Liberty Bank v. Honolulu Providoring, Inc., 7657

• Decision Date: 14 September 1982
• Docket Number: No. 7657,7657
• Parties: , 34 UCC Rep.Serv. 1025 LIBERTY BANK, Plaintiff-Appellee, Cross-Appellant, v. HONOLULU PROVIDORING INC., Thomas A. Griffiths and J. Betty Griffiths, aka Jeanette B. Griffiths, Defendants-Appellants, Cross-Appellees.
• Court: Hawaii Supreme Court

Page 576

650 P.2d 576

65 Haw. 273, 34 UCC Rep.Serv. 1025

LIBERTY BANK, Plaintiff-Appellee, Cross-Appellant, v. HONOLULU PROVIDORING INC., Thomas A. Griffiths and J. Betty

Griffiths, aka Jeanette B. Griffiths,

Defendants-Appellants, Cross-Appellees.

No. 7657.

Supreme Court of Hawai'i.

Sept. 14, 1982.

Syllabus by the Court

1. Secured creditor is required to dispose of collateral upon debtor's default in a commercially reasonable manner and to provide reasonable notification to debtor of the intended disposition. HRS § 490:9-504(3) (Supp.1981).

2. Parties are allowed to determine by agreement the appropriate standards that will fulfill notification and commercial reasonableness requirements as long as such standards are not manifestly unreasonable. HRS § 490:9-501(3)(b) (Supp.1981).

3. Guarantor is also entitled to notice of the intended disposition of the collateral and is considered to be a borrower or debtor for purposes of HRS § 490:9-504(3) (1976).

4. In the absence of any agreement between the parties as to remedies, debtor injured by secured creditor's failure to comply with notice required by the security agreement has the rights and remedies provided in the relevant provisions of Article 9 of the Uniform Commercial Code. HRS § 490:9-501(2) (1976).

5. If secured creditor fails to comply with notification requirements or disposes of collateral other than in a commercially reasonable manner, secured creditor has the burden of rebutting the presumption that the fair market value of the collateral equals the unpaid balance of the outstanding debt.

6. In proving the fair market value of the collateral, secured creditor who fails to comply with the requirements of the Uniform Commercial Code may not rely solely on the value received on resale, but must prove the value of the collateral by other evidence.

7. Debtor is entitled to have the amount of damages sustained because of secured creditor's failure to comply with Uniform Commercial Code requirements set-off against any deficiency secured creditor would otherwise recover. HRS § 490:9-507(1) (1976).

Philip D. Bogetto, Honolulu (Michael A. Weight, Honolulu, with him on the briefs), for defendants-appellants, cross-appellees.

Neil F. Hubert, Honolulu (Hong and Iwai, Honolulu, of counsel), for plaintiff-appellee, cross-appellant.

Before RICHARDSON, C. J., and LUM, NAKAMURA, PADGETT and HAYASHI, JJ.

LUM, Justice.

The salient issue in this appeal is whether the trial court erred in concluding as a matter of law that a public auction of collateral to satisfy an unpaid loan was held in a commercially reasonable manner under HRS § 490:9-504 of the Uniform Commercial Code. Finding an affirmative answer on the basis of the very language of the security agreement, we reverse the lower court's decision and remand the case for execution of the appropriate remedy.

I.

Defendant-appellant Honolulu Providoring, Inc. ("Providoring") entered into a note and security agreement with plaintiff-appellee Liberty Bank on January 21, 1975. The note and security agreement refinanced three previous loans between the two parties. Additional funds advanced to Providoring on the new security agreement totalled $28,976.64 in principal and interest. The note and security agreement described the collateral which secured the debt by reference to "UCC 1," a financing statement listing approximately fifty items of equipment owned by Providoring, recorded in conjunction with an August 1974 note and security agreement executed between the same parties. Defendants-appellants Thomas and Jeanette Griffiths, owners of Providoring, signed the January 1975 note and security agreement as indorsers and payment guarantors in accordance with a continuing guaranty made on October 29, 1974, in which the Griffiths agreed to guarantee all future loans extended by Liberty Bank to Providoring.

Providoring was delinquent on its payments on the January 1975 loan over the next two years. By letter dated March 4, 1977, Liberty Bank demanded the entire unpaid balance of $10,200.00 within five days. When appellants failed to comply, Liberty Bank officials took a physical inventory of Providoring's equipment.

