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Westgate State Bank v. Clark
231 Kan. 81 (Kan. 1982)
Prager
This is an action brought by a creditor bank to recover a deficiency
judgment against two debtors after the repossession and private sale of two recreational
vehicles (RV) which had served as collateral for the loan. The plaintiff-creditor is
Westgate State Bank which we will refer to in the opinion as plaintiff or the bank. The
debtor-defendants are Charles K. Clark, Jr. and Barry B. Clark. We will refer to them as
the debtors or the defendants.
The facts in the case are not really in dispute and essentially are as
follows: The defendants Clarks were engaged in the business of renting recreational
vehicles to the general public under the name of R.V. Enterprises, Lenexa, Kansas. The
defendants entered into a loan and security agreement with the plaintiff bank on June 21,
1977. The amount of the promissory note was $39,459.42, and the defendants furnished two
1976 Cruise Air Motor Homes as security for the loan. Thereafter, problems arose when the
defendants failed to make timely payments on their note. On October 17, 1977, the bank
sent the defendants a notice of right to cure on the basis of the defaults. On October 9,
1979, the bank repossessed the two Cruise Air Motor Homes. The following day, October 10,
1979, the bank sent a notice to each defendant by registered mail. Each notice in
substance advised the defendants that the bank had repossessed the vehicles on October 9,
1979, and reminded the defendants that the right to cure notice had been sent to them on
October 17, 1977, some two years prior to the repossession. The notices advised the
defendants that the loan balance due at that time was $22,317.54 and that in ten days from
that date the vehicles would be sold to the highest bidder and a lawsuit would be
commenced without further notice against them to recover the difference between the
balance due and the highest bid received. The notice specifically advised each defendant
that he had ten days to contact the bank and that they should talk to a certain named
employee of the bank.
Thereafter, the bank sold the two RVs by private sale to the highest
bidder on each vehicle. The sale price on each vehicle was $5,000. The bank then filed
this action to recover the cost and expenses of repossession and sale and for the
deficiency which resulted from the sale of the RVs at a price less than the outstanding
debt. The defendants filed an answer alleging that the sale of the RVs by the bank was not
done in a commercially reasonable manner and the highest possible price was not secured.
The defendants further alleged that the RVs were not properly prepared for sale and that
notice of sale was not given to the defendants. The case then proceeded to trial.
At the trial, each of the parties called one witness. The bank
presented the testimony of its consumer loan officer who identified the promissory note
and security agreement. The loan officer did not supervise the loan in the beginning and
was simply the custodian of the records. He testified as to collection problems arising in
connection with the loan and that a right to cure notice was sent to the defendants on
October 17, 1977. The bank tried to collect the account for two years and finally in
October of 1979 repossessed the two RVs. The loan officer identified the repossession
notice which was sent to each of the defendants by registered mail advising them that the
RVs would be sold to the highest bidder after ten days. He testified that neither of the
defendants responded to the notice. He testified that after repossession by the bank, the
two RVs were taken to Keith's Camper Sales on Leavenworth Road in Kansas City, Kansas, to
prepare them for sale. Certain expenses and charges were incurred in winterizing the
vehicles and preparing them for sale. These charges were added to the balance due on the
note.
Prior to the sale, employees of the bank by telephone called various
people who they thought might be in the market for the two RVs. The homes were in average
condition, according to the loan officer, and prospective buyers had the opportunity to
inspect them at Keith's Camper Sales and then make bids at the bank. A total of six bids
were received on the two RVs. Each of the homes was purchased for a bid price of $5,000.
On cross-examination, the loan officer testified that he did not know the exact number of
people who were contacted about the sale; there were five or six he knew of. After the
sale in this case, he never advised the defendants as to the sales price or the amount of
the deficiency prior to the suit being filed. He did not know how much the vehicles were
worth retail. He did not consider a wholesale block sale in this case because that would
cost a fee. There was not public advertising about the sale because of the cost involved.
On re-cross-examination, he testified that the notice the bank sends to debtors does not
tell the debtor how to bid or the place or hour of the sale. The bank then rested its
case.
The only witness presented in support of the defense was the defendant,
Charles K. Clark, Jr. He testified that the vehicles were in very good condition and fully
equipped and air conditioned and that eight people could sleep in each of the vehicles.
