U.S. v. New Mexico Landscaping, Inc.

• Decision Date: 28 February 1986
• Docket Number: No. 83-2329,83-2329
• Citation: 785 F.2d 843
• Parties: 42 UCC Rep.Serv. 1867 UNITED STATES of America, Plaintiff-Appellee, v. NEW MEXICO LANDSCAPING, INC., Employment Security Commission, Jemez Development, Inc., City of Albuquerque, New Mexico, Defendants-Cross Defendants-Appellees, LaMonte J. Urban, Ella Mae Urban, Defendants-Cross Defendants-Appellants, Bureau of Revenue, State of New Mexico, Defendant-Cross Claimant-Appellee, Patricia A. Buchanan, Springer Building Materials Corporation, Defendants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 843

785 F.2d 843

42 UCC Rep.Serv. 1867

UNITED STATES of America, Plaintiff-Appellee, v. NEW MEXICO LANDSCAPING, INC., Employment Security Commission, Jemez Development, Inc., City of Albuquerque, New Mexico Defendants-Cross Defendants-Appellees LaMonte J. Urban, Ella Mae Urban, Defendants-Cross Defendants-Appellants Bureau of Revenue, State of New Mexico, Defendant-Cross Claimant-Appellee Patricia A. Buchanan, Springer Building Materials Corporation, Defendants.

No. 83-2329.

United States Court of Appeals, Tenth Circuit.

Feb. 28, 1986.

S. Ricardo Narvaiz (William L. Lutz, U.S. Atty., Albuquerque, N.M., with him on brief), Small Business Admin., Washington, D.C., for plaintiff-appellee.

James T. Roach, Albuquerque, N.M., for defendants-appellants.

Before BARRETT and McKAY, Circuit Judges, and THEIS, ^* District Judge.

BARRETT, Circuit Judge.

This appeal is taken by defendants-appellants, Lamonte J. Urban and Ella Mae Urban (Urbans), guarantors of a Small Business Administration (SBA) loan, from the district court's grant of a Motion for Summary Judgment and entry of a Stipulated Judgment, Decree of Foreclosure, Order of Sale (Stipulated Judgment), Deficiency Judgment and Order denying Urban's Motion to Set Aside the Stipulated Judgment all in favor of plaintiff-appellee, SBA. The district court granted SBA's Motion for Summary Judgment finding that the Urbans had waived their defenses as guarantors under the SBA guaranty agreement.

I. Facts

On June 30, 1978, New Mexico Landscaping, Inc. (debtor) executed and delivered a promissory note evidencing a loan to it of $145,000 by the SBA. The note was for a term of ten years at an interest rate of 3% per annum. To secure payment of the note, the Urbans executed a guaranty agreement which was also executed and delivered to the SBA on June 30, 1978.

Debtor defaulted on payments to the SBA and by letter dated June 23, 1980, the SBA accelerated the indebtedness under the terms of the promissory note. In the same letter, the SBA requested payment from the Urbans of the unpaid principal and interest pursuant to the guaranty agreement.

On March 4, 1982, the SBA filed the instant suit against the Urbans in the district court for the District of New Mexico to collect the principal and interest owing as specified in the guaranty agreement. On November 16, 1982, the SBA moved for summary judgment on the basis that the Urbans "executed an unconditional and absolute guarantee for a government loan" and the Urbans' defenses were insufficient as a matter of law. (R., pp. 19, 20, 20-32).

The Urbans opposed the motion for summary judgment on several grounds, including allegations that the SBA failed to handle or dispose of the collateral for the loan in a commercially reasonable manner. They also alleged that the SBA allowed the deterioration and loss of the collateral by the SBA's willful acts or willful failure to act. In support of their position, Mr. Urban stated in an affidavit that while the SBA had possession or control alone or in connection with the trustee in bankruptcy since August, 1980, the SBA did not sell the collateral until June 9, 1981. Mr. Urban also stated that on several occasions he informed SBA officials of the alleged deterioration, depreciation, and waste of the collateral, but the SBA failed to act to prevent the loss. (R., pp. 34-44).

On December 27, 1982, the district court granted the SBA's motion for summary judgment and on March 4, 1983, entered the Stipulated Judgment. While the Stipulated Judgment indicates that the Urbans' attorney appeared, the SBA admitted that it was not sent to Urbans' attorney. (R., p. 105.) In addition, the real property securing the loan was sold on May 4, 1983, without formal notice to the Urbans.

On August 18, 1983, a deficiency judgment for $64,620.45 was entered against the Urbans and on August 26, 1983, they moved to set aside the Stipulated Judgment. That motion was denied on September 16, 1983.

