U.S. v. Conrad Pub. Co., s. 78-1251

• Decision Date: 29 December 1978
• Docket Number: Nos. 78-1251,78-1290,s. 78-1251
• Citation: 589 F.2d 949
• Parties: 25 UCC Rep.Serv. 857 UNITED STATES of America, Appellant, v. CONRAD PUBLISHING COMPANY, a corporation, the Estate of Currie Conrad, John G. Conrad and Charles Conrad, Appellees (Two cases).
• Court: U.S. Court of Appeals — Eighth Circuit

Page 949

589 F.2d 949

25 UCC Rep.Serv. 857

UNITED STATES of America, Appellant, v. CONRAD PUBLISHING COMPANY, a corporation, the Estate of Currie Conrad, John G. Conrad and Charles Conrad Appellees (Two cases).

Nos. 78-1251, 78-1290.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 14, 1978.

Decided Dec. 29, 1978.

Allan Gerson, Atty., App. Sec., Civ. Div., Dept. of Justice, Washington, D. C. (argued), Barbara Allen Babcock, Asst. Atty Gen., Washington, D. C., James R. Britton, U. S. Atty., Fargo, N. D., and Ronald R. Glancz, Washington, D. C., on brief, for appellant United States.

William C. Kelsch of Kelsch, Kelsch & Tudor, Mandan, N. D., argued and on brief, for Conrad Publishing Co.

Before GIBSON, Chief Judge, and LAY and HEANEY, Circuit Judges.

HEANEY, Circuit Judge.

The United States brought this action in order to collect the balance due on a promissory note given by Conrad Publishing Company and assigned to the Small Business Administration (SBA). It sought to recover $63,816.76 from the Company and the guarantors of the note, Charles Conrad, John Conrad and Currie Conrad. ¹ This amount represented the deficiency remaining after the sale of the Company's assets and real property. The District Court determined that the SBA did not conduct the sale of the Company's assets in a commercially reasonable manner as required by N.D.Cent.Code § 41-09-50(3), U.C.C. § 9-504(3). It found that a proper sale would have brought an additional.$40,789.58 and deducted that amount from the deficiency. A judgment of $26,554.28 was entered against the Company and the three Conrad guarantors. The United States appeals from this judgment, claiming that it is entitled to recover the entire deficiency. The Company and the guarantors cross-appeal from the measure of damages utilized by the District Court. We affirm in part, reverse in part and remand for further proceedings.

On March 7, 1968, Conrad Publishing Company borrowed $225,000 from the Bank of Burleigh County, Bismarck, North Dakota. The promissory note, evidencing the loan, was subsequently assigned by the bank to the SBA, an agency of the United States. The loan was secured by a mortgage on certain real property owned by the Company, a security agreement covering primarily the Company's equipment, and personal guarantees executed by Charles Conrad, John Conrad and Currie Conrad.

Conrad Publishing defaulted on April 4, 1975, at which time there was a balance due on the note of approximately $105,000. The SBA and the bank immediately took possession of all of the Company's assets. A foreclosure sale of all of the collateral was scheduled for May 6, 1975.

On April 23, 1975, the SBA contacted eleven North Dakota auctioneers and requested bids to conduct the sale. Only two auctioneers responded. One, Mr. Fitzgerald, refused to bid. He explained his refusal as follows:

Here it is April 26th, Saturday, and you have the sale date as of May 6th. I find it impossible to do the right kind of a job of advertising in such a short time, and a poor job of advertising is no good for any kind of a sale. I just can't do business that way so I will not be bidding on this sale. Maybe some other time.

The other, Mr. Berg, submitted a bid. Berg was hired as auctioneer for the sale on April 25, 1975, only seven days before the sale.

The total advertising for the sale consisted of mailing seven letters to printers, the distribution of six hundred handbills, and one advertisement in both the Bismarck Tribune and the Fargo Forum. No advertisements were placed in trade journals or in out-of-state newspapers. There were one hundred eighteen registered bidders at the auction. Of approximately seventy-five to eighty-five publishers in fifteen to twenty-five job printers in North Dakota, only eighteen were represented at the sale.

The Conrads estimated that the value of the equipment at the time of the sale was $165,000. John West, of the SBA, "guesstimated" that the value of the equipment was $50,000. No professional appraisal of the equipment was made. Approximately thirty minutes before the auction began, a Mr. Malone made an oral bulk bid for $101,000. West requested that Malone support the offer by guaranteeing a down payment of between $10,000 and $15,000. No guarantee was made and West concluded that the offer was not bona fide.

