Alma Brooks v. Travis Chapman, Denise Chapman, and Union Bank & Trust Company

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October 27, 2004



v. [CIV-2001-164-5]





Olly Neal, Judge

Alma Brooks appeals from the Drew County Circuit Court's denial of her claim for a deficiency judgment against appellees Travis Chapman and Denise Chapman, who purchased her business, Daylite Nursery, in Monticello, Arkansas, with money that they borrowed from appellee Union Bank & Trust Company (Union Bank). She also appeals from the circuit court's award of judgment to Union Bank for the value of the nursery's inventory, on which the bank held a perfected security interest, that appellant sold without complying with the provisions of Article 9 of the Uniform Commercial Code (UCC). We affirm.

In December 1999, the Chapmans entered into an agreement to buy the nursery for $65,000 from appellant. On January 4, 2000, they borrowed $33,050 from Union Bank to finance the purchase and gave the bank a promissory note and a security interest in the nursery's inventory. Union Bank filed a financing statement with the Drew County Circuit Clerk's Office on January 5, 2000, and with the Arkansas Secretary of State's Office on January 10, 2000. The bill of sale, signed by appellant and the Chapmans, recited that the Chapmans had paid appellant $30,000, leaving a balance of $35,000; that appellant conveyed the business, including all "merchandise, inventory, and equipment ... free from all encumbrances"; and that appellant retained a vendor's lien on the property. The Chapmans gave appellant a promissory note for $35,000 that provided for monthly payments of $700. Although appellant filed a copy of the bill of sale and the promissory note with the Drew County real estate records on February 18, 2000, she did not file a financing statement, nor did she file any documents with the Arkansas Secretary of State.

Appellees were unaware that, at the time of the sale, Commercial Bank & Trust Company in Monticello had a prior perfected security interest in all of appellant's inventory and that the business owed sales taxes to the State of Arkansas. After the Chapmans discovered that appellant had breached the "no encumbrances" warranty in the bill of sale, they notified her that they would make no further payments to her. Without the Chapmans' permission, appellant repossessed some of the nursery's inventory, which she sold for approximately $1,700 at private sale without notice to appellees. She also repossessed and sold a trailer used by the business for $1,000.

Union Bank filed this action against appellant for possession of the property that she had repossessed in violation of its security interest or, in the alternative, for judgment in the amount of its value. Appellant filed a cross-claim against the Chapmans for the balance due on the promissory note. The Chapmans filed a counterclaim against appellant, alleging misrepresentation and fraudulent inducement.

After a bench trial, the circuit court issued its findings of fact and conclusions of law. It found that appellant had promised the Chapmans that the property was free from allen cumbrances. The court found that appellant had, without a court order or the Chapmans' permission, repossessed the inventory, which had a value of $8,218, and had sold it at private sale for $1,700 without notice to appellees. The court concluded that Union Bank held a perfected security interest in the property and that appellant had failed to perfect a security interest in it. The court also found that appellant had failed to provide appellees with notice of the sale as required by Ark. Code Ann. §§ 4-9-504(3) and 4-9-507 (Repl. 1991).1 It also held that, because appellant had failed to comply with Arkansas law when she sold the repossessed property without notice to the Chapmans, she was not entitled to any deficiency judgment against them. The circuit court entered judgment in the amount of $8,218 for Union Bank, dismissed appellant's claim against the Chapmans, and awarded no damages to the Chapmans on their counterclaim against appellant.

The standard that we apply when we review a judgment entered by a circuit court after a bench trial is well established. We do not reverse unless we determine that the circuit court erred as a matter of law or we decide that its findings are clearly against the preponderance of the evidence. Riffle v. United Gen. Title Ins. Co., 64 Ark. App. 185, 984 S.W.2d 47 (1998). We view the evidence in the light most favorable to the appellee, resolving all inferences in the appellee's favor. Ford Motor Credit Co. v. Ellison, 334 Ark. 357, 974 S.W.2d 464 (1998). We defer to the trial court's superior ability to judge the credibility of the witnesses and the weight to be given their testimony. Eagle Bank & Trust Co. v. Dixon, 70 Ark. App. 146, 15 S.W.3d 695 (2000).

In her first point on appeal, appellant does not contest the trial court's finding of fact that she repossessed inventory from the Chapmans. She also concedes that she failed to perfect her security interest in the property; that she did not notify Union Bank of her repossession and sale of the collateral; and that Union Bank is entitled to judgment for the value of the property. She argues, however, that the trial court's finding of fact as to the value of the repossessed property is not supported by the evidence. We disagree.

At trial, appellant testified that the plants she had repossessed and sold had been in "such bad shape they were hardly worth moving" and placed their value at less than $2,000. On the other hand, Denise Chapman testified that the plants had been in good condition and that, in preparation for trial, she had reviewed the business's records and had determined that the value of the inventory taken by appellant was $8,218. The value of this inventory was a question of fact, and the trial court obviously believed Mrs. Chapman. Given the trial court's ability to observe the witnesses and assess their credibility, we hold that its finding on this issue is not clearly against a preponderance of the evidence.

Appellant also argues that the trial court committed error in failing to award her a deficiency judgment against the Chapmans. She asserts that she did not repossess the "entire business" but "only picked up a few items" and that her failure to notify the Chapmans of the sale should not "cancel the debt as to the rest of the transaction." Appellant argues that, because she lost the original of the promissory note on which she is suing the Chapmans, a copy of that note, which she offered into evidence with the explanation that she did not know the location of the original, was admissible. At trial, the trial court allowed the copy's introduction into evidence as a copy of the note that was recorded but refused to admit it as a collection device. The trial court, however, did not refuse to award appellant a deficiency judgment because of her failure to produce the original of the promissory note. Instead, it based its refusal on appellant's failure to give the Chapmans notice of the sale of the repossessed inventory.

Arkansas Code Annotated section 4-9-504(3) (Repl. 1991) provides that reasonable notification of the time after which a private sale is to be made shall be sent by the secured party to the debtor, if he has not signed after default a statement renouncing or modifying his right to notification of sale. The Chapmans did not sign such a statement. In First State Bank of Morrilton v. Hallett, 291 Ark. 37, 722 S.W.2d 555 (1987), the supreme court expressly adopted the "absolute bar rule," which denies any deficiency to a secured creditor that violates Part 5 of Article 9 of the UCC. Accord First Cmty. Bank of S.E. Ark. v. Paccio, 70 Ark. App. 313, 17 S.W.3d 510 (2000).

Appellant has not disputed the trial court's finding that she failed to provide the Chapmans with notice of the sale. According to the cases following Ark. Code Ann. § 4-9-504, it necessarily follows that appellant cannot recover the balance due on the promissory note that the collateral secured.


Griffen and Roaf, JJ., agree.

1 The court found that this case was governed by Article 9 of the UCC as it existed prior to the effective date of Act 1439 of 2001, which extensively amended Article 9.