In re Kelaidis

• Decision Date: 19 April 2002
• Docket Number: BAP No. UT-01-037.,Bankruptcy No. 00-22223.,Adversary No. 00-2189.
• Citation: 276 B.R. 266
• Parties: In re Mathew J. KELAIDIS and Christine Kelaidis, Debtors. Mathew J. Kelaidis and Christine Kelaidis, Plaintiffs-Appellees, v. Community First National Bank, formerly known as Guardian State Bank, Defendant-Appellant.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

276 B.R. 266

In re Mathew J. KELAIDIS and Christine Kelaidis, Debtors Mathew J. Kelaidis and Christine Kelaidis, Plaintiffs-Appellees, v. Community First National Bank, formerly known as Guardian State Bank, Defendant-Appellant.

BAP No. UT-01-037.

Bankruptcy No. 00-22223.

Adversary No. 00-2189.

United States Bankruptcy Appellate Panel, Tenth Circuit.

April 19, 2002.

Brett P. Johnson, Snell & Wilmer, Salt Lake City, UT, for Plaintiffs-Appellees.

Stephen B. Mitchell, Burbidge & Mitchell, Salt Lake City, UT, for Defendant-Appellant.

Before PUSATERI, BOHANON, and MICHAEL, Bankruptcy Judges.

OPINION

PUSATERI, Bankruptcy Judge.

Defendant Community First National Bank ("Community") appeals the bankruptcy court's judgment disallowing its claim against the chapter 13 debtors ("the Debtors") based on their guaranties and barring it from foreclosing on two houses they own. For the reasons stated below, we affirm.

Background

In 1996, the Debtors were principals of Dad's Inc. ("Dad's"). Community financed most of Dad's purchase of a restaurant, including both real property and the furniture, fixtures, and equipment located on it. The loan was secured by a trust deed on the real property and a security interest in the personal property. In addition, the Debtors guaranteed the loan and further secured it with trust deeds on two houses they owned. The guaranties the Debtors signed contained language purporting to give Community broad powers to deal with the Dad's debt and the collateral, and to waive essentially any rights the Debtors could waive. A third party held a junior deed of trust on Dad's real property. After the purchase, Dad's installed several more items of equipment that also served, along with the furniture, fixtures, and equipment already in the restaurant, as collateral ("the Personal Property") for Community's loan.

In 1999, Dad's defaulted, and Community commenced non-judicial foreclosure on Dad's real property and the Debtors' two houses. Dad's filed a chapter 11 bankruptcy, but the junior lien holder obtained stay relief and foreclosed on Dad's real property, subject to Community's lien. A short time later, Dad's bankruptcy case was converted to chapter 7. Dad's was evicted from the real property, and the keys to the restaurant were delivered to the chapter 7 trustee. Later, Community foreclosed and bought the real property by a credit bid (apparently eliminating the junior lien holder's interest at that time).

A few months later, Community obtained an appraisal of Dad's Personal Property and also noticed the Debtors' houses for sale under the trust deeds. The Debtors filed a chapter 13 bankruptcy proceeding, staying the sale of the houses.

Shortly after foreclosing on Dad's real property, Community listed it for sale with two realtors. Potential buyers were told that a purchase of the Personal Property would either have to be negotiated separately with or approved by the chapter 7 trustee for Dad's bankruptcy estate. The realtors were not entitled to any commission for selling the Personal Property. For five or six months, Community and its realtors could gain access to the restaurant only by borrowing the keys from the chapter 7 trustee. Community's only effort to sell the Personal Property was by listing it in connection with the real property, so a potential buyer could have learned it was for sale only by asking about the real property.

A number of appraisals of the Personal Property were made at various times. Before Community made the Dad's loan in 1996, an appraiser valued the restaurant's then-existing personal property at $70,000, and as indicated, Dad's later added more items to the restaurant that are part of the Personal Property. In March 1999, at Dad's request, an appraiser valued the Personal Property at $105,000.

