National Bank of Washington v. Pearson

• Decision Date: 14 December 1988
• Docket Number: Nos. 87-3570,I-,87-3558L and 87-3567,D,s. 87-3570
• Citation: 863 F.2d 322
• Parties: 7 UCC Rep.Serv.2d 1333 NATIONAL BANK OF WASHINGTON, Plaintiff-Appellee, v. John B. PEARSON, Defendant-Appellant, and Danielle R. Pearson; Doesefendants. (Two Cases) NATIONAL BANK OF WASHINGTON, Plaintiff-Appellant, v. John B. PEARSON, Defendant-Appellee, and Danielle R. Pearson; Doesefendants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 322

863 F.2d 322

7 UCC Rep.Serv.2d 1333

NATIONAL BANK OF WASHINGTON, Plaintiff-Appellee, v. John B. PEARSON, Defendant-Appellant, and Danielle R. Pearson; Does I-X, Defendants. (Two Cases)

NATIONAL BANK OF WASHINGTON, Plaintiff-Appellant, v. John B. PEARSON, Defendant-Appellee, and Danielle R. Pearson; Does I-X, Defendants.

Nos. 87-3570, 87-3558L and 87-3567.

United States Court of Appeals Fourth Circuit.

Argued Oct. 6, 1988.

Decided Dec. 14, 1988.

Ferdinand J. Mack, Frederick, Md., for defendant-appellant.

Henry Robbins Lord (C. Lamar Garren, Stephen H. Kaufman, Piper & Marbury, Baltimore, Md., on brief), for plaintiff-appellee.

Before WINTER, Chief Judge, and SPROUSE and WILKINS, Circuit Judges.

HARRISON L. WINTER, Chief Judge:

In this consolidated diversity action, defendant John B. Pearson appeals the district court's grant of summary judgment against him on the issue of his liability under a loan guaranty agreement he had entered into with plaintiff National Bank of Washington ("NBW"). In a cross-appeal, NBW contends that the district court erred in refusing to allow it to amend its answer to a counterclaim for slander brought by Pearson and in denying its motion for judgment n.o.v. on the issue of the jury's award of punitive damages against it. We affirm the grant of summary judgment against Pearson and the denial of NBW's motion for leave to amend its answer, but reverse the denial of NBW's motion for judgment n.o.v.

I.

The history of this case is rather serpentine, but it is necessary to set it forth in some detail in order properly to address the parties' contentions.

In 1975, John B. Pearson was president of Keys Corporation ("Keys"). In order to obtain a loan for Keys, Pearson and his then wife Danielle entered into a guaranty agreement with NBW in which the Pearsons expressly agreed

that the taking or possession of any security or form of security shall in no way affect our liability hereunder, and that in case of default in payment legal proceedings to enforce such payment may be instituted and prosecuted against any one or more of us without first having recourse to any other available security or other available remedy.

Thereafter, NBW made a loan of $2,000,000 to Keys, taking a security interest in, among other things, Keys' accounts receivable.

Keys' financial position began to deteriorate in 1975. In spite of Keys' declining fortunes, however, Pearson engaged in a pattern of highly questionable self-dealing. He caused the transfer with inadequate consideration of two valuable pieces of real estate owned by Keys to a trust established for the benefit of his children, paid himself a large bonus, and even had Keys prepay the rent on his leased Mercedes automobile for six months in 1978. ¹ By December, 1978, Keys' financial situation had declined to such a point that NBW declared a default on its loan. Keys consented to the entry of judgment against it for $2,051,896.50 in principal and interest, and NBW took possession of its accounts and began to collect them.

Pearson had moved to Nevada in November, 1978, about one month before Keys' default, and his address was unknown. In December, 1978 or January, 1979, NBW's Arthur Spielman contacted the Valley National Bank in Nevada and spoke with bank officer William Waldren. The two men disputed the content of their conversation at trial. Waldren testified that Spielman had indicated that the call was a "skip trace," that is, an inquiry from one bank to another concerning the whereabouts and finances of a debtor trying to avoid his obligations. Waldren testified that Spielman told him that Pearson had "[taken] inventory, [sold] inventory and [taken] the money, or [taken] ... inventory that was pledged against the loan." Spielman denied telling Waldren that Pearson had stolen inventory or proceeds.

In December, 1978, NBW brought an action against Pearson in a Maryland state court to recover under the guaranty agreement. NBW moved for summary judgment on the issue of Pearson's liability. Pearson resisted, arguing that NBW had failed to collect Keys' accounts receivable that it held as collateral. Pearson contended that this behavior was commercially unreasonable and that NBW was therefore precluded from seeking payment from Pearson by Maryland's enactment of the Uniform Commercial Code, Md.Com.Law Code Ann. Sec. 9-504(3) (1975) ("UCC"). The state court granted NBW's motion, ruling that in the guaranty agreement Pearson had expressly waived any entitlement he may have had to a commercially reasonable disposition of the collateral, and the case proceeded to trial on the issue of the amount of Pearson's liability. Just before trial was to begin, however, Pearson removed the action to federal district court in Maryland and moved for reconsideration of the order granting summary judgment. Judge Murray denied Pearson's motion, reasoning that considerations of federalism and the law of the case doctrine required him to let the state court's order stand.

