Lamp Fair, Inc. v. Perez-Ortiz

• Decision Date: 06 June 1989
• Docket Number: Nos. 88-1333,88-1334,PEREZ-ORTIZ,s. 88-1333
• Citation: 888 F.2d 173
• Parties: 9 UCC Rep.Serv.2d 1388 LAMP FAIR, INC., Plaintiff, Appellee, v. Pedro V., et al., Defendants, Appellants. LAMP FAIR, INC., Plaintiff, Appellant, v. Pedro V., et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 173

888 F.2d 173

9 UCC Rep.Serv.2d 1388

LAMP FAIR, INC., Plaintiff, Appellee, v. Pedro V. PEREZ-ORTIZ, et al., Defendants, Appellants.

LAMP FAIR, INC., Plaintiff, Appellant, v. Pedro V. PEREZ-ORTIZ, et al., Defendants, Appellees.

Nos. 88-1333, 88-1334.

United States Court of Appeals First Circuit.

Heard June 6, 1989.

Decided Oct. 25, 1989.

David Efron with whom Rolando A. Silva and Bernardo Vazquez, Rio Piedras, P.R., were on brief for Lamp Fair, Inc.

Jorge P. Sala with whom Law Offices of Jorge P. Sala, San Juan, P.R., was on brief for Pedro V. Perez-Ortiz, et al.

Before BREYER, REINHARDT, ^* and TORRUELLA, Circuit Judges.

BREYER, Circuit Judge.

Does Article 9 of the Uniform Commercial Code permit a secured creditor, over the objection of the debtor, both to retain collateral for the creditor's own use and also to obtain a deficiency judgment? We believe that, in the circumstances of the present case, the answer is "no." Accordingly, we reverse the judgment of the district court.

I. Relevant Background Facts

The plaintiff in this diversity case, Lamp Fair, Inc., sold its store to the defendant, Pedro Perez Ortiz, and Perez Ortiz failed to pay the full price. Lamp Fair then repossessed the store, kept it, and sued Perez Ortiz for the "deficiency" between Lamp Fair's valuation of the store and what Perez Ortiz still owed. A Security Agreement between the parties provides that Connecticut law governs. Connecticut has enacted the Uniform Commercial Code, Conn.Gen.Stat. Secs. 42a-9-501 et seq., (see attached Statutory Appendix), and so we must interpret the relevant provisions of that Code to determine whether or not Lamp Fair can obtain a deficiency.

To be more specific, we take the following factual background as relevant to this appeal:

a. On July 1, 1985, Pedro Perez Ortiz and Lamp Fair, Inc., made a contract. Perez Ortiz bought Lamp Fair's lighting fixture store located in Orange, Connecticut. Perez Ortiz promised to pay $327,000; in return he received furniture, fixtures, equipment, inventory, goodwill, and covenants not to compete.

b. Perez Ortiz paid Lamp Fair $50,000 at the time of the sale. He signed notes promising to pay the remaining $277,000 over time. He and Lamp Fair also signed a Security Agreement, intended to make certain that Perez Ortiz would pay this money. The Security Agreement gave Lamp Fair a secured interest in the store as collateral for the notes.

c. After a few months had passed, Perez Ortiz decided he could not, or would not, pay the additional money he owed under the contract and notes. On December 26, 1985, he returned the store--inventory, fixtures, and all--to Lamp Fair.

d. Lamp Fair immediately began to operate the store. In January 1986 Lamp Fair sent Perez Ortiz a bill for $131,000, which, it said, represented the difference between a) the money Perez Ortiz still e. Perez Ortiz refused to pay the $131,000. Lamp Fair then brought this suit.

owed under the contract and notes, and b) the value of the store and inventory, which he had returned.

After a trial before a magistrate, the district court entered a judgment in Lamp Fair's favor and against Perez Ortiz for $65,000. Both sides now appeal.

II. The Law

Perez Ortiz argued at trial that his return of the store in December, and Lamp Fair's acceptance of the store, amounted to a rescission of the July contract. That is to say, it amounted to an agreement between the parties that Lamp Fair would accept the store back and, in return, would forgive Perez Ortiz's still outstanding debt. The magistrate found, however, that there was no such rescission or new agreement. He found that Lamp Fair, while accepting the store, did not promise to forgive any still outstanding debt. The magistrate's conclusion on this issue was not "clearly erroneous," and we accept it as lawful. See Fed.R.Civ.P. 52(a).

If there was no rescission of the contract, however, the original contract, notes and, in particular, the Security Agreement govern the legal relation between the parties. The Security Agreement set out what would happen if Perez Ortiz defaulted on his obligation to pay the remainder of the purchase price (as he did). It provided that Lamp Fair could require Perez Ortiz to assemble the collateral, and that Lamp Fair could then take possession of it (i.e., the store), which is just what happened. The Agreement also provided that Lamp Fair would have "all the remedies of a Secured Party under the Uniform Commercial Code of Connecticut." In light of this last statement in the Agreement the magistrate should have looked to the Uniform Commercial Code (as adopted by Connecticut) to determine whether or not Lamp Fair was entitled to more than it had already received--the $50,000 down payment, the monthly payments through December, and the returned store. The magistrate failed to do this. We have examined Connecticut law ourselves, however, and we conclude that Lamp Fair cannot recover a deficiency.

