May v. Women's Bank, N.A., 89SC449

• Decision Date: 25 March 1991
• Docket Number: No. 89SC449,89SC449
• Parties: 14 UCC Rep.Serv.2d 26 Virginia MAY, Petitioner, v. The WOMEN'S BANK, N.A., Respondent.
• Court: Colorado Supreme Court

Page 1145

807 P.2d 1145

14 UCC Rep.Serv.2d 26

Virginia MAY, Petitioner, v. The WOMEN'S BANK, N.A., Respondent.

No. 89SC449.

Supreme Court of Colorado En Banc.

March 25, 1991.

O'Connor & Hannan, Paul G. Goss, Marian L. Carlson, Denver, for petitioner.

Fowler & Schimberg, P.C., Daniel M. Fowler, Terrence P. Murray, Denver, for respondent.

Justice KIRSHBAUM delivered the Opinion of the Court.

In May v. The Women's Bank, No. 87CA1852 (Colo.App. June 1, 1989) (not selected for official publication), the Court of Appeals held that by executing an unconditional guaranty petitioner Virginia May waived the right provided by section 4-9-504(3) of the Colorado Uniform Commercial Code (the Code) to challenge the disposition of collateral by respondent The Women's Bank (the Bank) on the ground that the Bank failed to dispose of the property in a commercially reasonable manner. Having granted May's petition for certiorari to review that conclusion, we reverse and remand with directions.

I

In 1983 and 1984, May was the president and principal shareholder of the LaBoca chain of retail clothing stores. During that period of time LaBoca entered into a series of financial transactions with the Bank. In connection with those transactions, the Bank obtained a security interest in LaBoca's inventory, accounts receivable, furniture, fixtures and equipment. In addition, May executed a continuing guaranty in which she personally "guarantee[d] absolutely and unconditionally" the payment of all debts of LaBoca to the Bank. May also executed two promissory notes and deeds of trust in favor of the Bank against properties she owned. In October 1984, all of LaBoca's debts to the Bank were consolidated into a single promissory note secured by LaBoca's assets, the guaranty and the two deeds of trust on May's properties.

In June of 1985, LaBoca filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 1101-1174 (1988). The Bank obtained permission from the bankruptcy court to replevy and liquidate LaBoca's assets. After disposing of those assets, the Bank commenced foreclosure actions under the May deeds of trust to recover a claimed deficiency. May then instituted this action, alleging that the Bank's negligence in failing to conduct the sale of LaBoca's assets in a commercially reasonable manner, as required by section 4-9-504(3) of the Code, was the cause of any deficiency owed to the Bank. ¹

The Bank filed a motion for summary judgment, asserting that uncontroverted facts established that by executing the continuing guaranty May had waived any right she might have had to rely upon the Code's provisions concerning the disposition of collateral. The trial court granted the Bank's motion, and the Court of Appeals affirmed the trial court's judgment.

II

May contends that the Code prohibits a guarantor from waiving the right to insist upon disposition of collateral in a commercially reasonable manner. The Bank asserts that the Code's provision prohibiting a debtor from waiving such right is not applicable to a guarantor of a secured transaction. We agree with May.

A

Section 4-9-504(3) of the Code provides specific protections to debtors with respect to the disposition of property pledged to secure a debt, as follows:

Disposition of the collateral may be by public or private proceedings and may be made by way of one or more contracts. 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....

§ 4-9-504(3), 2 C.R.S. (1973 & 1990 Supp.). ² This section requires a secured party to provide a debtor with reasonable notice of any disposition of collateral after default unless the debtor, after such default, specifically knowingly and in writing releases the creditor from such obligation. Burdick v. Tucker, 780 P.2d 34 (Colo.App.1989); United Bank v. Reed, 635 P.2d 922 (Colo.App.1981). The section also expressly requires a creditor to dispose of collateral in a commercially reasonable manner. Cooper Invs. v. Conger, 775 P.2d 76 (Colo.App.1989).

