Rutan v. Summit Sports, Inc.

• Decision Date: 29 October 1985
• Citation: 219 Cal.Rptr. 381,173 Cal.App.3d 965
• Court: California Court of Appeals Court of Appeals
• Parties: , 42 UCC Rep.Serv. 342 Joe RUTAN et al., Plaintiffs and Appellants, v. SUMMIT SPORTS, INC. and Alan P. MacQuoid, Defendants and Respondents. Civ. 23733.

Page 381

219 Cal.Rptr. 381

173 Cal.App.3d 965, 42 UCC Rep.Serv. 342

Joe RUTAN et al., Plaintiffs and Appellants, v. SUMMIT SPORTS, INC. and Alan P. MacQuoid, Defendants and Respondents.

Civ. 23733.

Court of Appeal, Third District, California.

Oct. 29, 1985.

As Modified Nov. 19, 1985.

Babitzke & Meleyco, Michael F. Babitzke, Stockton, for plaintiffs and appellants.

Morse, Morse & Morse, Brian D. Morse and John D. Kirihara, Merced, for defendants and respondents.

PUGLIA, Presiding Justice.

Defendants Summit Sports, Inc., a corporation, and Alan P. MacQuoid moved to set aside a default and default judgment in favor of plaintiffs Joe Rutan et al. Plaintiffs appeal from an order granting defendants' motion. One of the questions presented on appeal is whether a creditor's failure to give the debtor notice of sale of collateral securing a promissory note as required by Uniform Commercial Code section 9504, subdivision (3), necessarily bars a deficiency judgment against the guarantor of the note. We conclude that it does not where, as here, the guarantor has waived notice.

On March 29, 1982, plaintiffs brought action against defendants to recover on a promissory note and to obtain possession of an airplane securing the note. The complaint alleged default on a note and security agreement executed by Summit Sports, Inc., and guaranteed by MacQuoid, its president. The prayer for relief sought $24,366.97 on the note, plus interest and attorney fees. Plaintiffs also requested orders permitting them to take possession of and sell the airplane with the net proceeds of sale to be applied to the debt.

Defendants were served with the summons and complaint but failed to respond. On July 12, 1982, plaintiffs requested entry of and the court entered the default of both defendants. At a hearing in September 1982, the court granted plaintiffs possession of the airplane but continued the default judgment hearing, indicating it wished to consider the details of sale of the airplane to assure that it would be conducted in a commercially reasonable manner.

In the spring of 1983, plaintiffs sold the airplane for $22,000. Following a hearing in May 1983, the court approved the sale and, after deducting expenses from the sale proceeds, determined plaintiffs were entitled to a deficiency judgment of $14,395.23, attorney fees of $1,500, and costs. The default judgment was entered on June 13, 1983.

On October 31, 1983, defendants made their first appearance in the action by moving to vacate the default and default judgment under Code of Civil Procedure section 473 or, alternatively, under the court's inherent equitable power. The court granted the motion on the sole ground the deficiency judgment was barred by plaintiffs' failure before selling the collateral to comply with the notice requirements of Uniform Commercial Code section 9504, subdivision (3).

On appeal, plaintiffs contend the court lacked jurisdiction to set aside the default pursuant to Code of Civil Procedure section 473 and otherwise abused its equitable power to do so. Plaintiffs further maintain that a secured creditor's failure to notify a debtor of an intended sale of collateral does not bar a deficiency judgment against a guarantor.

I

The general rule is that the six-month period within which to bring a motion to vacate under section 473 runs from the date of the default and not from the judgment taken thereafter. (Nemeth v. Trumbull (1963) 220 Cal.App.2d 788, 791, 34 Cal.Rptr. 127; Weiss v. Blumencranc (1976) 61 Cal.App.3d 536, 541, 131 Cal.Rptr. 298.) The reason for the rule is that vacation of the judgment alone ordinarily would constitute an idle act; if the judgment were vacated the default would remain intact and permit immediate entry of another judgment giving the plaintiff the relief to which his complaint entitles him. (Nemeth, 220 Cal.App.2d at pp. 791-792, 34 Cal.Rptr. 127; Howard Greer etc. Originals v. Capritti (1950) 35 Cal.2d 886, 888-889, 221 P.2d 937; see also Weiss, 61 Cal.App.3d at p. 541, 131 Cal.Rptr. 298.)

Nonetheless, the "default and default judgment are separate procedures." (Jonson v. Weinstein (1967) 249 Cal.App.2d 954, 958, 58 Cal.Rptr. 32.) The latter does not necessarily have any bearing on, and may be set aside without disturbing, the former. (Ibid.; see also Engebretson & Co. v. Harrison (1981) 125 Cal.App.3d 436, 438, 445, 178 Cal.Rptr. 77; Becker v. S.P.V. Construction Co. (1980) 27 Cal.3d 489, 495, 165 Cal.Rptr. 825, 612 P.2d 915.)

The circumstances of the present case dictate that the default and default judgment be considered as discrete events. Since defendants' motion was made more than six months after the default was entered but within six months after the judgment, the court had jurisdiction under section 473 to grant relief from the judgment but not the default.