A.

Article 9 of the Uniform Commercial Code sets forth the remedies available to a secured party. It gives a secured party, such as Lamp Fair, three basic options after default. See 2 J. White and R. Summers, Uniform Commercial Code 570 (3d ed. 1988). Each of these options, while permitting the creditor under some circumstances to obtain the collateral, contains safeguards to assure the debtor that the secured party will not take unfair advantage of the situation and that the value of the collateral will be fairly ascertained.

1. Judgment. The secured party may simply sue on the note itself; that is to say, he "may reduce his claim to judgment ... by any available judicial procedure." U.C.C. Sec. 9-501(1); Conn.Gen.Stat. Sec. 42a-9-501(1). At a judicial sale of the debtor's property (which would not be governed by the Code), the secured party may buy the collateral himself, and he can look to the debtor's other property to satisfy any remaining debt. U.C.C. Sec. 9-501(5), Sec. 9-501 comment 6. A secured party choosing this option may take possession of the collateral prior to obtaining judgment, but only to preserve it as security for the debt. Kimura v. Wauford, 104 N.M. 3, 715 P.2d 451, 453 (1986). He does not own the collateral; he may use it only "for the purpose of preserving the collateral or its value" for future disposition. U.C.C. Sec. 9-207(4); Wade v. Sport Concession Enterprises, Inc., 138 Ga.App. 17, 225 S.E.2d 488, 489 (1976). It would be "unfair to the debtor to allow a creditor to take possession at all, if the creditor never intended to dispose of the security." Kimura, 715 P.2d at 454.

Lamp Fair cannot look to this "judgment option" to support its claim to a "deficiency judgment," because Lamp Fair did not choose this option. The record makes clear that Lamp Fair has not sought a judicial sale of the store, nor did Lamp Fair take possession of the store simply for the purpose 2. Retention. The secured party's second option after default is to "retain the collateral in satisfaction of the obligation." U.C.C. Sec. 9-505(2). The Code makes clear, however, that retention of the collateral normally completely satisfies the debt; the secured party must abandon any claim for deficiency (unless the debtor signs a written statement permitting such a claim, which Perez Ortiz did not do). U.C.C. Sec. 9-505, comment 1; 2 J. White and R. Summers, Uniform Commercial Code 585; Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769, 771 (Tex.1982). The Code also states that the secured party must give notice of its intention to retain the collateral in satisfaction of the obligation, so that the debtor may object to retention and demand that the collateral be sold. Lamp Fair did not give this notice; it did not consciously choose this option.

of preserving it or its value for future disposition. Rather, Lamp Fair intended to keep the store for its own use, and to obtain a deficiency judgment as well.

3. Disposition. Section 9-504 sets forth the secured creditor's remaining option. It says that he "may sell, lease or otherwise dispose of any or all of the collateral ... by public or private proceedings." After doing so, he must "account to the debtor for any surplus," and "the debtor is liable for any deficiency." Every aspect of the disposition must be "commercially reasonable." In addition, the secured creditor must give the debtor notice of when the sale or other disposition will take place. The secured creditor can buy the collateral himself at any "public sale," but he cannot buy it at a "private sale" unless the collateral is "of a type customarily sold in a recognized market or ... the subject of widely distributed standard price quotations." U.C.C. Sec. 9-504(1)-(3). These rules in part seek to protect the debtor, for they help prevent the creditor from acquiring the collateral himself at less than its true value or unfairly understating its value to obtain a greater-than-warranted deficiency judgment. 2 J. White and R. Summers, Uniform Commercial Code 590, 599 (3d ed. 1988); 1A P. Coogan, W. Hogan, D. Vagts & J. McDonnell, Secured Transactions Under the Uniform Commercial Code Sec. 8.04(2)(c) at 8-97, Sec. 8.06(2) at 8-123 (1989); Ocean National Bank of Kennebunk v. Odell, 444 A.2d 422, 425 (Me.1982).

B.

Given these provisions of Connecticut law, Lamp Fair, in our view, cannot both retain the collateral and also obtain a deficiency judgment. We can reach this conclusion through either of two alternative lines of reasoning.

First, the majority of courts that have dealt with this issue would simply hold that Lamp Fair's conduct in retaining and operating the store on a permanent basis brings the transaction within the scope of the Sec. 9-505(2) "retention option," irrespective of whether or not Lamp Fair consciously chose to invoke this option. See, e.g., Shultz v. Delaware Trust Co., 360 A.2d 576, 578 (Del.Super.1976) (retention of collateral for five years may be found to be in satisfaction of obligation despite...