The parties raise several issues for our consideration. We believe the dispositive issues can be stated as follows: (1) whether state or federal law applies in this case; (2) whether the "defense" of commercial unreasonableness was available to the Urbans; (3) whether the district court erred in granting summary judgment; and (4) whether the Urbans' due process rights were violated because they were not notified of the entry of the Stipulated Judgment or the foreclosure sale.

II. Governing Law

The parties agree that under Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943) federal law governs questions arising under the SBA, a nationwide federal program. What the parties dispute, however, is the substantive federal rule of law to be applied in this case.

We begin by noting that in Clearfield Trust the Supreme Court stated: "In the absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards.... In our choice of the applicable federal rule we have occasionally selected state law." 318 U.S. at 367, 63 S.Ct. at 575. We followed the Clearfield Trust approach in United States v. Lattauzio, 748 F.2d 559 (10th Cir.1984), a case similar to the case at bar in which defendant guarantors of an SBA loan sought to raise the "defense" of commercial unreasonableness. In Lattauzio we held as follows:

Since there is no Act of Congress to the contrary, we shall assume, in our disposition of the present case, that in fashioning the governing rule the Uniform Commercial Code of the State of New Mexico is incorporated therein. We shall further assume that N.M.Stat.Ann. Sec. 55-9-504 (1978) concerning the sale of collateral in a commercially reasonable manner inures to the benefit of a guarantor.

748 F.2d at 562. See also, United States v. Meadors, 753 F.2d 590 (7th Cir.1985).

We assume now, as we did in Lattauzio, that the New Mexico Uniform Commercial Code (UCC) is to be incorporated herein as the substantive federal law to be applied. While section 55-9-504 "inures to the benefit of a guarantor," we look to the common law of New Mexico with respect to whether the "defense" of commercial unreasonableness under section 55-9-504 can be waived by agreement of the parties.

Our research reveals that the New Mexico Supreme Court addressed this very issue in American Bank of Commerce v. Covolo, 88 N.M. 405, 540 P.2d 1294 (1975). There the court considered the contention of the guarantors that the lender had acted in a commercially unreasonable manner by negligently failing to perfect a security interest in the collateral. The supreme court reviewed applicable provisions of the UCC as enacted by the New Mexico Legislature. The court then held that the UCC "allows the parties [to a guaranty agreement] to determine the standards by which the performance of their good faith obligations are to be measured...." 540 P.2d at 1298.

The New Mexico Supreme Court concluded that the standard of care regarding the collateral which the lender owed the guarantors could simply be determined by "reading and interpreting the provisions of the guaranty agreement...." Id. After reviewing the terms of the guaranty agreement, the court held: "Where a guarantor or surety expressly and unequivocally consents to a waiver or release of his rights in the collateral, he will not be heard to complain...." Id. at 1299. Thus, we hold that under New Mexico law the "defense" of commercial unreasonableness available under section 55-9-504 of the New Mexico UCC can be waived by agreement of the parties.

III. Defense of Commercial Unreasonableness

Assuming, as we do, that the above sets forth the substantive law to be applied in this case, we consider whether the Urbans waived protections afforded under the New Mexico UCC by executing the SBA guaranty agreement. We believe a review of the provisions of the SBA guaranty agreement will reveal that the Urbans waived the SBA's duties regarding the collateral.

First, we note that the Urbans "unconditionally" guaranteed payment of the note entered into between the SBA and the debtor: "In order to induce Small Business Administration (hereinafter called "Lender") to make a loan or loans, or renewal or extension thereof, to New Mexico Landscaping, Inc. (hereinafter called the "Debtor"), the Undersigned hereby unconditionally guarantees to lender ... the due and punctual payment when due ... of the principal of and interest on and all other sums payable, or stated to be payable, with respect to the note of the Debtor...." (R., p. 72.)

Second, under the agreement, the Urbans waived several substantive rights as guarantors.

The Undersigned waives any notice of the incurring by the Debtor at any time of any of the Liabilities, and waives any and all presentment, demand, protest or notice of dishonor, nonpayment, or other default with respect to any of the Liabilities and any obligation of any party at any time comprised in the collateral. The Undersigned hereby grants to Lender full power, in its uncontrolled discretion and without notice to the Undersigned, but subject to the provisions of any agreement between the Debtor or any other party and Lender at the time in force, to deal in any manner with the Liabilities and the collateral, including, but without limiting the generality of the foregoing, the following powers:

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(d) To consent to the substitution, exchange, or release of all or any part of the collateral, whether or not the collateral, if any, received by lender upon such substitution, exchange, or release shall be of the same or different character or value than the collateral surrendered by lender;

(e) In the event of the nonpayment when due ... to realize on the collateral ... at any public or private sales ... 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...