Chrysler Credit Corp. v. Curley

Decision Date20 December 1990
Docket NumberCiv. A. No. 90-484-A.
PartiesCHRYSLER CREDIT CORPORATION, Plaintiff, v. Edward R. CURLEY, Jr., Barbara A. Curley, et al., Defendants.
CourtU.S. District Court — Eastern District of Virginia

Carol T. Stone, Jordan Coyne Savits & Lopata, Fairfax, Va., for plaintiff.

William B. Cave, Felton & Cave, Richmond, Va., for defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

This is a diversity action on a guaranty. Plaintiff Chrysler Credit Corporation ("Chrysler") seeks recovery from a group of five guarantors of an automobile dealership. Default judgments have been entered against three of the five.1 The remaining two guarantors are defendants Edward and Barbara Curley. Before the Court are plaintiff's motion for summary judgment against the Curleys on the entire indebtedness of the dealership and the Curleys' motion for partial summary judgment as to one aspect of the dealership's liability. Central to the disposition of these motions is the validity and effect of a guarantor's pre-default, unconditional guaranty of payment which includes a waiver of certain rights provided to debtors under Virginia's version of the Uniform Commercial Code ("UCC"). More specifically, the questions presented are 1) whether Virginia law permits a guarantor, prior to default, to waive the rights to notice and to a commercially reasonable disposition of collateral provided by UCC § 9-504(3), and 2) whether another contract between Chrysler and the debtor, the Vehicle Financing and Repurchase Agreement, precludes Chrysler's reliance on an unconditional guaranty of payment. For the reasons stated below, the Court concludes (i) that defendants' pre-default waiver of the right to notice and to object to the commercial reasonableness of the collateral sale is valid, (ii) that Chrysler's remedy under the guaranty is not precluded by the Vehicle Financing and Repurchase Agreement, and (iii) that defendants are liable to Chrysler for the full amount still owed Chrysler after the sale of the collateral.

I. Background

In early 1987, defendants and others incorporated Dahlgren Chrysler-Plymouth, Dodge, Inc., (the "Dealership"), a Virginia corporation, for the purpose of selling motor vehicles in Dahlgren, Virginia. Subsequently, they obtained a dealer franchise from Chrysler Motors Corporation. As part of the franchise relationship, the Dealership entered into a number of contracts with Chrysler, including a Security Agreement, Master Credit Agreement, and various financing agreements. In conjunction with these agreements, defendants also executed a Continuing Guaranty (the "Guaranty").2

By mid-1989, the Dealership was in financial difficulty. On May 31, 1989, the Dealership forwarded to Chrysler three checks representing amounts owed on three automobiles Chrysler had financed for the Dealership. On June 9, 1989, the Dealership's bank refused to honor the checks and returned them to Chrysler marked "N.S.F." (no sufficient funds). Thereafter, Chrysler conducted inventory audits at the Dealership, declared that the Dealership's indebtedness was due, and on June 22, 1989, seized the assets of the Dealership as collateral pursuant to an order of the Circuit Court of King George County, Virginia. Chrysler then proceeded to dispose of the repossessed collateral by means of direct sales and consignments. The Dealership closed sometime in June or July of 1989. On February 12, 1990, Chrysler made demand on the defendants, as guarantors, to satisfy the deficiency remaining from the asset sales. When defendants failed to respond to the demand, Chrysler filed this suit.

Plaintiff's motion is based on the Guaranty executed by defendants on March 16, 1987. Pursuant to the Guaranty, defendants agreed, as primary obligors, jointly and severally, to guarantee unconditionally to Chrysler the full and prompt payment when due of all indebtedness of the Dealership. Defendants further agreed that Chrysler could have immediate recourse against the guarantors without any obligation to seek relief first against the Dealership. In short, Chrysler need not foreclose or realize on any collateral security before demanding payment from defendants. Finally, by the Guaranty's terms, defendants agreed to waive in general "each and every defense which, under principles of guarantee or suretyship law, would otherwise operate to impair or diminish the liability of Guarantor for the Indebtedness." Guaranty ¶ 4. Especially pertinent to the instant motions, the Guaranty also contains two specific waivers regarding notice: 1) "the making of a demand, or absence of demand, for payment of the Indebtedness, or giving, or failing to give, any notice of dishonor or protest or any other notice"; 2) "any notice of the disposition of any collateral security and any right to object to the commercial reasonableness of the disposition of any such collateral security." Guaranty ¶¶ 4(f), 5(d).