The auction began and the equipment was sold in a piecemeal fashion. Much of the equipment was sold at a price significantly lower than its estimated value. Donald Gackle, an independent publisher, testified that one of the principal items for sale a four-unit Fairchild press was worth between $13,000 and $25,000. Gackle was interested in obtaining the press as trading stock. Prior to the auction, he had contacted two printing equipment dealers who stated that they would allow him $13,000 as a trade-in value. Gackle was the only individual to bid on the press and he purchased it for $2,500. A photoprinting machine, which cost $34,925 in 1967, was sold for $106. A sticher, that had a value of several thousand dollars, was sold for $75. Gackle testified that cameras "went for ridiculously low prices."

Part of the problem was that there were few buyers who were interested in printing equipment. ² Another source of the problem was the inexperience of the auctioneer. Berg was unfamiliar with the operation of the equipment, its value or its intended use. The bidders were required to identify certain items auctioned off since Berg was unable to do so. The SBA did not furnish Berg any expert assistance.

The sale of the Company's personal property resulted in gross proceeds of $22,524.67. After deducting $6,241.81 in expenses, the net proceeds were $16,283.19. The net proceeds were applied against the balance due on the note payable. At a later date, the government foreclosed on the real property of the Company. The foreclosure sale netted $27,863.51 which was also used to reduce the balance due on the note. ³ A deficiency of $63,816.76 remained.

The government argues, initially, that the District Court erred in applying the Uniform Commercial Code to the transaction. It maintains that the District Court should have used the "federal law of contracts" in which the terms of the contract are controlling. The note payable stated that

(The SBA) is empowered to sell, assign, and deliver the whole or any part of the Collateral at public or private sale, without demand, advertisement or notice of the time or place of sale or of any adjournment thereof, which are hereby expressly waived.

The guarantee signed by the Conrads stated that

(The SBA) may elect, at any public or private sale or sales, for cash or on credit or for future delivery, without demand, advertisement or notice of the time or place of sale or any adjournment thereof (the undersigned hereby waiving any such demand, advertisement and notice to the extent permitted by law) * * * .

Thus, the government contends, the Company and the guarantors waived their rights to have the sale conducted in a commercially reasonable manner. The Company's and the guarantors' sole recourse was to claim that the SBA's actions in conducting the sale were unconscionable.

The District Court determined that the transaction was governed by the U.C.C. as adopted by North Dakota either "by virtue of the fact that the U.C.C. is the common law of the federal courts * * * or by virtue of the fact that state commercial law controls the rights of the parties." It concluded that the waiver of rights found in the note and in the guarantees was limited by N.D.Cent.Code §§ 41-09-47(3)(b), 41-09-50(3), U.C.C. §§ 9-501(3)(b), 9-504(3), and that the requirement of a "commercially reasonable" sale of collateral could not be waived. The District Court further concluded that although N.D.Cent.Code § 41-09-47(3), U.C.C. § 9-501(3), allows parties to substitute other reasonable standards in a contract for the statutory standards, the purported waivers provided no standards whatsoever. Thus, the sale had to be examined for its compliance with the "commercially reasonable" test presented by statute.

We agree with the government that federal law, rather than state law, controls the rights and obligations of the parties. See United States v. Beardslee, 562 F.2d 1016, 1022 (6th Cir. 1977), Cert. denied,--- U.S. ----, 99 S.Ct. 113, 58 L.Ed.2d 128 (1978); United States v. Marshall, 431 F.Supp. 888, 890 (N.D.Ill.1977); 13 C.F.R. § 101.1(d). Cf. United States v. Hext, 444 F.2d 804, 807-809 (5th Cir. 1971). We must still determine, however, whether we should use the U.C.C. as adopted by North Dakota as the federal rule, or whether we should use the federal common law rule suggested by the SBA.

In the absence of some overriding federal interest in uniformity, the applicable state law generally provides the rule of decision. See United States v. Yazell, 382 U.S. 341, 86 S.Ct. 500, 15 L.Ed.2d 404 (1966); United States v. Marshall, supra at 891. We find no such overriding federal interest here. Many SBA loans are negotiated with the assistance of local banks and, in most transactions, the SBA has consistently "as a matter of convenience" operated as if the local U.C.C. was legally applicable. In this case, the SBA obtained a security agreement from the Conrads and filed a financing statement. It gave the Conrads notice of the auction. There is no evidence that this policy has, in any manner, adversely affected federal fiscal interests. To the contrary, the SBA, in this case, relied on its prior perfected security interest under the North Dakota U.C.C. to maintain priority over other creditors of Conrad Publishing.

There is no evidence that the SBA's ability to smoothly process loan transactions will be seriously hampered. The SBA already utilizes local procedures to implement its programs, especially for recordation and notification purposes. 13 C.F.R. § 101.1(d)(3). In view of the near universal adoption of the U.C.C., ⁴...