U.S. v. Dawson

Decision Date11 April 1991
Docket NumberNo. 90-1863,90-1863
Citation929 F.2d 1336
Parties14 UCC Rep.Serv.2d 649 UNITED STATES of America; and James Abdnor, Administrator, United States Small Business Administration, Appellees, v. Margaret Ann DAWSON, Successor Trustee of the Henry M. Dial Estate Trust; Ancil E. Trucks; and, Charlotte L. Trucks, Appellants. Simmons First National Bank of Pine Bluff; Weyerhaeuser Company.
CourtU.S. Court of Appeals — Eighth Circuit

John Harris Jones, Pine Bluff, Ark., for appellants.

Floyd Mac Dodson, Little Rock, Ark., for appellees.

Before LAY, Chief Judge, BRIGHT, Senior Circuit Judge, and MAGILL, Circuit Judge.


LAY, Chief Judge.

Margaret Ann Dawson appeals from the district court's order granting summary judgment in favor of the Small Business Administration ("SBA") and denying her motion for summary judgment. On appeal, Dawson argues in rem foreclosure of the mortgage she executed to guarantee her brother's promissory note is barred because of lack of notice of the sale of the debtor's collateral. We agree and reverse the judgment of the district court.


On December 22, 1982, Henry C. Dial executed and delivered to the National Bank of Commerce ("Bank") a promissory note in the original principal amount of $50,000, bearing interest at the rate of fourteen percent per annum. The note was secured by the inventory and fixtures of Dial's Hardware. Dial's sister, Margaret Ann Dawson, an accommodation guarantor of her brother, executed and delivered to the Bank a mortgage on real property located in Jefferson County, Arkansas to secure payment of the note. On July 1, 1983, Dial, the Bank, and Sam H. Stephens signed an Agreement for Assumption of Indebtedness ("Agreement") that provided that Stephens would assume all of the liabilities and obligations under the terms of the promissory note in exchange for the assets of Dial's Hardware. The Agreement provided, however, that Dial was not relieved of his personal liability to the Bank on the debt. Dial died on November 20, 1983, but the Bank never filed a claim against his estate. In April, 1986, Sam Stephens filed a bankruptcy petition and subsequently was discharged. The hardware store assets that secured the note assumed by Stephens were sold at a public auction for $16,249.71, and the proceeds were applied to the loan balance. The proceeds did not cover the entire amount of the remaining debt. Dawson never received notice of the auction and sale of the store assets.

In August, 1986, the Bank assigned the promissory note and Dawson's mortgage to the SBA. The SBA brought this action against Dawson, the guarantor, for in rem foreclosure of the mortgage originally pledged to the bank as security for the note. The SBA sought to pay off the remaining balance of the debt, which equalled $18,252.12 plus interest. Dawson counterclaimed for release of the mortgage as a cloud on her title. The district court granted summary judgment in favor of the SBA and denied Dawson's motion for summary judgment. On appeal, Dawson argues as a complete defense to the action that (1) she was discharged by a material alteration in the obligation secured, (2) the Arkansas statute of nonclaim barred an in rem judgment by the SBA against the collateral, and (3) the SBA was not entitled to foreclose on the mortgage securing the note because she was not given notice of the sale of the principal collateral.

We reject Dawson's claim on her first and second defenses. We agree, however, with her argument regarding lack of notice.

Material Alteration

Under Arkansas law, a material alteration in an obligation assumed without the consent of the guarantor will discharge the guarantor's obligation. Moore v. First Nat'l Bank of Hot Springs, 3 Ark.App. 146, 150-51, 623 S.W.2d 530, 533 (1981). An alteration is material, however, only if "the guarantor is placed in the position of being required to do more than his original undertaking." Continental Ozark, Inc. v. Lair, 29 Ark.App. 25, 29, 779 S.W.2d 187, 189 (1989).

Dawson asserts that Stephens's assumption of obligations and liabilities under the note constituted a material alteration in the note. We disagree. The assumption agreement stated that Dial remained liable under the terms of the note. No provision of the note or mortgage was altered. 2

Statute of Nonclaim

Dawson also contends that the SBA may not foreclose on the mortgage securing the promissory note because no claim was filed against the estate of Dial within six months after publication of notice to creditors. Ark.Code Ann. Sec. 28-50-101 (Supp.1989). She asserts that the note and the mortgage are inseparable under Arkansas law. We believe this argument is unsound.

