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Blackhawk Prod. Credit v. Meridian Implement

OPINION FILED MARCH 11, 1980.

BLACKHAWK PRODUCTION CREDIT ASSOCIATION, PLAINTIFF AND COUNTERDEFENDANT-APPELLEE,

v.

MERIDIAN IMPLEMENT CO., DEFENDANT AND COUNTERPLAINTIFF-APPELLANT.



APPEAL from the Circuit Court of Winnebago County; the Hon. GALYN MOEHRING, Judge, presiding.

MR. JUSTICE WOODWARD DELIVERED THE OPINION OF THE COURT:

Rehearing denied April 17, 1980.

This is an appeal from a judgment for $11,072.51 entered in favor of the plaintiff, Blackhawk Production Credit Association. Plaintiff's claim was predicated on the alleged wrongful disposition by the defendant, Meridian Implement Company, of certain collateral; plaintiff's motion for summary judgment on the issue of liability was granted and defendant's motion for summary judgment on the same issue was denied. Thereafter, a trial was held on the issue of damages, which resulted in the judgment described above.

On October 14, 1974, Craig Dummer (hereafter debtor) purchased a tractor from defendant; the unpaid balance was secured by a purchase money security interest which was perfected. On April 30, 1975, debtor executed a farm security agreement with plaintiff which granted a subordinate security interest in the same tractor, which interest was also perfected. On July 9, 1976, defendant declared debtor to be in default and repossessed the tractor; thereupon, debtor entered into an agreement with defendant whereby defendant would retain possession of the tractor and another piece of equipment in satisfaction of all obligations of the debtor, which totaled over $20,000.

In the spring of 1977, plaintiff made a demand on defendant that the tractor be sold pursuant to section 9-504 of the Uniform Commercial Code (Ill. Rev. Stat. 1977, ch. 26, par. 9-504) or that defendant pay plaintiff the difference between the value of the tractor and the unpaid balance secured by defendant's prior security interest therein. At no time prior to this demand did defendant have any actual notice or written notice of plaintiff's subordinate security interest in the tractor. After plaintiff's demand, defendant proceeded to sell the tractor in the ordinary course of its business, although the present lawsuit had been instituted.

The first issue which must be considered is whether the defendant's retention of the collateral in satisfaction of the secured debt, as well as the unsecured debt, was valid under section 9-505(2) of the Uniform Commercial Code (Ill. Rev. Stat. 1977, ch. 26, par. 9-505(2)), which provides in relevant part:

"(2) In any other case involving consumer goods or any other collateral a secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of such proposal shall be sent to the debtor if he has not signed after default a statement renouncing or modifying his rights under this subsection. In the case of consumer goods no other notice need be given. In other cases notice shall be sent to any other secured party from whom the secured party has received (before sending the notice to the debtor or before the debtor's renunciation of his rights) written notice of a claim of an interest in the collateral. * * * In the absence of such written objection the secured party may retain the collateral in satisfaction of the debtor's obligation." (Emphasis added.)

The above language indicates that the secured party may retain the collateral in satisfaction of the debtor's obligation. It should be noted that there is no indication that the debtor, after default, may agree to allow the secured party to keep the collateral in satisfaction of more than the obligation; however, such an action is not expressly prohibited.

The Illinois Code Comment to this section offers some additional guidance. It provides:

"This section establishes a procedure by which a secured party may prepare to retain the collateral in satisfaction of the secured debt * * *." (Emphasis added.) (Ill. Ann. Stat., ch. 26, par. 9-505(2), Ill. Code Comment, at 350 (Smith-Hurd 1974).)

The Code Comment further states:

"This subsection continues, with substantial improvements, a procedure by which the parties may agree, after default, that the secured party retain the collateral in satisfaction of the obligation secured by it." (Emphasis added.) Ill. Ann. Stat., ch. 26, par. 9-505(2), Ill. Code Comment, at 351 (Smith-Hurd 1974).

• 1 Such language supports the position that the secured party may retain collateral only in discharge of the debt secured thereby. In this light we conclude that the trial court properly construed the language of section 9-505(2), noting also that after default the debtor entered into an agreement with the secured party which is not provided for in the Code, and that the agreement in this cause substantially affects the rights of a subordinate secured party and provides a windfall to the secured party of the surplus in value in excess of the secured debt. Furthermore, it appears that the debtor was the only one who was aware of the existence of both the security agreements when the retention agreement was made. This knowledge placed him in a position of being able to attempt to prefer one creditor over another, and we believe it is manifestly improper for him to be able to do so.

Defendant contends that plaintiff's claim, based upon a subordinate security interest, is barred by its failure to give defendant timely, written notice of its claim as required by section 9-505(2). That section provides that only those creditors who have given timely written notice prior to the proposal for retention are entitled to notice and an opportunity to object. Moreover, the Illinois Code Comment following said section indicates that the revised section 9-505(2) contemplates a shift of the burden of notification, since "[i]n the nature of things the junior secured party is ...


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