Cherry Manor, Inc. v. American Health Care, Inc.

• Decision Date: 20 September 1990
• Docket Number: 16660,Nos. 16644,s. 16644
• Citation: 797 S.W.2d 817
• Parties: 13 UCC Rep.Serv.2d 967 CHERRY MANOR, INC., Plaintiff-Respondent, v. AMERICAN HEALTH CARE, INC., and American Capital Management Services, Inc., Defendants-Appellants.
• Court: Missouri Court of Appeals

Page 817

797 S.W.2d 817

13 UCC Rep.Serv.2d 967

CHERRY MANOR, INC., Plaintiff-Respondent, v. AMERICAN HEALTH CARE, INC., and American Capital Management Services, Inc., Defendants-Appellants.

Nos. 16644, 16660.

Missouri Court of Appeals,

Southern District,

Division Two.

Sept. 20, 1990.

Motion for Rehearing or Transfer

Denied Oct. 11, 1990.

Application to Transfer Denied Nov. 20, 1990.

Harold F. Glass, Randy R. Cowherd, Schroff, Glass & Newberry, Springfield, for defendants-appellants.

William G. Todd, W. Craig Hosmer, Woolsey, Fisher, Whiteaker & McDonald, Springfield, for plaintiff-respondent.

SHRUM, Judge.

This is an action by Cherry Manor, Inc. (hereafter "Cherry Manor"), against American Health Care, Inc. (hereafter "American Health"), and American Capital Management Services, Inc. (hereafter American Capital), seeking a deficiency judgment on a purchase money promissory note. American Health and American Capital filed counterclaims against Cherry Manor seeking: (a) damages for conversion of personal property (Count I); (b) damages pursuant to § 400.9-507 [Uniform Commercial Code-Secured Transactions] ¹ for violations of § 400.9-504(3) ² and § 400.9-507(1) ³ (Count II); (c) punitive damages for intentional, willful and wanton conduct in depriving them of their personal property (Count III); and (d) actual and punitive damages for alleged misrepresentations by Cherry Manor in its financial statements to induce American Health to purchase the nursing home real estate and personal property (Count IV). The case was tried non-jury. The appeal is by American Health and American Capital from a judgment for Cherry Manor for $194,957.25 on Cherry Manor's suit on the promissory note. American Health and American Capital also appeal the judgment denying relief on all counts of their counterclaim. The judgment for Cherry Manor for the note deficiency is reversed. The judgment for Cherry Manor on the counterclaims is affirmed.

In June 1985, Cherry Manor sold a nursing home business to American Health for $710,000.00. Included in the sale was real estate and personal property connected with the nursing home business. ⁴ American Health paid $60,000.00 cash as down payment and gave Cherry Manor a single promissory note for $650,000.00 for the balance of the purchase price. The note was secured by a deed of trust on the real property and a security agreement covering the personal property, inventory and fixtures. ⁵ American Capital signed the note as guarantor. Monthly payments, as provided in the note, were paid through June 1, 1986, but no payments were made on the note by anyone after June 1, 1986. The principal balance due on the note was $650,000.00 when default occurred. Cherry Manor accelerated payments under the note and instituted nonjudicial foreclosure proceedings on the real estate by giving notice of trustee's sale. Notice of the real estate foreclosure sale was sent to American Health via certified mail. The president of American Health received the trustee's notice of the real estate foreclosure sale and he attended the sale on the scheduled date of October 28, 1986. At the foreclosure sale, no mention was made that personal property was being sold. The attorney handling the foreclosure sale for Cherry Manor testified that the deed of trust foreclosure sale did not cover, in any sense, the personal property. The real estate was sold to Cherry Manor for $400,000.00. Attorney fees of $4,000.00 were charged leaving $396,000.00 from the real estate foreclosure sale which was credited to the unpaid balance on the note. Interest due as of October 28, 1986, was $27,092.71. In early December 1986, American Health, after threat of wrongful detainer action and by virtue of negotiations, returned possession of the nursing home real estate and its contents to Cherry Manor. ⁶ Subsequently, in July 1987, Cherry Manor sold the nursing home real estate and personal property to Mr. and Mrs. Simmons for $500,000.00.

When the real estate and personal property were re-sold in July 1987, no allocation was made in the purchase price between the real estate and personal property. Cherry Manor never sent written notice to American Health or American Capital of the time and place of any public sale of the nursing home personal property. Cherry Manor never sent written notice to American Health or American Capital of the time after which private sale or other intended disposition was to be made of the nursing home personal property. The president of American Health and American Capital valued the nursing home personal property at $150,000.00 at the time Cherry Manor took it back. Cherry Manor offered evidence that after giving credit for the net real estate foreclosure price of $396,000.00, giving $140,000.00 credit for the nursing home personal property, and adding back to the note interest and $13,831.25 in attorney fees incurred in connection with the note collection, the balance due on the note was $194,957.25. The trial court utilized that evidence to enter its note deficiency judgment in favor of Cherry Manor for $194,957.25. In its conclusions of law, the trial court determined that the "deficiency should be reduced by the agreed value of the personal property One Hundred Forty Thousand ($140,000) Dollars," and that "[p]laintiff should not be barred from its deficiency action entirely merely because of lack of notice of the subsequent sale of the combined assets."

