Congress Financial Corp. v. Sterling-Coin Op Mach. Corp.

• Decision Date: 02 February 1972
• Docket Number: No. 19531-19533.,19531-19533.
• Citation: 456 F.2d 451
• Parties: CONGRESS FINANCIAL CORPORATION v. STERLING-COIN OP MACHINERY CORPORATION et al., Appellant in No. 19531. Appeal of STERLING EQUIPMENT CORPORATION, No. 19532. Appeal of STERLING SUPPLY CORPORATION, No. 19533.
• Court: U.S. Court of Appeals — Third Circuit

456 F.2d 451 (1972)

CONGRESS FINANCIAL CORPORATION v. STERLING-COIN OP MACHINERY CORPORATION et al., Appellant in No. 19531 Appeal of STERLING EQUIPMENT CORPORATION, No. 19532 Appeal of STERLING SUPPLY CORPORATION, No. 19533.

Nos. 19531-19533.

United States Court of Appeals, Third Circuit.

Argued November 30, 1971.

Decided February 2, 1972.

Lawrence Silver, Dilworth, Paxson, Kalish, Levy & Coleman, Philadelphia, Pa., for defendants-appellants; (Leonard J. Cook, Richard J. Gordon, on the brief.)

Edward Greer, Mesirov, Gelman, Jaffe & Levin, Philadelphia, Pa., for plaintiff-appellee; (Edward L. Snitzer, on the brief).

Before SEITZ, Chief Judge, KALODNER and GIBBONS, Circuit Judges.

OPINION OF THE COURT

GIBBONS, Circuit Judge.

The defendant-appellants, Sterling-Coin Op Machinery Corporation, Sterling Equipment Corporation and Sterling Supply Corporation appeal from a judgment in the sum of $16,273.03¹ entered in favor of plaintiff-appellee, Congress Financial Corporation after a non-jury trial. Sterling-Coin Op Machinery Corporation is in the business of selling coin-operated dry cleaning equipment. Congress Financial Corporation (Congress), a finance company, loans money on the security of installment paper. In 1962 Sterling-Coin Op Machinery Corporation entered into a financing contract with Congress. Sterling Equipment Corporation and Sterling Supply Corporation each unconditionally guaranteed the obligations of Sterling-Coin Op Machinery Corporation to Congress, and for purposes of this opinion the defendants will be referred to collectively as Sterling.

In October 1962 Sterling sold certain dry cleaning equipment to Marguerite Mueller and her husband Frederick Mueller for $28,051.33. Simultaneously with their execution of the conditional sale contract the Muellers executed a judgment note for $28,051.33 payable to Sterling's order. The note contained a clause authorizing any attorney to confess judgment against them upon default for any unpaid balance.

In the general financing agreement between Congress and Sterling, Sterling undertook to repurchase on demand any installment paper sold to Congress upon which a default should occur. The Mueller conditional sale contract and judgment note were assigned to Congress by a separate written assignment, which in relevant part said:

". . . Sterling warrants the payment when due of each sum payable thereunder and the payment on demand of the entire unpaid balance in the event of non-payment by the buyer of any monthly sum at its due date, or of any other default by the buyer without first requiring assignee to proceed against said buyer.

* * * * * *

Sterling warrants compliance with all filing and recording requirements, hereby agreeing that any filing or recording or renewals thereof which Congress may undertake at Sterling\'s request, or otherwise, shall be at Sterling\'s expense and without responsibility whatsoever on Congress\' part for any omission or invalid accomplishment thereof, whether through Congress\' failure, neglect, or for any reason, and such omission or invalid accomplishment shall not relieve Sterling of any responsibility to Congress.

* * * * * *

The assignment shall be construed under the laws of the State of New York and none of the terms shall be modified except by a writing signed by an officer of assignee and notice of the acceptance thereof is hereby waived."

The district court found that the quoted language of the assignment was intended by the parties to apply both to the conditional sale contract and to the judgment note. In a transmittal letter accompanying the assignment, conditional sale contract and judgment note, Sterling wrote:

"We are enclosing the Conditional Sale Contract on Bankers Commercial forms, covering a sale to Marguerite M. Mueller. Her husband has signed the guarantee on the back of Page 1.

You will also find enclosed a Judgment Note, endorsed to your order, with our recourse, signed by both husband and wife, which we ask you to record in the proper county, and send us the notice of recording."

