In re Crosby
| Decision Date | 22 December 1994 |
| Docket Number | BAP No. EC-94-1566-RJC. Bankruptcy No. 91-21031-A-7. |
| Citation | 176 BR 189 |
| Parties | In re Ralph W. CROSBY; Beverly F. Crosby, Debtors. Ralph W. CROSBY; Beverly F. Crosby, Appellants, v. Douglas REED; Gayle Reed, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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Helga A. White, Sacramento, CA, for appellants.
Dennis K. Cowan, Redding, CA, for appellees.
Before RUSSELL, JONES and CARLSON1, Bankruptcy Judges.
The debtors filed an objection to an amended proof of claim filed by a secured party after the secured party foreclosed on the collateral eight months after repossession. The debtors assert, in an effort to bar the secured party from obtaining a deficiency judgment, that the secured party elected to retain the collateral in satisfaction of the obligation and that the sale was not conducted in a "commercially reasonable" manner after an eight month delay. The bankruptcy court overruled the objection. The debtors appeal. We AFFIRM.
On July 14, 1989, the appellees, Douglas and Gayle Reed ("Reeds") sold the Palomino Room, a bar/restaurant well known in Red Bluff, California to the debtors/appellants, Ralph and Beverly Crosby ("Crosbys") and third parties Joseph Dean and Brenda Eitzen ("Eitzens") for $351,000.2
The Reeds retained the master lease for the premises and granted a sub-lease to the Crosbys and Eitzens. Pursuant to the sale, the Crosbys and Eitzens paid $116,000 in cash and signed two promissory notes for the remaining $235,000. A security agreement was also executed, securing both notes with "all stock in trade and goodwill of . . . the Palomino Room . . . and the . . . fixtures and equipment."
The Crosbys and Eitzens assigned their interest in the Palomino Room to the Crosby/Eitzen California Partnership, d.b.a. Palomino Room ("partnership"). The partnership defaulted on the notes and in May 1990 the Reeds obtained a state court judgment against the partnership, the Crosbys and the Eitzens for $264,359.75.3
In December 1990, the Reeds were granted relief from the automatic stay to foreclose on the collateral securing their judgment. Prior to vacating the premises, the existing inventory was valued at $11,916.15.
The Reeds reopened and began operating the restaurant in mid-December, 1990, and had an appraisal conducted in January 1991. The appraised value of the fixtures and equipment was $40,290.55.
In August 1991, the Reeds published a notice of a public auction, in which the stock in trade, the fixtures and equipment of the Palomino Room were to be sold pursuant to the security agreement. The sale was conducted by a licensed auctioneer. The Reeds were the only bidders at the sale, and purchased all of the assets with a credit bid of $40,000.
In October 1993, the Crosbys and the Chapter 7 trustee filed objections to the Reeds' amended claim for the deficiency. The bankruptcy court held a hearing on the objection.
The bankruptcy court ruled in favor of the Reeds, overruled the objection and valued the Reeds' claim at $231,315.53. The bankruptcy court also noted that if there were sufficient assets to pay all claims in full, then the Reeds would also be entitled to interest on the principal from February 1991. The Crosbys timely filed a notice of appeal.
A. Whether a secured party who uses its collateral after repossession, but prior to a public sale, makes an implied election to retain its collateral in full satisfaction of the debtors' obligation, thereby waiving any deficiency recovery against a defaulting debtor.
B. Whether the sale of a secured creditor's collateral is commercially reasonable when the sale was conducted eight months after repossession.
A bankruptcy court's interpretation of state law is reviewed under the same de novo standard as a question of federal law. Whitcombe v. Stevedoring Services of America, 2 F.3d 312, 316 (9th Cir.1993) (citing Salve Regina College v. Russell, 499 U.S. 225, 231-32, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991)); In re Breen, 123 B.R. 357, 359 (9th Cir. BAP 1991).
Classification of collateral under the Uniform Commercial Code is a question of law reviewed de novo. In re Newman, 993 F.2d 90, 93 (5th Cir.1993). A finding by the bankruptcy court that a sale is "commercially reasonable" is a finding of fact and will be upheld by a reviewing court unless it is clearly erroneous. Ingersoll-Rand Fin. Corp. v. Miller Mining Co., Inc., 817 F.2d 1424, 1427 (9th Cir.1987).
