Federal Financial Co. v. Papadopoulos

Federal Financial Co. v. Papadopoulos  (97-348); 168 Vt. 621; 721 A.2d 501

[Filed 27-Oct-1998]


                                 ENTRY ORDER


                       SUPREME COURT DOCKET NO. 97-348

                               JUNE TERM, 1998

  Federal Financial Co.	              }	APPEALED FROM:
                                      }
                                      }
       v.	                      }	Windsor Superior Court
                                      }	
  Georgios Papadopoulos and	      }
  Angelo Pananas	              }	DOCKET NO. 161-4-96Wrcv	


       In the above-entitled cause, the Clerk will enter:

       Plaintiff Federal Financial Co. appeals from a superior court judgment
  in favor of defendants Georgios Papadopoulos and Angelo Pananas in this
  action for a deficiency judgment.  Plaintiff contends the trial court erred
  in ruling that: (1) plaintiff's sale of secured  collateral was not
  commercially reasonable; and (2) the appropriate remedy was dismissal of
  plaintiff's action.  We affirm.

       As found by the trial court, the facts underlying this dispute were as
  follows: In November 1992, defendants borrowed $20,000 from the First
  National Bank of  Vermont (FNB) to purchase restaurant equipment for a
  pizza parlor.  Defendants gave FNB a  note for $20,000 secured by the
  restaurant equipment.  The terms of the loan provided that  defendants
  would repay $400 per month with no interest for fourteen months if payments
  were  made in a timely manner.  In January 1993, the Federal Deposit
  Insurance Corporation (FDIC) seized FNB and took over its assets. 
  Defendants thereupon stopped making payments on the note, claiming that
  they did not know to whom they should make the payments. 

       In April 1994, defendant Pananas bought defendant Papadopoulos's
  interest in the  restaurant and organized it as a corporation.  Both
  defendants, however, remained liable on the original loan.  Although
  Papadopoulos no longer owned an interest in the restaurant, he continued to
  handle business operations with Pananas.

       In November 1994, plaintiff purchased defendants' debt from the FDIC. 
  In January 1995, plaintiff requested that defendants promptly repay the
  debt and interest totaling $21,984.  Defendants did not make any payments. 
  Accordingly, in March 1995, plaintiff notified defendants to assemble the
  collateral for repossession, and defendants removed the equipment from the
  restaurant and stored it in another portion of the building.  Plaintiff
  then engaged Stan & Son, a company that regularly repossesses collateral
  restaurant equipment for banks, to pick up the equipment.  Stan & Son is
  also a dealer in new and used restaurant equipment, and often purchases
  used equipment from banks after repossession to resell at auction or at
  their warehouse showroom. 

       After Stan & Son transported the equipment to its warehouse, plaintiff
  inquired if it  wished to make a bid.  Plaintiff did not solicit any other
  bids or obtain information from any other source about the value of the
  property.  Stan & Son bid $1,010 for all of the equipment.  Plaintiff then
  notified defendants of the bid, informing them that the sale would be made
  unless 

  

  defendants objected.  When defendants raised no objection, plaintiff
  accepted the bid.(FN1)

       Plaintiff then filed this deficiency action for $26,355.11,
  representing the balance due on the note plus attorney's fees and costs. 
  The court granted summary judgment in favor of plaintiff as to defendants'
  liability on the note.  However, following a hearing on the issue of
  damages, the court ruled that plaintiff's sale of the property was not
  commercially reasonable under 9A V.S.A. § 9-504(3), and, accordingly,
  dismissed the action and entered judgment in favor of defendants.  This
  appeal followed.

       Plaintiff contends the trial court erred in concluding that the sale
  of the equipment was not commercially reasonable.  Section 9-504 of Title
  9A controls the sale of secured goods after default.  Subsection (3) of §
  9-504 provides in part:

    Disposition of the collateral may be by public or private
    proceedings and may be made by way of one or more contracts.  Sale or
    disposition may be as a unit or in parcels and at any time and place 
    and on any terms but every aspect of the disposition including the 
    method, manner, time, place and terms must be commercially reasonable.

       Whether a sale is commercially reasonable must be determined on a
  case-by-case basis.  See Chittenden Trust Co. v. Maryanksi, 138 Vt. 240,
  244, 415 A.2d 206, 208 (1980).  The burden is on the secured party to prove
  that the disposition of collateral was commercially reasonable, and
  preceded by reasonable notice.  See id. at 244-45, 415 A.2d  at 209;
  American Fin. Corp. v. DeLong, 140 Vt. 292, 293, 437 A.2d 1100, 1101
  (1981).  We will affirm the trial court's findings and conclusions unless
  clearly erroneous.  See Maryanski, 138 Vt. at 243, 415 A.2d  at 208. 

       Plaintiff asserts that the trial court misapplied or overlooked a
  number of salient factors in concluding that the sale was not commercially
  reasonable.  First, it asserts that the court erroneously ignored the fact
  that defendants were put on notice of the sale, failed to object, and
  therefore allegedly waived their right to challenge its commercial
  reasonableness.  Plaintiff cites no authority to support the claim, which
  is clearly contrary to the requirement that the secured party establish
  both reasonable notice and commercial reasonableness.  See Maryanksi, 138
  Vt. at 244-45, 415 A.2d  at 208 ("[T]he secured party has the burden of
  pleading and proving that any given disposition of collateral was
  commercially reasonable, and preceded by reasonable notice.").

