Atrium Funding Corp. v McRoberts

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[*1] Atrium Funding Corp. v McRoberts 2006 NY Slip Op 50107(U) [10 Misc 3d 1077(A)] Decided on January 27, 2006 Supreme Court, Suffolk County Sgroi, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on January 27, 2006
Supreme Court, Suffolk County

Atrium Funding Corporation, Plaintiff,

against

Deborah McRoberts d/b/a LUMBERTON SPECIALTIES, DEBORAH McROBERTS and ESTEL McROBERTS, Defendants.



14328-2005



MARKOWITZ & RABBACH LLP

Attorney for Plaintiff

290 Broadhollow Road, Suite 301

Melville, New York 11747

ESTEL McROBERTS

Defendant Pro Se

P.O. Box 8332

Lumberton, Texas 77657

Sandra L. Sgroi, J.

ORDERED that the motion by the Plaintiff for summary judgment as against the Defendant Estel McRoberts on the fourth and fifth causes of action is granted without opposition in the amount of $51,539.57 together with statutory interest from April 13, 2005, costs and disbursements ; and it is further

ORDERED that the Court orders that an inquest as to attorneys fees be held on March 9, 2006 at 10:00a.m., and it is further

[*2]ORDERED that the motion for a default judgment against the Defendant Deborah McRoberts is denied with leave to renew and upon renewal the Plaintiff is directed to submit an affidavit of military service together with copies of all papers submitted on this motion.

In February of 1998, the Defendant Deborah McRoberts d/b/a Lumberton Specialties entered into a Finance Lease and Security Agreement for certain equipment with HAPL Leasing Co., Inc.(Exhibit A) and the Defendants Deborah McRoberts and Estel McRoberts delivered to HAPL Leasing Co. an Equipment Lease Guaranty whereby they both personally guaranteed the performance and obligations under the Lease and Security Agreement (Exhibit B). On or about June 12, 2003, Lumberton Specialties was given notice that the Lease was assigned to the Plaintiff herein Atrium Funding Corporation (Exhibit C).

When the Defendant defaulted in the payments due under the Lease, demand was made for the fully accelerated balance and, on or about April 1, 2005, the Plaintiff repossessed the equipment pursuant to the terms of the Lease. On this motion, the Plaintiff alleges that the Equipment was sold by private sale in a commercially reasonable manner on or about April 13, 2005. After the property was sold, this action was instituted to recover the outstanding deficiency between the accelerated balance due on the Lease and the proceeds from the resale of the Equipment. According to the Plaintiff, it is now owed $51,539.57. The Plaintiff arrived at this figure by adding the accelerated balance due on the Lease of $36,854.36 together with a purchase option of $5,912.50 plus renewal rents in the amount of $26,160.00 and late fees of $4,411.01, and subtracting from that sum payments of $10,798.30 and sale proceeds of $11,000.00 (Exhibit F; Affidavit of Thaddeus Pawelec, President of Atrium Funding Corporation attached to motion).

After the summons and complaint were served on both of the Defendants by personal delivery, the Defendant Estel McRoberts served an answer to the summons and complaint. This answer, prepared by Estel McRoberts as a pro se Defendant, does not allude to the guaranty signed by this Defendant and instead states that "Estel McRoberts was not an employee of Lumberton Specialties and had no part in it's (sic) operations or financial disbursements. In April 2004, Deborah L. McRoberts was given full control of Lumberton Specialties, the property of Lumberton Specialties, inventory, equipment, income and revenue." While this Defendant alleges in his answer that Deborah McRoberts has forged his name on some documents in the past, the answer does not allege that Estel McRoberts' name was forged on the guaranty on which the Plaintiff is relying.

