Ford & Vlahos v. ITT Commercial Finance Corp.

Decision Date15 December 1994
Docket NumberNo. S035748,S035748
Citation8 Cal.4th 1220,885 P.2d 877,36 Cal.Rptr.2d 464
CourtCalifornia Supreme Court
Parties, 885 P.2d 877, 25 UCC Rep.Serv.2d 630 FORD & VLAHOS, Plaintiff, Cross-defendant and Appellant, v. ITT COMMERCIAL FINANCE CORP., Defendant, Cross-complainant and Appellant.

Kline & Joseph, Stephen L. Joseph, Washington, DC, Richard Collier Sears, Nossaman, Guthner, Knox & Elliott, William T. Bagley and Douglas J. Maloney, San Francisco, for plaintiff, cross-defendant and appellant.

Christopher M. Micheli and Nancy N. McDonough, Sacramento, as amici curiae on behalf of plaintiff, cross-defendant and appellant.

Howard, Rice, Nemerovski, Canady, Robertson & Falk, Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, Jerome B. Falk, Jr., Bernard A. Burk and Matthew F. Weil, San Francisco, for defendant, cross-complainant and appellant.

Christopher E. Chenoweth, San Francisco, as amicus curiae on behalf of defendant, cross-complainant and appellant.

MOSK, Justice.

This case presents a narrow question of law: whether the California version of Uniform Commercial Code section 9-504, subdivision (3), definitively limits a secured party's duty to advertise the sale of collateral merely to placing a legal notice in a newspaper. We conclude it does not, and therefore reverse the Court of Appeal's judgment and remand the case for consideration of the secured party's other claims of error.

Defendant secured party lent plaintiff debtor money to buy a Lockheed Hercules C-130A aircraft and acquired a purchase-money security interest in it. The parties agreed that California law would govern the security agreement.

Plaintiff defaulted on the loan and was notified by defendant that it would repossess the aircraft. On August 26, 1987, defendant informed plaintiff it would hold a public sale of the C-130A on September 3 at Chandler, Arizona.

On August 28, 1987, defendant advertised the sale's time and place in the Arizona Republic, a newspaper of general circulation in Maricopa County, Arizona, where Chandler is located. The advertisement stated that the United States Department of State would have to approve "the purchaser and the secured party's right to bid [on] and purchase" the aircraft. But the advertisement apparently inadvertently omitted the information about whom to contact to qualify as a bidder. That error caused defendant to place a corrected advertisement in the Phoenix (Arizona) Gazette on September 2.

Defendant, the sole bidder at the auction, bought the C-130A the next day for $1 million. After the sale defendant's agent advertised the aircraft in Trade-A-Plane. The agent testified that Trade-A-Plane is "the Bible of aircraft sales in this country." In March 1988 defendant agreed to sell the C-130A to African Air Trans, Inc., for $1,525,000, eventually, according to defendant, receiving $1,487,000 from that company.

Plaintiff sued for improper disposition of the collateral and defendant cross-complained for a deficiency plaintiff allegedly owed after credit for the $1 million foreclosure-sale bid.

The trial court found the aircraft's sale commercially unreasonable because accompanied by insufficient publicity and hence the subject of too few bids. The court also found the notices of sale "legally insufficient" for various reasons. The court's statement of decision recited:

"The only notice of the auction was the Arizona Republic newspaper ad placed in the auction section of the newspaper. The ad contained an incomplete sentence regarding qualifications to purchase.

"The Court finds that a correction appeared in the Phoenix Gazette on September 2, 1987, one day prior to the auction.

"The Court finds that there was no evidence that the Arizona Republic or Phoenix Gazette were publications circulated among or read by potential purchasers of this Aircraft.

"The Court finds that no publicity for the September auction sale was given in aviation trade journals, such as Trade-A-Plane....

"The Court concludes that publication of a notice for the September 3 auction of this Aircraft in the Phoenix Gazette was legally insufficient to satisfy [California Uniform Commercial Code section] 9504 in that it did not conform to the five-day time requirement of the statute.

"The Court finds that the Arizona Republic notice affirmatively stated that prequalification as a bidder was necessary.

"The Court concludes that the omission of any contact name or telephone number to obtain prequalification information rendered the wording contained in the Arizona Republic notice legally insufficient under [California Uniform Commercial Code section] 9504....