The sole point briefed on appeal by American Health and American Capital is a claim of trial court error in entering a deficiency judgment in favor of Cherry Manor when it failed to give American Health and American Capital notice of the sale or intended disposition of the nursing home personal property. Beginning with Gateway Aviation, Inc. v. Cessna Aircraft, 577 S.W.2d 860, 862-63 (Mo.App.1978), and consistently thereafter, Missouri appellate courts have held that before a secured party can obtain a deficiency against a debtor, the debtor must be given notice of what is about to occur; i.e., a notice that a sale of the personal property collateral is going to be held as required by the Uniform Commercial Code and particularly § 400.9-504(3). ⁷ The failure to receive notice prevents a deficiency judgment. Boatmen's Bank of Nevada v. Dahmer, 716 S.W.2d 876, 877 (Mo.App.1986); Modern Auto Co., Inc. v. Bell, 678 S.W.2d 443 (Mo.App.1984); Clune Equipment Leasing Corp. v. Spangler, 615 S.W.2d 106, 108 (Mo.App.1981); Anheuser v. Oswald Refractories Co., Inc., 541 S.W.2d 706, 711 (Mo.App.1976). See generally Annotation, Uniform Commercial Code: Failure of Secured Creditor to Give Required Notice of Disposition of Collateral as Bar to Deficiency Judgment, 59 A.L.R.3d 401 (1974). The Federal Courts have recognized Missouri's adherence to the "No Notice--No Deficiency" rule, Executive Financial Services v. Garrison, 722 F.2d 417, 418 (8th Cir.1983), and that "[i]t is settled law in Missouri that a creditor's failure to give notice of the sale of collateral precludes a deficiency judgment." Chemical Sales Co., Inc. v. Diamond Chemical Co., 766 F.2d 364, 369 (8th Cir.1985). "The right to a deficiency judgment accrues only when there is strict compliance with statutory requirements." Chrysler Capital Corp. v. Cotlar, 762 S.W.2d 859, 861 (Mo.App.1989); First Missouri Bank & Trust Co. v. Newman, 680 S.W.2d 767, 770 (Mo.App.1984). Any doubt as to whether there has been compliance with the provisions of § 400.9-504(3) are to be resolved in favor of the debtor. Boatmen's Bank of Nevada v. Dahmer, supra, at 877; Modern Auto Co., Inc. v. Bell, supra, at 444. The notice requirements of § 400.9-504(3) contemplate a written notice in all instances. Boatmen's Bank of Nevada v. Dahmer, supra, at 878; Executive Financial Services v. Garrison, 418-19. Voluntary surrender of the collateral by the debtor to the creditor does not waive the debtor's right to notice and the statutory notice provision may not be waived or varied. Boatmen's Bank of Nevada v. Dahmer, supra, at 877; Clune Equipment Leasing Corp. v. Spangler, supra, at 108. To say that a debtor waives his right to notice by voluntarily delivering the collateral to the secured party "would discourage debtors from the cooperative delivery of possession of the collateral and would frustrate the policies of Article Nine in promoting peaceful repossessions and protecting the debtor's rights upon default." Executive Financial Services v. Garrison, supra, at 420. "Since deficiency judgments after repossession of collateral are in derogation of the common law, any right to a deficiency accrues only after strict compliance with the relevant statutes." Gateway Aviation, Inc. v. Cessna Aircraft, supra, at 863. A guarantor (such as American Capital) is a debtor within the meaning of § 400.9-504(3) and is, therefore, entitled to notice the same as the maker of the note. Section 400.9-105(1)(d). Clune Equipment Leasing Corp. v. Spangler, supra, at 108. The purpose of statutory notice is to apprise the debtor of the details of a sale so that the debtor may take whatever action he deems necessary to protect his interest. Chrysler Capital Corp. v. Cotlar, supra, at 861; Modern Auto Co., Inc. v. Bell, supra, at 445. In Missouri, the party seeking the deficiency judgment bears the burden of proving compliance with the § 400.9-504(3) requirement, including the burden of proving the sufficiency of the notice. Lendal Leasing v. Farmer's Wayside Stores, 720 S.W.2d 376, 379 (Mo.App.1986); First Missouri Bank & Trust Co. v. Newman, 680 S.W.2d 767, 769-70 (Mo.App.1984).

From the above, it is clear that the law is settled in Missouri that a creditor's failure to give notice of the sale of collateral precludes a deficiency judgment. U.S. v. Friesz, 690 F.Supp. 843, 844 (E.D.Mo.1988). Does the fact here that there was only one note secured by both real estate deed of trust and security agreement on personal property mandate a different rule? The...