Vermont Nat. Bank v. Hamilton

• Citation: 149 Vt. 477,546 A.2d 1349
• Decision Date: 25 March 1988
• Docket Number: No. 86-178,86-178
• Court: Vermont Supreme Court
• Parties: , 7 UCC Rep.Serv.2d 312 VERMONT NATIONAL BANK v. Richard HAMILTON, Ann B. Hamilton, Robert C. Paquin, Phyllis Paquin, George R. Howard and Nancy M. Howard.

Page 1349

546 A.2d 1349

149 Vt. 477, 7 UCC Rep.Serv.2d 312

VERMONT NATIONAL BANK v. Richard HAMILTON, Ann B. Hamilton, Robert C. Paquin, Phyllis

Paquin, George R. Howard and Nancy M. Howard.

No. 86-178.

Supreme Court of Vermont.

March 25, 1988.

Jerome I. Meyers, White River Junction, for plaintiff-appellant.

Plante, Richards, Hanley & Gerety, White River Junction, for defendants-appellees Hamilton.

ALLEN, C.J., DOOLEY and MAHADY, JJ., BARNEY, C.J. (Ret.) and KEYSER, J. (Ret.), Specially Assigned.

DOOLEY, Justice.

This is an action for a deficiency judgment following the sale at public auction of certain collateral. The lower court denied the deficiency because it found that the plaintiff had failed to give proper notice of the sale to defendants. The plaintiff appeals from this ruling.

The plaintiff below, and appellant in this Court, is Vermont National Bank, the secured party. The debtor, Northeast Ecology Systems, Inc., (the company) went bankrupt and the action was tried against Richard and Ann Hamilton (defendants) who were guarantors of the obligation to plaintiff. Defendant, Richard Hamilton, was the vice-president of the company.

The company purchased steel racking in order to store large trays of earthworms. The plaintiff financed the purchase and took a security interest in the racking. The company was unable to pay the plaintiff. As a result, the plaintiff brought this action against the defendants and the company, ¹ and sought an order giving it immediate possession of the steel racking as well as an award of damages. The parties were able to settle the issue of possession of the racking, and the settlement was incorporated into an order of the court of May 7, 1981. The order provided that "constructive possession" of the racking would be turned over to plaintiff and that the racking "shall be sold for any commercially feasible, reasonable sum" with the proceeds applied to the debt due to the plaintiff. The sale was to occur within sixty days and if it was not so consummated, the plaintiff could "resort to any and all legal remedies available." The order also provided that defendants would have the property appraised and that they would store it on their leased premises or on any premises to which they moved if approved by the plaintiff.

Part of the intent of the order was to give defendants, including the company, an opportunity to find a purchaser for the racking. Although Richard Hamilton did contact some firms who might use the racking, neither he nor the bank sold the racking within the sixty day period provided in the order. The property was never appraised. Defendants moved the property to new leased premises where it had to be stored outside. Plaintiff was aware of the move and did not object. Plaintiff tried to find indoor storage without success. The racking rusted and declined significantly in value because of the outdoor storage.

Finally, plaintiff sold the racking at public auction on November 6, 1982. Plaintiff never notified defendants of the sale either orally or in writing. However, defendant Ann Hamilton read the auction announcement in the newspaper four or five days before the auction. She called the loan officer at plaintiff bank to confirm the sale. She attended the auction and did not bid.

The auction failed to produce sufficient proceeds to pay off the debt to plaintiff. Since the company was bankrupt, plaintiff sought damages against the defendants as guarantors. The amount sought was the remainder of the debt along with the expenses of selling the collateral and collection of the debt. Defendants raised a number of defenses related to the handling of the collateral and the sale. The trial court accepted one of these defenses--that the plaintiff failed to give proper notice of the sale to defendants as required by § 9-504(3) of the Uniform Commercial Code, 9A V.S.A. § 9-504(3). As a result, it denied plaintiff any deficiency and entered judgment for defendants.

Plaintiff claims the trial court erred in two respects: (a) the May 7, 1981 order of the court superseded the requirements of the Uniform Commercial Code so that a sale in conformance with that order was valid; and (b) the notice to defendants of the auction sale did comply with the requirements of § 9-504(3). ² Before addressing these arguments, it is helpful to set forth briefly the applicable UCC provisions and our precedents.

Section 9-504 sets forth the procedures for a secured party to dispose of collateral after a default by the debtor. Among the requirements imposed by the section is that "reasonable notification of the time and place of any public sale ... shall be sent by the secured party to the debtor...." 9A V.S.A. § 9-504(3). The term debtor, for purposes of Article 9 of the UCC, is defined to include "the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral...." 9A V.S.A. § 9-105(1)(d).