"The Court finds that, other than the newspaper notices, Defendant ITT made no efforts to contact potential purchasers regarding the September 3 auction.

"The Court finds that Defendant ITT had available to it the resources of an aircraft broker ... who knew potential aircraft buyers and the means of publicity to announce aircraft auctions....

"The Court concludes that Defendant ITT did not conduct the auction sale on September 3, 1987 in good faith and in a commercially reasonable manner as required by [California Uniform Commercial Code section] 9504...."

With regard to the collateral's value, the court ruled, "based on ... expert opinion testimony ..., that the fair market value of the Aircraft on the date of sale, September 3, 1987, was $3.8 million."

On the basis of that valuation, the court set plaintiff's damages at $3.8 million, but granted defendant an offset of $996,050, a figure representing the sum of plaintiff's debt to defendant and defendant's expenses in repossessing, refurbishing and selling the aircraft. The ensuing judgment netted plaintiff $2,803,950.

The Court of Appeal reversed the judgment in part. As relevant here, the majority decided the Legislature had created a "safe harbor" in California Uniform Commercial Code section 9504, subdivision (3)--unlabeled statutory references are to this code--whereby satisfying the statute's notice requirement precluded any challenge to the sale's commercial reasonableness on the basis of inadequate publicity. The majority wrote, "ITT [defendant] contends that by specifying the time and manner for notice of a public sale, our Legislature intended to establish a bright-line rule to prevent disputes over the 'reasonableness' of presale publicity. This contention is supported by the legislative history of section 9504(3)." Thus, the majority reasoned, "Compliance with the letter of section 9504(3) creates a safe harbor against claims that the publicity for a public sale was inadequate." Acknowledging that "there may be situations ... where such a limited notice would seem less than fair," the majority stated in essence that any complaints should be addressed to the Legislature. The majority thus rejected the reasoning of American Business Credit Corp. v. Kirby (1981) 122 Cal.App.3d 217, 221, 175 Cal.Rptr. 720, and Clark Equipment Co. v. Mastelotto, Inc. (1978) 87 Cal.App.3d 88, 96-97, 150 Cal.Rptr. 797, "cases that have suggested, contrary to our conclusion, that a single, timely newspaper notice might not be sufficient," because those cases "did not consider section 9504(3)'s legislative history, or address whether the statute's notice provisions were meant to conclusively establish what is required to publicize an auction of collateral."

The dissent declared that the majority's bright-line rule was unfounded. Citing the cases mentioned above, the dissent observed that, "In each of these cases the court treated adequate notice and publicity adequate to be commercially reasonable as two distinct inquiries. Adequate notice, that is notice which met the minimum requirements of the subdivision, did not define the scope of commercially reasonable publicity or advertising." The dissent continued, "In my view the specific notice requirements imposed by the section define the minimum notice which must be given. I do not, unlike the majority, construe notice to be coextensive with publicity. The duty to publicize a sale adequately arises from the general duty of the creditor to act 'in a commercially reasonable manner.' What is commercially reasonable publicity must turn on the specific circumstances of what the collateral is and how it is to be sold. [p] ... The published notice given here was not, standing alone, commercially reasonable publicity for the sale of a multimillion dollar aircraft."

Because the Court of Appeal majority concluded that the Legislature had conclusively defined the publicity required for a sale of foreclosed collateral, it did not address defendant's other claims of error, including contentions regarding the court's calculation of the aircraft's value, its valuation of defendant's expenses attendant to repossessing and selling the aircraft, and its asserted refusal to find that plaintiff was not the real party in interest.

We granted plaintiff debtor's petition for review. For its part, defendant secured party requests that we take judicial notice of certain materials bearing on legislative intent. That request, which is unopposed, is also granted. (Evid.Code, §§ 452, subds. (c), (h), 459, subd. (a).)

Defendant contends that the references to notice in subdivision (3) of section 9504 conclusively define the publicity required for a public sale of foreclosed collateral. Defendant reasons that because it met the statute's notice requirements, the court could not properly find the sale commercially unreasonable for want of sufficient publicity. In sum, it contends the Court of Appeal majority correctly understood the meaning of section 9504, subdivision (3).

We interpret the California Uniform Commercial Code otherwise. As we will describe, notice on the one hand, and publicity or advertising on the other, are separate but related concepts under the California Uniform Commercial Code. (We define advertising broadly as all...

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