Hoch v. Ellis, 4475

• Decision Date: 08 May 1981
• Docket Number: No. 4475,4475
• Citation: 627 P.2d 1060
• Parties: 31 UCC Rep.Serv. 760 Edward H. HOCH and Edward A. Hoch, Appellants, v. Charles William ELLIS and Evalyn B. Ellis, Appellees.
• Court: Alaska Supreme Court

Page 1060

627 P.2d 1060 31 UCC Rep.Serv. 760 Edward H. HOCH and Edward A. Hoch, Appellants,
v.
Charles William ELLIS and Evalyn B. Ellis, Appellees. No. 4475. Supreme Court of Alaska. May 8, 1981.

Peter Walton & Associates, Anchorage, for appellants.

Kenneth R. Lamb, Kenneth R. Lamb & Associates, Anchorage, for appellees.

Before RABINOWITZ, C. J., and CONNOR, BURKE and MATTHEWS, JJ.

OPINION

RABINOWITZ, Chief Justice.

Charles Ellis and his wife Evalyn, as shareholders in B & E Enterprises, Inc.,

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owned the Norge Village Happy Hour Cleaners, a laundromat and dry cleaning operation in Fairbanks. The business operated out of a building owned by Bud Meyeres. In 1967, the business was sold to the 3-H Corporation, an Alaska corporation. 3-H was a family operation with the majority of the stock owned by Edward A. Hoch. ¹ The sale of the business was for $154,500. 3-H put up $12,000 as down payment and earnest money. A promissory note for the remaining $142,500 was executed along with a security agreement covering this entire amount. The promissory note was signed both by Edward A. Hoch as president of 3-H Corporation and by each of the three Hochs, individually. The collateral for the security agreement was:

(a)ll of the cleaning, laundry and related equipment, fixtures and furniture, and any replacements thereof, now owned or hereafter acquired for use in (the laundromat and dry cleaning operation) ....

Upon assuming the business, 3-H had initial success in running the laundromat.

In December 1970, 3-H Corporation opened another laundry facility, Suds Laundry and Dry Cleaners, in another section of Fairbanks. Business, however, deteriorated to the extent that 3-H Corporation, in 1971, filed a Chapter XI proceeding in federal court. Edward A. Hoch (henceforth Hoch) testified that it was starting the second laundry operation that drove the 3-H Corporation under financially. For a period of thirteen months, Hoch continued to operate both facilities as a debtor in possession. The business was finally adjudicated bankrupt on October 13, 1972.

During the period of the Chapter XI proceedings, 3-H made only one payment on the promissory note. Appellees instituted suit on August 15, 1972, on the sum still owing on the promissory note, $70,915.86 plus interest. ² As part of the sale of the business, Ellis had also transferred to 3-H the right to lease the premises of the laundromat at a rental of $1200 per month. Payments on the lease had been kept current through the bankruptcy adjudication proceedings except for the last few monthly payments. After bankruptcy adjudication in October 1972, Ellis was uncertain as to the disposition of the secured property. During the winter of 1972-73, Ellis was living with his family in Phoenix, Arizona, and attempting to clarify the situation by phone. During one of these calls, Ellis offered the landlord of the building, Bud Meyeres, the collateral in part payment of the past due rent. This offer was rejected. Ellis and his wife then came to Fairbanks to try to settle the matter. Ellis never testified as to exactly how long he was in Fairbanks, but it appears to have been, at most, a week or two. They arrived at the end of March. On March 28, Ellis filed an application for reclamation, seeking to reclaim the collateral on the security agreement since it failed to cover the amount secured. Ellis testified that he had not sought reclamation earlier because he had not previously known what to do and had not sublet the building during this period, because he concluded that no one would rent it filled with laundry equipment in a state of disrepair. On April 2, 1973, the trustee in bankruptcy turned the collateral over to Ellis.

At that point, Ellis began making inquiries regarding potential purchasers. Through a series of phone calls, Florian Maldonado was located. Maldonado purchased the equipment for $10,000 cash, and subsequently invested an additional $38,000 in refurbishing the business. Maldonado

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also sublet from Ellis the building housing the laundry. However, the lease was for $1500 per month, $300 more than the rate at which 3-H Corporation had leased the building from Ellis ($1200 per month was also the rent in the original lease between Ellis and Meyeres).