In January 2000, Community obtained an appraisal by Tom Erkelens that valued Dad's personal property at $25,000 in place, and $7,700 if removed and auctioned. Erkelens, however, was not given a list of the Personal Property that Community wanted to have appraised, and he omitted a number of items from his appraisal that were a part of the Personal Property. These items included a nine-foot back counter bar with two storage doors and refrigerator, an eleven-foot order counter with tile top, a plate chiller, an eight-foot stainless steel makeup counter with two food warmers, a floor safe, a U.S. Range conventional oven with grill, a ten-foot stainless steel ticket slide, fifteen feet of stainless steel shelving, a hood exhaust system, six oak chandeliers, an ice machine, a stainless steel steam kettle oven, a 600 gallon hot water heater, 77 brass railings and 77 etched glass pieces. Erkelens testified that he did not remember some of the items, did not value some because their removal might damage the premises, and did not value others because he thought they were fixtures or built-ins that would have no liquidation value. Community's officer in charge of the Dad's loan was disappointed by Erkelens's appraisal of the Personal Property but made no effort to compare Erkelens's list of the property he had appraised with Community's own list of the Personal Property or otherwise to reconcile Erkelens's appraisal with the earlier appraisals the bank had obtained.

At trial, the Debtors presented the testimony of another appraiser. This man had acted as a listing agent for Dad's in 1996 for an attempted sale of its real and personal property. At that time, he valued the Personal Property at $135,000 if sold in place. In August 2000, he valued it at $105,000 if sold in place. He did not testify about its liquidation value at either time.

Community finally resold the Dad's real property in August 2000. The buyers were not interested in buying the Personal Property. Relying solely on Erkelens's appraisal, Community decided that removing the Personal Property from the restaurant, paying to repair any damage caused by the removal, and paying a subsequent commission to sell the property would not produce enough additional money to be worth the effort, and so offered to sell the Personal Property to the real property buyers for $1,500. The buyers agreed to buy it for that price.

The Debtors filed their current chapter 13 case in February 2000, and Community filed a proof of claim for over $120,000, partly secured and partly unsecured. Community later filed an amended proof of claim to reduce its claim by the amount of the proceeds of the August sale of the Personal Property. The Debtors filed an adversary proceeding attacking the validity of Community's claim, contending, among other things, that Community's sale of the Personal Property had been commercially unreasonable, so its claim against the Debtors should be unenforceable.

In a summary judgment ruling, the bankruptcy court rejected Community's assertion that the Debtors' unconditional guaranty of Dad's debt had waived any right they otherwise might have had to complain that Community's sale of any of the Dad's collateral had been commercially unreasonable. Following a bench trial, the court determined that Community's sale of the Personal Property had been commercially unreasonable "in virtually every respect." Memorandum Decision at 17, in II Appellant's Appendix at 00378. Finally, although the court recognized that Utah Supreme Court had not consistently followed a single approach in determining the effect of a creditor's failure to dispose of its collateral in a commercially reasonable manner, the court concluded it must adopt the approach that absolutely bars the creditor from recovering any deficiency judgment against the debtor because the Utah Supreme Court had "most often, and most recently" adopted that approach. Id. Community timely appealed, and neither of the parties objected to our jurisdiction over the appeal.

Discussion

Community raises four issues on appeal, all concerning questions of Utah state law: (1) Did the Debtors waive their right to object to the commercial reasonableness of Community's sale of the Personal Property by signing guaranties giving Community the right to release its lien on any of its collateral?; (2) Did the bankruptcy court erroneously conclude that Community sold the Personal Property in a manner that was not commercially reasonable?; (3) Even if Community did not sell the Personal Property in a commercially reasonable manner, is Community nevertheless entitled to foreclose on the real property that the Debtors pledged to secure their guaranties?; and (4) Even if Community did not sell the Personal Property in a commercially reasonable manner did the bankruptcy court err in ruling that this fact barred Community from recovering anything from the Debtors on their guaranties?¹ These issues all arise under the Utah version of the Uniform Commercial Code ("the UCC") as it existed before Utah adopted Revised Article 9 effective July 1, 2001, and amended other Articles as needed to reflect that substantial change. See 2000 Utah Laws, ch. 252, § 177. The events that generated this appeal all occurred before the new Article 9 took effect, and so are governed by the Utah UCC, Utah Code Ann. § 70A-1-101 (1953 & Supp.1999), et seq., as it existed before that date. Consequently, we will refer to the UCC provisions involved in this appeal as "Old" or "Old UCC" Article 3 and Article 9 provisions. We express no opinion about whether the result in this case would be different under the Utah UCC after July 1, 2001.

1. Waiver of Commercial Reasonableness

Relying on Old UCC § 70A-3-605, Community argues that in their guaranties, the Debtors waived any right to complain about the commercial reasonableness of its disposition of collateral. However, Old Article 3 applied only to "negotiable instruments," Old § 70A-3-102(1), generally referred to in the rest of Old Article 3 simply as "instruments," see Old § 70A-3-104(2). Old § 70A-3-605, in turn, applied only to a party who was liable on...