Matter of Deephouse Equipment Co., Inc.
| Citation | 38 BR 400 |
| Decision Date | 27 February 1984 |
| Docket Number | Bankruptcy No. 2-81-01245,Adv. No. 2-81-0812. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — District of Connecticut |
| Parties | In the Matter of DEEPHOUSE EQUIPMENT COMPANY, INC., Debtor. DEEPHOUSE EQUIPMENT COMPANY, INC., Plaintiff, v. Walter J. KNAPP, Capitol City Construction Company, Inc., Defendants. |
Julia Aurigemma of Hoberman, Pollack & Roseman, P.C., Hartford, Conn., for plaintiff.
Glen D. Morgan of Greene & Bloom, Hartford, Conn., for defendant, Walter J. Knapp.
Everett F. Fink, West Hartford, Conn., for defendant, Capitol City Const. Co., Inc.
MEMORANDUM AND DECISION
The matter before the court raises issues under the Uniform Commercial Code where the decisional law, unfortunately, is not uniform. The relevant factual background which raises these issues, as disclosed in the pleadings and evidence received at trial, is as follows.
Deephouse Equipment Company, Inc. (Deephouse) operating a business in Berlin, Connecticut, sold a tractor-loader-backhoe combination (backhoe) on December 20, 1976 at a cash price of $17,000.00 to Knapp Construction Company, Inc. (Knapp), a company located in Rocky Hill, Connecticut. The parties arranged the financing of this purchase through General Discount Corporation (General) located in Boston, Massachusetts. General prepared a conditional sales contract (contract), a U.C.C. financing statement, and a personal guarantee by Walter J. Knapp, president of Knapp. Knapp executed the documents in favor of Deephouse who then assigned them to General, with recourse. The contract called for $20,533.50 to be paid by Knapp in 36 monthly installments of $533.05 at General's office in Boston. The contract provided that it would be construed in accordance with and governed by the laws of Massachusetts, and that "upon the occurrence of any default, Holder . . . shall have the rights and remedies of a secured party under the Uniform Commercial Code of the Commonwealth of Massachusetts as amended from time to time."
On September 13, 1977, with the written consent of Deephouse and General, Knapp transferred the backhoe to Capitol City Construction Company, Inc. (Capitol). Capitol assumed the contract's unpaid balance of $18,117.76 and Walter J. Knapp agreed that his guarantee would remain in force. Sometime prior to August, 1978, Capitol defaulted in the installment payments under the contract. In May or June of 1978, Capitol had hired F & W Welding Service, Inc. (F & W) to transport the backhoe to F & W's premises in Orange, Connecticut for repairs. While at F & W, the backhoe's engine "blew a rod" and F & W disassembled the engine. Although Capitol believed F & W was responsible for the engine blowout, Capitol did not contact F & W further concerning disposition of the backhoe. Capitol was then in arrears in the monthly contract payments and did not have the funds to pay for the required extensive repairs. Furthermore, Capitol was aware that F & W had notified both Deephouse and General about the backhoe. On December 18, 1978, after demand by General that Deephouse repurchase the contract, Deephouse did so and paid to General the balance due of $10,735.52. When Deephouse arrived at F & W on January 22, 1979 to take possession of the backhoe, F & W demanded, and Deephouse paid, $866.65 for F & W's service and towing charges and its labor charge to disassemble the engine. Deephouse also paid $140.60 to F.P. Ryan to truck the backhoe from Orange, Connecticut to Deephouse's yard in Berlin, Connecticut. The inoperable backhoe with the engine dismantled has remained there ever since.
