Connecticut Bank and Trust Co., N.A. v. Incendy

Decision Date05 April 1988
Docket NumberNo. 13092,13092
Citation540 A.2d 32,207 Conn. 15
CourtConnecticut Supreme Court
Parties, 5 UCC Rep.Serv.2d 857 CONNECTICUT BANK AND TRUST COMPANY, N.A. v. Victor INCENDY et al.

Ross G. Fingold, with whom, on the brief, were Leonard M. Bieringer and Edward C. Taiman, Jr., Hartford, for appellant (plaintiff).

William F. Gallagher, with whom, on the brief, was Evelyn A. Barnum, New Haven, for appellees (named defendant et al.).

Before PETERS, C.J., and ARTHUR H. HEALEY, CALLAHAN, GLASS and HULL, JJ.

CALLAHAN, Associate Justice.

The plaintiff, Connecticut Bank and Trust Company, N.A. (CBT), filed the instant appeal from a judgment of the trial court, Lewis, J., rendered in accordance with the findings and report of an attorney state trial referee, Isadore M. Mackler. The appeal was transferred from the Appellate Court to this court, pursuant to Practice Book § 4023. It presents two interrelated issues of first impression for this court. First, whether notice given by a creditor to a debtor of a public sale of repossessed collateral which complies with General Statutes § 42a-9-504(3) is sufficient notice for a subsequent private sale of the same collateral after the public sale has proven unsuccessful. 1 Second, if notice of the sale is not sufficient, what is the effect of such insufficiency on the right of a creditor to obtain a deficiency judgment.

The relevant facts are not in dispute. On June 5, 1974, Connecticut Electric Products, Inc. (CEP), a manufacturer of plastic injected molded products, executed a promissory note in the amount of $103,500, which was made payable to CBT. To secure the note, CEP gave the bank security interests in CEP's inventory, accounts receivable, and machinery and equipment. As part of the financing arrangement, Victor Incendy and Jeanette Incendy, who were the officers and sole owners of the capital stock in CEP, personally executed a written guaranty to the bank guaranteeing payment of the note and all other moneys advanced to CEP by CBT. 2 To secure the note and as part of their guaranty, the Incendys executed a mortgage deed to the bank on real estate they owned in Norwalk. The mortgage deed was recorded in the Norwalk land records on June 7, 1974.

On June 5, 1974, the same day CEP executed the promissory note, CBT entered into an agreement with Thomas Industries, Inc. (Thomas), a company experienced in liquidating heavy machinery and equipment. Thomas agreed that, in the event of a default by CEP, it would pay to CBT not less than $145,000, minus amounts due to prior lienholders, in return for the right to dispose of the collateral in accordance with the Uniform Commercial Code. 3

Soon thereafter, CEP defaulted on the note. In November, 1974, CBT took possession of the collateral by a peaceable entry onto CEP's premises and contacted Thomas to effect its disposition. Thomas made arrangements for a public auction of the collateral to be held on January 25, 1975, on CEP's premises and publicly advertised the auction in a trade publication and by circulating brochures within the trade. The Incendys were given proper notice of the public auction and, in fact, attended. All of CEP's machinery and equipment were sold at the auction with the exception of one injection plastic molding machine and three horizontal molding presses. These four machines were withdrawn from the auction block allegedly because the bids received were insufficient to pay prior liens held by the Pennwalt Corporation and ITT Industrial Credit, Inc. 4 The total proceeds realized from the public auction were $46,585.

Sometime after January 25, 1975, Thomas shipped the four unsold machines on consignment to the Gavlick Machinery Corporation (Gavlick), a used machinery dealer located in Bristol, for resale. The first time CBT became aware of the transfer to Gavlick was on April 8, 1975, when it received an accounting from Thomas indicating that two of the four machines had been sold for a total of $41,500. 5 CBT was informed that the remaining two machines had been sold for a total of $64,500 when it received a final report and accounting from Thomas in February, 1976. It is undisputed that the defendants did not receive any notice from CBT that the four machines had been sent to Gavlick for resale nor did they receive notice of a time after which the machines would be sold. The defendants did not know that a final disposition of the machinery had occurred until after CBT had initiated this lawsuit.

