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COMMERCIAL DISCOUNT CORP. v. KING

United States District Court, Northern District of Illinois, E.D


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 identical to that involved here.*fn2 In the Bayer case the Illinois Appellate Court said (57 Ill. App.3d at 299-300, 14 Ill.Dec. 647, 372 N.E.2d at 929):

  Whether, within the meaning of section 9-504(3),
  the term "debtor" includes the obligor who does
  not own the collateral is a question of first
  impression in Illinois. . . . Plaintiff attempts
  to distinguish the rule requiring notice to
  guarantors by asserting its applicability only
  where the guarantors are involved in the day to
  day operations of the owner of the collateral. We
  find no such requirement in Hepworth v. Orlando
  Bank & Trust Co., and our reading of T&W Ice Cream,
  Inc. v. Carriage Barn, Inc. indicates that, while
  such a factor was present, it was not
  dispositive. . . . Viewed in this light, we believe
  the only reading of section 9-504(3) compatible
  with Illinois law is that such section deals with
  both the collateral and the obligation and,
  accordingly, the term "debtor" includes both the
  owner of the collateral and the obligor when they
  are not the same person. Ill.Rev.Stat. 1975, ch.
  26, par. 9-105(1)(d).

  Here, defendants guaranteed full and prompt
  payment and further promised that it "shall be a
  continuing, absolute and unconditional guaranty."
  There is nothing in the record to indicate that
  they waived or modified the notice requirement
  after the occurrence of default. Consequently, we
  cannot say that the trial court misapprehended
  the law in requiring plaintiff to show compliance
  with the notice provision of section 9-504(3).

Bayer is dispositive here under the familiar rules applicable to diversity cases.*fn3 Indeed, although the parties have not addressed the issue, the defensive use of collateral estoppel approved in Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971) precludes CDC from relitigating the issue it litigated and lost in Bayer.*fn4

It is true that Judge Aspen has recently analyzed the precise question before this Court and held that Section 9-504(3) does not prevent pre-default waiver by guarantors of the right to notice. National Acceptance Company of America v. Wechsler, 489 F. Supp. 642 (N.D.Ill. 1980). After acknowledging the holding in Bayer, Judge Aspen reasoned (489 F. Supp. at 647-48):

  Nonetheless, the Court does not believe that a
  guarantor's status as a debtor under Section
  9-504(3) compels the conclusion that a guarantor
  may not waive the rights accorded thereunder.
  First, it should be observed that the collateral
  in question is not owned by the guarantor. Thus
  while it may be unconscionable to permit a
  secured party such as NAC to dispose unreasonably
  of a debtor's property, the same cannot be said
  as to a guarantor, who by definition has a lesser
  interest in that collateral. Second, the Court
  must consider the general purpose of guarantee
  agreements. Such agreements facilitate the
  issuance of loans by insuring that the lender has
  a ready source from which it can collect in the
  event of default by the debtor. To this end it
  would not be unusual for a lender to require a
  guarantor to waive objections

  to payment that otherwise might be available.

Were this Court writing on a clean slate, it might concur in the approach taken by Judge Aspen. But that is not the case. Judge Aspen was of the opinion that "the Court in Bayer was not presented with a question of waiver. . . ." (489 F. Supp. at 648). As defendants here have demonstrated by providing this Court with an excerpt from the CDC brief in Bayer, the Illinois Appellate Court was presented with the waiver question and rejected CDC's argument. That was the significance of its stating (emphasis added):

  There is nothing in the record to indicate that
  they waived or modified the notice requirement
  after the occurrence of default.

Had the pre-default waiver been sufficient, clearly the Court would not have spoken in those terms. And the identity of the parties in the two cases (a factor not present before Judge Aspen) makes the conclusion all the more compelling.

Accordingly King's Second Supplemental Defense requires that this Court's entry of summary judgment be vacated. Under the doctrine announced by the Illinois Appellate Court for the First District, the parties will be required to deal with the deficiency issue in the context of the presumption referred to in National Boulevard Bank of Chicago v. Jackson.

Third Affirmative Defense

Much of the Racran equipment was eventually sold to Phoenix Smelting Corp. ("Phoenix"). Certain principals of Phoenix were co-guarantors of the security agreement along with King and Rainey, while others were once officers of plaintiffs. King argues those relationships reflect a "conflict of interest," violating plaintiffs' duty to act in good faith.

UCC Article 9 directly refutes King's argument. All the equipment was sold at a public auction. Section 9-504(3) specifically permits a secured party to purchase collateral at such a public auction. After the public auction, a debtor no longer has any interest in the collateral. See, Section 9-504(4).*fn5

Personal Jurisdiction

Rainey, a non-resident of Illinois, contends that this Court lacks jurisdiction over his person. Plaintiffs assert jurisdiction under the "transacting business" clause of the Illinois Long Arm Statute, Ill.Rev.Stat. ch. 110, § 17(a). All the facts amply support personal jurisdiction over Rainey:

    (1) Rainey's guaranty states that it was
  "signed, sealed and delivered by the undersigned
  at Chicago, Illinois."

    (2) Rainey's guaranty states that "it shall be
  construed according to the laws of Illinois, in
  which State it shall be performed by the
  undersigned."

    (3) Under the loan agreement between Racran and
  plaintiffs, Racran agreed to submit to personal
  jurisdiction in Illinois and to litigate all
  disputes in Illinois. Rainey signed the loan
  agreement on behalf of Racran.

Our Court of Appeals has found personal jurisdiction over a guarantor in a largely similar situation. O'Hare International Bank v. Hampton, 437 F.2d 1173 (7th Cir. 1971). Rainey's Affirmative Defense No. 2 is stricken.

Conclusion

King's motion to vacate the order of summary judgment is granted. Both King's and Rainey's supplemental affirmative defenses, except for King's Second Supplemental Defense and the corresponding defense asserted by Rainey, are stricken under Fed.R.Civ.P. 12(f) as insufficient on their face. In addition Rainey's Affirmative Defense No. 2 is also stricken. At the status report date previously set for June 1, 1981 the Court will discuss further proceedings with counsel for the parties.


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