Dakota Bank & Trust Co., Fargo v. Grinde

• Decision Date: 18 April 1988
• Docket Number: No. 870169,870169
• Court: North Dakota Supreme Court
• Parties: 6 UCC Rep.Serv.2d 568 DAKOTA BANK & TRUST CO., FARGO, Plaintiff and Appellee, v. Jon GRINDE, Defendant and Appellant. Civ.

Page 813

422 N.W.2d 813

6 UCC Rep.Serv.2d 568

DAKOTA BANK & TRUST CO., FARGO, Plaintiff and Appellee, v. Jon GRINDE, Defendant and Appellant.

Civ. No. 870169.

Supreme Court of North Dakota.

April 18, 1988.

Lamb, McNair, Larson & Carlson, Ltd., Fargo, for plaintiff and appellee; argued by David J. Hauff.

Garaas Law Firm, Fargo, for defendant and appellant; argued by David A. Garaas.

GIERKE, Justice.

Jon Grinde appeals from a district court summary judgment holding him liable to the Dakota Bank and Trust Company, Fargo [Bank] for $52,005.13 plus interest as a guarantor of a corporate debt. We reverse and remand for further proceedings.

Grinde was the sole shareholder of C.J.'s, Inc. [C.J.'s]. In December 1983, C.J.'s executed a $95,000 promissory note to the Bank to renew various notes the corporation had with the Bank. That money was used to buy fixtures and other equipment for a bar and restaurant near Detroit Lakes, Minnesota, which C.J.'s was purchasing from Virgil Cummins pursuant to a contract for deed which had an original purchase price of $100,000, with approximately $50,000 remaining to be paid. The promissory note was secured by a security agreement covering the equipment on the premises, by a mortgage covering the real property, and by C.J.'s interest in the contract for deed. Grinde also executed a personal guaranty for the debt.

C.J.'s leased the bar and restaurant to Randy Johnson under a verbal agreement whereby Johnson would make the payments due to the Bank under the promissory note. According to Grinde, Johnson planned to purchase the bar and restaurant at a price that would extinguish C.J.'s debt to the Bank. Although it is disputed whether a default occurred, the Bank subsequently "took over the security" from C.J.'s. At that time, according to Grinde, he had conversations with Jim Mattson, a loan officer at the Bank, and was led to believe that the Bank would handle the leasing of the property directly, including negotiating the purchase price with Johnson, and that the Bank "would be looking after [Grinde's] interest in its dealings with ... Johnson."

A short time later, the Bank apparently sold the building, lot, and all of the contents to Johnson at a price which was, according to Grinde, "far below market value." Grinde asserted by affidavit that the lot alone was worth $60,000 and that $50,000 worth of improvements were done on the premises at the time the promissory note was executed by C.J.'s. Grinde asserted that although he "is unaware of the true purchase price" that Johnson paid, he "believes that the amount received was approximately $12,000 above the remaining payments on the Contract for Deed for a total purchase price of approximately $62,000. If the total amount the bank received was $62,000, it received only approximately one-half of what the property was worth." Grinde asserted that had the Bank merely kept the existing lease in effect, it would have been paid in full.

The Bank thereafter brought this suit against Grinde asserting that C.J.'s had defaulted on the promissory note and that Grinde, as the guarantor, was liable for approximately $50,000 representing the balance due and owing on the note plus interest. The Bank moved for summary judgment, asserting that under the terms of the guaranty, Grinde had waived all of his rights with respect to disposition of the collateral. The Bank's motion was accompanied by an affidavit of Jim Mattson which stated that after the promissory note was "past due," C.J.'s "turn[ed] over ... certain collateral involving both real and personal property" to the Bank and that the Bank sold the collateral. Mattson's affidavit also set forth the amount of the balance remaining due after applying the proceeds from the sale to the indebtedness. Grinde responded to the motion with an affidavit alleging the facts set forth above.

The district court granted the Bank's motion, concluding that "there are no genuine issues as to any material facts and that the [Bank] is entitled to Judgment as a matter of law." Grinde has appealed.

Summary judgment is a procedural device available for the prompt disposition of a controversy without the necessity of trial when, viewing the evidence in the light most favorable to the opposing party and giving that party the benefit of all favorable inferences, there is no genuine dispute as to either the material facts or the inferences to be drawn from undisputed facts. Ostlund Chemical Co. v. Norwest Bank, 417 N.W.2d 833, 835 (N.D.1988). Summary judgment may also be granted when, although factual disputes exist between the parties, the law is such that resolution of the factual disputes will not change the result. Russell v. Bank of Kirkwood Plaza, 386 N.W.2d 892, 897 (N.D.1986).