Suit proceeded on the original promissory note, and after a non-jury trial the superior court ruled:

The Ellises are entitled to a judgment against both Defendants, jointly and severally for all amounts unpaid on the Promissory Note, after having been given credit for the amount obtained at the sale and the amount obtained in the companion California litigation, interest thereon as appropriate, costs and attorney's fees. ³

The paramount issue on this appeal is whether the superior court erred in deducting, from the amount found due from Hoch to Ellis on the promissory note, only $10,000 for the collateral. More specifically, the question is whether there was sufficient evidence advanced by the Ellises to support the superior court's conclusion that the laundry equipment collateral was worth only $10,000, the price for which it was sold, rather than the more than $70,000 remaining to be paid on the promissory note.

We start with the applicable provisions of the U.C.C. Former AS 45.05.788(c) (U.C.C. § 9-504(3)) provided, in relevant part, that "every aspect of the disposition including the method, manner, time, place, and terms must be commercially reasonable," and that (with exceptions not relevant here) "reasonable notification of the time and place of a public sale or reasonable notification of the time after which a private sale or other intended disposition is to be made shall be sent by the secured party to the debtor." ⁴

Appellants argue that the sale was deficient in both these respects, i. e., that notification of the sale was not given to them, and that the manner of the sale was not "commercially reasonable."

If the sale was deficient in either respect, then a burden is placed upon appellees to rebut the presumption that the fair market value of the collateral was at least equal to the amount of the outstanding debt. If they fail to meet this burden, then the presumption leads to the conclusion that the entire debt is discharged:

The fair and reasonable value of the collateral at the time of repossession should be offset against the balance due on the security agreement. Where the collateral has been sold in a sale that does not comply with the provisions of the UCC, there is a rebuttable presumption that the fair and reasonable value of the collateral is at least equal to the amount of the outstanding debt.

Kobuk Engineering & Contracting Services, Inc. v. Superior Tank & Construction Co-Alaska, Inc., 568 P.2d 1007, 1013 (Alaska 1977). In Kobuk, we applied this rule to a sale which did not meet the "commercially reasonable" requirement. In Weaver v. O'Meara Motor Co., 452 P.2d 87 (Alaska 1969), we applied this same rebuttable presumption

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rule to a sale which failed to comply with the notice requirements.

Addressing the notice issue first, we note the superior court concluded that the sale violated the notice provision of the statute. This finding was amply supported by the evidence. That being the case, our ruling in Weaver controls this matter: "Where noncompliance with the notice of sale provision of AS 45.05.788(c) (currently AS 45.09.504(c)) has been shown, the burden of proving that the market value of the collateral was received at the sale is upon the secured party." Id. at 91-92.

Appellants also argue that the sale was not commercially reasonable. We need not address that argument, in light of our agreement with the superior court's conclusion that the notice provisions were violated. Were we to find that the sale was commercially unreasonable, then, under Kobuk, a rebuttable presumption would attach that the fair and reasonable value of the collateral was at least equal to the amount of the outstanding debt. This is the practical equivalent to the burden imposed by Weaver. If the appellees carry their burden of proof under Weaver, they have rebutted any presumption which would attach under Kobuk were we to find that the sale was not commercially reasonable.

Thus, it is clear that the issue is whether the appellees met their burden of proving that the market value of the collateral was received, in order to rebut the presumption that the collateral at the time of sale was worth at least the amount of the unpaid debt. Initially, we must determine what standard of proof must be met. In Kobuk, we specifically stated that the burden is on the secured party to prove by "convincing" evidence the value of the collateral. 568 P.2d at 1014. Here the superior court was uncertain as to the appropriate burden of proof, ⁵ but specifically found the evidence clear and convincing. ⁶ Given Alaska's position of not totally depriving the secured party of compensation when there is noncompliance with U.C.C. requirements, we think that the more exacting standard of clear and convincing evidence ⁷ is appropriate.

Having established the standard, we turn to the facts. In Kobuk, we noted two ways in which the applicable presumption may be rebutted:

In order to overcome that presumption, the secured party has the burden of either (1) obtaining a fair and reasonable appraisal at or near the time of repossession, or (2) producing convincing evidence of the value of the collateral. In order to meet the latter burden the secured creditor is required to bring forward proof of the condition of the collateral and the usual price of items of like condition. ⁸

568 P.2d at 1013-14.

As to the appraisal leg of this test, the superior court was faced with a variety of appraisals submitted by Hoch in his attempt to persuade the court that the sale was commercially unreasonable. The superior court found these too speculative and unreliable

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to consider, so we will disregard...