The Plaintiff has moved for summary judgment as against Estel McRoberts on the fourth and fifth causes of action. The Plaintiff has met its burden of proof and has submitted sufficient evidence to establish a prima facie right to judgment by providing the Court with Defendant's guaranty of the obligation and proof of the failure to make payments in accordance with the terms of the Lease and the Guaranty (see, Korea Exch. Bank v. A.A. Trading Co., 8 AD3d 344, 777 NYS2d 736; Merchs. Bank v. Itzkoff, 1 AD3d 178, 767 NYS2d 74; Sacco v. Sutera, 266 AD2d 446, 698 NYS2d 532). The Court notes at this juncture that the Guaranty was signed by Estel McRoberts on February 3, 1998 in the presence of a notary public. [*3]

While the Defendant Estel McRoberts may have had no contact with the business since April of 2004, this fact does not void the terms of his Guaranty.

A copy of the Guaranty has been attached to the motion papers as Exhibit B. The guaranty specifically states that the Lessor was authorized without notice or demand and without affecting Guarantor's liability, "***to renew, extend, accelerate or otherwise exchange payment terms***" without notice or demand and without affecting liability of the Guarantor (Exhibit B).

The continuing guaranty could have been terminated by the Guarantor Estel McRoberts by notice to the Plaintiff or the Plaintiff's assignor that he was revoking his liability pursuant to the Guaranty for obligations incurred by Lumberton Specialties subsequent to receipt of the termination notice(see, Emery v. Baltz, 94 NY 408, 414; Picker v. Fitzelle, 60 App.Div. 451, 452-453, 69 N.Y.S. 902). However, the Guarantor did not act to terminate the guaranty and the fact that Deborah McRoberts took control of the business did not serve to release Estel McRoberts from his contractual obligations (see, 27th Street Associates, LLC v. Lehrer, 4 AD3d 165, 772 NYS2d 28). In fact, any agreement affecting the business of the debtor Lumberton Specialties made between Estel McRoberts and Deborah McRoberts concerning the distribution of liability, the assets or the control of the business, to which the creditor was not a party, would not affect the several liability of all the Guarantors for the entire debt as specified in the written Guaranty(see, Key Bank, N.A. v. Ryan, 132 AD2d 220, 522 NYS2d 369).

Although it is alleged in the Defendant's answer that Deborah McRoberts took total control of the business, and, therefore, presumably Estel McRoberts was no longer directly involved in Lumberton Specialties' business operations, this change in control was ineffectual to terminate Estel McRoberts' liability under the guaranty in the absence of express notification of such intent to terminate the Guaranty( see, Chemical Bank v. Sepler, 60 NY2d 289, 294, 469 NYS2d 609, 457 NE2d 714). Even if Estel McRoberts had notified the Plaintiff that Deborah McRoberts had sole control of the business, this would not serve to release Estel McRoberts from the Guaranty unless Estel McRoberts unequivocally gave notice that he was terminating the guaranty ( see, Manufacturers & Traders Trust Co. v. Thielman, 92 AD2d 742, 743, 461 NYS2d 86). There is no proof in this record that such notice was given. Therefore, Estel McRoberts remains liable on the underlying obligation.

Under both the common law and the New York Uniform Commercial Code, a secured party has a duty to exercise reasonable care in the custody and preservation of collateral in its possession (see, Federal Deposit Ins. Corp. v Marino Corp., 74 AD2d 620, 425 NYS2d 34; Grace v Sterling, Grace & Co., 30 AD2d 61, 289 NYS2d 632; Uniform Commercial Code § 9-207). This obligation imposed by the Code upon the Plaintiff to exercise reasonable care of the collateral remains the same whether the secured party came into possession of the property before or after the debtor's default (Uniform Commercial Code § 9-207, comment; Matter of Bud-Lee Ski Centers v State of New York, 116 AD2d 715, 716, 497 NYS2d 768).

Under Uniform Commercial Code § 9-610 (a), "(a) secured party after default may sell, lease or otherwise dispose of any or all of the collateral in its present condition or following any [*4]commercially reasonable preparation or processing". Subdivision (b) of Uniform Commercial Code § 9-610 states further that "(e)very aspect of a disposition of collateral, including the method, manner, time, place and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms."

