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COMMERCIAL DISCOUNT CORP. v. KING

May 14, 1981

COMMERCIAL DISCOUNT CORPORATION AND LEASEAMATIC, INC., PLAINTIFFS,
v.
WILLIAM S. KING AND HORACE RAINEY, JR., DEFENDANTS.



The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Commercial Discount Corporation ("CDC") and Leaseamatic, Inc. ("Leaseamatic," a CDC subsidiary) sued defendants William S. King ("King") and Horace Rainey, Jr. ("Rainey") on their joint and several personal guaranties of certain indebtedness of Racran Corp. ("Racran"). CDC and Leaseamatic moved for partial summary judgment against King on the issue of liability. This Court's September 23, 1980 memorandum opinion and order (the "Opinion") granted that motion. King has now moved to vacate the summary judgment on the basis of supplemental affirmative defenses arising out of events occurring after the original motion was fully briefed. For the reasons stated in this memorandum opinion and order King's motion is granted, but part of his affirmative defenses are stricken.

Although summary judgment was not entered as to Rainey, Rainey has filed a set of nearly identical supplemental affirmative defenses, in addition to previously-filed affirmative defenses. Rainey's affirmative defenses are stricken in part for reasons also stated in this opinion.

First Supplemental Defense

King's first and second supplemental defenses involve identical facts but different legal theories. Both are based on plaintiffs' failure to provide notice of the sale of collateral. Defense No. 1 states that such failure is an absolute bar to plaintiffs seeking a deficiency judgment. Defense No. 2 states that such failure creates a presumption that the proceeds from the sale of the collateral equal the value of the outstanding debt, forcing plaintiff to prove that a fair price was received for the collateral. Dual defenses are asserted because the Illinois Appellate Courts are split as to the legal ramifications of a failure to provide notice of the sale of collateral.

Under Illinois law a trial court is bound by the decisions of all Appellate Courts, but is bound by the Appellate Court in its own district when the Appellate Courts differ. People v. Thorpe, 52 Ill. App.3d 576, 579, 10 Ill.Dec. 351, 354, 367 N.E.2d 960, 963 (2d Dist. 1977). That principle also applies to federal courts sitting in diversity cases. Instrumentalist Co. v. Marine Corps League, No. 80 C 5195 (N.D.Ill. Mar. 31, 1981). This Court is therefore bound by decisions of the Illinois Appellate Court for the First District. That court holds that a failure to provide notice simply creates a presumption that the proceeds from the sale of the collateral equal in value any outstanding debt. National Boulevard Bank of Chicago v. Jackson, 92 Ill. App.3d 928, 48 Ill.Dec. 327, 416 N.E.2d 358 (1st Dist. 1981). King's First Supplemental Defense, which relies on a theory different from the one this Court must apply, is therefore insufficient as a matter of law.

Second Supplemental Defense

As part of its loan and security agreement, Racran gave plaintiffs a security interest in all of its equipment. King's Second Supplemental Defense concerns plaintiffs' sale of some of that equipment. Plaintiffs disposed of the collateral under the power granted a secured party under the Illinois Uniform Commercial Code (the "UCC," cited "Section —"), Ill.Rev.Stat. ch. 26, § 9-504(1). Under a related provision, Section 9-504(3):

  Unless collateral is perishable or threatens to
  decline steadily in value or is of a type
  customarily sold on a recognized market,
  reasonable notification of the time and place of
  any public sale or reasonable notification of the
  time after which any private sale or other
  intended disposition 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.

King asserts, and apparently plaintiffs do not contest the fact, that no notice was sent. Plaintiffs contend that defendants waived any right to notice in the following provision of the guaranty agreement:

  The liability hereunder shall in no wise be
  affected or impaired by (and said CDC is hereby
  expressly authorized to make from time to time,
  without notice to anyone), any sale . . . of any
  security or collateral therefor.

Provisions of the UCC, like any other contract term, can be waived.*fn1 But UCC Article 9 may present an exception to that general rule. Section 9-504(3) provides that notice of a sale is required unless the debtor has, after default, waived this right. Section 9-501(3) provides that various rules favoring debtors, including those in Section 9-504(3), may not be waived. Those two sections in combination clearly render a debtor's pre-default waiver of the right to notice void.

While the quoted provision of the guaranty agreement was plainly intended to waive any right to notice of the sale of collateral, it was of course signed before Racran's default. Neither King nor Rainey waived his right to notice after Racran defaulted.

This Court must therefore decide whether Section 9-504's waiver restriction, which by its terms applies solely to debtors, encompasses guarantors within that term. One recent Illinois opinion offers guidance. In Commercial Discount Corp. v. Bayer, 57 Ill. App.3d 295, 14 Ill.Dec. 647, 372 N.E.2d 926 (1st Dist. 1978) the court was confronted with the problem whether, absent waiver, a guarantor is entitled to notice under Section 9-504. As indicated by the case name, CDC was the plaintiff there as it is here. In all relevant respects (the provisions referred to in the Opinion) the guaranty form was ...


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