Hartford-Carlisle Sav. Bank v. Shivers, HARTFORD-CARLISLE
| Decision Date | 23 July 1997 |
| Docket Number | No. 96-909,HARTFORD-CARLISLE,96-909 |
| Citation | 566 N.W.2d 877 |
| Parties | 33 UCC Rep.Serv.2d 8 SAVINGS BANK, Plaintiff-Respondent, v. Larry R. SHIVERS, Defendant-Movant. Anita L. Shodeen, Trustee. |
| Court | Iowa Supreme Court |
John P. Roehrick of Roehrick, Hulting, Blumberg & Kirlin, P.C., Des Moines, for Defendant-Movant.
Robert M. Benton of Stuyvesant & Benton, Carlisle, for Plaintiff-Respondent.
Considered by McGIVERIN, C.J., and LAVORATO, NEUMAN, ANDREASEN, and TERNUS, JJ.
The case comes to us on six certified questions from the federal district court. The questions concern the viability of the absolute bar rule in Iowa. The rule bars a secured creditor from obtaining a deficiency judgment when the creditor fails to give the debtor notice of the sale of collateral required by Iowa Code section 554.9504(3) (1993). We had strictly applied the rule until Barnhouse v. Hawkeye State Bank, 406 N.W.2d 181 (Iowa 1987). The peculiar facts in Barnhouse led us not to apply the rule in that case. We conclude that the absolute bar rule is presently the law in Iowa and that Barnhouse is an exception to that rule.
In its certification order the federal district court set out the following statement of facts. The Hartford-Carlisle Savings Bank and Larry L. Shivers entered into a security agreement granting the bank a security interest in Shivers' livestock, machinery, and equipment. On July 14, 1994, Shivers filed for bankruptcy under Chapter 7 of the United States Bankruptcy Code.
Anita Shodeen, the trustee, abandoned Shivers' livestock on August 4, 1994. Shivers then requested the livestock be sold by private sale to a relative. The bank rejected the request and opted to sell the livestock at a sale barn. Shivers delivered the livestock to the Humeston Livestock Auction, Inc. The livestock was sold on September 8, 1994. The proceeds of the sale were paid by check to Shivers and the bank. The check was sent to the bank with Shivers' consent.
On August 31, 1994, the bank filed a motion for relief from stay so it could proceed to obtain Shivers' machinery and equipment. Duane Mott appraised the machinery and equipment on September 14, 1994; the bankruptcy court ordered the stay lifted as to the machinery and equipment; and the trustee entered a report abandoning the machinery and equipment.
The bank gave Shivers and his family the opportunity to purchase any of the machinery and equipment that Shivers chose not to exempt. Shivers declined to buy the nonexempt items, except for some fence-line feed bunks. The bank took possession of the remaining nonexempt machinery and equipment and sold it sometime between November 21, 1994, and April 28, 1995. The proceeds were first applied to satisfy the principal of a purchase money security interest owed to John Deere. The balance of the proceeds was applied to the bank's two notes that were secured by the security agreement on Shivers' livestock, machinery, and equipment.
Shivers did not file at any time after default a statement renouncing or modifying his right to notification of the sale of the livestock, machinery, or equipment. Shivers was not notified of the time and place of the sale of the livestock or the machinery and equipment. Shivers was notified that the cattle would be sold at the sale barn. He was not notified of the method or manner of disposition of the machinery or equipment.
On April 14, 1995, the bank filed a complaint objecting to the discharge of Shivers pursuant to sections 727(a)(2)(A), 727(a)(4)(A), and 727(a)(5) of the bankruptcy code and taking exception to discharge pursuant to sections 523(a)(4) and 523(a)(6) of the bankruptcy code. Shivers answered the complaint and asserted an affirmative defense alleging the bank failed to notify him of the proposed method of disposition of collateral and the time and place of the sale, as required by Iowa Code section 554.9504(3). Shivers further alleged that the bank's failure to dispose of the machinery and equipment in a "commercially reasonable manner" and to give the required notice of the disposition bars the bank from recovery of any deficiency judgment on its two notes.
In its certification order, the federal district court withdrew reference of bankruptcy jurisdiction, pursuant to 28 United States Code section 157(d) and Federal Rule of Bankruptcy Procedure 5011(a), for the sole purpose of certifying the following questions of law to our court:
(1) Is the "Absolute Bar Rule," as adopted in Federal Deposit Insurance Corp. v. Farrar, 231 N.W.2d 602 (Iowa 1975), still accepted in Iowa?