Each of the vehicles had been driven 90,000 miles but the engines and drive trains were in
excellent condition. Both were 1976 models. The defendants were in the business of renting
mobile homes and had previously advertised the homes for sale. They started out by setting
a price at $12,000 each but were unable to sell them. At $9,000 each, they were a good
buy. At $5,000 each, they were given away. Defendant testified that they had numerous
offers for each vehicle in the area of $7500 which they did not accept at the time. Clark
further testified that he assumed that the bank would sell the homes at wholesale. If he
would have known the homes were to be sold for only $5,000 each, he would have called his
contacts in the area. He stated that he had not heard of any of the persons who actually
bid. Defendant, on cross-examination, testified that when he got the letter notice from
the bank, he filed it. He did not write or call the bank. He assumed that the RVs would be
wholesaled, possibly at a place in Belton, Missouri, which has a special sale once a month
for RVs. On redirect, he testified that, when defendants were engaged in the RV business
they rented out vehicles up to a maximum of nine at a time. They were in the RV business
about three years all together.
At the close of the hearing the trial court made brief findings of fact
and entered judgment in favor of the defendants. In its findings, the court noted the
promissory note and security agreement dated June 21, 1977, that defaults in payments had
been made by the defendants, and that the right to cure was sent by the plaintiff in
October of 1977. The court also found that notice of sale and repossession was sent by the
bank to each defendant in October of 1979; that the bank by word-of-mouth notified five or
six persons that the two RVs were for sale; and found that the bank incurred some costs in
maintenance and repair after repossession but prior to sale. The court then concluded that
the word-of-mouth solicitation of bids was not sufficient to meet the requirements of
K.S.A. 16a-5-103 (Ensley) under the Kansas Uniform Consumer Credit Code (UCCC) as a matter
of law. The court further stated that, since the bank did not dispose of the goods in good
faith and in a commercially reasonable manner, as a matter of law the bank was not
entitled to judgment for a deficiency. The trial court then entered judgment in favor of
the defendants. The court erroneously relied on the provisions of K.S.A. 16a-5-103, a
provision of the UCCC which will be discussed later.
On December 10, 1980, the bank's motion for a new trial was heard by
the court. At that hearing, the trial court was advised for the first time that the
provisions of the UCCC were not applicable to the sale, since the defendants, as
purchasers engaged in a commercial enterprise, were not consumers as defined in the UCCC. The court then concluded that comparable provisions of the Uniform
Commercial Code (UCC) were applicable which precluded, as a matter of law, a deficiency
judgment by a secured creditor who repossesses the collateral in any case where the sale
of the collateral was not conducted in a commercially reasonable manner. The trial
court then modified its findings to show that the transaction was covered by the UCC, not
the UCCC, but adhered to its prior findings that the sale of the collateral was not
conducted in a commercially reasonable manner. The plaintiff bank has appealed from the
judgment of the district court entered in favor of the defendants.
At the outset, it should be stated that the district court was correct
in holding that K.S.A. 16a-5-103 (Ensley) of the Uniform Consumer Credit Code was not
applicable in determining the rights of the parties in this case. That section, which
places a restriction on the right of a secured creditor to secure a deficiency judgment
against the debtor, provides in part as follows:
"(1) This section applies to a deficiency on a consumer credit sale of goods or services and on a consumer loan in which the lender is subject to defenses arising from sales (section 16a-3-405); a consumer is not liable for a deficiency unless the creditor has disposed of the goods in good faith and in a commercially reasonable manner." (Emphasis supplied.)
It is important to note that under K.S.A. 16a-5-103 a consumer is
not liable for a deficiency judgment as a matter of law unless the repossessed creditor
has disposed of the goods in good faith and in a commercially reasonable manner. That
section is not applicable in this case because the loan was not a consumer loan as defined
by K.S.A. 16a-1-301(13). To have a consumer loan, the debt must be incurred by a person,
primarily for personal, family, or household purposes. In this case, it was undisputed
that the debt was incurred for the purpose of renting out the vehicles as a part of a
business enterprise. Hence, the UCCC was clearly not applicable.
This case is, therefore, controlled by the provisions of the UCC and
requires us to examine certain of its provisions. . . .
. . .
