U.S. v. Terrey

• Decision Date: 22 June 1977
• Docket Number: No. 76-2676,76-2676
• Citation: 554 F.2d 685
• Parties: 21 UCC Rep.Serv. 1488 UNITED STATES of America, Plaintiff-Appellee, v. Thomas N. TERREY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 685

554 F.2d 685

21 UCC Rep.Serv. 1488

UNITED STATES of America, Plaintiff-Appellee, v. Thomas N. TERREY, Defendant-Appellant.

No. 76-2676.

United States Court of Appeals, Fifth Circuit.

June 22, 1977.

Edward R. Finck, Jr., Albert M. McNeel, Jr., San Antonio, Tex., for defendant-appellant.

John E. Clark, U. S. Atty., Henry Valdespino, Asst. U. S. Atty., San Antonio, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before WISDOM, GEE and FAY, Circuit Judges.

WISDOM, Circuit Judge:

This appeal challenges a recovery by the United States on a guaranty agreement executed by the defendant-appellant, Terrey, to secure a Small Business Administration loan. When the original debtor, SESO Corporation, defaulted on the loan, it turned over its assets to the SBA. The Administration sold the assets at a public auction and sued Terrey for the resulting deficiency. The district court directed a verdict for the SBA, overruling Terrey's contention that the agency had not sold the assets in a commercially reasonable manner. We hold that the jury should have been allowed to decide whether the sale was commercially reasonable. We reverse the judgment of the district court and remand for a new trial.

I.

Thomas Terrey and Stephen Taylor organized SESO in 1970 and became its only officers and shareholders. They manufactured burglar alarms until 1972 when the federal government reserved for its own use the radio frequency used in the alarms. Instead of changing frequencies, the men decided to change products and to develop a computer-controlled message board sign for sale to retail businesses. Shortly thereafter, they sold the controlling interest in the corporation to Milton E. Travis and L. E. Travis, Jr., who invested $50,000 in the business and leased a computer programmer to the company.

SESO secured a $100,000 loan from the National Bank of Commerce of San Antonio on March 23, 1973, as a source of working capital. The company executed a note in the amount of the debt and entered three security agreements with the bank covering the company's equipment, furniture, fixtures, inventory, accounts, and contract rights, as well as 525 shares of SESO stock issued to Terrey and Taylor. At the same time Terrey entered a guaranty agreement with the bank pledging payment under the terms of the note.

Both the note and the guaranty were standard forms provided by the SBA. The note provided that its holder could "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 note also stated:

This promissory note is given to secure a loan which SBA is making or in which it is participating and, pursuant to Part 101 of the Rules and Regulations of SBA (13 C.F.R. 101.1(d)), this instrument is to be construed and (when SBA is the Holder or a party in interest) enforced in accordance with applicable Federal law.

The guaranty provided that Terrey unconditionally guaranteed payment of the note and that he granted to the bank:

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:

(3) In the event of the nonpayment . . . or in the event of default . . . to realize on the collateral or any part thereof, as a whole or in such parcels or subdivided interests as Lender 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 and such demand, advertisement and notice to the extent permitted by law), or by foreclosure or otherwise, or to forebear from realizing thereon, all as Lender in its uncontrolled discretion may deem proper, and to purchase all or any part of the collateral for its own account at any such sale or foreclosure, such powers to be exercised only to the extent permitted by law. (Emphasis added.)

The guaranty did not state whether state or federal law governed the terms of the agreement.

The security agreements, on the other hand, entered contemporaneously with the note and the guaranty, provided, "The law governing this secured transaction shall be the Texas Uniform Commercial Code and other applicable laws of the State of Texas." Furthermore, point VII-B of each security agreement limited the remedies of the secured party in conformance with the Texas UCC. ¹

SESO made only three payments on the note. In November 1973, when it had missed four payments, it ceased business for lack of operating capital. In a meeting on November 19 between Terrey, his lawyer, a bank officer, and three officials of the SBA, Terrey turned over the assets of the corporation to the SBA. Although at trial the participants did not recall the meeting clearly, they apparently did not reach any agreement about liquidating the business. There is no written record of the meeting. On November 27 the bank assigned the note, security agreements, and guaranty to the SBA in return for payment by the agency of 90 percent of the amount due on the note.

The SBA put one of its loan officers, John Swidelsky, in charge of the collateral and the liquidation of SESO. After the meeting on November 19, he immediately changed the locks on the building leased by the company at 307 Nakoma Street in San Antonio, secured equipment and supplies that were stored outdoors, and posted no trespassing notices. He took pictures of the property and also checked company supplies stored at two other locations. He did not inventory or appraise the assets. He also failed to ascertain the history of the business because, he said, the company was going into liquidation. In a deposition before trial he said he had not requested the history perhaps because he was not interested in it. At trial he also said he could not remember when or whom he had asked for the books of the company.

Within a day or two of the November 19 meeting, Swidelsky, after consultation with other SBA officials, decided that a public auction would best liquidate the company assets. ² Although Swidelsky admitted at trial that the agency usually attempted to negotiate sales of entire businesses, he did not attempt such a sale of SESO. ³ He testified that public auctions were last resorts for disposition, but he did not explain why the decision to auction the assets of SESO was reached within two days of the abandonment of the collateral, before the agency knew the value of the business.

Instead of negotiating a private sale, Swidelsky contacted Ernest St. Clair, an experienced auctioneer, to request that his company handle a public auction of SESO. St. Clair had never liquidated an electric sign manufacturing business before, but he accepted the SBA offer and inspected the SESO property within a week of the request. After visiting the premises only once, he told the SBA that he estimated the value of the assets at $15,000. Despite the fact that the outstanding balance on the loan exceeded $94,000, the SBA accepted the St. Clair estimate. When the value was set, neither the auctioneer nor the agency knew that two of the signs in the company's inventory were nearly completed. The defendant set their value at $56,000 and the value of the entire assets at $121,300. These figures were never conveyed to the SBA, in part because the agency never informed Terrey of St. Clair's estimate.

Shortly after St. Clair inspected the assets, the SBA set the date for the auction for January 15, 1974. Although Swidelsky testified that he could not remember why the agency had decided so quickly to auction the assets, he said that the date was established to avoid the Christmas holidays, to ensure adequate preparation by St. Clair, and to guarantee vacation of the building by January 19, 1974, when another month's rent of $500 became due. Terrey was not informed of the date until January 2.

In early December Terrey contacted Cummings and Company, now the parent corporation of American Time, a manufacturer of computerized signs, regarding the purchase of SESO. In response, two officers of American Time met with Swidelsky and Taylor on December 10 to inspect the property. According to a file memorandum written by Swidelsky:

They inspected the premises and appeared to be very interested. However, Mr. Short (the president of American Time) stated that before they could seriously consider purchasing the business, they would require an accurate list of inventory, a list of all contracts and status thereof, and a list of jobs and what it would require in terms of time and money to complete such jobs . . ..

Swidelsky sent Taylor an inventory list compiled earlier by an independent accountant. Terrey testified, however, that Taylor, who had not managed the company since September, did not assemble the other requested information. Consequently, Terrey took the information to American Time during the first week of January, when he learned of its continuing interest in purchasing SESO. According to the defendant, they discussed a sale price of $100,000 to $110,000 but reached no agreement. Terrey conveyed this continuing interest to Swidelsky on January 9 and requested a three-week delay to enable American Time to evaluate the information Terrey had supplied. An SBA file memorandum written by Swidelsky indicates that he refused to postpone the auction. Furthermore, he told Terrey that American Time would have to come up with a firm offer and $50,000 before the SBA would consider selling the company as a whole. There was no indication in the record that...