In re Replogle

• Decision Date: 24 October 1989
• Docket Number: Adversary No. 89-4052.,Bankruptcy No. 88-40156
• Citation: 107 BR 1
• Parties: In re James C. REPLOGLE, Debtor. FIRST AGRICULTURAL BANK, Plaintiff, v. James C. REPLOGLE, Claudia Replogle, Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

107 B.R. 1 (1989)

In re James C. REPLOGLE, Debtor.

FIRST AGRICULTURAL BANK, Plaintiff, v. James C. REPLOGLE, Claudia Replogle, Defendant.

Bankruptcy No. 88-40156, Adversary No. 89-4052.

United States Bankruptcy Court, D. Massachusetts.

October 24, 1989.

Michael E. MacDonald, Cain, Hibbard, Myers & Cook, Pittsfield, Mass., for Plaintiff/First Agricultural Bank.

Joseph H. Reinhardt, Hendel, Collins & Newton, Springfield, Mass., for defendants/James C. & Claudia Replogle.

OPINION

JAMES F. QUEENAN, Jr., Bankruptcy Judge.

First Agricultural Bank (the "Bank") seeks in Count I of its complaint to obtain judgment against James C. Replogle ("Replogle") for a foreclosure deficiency allegedly due under Replogle's guaranties of indebtedness of Hillsdale Packing Company, Inc. ("Hillsdale Packing"), and in Count II to set aside as fraudulent a transfer of real estate made in 1984 by Replogle to his wife. The case began in Massachusetts state court and was then removed here by the Replogles. Thereafter the Bank filed an amended complaint in this Court. The Court then issued a pretrial order bifurcating the trial in order to first hear and determine the issue of liability, including primarily the question of whether the Bank's foreclosure sale was conducted in a commercially reasonable manner. This was done in recognition that a ruling against the Bank on this issue could be dispositive of the entire case. That aspect of the trial is now completed, and I set forth here findings of fact and conclusions of law.

Many of the facts are undisputed. Prescinding from the question of the commercial reasonableness, the Bank is owed $605,880.54 for monies advanced to Hillsdale Packing under two industrial development revenue bonds, a demand note and a time note. The debt is secured by a real estate mortgage on Hillsdale Packing's plant and vacant land, and by a security agreement covering its equipment, accounts receivable, inventory and other personal property. Replogle guaranteed payment of the Hillsdale Packing debt through execution of separate documents on November 1, 1984 and September 19, 1986. Hillsdale Packing, until its demise, was in the business of slaughtering cattle and, later, hogs at its plant in Hillsdale, New York. Replogle was its president and fifty percent owner of its capital stock; one Gerald Morelli ("Morelli"), who also guaranteed the Bank's debt, owned the other fifty percent stock interest.

On June 11, 1987, Hillsdale Packing terminated operations because of financial difficulties; on the following day it surrendered possession of its real and personal property to the Bank. Shortly thereafter, Replogle and Morelli had separate discussions with the Bank about the possibility of starting up the business again with other investors. Neither presented the Bank with any specific plan, and the discussions terminated without the Bank being asked to make any decision concerning a new venture to be started by either. The Bank soon received a telephone call from a government meat inspector informing it that the federally-authorized meat stamp would have to be surrendered. Ms. Kelley, the Bank officer handling the foreclosure, obtained a 120 day extension of this stamp until the following October, when the stamp was surrendered. Other permits necessary for the slaughtering operations expired about the same time. The Bank made no effort to ascertain the need for retention of these other permits; nor did it try to obtain an extension of their effectiveness. The Bank also made no effort to sell the business assets as an entity, either through private or public sale. It contacted no operators of slaughterhouses, and it did not seek to employ a business broker. It placed no advertising seeking a sale of the entire business assets. It did not take an inventory of the equipment until February of 1988 when its auctioneer did so in anticipation of a public auction. By that time some items were missing — an automatic meat slicer and a tractor with a manure spreader. The Bank's efforts were confined to arranging the separate and uncoordinated auctions of real and personal property described below.

The Bank instituted proceedings in the New York Supreme Court for foreclosure of the plant and other real estate of Hillsdale Packing, joining Hillsdale Packing, Replogle and Morelli (and others) as defendants. Although we are informed that Replogle and Hillsdale Packing unsuccessfully opposed the action, the parties have furnished us with no details concerning these defenses or any court rulings thereon, other than an intimation in questions by the Bank's counsel that the New York court acted on some party's motion for summary judgment. On September 30, 1988, a referee appointed by the New York Supreme Court conducted an auction of the real estate at the courthouse for the County of Columbia, New York. The Bank was the highest bidder, purchasing the company's three parcels for a total price of $257,000. Upon the referee's motion for confirmation of his report of the sales, the New York Supreme Court confirmed the sales and entered a $653,275.28 judgment against Hillsdale Packing. It declined to enter judgment against Replogle or Morelli, without prejudice to a renewal of the request for judgment against them. It knew that Replogle was then a debtor in the bankruptcy case pending here, and presumably it declined to enter judgment against him because the automatic stay was then in effect against such action, pursuant to 11 U.S.C. § 362.