Moreover the basis for the trial court's order does not constitute grounds in equity for setting aside the default. Manifestly, a defect in notice affecting the right to a deficiency judgment provides no equitable grounds for vacation of the earlier default. The duty to notify the debtor of the sale of the collateral arose after the entry of default and had no impact on defendants' antecedent opportunity timely to present a defense to the complaint. Hence the default of both defendants was improperly vacated on the ground stated by the court.

II

The question remains whether the deficiency judgment was properly set aside under Code of Civil Procedure section 473 on a showing of "mistake, inadvertence, surprise, or excusable neglect" or, alternatively, by virtue of the court's inherent equity power to vacate a judgment obtained through "extrinsic fraud" or mistake. (See County of San Diego v. Magri (1984) 156 Cal.App.3d 641, 646-647, 203 Cal.Rptr. 52; Carroll v. Abbott Laboratories, Inc. (1982) 32 Cal.3d 892, 897-898, 187 Cal.Rptr. 592, 654 P.2d 775; Weitz v. Yankosky (1966) 63 Cal.2d 849, 855, 48 Cal.Rptr. 620, 409 P.2d 700.)

Plaintiffs sued for two different forms of relief--recovery of the debt owing on the promissory note and possession of the collateral securing the note under the security agreement. (See KMAP, Inc. v. Town & Country Broadcasters, Inc. (1975) 49 Cal.App.3d 544, 122 Cal.Rptr. 420.) It is plain that the trial court never intended the "default" entered on July 12, 1982, to be conclusive of plaintiffs' right to a deficiency judgment. (See Northrup Corp. v. Chaparral Energy, Inc. (1985) 168 Cal.App.3d 725, 729-730, 214 Cal.Rptr. 173.) In granting plaintiffs possession of the collateral, the court expressly reserved jurisdiction to determine the reasonableness of any deficiency remaining between the proceeds of the sale of the plane and the full amount of the indebtedness.

The right to a deficiency judgment is lost when the secured party fails to give proper notice to the debtor as required by Uniform Commercial Code section 9504, subdivision (3). (Atlas Thrift Co. v. Horan (1972) 27 Cal.App.3d 999, 104 Cal.Rptr. 315; Western Decor & Furnishings Industries, Inc. v. Bank of America (1979) 91 Cal.App.3d 293, 306-308, 154 Cal.Rptr. 287; cf. cases collected in Annot. (1974) 59 A.L.R.3d 401.) Under the circumstances present here, section 9504, subdivision (3), permits the secured party, after a default on an indebtedness, to sell the collateral in a commercially reasonable manner but requires the secured party to give the debtor prior written notice of the time and place of sale. ¹ "The purpose of notice is to give the debtor an opportunity either to discharge the debt and redeem the collateral, to produce another purchaser, or to see that the sale is conducted in a commercially reasonable manner." (Buran Equipment Co. v. H & C Investment Co. (1983) 142 Cal.App.3d 338, 341, 190 Cal.Rptr. 878.)

Lack of notice need not be raised as an affirmative defense. Rather, the secured party bears the burden of alleging and proving compliance with section 9504, subdivision (3), as a condition to obtaining a deficiency judgment following the sale of collateral. (Barber v. LeRoy (1974) 40 Cal.App.3d 336, 343-344, 115 Cal.Rptr. 272; see also J.T. Jenkins Co. v. Kennedy (1975) 45 Cal.App.3d 474, 482, 119 Cal.Rptr. 578; Clark Equipment Co. v. Mastelotto, Inc. (1978) 87 Cal.App.3d 88, 95, 150 Cal.Rptr. 797.)

At oral argument counsel acknowledged plaintiffs' failure to give notice of sale to defendants and virtually conceded that this failure foreclosed plaintiffs from obtaining a valid deficiency judgment against the debtor. Accordingly, counsel agrees that the order vacating the deficiency judgment as to defendant Summit Sports must be affirmed.

Counsel makes no such concession, however, with respect to defendant MacQuoid, the guarantor of the promissory note executed by Summit Sports. The guaranty was unconditional in nature and contained express waivers of the rights (1) to assert any defenses available to Summit Sports and (2) to any notice when plaintiffs exercised their rights against the debtor to hold, sell, release or otherwise dispose of the collateral. Even assuming that a guarantor is otherwise entitled to the protections of section 9504, subdivision (3), ² the guaranty agreement signed by MacQuoid purports to waive those protections whether predicated on plaintiffs' failure to give notice to Summit Sports or to MacQuoid.

A debtor cannot before default waive the right to notification of sale of collateral. (Barber v. LeRoy, supra, 40 Cal.3d at p. 344, 115 Cal.Rptr. 272.) Uniform Commercial Code section 9501, subdivision (3), specifically bars such a waiver on the part of a "debtor." (Barber v. LeRoy, 40 Cal.App.3d at pp. 342-343, 115 Cal.Rptr. 272.) ³ Though no California case has considered the issue a federal court applying California law has determined that a guarantor is not a "debtor" within the meaning of Uniform Commercial Code section 9501, subdivision (3). (United States, etc. v. Kurtz (E.D.Pa.1981) 525 F.Supp. 734, 745-746, a...