In June, 1981, Deephouse brought suit in a Connecticut state court against Capitol, and Walter J. Knapp on his guarantee, for the balance due on the contract of $10,735.52, the monies paid to F & W and Ryan to secure possession of the backhoe, legal fees and interest.1 Although the Deephouse complaint averred that Deephouse had repossessed the backhoe, there was no reference either to its disposition or to any credit due Capitol. In their answers to the complaint, both Capitol and Walter J. Knapp admitted that the contract was in default and that they had refused to pay the monies demanded by Deephouse. By way of special defenses, they asserted that Deephouse's repossession of the backhoe, its failure to dispose of it and the length of the retention of the backhoe constituted violations of the requirements of commercial reasonableness and good faith imposed by the Uniform Commercial Code.2
Deephouse filed a chapter 11 petition on November 30, 1981, and shortly thereafter removed the state court action against Capitol and Walter J. Knapp to the bankruptcy court. At the trial held on May 26, 1982 and June 23, 1982, James R. Deephouse, the president of Deephouse, testified that after taking possession of the backhoe in January, 1979, he believed that the market for the backhoe, in its inoperable condition, was poor. Therefore, he did not attempt to put the backhoe up for auction. He neither advertised the backhoe for sale nor called other dealers about it. Only in the last six months prior to trial, did he put the backhoe in a used equipment list which he passed out to dealers. He stated that he retained the backhoe in the expectation that he could purchase a used or rebuilt engine to put in the backhoe to make it saleable. Because Deephouse itself was experiencing cash problems, it never had the monies available, estimated by Mr. Deephouse at $3,000.00 minimum, to make these repairs. Deephouse never sent Capitol a notice that it proposed to retain the backhoe in satisfaction of the obligation. Mr. Deephouse stated, based upon casual offers he received, that the backhoe in its nonoperating condition had and has a value of $3,000.00, although he conceded he would not sell the backhoe for that amount. He testified the backhoe would be worth $10,000.00 to $12,000.00 if repaired. Aaron Cox, president of Capitol and experienced in the purchasing of construction equipment, testified that the backhoe was worth "at least $8,000.00," (transcript of June 23, 1982 at 59) in its nonoperating condition and if in operating condition would have a value of between $12,000.00 and $14,000.00. He stated the cost of repair should be $4,000.00 or less.3
The defendants assert that Deephouse's nonaction with respect to the backhoe bars it from any recovery on the debt. They argue that a secured party who repossesses and retains collateral for an unreasonably long time impliedly elects to retain the collateral in full satisfaction of the debt the collateral secures. Alternatively, the defendants argue that even if such an election cannot be found, a secured creditor who fails to make a reasonable disposition of repossessed collateral is barred from recovery of any deficiency. Because the contract payments were to be made in Massachusetts to General which was located there and because none of the parties challenge the application of the contract clause providing that the legal issues in this proceeding be determined in accordance with the laws of Massachusetts, I will proceed on that basis.4
Chapter 106, § 9-505(2) of the Massachusetts General Laws provides:
A secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of such proposal shall be sent to the debtor if he has not signed after default a statement renouncing or modifying his rights under this subsection.
Mass.Ann.Laws ch. 106, § 9-505(2) (Law. Co-op.1983 Supp.). Courts appear to take at least three different approaches to the issue of whether or not a § 9-505(2) election can be made by a creditor where the creditor has not sent the written proposal to the debtor to retain the collateral in satisfaction of the obligation. One group of courts holds that a § 9-505(2) election can be implied from an unreasonably prolonged retention of collateral. See Shultz v. Delaware Trust Co., 360 A.2d 576 (Del. Super.Ct.1976); Bradford v. Lindsey Chevrolet Co., Inc., 117 Ga.App. 781, 161 S.E.2d 904 (1968); Service Chevrolet, Inc. v. Kelley, 99 Wash.2d 199, 660 P.2d 760 (1983). A second line of cases holds that an election under § 9-505(2) is impossible absent the service on the debtor of the statutory proposal to retain. See Clark Leasing Corp. v. White Sands Forest Products, Inc., 87 N.M. 451, 535 P.2d 1077 (1975); S.M. Flickinger Co., Inc. v. 18 Genesee Corp., 71 A.D.2d 382, 423 N.Y.S.2d 73 (1979). A third position requires proof that the creditor definitely manifested an intent to accept the collateral in satisfaction of the obligation. See Nelson v. Armstrong, 99 Idaho 422, 582 P.2d 1100 (1978); Jones v. Morgan, 58 Mich.App. 455, 228 N.W.2d 419 (1975); Winters National Bank & Trust Co. v. Saker, 66 Ohio App.2d 31, 419 N.E.2d 890 (1979). I believe from a review of the following cases that Massachusetts would be included in this third line of authority.
In Fed. Deposit Ins. Corp. v. Air Atlantic, Inc., 389 Mass. 950, 452 N.E.2d 1143 (1983), a pledgee held mutual fund shares to secure certain notes. Upon default on the notes, the pledgee's successor, the Federal Deposit Insurance Corporation (F.D.I.C.), sent notice of default to the owner of the shares and in the same letter declared its intent to foreclose on the securities and sell them for the debtors' account. Id., 389 Mass. at 952-53, 452 N.E.2d at 1145. In response to the owner's letter which denied the F.D.I.C.'s right to possess the shares, the F.D.I.C. reiterated its demands for payment and declared the "collateral will now be redeemed and the proceeds applied against the debtors." Id., 389 Mass. at 953, 452 N.E.2d at 1145. Five years later, the F.D.I.C. sold the shares. Id. When the F.D.I.C. sued on the notes, the defendants argued that the F.D.I.C. had impliedly...
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