Worrel v. Farmers Bank of State of Del.

• Decision Date: 11 December 1980
• Citation: 430 A.2d 469
• Parties: , 31 UCC Rep.Serv. 132 Philip R. WORREL, Defendant Below, Appellant, v. FARMERS BANK OF the STATE OF DELAWARE, a Corporation of the State of Delaware, Plaintiff Below, Appellee.
• Court: United States State Supreme Court of Delaware

Page 469

430 A.2d 469

16 A.L.R.4th 1323, 31 UCC Rep.Serv. 132

Philip R. WORREL, Defendant Below, Appellant, v. FARMERS BANK OF the STATE OF DELAWARE, a Corporation of the

State of Delaware, Plaintiff Below, Appellee.

Supreme Court of Delaware.

Submitted Dec. 11, 1980. ^*

Decided May 5, 1981.

Louis B. Ferrara of Aerenson, Balick & Ferrara, Wilmington, for defendant below, appellant.

Edward T. Ciconte of D'Angelo & Ciconte, Wilmington, for plaintiff below, appellee.

Before DUFFY, QUILLEN and HORSEY, JJ.

HORSEY, Justice:

This appeal concerns the timeliness of a creditor's suit for a deficiency balance following debtor's breach of an installment sale security agreement and creditor's repossession and sale of the secured property. The question presented is whether the applicable statute runs: (1) from date of debtor's initial default as to an installment payment; (2) from date of creditor's exercise of its option to declare debtor's whole obligation to be immediately due; or (3) from date of creditor's repossession sale and determination that a deficiency exists.

The trial court, the Court of Common Pleas, New Castle County, following an evidentiary hearing, granted judgment for Philip R. Worrel, the debtor-defendant, on the claim of Farmers Bank of the State of Delaware (Bank), the creditor-plaintiff. In a bench ruling, the Court apparently accepted the four-year limitation of 6 Del.C. § 2-725 as the applicable statute and held that the Bank's suit was time-barred. ¹

On Bank's appeal to Superior Court, that Court affirmed the trial court's ruling as to the applicable statute of limitations, 6 Del.C. § 2-725, ² but reversed as to the timeliness of the suit. Superior Court ruled that § 2-725 did not begin to run until the date of Bank's sale of the repossessed automobile. Since the sale had occurred within four years of the filing of suit, the Court ruled the Bank's suit to be timely under § 2-725 Worrel then docketed this appeal.

The parties now agree that the applicable statute of limitations is 6 Del.C. § 2-725. ³ Their sole disagreement is over when the four-year limitation of § 2-725 begins running as to the Bank's deficiency claim. We hold that Bank's claim for recovery of a deficiency balance for Worrel's breach of the sales-debt instrument accrued and the four-year limitation of 6 Del.C. § 2-725 began to run from the date following debtor's default that Bank, by word or conduct, evidenced its intent to exercise its option to declare debtor's remaining obligations to be immediately due.

I

The pertinent facts are that on October 26, 1972, Philip R. Worrel, defendant-appellant, purchased an automobile from William H. Porter, Inc. (Porter) through financing arranged by Porter with Farmers Bank of the State of Delaware. Under the written agreement entered into by the parties titled, "Purchase Money Security Agreement" ⁴ (Agreement), Worrel agreed to pay Farmers Bank (assignee of Porter) the balance of the purchase price, including financing and other charges, over three years in 36 equal consecutive monthly installments of $156.08 with the first such monthly installment due December 10, 1972.

The record is clear that Worrel made the initial payment due December 10, 1972; but the record is unclear as to all the events that followed. The Bank contended and attempted to prove at trial that Worrel made a second partial payment of $56.08 in February 1973. However, Worrel denied making any later payment, and the trial court expressly found that the December 10 payment was the only payment made by Worrel.

Farmers Bank repossessed the automobile on March 28, 1973 and sold it on May 2, 1973 at public sale for a net sum of $2,650. After crediting this amount against Worrel's obligations under the Agreement, the Bank determined that there was a deficiency balance of $1,924.62. However, Farmers Bank did not file suit against Worrel to collect such balance until January 13, 1977. Worell answered the suit by denying liability and pleading that the suit was time barred.

