the time of appeal, the appellate court applies the law prevailing at the time of the appellate disposition.

4. Where a secured creditor fails to comply with the notice to debtor requirement of HRS § 490:9-504(3) and disposes of collateral pledged as security for the underlying obligation, the secured creditor has the burden of rebutting the presumption that the fair market value of the collateral equals the unpaid balance of the outstanding debt. In proving fair market value, the secured creditor may not rely solely on the value received at the disposition sale, but must prove the fair market value by other evidence.

5. Where the secured creditor has failed to rebut the presumption applicable upon his violation of HRS § 490:9-504(3), the debtor is entitled to have the debt extinguished or where the secured creditor shows that the fair market value is higher 6. Where the debtor is harmed by the secured creditor's failure to comply with the notification requirement of HRS § 490:9-504(3), the debtor will be entitled under HRS § 490:9-507(1) (1976) to have the amount of damages set-off against any deficiency the secured creditor would otherwise recover.

than the sale price of the collateral but lower than the debt due, the debtor is entitled to have the debt reduced by the difference between the fair market value and the sale price.

7. The provisions of article 9 of HRS chapter 490 (1976 and Supp.1984) governing the rights of secured creditors to proceed against the collateral pledged by a debtor as security, do not apply to security interests in real estate.

8. Under HRS § 490:9-501(1) and (4) (1976), where a security agreement covers both real and personal property, the secured party may, upon breach of the underlying agreement by the obligor, proceed against the real property separately from the personalty or against both the real property and the personal property. Where the secured creditor proceeds against both the real property and the personal property, the provisions of article 9 of HRS chapter 490 do not apply and the creditor's rights are determined by the law relating to real property.

9. Although the provisions of article 9 of HRS chapter 490 are not applicable in a mortgage foreclosure proceeding, they are relevant in determining whether foreclosure should be granted.

10. Where the secured creditor who has not complied with the notice requirements of HRS § 490:9-504(3) is unable to rebut the presumption that the fair market value of the personal property sold in enforcement of his security interest equals the balance of the outstanding debt, foreclosure of a mortgage pledged as additional security for the underlying obligation should be denied.

11. Where in a proceeding for a deficiency judgment under article 9 of HRS chapter 490 the action is amended to include a proceeding for foreclosure of a mortgage of real property, the entire proceeding becomes equitable in nature and thereafter is governed by the rules of equity.

12. A complaint in equity is an appeal to the exercise of the equity court's sound discretion. Equity jurisprudence is not bound by strict rules of law but can mold its decree "to do justice," and a court of equity, once having acquired jurisdiction may retain the case to afford complete relief.

13. Where, in an action for foreclosure of a mortgage by a secured creditor who, in violation of the HRS § 490:9-504(3) notice provision had previously disposed of personal property given as security for the same underlying obligation secured by the mortgage, the fair market value of the personal property had not been determined, the equity court should have denied the interlocutory decree of foreclosure until the fair market value had been determined and the debtor credited with the difference between the fair market value and the sale price, and any damages suffered by reason of the notice violation.

14. Where a mortgagee assigns his interest in a mortgage, the assignee stands in the shoes of the mortgagee and is subject to any rights of setoff by the debtor at the time of the assignment.

Jeffrey M. Taylor, Honolulu, for defendants-appellants.

Roy T. Chikamoto, Sp. Asst. U.S. Atty., U.S. Atty.'s Office, Honolulu, for plaintiff-appellee United States of America, on behalf of SBA.

Emma S. Matsunaga (Vernon Y.T. Woo and Foster Thorbjornsen, with her on the brief; Woo, Kessner & Duca, of counsel), Honolulu, for plaintiff-appellee BOH.

Before HEEN, Acting C.J., TANAKA, J., and Circuit Judge DANIEL HEELY in place of Chief Judge BURNS, Recused.

HEEN, Acting Chief Judge.

Defendants-appellants Davis Radio Sales and Service, Inc. (DRSS), Davis Radio Corporation (DRC), Ross Alan Davis (Davis), and Noriko Davis (hereinafter, where appropriate, Ross Alan Davis and Noriko Davis will be collectively referred to as the Davises, and all defendants-appellants will be collectively referred to as Defendants) appeal (1) the trial court's June 17, 1981 order (June 17, 1981 order) authorizing plaintiff-appellee Bank of Hawaii (BOH) to proceed with the foreclosure of a second mortgage (mortgage) executed by the Davises; and (2) an interlocutory decree of foreclosure (interlocutory decree) of that mortgage in favor of plaintiff-appellee the United States of America on behalf of the Small Business Administration (SBA). ¹ We vacate the order and the interlocutory decree, and remand for further proceedings.

FACTS

In 1973, Davis was the sole stockholder of DRSS and DRC, two Hawaii corporations. In August of 1973, DRSS obtained a $100,000 line of credit (line of credit) from BOH in order to purchase car radios and stereos to sell in its business. The loan was secured by security interests in DRSS' and DRC's inventory, accounts receivable, and after-acquired property, and guaranties from DRC and the Davises personally. Between December 6, 1974, and June 30, 1975, BOH made nine loans to DRSS under the line of credit, totalling approximately $60,455.

On September 17, 1974, DRSS obtained from BOH a further $100,000 loan guaranteed by SBA (SBA guaranteed loan). The proceeds of the SBA guaranteed loan were to be used to pay $50,000 to First Hawaiian Bank ² on a previous debt and $50,000 for working capital. DRSS again secured the loan with its business inventory, accounts receivable, and after-acquired property. As additional security, the Davises executed another personal guaranty and the mortgage on their personal residence in favor of BOH. ³

On September 1, 1976, Davis sold DRSS and all of its inventory to Radio Specialists, Inc. (RSI), a Hawaii corporation formed by three former DRSS employees, Hugh J. Campbell (Campbell), Phillip W. Bridges (Bridges) and Wallace Tao (Tao). RSI assumed all of the debts and obligations owed by DRSS and gave BOH security interests in RSI's inventory and accounts receivable. BOH retained all the security it had obtained from DRSS, DRC, and the Davises, including the mortgage. In May, 1977, RSI ceased making payments on the loans.

PROCEDURAL HISTORY

On October 20, 1977, BOH filed suit against Defendants, RSI, and Campbell, Bridges, Tao, and their wives, ⁴ alleging that defendants owed BOH $44,454.61 on the line of credit and $84,177.41 in principal and $3,824.72 in interest on the SBA guaranteed loan. ⁵ The complaint sought possession of RSI's business inventory, which BOH alleged to be valued at $47,000, and judgment against all the defendants individually. BOH seized the business inventory pursuant to an ex parte order of the lower court, and on February 25, 1978, sold it at auction for $11,839.26. The net proceeds of $8,879.44 were applied to the repayment of the line of credit debt. Defendants were not given notice of the sale as required by Hawaii Revised Statutes (HRS) § 490:9-504(3) (Supp.1984). ⁶

On May 11, 1979, Defendants filed a motion for summary judgment on the ground that BOH's failure to give them notice of the sale of the business inventory discharged them from all liability for the balance due on the loans. On May 25, 1979, BOH filed a motion to amend count V of the complaint so as to allege that the Davises had executed the mortgage as further security for the SBA guaranteed loan and that BOH...