Banker v. Upper Valley Refrigeration Co., Inc.

• Decision Date: 10 January 1991
• Docket Number: Civ. No. 89-368-S.
• Parties: Richard E. BANKER v. UPPER VALLEY REFRIGERATION CO., INC., Quality Mechanical, Inc., Wilton L. Buskey, Carol Buskey.
• Court: U.S. District Court — District of New Hampshire

771 F. Supp. 6

Richard E. BANKER v. UPPER VALLEY REFRIGERATION CO., INC., Quality Mechanical, Inc., Wilton L. Buskey, Carol Buskey.

Civ. No. 89-368-S.

United States District Court, D. New Hampshire.

January 10, 1991.

Albert J. Cirone, Jr., Lebanon, N.H., for plaintiff.

L. Jonathan Ross, Manchester, N.H., for defendants.

ORDER

STAHL, District Judge.

In this civil action, plaintiff Richard E. Banker seeks a deficiency judgment for alleged nonpayment of a promissory note executed by defendants. Defendants Carol and Wilton Buskey move for summary judgment, claiming that Banker, by exercising control over stock pledged as security for the promissory note, took that stock in satisfaction of any claimed indebtedness, and is thus barred by Article Nine of the Uniform Commercial Code from obtaining a deficiency judgment.

1. Facts

The material facts are not in dispute.¹ Fed.R.Civ.P. 56(c). In July of 1986, Upper Valley Refrigeration Co., Inc. ("UVR"), then wholly owned by the Buskeys, purchased from Banker fifty percent of the outstanding shares of Quality Mechanical, Inc. ("QM"). On December 3, 1987, the parties entered into an agreement whereby UVR acquired from Banker the remaining shares of QM. Pursuant to that agreement, the Buskeys, UVR and QM signed a promissory note payable to Banker in the principal amount of $260,000.

Pursuant to a security agreement executed in connection with the sale, the defendants secured the note obligations with all of the outstanding shares of UVR and QM. Section four of the security agreement stated that "in the event of default, ... Banker may exercise all of the rights and remedies of a secured party under the Uniform Commercial Code or any other applicable law." Apparently also in the event of default, Banker had "the right to immediate possession of the physical collateral." Section five stated that "all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by the laws of the State of New Hampshire."

In June of 1989, Banker commenced suit against defendants in New Hampshire State Superior Court, alleging a default in payment on the promissory note. The case was removed to this Court on July 31.

By letter dated September 27, 1989, Banker's counsel notified the Buskeys, apparently for the second time, that they were in default, and warned that if the default were not cured by October 22, "the entire principal and outstanding interest shall at once become due and payable." Banker's counsel also stated that if the default were not cured within fifteen days, "we will proceed to secure our rights pursuant to the Security Agreement, and in particular, we will exercise all of Mr. Banker's rights as detailed in Section 4 of the agreement, including the rights ... available under the Uniform Commercial Code or other applicable law."

In October of 1989, pursuant to the security agreement, Banker took possession of the stock certificates of UVR and QM, which represented the outstanding shares of these corporations, and entered his name on them. At the time Banker took possession of the stock, it was being held in escrow by his attorney.

On January 15, 1990, after unsuccessful attempts at settlement and additional warnings, Banker commenced exercising his rights as sole shareholder of UVR and QM by removing the Buskeys as directors of these corporations and appointing himself director, president, and treasurer. Banker eventually assumed day-to-day control of UVR, and on January 26, 1990, initiated bankruptcy proceedings. On that same day, his counsel informed counsel for the Buskeys by letter that, notwithstanding these actions, Banker still intended "to recover all amounts due him from" the Buskeys. On January 29, Banker obtained an order for Chapter 11 relief for UVR from the United States Bankruptcy Court for the District of New Hampshire. In March of 1990, the bankruptcy case was converted from a Chapter 11 reorganization proceeding to a Chapter 7 liquidation.²

2. Discussion

As a preliminary matter, the Court addresses Banker's request that it accept his overdue objection to the Buskeys' motion for summary judgment. Banker also moves for a further extension of time to answer this motion, and for an extension of time for discovery.

The Court grants Banker's motion for acceptance of his late answer, but denies his motion to extend time. The Court has already granted Banker one extension with respect to his answer to the summary judgment motion. Moreover, the material facts necessary to decide this motion are not in dispute, and Banker has failed to persuade the Court that an extension of discovery would reveal any additional material facts.

