Kirkland, In re

• Decision Date: 15 October 1990
• Docket Number: No. 88-15519,88-15519
• Citation: 915 F.2d 1236
• Parties: , 12 UCC Rep.Serv.2d 1204 In re Larry Dean KIRKLAND and Billie Kirkland, Debtors. SECURITY PACIFIC NATIONAL BANK, Appellant, v. Larry Dean KIRKLAND and Billie Kirkland, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1236

915 F.2d 1236

59 USLW 2326, 12 UCC Rep.Serv.2d 1204

In re Larry Dean KIRKLAND and Billie Kirkland, Debtors SECURITY PACIFIC NATIONAL BANK, Appellant, v. Larry Dean KIRKLAND and Billie Kirkland, Appellees.

No. 88-15519.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 14, 1989.

Decided Oct. 15, 1990.

Richard A. Rogan and John Chu, Broad, Schulz, Larson & Wineberg, San Francisco, Cal., for appellant.

John H. MacConaghy, Koller & MacConaghy, Emeryville, Cal., Robert L. Hughes, Lempres & Wulfsberg, Oakland, Cal., for appellees.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before POOLE, NELSON and WIGGINS, Circuit Judges.

POOLE, Circuit Judge:

Appellant, Security Pacific National Bank (Security Pacific), brought this action against appellees, the Kirklands, to collect a deficiency claim on loans made and secured by Security Pacific and guaranteed by the Kirklands. In bankruptcy proceedings initiated by the Kirklands, the bankruptcy court granted summary judgment in favor of the Kirklands disallowing Security Pacific's deficiency claim against the Kirklands because Security Pacific failed to notify the Kirklands of the sale of collateral prior to its disposition in contravention of California Commercial Code Sec. 9504(3). The bankruptcy appellate panel affirmed and this appeal timely followed. We affirm and deny Security Pacific's request for summary judgment.

BACKGROUND ¹

On September 16, 1980, Security Pacific entered into a credit agreement with Cascade Oil Company (Cascade) of which Mr. Kirkland was president and majority stockholder. This revolving note and credit agreement established a $1,250,000 unsecured line of credit from Security Pacific and an additional $200,000 line of credit. The Kirklands also gave Security Pacific an unsecured general continuing guaranty of Cascade's credit line. The guaranty expressly waived all notices and gave Security Pacific the power to substitute, release, decrease, or alter any collateral.

Cascade defaulted on March 31, 1981. On May 20, 1981, Cascade, as part of a workout agreement, gave Security Pacific a security interest in certain of its real and personal property. Security Pacific waived the default through May 29, 1981. The Kirklands, as guarantors, consented to the collateralization of Cascade's loan in a letter agreement dated May 18, 1981. This letter agreement provides that the collateralization of Cascade's loan "does not affect or diminish" the Kirklands obligation under the continuing guaranty of September 16, 1980. ² Because Security Pacific rejected Cascade's repayment proposal, the Cascade obligation reverted to default status.

Pursuant to a second workout arrangement, Security Pacific agreed to a six-month moratorium on Cascade's obligation and obtained security for the Kirklands' previously unsecured guaranty. In the new agreement, dated June 8, 1981, Security Pacific secured the Kirklands' guaranty with a deed of trust on the Kirklands' 2,600 acre and 48 acre California ranches, and with a security interest in Mr. Kirkland's partnership interest in an apartment complex. The agreement also provides that the September 16, 1980 continuing guaranty "shall remain in full force and effect." ³

At the end of the moratorium, Cascade again failed to make payment and on May 7, 1982 filed a Chapter 11 bankruptcy petition in Wichita, Kansas. Mr. Kirkland subsequently resigned as president.

In August 1983 and September 1983, Cascade's new president sold a premix mud tank for $4,500 and a drilling rig for $55,000, respectively, either with the consent or at the direction of Security Pacific. The Kansas bankruptcy court found these sales to be commercially reasonable. The Kirklands were not given notice of the sales and learned about them after the sales took place.

PROCEDURAL HISTORY

In January 1985, the Kirklands filed individual Chapter 11 petitions. On May 15, 1985, Security Pacific filed its proof of claim. The Kirklands objected to this claim on the grounds that Security Pacific did not give the Kirklands notice of the sale of collateral and moved for summary judgment.

The bankruptcy court granted the motion holding that guarantors are "debtors" for the purpose of Sec. 9105(1)(d) and therefore entitled to the protections of Sec. 9504(3). As such, the Kirklands, as a matter of law, could not have waived their right to notice prior to default. The court also determined that there was no post-default waiver because the letter agreements subsequent to the initial default constituted a novation of the Kirklands' original obligation. Because no notice was given subsequent to default, the bankruptcy court disallowed the deficiency claim in the amount of $1,303,882.78 plus interest, cost of collection, and attorneys' fees.

