McEntire v. Indiana Nat. Bank

• Decision Date: 19 December 1984
• Docket Number: No. 4-783A219,4-783A219
• Citation: 471 N.E.2d 1216
• Parties: 39 UCC Rep.Serv. 1804 Lloyd McENTIRE, Appellant, v. The INDIANA NATIONAL BANK, Appellee.
• Court: Indiana Appellate Court

Page 1216

471 N.E.2d 1216

39 UCC Rep.Serv. 1804

Lloyd [sic] McENTIRE, Appellant, v. The INDIANA NATIONAL BANK, Appellee.

No. 4-783A219.

Court of Appeals of Indiana Fourth District.

Dec. 19, 1984.

Rehearing Denied Feb. 8, 1985.

Jay P. Kennedy, Kroger, Gardis & Regas, Indianapolis, for appellant.

Judith Kay Brown, Indianapolis, for appellee.

MILLER, Presiding Judge.

Indiana National Bank (Bank) was victorious in its pursuit of a deficiency judgment on a guaranty when it was awarded summary judgment against guarantors Loyd McEntire (McEntire), Jerry Galbreath, and Ernest K. Jones. The trial court found the three individuals liable upon their unconditional guaranty to assure payments of an equipment lease executed by McEntire Drywall, Inc. (Drywall), which company petitioned for relief in bankruptcy before successful completion of its lease agreement. McEntire, the lone appellant, oppugns the result reached by the trial court, arguing the summary judgment was improper because of both incorrect applications of the law and the existence of material issues of fact. We agree and reverse and remand for further proceedings not inconsistent with our opinion herein.

ISSUES

McEntire raises the following as the points of dispute incorrectly resolved by the trial court:

1) Does the guaranty create or incorporate a security interest so as to subject the Bank to the provisions of Article 9 of Indiana's commercial code?

2) Is McEntire, as guarantor of Drywall's obligation, a "debtor" as defined in IND.CODE 26-1-9-105(1)(d) and therefore entitled to notice of the disposition by the Bank of the leased equipment as required in IND.CODE 26-1-9-504(3)?

3) Did McEntire waive the notice of disposition of the collateral by the terms of the guaranty?

4) Was it proper for the trial court to grant summary judgment when McEntire had raised the defense that the Bank's disposition of the collateral had been commercially unreasonable?

FACTS

On July 9, 1980, the Bank and Drywall entered into an "Equipment Lease Agreement" whereby the company agreed to make sixty monthly payments of $175.88 for a telephone system priced at $7,106.00. Drywall also paid $1.00 for the option to purchase the equipment at the end of the lease for $710.60. At the same time the lease was executed, McEntire, Jerry Galbreath and Ernest K. Jones signed an unconditional guaranty upon liabilities of Drywall to the Bank, to the extent of $7,106.00.

In 1982, Drywall filed for bankruptcy, and the trustee in bankruptcy abandoned the telephone system to the Bank. The Bank, without notice to the individual guarantors or any attempt at advertisement, sold the system back to the original vendor at a private sale for $1050. The Bank then instituted suit against the guarantors for a deficiency judgment in the amount of $4,608.11. All the guarantors raised two defenses to the action, lack of notice of the sale and lack of commercial reasonableness of the sale itself. The Bank moved for summary judgment, granted by the court in the following terms:

"1. That no failure of consideration exist [sic] for the guaranty contract which is the subject of this action.

2. That the subject guaranty contract is a separate contract from that of the lease agreement and that the guaranty does not create or incorporate a security interest and is not subject to the provisions of Article 9 of the Uniform Commercial Code.

3. That the Defendants, Lloyd [sic] McEntire, Jerry Galbreath and Ernest Jones, are not 'debtors' within the scope of I.C. Section 26-1-9-504(3) and have under the terms of the guaranty waived their right to object to the manner of disposition of the leased equipment.

4. That the subject guaranty is an unconditional guaranty of payment and Defendants have no right thereunder to compel the Plaintiff to first proceed against the principal debtor on the leased equipment.

5. That Plaintiff by affidavit and the pleadings filed herein has established those elements necessary to recover on the lease and guaranty contracts as set forth in its Complaint.

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the Plaintiff, The Indiana National Bank, have and recover a judgment from the Defendants, Lloyd [sic] McEntire and Jerry Galbreath, jointly and severally, in the amount of Four Thousand Six Hundred Eight and 11/100 Dollars ($4,608.11), together with interest and the costs of this action, without relief from valuation and appraisement laws."