The secured party, here the Plaintiff who is seeking a deficiency judgment from the debtor and guarantors after the sale of the collateral, bears the burden of showing that the sale was made in a 'commercially reasonable' manner if that issue is raised by any person in the action to collect a deficiency judgment (see, Uniform Commercial Code, §§ 9-207, 9-610, 9-612, 9-613, 9-615, 9-626 ; Ford Motor Credit Co., Inc. v. Racwell Const., Inc., - NYS2d , 2005 WL 3434579, 2005 NY Slip Op. 09490 (N.Y.A.D. 2 Dept. Dec 12, 2005); Central Budget Corp. v Garrett, 48 AD2d 825, 368 NYS2d 268; Mack Fin. Corp. v Knoud, 98 AD2d 713, 714, 469 NYS2d 116). If the issue of commercial reasonableness is raised, the Court in an appropriate case may grant judgment on the issue of liability and set the matter down for an inquest as to the issue of damages (see, Ford Motor Credit Co., Inc. v. Racwell Constr., Inc., 2005 NY App. Div. LEXIS 14207, 2005 NY Slip Op 9490).

However, UCC § 9-626 (a)(1) specifically states that "(a) secured party need not prove compliance with the provisions of this part relating to collection, enforcement, disposition, or acceptance unless the debtor or a secondary obligor places the secured party's compliance in issue"(emphasis provided by the Court). Neither the debtor nor the secondary obligor, here Estel McRoberts, have raised an issue concerning the commercial reasonableness of the sale of the collateral and therefore that issue is not before this Court.

The Plaintiff also seeks attorneys fees as part of his judgment. Paragraph 25 of the Lease states that "(i)n the event of any legal action with respect to this Lease, the prevailing party in any such action shall be entitled to reasonable attorney fees, including attorney fees incurred at the trial level***together with all costs and expenses incurred in pursuit thereof." The Guaranty states that "(i)n the event of default by Lessee***Guarantor unconditionally promises to pay to Lessor***costs of collection, including reasonable attorney fees with or without trial***." The attorney for the Plaintiff alleges that the total legal fee incurred herein for this matter is $6,000.00. The Plaintiff's attorney has not attached a retainer agreement but has alleged that 30 hours of legal services have been provided by an attorney and "the legal staff" at an hourly billing rate of $200.00 per hour. The Court cannot ascertain from the affirmation of the attorney if work was performed by a paralegal or by an attorney and the Court is not inclined, without a further showing, to compensate the Plaintiff for work performed by a paralegal at the requested rate of $200 per hour. The issue of attorneys fees is therefore referred to an inquest.

The Plaintiff has moved for a default judgment as against Deborah McRoberts. Deborah McRoberts has not served an answer to the Complaint and she has not opposed this motion to hold her in default. According to the affidavit of service, the Defendant, Deborah McRoberts, was served by personal delivery on July 22, 2005. Thereafter, the summons and complaint was [*5]mailed to the Defendant on August 18, 2005 in conformity with the provisions of CPLR § 3215. There is however no military affidavit attached to the affidavit of service that has been submitted by the Plaintiff in support of its motion for summary judgment.

The Federal Soldiers' and Sailors' Civil Relief Act, as applied to New York courts, requires that, upon Defendant's default in any action or proceeding, plaintiff must, prior to entering judgment, file an affidavit establishing that (1) Defendant is not in the military service of either the United States or an ally of the United States; (2) Plaintiff's investigation was done after the default occurred (see, Citibank, N.A. v. McGarvey, 196 Misc 2d 292, 765 NYS2d 163); and (3) such investigation was performed shortly before the submission to the Court of the affidavit of military service (see, New York City Housing Authority v. Smithson, 119 Misc 2d 721, 464 NYS2d 672). While a defect in the military affidavit may not rise to the level of a jurisdictional defect if a default is entered with an improper affidavit, that does not excuse the Plaintiff from conducting the initial investigation required by Federal Law (see, Department of Housing Preservation and Development of City of New York v. West 129th Street Realty Corp., 9 Misc 3d 61, 802 NYS2d 826).

The motion to hold the Defendant in default is denied with leave to renew and upon renewal the Plaintiff is directed to submit an affidavit of military service and copies of all papers submitted on this motion.

Dated: ________________________ SANDRA L. SGROI, J. S. C.

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