At the time they executed the judgment note in October of 1962 the Muellers owned certain real estate in Allegheny County, Pennsylvania. In March of 1963 they defaulted on the note. In December of 1963 they made a conveyance of the Allegheny County real estate. Congress did not record the judgment note in Allegheny County until September, 1964, when it entered judgment against the Muellers in that county for $21,870.39.

Congress and Sterling pursued the Muellers and the transferee of the real estate. Eventually they agreed to a settlement with the Muellers whereby the latter paid $6,500 in cash and returned the equipment to Congress in exchange for a satisfaction of judgment and a release. Congress and Sterling agreed that the settlement was without prejudice to the rights and liabilities of either against the other. The $6,500 payment together with other payments which had been made by the Muellers left the outstanding balance on the original transaction at $12,517.73.

Congress sued Sterling for this amount. Sterling in its answer asserted the defense that Congress, as pledgee, had caused damage to the security and was thereby barred from recovery. Such damage, Sterling asserted, occurred because Congress failed to record the judgment note, and thereby failed to perfect a lien on the Muellers' real estate,² prior to the Muellers' alienation of that property in December of 1963. An appraisal in evidence suggests that in December of 1963, just prior to transfer, the Muellers had an equity in the transferred real estate of about $25,000. Sterling filed a counterclaim for $1,900.50, the legal fees which it had expended in pursuing the Muellers for the $6,500 settlement. The district court entered judgment for Congress in the amount of $12,517.73 plus interest, and against Sterling on its counterclaim.

Sterling relies upon § 9-207(1) of the Uniform Commercial Code which provides:

"A secured party must use reasonable care in the custody and preservation of collateral in his possession. In the case of an instrument or chattel paper reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed." N.Y.U.C.C. § 9-207(1) (McKinney 1964); Pa.Stat.Ann. Tit. 12A § 9-207(1) (1970).³

It is common ground between Sterling and Congress that the duty to "take necessary steps to preserve rights against prior parties" ordinarily would include the duty to record an instrument at an appropriate time. Cf. Siedman v. Merchants Bank of New York, 7 U.C.C. R.S. 881 (1970). Under § 9-207(3) a secured party must bear any loss caused by its failure to meet any obligation imposed by § 9-207(1). Thus, says Sterling, Congress must shoulder the total loss caused by its failure to record the judgment note including the cost of collecting the $6,500 settlement.

Congress, relying on the language of the assignment quoted above and on the last three words in § 9-207(1) "unless otherwise agreed," says that it had no duty in this case to take any steps to record. Certainly the language quoted from the assignment specifically purports to relieve the assignee of any liability for failing to record.

Sterling, however, argues that the quoted language is void under another section of the code, § 1-102(3):

"The effect of provisions of this Act may be varied by agreement, except as otherwise provided in this Act and except that the obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be disclaimed by agreement but 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."

N.Y.U.C.C. § 9-102(3) (McKinney 1964); Pa.Stat.Ann. Tit. 12A § 9-102(3) (1970).

Both parties take comfort from this provision. Sterling claims that the exculpatory clause in the assignment amounts to a disclaimer of the duty of reasonableness and care expressly prohibited by § 1-102(3). Congress says that the clause is merely a determination by agreement of the standard of reasonable care imposed by § 9-207(1).

If the assignment contained the language "the assignee shall have no duty to record the judgment note" we would have no difficulty in holding that loss here must fall on Sterling. Siedman v. Merchants Bank of New York, supra. But an agreement to that express effect cannot be found in the instrument. If there is such an agreement it arises by implication from the warranty by Sterling of compliance with all filing and recording requirements. Yet the exculpatory clause itself obviously implies that in some circumstances Congress may undertake to record. Accepting arguendo that the warranty language is by necessary implication an agreement, within the meaning of the second sentence of § 9-207(1), that reasonable care does not require that the assignee record the judgment note, then the balance of the clause must disclaim a duty other than the simple obligation of a secured party to preserve collateral through recordation. It would then operate in situations where a secured party, despite having contracted out of his ordinary duty to record, nevertheless undertook to record and did so without exercising care, thereby reducing the value of the collateral. So construed the exculpation from liability seeks to deprive the assignor in an action brought by the assignee of any defense predicated upon the assignee's careless impairment of the security.

It is not, however, in the light of all the papers, a necessary implication of the language of the recording clause in the assignment that Congress defined recording out of its § 9-207(1) duty of reasonable care. The assignment is on a printed form prepared by Congress and evidently intended to cover various kinds of commercial paper. Most such paper could and should be recorded at the outset.⁴ Other such paper, the judgment note here...