On November 1, 1988, a month after the real estate auction, a professional auctioneer hired by the Bank conducted an auction of the equipment of Hillsdale Packing at the company's plant. Items of equipment were sold to various bidders for a total price of $32,830.50.¹

I. COMMERCIAL REASONABLENESS OF BANK'S DISPOSITION OF PERSONAL PROPERTY

When a secured party forecloses upon and subsequently disposes of personal property, "every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable." Mass.Ann.Laws ch. 106, § 9-504 (Law. Co-op. 1984 & Supp.1989).² A guarantor of the debt is a "debtor" who may challenge the commercial reasonableness of a sale. Shawmut Worcester County Bank v. Miller, 398 Mass. 273, 278, 496 N.E.2d 625, 628 (Mass.1986). Counsel for Replogle argues that in disposing of all the operating assets of this business the Bank's obligation to act in a commercially reasonable manner required it to make some reasonable effort to sell the business as a package to someone interested in starting up a slaughterhouse. Only in this fashion, says counsel, could the Bank get a price in excess of liquidation value. He asserts that all of the assets could have been sold as a package because either a public or private sale of the personal property could have been coordinated with the real estate auction at the courthouse where, by statute, it had to be held. He also points to the Bank's failure to take an inventory for seven months and the unexplained disappearance of some items of equipment. I conclude that these omissions of the Bank are some indication of its failure to act in a commercially reasonable manner. See Miller, 496 N.E.2d at 630 (summary judgment for secured party denied because of allegations that it had improperly handled equipment prior to sale). I will deal with their weight in conjunction with my conclusions regarding the Bank's over-all burden of proof.

The Bank's only witness was its workout officer, Ms. Kelly. She was unfamiliar with the advertising and promotional efforts made on the equipment auction. The Bank offered no admissable evidence on the value of the equipment or of any other personal property constituting its collateral. Thus, essential evidence on the issue of commercial reasonableness was missing. The Bank appeared to rely upon the order of the New York Supreme Court affirming the referee's report of his sale. But that order is relevant only to the real estate sold by the referee. It has no bearing upon the commercial reasonableness of the auction sale of equipment or the disposition of any other personal property included in the Bank's security agreement.

The Bank has the burden of proof concerning the commercial reasonableness of its disposition of collateral. Shawmut Worcester County Bank v. Miller, 398 Mass. 273, 282, 496 N.E.2d 625, 630-31 (Mass.1986); Poti Holding Company v. Piggott, 15 Mass.App.Ct. 275, 444 N.E.2d 1311 (Mass.App.Ct.1983) (court failed to disagree with master's ruling on burden); K.B. Oil Co. v. Ford Motor Credit Co., Inc., 811 F.2d 310, 314 (6th Cir.1987); United States v. Willis, 593 F.2d 247, 258 (6th Cir.1979); Federal Deposit Ins. Corp. v. Rodenberg, 571 F.Supp. 455, 461 (D.Md. 1983); United States v. Champion Sprayer Co., 500 F.Supp. 708, 709 (E.D.Mich. 1980); Dynalectron Corp. v. Jack Richards Aircraft Co., 337 F.Supp. 659, 662-63 (W.D.Okla.1972). Clearly, it has not sustained that burden in light of its failure to furnish any evidence of the advertising and promotion of the auction sale, or of the equipment's value, and in light also of its various omissions previously discussed. I therefore find that the Bank's disposition of the collateral was not commercially reasonable.

II. EFFECT UPON BANK'S DEFICIENCY CLAIM

There remains the issue of what effect this disposition lacking commercial reasonableness has upon the Bank's claim for the balance of its indebtedness. In In re Nardone, 70 B.R. 1010 (Bankr.D.Mass.1987), this Court discussed that general legal issue at some length. In Nardone, however, it was unnecessary for the Court to divine which among the various legal theories is the law of Massachusetts. In Nardone, the debtor was entitled to prevail under any of the theories which have developed. I now return to that topic, at the risk of substantial repetition of what was said in Nardone.

The Uniform Commercial Code ("U.C.C."), enacted in Massachusetts and elsewhere,...