There are two basic issues presented by the bank on this appeal:
(1) Whether the district court erred in barring the plaintiff bank from
recovery of a deficiency judgment, as a matter of law, after the court found the
bank had disposed of the two RVs in other than a commercially reasonable manner?
(2) Whether the district court erred in finding the private sale of the
two RVs with only a telephone solicitation for bids and without advertising to the general
public was not a commercially reasonable sale?
[Discussion of the first issue is omitted in favor of Emmons v. Burkett, assigned elsewhere in the
materials.]
. . .
The second issue presented is whether the trial court erred in finding,
on the evidence presented, that the sale of the RVs was not a commercially reasonable
sale? We must first emphasize the generally accepted rule that, where a secured creditor
brings an action for a deficiency judgment after sale of the collateral, the burden of
proof as to the commercial reasonableness of the sale is on the plaintiff creditor. . . .
Unfortunately, the UCC does not specifically define the term
"commercially reasonable." Because the statutory definition of a commercially
reasonable sale is vague, the cases generally hold that a factual determination as to
whether a sale was commercially reasonable must depend on the particular facts of each
case. . . . We agree that the determination of the issue whether a sale was held in a
commercially reasonable manner is a question of fact to be determined in each particular
case by the trier of fact, and that, in an action for a deficiency judgment, the secured
creditor has the burden of proof to show that the disposition or sale of the collateral
was made in a commercially reasonable manner.
In deciding whether or not the sale of the collateral was accomplished
in a commercially reasonable manner, the trial court should consider all of the relevant
factors together as a part of a single transaction. As pointed out by the court in In
Re Zsa Zsa Limited, 352 F. Supp. 665 (S.D.N.Y. 1972):
"It is the aggregate of circumstances in each case -- rather than specific details of the sale taken in isolation -- that should be emphasized in a review of the sale. The facets of manner, method, time, place and terms cited by the Code are to be viewed as necessary and interrelated parts of the whole transaction." p. 670.
In the reported cases on the subject, there are many factors
suggested to be considered by the courts in determining whether the collateral was sold in
a commercially reasonable manner. It should be noted, for example, that in section 2 of
K.S.A. 84-9-507 [U.C.C. 9-627 in Revised Article 9]
some suggestions are made which should be considered in the determination of commercial
reasonableness: "The fact that a better price could have been obtained by a sale at a
different time or in a different method from that selected by the secured party is not of
itself sufficient to establish that the sale was not made in a commercially reasonable
manner. If the secured party either sells the collateral in the usual manner in any
recognized market therefor or if he sells at the price current in such market at the time
of his sale or if he has otherwise sold in conformity with reasonable commercial practices
among dealers in the type of property sold he has sold in a commercially reasonable
manner." That section also suggests that a disposition which has been approved in any
judicial proceeding or by any bona fide creditors' committee or representative of
creditors shall conclusively be deemed to be commercially reasonable.
There is an excellent discussion on the factors to be considered in
determining the commercial reasonableness of a sale in a treatise by Barkley Clark, The
Law of Secured Transactions Under the Uniform Commercial Code (1980). In section 4.8,
Professor Clark points out some of the elements of commercial reasonableness. He notes
that some factors, such as notice, are specifically provided in K.S.A. 84-9-504(3). Other
factors appear as recurrent themes in the decided cases. He suggests the following list of
factors to be used as a checklist by a creditor foreclosing under Article 9 of the UCC:
(1) The duty to clean up, fix up, and paint up the collateral.
It is suggested that, if the cost of preparing the collateral for sale is small in
comparison to the additional price it is likely to generate, the creditor should spend the
extra money. Cases are cited holding that washing and cleaning up consumer goods or
equipment may be the only commercially reasonable thing to do in order to generate bidder
interest at the sale.
(2) Public or private disposition. Article 9 gives to the
secured party an option to sell the property either at public or private sale. Comment 1
to § 9-504 [cf. Comment 7 to U.C.C. 9-610(b)
in Revised Article 9] suggests that a private sale should be used whenever such a
disposition is likely to result in a higher return. Which type of sale is the more
commercially reasonable action to take in a particular case must be determined from the
nature of the collateral and the other factual circumstances.