II

Superior Court, responding to the initial question as to the applicable statute of limitations, concluded that Article 2, rather than Article 9, of the Commercial Code controlled the contractual rights of the parties. From this it followed that the four-year "sales" limitation of 6 Del.C. § 2-725 controlled the timeliness of the Bank's suit; and Superior Court so held. In reaching this result, the Court relied heavily upon Associates Discount Corp. v. Palmer, 47 N.J. 183, 219 A.2d 858 (N.J.Supr., 1966). Palmer presented the same question as the instant case, namely, the timeliness of a creditor's suit to collect a deficiency balance following repossession and sale of debtor's automobile purchased under a "Bailment Lease Security Agreement." The New Jersey Supreme Court held that the four-year "sales" limitation of Pennsylvania's Commercial Code (Pa.Stat.Ann. 12A § 2-725) controlled, rejecting the contention that the deficiency action was based on the security arrangement between the parties rather than the sales aspect of their agreement. ⁵

We agree with the Court's initial rulings that Article 2, the sales article of the Uniform Commercial Code (6 Del.C. § 2-101 through 2-725), controlled the contractual rights of the parties and that § 2-725 was the applicable statute of limitations. ⁶ And we agree with the Court's reasoning to reach that result which was largely premised on Palmer. (As previously stated, the Bank concedes on appeal the correctness of the Court's determination that the Bank's deficiency action is controlled by 6 Del.C. § 2-725.) However, we cannot agree with the Court's ultimate ruling that the four-year limitation period of § 2-725 did not begin to run on the Bank's deficiency claim against Worrel until the amount of the deficiency balance was established by the Bank's sale of the repossessed automobile. ⁷

First, the ruling is inconsistent with the Court's rationale (as elaborated upon in Palmer, see footnote, p. 471) for finding Article 2 rather than Article 9 to control the parties' contractual rights and the applicable limitations on the Bank's suit. By ruling that the Bank's deficiency claim did not accrue, for limitation purposes, until a deficiency was established, the Court focused, improperly we think, upon the security aspects of the Agreement. ⁸ For the Court had previously ruled, correctly we think, that the sales aspect of the transaction controlled the parties' security rights as well.

Indeed, our Commercial Code fairly clearly states that a seller's retention of a security interest under a sales transaction does not remove the transaction from the operation of Article 2 of the Uniform Commercial Code. Section 2-102 excludes from the operation of Article 2 only those transactions in goods which are "intended to operate only as a security transaction...." The Delaware Study Comment to § 2-102 states, ⁹

This section, like § 75 of the Uniform Sales Act (6 Del.C. § 775), excludes from coverage of the Sales Article transactions which are actually security transactions but which are disguised in the 'form' of the sale. However, since the section merely excludes transactions which are intended to operate only as security transactions, actual sales transactions in which the seller also retains a security interest are covered by this chapter ....

Second, the language of 6 Del.C. § 2-725 as to the accrual of a cause of action under Article 2 cannot be reconciled with the Court's ruling that the Bank's claim for a deficiency balance did not accrue until the Bank's repossession sale of the automobile. Indeed, the Court below did not attempt to relate or reconcile its holding with the language of § 2-725. The Statute expressly provides that an action thereunder "must be commenced within 4 years after the cause of action has accrued" and that "(a) cause of action accrues when the breach occurs...." This is in accord with general law as to the accrual of actions for breach of contract; that is, "... a right of action accrues and the Statute begins to run at the time the contract is broken, not at the time when actual damage results or is ascertained...." 51 C.J.S. Limitations of Actions, § 126. See Keller v President, Directors and Company, etc., Del.Super., 24 A.2d 539 (1942); Bradford Inc. v. Travelers Indemnity Co., Del.Super., 301 A.2d 519 (1972).

While Palmer, supra, did not precisely decide when the four-year limitation of § 2-725 began to run on a suit to collect a deficiency balance under a transaction substantially similar to the instant case, the Court clearly rejected the contention that such an action was not governed by the sales statute of limitations, § 2-725. As the court stated, a suit for a deficiency judgment is nothing more than "an action to enforce the obligation of the buyer to pay the full sale price to the seller." 219 A.2d at 861.

North Carolina Nat'l Bank v. Holshouser, N.C.App., 38 N.C.App. 165, 247 S.E.2d 645 (1978) reaches a result contrary to Palmer. There the Court held a creditor's deficiency action following repossession and sale of a secured automobile to be controlled by a ten-year statute of limitations governing sealed instruments rather than by the four-year "sales" limitation of § 2-725 of the North Carolina Uniform Commercial Code. However, the Court's holding was premised on legislative intent (based on Commentary to § 2-102 of the North Carolina Commercial Code) that the sales article should apply only to the sales aspect of the transaction and that Article 9 of the Code should apply to security aspects of the transaction, as reflected in the parties' purchase money security agreement. ¹⁰ While not disagreeing with the rationale of Palmer, the Court in Holshouser found the North Carolina legislative intent within North Carolina sales § 2-102 to be "precisely contrary to that of the Pennsylvania Legislature." 247 S.E.2d at 648. Thus, the Court concluded that while the time...