Arkansas applies the general rule that a secured creditor retains the right to enforce a lien against real or personal property pledged as collateral, notwithstanding the creditor's failure to file a probable claim against the debtor's estate within the nonclaim limitations period. Moore v. Moore, 21 Ark.App. 165, 171-72, 731 S.W.2d 215, 219 (1987). In England v. Spiller, 128 Ark. 31, 33-34, 193 S.W. 86, 87 (1917), the Arkansas Supreme Court recognized that a secured creditor generally has the choice of filing a probate claim or relying on his security. The court stated that "if ... [a creditor] prefers to collect ... [his claim] within the period of administration he will probate it. If the security is ample and he prefers the interest, he can let the claim run and foreclose his lien, as he could do if the obligor had not died." Id. (quoting Rhodes v. Cannon, 112 Ark. 6, 13, 164 S.W. 752, 754 (1914)). In the present case, the SBA apparently considered the mortgaged property adequate security and therefore did not file a claim against Dial's estate within the nonclaim limitations period.

Guarantor's Collateral

Dawson argues the SBA may not foreclose on the mortgage securing the note because the SBA failed to give her notice of the time and place of the sale of the principal collateral, the hardware store assets. We agree.

Section 4-9-504(3) of the Arkansas Commercial Code provides:

Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor.

Ark.Stat.Ann. Sec. 4-9-504(3) (1987). "Debtor" is defined as "the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral." Ark.Stat.Ann. Sec. 4-9-105(1)(d) (1987). The Arkansas Supreme Court has held that a guarantor of a secured obligation is a "debtor" for purposes of the notice rule because a guarantor "is responsible for payment upon default of the principal obligor." Hallmark Cards, Inc. v. Peevy, 293 Ark. 594, 598, 739 S.W.2d 691, 693 (1987). Thus, a guarantor " 'owes payment or other performance of the obligation secured.' " First Nat'l Bank of Wynne v. Hess, 23 Ark.App. 129, 132, 743 S.W.2d 825, 827 (1988) (quoting Ark.Stat.Ann. Sec. 4-9-105(1)(d)). The notice rule allows a debtor "to challenge a proposed disposition before it is made" and gives the debtor "the opportunity to find interested buyers for the collateral." 1A P. Coogan, W. Hogan, D. Vagts, J. McDonnell, Secured Transactions Under the Uniform Commercial Code, Sec. 8.06(2) (1990). If a creditor complies with the notice requirement, a debtor can "maximize the sale price of the collateral and, thus, minimize any deficiency for which he [or she] will be liable." Rushton v. Shea, 423 F.Supp. 468, 469-70 (D.Del.1976).

In 1987, the Arkansas Supreme Court overruled earlier decisions that permitted a secured party who failed to comply with the notice requirement to recover a deficiency upon overcoming the presumption that the collateral was worth as much as the amount of the obligation. First State Bank of Morrilton v. Hallett, 291 Ark. 37, 39-40, 722 S.W.2d 555, 556 (1987), overruling, Norton v. National Bank of Commerce, 240 Ark. 143, 398 S.W.2d 538 (1966). The Hallett court held that a creditor must comply with the notice requirement to obtain a deficiency judgment. Id. 722 S.W.2d at 556. The court further held that failure to give proper notice to a debtor bars a secured party from recovering a deficiency judgment for the balance still outstanding. Id. 722 S.W.2d at 557; see also Hallmark Cards, Inc., 739 S.W.2d at 694 (holding that a secured party who fails to give a debtor notice of the sale of collateral is barred from recovering any deficiency between the sale price and the amount of the debt).

Notwithstanding its failure to comply with section 4-9-504(3), the SBA argues that it is not barred from foreclosing on the mortgage securing the promissory note because it is not seeking to collect a deficiency through a personal judgment. The SBA reasons that there cannot be a deficiency until all the collateral securing the note has been liquidated, including the real estate collateral securing the promissory note. This argument overlooks the primary distinction which the law makes between the primary debtor and the guarantor. It is well-settled that the guarantor is only secondarily liable, and then only on proof of default by the original debtor. Cf. First American Nat'l Bank v. Coffey-Clifton, 276 Ark. 250, 251-52, 633 S.W.2d 704, 705 (1982); Bass v. Service Supply Co., 25 Ark.App. 273, 275-76, 757 S.W.2d 189, 190 (1988).

The Arkansas appellate courts have never confronted the issue of whether a secured party who fails to provide a guarantor with notice of the sale of the debtor's collateral is barred from foreclosing on the guarantor's real estate pledged as collateral. We conclude that Arkansas law would not allow a secured party, who fails...

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