(3) Wholesale or retail disposition. In many cases, a
retail sale of the goods will command a much higher price; however, a retail sale may
involve more expenses and usually will take much longer to conclude. This in turn may not
be reasonably feasible in view of higher storage expense and higher interest accumulation
on the obligation. In some cases, a sale to a dealer on the wholesale market may be the
more reasonable approach. Sales to a dealer seem to be suggested under § 9-504 and the
official comments under that section and also in the official comment to § 9-507(2) which
suggests that sale of repossessed collateral through a dealer may be the better method in
the long run since the secured party does not usually maintain his own facilities for
making such sales. The answer to the question whether a sale on the retail or wholesale
market is commercially reasonable must generally depend upon the circumstances of each
particular case and, therefore, is a question of fact for the factfinder to determine.
(4) Disposition by unit or in parcels. K.S.A.
84-9-504(3) [U.C.C. 9-610(b) in Revised Article 9]
provides that disposition "may be as a unit or in parcels." Several cases have
imposed a duty on the secured party to dispose of certain items of collateral on a
piecemeal basis, if a higher price would be likely under such a disposition. Professor
Clark suggests that in all cases the secured party should weigh the possible higher
realization from piecemeal disposition against the higher cost of multiple sales. Much
depends on the nature of the collateral.
(5) The duty to publicize the sale. One of the most
important elements of commercial reasonableness is the duty to surround the sale with
publicity sufficient to attract a "lively concourse of bidders." In publicizing
a foreclosure sale, the exact time, place, and terms of a public sale should be published.
A number of cases hold that if the collateral is equipment, individual consumer goods, or
farm goods, there is a duty to provide prior inspection of the collateral for interested
purchasers. Failure to allow prior inspection may influence the court to conclude in a
particular case that the sale was not commercially reasonable.
(6) Length of time collateral held prior to sale.
Professor Clark points out cases holding that a sale was not commercially reasonable
because the secured parties acted too hastily by failing to take the time to advertise so
that additional bidders could have been encouraged. On the other hand, holding the
collateral for an extended period of time may be considered as undue delay, causing the
collateral to be sold at other than a fair price.
(7) Duty to give notice of the sale to the debtor and competing
secured parties. K.S.A. 84-9-504(3) imposes upon the secured party a duty to
"send" to the debtor "reasonable notification of the time and place of the
public sale or reasonable notification of the time after which any private sale or other
intended disposition is to be made." Professor Clark suggests that the purpose of
notification is both to protect the debtor's right of redemption and to enable the debtor
to enliven the concourse of bidders by any method. Failure to give proper notice can lead
to an action for damages by the debtor against the secured creditor under K.S.A.
84-9-507(1). Because of the conflict in the cases as to whether written notice is
required, Professor Clark suggests that the foreclosing creditor should reduce the
notification of the sale to writing. As to how far in advance of the sale the notification
should be sent to the debtor, the standard around the country seems to be ten days prior
to either a public or private sale. Comment (5) of K.S.A. 84-9-504 points out that the
term "reasonable notification" is not defined in the act, but it should be sent
in such time that persons entitled to receive it will have sufficient time to take
appropriate steps to protect their interests by taking part in the sale or other
disposition if they so desire. If a public sale is involved, the debtor must be told
exactly where and when the sale will take place. If a private sale will be held, the
notification must be only as to the time after which the sale will be made. However, if
the creditor knows specifically the name of the prospective purchaser and the amount of
his bid it would be very helpful to the debtor to have such information so that he could
better protect himself by exploring other avenues to obtain a better price. [Compare U.C.C. 9-611, 9-612,
and 9-613 in Revised Article 9.]
(8) The actual price received at the sale. The cases
indicate that the price actually received by the secured party is definitely one of the
most important factors to be considered in deciding whether a sale was commercially
reasonable. It is expressly provided in K.S.A. 84-9-507(2) [U.C.C.
9-627 in Revised Article 9], however, that the fact that a better price could have
been obtained by a sale at a different time or in a different method from that selected by
the secured party is not of itself sufficient to establish that the sale was not
made in a commercially reasonable manner. A relevant factor may be the price received by
the buyer of the collateral at a subsequent sale. A showing that the collateral was sold
only a short time later at a substantial or disproportionately higher price may strongly
imply that the secured party failed to receive a fair price for the collateral. . . .
It has been suggested that the secured creditor obtain an independent appraisal of
the collateral before the sale, so that only bids near the appraised value will
be considered.