On December 18, 1979, CBT first made a written demand on the Incendys to pay the balance due and owing on the note which they had personally guaranteed. The defendants failed to honor the demand and CBT instituted this action on November 17, 1981, 6 seeking to obtain a deficiency judgment against the Incendys and to foreclose its mortgage on their Norwalk real estate. In response, the defendants asserted, inter alia, a two count special defense of equitable recoupment. 7 Count one alleged that CBT had wrongfully misrepresented and concealed the actual date of the defendants' default. Count two alleged that CBT had failed to comply with the Uniform Commercial Code in that it had failed to provide the defendants with reasonable notice of the sale of the machines, and to dispose of the collateral in a commercially reasonable manner. The defendants also filed a counterclaim that asserted the same allegations as count one of their equitable recoupment special defense.

The matter was tried before an attorney state trial referee. The referee's report contained extensive and detailed findings of fact, which the parties do not dispute, and was accompanied by a nineteen page memorandum of decision. The referee recommended that judgment enter for CBT on the defendants' counterclaim, and that judgment enter for the defendants on CBT's complaint. 8 With regard to CBT's action, the referee found that it had failed to comply with the notice requirements of General Statutes § 42a-9-504(3) regarding the private sale of the four machines remaining unsold after the public auction. The referee further found that the private sale had not been conducted in a commercially reasonable manner and the amount received at the sale was therefore presumed to equal the balance of the debt owed, thus denying CBT a deficiency judgment.

Thereafter, the trial court, Lewis, J., adopted the findings and recommendations of the trial referee and rendered judgment in accordance therewith. On appeal, CBT challenges the trial court's rulings that the notice of the private sale was insufficient, and that the private sale was held in a commercially unreasonable manner. We find no error.

I

The first issue raised by CBT is whether the court erred in holding that the notice of the public sale was insufficient for purposes of the subsequent private sale of the collateral by Gavlick. It argues generally that notice of the unsuccessful public sale was sufficient notice for the subsequent private sale of the debtor's collateral because it complied with the "Letter and Spirit of the Uniform Commercial Code." We disagree.

The rights of a creditor or secured party to take possession of collateral after default and to dispose of it in a commercially reasonable manner are specifically provided for under the Uniform Commercial Code of this state. See General Statutes §§ 42a-9-503 and 42a-9-504(1). Prior to disposition, however, the code specifically requires that "[u]nless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor...." (Emphasis added.) General Statutes § 42a-9-504(3). It is thus clear from a reading of § 42a-9-504(3) that a debtor must be given reasonable notice of "any private sale," and not just private sales that occur in the absence of a prior unsuccessful public sale of the same collateral. CBT does not dispute the fact that no notices of the sales by Gavlick were ever given. Rather, it argues that proper notice of the public auction constituted sufficient notice of the subsequent private sale.

Although this court has not previously addressed this issue, two lower courts in Connecticut have, as have the courts of a number of other jurisdictions. The cases of Hertz Commercial Leasing Corporation v. Dynatron, Inc., 37 Conn.Sup. 7, 427 A.2d 872 (Super.Ct.1980), and Savings Bank of New Britain v. Booze, 34 Conn.Sup. 632, 382 A.2d 226 (App.Sess.1977), both involved the repossession and subsequent disposition of collateral by a creditor after the debtor's default. In each of those cases the creditor notified the debtor that the collateral would be sold at a public sale that would be held at a specified time, date and place. In Savings Bank of New Britain v. Booze, supra, at 632-33, 382 A.2d 226, the creditor withdrew the collateral, an automobile, from the auction block because the bids received were insufficient. In Hertz Commercial Leasing Corporation v. Dynatron, Inc., supra, 37 Conn.Sup. at 9, 427 A.2d 872, the collateral was not sold at auction for reasons not apparent in the decision. Nevertheless, in each case the collateral was subsequently sold by the creditors without providing additional notice to the debtors. In both cases the courts held that the respective creditors had failed to comply with the notice requirements of § 42a-9-504(3) because they had failed to give the debtors specific notice of the subsequent private sales. Hertz Commercial Leasing Corporation v. Dynatron, Inc., supra, at 12, 427 A.2d 872, Savings Bank of New Britain v. Booze, supra, 34 Conn.Sup. at 635-36, 382 A.2d 226.

This view is unanimously supported by the decisions of other jurisdictions that have addressed the issue in...

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