II. Analysis

Chrysler asserts three claims. First, Chrysler seeks recovery for eight automobiles financed by Chrysler and sold by the Dealership, but for which Chrysler never received payment. Automobiles sold in this fashion typically are referred to in the industry as "sold out of trust." The parties have stipulated that as of the date of repossession, the Dealership owed Chrysler the principal amount of $82,374.84 for these vehicles.

Chrysler's second claim is for losses from the repossession and sale of the Dealership's assets. The parties have stipulated that Chrysler's total losses, after application of all recoveries, aggregate $105,722.08.

Third, Chrysler seeks recovery for losses incurred on the repossession and sale of vehicles financed for consumer purchasers. These losses were sustained when, after the Dealership ceased doing business, certain customers whose purchase contracts had been financed by Chrysler defaulted on their obligations to pay. Chrysler seeks $124,059.17 on this claim.

Defendants concede, in both written and oral argument, that they are liable as guarantors for the outstanding obligation of the Dealership with respect to Chrysler's first claim regarding vehicles sold out of trust. Similarly, defendants "raise no defense" as to the Dealership's or their personal liability as guarantors for deficiencies resulting from most of Chrysler's sales of the collateral. Defendants' Memorandum in Opposition to Summary Judgment and in Support of Motion for Partial Summary Judgment at 4-5.3 As to Chrysler's second claim, defendants' sole objection, on grounds of notice and commercial reasonableness, is to Chrysler's disposition of the Dealership's new and used inventory through the Fredericksburg Auto Auction. Consequently, the issues remaining to be resolved are the disposition of the inventory and Chrysler's third claim regarding vehicles financed for consumer purchase.

A. Disposition of Inventory

Chrysler consigned the majority of the Dealership's vehicle inventory to Chrysler Motor Corporation for sale at Chrysler Motor's bi-weekly fleet auction conducted by Fredericksburg Auto Auction. Defendants assert two UCC-based objections to this disposition: first, that the notice provided to them by Chrysler was inadequate, and second, that the auction sale was not commercially reasonable. See Va.Code § 8.9-504(3).4

In the ordinary debtor-creditor situation, defendants' objections might well be valid. Here, however, the Guaranty by its express terms specifies that defendants waived their right to notice and the right to object to alleged commercial unreasonableness with regard to the disposition of Chrysler's collateral security. The pertinent question is thus whether a guarantor, prior to default, may waive the rights which UCC § 9-504(3) expressly confers on debtors.

The Supreme Court of Virginia has not ruled on the issue of pre-default waiver by a guarantor.5 Other jurisdictions are divided on the issue. The majority of federal courts, as well as some state courts, permit guarantors to waive UCC § 9-504(3) rights prior to default.6 A substantial number of jurisdictions have reached the opposite result, reasoning that pre-default waivers by guarantors conflict with the UCC's express prohibition against waiver of certain rights by debtors, including the rights specified in UCC § 9-504(3).7See UCC § 9-501. Because this is a diversity matter and because the issue is unsettled in Virginia, this Court has the challenging task of divining which line of authority the Supreme Court of Virginia would choose to follow were it squarely presented with this question. See Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); see also Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1782, 18 L.Ed.2d 886 (1967); Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 209, 76 S.Ct. 273, 279, 100 L.Ed. 199 (1956) (Frankfurter, J., concurring). On balance, the factors pertinent to this choice point persuasively to the conclusion that Virginia would permit pre-default waivers by guarantors.

Analysis properly begins with Va.Code § 8.9-501(3), Virginia's anti-waiver rule.8 This section generally prohibits, except where explicitly authorized, debtor waivers of the right to notice of the collateral sale and the right to a commercially reasonable disposition. Taken together with § 8.9-504(3), which permits debtors to waive the right to notice after default by means of a written statement, § 8.9-501(3) invites the inference that debtors may not waive their § 8.9-504(3) rights in the pre-default context. See Commercial Discount Corp. v. King, 515 F.Supp. 988, 990 (N.D.Ill.1981). Indeed, the rule barring pre-default waivers by debtors is well-established. See 9 Anderson, Uniform Commercial Code § 9-504:64 (3d ed. 1985 & Supp.1990); 69 Am.Jur.2d, Secured Transactions §§ 617, 624 (citing cases). But the analysis does not end here, for the anti-waiver rule in § 8.9-501(3) refers solely to the "debtor"; guarantors are not...

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