(2) Has the "Absolute Bar Rule" been abrogated by the decision in Barnhouse v. Hawkeye State Bank, 406 N.W.2d 181 (Iowa 1987) and its progeny?
(3) If the "Absolute Bar Rule" has not been abrogated, is it now applied on a case by case basis?
(4) If the "Absolute Bar Rule" has not been abrogated, must all the following factors promulgated in Barnhouse, (a) the loan transaction must bear a direct relation to the debt incurred; (b) the amount of collateral sold must be a bare fraction of the total collateral; and (c) the underlying purposes of [Iowa Code] section 554.9504(3) must not be frustrated, be first applied before determining if the "Absolute Bar Rule" is applicable?
(5) If the "Absolute Bar Rule" has been abrogated, does Iowa now adopt the "Rebuttable Presumption Rule"?
(6) Has a creditor's security interest been exhausted so as to ban it from seeking a deficiency judgment when a debtor retains collateral which is subject to the security interest but which has been exempted under Iowa law in a Chapter 7 bankruptcy proceeding?
Before proceeding to answer the certified questions, we think some background discussion would aid our analysis. Iowa Code sections 554.9503 and 554.9504(1) of Iowa's Uniform Commercial Code permit a secured creditor to repossess and dispose of collateral upon a debtor's default. Section 554.9504(1) requires the creditor to apply the proceeds of the disposition first to the expenses of the disposition and then to the satisfaction of the indebtedness secured by the collateral. The debtor is liable for any deficiency pursuant to Iowa Code section 554.9504(2).
However under Iowa Code Section 554.9504(3) "every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable." In addition, section 554.9504(3) requires that
reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor, if the debtor has not signed after default a statement renouncing or modifying the debtor's right to notification of sale.
Thus, section 554.9504(3) clearly makes commercial reasonableness and notification mandatory for the secured creditor.
What is not clear in our commercial code is what effect the secured creditor's noncompliance with these requirements has upon the creditor's claim to a deficiency judgment. Iowa Code section 554.9507(1) does provide that the debtor can sue for damages occasioned by a secured creditor's noncompliance with the commercial reasonableness and notice requirements. The question is whether section 554.9507(1) is the exclusive remedy for a secured creditor's noncompliance with these requirements. Whether section 554.9507(1) is the debtor's exclusive remedy has been an issue before many courts and has not been decided uniformly. One commentator described the problem this way:
[T]he drafters failed to give adequate attention to what sanctions should apply when the secured party fails to follow the prescribed procedures. Superficially, section 9-507(1) appears to deal with the issue. The first sentence of the section provides that if the secured party is not complying with the statutory requirements, the debtor may go to court and obtain an order compelling it to do so. The second sentence allows the debtor to recover damages for any loss resulting from the secured parties' failure to follow the statute. And the third sentence provides for a monetary penalty in consumer transactions.
What the drafters seem to have failed to anticipate is that the real lever for making a secured party satisfy the Code requirements is denial of its deficiency judgment. Suits enjoining improper dispositions or seeking damages against secured parties are very rare, but secured parties seeking deficiency judgments are the norm, and denial of the deficiency is what gets secured parties' attention.
The drafters' failure to resolve the deficiency judgment question left the matter to the courts.
In Beneficial Finance Co. v. Reed, 212 N.W.2d 454, 459-60 (Iowa 1973), this court set out the two competing interpretations of the damage provision in section 554.9507(1). Under the first interpretation--the absolute bar rule--a secured creditor's failure to give proper notice or sell in a commercially reasonable manner is an absolute bar to any right to recover a deficiency. Reed, 212 N.W.2d at 459-61. Courts espousing this theory impose an irrebuttable presumption that the value of the collateral equals the value of the debt or judgment obtained. Id. Thus, the courts espousing the absolute bar rule hold that the damage provision as stated in section 554.9507(1) is not the exclusive remedy for a secured creditor's noncompliance.
Under the second interpretation--the rebuttable presumption rule--a secured creditor's failure to give notice or sell in a commercially reasonable manner creates a rebuttable presumption that the value of the collateral is at least equal to the unpaid balance of the debt. Although this rule does not automatically bar the creditor from collecting any...
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