Farmers State Bank v. Mobile Homes Unlimited

• Decision Date: 20 April 1979
• Docket Number: No. 14340,14340
• Citation: 36 St.Rep. 792,593 P.2d 734,181 Mont. 342
• Parties: FARMERS STATE BANK et al., Plaintiff and Appellant, v. MOBILE HOMES UNLIMITED et al., Defendants and Respondents.
• Court: Montana Supreme Court

Page 734

593 P.2d 734

181 Mont. 342

FARMERS STATE BANK et al., Plaintiff and Appellant, v. MOBILE HOMES UNLIMITED et al., Defendants and Respondents.

No. 14340.

Supreme Court of Montana.

Submitted Feb. 13, 1979.

Decided April 20, 1979.

Jack W. Stark (argued), Victor, for plaintiff and appellant.

Boone, Karlberg & Haddon, Sam E. Haddon (argued), Missoula, Curtis C. Cook (argued), Hamilton, for defendants and respondents.

HASWELL, Chief Justice.

Farmers State Bank appeals from findings of fact, conclusions of law and judgment entered by the District Court of Ravalli County, holding that because the bank had acted in a manner not authorized by the Uniform Commercial Code (U.C.C.) in repossessing certain property and dealing with certain notes, it was precluded from recovering a deficiency judgment on the notes from obligor Mobile Homes Unlimited or guarantors E. R. Vallance, Barbara Vallance, and Don Garrod.

Respondents E. R. Vallance and Don Garrod were the operators of a trailer sales facility, Mobile Homes Unlimited. Each owned a half interest in the enterprise. The business had a "floor plan" financing arrangement with appellant Farmers State Bank whereby the bank would loan money for the purchase of trailers and respondents would execute notes to the bank with the trailers as security, with the idea that respondents would be able to resell the trailers, pay off the notes, and still realize a profit for the business.

In 1975, Garrod arranged to sell his half interest in Mobile Homes Unlimited to Vallance. At that time, five trailers were obligated to the bank under the floor plan arrangement, each secured by a separate note.

As a result of the sale of Garrod's interest to Vallance, it was necessary to refinance the Mobile Homes Unlimited units that were floor planned by the bank. The five notes for the five units involved were consolidated into a single note for $50,609. The note named Mobile Homes Unlimited as maker and was executed by E. R. Vallance, President, and Barbara Vallance, Secretary-Treasurer. On the reverse side the note was signed individually by E. R. Vallance, Barbara Vallance, and Don Garrod as guarantors. At the same time this note was executed (April 7, 1975), a separate note for $9,287.04, covering other obligations of Mobile Homes Unlimited to the bank was also executed in like manner with the Vallances and Garrod again signing in their individual capacities as guarantors. The larger note was secured by the five trailers, and a U.C.C. financing statement listing them was properly filed. The smaller note was unsecured.

On June 11, 1976, a complaint was filed in the District Court, Ravalli County, alleging that the two notes were in default and seeking recovery from respondents of a balance due of $26,665.55 on the larger note and $8,287.04 on the smaller note. The complaint noted that two mobile homes remaining under the security agreement (the other three having already been sold by Mobile Homes Unlimited) had been repossessed by the bank and would be sold. They subsequently were sold and the proceeds applied to the balance due, reducing the amount in controversy.

Separate answers were filed by Garrod, Mobile Homes Unlimited, and the Vallances. Garrod alleged, among other things, that any sums owing had been paid. Mobile Homes Unlimited alleged that plaintiff had derived more than sufficient funds to pay off the smaller note from the sale of the two trailers it took into possession under the security agreement, and that the larger note would have been paid off already if payments which Mobile Homes previously made had been applied in accordance with an agreement which had been reached during the negotiations leading to the execution of the notes, which agreement the bank had allegedly ignored. The answer of the Vallances also alleged that the notes would have been paid off already if the payments had been properly applied, and contended further that they were discharged of any obligation because the bank allegedly failed to give them proper notice under the U.C.C. regarding sale of the repossessed trailers. A later amended answer and counterclaim was filed by Mobile Homes Unlimited adding the allegation that the bank had unlawfully seized certain items in which it had no security interest when it repossessed the trailers. The counterclaim sought $10,000 damages for the items allegedly seized unlawfully and $10,000 punitive damages.

Trial was held before Judge E. Gardner Brownlee on December 17, 1976, August 27, 1977, and October 28, 1977. The fragmentation was the result of recesses imposed by Judge Brownlee because the evidence was being presented in such a confused manner that he was unable to follow the arguments and he therefore required the parties to sort out their contentions and submit them in intelligible written form.

The evidence adduced at trial indicated that for certain checks paid to the bank by Mobile Homes Unlimited which had notations on them in regard to the manner in which they were to be applied to reduce the obligations, the bank disregarded the notations and distributed the funds to suit its own purposes, contrary to both the notations on the checks and to the manner of distribution that had been previously agreed upon in the negotiations leading up to the execution of the notes.

The evidence in regard to the repossession and sale of the collateral was that an officer of the bank, accompanied by respondent Garrod, had gone to the Mobile Homes Unlimited lot; that the two trailers still covered by the security agreement together with a third trailer not covered by any agreement but which had been received as a trade-in on the sale of one of the other secured trailers were taken; that Don Garrod took and sold eight furnaces not covered by any security agreement and turned the proceeds over to the bank; and that in the trailers seized by the bank were certain items of furniture which defendants alleged were not covered by the security agreement. There was conflicting evidence as to whether all respondents had been given notice as required under the U.C.C. before the sale of the repossessed trailers.

It was established that both notes involved had been extended six months, the extension being signed "Mobile Homes Unlimited X E. R. Vallance." No notice was given to Don Garrod that the extension was being made.

The last entry on the reverse of the larger note is under "Advances Given" and is in the sum of $500, increasing the balance due from $3,605.55 to $4,105.55. The bank's testimony was that this was not really an "advance" but rather a return to a buyer of one of the repossessed trailer because the trailer had been sold to him as a 1974 model whereas it was actually a 1973. No notice of this "advance" was given to any of the defendants.

Subsequent to trial, on February 6, 1978, findings of fact, conclusions of law and judgment were entered. The District Court found that the bank had taken possession of a trailer not a part of any security agreement (even though the trailer was a trade-in on one which was covered by a security agreement); that the bank took possession of some furniture and furnaces not listed on any security agreement; that the bank "in effect took over the operation of the business and made disposition of property in the manner not completely authorized by the U.C.C. or the Security Agreement"; that from the evidence submitted it was impossible for the court to determine what amount would be owed the bank if it had proceeded properly; and that any deficiency "could just as well be the result of improper conduct on the part of the plaintiff bank as it could be the result of defendants' actions." The court also found that the Vallances had filed a counterclaim against the bank (erroneous the only counterclaim was filed...