First Alabama Bank of Montgomery, N. A. v. Parsons

Decision Date05 November 1980
Parties30 UCC Rep.Serv. 392 FIRST ALABAMA BANK OF MONTGOMERY, N. A. v. Jim D. PARSONS and James L. Whitehead. Civ. 2207.
CourtAlabama Court of Civil Appeals

James A. Byram, Jr. and G. Griffin Sikes, Jr. of Steiner, Crum & Baker, Montgomery, for appellant.

Jere L. Beasley and Frank M. Wilson, Montgomery, for appellees Jim D. Parsons and B & E Steel Services, Inc.

Randall C. Morgan, Montgomery, for appellee James L. Whitehead.

HOLMES, Judge.

The plaintiff, First Alabama Bank of Montgomery, N.A., sued the defendants for the balance due on certain promissory notes. The bank was, in fact, seeking a deficiency judgment after sale of certain equipment which was security for one of the notes. Defendants counterclaimed, alleging commercially unreasonable behavior by the bank.

The trial court granted defendants' motions for a directed verdict on ground that the bank's failure to comply with § 7-9-504(3), Code of Ala.1975 (notice to debtor of disposition of collateral after repossession), bars the bank's recovery of a deficiency judgment. The lawsuit went to the jury on defendants' counterclaim. The jury returned a verdict against the bank for $6,000. The bank appeals and we reverse and remand.

The primary issue on appeal is whether the bank's failure to comply with § 7-9-504(3) bars as a matter of law a creditor from recovering a deficiency judgment.

The pertinent facts as revealed by the record are as follows: The defendants in this case are B&E Steel Services, Inc., and Mr. Parsons and Mr. Whitehead, officers of the corporation. Parsons and Whitehead executed unconditional continuing guaranties of the corporation's debts. Thereafter, B&E obtained two loans from plaintiff bank, both of which were evidenced by notes. One note was secured by two pieces of equipment. The other note was unsecured.

B&E defaulted on both notes. The bank, pursuant to the loan agreement, applied the balance of B&E's checking account to the debt owed on the unsecured loan. This action substantially reduced the amount due.

The bank then repossessed the collateral. Parsons and B&E were notified that the equipment would be sold to the highest bidder at the bank's main office on February 19, 1979, if it were not redeemed by that date. Whitehead was given no notice of this proposed sale.

Although the bank received some bids on February 19, it did not accept any of them. Instead, it entered the collateral in a heavy equipment auction held on March 17, 1979. The bank did not notify any of the defendants of this sale.

Parsons and Whitehead were notified on April 16, 1979, that the equipment had been sold at auction and that the proceeds had been applied to the debt remaining on the secured note. The notice stated the amounts due on each note and demanded that Parsons and Whitehead fulfill their obligations as guarantors by paying both notes in full. No payment was forthcoming and the bank filed the instant suit.

Before deciding the primary issues it is necessary to determine if a guarantor is a debtor within the meaning of § 7-9-504(3). If a guarantor is not a debtor within the meaning of that section, as the bank urges, then the trial court erred in ruling the bank's deficiency judgment action was barred by its failure to comply with § 7-9-504(3). Put another way, the bank contends that guarantors, such as Whitehead and Parsons, are not entitled to notice under § 7-9-504(3).

"Debtor" as used in Article 9 of the Uniform Commercial Code is defined in § 7-9-105(1)(d), which says that a debtor is "the person who owes payment or other performance of the obligation secured, ...." Whether this definition includes a guarantor is a question of first impression in Alabama.

One who unconditionally guarantees another's debt obviously "owes payment or other performance of the obligation secured." T & W Ice Cream, Inc. v. Carriage Barn, Inc., 107 N.J.Super. 328, 258 A.2d 162 (1969). Although there is authority to the contrary, we feel this is the better view.

A well reasoned and scholarly discussion of the issue may be found in Chase Manhattan Bank, N.A. v. Natarelli, 93 Misc.2d 78, 401 N.Y.S.2d 404 (1977). In that opinion the court pointed out that the purpose of UCC § 9-504(3) is to notify all persons having an interest in the collateral so that they may protect their interests. Notice of sale allows those persons to safeguard any right of redemption, to bid at the sale, to procure other bidders, or otherwise insure that a fair price is received for the collateral. Because a guarantor is liable for any deficiency after sale, he has at least as much at stake in a sale after default as the debtor does.

With the above in mind, we find that a guarantor is a "debtor" within the meaning of § 7-9-105(1)(d) and is therefore entitled to notice under § 7-9-504(3). Consequently, the trial judge was correct in ruling that Parsons and Whitehead were entitled to notice.

The next question is whether the bank failed to comply with § 7-9-504(3). The bank concedes that it gave no notice to Whitehead, but contends that Parsons and B&E were properly notified.

As shown above, Parsons and B&E did receive notice of the proposed February sale. They were not notified of the subsequent auction in March. The trial judge ruled that the bank's notice of the February sale was insufficient as a matter of law to notify Parsons and B&E of the March sale.

While there is no Alabama authority on point, a Connecticut court, in Savings Bank of New Britain v. Booze, 34 Conn.Sup. 632, 382 A.2d 226 (1977), was faced with a similar set of facts. That court held that notice of one sale at one location was not sufficient notice of a second sale at a different location. Based on the foregoing authority, we uphold the trial court's ruling in this case that the bank's notice to Parsons and B&E was insufficient as a matter of law.

As indicated above, the primary issue in this case is whether the bank's failure to comply with § 7-9-504(3) bars the bank's action for a deficiency judgment.

In the present case, Whitehead through able counsel contends that the bank's total failure to give him notice of sale amounted to commercially unreasonable behavior. Parsons and B&E contend that the bank acted in a commercially unreasonable manner because they received insufficient notice.

In Valley Mining Corp., Inc. v. Metro, Ala., 383 So.2d 158 (19...

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