Empire Life Insurance Co. of America v. Valdak Corp.

• Decision Date: 10 November 1972
• Docket Number: No. 72-1063.,72-1063.
• Citation: 468 F.2d 330
• Parties: EMPIRE LIFE INSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. VALDAK CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

468 F.2d 330 (1972)

EMPIRE LIFE INSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. VALDAK CORPORATION, Defendant-Appellant.

No. 72-1063.

United States Court of Appeals, Fifth Circuit.

October 12, 1972.

Rehearing Denied November 10, 1972.

Donnie R. Duplissey, Dean Carlton, Dallas, Tex., Byron Edwards, Grand Forks, N. D., for defendant-appellant.

Stewart Frazer, Douglas E. Bergman, Dallas, Tex., for plaintiff-appellee.

Before BELL, GOLDBERG and RONEY, Circuit Judges.

GOLDBERG, Circuit Judge:

In this diversity case involving the precipitous diminution in value of stock pledged by defendant as collateral for a loan, plaintiff, suing for a deficiency judgment after a foreclosure sale, advocated one theory of the Uniform Commercial Code; defendant advanced a different reading of the U.C.C., and the trial court applied yet a third application of the Code. Finding the Code to be inapplicable to the transaction at issue, and finding defendant's counterclaim for fraudulent depletion of the collateral wrongfully dismissed, we reverse and remand the case for a new trial.

The facts show that on September 30, 1965, plaintiff, an insurance company residing in Texas, loaned defendant, a North Dakota corporation, $350,000 with repayment due on September 30, 1970. As collateral for the loan, defendant pledged 50,000 shares of stock in National Insurance Company (hereinafter "National") in accordance with a written security agreement dated September 30, 1965, and apparently signed in North Dakota. Sometime in 1965 plaintiff gained control of National, and defendant alleges that at the time plaintiff took control the 50,000 shares held as collateral were worth approximately $24 a share ($1,200,000). When the note came due on September 30, 1970, defendant failed to pay. Shortly thereafter plaintiff notified defendant that the collateral would be liquidated at a given time and place at a private sale and that unless defendant paid the debt prior to the date of sale, plaintiff would file suit for whatever deficiency resulted from the foreclosure sale. Defendant failed to respond to the notice of sale and on November 30, 1970, plaintiff, allegedly in accordance with a provision in the security agreement permitting such action, sold the stock to itself for $3.00 a share ($150,000). In January of 1971, plaintiff filed this suit in federal court, claiming that defendant still owed $261,950 on the loan.¹

Defendant answered that the purported private sale was invalid and that therefore no deficiency was owing, and further counterclaimed that since 1965 plaintiff fraudulently and illegally used its control of National to devalue the corporation and in consequence to deplete its assets in violation of plaintiff's duty to defendant as pledgee of the collateral. The fraudulent acts of plaintiff alleged by defendant included, inter alia, execution of a service agreement between the plaintiff insurance company and National which depleted National; discharge of experienced employees and depletion of National's agency force; sale of certain mortgages by plaintiff to National which resulted in a loss to National; and loans to officers and directors at lower rates of interest than the going rate, contrary to statute. Prior to trial, the district court granted plaintiff's motion to dismiss the counterclaim.²

At the trial on plaintiff's main claim for the deficiency judgment, extensive evidence was introduced by both sides as to the value of the stock at various times and the case was sent to the jury with instructions to decide (1) whether the foreclosure sale met the standards of "commercial reasonableness" as defined in the Uniform Commercial Code, particularly section 9-504; and (2) what the fair market value of the National stock was on November 30, 1970. The jury returned a verdict finding that (1) the sale was not "commercially reasonable," and (2) the fair market value of the stock on November 30, 1970, was $3.25 per share. The court thereby allowed defendant a set-off of $162,500 and gave plaintiff judgment for the deficiency, interest, and attorney's fees, totalling $249,400. From this judgment defendant appeals, claiming that (1) under the U.C.C., no deficiency should have been entered since there was a factual finding that the foreclosure sale was not commercially reasonable, and (2) the counterclaim for depletion of the collateral was wrongfully dismissed.

The Foreclosure Sale & Deficiency Judgment

At oral argument of this appeal, the bench raised the threshold question (apparently for the first time in the litigation) of whether the U.C.C., upon the standards of which the trial was based, was applicable to the transactions at issue.³ The security agreement was drafted on September 30, 1965, and the effective date of the Code in both Texas and North Dakota⁴ was July 1, 1966. Section 10-102(2) of the Code⁵ provides:

"Transactions validly entered into before the effective date specified in Section 10-101 of this Act and the rights, duties and interests flowing from them remain valid thereafter and may be terminated, completed, consummated, or enforced as required or permitted by any statute or other law repealed or modified by this Act as though such repeal or modification had not occurred."