Record, pp. 158-59. McEntire is the sole appellant before us, arguing for reversal.

DECISION

Summary judgment proceedings in this state are governed by Ind.Rules of Procedure, Trial Rule 56, which clearly states that

"[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits and testimony, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

T.R. 56(C). If there are any doubts as to whether any issue of material facts exists with regard to the claim, a motion for summary judgment must be resolved in the nonmovant's favor. To determine if such doubts indeed exist, the evidence is to be construed liberally in the nonmovant's favor. Woodward Insurance, Inc. v. White (1982), Ind., 437 N.E.2d 59; Bridgewater v. Economy Engineering Co. (1984), Ind.App., 464 N.E.2d 14, trans. pending. Once having determined no issues of material fact exist, we must still determine that the trial court has correctly applied the law to those facts. Krueger v. Bailey (1980), Ind.App., 406 N.E.2d 665.

It is with this standard then that we review two of the trial court's conclusions--that this transaction is not subject to Article 9 of the Uniform Commercial Code and that even if Article 9 applies, McEntire is not protected thereunder. ¹ Under the circumstances and the issues presented herein, we must deal with both inquiries included in our standard of review because there is a genuine issue over material facts and the trial court incorrectly applied the law.

Application of Article 9 of the U.C.C.

The guaranty executed by McEntire very clearly covers the following of Drywall's obligations:

"FOR VALUE RECEIVED and in consideration of credit given or to be given, or of advances made or to be made, or of other financial accommodation afforded or to be afforded to McEntire Drywall, Inc. (hereinafter referred to as the 'Debtor') by The Indiana National Bank, Indianapolis, Indiana (hereinafter called 'Bank'), the undersigned hereby guarantees the full and prompt payment, when due, whether by acceleration or otherwise, together with interest and all costs, expenses and attorneys' fees, of any and all notes, bills, drafts, commercial paper and other obligations of the Debtor of every kind (herein collectively called 'Liabilities') whether signed, accepted, drawn or endorsed by the Debtor, that are or shall be owned, held or acquired whether through discount, overdraft, purchase, direct loan, or as collateral or otherwise by Bank, either for the Debtor or for any holder thereof, provided that the Liability thereon and hereon of the undersigned shall not exceed the principal sum of Seven Thousand One Hundred Six and 00/100 Dollars ($7,106.00) at any one time outstanding together with interest thereon and all costs, expenses and attorneys' fees incurred by the Bank in the enforcement of the Liabilities."

Record, p. 13. (Emphasis added.) When interpreting a guaranty, we follow the rules of construction applicable to any other contract. Thus, in the absence of ambiguity in the language used, we construe a guaranty's provisions as a matter of law. Goeke v. Merchants National Bank & Trust Co. of Indianapolis, (1984) Ind.App., 467 N.E.2d 760; Loudermilk v. Casey, (1982) Ind.App., 441 N.E.2d 1379. The terms of this particular guaranty very clearly contemplate the equipment lease agreement at issue herein and must have been so intended. However, our inquiry continues because the issue remains whether the guaranty comes within the ambit of the U.C.C. provisions regarding security agreements.

Indiana's version of the U.C.C. provides the following with respect to categorizing a purported lease as an actual security agreement:

"Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security."

IND.CODE 26-1-1-201(37). This statute clearly provides two ways of determining whether a lease in actuality is a conditional sale, a vehicle for securing an interest in an item the "lessee" is purchasing from the "lessor." The distinguishing difference between the two foci of I.C. 26-1-1-201(37) devolves upon the terms of any option to purchase included in the agreement.

Within the terms of subsection (b), if the lease provides an option whereby the lessee can purchase the property for no additional or for a nominal consideration, the lease is, as a matter of law, a security agreement. E.g., Bolen v. Mid-Continent Refrigerator Co., (1980) Ind.App., 411 N.E.2d 1255. However, unlike the situation in Bolen, where the consideration set forth was $1.00 and sales tax, we have no clear-cut evidence here that Drywall's option price on the telephone system, of $710.60, was "nominal consideration." We would have no problems if the sum here were very small in absolute terms, as in Bolen, but because $710.60 is not of such character, we can find it "nominal" only if it is insubstantial in relation to the fair market value of the telephone system at the time the option would have been exercised. See Matter of Marhoefer Packing...