On September 22, 1988, the bankruptcy appellate panel issued an opinion upholding the bankruptcy court's order and affirming the grant of summary judgment. In re Kirkland, 91 B.R. 551 (Bankr. 9th Cir.1988). The court held that, even if the letter agreements incorporated the terms of the continuing guaranty by reference, Cascade's repeated failure to make payments constituted separate defaults, not one continuous default. Therefore, the waivers of notice, if any, occurred prior to, not after, the last default. The panel also affirmed the bankruptcy court's decision to disallow Security Pacific's deficiency claim in its entirety. Security Pacific appeals and requests summary judgment on the grounds that guarantors are not entitled to notice, that a guarantor can waive the right to notice prior to default, and that no novation of contract took place. We affirm and deny Security Pacific's request for summary judgment.

STANDARD OF REVIEW

A bankruptcy court's decision to grant summary judgment is reviewed de novo. In re Two S Corp., 875 F.2d 240, 242 (9th Cir.1989). This court must employ the same standard used by the bankruptcy court under Fed.R.Civ.P. 56(c), Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir.1986), and must determine whether there are any genuine issues of material fact and whether the bankruptcy court correctly applied the relevant substantive law when the evidence is viewed in a light most favorable to the nonmoving party. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989).

An interpretation of state law is likewise reviewed de novo. Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir.1984) (en banc). When interpreting state law, a federal court is bound by the decision of the highest state court. Dimidowich v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir.1986), reh'g denied, op. modified, 810 F.2d 1517 (9th Cir.1987). 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. Id. at 1482; Molsbergen v. United States, 757 F.2d 1016, 1020 (9th Cir.1985), cert. dismissed, 473 U.S. 934, 106 S.Ct. 30, 87 L.Ed.2d 706 (1985). However, " 'in the absence of convincing evidence that the highest court of the state would decide differently,' " American Triticale, Inc. v. Nytco Services, Inc., 664 F.2d 1136, 1143 (9th Cir.1981) (quoting Stoner v. New York Life Ins. Co., 311 U.S. 464, 61 S.Ct. 336, 85 L.Ed. 284 (1940)), a federal court is obligated to follow the decisions of the state's intermediate courts. See id.

ANALYSIS

I. The Definition of Debtors under Commercial Code Sec. 9504(3).

At issue is whether a "guarantor" is a "debtor" for the purposes of Sec. 9504(3). California Commercial Code Sec. 9504(3) requires a secured creditor to notify a debtor in default of the manner in which the creditor will dispose of the collateral unless, after default, the debtor waives this right. Commercial Code Sec. 9504(3) provides in relevant part:

Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold in a recognized market, the secured party must give to the debtor, if he has not signed after default a statement renouncing or modifying his right to notification of sale, ... a notice in writing of the time and place of any public sale ... any private sale or other intended disposition ... to be made. ⁴

Under Commercial Code Sec. 9501(3), this post-default notice requirement cannot be waived except as provided in Sec. 9504(3). Article Nine defines a debtor as

the person who owes payment or other performance of the obligation secured, whether or not he or she owns or has rights in the collateral ... Where the debtor and owner of the collateral are not the same person, "debtor" means the owner of the collateral in any provision dealing with the collateral, the obligor in any provision dealing with the obligation and may include both where the context so requires.

Commercial Code Sec. 9105(1)(d).

The California Supreme Court has not decided this issue. However, four California Courts of Appeal have. The three most recently decided cases, relied upon by the bankruptcy appellate panel in its decision and by the Kirklands in this appeal, have held that a guarantor is a debtor for the purposes of Commercial Code Sec. 9105(1)(d) and entitled to the protections of Sec. 9504(3). See American Nat'l Bank v. Perma-Tile Roof Co., 200 Cal.App.3d 889, 246 Cal.Rptr. 381 (1988); C.I.T. Corp. v. Anwright Corp., 191 Cal.App.3d 1420, 237 Cal.Rptr. 108 (1987); Connolly v. Bank of Sonoma County, 184 Cal.App.3d 1119, 229 Cal.Rptr. 396 (1986). The oldest decision, the first to decide this issue in California, and the one relied upon by Security Pacific, Rutan v. Summit Sports, Inc., 173 Cal.App.3d 965, 219 Cal.Rptr. 381 (1985), reached the opposite conclusion. ⁵

In construing California law, we feel bound by the interpretation adopted by the majority of California appeals courts. We, therefore, hold that for the purposes of Sec. 9105(1)(d) a guarantor...