California Commercial Code § 9504 governs the rights of a secured party to dispose of its collateral after default. Section 9504(1) provides that "a secured party after default may sell, lease or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation or processing." Cal. Comm.Code § 9504(1) (West 1994 Supp.).
Subsection (2) of § 9504 requires the secured party, upon disposition of the collateral, to account to the debtor for any surplus and, unless otherwise agreed, the debtor is liable for any deficiency. Section 9505(2) is the one exception to the general rules of disposition set forth in § 9504.
Section 9505(2) provides, in relevant part:
A secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of such proposal shall be sent to the debtor if he has not signed after default a statement renouncing or modifying his rights under this subsection. . . . If the secured party receives objection in writing from a person entitled to receive notification within 21 days after the notice was sent, the secured party must dispose of the collateral under Section 9504. In the absence of such written objection the secured party may retain the collateral in satisfaction of the debtor\'s obligation.
Cal.Comm.Code § 9505(2) (West 1990) (emphasis added).
The Crosbys admit in their opening brief that "there is no specific letter from the Reeds to the Crosbys stating the Reeds' intention to retain the collateral in satisfaction of the debt. . . ." Rather, they assert that "other written and verbal communication to the public . . . constitute notice to the Crosbys that they (the Reeds) intend or elect to keep the collateral."4
In order to determine whether there was an election to retain the collateral based on the "other written and verbal communications," we must look to state law to determine whether a California court would conclude that the requirements of § 9505(2) were satisfied. In interpreting California's Commercial Code, the Ninth Circuit Court of Appeals has stated:
When interpreting state law, a federal court is bound by the decision of the highest state court. In the absence of such a decision, a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance. However, in the absence of convincing evidence that the highest court of the state would decide differently, a federal court is obligated to follow the decisions of the state\'s intermediate courts.
In re Kirkland, 915 F.2d 1236, 1238-39 (9th Cir.1990) (citations omitted).
We are unaware of any California Supreme Court opinion on this exact issue. However, in other jurisdictions, there exist three points of view on whether a secured party should be held to have retained collateral in satisfaction of a debtor's obligation, even though the security holder never made a proposal in writing.
Under the first viewpoint, "an election to take the collateral in full satisfaction will not be implied; it must be made by written notice to the debtor." Chrysler Credit Corp. v. Mitchell, 94 A.D.2d 971, 464 N.Y.S.2d 96, 97 (1983).
While both the second and third viewpoints allow implied elections to retain collateral in satisfaction of indebtedness, one is based on duration and the other on the secured party's intent. The second viewpoint holds that an election may be implied from an unreasonably prolonged retention of collateral by the secured party. Service Chevrolet, Inc. v. Sparks, 99 Wash.2d 199, 660 P.2d 760, 763 (1983) ()
The third viewpoint allows an implied election, but only if it is shown that the secured party manifested an intent to accept the collateral in satisfaction of the obligation. In re Deephouse Equip. Co., Inc., 38 B.R. 400, 404-05 (Bankr.D.Conn.1984). The debtor bears the burden of showing that the secured party manifested an intent to retain the collateral in satisfaction of the obligation under the third viewpoint. Nelson v. Armstrong, 99 Idaho 422, 582 P.2d 1100, 1108 (1978).
Regardless of which view the California Supreme Court would choose, we do not believe the Crosbys would succeed under any of the viewpoints. First, it is clear that there was no written notice to the Crosbys indicating that the Reeds intended to retain the collateral.
Second, the time period was reasonable. The Reeds took possession of the restaurant and began to make improvements to preserve and increase the value of the collateral. The eight months of retention by the Reeds was much shorter than the periods of time in question in the cases generally cited by the Crosbys. E.g., Haufler v. Ardinger, 1979 Mass.App.Div. 532, 1979 WL 30107 (1979) (38 months); Banker v. Upper Valley Refrigeration Co., Inc., 771 F.Supp. 6, 10 (D.N.H.1991) (18 months); Shultz v. Delaware Trust Co., 360 A.2d 576, 578 (Del.Super.Ct.1976) (over 5 years); Moran v. Holman, 514 P.2d 817, 818 (Alaska 19...
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