Greathouse v. Charter Nat. Bank-Southwest

• Decision Date: 01 July 1992
• Docket Number: No. D-0296,R,BANK-SOUTHWES,D-0296
• Parties: 17 UCC Rep.Serv.2d 1349, 19 UCC Rep.Serv.2d 953 Carolyn GREATHOUSE, Independent Executrix of the Estate of Clyde R. Greathouse, Deceased, Petitioner, v. CHARTER NATIONALespondent.
• Court: Texas Supreme Court

Page 173

851 S.W.2d 173

17 UCC Rep.Serv.2d 1349, 19 UCC Rep.Serv.2d 953

Carolyn GREATHOUSE, Independent Executrix of the Estate of Clyde R. Greathouse, Deceased, Petitioner, v. CHARTER NATIONAL BANK-SOUTHWEST, Respondent.

No. D-0296.

Supreme Court of Texas.

July 1, 1992.

Rehearing Overruled Dec. 22, 1992.

Supplemental Opinion on Rehearing

Dec. 22, 1992.

Gary L. McConnell, Angleton, for petitioner.

Larry Huelbig, Audrey Seldon, Houston, for respondent.

OPINION

HECHT, Justice.

Section 9.504 of the Uniform Commercial Code, TEX.BUS. & COM.CODE § 9.504, requires that collateral must be disposed of in a commercially reasonable manner. The Code, however, does not allocate the burden of pleading and proving whether this requirement has been met in an action by a creditor against a debtor for the deficiency due after disposition of the collateral. We granted writ of error to resolve a split among Texas courts of appeals over this procedural issue.

Forrest Allen & Associates, Inc. defaulted on a note payable to Charter National Bank-Southwest, guaranteed by Clyde R. Greathouse, and secured by an assignment of insurance expirations, commissions, accounts receivable, furniture and fixtures. Charter took the pledged collateral and sold it for $100,000, leaving a principal balance due on the note of $151,014.95. Charter then sued Forrest Allen and Greathouse for the deficiency, interest and attorney fees. Greathouse died during the pendency of the suit, and the independent executrix of his estate was substituted as a defendant.

Charter did not plead that it had disposed of the collateral in a commercially reasonable manner, but it did plead generally that: "All conditions precedent have been performed or have occurred. All just and lawful credits, payments and offsets have been allowed." Defendants answered with a general denial. At trial before the court without a jury, Charter's sole witness established the amount due on the note after foreclosure, and Charter rested its case. Greathouse then moved for judgment on the grounds that Charter had failed to plead or prove an element of its cause of action, namely, a commercially reasonable disposition of the pledged collateral. Charter responded that it had satisfied its pleading obligation by alleging generally the performance of all conditions precedent, and that it was not required to prove the commercial reasonableness of the foreclosure absent a specific denial by Greathouse. Charter relied upon Rule 54, TEX.R.CIV.P., which states:

In pleading the performance or occurrence of conditions precedent, it shall be sufficient to aver generally that all conditions precedent have been performed or have occurred. When such performances or occurrences have been so plead, the party so pleading same shall be required to prove only such of them as are specifically denied by the opposite party.

Charter also requested a continuance to procure evidence of the commercial reasonableness of the foreclosure sale. The trial court denied both Charter's request for a continuance and Greathouse's motion for judgment, and Greathouse rested its case without offering any evidence. After taking the case under submission, the trial court rendered judgment for Charter in the amount of $252,858.28.

Only Greathouse appealed. ¹ The court of appeals affirmed, holding "that the burden of specifically pleading a lack of commercial reasonableness or notice in a deficiency action under section 9.504 ... rests with the debtor." 795 S.W.2d 1, 3. Once the debtor has specifically raised the issue, the court held, the burden of proof is upon the creditor. The court reasoned: "Such an approach informs a creditor which areas (if any) are disputed and which items of proof must be produced; it does not allow a creditor to avoid proving its case.... Without indication of a debtor's objections, a creditor is prejudiced in the preparation of its case." Id. at 2.