While NBW's action against Pearson was proceeding in the Maryland court, Keys' creditors commenced an involuntary bankruptcy proceeding against it in March, 1979. NBW ceased its efforts to collect Keys' accounts receivable at that time and cooperated with the bankruptcy trustee in collecting the remaining accounts and in achieving an orderly liquidation and distribution of the rest of Keys' collateral. Meanwhile, NBW brought another lawsuit against Pearson in federal district court in Nevada in April, 1980. Pearson, having been apprised of Spielman's conversation with Waldren, brought a counterclaim against NBW for slander. ² NBW moved for summary judgment on the issue of Pearson's liability under the guaranty. The Nevada district court denied NBW's motion. It was of the view that Pearson might "be correct in his assertion that a guarantor may rely on commercial reasonableness, even where the guarantee is phrased in absolute terms, if the creditor chooses first to act against the collateral."

In March, 1982, the Nevada action was transferred to the Maryland district court and consolidated with the action pending there. NBW moved for summary judgment in the transferred Nevada action on the issue of Pearson's liability, and Judge Black granted its motion, noting that "the peculiar circumstances" of the case made reconsideration of the Nevada court's order "particularly appropriate." Judge Black stated that the earlier order of the Maryland state court granting NBW's motion, which Judge Murray had approved, was "a thorough and reasoned interpretation of the law." He explained further that "fundamental notions of federalism" and judicial efficiency required that the state court opinion--the "law of the case"--apply in the consolidated action.

The case proceeded on the remaining issues. In February, 1984, almost four years after the action was commenced, NBW moved to amend its answer to Pearson's slander counterclaim to assert a defense of privilege. Judge Black denied NBW's motion on the ground that it had "waived its right to assert [the defense] by not so pleading in accordance with the Federal Rules of Civil Procedure." Trial began before then Magistrate Smalkin ³ in April, 1986, but had to be suspended when NBW's counsel withdrew after it became apparent that he would be called as a witness. In October, 1986, after its present counsel had entered the case, NBW again moved to amend its answer to include a defense of privilege. Magistrate Smalkin denied this motion, reasoning that although the policy of the Federal Rules is to allow liberal amendment of pleadings, Judge Black's order had become the law of the case.

The jury trial of the consolidated action took place in November, 1986. The jury found that Pearson owed NBW $1,584,225.00 under the guaranty; Magistrate Smalkin revised this amount upward to $2,326,884.85, the full uncontested amount of NBW's claim. The jury found in favor of Pearson on his slander counterclaim, however, and awarded him $5,500 in compensatory damages and $300,000 in punitive damages. NBW moved for judgment n.o.v. on the question of punitive damages or in the alternative for a remittitur of the punitive damage award. The district court denied NBW's motion, and this appeal and cross-appeal followed.

II.

We address first Pearson's contention that the district court erred in granting summary judgment for NBW on the issue of Pearson's liability under the guaranty agreement.

Section 9-504(3) of the UCC expressly provides that "every aspect of the disposition" of a debtor's collateral by a secured creditor must be "commercially reasonable." While the UCC is silent as to the consequences of a secured party's failure to dispose of a debtor's collateral in a commercially reasonable fashion, the Maryland Court of Appeals has suggested strongly that such a failure bars a deficiency action against the debtor. In Harris v. Bower, 266 Md. 579, 295 A.2d 870 (1972), that court quoted approvingly a federal district court's declaration that a " 'creditor is not entitled to a deficiency judgment unless the sale of the collateral was conducted in a manner which was commercially reasonable.' " 266 Md. at 591, 295 A.2d at 876, quoting Dynalectron Corp. v. Jack Richards Aircraft Co., 337 F.Supp. 659, 663 (W.D.Okla.1972). See Sachs and Belgrad, Liability of the Guarantor of Secured Indebtedness After Default and Repossession Under the Uniform Commercial Code: A Walk on the Wild Side by the Secured Party, 5 U.Balt.L.Rev. 153, 186-87 (discussing Harris ). Moreover, in Maryland Bank v. Wathen, 288 Md. 119, 414 A.2d 1261 (1980), the court expressly held that a secured creditor's compliance with another provision of Sec. 9-504(3), the requirement that the creditor notify the debtor of the time and place of a public sale of his collateral, is a condition precedent to recovery from the debtor.

Pearson argues that Sec. 9-504(3) applies to guarantors as well as debtors and therefore...