The sole issue before the Court on the Buskeys' motion for summary judgment is whether Article Nine of the Uniform Commercial Code³ permits Banker to take possession of the collateral at issue in the manner described above, and continue to seek a deficiency judgment. Banker and the Buskeys concede that Article Nine is the law to be applied in deciding this motion.

Although the Supreme Court of New Hampshire has not had occasion to address this particular issue, the First Circuit, applying Connecticut law, considered a similar question in Lamp Fair v. Perez-Ortiz, 888 F.2d 173 (1st Cir.1989). The New Hampshire U.C.C. provisions applicable to the instant case are identical in all material respects to those construed in Lamp Fair, and this Court is unaware of any reason why New Hampshire's reading of these provisions would differ from Connecticut's. Therefore, the Court applies Lamp Fair in addressing the Buskeys' motion for summary judgment.

The Lamp Fair facts are analogous to those of the instant action. On January 1, 1985, Perez-Ortiz contracted with Lamp Fair to purchase from it a lighting fixture store. Perez-Ortiz paid a portion of the purchase price at the time of sale, and signed promissory notes for the remainder. Lamp Fair took a security interest in the store as collateral for the notes. On December 26, Perez-Ortiz returned the store to Lamp Fair, having failed to pay the amount owed pursuant to the notes. Lamp Fair immediately began to operate the store, and, in January of 1986, demanded payment for the difference between the value of the store as calculated by it, and the money Perez-Ortiz still owed it under the contract. When Perez-Ortiz refused to pay, Lamp Fair brought suit. Id. at 174-75.

The court in Lamp Fair applied Article Nine, which sets forth the remedies available to a secured party. Under Article Nine, a secured creditor has three options in the event of default by a debtor. He may (1) employ "strict foreclosure," that is, "retain the collateral in satisfaction of the obligation" (9-505), (2) "reduce his claim to judgment ... by any available judicial procedure" (9-501), or (3) "sell, lease or otherwise dispose of any or all of the collateral ... by public or private proceedings" (9-504). See id. at 175-76; RSA 382-A:9-501(1), :9-505(2), :9-504(1) & (3).

The court concluded that Lamp Fair had taken possession of the collateral in full satisfaction of the debt, and thus was barred from maintaining an action for a deficiency judgment. This result was reached through two alternative readings of the above provisions.

Under the first reading, Lamp Fair had "foreclosed" on the collateral pursuant to option one (9-505), and, in accordance with that provision, had forfeited any claim for deficiency. Id. at 176. Alternatively, if 9-505 were inapplicable, Lamp Fair could maintain its claim, but only if it could show that it had taken possession of the store for the purpose of effectuating either of its two remaining options (9-501 or 9-504). The court found that Lamp Fair did not take possession for such a purpose, and concluded that its claim for deficiency was barred by either reading of Article Nine. See id. at 175-76, 177. Since both lines of reasoning led to the same result, the Lamp Fair court expressly refrained from deciding which line of reasoning Connecticut would apply.

The Buskeys assert that Lamp Fair requires this Court to grant them summary judgment in the instant action. In addressing this claim, the Court considers each of Banker's Article Nine options to determine which, if any, is applicable.

9-505: Strict Foreclosure

If a creditor successfully forecloses by retaining the security, the debt is "completely satisfied." If the debt is so satisfied, the creditor must completely abandon any claim for deficiency." Id. at 176 U.C.C. § 9-505 requires a creditor who chooses this option to send the debtor written notice of his intention to do so. See RSA 382-A:9-505(2). However, there is disagreement among jurisdictions as to whether a creditor who does not fulfill the notification requirement nonetheless can be deemed to have employed strict foreclosure. Lamp Fair at 176-77.

A majority of jurisdictions do not require notice, and will in certain circumstances apply strict foreclosure by operation of law. These jurisdictions reason "that the Code intends `to put the creditor to an election either to sell the repossessed collateral pursuant to Section 9.504 or to retain the collateral in complete satisfaction of the debt pursuant to Section 9.505.'" Id. at 176 (quoting Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769, 771-72 (Tex.1982)). A minority of courts refuse "to `force' the strict foreclosure option upon an unwilling secured creditor." Id. at 177. The Lamp Fair court did not take a position on this issue. Id. at 176-78.

In the instant case, Banker did not notify the Buskeys that he intended to retain the security in satisfaction of their debt. Nor did he opt to sell the repossessed collateral. Thus, the majority of courts which have considered the question would hold that Banker retained the security in satisfaction of the debt, and that he cannot now claim a deficiency. A minority would hold that, since Banker did not fulfill...