       Next, plaintiff asserts that the court erroneously faulted it for
  selling the equipment at a private sale.  Plaintiff relies on the oficial
  comment to § 504, which observes that private sales of repossessed property
  through commercial channels are to be encouraged when they will result in a
  higher realization on the collateral.  See 9A V.S.A. § 504, cmt. 1.  A
  review of the court's carefully reasoned decision, however, reveals that it
  did not fault plaintiff's use of a private sale, but rather plaintiff's
  exclusive reliance on one bid from the dealer already in possession, and
  its failure to obtain any other independent appraisals, valuations, or bids
  to establish the market value of the collateral.  See Hall v.Owen County
  State Bank, 370 N.E.2d 918, 932 (Ind. Ct. 

  

  App. 1977) ("any private sale of collateral in which only one bid is
  received or solicited is highly questionable and should be closely
  scrutinized by the trial court").  

       Plaintiff also asserts that the court erroneously considered price as
  a factor in determining the commercial reasonableness of the sale. 
  Plaintiff notes that under 9A V.S.A. § 507(2), "[t]he 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."  Again, a review of the court's decision reveals that
  it did not rely on sale price alone, but merely factored the extremely low
  bid, compared to the equipment's resale value, into its overall assessment. 
  This was proper.  See Granite Equip. Leasing Corp. v. Marine Dev. Corp.,
  230 S.E.2d 43, 44 (Ga. Ct. App. 1976) (holding that resale of collateral
  within short period at substantial profit was evidence of unreasonableness
  of initial sale); Hall, 370 N.E.2d  at 929-30 (showing that collateral was
  resold at substantially higher price may strongly imply that secured party
  failed to receive fair price for collateral).  

       Plaintiff next asserts that the court erroneously ignored the fact
  that defendants themselves reduced the value of the collateral by removing
  it from the restaurant.  There was conflicting evidence on this point,
  however.  The court noted that plaintiff's attorney wrote to defendants
  asking them "to assemble the collateral .  .  . for repossession and sale." 
  Therefore, the court's failure to find defendants responsible for any
  diminished value resulting from the off-site sale was not clear error.  See
  Blodgett Supply Co. v. P.F. Jurgs & Co., 159 Vt. 222, 228, 617 A.2d 123,
  126 (1992) (court's findings and conclusions will not be disturbed merely
  because there was substantial contradictory evidence).

       Finally, plaintiff asserts that the sale was presumptively reasonable
  under 9A V.S.A. § 507(2), which provides that a secured party has sold the
  collateral in a commercially reasonable manner if he or she sold "in the
  usual manner in any recognized market therefor or if [the secured party]
  sells at the current price in such market at the time of [the] sale or if
  [the secured party] has otherwise sold in conformity with reasonable
  commercial practices among dealers in the type of property sold."  
  Plaintiff cites in this regard the trial court's findings that Stan & Son
  was a dealer in used restaurant equipment, a regular participant in a
  recognized used equipment market covering Vermont, New Hampshire, New York
  and Western Massachusetts, and was frequently asked to bid on equipment
  that it had repossessed and stored.  The court found, however, that
  plaintiff had failed to demonstrate that it sold the equipment through the
  recognized market at the current market price or in conformity with
  reasonable commercial practices among such dealers.  Indeed, it found there
  was no credible evidence to support a finding that plaintiff's reliance on
  Stan & Son's exclusive, self-serving bid was the common or reasonable
  market practice.  See Jackson State Bank v. Beck, 577 P.2d 168, 170 (Wyo.
  1978) (sale of collateral by creditor to itself was not commercially
  reasonable).  These findings and conclusions were not clearly erroneous in
  the light of the record evidence, and therefore must be upheld.  See
  Maryanski, 138 Vt. at 243, 415 A.2d  at 208.

       Lastly, plaintiff contends that even if the sale was not made in a
  commercially reasonable manner, this determination should not operate as an
  absolute bar to recovery of a deficiency judgment.  Plaintiff notes that a
  number of jurisdictions do not apply the absolute bar rule,  and urges this
  Court to adopt a rule that would allow it to recover the difference between
  the fair market value attributed to the equipment by defendants ($8,000)
  and the deficiency ($21,355.11).  We rejected an identical argument in a
  similar case involving a failure to provide reasonable notice of the sale
  of repossessed property.  See Chittenden Trust Co. v. Andre Noel Sports,
  159 Vt. 387, 392-95, 621 A.2d 215, 218-20 (1992).  As we explained in Andre
  Noel, the absolute 

  

  bar rule "is simple, certain, and easily administered, and it provides
  greater incentive for creditors to comply with § 9-504(3)."  Id. at 395,
  621 A.2d  at 220.  Therefore, as in Andre Noel, we decline to abandon our
  long-held rule.
   
       Affirmed.	


       	BY THE COURT:



       	_______________________________________
  	Jeffrey L. Amestoy, Chief Justice

       	_______________________________________
  	John A. Dooley, Associate Justice

  	_______________________________________
  	James L. Morse, Associate Justice

  	_______________________________________
  	Denise R. Johnson, Associate Justice
  	
       	_______________________________________
  	Marilyn S. Skoglund, Associate Justice

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                                  Footnotes


FN1.  Although plaintiff gave notice of the sale only to counsel for
  defendant Papadapoulos, the court found that the notice was sufficient to
  inform defendant Pananas, and that finding is not contested on appeal.