(9) Other factors to be considered. Other factors
suggested to be considered in deciding whether a sale was commercially reasonable include
the number of bids received and the method employed in soliciting bids, particularly in
the case of a private sale. In addition, the time and pace of the sale must be such that
they are reasonably calculated to bring out a reasonable number of bidders, particularly
in the case of a public sale. The above list of suggested factors is not intended to be
exclusive and should not prevent a court from considering other relevant factors in a
particular case.
[Editorial note: The court accurately recites common law
criteria for assessing the commercial reasonableness of a collateral disposition.
Nonetheless, as an empirical matter, there may be only a few factors that determine the
commerical reasonableness of most collateral dispositions. Law professor Jack
Williams performed a statistical analysis of 184 collateral disposition opinions in the
Lexis and Westlaw databases. His analysis predicts that if the secured party gave
adequate notice of the disposition and did not engage in self-dealing, the disposition
will be found commercially reasonable in the overwhelming number of cases in which the bid
price equaled or exceeded 63% of the fiar value of the collateral and will be found
commercially unreasonable in the overwhelming number of cases in which the bid price was
less than 63% of the fair value of the collateral. He concludes:
"Controlling for lack of self-dealing and notice, the statistical results strip the
remaining factors from the inquiry. . . . Thus, . . . bid price is
king." Jack Williams, Debunking the Myth Engulfing Article 9 Collateral
Dispositions, 9 Amer. Bkry. Inst. L. Rev. 703, 731 (2001).]
As noted heretofore, it is the philosophy of the UCC that the debtor
and the secured creditor, in their dealings, should act toward each other in good faith
and in a reasonable manner. In every case, that should be the ultimate test to be
applied by a trial court in determining the issue of commercial reasonableness. Since the
issue of commercial reasonableness is usually one of fact, the decision of the trial court
will be sustained on appeal when there is substantial, competent evidence to support its
findings. This case was tried by the court, sitting without a jury, and the trial court
found that the bank did not dispose of the RVs in a commercially reasonable manner,
because only five or six bids were solicited by telephone and there was no advertising
directed toward the general public. We have considered the testimony of the two witnesses
who testified at the trial and have concluded that there is substantial, competent
evidence to support the finding of the trial court that the plaintiff bank did not sell
the goods in a commercially reasonable manner.
As noted above, this action being one for the recovery of a deficiency
judgment by a secured creditor after repossession and sale of the collateral, the burden
of proof was on the bank to show that the two RVs were sold in a commercially reasonable
manner. The evidence presented by the plaintiff, which has been summarized at the
beginning of this opinion, was very skimpy. The plaintiff did not offer testimony as to
how the persons making bids were selected or whether they were dealers or private
individuals or whether a sale by wholesale or retail would have brought a better price.
The bank's loan officer testified that he did not know how much the vehicles were worth
retail. It was undisputed that the vehicles were in a very good condition. The defendant
testified that his business had numerous offers in the area of $7,500 for each of the
recreational vehicles. Under the evidence presented, we cannot say as a matter of law that
the plaintiff bank sustained its burden of proof or that the trial court erred in holding
that the two vehicles were not sold in a commercially reasonable manner.
The case must be reversed, however, because the district court
erroneously held that, where a secured creditor sells the collateral in other than a
commercially reasonable manner, the creditor is absolutely barred as a matter of law from
securing a deficiency judgment. Under the legal principles which we have adopted, a
secured creditor is not barred as a matter of law where the sale of collateral is other
than in a commercially reasonable manner, but there is a rebuttable presumption that the
value of the collateral is equal to the unpaid balance of the debt, and the secured
creditor has the burden of presenting evidence to show to the contrary. In this case, the
trial court did not determine the actual value of the two RVs at the time they were sold.
Thus, it did not determine whether the plaintiff rebutted the presumption. The case is,
therefore, reversed and remanded to the district court with instructions to grant the
parties a new trial on the issues as to whether the plaintiff rebutted the presumption
that the value of the collateral is equal to the unpaid balance of the debt and whether
the defendants are entitled to any damages as a setoff due to the failure of plaintiff
bank to dispose of the two RVs in a commercially reasonable manner.
The judgment of the district court is reversed and remanded for a new
trial in accordance with the directions set forth in this opinion.