On the procedural issue before us, the Uniform Commercial Code has not achieved its purposes of simplification and uniformity of commercial law. Texas courts are severely split on the subject. Many of them indicate that the creditor must plead and prove a commercially reasonable disposition of the collateral, ² while others have treated commercial unreasonableness as a defense which the debtor must raise in order to shift the burden of proof to the creditor. ³ Our sister states are equally divided. Some states place the burden on the creditor in a deficiency suit to both plead and prove compliance with the notice and commercial reasonableness requirements of section 9.504. ⁴ In other states, the debtor raises the issue in pleadings as a counterclaim or a defense in order to put the creditor to proof on the matters so challenged, and the secured creditor then bears the burden of proving compliance. ⁵ A few states treat the issue as an affirmative defense. ⁶

This division of authority illustrates the difficulty which attends an allocation of the burdens of pleading and proof. In discussing whether a matter should be considered an affirmative defense, Professor McDonald has observed:

the allocation of an element to the plaintiff's case or to the defendant's affirmative pleading is not determined by abstract logic. There is no reason in logic for instance, why a plaintiff should not be compelled as an element of his case to establish that he was free of contributory negligence or did not induce a particular contract by fraud; or that an assertedly subsisting claim has not been paid or released. Considerations of fairness and convenience, of the ease or difficulty of making proof, of the comparative likelihood that a particular defensive situation may exist in a reasonable proportion of the cases presented in court, and even of handicapping disfavored contentions, have contributed to the shaping of the concept of an "affirmative" defense.

2 ROY W. MCDONALD, TEXAS CIVIL PRACTICE IN DISTRICT AND COUNTY COURTS § 7.34.1.--C, at 221 (Frank W. Elliott ed., 1982 rev.). We employed one of these considerations in Eckman v. Centennial Sav. Bank, 784 S.W.2d 672, 675 (Tex.1990), to assign the burden of pleading and proving whether a plaintiff has assets of $25 million or more and thus is excepted from the definition of business consumer under the Deceptive Trade Practices--Consumer Protection Act, TEX.BUS. & COM.CODE § 17.45(4). In assigning that burden to the defendant, we reasoned:

The comparative likelihood that a certain situation may occur in a reasonable percentage of cases should be considered when determining whether a fact should be allocated as an element of the plaintiff's case or to the defendant as an affirmative defense.... Obviously, most litigants do not have assets of $25,000,000 or more. Requiring every DTPA plaintiff to prove that he is not a multimillionaire would be an inefficient and uneconomical use of judicial resources.

As Professor McDonald observed, logic alone does not dictate the assignment of the burden of pleading and proof. The division of authority throughout the country on the issue now before us demonstrates this. There is simply no clear answer to whether a creditor should be required to plead and prove that collateral has been disposed of in a commercially reasonable manner as an element of a claim for the amount due on the debt, or whether a debtor should be required to allege and show that collateral has not been so disposed of as a defense to the creditor's demand for payment. To resolve the issue, we consider factors like those Professor McDonald mentions.

A commercially reasonable disposition of collateral is in the nature of a condition to a creditor's recovery in a deficiency suit. We suggested this in Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769, 771 (Tex.1982), where we said: "The only limits on the creditor's disposition of the collateral is that it must be commercially reasonable, and must be made only after notification to the debtor if required by section 9.504. Then and only then is he entitled to sue for a deficiency." (Emphasis added.) ⁷ Evidence on the issue will ordinarily be more readily available to the creditor, who takes the collateral and arranges for its disposition, than to the debtor, who ordinarily plays no role in the disposition and is absent when it occurs. In general, it is easier for a creditor to prove that a disposition of collateral was commercially reasonable than for a debtor to prove it was not. Furthermore, the creditor controls the disposition of the collateral, and the debtor often has little or no say in how it is done. Accordingly, the creditor bears greater responsibility to demonstrate that the disposition met the requirements of law. However, the commercial reasonableness of a disposition of collateral is not in dispute in most deficiency suits. To require proof of this issue in every case, even if it is not disputed, would be an unreasonable burden on the judicial process.

Based upon these considerations, we conclude that a creditor in a deficiency suit must plead that disposition of the collateral was commercially reasonable. ⁸ This may be pleaded specifically or by averring generally that all conditions precedent have been performed or have occurred. If pleaded generally, the creditor is required to prove that the disposition of collateral was commercially reasonable only if the debtor specifically denies it in his answer. Should the creditor plead specifically, then it must, of course, prove the allegation in order to obtain a favorable judgment. ⁹

In this case, Charter met its burden of pleading by its general allegation that all conditions precedent had been performed. In answer, Greathouse did not specifically deny that Charter's disposition of the collateral was commercially unreasonable. Consequently, Charter was not required to prove commercial reasonableness at trial. The trial court did not err in rendering judgment for Charter. Therefore, the...