Two terms contained in § 9-504(3) are defined generally in the UCC. Section 1-201(26) defines "notifies" to mean "taking such steps as may be reasonably required to inform the other in ordinary course whether or not such other actually comes to know of it." Section 1-201(38) defines "send" as follows:

"Send" in connection with any writing or notice means to deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and in the case of an instrument to an address specified thereon or otherwise agreed, or if there be none to any address reasonable under the circumstances. The receipt of any writing or notice within the time at which it would have arrived if properly sent has the effect of a proper sending.

We have had opportunity in the past to analyze the collateral sale provisions of Article 9 of the Uniform Commercial Code. In Chittenden Trust Co. v. Maryanski, 138 Vt. 240, 244-45, 415 A.2d 206, 209 (1980) (citations omitted), we adopted the majority rule that "the secured party has the burden of pleading and proving that any given disposition of collateral was commercially reasonable, and preceded by reasonable notice." The Court in Maryanski found that the sale involved in the case was not made in a commercially reasonable manner. Id. at 246, 415 A.2d at 210. It adopted the majority rule that "the secured party's duty to prove compliance with § 9-504(3) is a condition precedent to recovery of a deficiency judgment." Id. See also United States v. Lang, 610 F.Supp. 292, 293 (D.Vt.1985).

A second precedent on § 9-504(3) is Adams v. B & D Builders & Developers, Inc., 144 Vt. 353, 477 A.2d 628 (1984), which, like this case, involved an action for a deficiency judgment against a guarantor of a debt and a defense of lack of notice. The Court held that guarantors of a corporate debtor's obligation are "debtors" under § 9-504(3) and therefore are entitled to reasonable notice of a collateral sale. ³ It found that § 9-504(3) did not provide the specific manner in which notice of sale of the collateral must be given. Without such guidance, it held that the Court "must focus on whether the secured party has taken 'reasonable steps' necessary to inform the debtor and other interested parties of the disposition" and that a showing of good faith by the secured party was relevant to reasonableness. Adams, 144 Vt. at 356, 477 A.2d at 631.

In Adams, the secured party had sent a written notice of the sale to a husband where the wife was also a guarantor. The Court held that since the husband and wife lived together and were co-owners of the corporation for which the debt was guaranteed, it was reasonable to assume that notice to one would be passed to the other. Id. at 357-58, 477 A.2d at 631-32. Thus, the notice was found to be reasonable, in compliance with § 9-504(3), even though the wife never actually received it.

Plaintiff argues that it complied with 9-504(3) as the requirements have been interpreted in Adams. Before reaching this issue, we must dispose of plaintiff's claim that the 1981 agreement eliminated any requirement to give notice to the debtor under § 9-504(3) or acted as notice.

While plaintiff has framed its claim in a number of ways, the essence of its argument is that the defendants have waived the requirement on plaintiff to give them notice of the sale. As the next paragraph details, we do not think the facts support a waiver in this case. We note here, however, that even if plaintiff could show a waiver, it would face significant legal hurdles in enforcing it. Section 9-501(3) generally prohibits waivers of the notice requirements of § 9-504(3) by a debtor. A majority of courts have found this prohibition applicable to guarantors. See, e.g., Prescott v. Thompson Tractor Co., 495 So.2d 513 (Ala.1986); Shawmut Worcester County Bank v. Miller, 398 Mass. 373, 379-80, 496 N.E.2d 625, 629 (1986). Judge Billings has so found in the United States District Court, predicting that we will do likewise. United States v. Lang, 621 F.Supp. 1182, 1184 (D.Vt.1985). Some courts have excepted post-default waivers from the reach of § 9-501(3). See, e.g., Simmons Machinery Co. v. M & M Brokerage, Inc., 409 So.2d 743, 748 (Ala.1981). These holdings are, however, difficult to reconcile with the fact that the official version of the Uniform Commercial Code was amended in 1972 to specifically authorize post-default waiver of notice. See Uniform Commercial Code § 9-504(3) in 3A Uniform Laws Annotated at 258-59 (1982). ⁴ That amendment was unnecessary if § 9-501(3) did not apply to post-default waivers. The amendment was not adopted in Vermont.

We cannot interpret the stipulated order of May 7, 1981 as a specific waiver of further notice of the disposition of the collateral. In fact, it was effective by its terms only for sixty days--the time within which defendant was to have arranged a sale. Thereafter, plaintiff was left to "any...