Paragraph 7 of the guaranty signed by Grinde in this case provides in pertinent part:

"The liability of the undersigned [Grinde] shall not be affected or impaired by any of the following acts or things (which the Bank is expressly authorized to do, omit or suffer from time to time, both before and after revocation of this guaranty, without notice to or approval by the undersigned): ... (vi) any failure to obtain collateral security (including rights of setoff) for Indebtedness, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, insure, or enforce any collateral security; or any modification, substitution, discharge, impairment, or loss of any collateral security; (vii) any foreclosure or enforcement of any collateral security; ..."

Although it is not clear from the district court's written order, an examination of the transcript of the hearing on the summary judgment motion reveals that the court ruled that Grinde had waived all of his rights with regard to the Bank's "enforcement of any collateral security," and because Grinde was a guarantor rather than the principal debtor, these rights could be validly waived under the provisions of Chapter 41-09 [Article 9, Uniform Commercial Code], N.D.C.C.

Grinde asserts on appeal that even if the guaranty purports to waive all of his rights with regard to the disposition of the collateral, a guarantor is a "debtor" for the purposes of Article 9 and, consequently, before default he could not validly waive his right to notice of disposition of collateral or the Bank's duty to sell the collateral in a commercially reasonable manner [see Secs. 41-09-47(3) [9-501] and 41-09-50(3) [9-504], N.D.C.C.], ¹ or the Bank's duty to act in good faith [see Sec. 41-01-02(3) [1-102], N.D.C.C.]. ² See American State Bank of Killdeer v. Hewson, 411 N.W.2d 57 (N.D.1987).

In State Bank, Etc. v. All-American Sub, Inc., 289 N.W.2d 772, 779 (N.D.1980), we noted that there was a "split of authority" on the question whether a guarantor may waive notice of intended disposition of collateral prior to default, but declined to decide the issue. Since then, the Eighth Circuit Court of Appeals has been called upon to decide the issue from the standpoint of North Dakota's version of the Uniform Commercial Code. In United States v. Kukowski, 735 F.2d 1057, 1058-1059 (8th Cir.1984), the court noted that the issue was unsettled in this state and, relying upon the Ninth Circuit Court of Appeals' decision in First Nat'l Park Bank v. Johnson 53 F.2d 599 (9th Cir.1977), and giving "great weight" to the North Dakota federal district court's interpretation of our law, concluded that a guarantor could validly waive notice of the intended disposition of collateral in the guaranty agreement. With all due respect to the federal court, we reach a contrary conclusion.

The nonwaivable rights set forth under Sec. 41-09-47(3) [9-501], N.D.C.C., are accorded only to a "debtor," which, for purposes of Article 9 secured transactions, is defined in Sec. 41-09-05(1)(d) [9-105], N.D.C.C.:

"41-09-05. (9-105) Definitions and index of definitions.

"1. In this chapter unless the context otherwise requires:

* * *

* * *

"d. 'Debtor' means the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral, and includes the seller of accounts or chattel paper. Where the debtor and the owner of the collateral are not the same person, the term 'debtor' means the owner of the collateral in any provision of the chapter dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires."

Under North Dakota law, a guaranty is "a promise to answer for the debt, default, or miscarriage of another person." Sec. 22-01-01(1), N.D.C.C. It is a contract which, although separate and distinct from the contract imposing obligations on the principal, nevertheless imposes an obligation on the guarantor if the principal defaults in performance or payment. See Bank of Kirkwood Plaza v. Mueller, 294 N.W.2d 640, 643 (N.D.1980). Because a guarantor becomes liable upon the principal's default, we believe that a guarantor qualifies as a "debtor" within the broad statutory definition in Sec. 41-09-05(1)(d) as owing "payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral." [Emphasis added.]

Practical considerations support this conclusion. Upon default by the principal, the guarantor becomes liable for any deficiency after sale and, consequently, has as much interest in protecting his rights during the sale or disposition of the collateral as does the principal. Denying guarantors the protections afforded to debtors under the Code would allow a secured party to circumvent the requirements of Sec. 41-09-50(3) with impunity, thereby undermining the protective purpose of the statute. See Connolly v. Bank of Sonoma County, 184 Cal.App.3d 1119, 229 Cal.Rptr. 396, 399-400 (1986). Furthermore, requiring a secured party to give notice of disposition of collateral to the guarantor will not cause the creditor...