In the overwhelming majority of cases where retroactivity of the Code has been in issue, it has been found that when a transaction was entered into⁶ prior to the effective date of the Code, the transaction would thereafter be governed for all purposes by the law in effect when the transaction was entered into. E. g., In re Kokomo Times Publishing and Printing Corp., D.Ind.1968, 301 F.Supp. 529; Phoenix v. Kovacevich, 246 Cal.App.2d 774, 55 Cal.Rptr. 135 (1966); Leiter v. Arnold, 114 Ga.App. 323, 151 S.E.2d 175 (1966); Wellbro Building Co. v. McConnico, 421 P.2d 837 (Okl.1966); McCormack v. E. E. McCormack Co., 239 Or. 264, 397 P.2d 198 (1964); and Lack's Stores, Inc. v. Waisath, supra note 5. Contra, United Sec. Corp. v. Bruton, 213 A.2d 892 (D.C.App. 1965). The conclusion is therefore inescapable that this security agreement, entered into ten months before the effective date of the Code in both Texas and North Dakota, is governed by the prior law, even as to those aspects of the transaction, including the foreclosure, that took place after the effective date of the Code.

From our reading of the pre-Code law, it is clear that the standard for judging the validity of a foreclosure sale is significantly different from the standard enunciated in the U.C.C. Rather than employing a standard of "commercial reasonableness," which requires the secured party to meet various prerequisites regardless of prearranged foreclosure provisions in the security agreement, the prior law merely requires the pledgee to dispose of the collateral in "good faith." Compliance with a prior contractual agreement as to the mode of disposal has, under the prior law, generally been considered good faith, absent some gross impropriety. See Taylor v. Banks, 392 S.W.2d 856 (Tex.Sup.Ct.1965); Anchor v. Gose, 8 S.W.2d 690 (Tex.Civ.App.1928); Elmer v. Elmer, 203 So.2d 391 (La.App. 1967); In re Kiamie's Estate, 309 N.Y. 325, 130 N.E.2d 745 (1955). The U.C.C. introduced into our commerce a new set of business folkways and commercial mores. The trial below, however, was wrongfully predicated upon that new set of folkways and mores. The commencement date of the Code was set by statute, and we are not at liberty to apply the law nunc pro tunc.

We are fully cognizant of the fact that both parties and the trial court tried this case under the assumption that the U.C.C. was applicable, and we are aware that a new trial will be burdensome on all parties. We are aware that as a general rule parties should be held bound by whatever theory of law they argued below and absent some manifest injustice, an appellate court should not allow a party to attempt a whole new theory after he has been unsuccessful at trial. See e. g., D. H. Overmyer Co. v. Loflin, 5 Cir. 1971, 440 F.2d 1213. The rationale for this rule derives from the needs of judicial economy and the desirability of having all parties present all their claims in the court of first instance. See Hormel v. Helvering, 1940, 312 U.S. 552, 556-560, 61 S.Ct. 719, 721-723, 85 L.Ed. 1037, 1040-1043. Here, however, it is not one of the parties seeking to advance a new theory, rather, it is this court, in fulfillment of its duty to apply the correct law, that is seeking to put the case back on the right track.⁷ Since the case must, in any event, be remanded for trial on the counterclaim, neither the ends of judicial economy nor the ends of justice would be well served by our acquiescence in the erroneous application of law indulged in by all parties below. It is well established that as a matter of discretion, an appellate court may pass upon issues not pressed before it or raised below when the ends of justice will be best served by doing so. See American Surety Co. of N. Y. v. Colblentz, 5 Cir. 1967, 381 F.2d 185; In re Linda Coal and Supply Company, 1 Cir. 1958, 255 F.2d 653; De Fonce Construction Company v. City of Miami, 5 Cir. 1958, 256 F.2d 425. See, generally, Hormel v. Helvering, supra. We feel this is such an instance and that we would be amiss if we did otherwise.

Appellate review does not consist of supine submission to erroneous legal concepts even though none of the parties declaimed the applicable law below. McCrea v. Harris County Houston Ship Channel Navigation Dist., 5 Cir. 1970, 423 F.2d 605, 610; Kurdziel v. Pittsburgh Tube Co., 6 Cir. 1969, 416 F.2d 882, 886; Foster v. United States, 2 Cir. 1964, 329 F.2d 717, 718. See also International Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers of America v. Zantop Air Transport Corp., 6 Cir. 1968, 394 F.2d 36, 40. Our duty is to enunciate the law on the record facts. Neither the parties nor the trial judge, by agreement or passivity, can force us to...