Swanson v. May

• Decision Date: 28 March 1985
• Docket Number: No. 6271-III-6,6271-III-6
• Citation: 40 Wn.App. 148,697 P.2d 1013
• Court: Washington Court of Appeals
• Parties: , 41 UCC Rep.Serv. 274 Donald E. SWANSON and Dorothy V. Swanson, husband and wife, Respondents, v. Duane MAY and Patricia May, husband and wife, Appellants.

Page 148

40 Wn.App. 148

697 P.2d 1013, 41 UCC Rep.Serv. 274

Donald E. SWANSON and Dorothy V. Swanson, husband and wife, Respondents, v. Duane MAY and Patricia May, husband and wife, Appellants.

No. 6271-III-6.

Court of Appeals of Washington,

Division 3, Panel One.

March 28, 1985.

Judith A. Butler, Lukins & Annis, P.S., Spokane, Robert J. Rohan, Schweppe, Krug & Tausend, P.S., Seattle, for appellants.

Guy M. Zajonc, Valerie D. Jolicoeur, Zajonc, Tripp, Jolicoeur & McNallen, Spokane, for respondents.

McINTURFF, Judge.

Donald E. Swanson brought this claim against Duane May ¹ for losses sustained pursuant to a farm equipment purchase/lease agreement. The court awarded Mr. Swanson a deficiency judgment for losses accrued through the disposition of repossessed collateral. On appeal, Mr. May principally contends the court erred by awarding the deficiency because (1) Mr. Swanson retained the property for an unreasonable time, which should preclude any deficiency; and, (2) the contract was void because it was usurious. We affirm.

On June 1, 1980, Mr. Swanson entered into the agreement which provided that Mr. May pay $24,500 plus interest, computed at 36 percent per annum and compounded monthly. The agreement also afforded Mr. May the option to purchase the equipment at the end of the lease for $4,810, plus tax. When Mr. May took possession of the equipment, he had paid Mr. Swanson $1,000 and had a remaining balance of $31,000.

As Mr. May did not make any further payments, the debt became delinquent and Mr. Swanson peacefully repossessed the equipment apparently in August 1981. Eight days after he had repossessed the equipment, Mr. Swanson made the first of several attempts to notify Mr. May of his decision to sell the equipment to the highest bidder and to collect any deficiency. Mr. Swanson first attempted notice by certified mail; and after four endeavors to deliver the letter, the post office returned it unopened. Mr. Swanson also conversed by phone with Mrs. May regarding his plans to dispose of this equipment.

Mr. Swanson marketed the collateral solely by locating it next to a large "For Sale" sign on his property, which borders a highway; he had used this method for the previous 7 years to sell other farm equipment. Apparently, no public auction was considered or held and no other effort was made to dispose of the collateral. Mr. Swanson did not use the equipment while in his possession before sale.

Although the equipment remained unsold for over 14 months, Mr. Swanson and his expert witness testified both the poor operating condition of the equipment and generally dismal market conditions hampered immediate sale. Mr. Swanson repaired some of the equipment and the first piece sold in October 1982; the remaining equipment sold in April 1983. On motion for partial summary judgment, the court determined the lease was intended as security for the payment of the purchase price, thereby falling within the scope of RCW 62A.9; that the equipment was not purchased for personal, family or household use; ² and that the agreement contained a usurious rate of interest. At trial, the court determined the usury statute, RCW 19.52.090, did not apply to this contract and that the equipment was sold in a commercially reasonable manner.

First, Mr. May contends the court erred in granting the deficiency judgment because Mr. Swanson retained the repossessed collateral for more than 1 year before sale. He claims such delay precludes Mr. Swanson's right to a deficiency, citing Service Chevrolet, Inc. v. Sparks, 99 Wash.2d 199, 660 P.2d 760 (1983).

RCW 62A.9-507 provides the framework in which a creditor may choose between two basic methods of obtaining the benefit of his bargain from a defaulting debtor. Where, as in this case, no purchase of consumer goods is involved, the creditor may repossess the goods subject to his security interest and either retain them in full satisfaction of the debt, RCW 62A.9-505(2), ³ or resell them and apply the proceeds to the debt. RCW 62A.9-504(1). ⁴ In the latter case, the debtor is liable for any deficiency. RCW 62A.9-504(2).

The seminal issue, then, is whether the Sparks rule, which implies an election of remedies where the creditor retains the property for an unreasonable period of time, applies here. In Sparks, a bank repossessed a financed vehicle and returned it to the auto dealer, who informed the debtor within 2 to 4 weeks after repossession that the dealership would sue for the outstanding balance. Concluding the auto dealer had no right to deficiency judgment, the court held the dealer had elected to keep the collateral in full satisfaction of the debt, reasoning there "must ... be a 'reasonable' limit to the length of time a secured party is permitted to hold collateral before it is deemed to have exercised its right to retain that collateral in satisfaction of the obligation." Sparks, 99 Wash.2d at 204, 660 P.2d 760.