The creation of these obligations of creditors affords debtors with corresponding rights. The Code contains the following pertinent provisions with respect to a debtor's right to require that collateral be disposed of in a commercially reasonable manner:

To the extent that they give rights to the debtor and impose duties on the secured party, the rules stated in the subsections referred to below may not be waived or varied except as provided with respect to compulsory disposition of collateral (subsection (3) of section 4-9-504 and section 4-9-505) ... but the parties may by agreement determine the standards by which the fulfillment of these rights and duties is to be measured if such standards are not manifestly unreasonable:

....

(b) Subsection (3) of section 4-9-504 and subsection (1) of section 4-9-505 which deal with disposition of collateral....

§ 4-9-501(3), 2 C.R.S. (1973 & 1990 Supp.). These provisions prohibit a debtor from releasing a secured party from the obligation to dispose of collateral in a commercially reasonable manner. Conger, 775 P.2d at 80. While the Code authorizes waiver of the right to receive reasonable notice of the disposition of collateral after default, it prohibits waiver of the right to demand a commercially reasonable disposition of the collateral.

This distinction emphasizes the significance of the requirement in section 4-9-504(3) that collateral be disposed of in a commercially reasonable manner. To assure confidence in the integrity and fairness of such transactions, debtors, creditors and third party purchasers must all be able to assume that the collateral will not be disposed of in an unreasonable manner. A contrary rule would encourage inequitable, collusive and fraudulent manipulations of sales of collateral by creditors, third parties and debtors.

The obligations and rights established by the above-quoted provisions of the Code further several additional public policy goals. Requiring a creditor to give a debtor reasonable notice of any disposition of collateral permits the debtor to pursue alternative means to ensure satisfaction of the debt, promotes economic efficiency, and tends to reduce the potential deficiency for which the debtor might be liable. First Nat'l Bank v. Cillessen, 622 P.2d 598, 600-01 (Colo.App.1980). In recognition of the fact that furtherance of these policies are central goals of the Code, our Court of Appeals has determined that a creditor's failure to fulfill either of these duties creates a presumption that upon default the value of the collateral is to be measured by the amount of the balance of the debt and that, absent proof to the contrary, such creditor is not entitled to any deficiency judgment against the debtor. Conger, 775 P.2d 76 (commercially unreasonable sale); Reed, 635 P.2d 922 (failure to give notice).

B

The Bank does not challenge the foregoing legal principles. The Bank contends, however, that as a guarantor rather than a debtor, May is not prohibited from waiving her right to require disposition of the collateral in a commercially reasonable manner. We do not agree with this argument.

The term "debtor" is defined by the Code as follows:

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

§ 4-9-105(1)(d), 2 C.R.S. (1973 & 1990 Supp.). In First National Bank v. Cillessen, 622 P.2d 598 (Colo.App.1980), the Court of Appeals considered the question of whether a co-maker of a corporate note should be deemed a debtor for purposes of section 4-9-504(3)'s requirement of notice after default. Relying in part on the broad definition of the term "debtor" contained in section 4-9-105(1)(d) of the Code, the court answered that question in the affirmative. The court noted that all persons who might ultimately be determined liable for any deficiency in a loan transaction have equally strong interests in minimizing the extent of their potential liabilities. Cillessen at 600-01.

Questions of whether a guarantor should be deemed a debtor for purposes of state commercial code provisions requiring notice and commercially reasonable disposition of collateral and whether such a guarantor is prohibited from waiving the rights to require reasonable notice after default and commercially reasonable disposition of collateral have been addressed by many courts. Almost all of those courts have answered such questions affirmatively. United States v. Kelley, 890 F.2d 220 (10th Cir.1989) (guarantor may not waive Kansas commercial code requirement of commercially reasonable disposition of collateral); Ford Motor Credit v. Lototsky, 549 F.Supp. 996 (E.D.Pa.1982) (guarantor is debtor for purposes of Pennsylvania commercial code and may not waive requirement of commercially reasonable disposition of collateral); Prescott v. Thompson Tractor, 495 So.2d 513 (Ala.1986) (guarantors are debtors for purposes of Alabama...