Gambo v. Bank of Maryland

Decision Date01 September 1994
Docket NumberNo. 142,142
Citation648 A.2d 1105,102 Md.App. 166
Parties, 63 USLW 2334, 24 UCC Rep.Serv.2d 1318 Frances GAMBO v. BANK OF MARYLAND. ,
CourtCourt of Special Appeals of Maryland

ELLEN L. HOLLANDER, Judge, Specially Assigned.

Frances Gambo, appellant, challenges two orders that denied Gambo's efforts to vacate a confessed judgment obtained by appellee, Bank of Maryland (the "Bank"). Her appeal presents questions of first impression in Maryland involving the interpretation of §§ 9-105(1)(d), 9-501(3), and 9-504(3) of the Maryland Uniform Commercial Code ("UCC"), codified at Md.Com.Code I Ann., Title 9 (1992). 1 At issue is the capacity of a guarantor of a loan to waive, in advance of default, affirmative defenses that a debtor otherwise cannot waive under Article 9 of the UCC.

We hold, for purposes of Article 9 of the UCC, as follows: (1) a guarantor is a debtor under § 9-105(1)(d); (2) a guarantor is entitled to the protections provided to a debtor in § 9-504(3); and (3) § 9-501(3) precludes a guarantor's pre-default waiver of the rights established by § 9-504(3) and renders any such waiver invalid. Accordingly, for the reasons we discuss below, we conclude that the Circuit Court for Baltimore County erred in failing to vacate the confessed judgment, and we shall reverse.

Factual Summary

Ms. Gambo is an attorney licensed to practice law in Maryland. Her husband, Americo Gambo, was, at the relevant time, president of Commercial and Corporate Audio and Video, Inc. ("CCAV"). 2 On May 27, 1988, in return for a loan of some $325,000 from the Bank, CCAV executed a promissory note in favor of the Bank, secured by a purchase money security interest in a van and video equipment installed inside the van (the "Security"). In addition, the Bank required Mr. and Ms. Gambo to guarantee personally CCAV's promissory note. The Gambos executed an unconditional guaranty on May 27, 1988, which contained three paragraphs relevant to this case:

5. WAIVER OF NOTICE: Guarantors authorize Bank (whether or not after revocation or termination of this guaranty), without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing their liability hereunder, from time to time, to ... (b) take and hold security for the payment of this guaranty or the indebtedness and exchange, enforce, waive, and release any such security; (c) apply such security and direct the order or manner of sale thereof as Bank in its discretion may determine....

* * * * * *

8. WAIVER BY GUARANTORS: Guarantors waive any right to require Bank to (a) proceed against [CCAV] or any other party, (b) proceed against or exhaust any security held from [CCAV], or (c) pursue any other remedy in Bank's power whatsoever....

Bank may, at its election, foreclose on any security held by Bank by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, or exercise any other right or remedy Bank may have against [CCAV] or any security, without affecting or impairing in any way the liability of Guarantors hereunder except to the extent the indebtedness has been paid. Guarantors waive any defense arising out of any such election by Bank, even though such election operates to extinguish any right or reimbursement or subrogation or other right or remedy of Guarantors against Borrower or any security.

* * * * * *

19. CONFESSION OF JUDGMENT: Guarantors hereby authorize any attorney at law to appear for Guarantors before any court having jurisdiction and confess judgment against Guarantors, as of any time after any of the obligations are due (whether by demand, normal maturity, upon acceleration or otherwise) for the unpaid balance of the obligations, together with interest, court costs and attorney's fees of twenty percent (20%) of the amount due.

E.6-9 (emphasis added).

On October 29, 1990, CCAV filed a Chapter 11 bankruptcy petition, which was converted to a Chapter 7 bankruptcy petition on December 9, 1992. As CCAV was in default of its loan to the Bank, it voluntarily surrendered the Security to the Bank on January 20, 1993. The Bank thereafter sold the Security to the sum of $40,000 in a private sale held on May 14, 1993.

On April 1, 1993, the Bank filed in the Circuit Court for Baltimore County a Complaint for Confessed Judgment against the Gambos. The complaint alleged arrears of $265,771.40 in principal, $78,123.93 in pre-judgment interest, $13,288.57 in late charges, and $75.00 in expenses, totalling $357,258.90. In addition, the Complaint requested attorneys' fees of 20% of the sum due, amounting to $71,451.78. That same day, Judgment by Confession was entered in favor of the Bank for all damages claimed, including attorneys' fees.

