United States District Court, Northern District of Illinois, E.D
May 14, 1981
COMMERCIAL DISCOUNT CORPORATION AND LEASEAMATIC, INC., PLAINTIFFS,
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
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
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
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
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
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
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
(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.
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.