Here, the court distinguished Sparks from the instant case because Sparks dealt specifically with a consumer transaction and RCW 62A.9-501(1). That section is unique to Washington state and precludes a creditor from obtaining the deficiency judgment when the debtor's collateral has been repossessed "in full satisfaction" of the debt, or the creditor has sold the collateral pursuant to RCW 62A.9-504.

Although Sparks dealt with consumer goods, there are several reasons why the rule applies here. First, the Sparks court did not limit the ruling solely to consumer transactions. Second, the court, while applying RCW 62A.9-501(1), adopted the rule as established in several other jurisdictions: a secured party's unreasonably long retention of collateral will imply an election of remedy pursuant to RCW 62A.9-505(2). ⁵ Third, the rationale behind the Sparks rule applies equally here. That is, a creditor's extended possession affects the debtor negatively in two ways: such possession deprives the debtor of the use and benefit of the collateral; and, the debtor's investment depreciates in direct proportion to the length of time the creditor retains the property. See, e.g., National Equip. Rental v. Priority Elecs. Corp., 435 F.Supp. 236, 239 (E.D.N.Y.1977); Haufler v. Ardinger, 28 U.C.C.Rep.Serv. 893, 897 (Mass.Dist.Ct.1979).

As the Sparks court stated the rule, a secured party is permitted a reasonable length of time "to hold collateral before it is deemed to have exercised its right to retain that collateral in satisfaction of the obligation." Sparks, 99 Wash.2d at 204, 660 P.2d 760. The determination of what length of time is "reasonable" is a question for the trier of fact. Sparks; see also Mount Vernon Dodge, Inc. v. Seattle-First Nat'l Bank, 18 Wash.App. 569, 587-88, 570 P.2d 702 (1977); Shultz v. Delaware Trust Co., 360 A.2d 576, 578 (Del.Super.Ct.1976).

Immediately after repossession, Mr. Swanson began his attempts to sell the collateral on his property which adjoins a highway, but did not use public auction or newspaper advertising. It must be noted that the equipment was damaged and it was necessary for Mr. Swanson to repair it. Expert testimony also explained the depressed nature of the farm equipment market and the lack of funds available from lending institutions to purchase that type of equipment. Applying the Sparks rule to these facts, we find substantial evidence supports the finding that Mr. Swanson disposed of the property within a reasonable time; thus no election of remedy is implied. Thorndike v. Hesperian Orchards, Inc., 54 Wash.2d 570, 343 P.2d 183 (1959).

Next, Mr. May alleges that regardless of the Sparks rule, the court erred in concluding Mr. Swanson had disposed of the property in a commercially reasonable manner. The sale of collateral on default is controlled by RCW 62A.9-504. Every aspect of the disposition, including the method, manner, time, place, and terms must be commercially reasonable. RCW 62A.9-504(3). The code also imposes an obligation of good faith on the performance of all duties under the code. Sparks, 99 Wash.2d at 204, 660 P.2d 760; Cavell v. Hughes, 29 Wash.App. 536, 539, 629 P.2d 927 (1981); see Official Comment 1, RCW 62A.9-507. This means the creditor must act to protect his and the debtor's interest. Leasing Serv. Corp. v. Broetje, 545 F.Supp. 362, 368 (S.D.N.Y.1982); Liberty Nat'l Bank & Trust Co. of Oklahoma City v. Acme Tool Div. of Rucker Co., 540 F.2d 1375, 1382 (10th Cir.1976). Courts have often formulated the duty of a creditor who sells collateral after default in terms of a fiduciary obligation. One of the inherent duties is to " 'use every effort to sell the estate under every possible advantage of time, place, and publicity.' " Foster v. Knutson, 84 Wash.2d 538, 548, 527 P.2d 1108 (1974) (quoting Perry on Trusts & Trustees § 602o (4th ed. 1911)). Indeed, a creditor is "required to use his best efforts to sell the collateral for the highest price and to have a reasonable regard for the debtor's interests." Foster, 84 Wash.2d at 549, 527 P.2d 1108.

The trial court concluded the sale was conducted in a reasonable manner after considering four factors:

[T]he relationship of the price obtained to the recognized market price; the conformity of the sale to commerically accepted standards; the presence or absence of a recognized market, and the utilization of it in a sale; and the overall reasonableness of the means and method of disposition under the circumstances.

Given these four factors and that (1) the equipment, valued at $8,000 at repossession, was eventually sold for $12,600; (2) the depressed nature of the farm equipment market hampered immediate sale; and (3) Mr. Swanson marketed the equipment in a previously successful manner, we find that although we may have ruled differently, substantial evidence supports the court's finding that Mr. Swanson conducted the sale in a commercially reasonable manner.

Next, Mr. May contends the court erred by finding Mr. Swanson had provided satisfactory...