In a letter dated March 22, 1977, Liberty Bank notified the Griffiths that the equipment securing the loan would be auctioned to cover the remaining balance and expenses. The Griffiths were further advised that "[a]lthough the exact date of the auction has not yet been determined, it is estimated that it will be held within two weeks. In any case you will be notified by Liberty Bank." Thomas Griffiths signed the letter to indicate his approval and acceptance of its contents as requested by Liberty Bank, but Jeanette Griffiths did not.

In a letter dated April 12, 1977 and postmarked April 14, 1977, Liberty Bank informed the Griffiths that the auction of the equipment was to be held on April 16, 1977. The auction was held as scheduled without prior judicial approval or approval by a creditors' committee or representative. ¹

On November 3, 1977, Liberty Bank instituted an action against Providoring and the Griffiths for a deficiency judgment of approximately $20,000.00 due on the January 1975 note and security agreement. Providoring and the Griffiths filed a counterclaim alleging, inter alia, that Liberty Bank had fraudulently and materially altered the August 1974 note and security agreement to include additional security and that the auction did not comply with the provisions of the Uniform Commercial Code. A non-jury trial was held and the lower court entered judgment against Providoring and the Griffiths for $17,576.00.

Providoring and the Griffiths filed an appeal from the judgment against them, alleging that the trial court had made numerous errors in its findings of fact and conclusions of law. Appellants' principal contentions on appeal, inter alia, were that the trial court erred in finding that there was credible evidence that the auction was conducted in a commercially reasonable manner, in failing to admit exhibits which they claim would prove that the August 1974 note and security agreement was materially altered, and in dismissing their counterclaim regarding the ownership of a particular machine.

Liberty Bank filed a cross-appeal contending that the trial court erred in several of its pretrial orders such as dismissing Liberty Bank's motion for imposition of sanctions against Providoring and the Griffiths for their failure to comply with discovery matters, refusing to grant Liberty Bank's motion to dismiss Counts I, II, and IV of their counterclaim, and setting aside its dismissal of Counts III and V of their counterclaim.

II.

Appellants' most meritorious contention on appeal is that the auction held by Liberty Bank was commercially unreasonable because Liberty Bank failed to provide them with proper notice.

HRS § 490:9-504(3) (Supp.1981) allows a secured creditor to dispose of the debtor's collateral upon default of the debtor, but requires that any disposition be "commercially reasonable" and that reasonable notification of any disposition be given to the debtor and other secured parties. The provisions of HRS § 490:9-504(3) are in relevant part as follows:

Sale or other disposition may be as a unit or in parcels and at any time and place and on any terms but every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable. Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor, if he has not signed after default a statement renouncing or modifying his right to notification of sale. (Emphasis added.)

The requirements of commercial reasonableness and notification are fundamental rights of the debtor and may not be varied or waived. However, the parties are allowed, under HRS § 490:9-501(3)(b), to determine by agreement the appropriate standards that will fulfill these requirements as long as the standards are not manifestly unreasonable. ²

The parties herein made such an agreement establishing the time for reasonable notification of the disposition of the collateral. Paragraph 13 of the January 1975 note and security agreement provides as follows:

13. NOTICE TO BORROWER. Whenever notice is required, including notice of the time and place of any public sale or other disposition of the collateral is to be made, reasonable notice shall be deemed to be five days. Notice to Borrower shall be deemed to have been given upon the mailing thereof, postage prepaid, to the Borrower's address as it appears with Borrower's signature herein or to such other address as Borrower shall have furnished to Bank in writing or to Borrower's last address known to Bank.

Although the notice requirement in the note and security agreement expressly refers only to "Notice to Borrower," it has been generally recognized that the guarantor is also entitled to notice of the disposition of the collateral and is considered to be a borrower or debtor for purposes of UCC § 9-504(3). Hepworth v. Orlando Bank & Trust Co., 323 So.2d 41 (Fla.App.1975); Commercial Discount Corp. v. Bayer, 57 Ill.App.3d 295, 14 Ill.Dec. 647, 372 N.E.2d 926 (1978); Chase Manhattan Bank, N. A. v. Natarelli, 93 Misc.2d 78, 401 N.Y.S.2d 404 (1977); State Bank of Burleigh County Trust Co. v. All-American Sub, Inc., 289 N.W.2d 772 (N.D.1980). Both Providoring as the debtor and the Griffiths as the guarantors were therefore entitled to a five-day notice of the time and place of the auction of Providoring's equipment.

Liberty Bank did not provide the five-day notice as required in the note and security agreement. A letter informing Mr. Griffiths of the time and place of the April...