Security Trust Co. of Rochester v. Thomas

Decision Date04 November 1977
Citation399 N.Y.S.2d 511,59 A.D.2d 242
Parties, 22 UCC Rep.Serv. 1305 SECURITY TRUST COMPANY OF ROCHESTER, Respondent, v. Earl E. THOMAS and Rosemary A. Thomas, Appellants.
CourtNew York Supreme Court — Appellate Division

Martin S. Handelman, Rochester, for appellants.

Harris, Beach, Wilcox, Rubin & Levey, Rochester, for respondent (Paul Yesawich, Rochester, of counsel).

Before MARSH, P. J., and MOULE, DENMAN, GOLDMAN and WITMER, JJ.

OPINION

WITMER, Justice.

This appeal requires us to determine whether a secured lender who repossesses the security from the defaulting debtor and sells it at public or private sale may recover a deficiency judgment against the debtor without proving that its notice to the debtor of the sale was reasonable and that the sale was conducted in a commercially reasonable manner. We hold that it cannot; that questions of fact were presented on the pleadings herein at Special Term; and that Special Term erred in granting the plaintiff-lender's motion for summary judgment for the amount of the alleged deficiency on its loan to defendants.

In 1971 defendant Earl E. Thomas of Rochester, New York bought a tractor for hauling shippers' trailers, and borrowed $25,000 from plaintiff, the Security Trust Company of Rochester (the Bank), to finance it. He signed an installment payment note therefor and his wife, defendant Rosemary Thomas, signed an instrument guaranteeing payment of the principal and interest thereof. In addition, the Bank received a security interest in defendant's new tractor. Defendant defaulted in his payments on the tractor, and plaintiff contacted him about repossessing it. Defendant advised plaintiff that the tractor was at his employer's yard in Rochester, New York, giving the address, and plaintiff repossessed it. It is disputed as to whether defendant advised plaintiff that in the late summer of 1975 he had changed his residence address to 22 Malvern Street, Rochester.

Plaintiff delivered the repossessed tractor to a motor vehicle dealer in the Village of Honeoye Falls, New York, about 25 miles south of the City of Rochester, and offered it for public sale on April 21, 1976. It mailed a notice of the sale to defendant at 22 Melville Street, Rochester, New York, but the notice was returned to the plaintiff because of incorrect address. Plaintiff also posted notices of the proposed sale on "three public buildings", presumably in the Village of Honeoye Falls. At the sale it rejected the only bid of $2,000; and two or three weeks later, without notice to defendant, it sold the tractor at private sale for $4,000.

In July, 1976 plaintiff instituted this action against defendants to recover the deficiency alleged to be due on the note, and under CPLR 3213 it moved for summary judgment. Defendants interposed objections, contending that the tractor was worth substantially more than the amount received and that the plaintiff failed to give them proper notice of the sale and failed to conduct the sale in a commercially reasonable manner. Despite such objections, Special Term found that there was no question of fact for trial and granted the motion. Without determining the question, Special Term assumed that plaintiff's notice to the defendants of the sale was defective.

In the event of default by a buyer, subdivision 1 of section 9-504 of the Uniform Commercial Code authorizes a secured creditor to liquidate the security and apply the proceeds to the unpaid balance of the debt. Subdivision 2 thereof provides that the debtor shall be liable for any remaining deficiency. Subdivision 3 imposes upon the creditor the obligation to conduct a "commercially reasonable" sale of the collateral and, in a case such as this, to send reasonable notice of the sale to the debtor. In the event of compliance by the creditor with the foregoing, the creditor is protected against claims by the debtor concerning the manner of the sale and the price obtained (UCC, § 9-507(2)). If the secured party has failed to give reasonable notice or to sell in a commercially reasonable manner, the debtor may recover from the creditor any loss caused by the creditor's failure to comply with these provisions (UCC, § 9-507(1); Stanchi v. Kemp, 48 A.D.2d 973, 974, 370 N.Y.S.2d 26, 27).

The Uniform Commercial Code is silent as to the rights of the creditor to recover the deficiency when it has not given reasonable notice of the sale to the debtor or has not sold the collateral in a commercially reasonable manner, and this question remains unsettled in this State as well as in many other States (see, A Creditor's Rights To A Deficiency Judgment Under Article 9 Of The Uniform Commercial Code: Effect Of Lack Of Notice, 42 Brooklyn Law Review (1975), 56, 61 et seq.; A Secured Creditor's Right to Collect a Deficiency Judgment Under UCC Section 9-504: A Need to Remedy the Impasse, 31 Business Lawyer 2025 (1976); Secured Transactions New Jersey Upholds The Right Of A Secured Party To Collect A Deficiency Judgment, Under UCC 9-504(2) Although Notice Provisions of 9-504(3) Were Not Observed, 76 Dickinson Law Review 394 (1972)). It would seem that this defect in the statute should be corrected by the Legislature; but in the absence of appropriate legislative provision, the courts must establish the rule by decision.

Since adopting the Uniform Commercial Code the courts of several States have ruled that failure of the secured creditor to give reasonable notice to the debtor of the sale of the security on the latter's default, bars the creditor from obtaining a deficiency judgment against the debtor (see Bank of Gering v. Glover, 192 Neb. 575, 579, 223 N.W.2d 56, 59 (1974); Turk v. St. Petersburg Bank & Trust Co., 281 So.2d 534 (Fla.App.1973); Atlas Thrift Co. v. Horan, 27 Cal.App.3d 999, 104 Cal.Rptr. 315 (1972)). Several New York cases have held in accordance with this view (Avis-Rent-A-Car System v. Franklin, 82 Misc.2d 66, 366 N.Y.S.2d 83 (App. Term); Leasco Data Processing Equip. Corp. v. Atlas Shirt Co., 66 Misc.2d 1089, 323 N.Y.S.2d 13, citing prior New York nisi prius cases with like holding). Some States have gone to the opposite extreme, interpreting literally subdivision (1) of section 9-507 of the Uniform Commercial Code to mean that if the secured creditor fails to sell in accordance with the provisions of the statute, the debtor may recover from the secured party any loss caused by the latter's failure, but cannot bar the creditor's action for deficiency judgment (see Commercial Credit Corp. v. Wollgast, 11 Wash.App. 117, 521 P.2d 1191 (1974)).

A great number of States have found that a middle ground is more equitable for the parties and a fairer interpretation of the statute, and have held that despite failure of the secured party to give notice of sale of the security to the debtor as provided by the statute, and even despite the creditor's failure to conduct the sale in a commercially reasonable manner, the creditor may still recover a deficiency judgment against the debtor, except that in such cases the secured creditor must prove the amount of his deficiency and that the fair value of the security was less than the amount of the debt. This is sometimes...

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