On June 28, 1993, Ms. Gambo filed a Motion to Vacate Judgment. In her motion, she made several allegations: the Security was sold for substantially less than its fair market value; the arrearage claimed in the Complaint differed from the balance the Bank had claimed on other occasions; and the attorneys' fees were unconscionable. After a hearing on August 30, 1993, the circuit court denied the Motion to Vacate Judgment.

On September 9, 1993, Gambo filed a Motion to Reconsider. She argued that a guarantor is a debtor as defined in § 9-105(d), with the same rights as any other debtor. As a debtor, Ms. Gambo argued, as she now claims, that she is entitled to the protections set forth in § 9-504(3), governing the sale of security, and § 9-501(3), prohibiting a debtor's waiver of the protections set forth in § 9-504(3). Specifically, Gambo contended then, as now, that a guarantor has a debtor's right to notice of disposition of collateral and to disposition of collateral in a commercially reasonable manner. In opposition, the Bank relied on Nat'l Bank of Washington v. Pearson, 863 F.2d 322 (4th Cir.1988) and argued that, based on the contract of guaranty, Ms. Gambo had waived such defenses. The trial court determined that § 9-501(3) is inapplicable to guarantors and denied Gambo's Motion to Reconsider.


Gambo frames two issues for consideration by this Court:

1. Did the trial Court err in finding that an unconditional guarantor of a secured loan governed by the provisions of the [UCC], is not a debtor, as defined in the statute, and may waive the statutory protections afforded to debtors in the statute with regards to the right to notice of the disposition of the collateral, and the right to commercially reasonable disposition of the collateral upon default by the principal debtor on the loan?

2. Did the trial court err in not setting aside the judgment, when the appellant raised questions of fact as to the amount due under the contract, and the reasonableness of attorneys' fees included in the judgment?


Whether a guarantor is a debtor under Article 9 of the UCC, and whether a guarantor may waive the protections of § 9-504(3), are questions that have been the subject of much discussion in legal circles. 3 Although these issues have spawned substantial debate and have produced a plethora of reported cases throughout the country, Maryland has not yet resolved these important matters. We join the majority of jurisdictions in determining that a guarantor is a debtor within the meaning of § 9-105(d) and therefore enjoys the same protections as a debtor under § 9-504(3). We conclude that under § 9-501(3), a guarantor cannot, prior to default, waive the rights afforded to a debtor under § 9-504(3).

I. Guarantor as Debtor

A debtor is defined in § 9-105(1)(d) as follows 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 title dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires....

Under the terms of the guaranty, if CCAV defaulted on the note, Ms. Gambo effectively became the debtor, as she was unconditionally and absolutely liable to the Bank. She "owe[d] payment or other performance of the obligation secured." Rosenbloom v. Feiler, 290 Md. 598, 603, 431 A.2d 102 (1981) ("The liability of a guarantor of payment is indistinguishable from that of a co-maker."). The guaranty constituted "a collateral promise ... to answer for the payment of some debt in the case of default of another who is liable for such payment in the first instance. The guarantor in effect is a voucher for the principal debtor." Ford Motor Credit Corp. v. Lototsky, 549 F.Supp. 996, 998 (E.D.Pa.1982) (Pa.UCC). See also, Ronald A. Anderson, 8 Anderson on the Uniform Commercial Code §§ 9-105:10-11, at 555-57, and 9A Anderson § 9-504:41, at 746 (3d ed. 1984 & Supp.1993).

The proposition that a guarantor is a "debtor" within the meaning of § 9-105(1)(d) is in accord with the overwhelming majority of jurisdictions that have considered the issue, including the Fourth Circuit in Pearson, 863 F.2d 322. 4 Moreover, to include a guarantor within the definition of the term debtor is wholly consistent with a functional view of the underlying transaction and the UCC approach. See, e.g., Dakota Bank & Trust Co., Fargo v. Grinde, 422 N.W.2d 813, 817 (N.D.1988); Chase Manhattan Bank N.A. v. Natarelli, 93 Misc.2d 78, 401 N.Y.S.2d 404, 411 (Sup.Ct.1977). As the Court said in Lototsky:

[T]he unconditional guarantor is in a very real sense the debtor. When the probability of deficiency looms after default, the guarantor is the real target of the secured party. It is simply inequitable, therefore, to permit the secured party, who fixes the amount of the guarantor's liability in the first step of the collection effort by repossession and sale, to deny in the face of this...

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