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State National Bank v. Northwest Dodge





Appeal from the Circuit Court of Cook County; the Hon. Michael F. Zlatnik, Judge, presiding.


This is the second appeal arising out of a contract dispute between State National Bank of Evanston (Bank), and Northwest Dodge, Inc. (Dodge). In the previous appeal we reversed a judgment in favor of the Bank, holding that Dodge was a debtor under section 9-101 of the Uniform Commercial Code (UCC) (as adopted in Ill. Rev. Stat. 1975, ch. 26, par. 9-101 et seq.). As such, Dodge was entitled to notice before the Bank sold repossessed motor vehicles that were the subject of retail sales conracts which Dodge had sold to the Bank. (State National Bank v. Northwest Dodge, Inc. (1980), 86 Ill. App.3d 90, 408 N.E.2d 1.) On remand the trial court held that the Bank's failure to notify Dodge before it sold the vehicles barred it from recovering, as a "deficiency," the amounts that it had debited to the dealer's reserve account following the sale of the vehicles. Therefore, the court entered summary judgment in favor of Dodge on its counterclaim for damages, the measure of which was determined to be the total amount that the Bank had debited to the reserve account. *fn1 For the reasons that follow, we affirm the trial court's judgment.

Dodge, an automobile dealer, sells vehicles to the general public. In 1973 it entered into a "General Dealer Agreement" with the Bank, pursuant to which it sold the Bank retail installment contracts covering its customers' purchase of recreational vehicles. Pursuant to its agreement with Dodge, the Bank purchased the contracts at a discount from their face amounts. Dodge made several warranties pertaining to the contracts and agree that "if any warranty * * * is breached or if the Buyer [of the vehicle] successfully asserts against [the Bank] a claim or defense arising out of any of said contracts, or cancels any of said contracts pursuant to law, [Dodge would] repurchase such contracts, on demand, for the unpaid balance due thereon." In Addendum C to the parties' agreement, Dodge was given a 3% participation in the finance income from the installment contracts, 1% of which was to be credited to a dealer's reserve account. Addendum C further provided that the Bank would disburse sums from this fund periodically. Finally, Dodge agreed that the Bank could "charge to the reserve fund, or [Dodge] would pay [Bank] on demand (i) [Dodge's] proportionate share of all refunds allowed on prepayment of accounts, (ii) the balance owing on accounts on which 2 or more installments [were] delinquent, and (iii) the balance owing on accounts which any warranty [was] breached or which [became] uncollectible for any reason."

In February of 1976 the Bank filed a complaint, alleging that Dodge had failed to pay its proportionate share of refunds on prepaid accounts. Dodge counterclaimed, alleging that the Bank "failed to pay Northwest from the Dealer Reserve Account as required by the Agreement" and also claimed that "the Bank charged to the reserve fund of Northwest the balance owing on accounts without a showing that a warranty had been breached or that the accounts had become uncollectible."

The parties stipulated that eight of the recreational vehicles purchased from Dodge had been repossessed by the Bank and then sold by the Bank without prior notice to Dodge. After the sale, the Bank debited the Dealer Reserve Account for amounts representing deficiencies from the sale of the repossessed vehicles and then notified Dodge.

The trial court held that the general dealer agreement between the parties did not create a debtor-creditor relationship as contemplated by section 9-105(1)(d) of the UCC and that consequently Dodge was not entitled to prior notice of the Bank's sale of the repossessed vehicles. The court entered judgment for the Bank on its complaint and also entered judgment against Dodge on its counterclaim. Dodge appealed from that judgment. We reversed, holding that Dodge was a debtor, entitled to notice under Article 9. We remanded the cause with instructions for the trial court to determine what losses Dodge should recover on its counterclaim. The trial court awarded Dodge a total of $20,825.45 and subsequently denied the Bank's petition for a rehearing. Thereafter, the Bank brought this appeal.


In the abstract, the issue presented is whether a secured party's failure to give the debtor notice under section 9-504(3) before selling the repossessed collateral bars the secured party from recovering any deficiency as a matter of law (absolute bar theory). The Bank urges us to adopt the countervailing view that failure to give such presale notice simply creates a rebuttable presumption in favor of the debtor that the value of the collateral is equal to the amount of debt outstanding. *fn2 Under this theory, to recover a deficiency, the secured party must, in addition to overcoming this presumption, prove that the sale of the collateral was commercially reasonable.

• 1 Initially we emphasize that the parties' rights and obligations in this case were governed by the terms of their agreement as well as the pertinent provisions of the UCC. The Bank had the contractual right to debit the reserve account or to demand payment from Dodge for the full amount of any balance due on accounts as to which two or more installments were past due or which were uncollectible for any reason. Had it pursued this contractual right of recourse the question of its right to a deficiency after selling the vehicles would not have arisen. *fn3 By exercising its right to dispose of collateral under section 9-504, however, the Bank was obligated to comply with the notice provision of section 9-504(3) *fn4 which provides in relevant part:

"[R]easonable 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 * * *." (Emphasis added.) Ill. Rev. Stat. 1975, ch. 26, par. 9-504(3).

The Bank concedes that the provision is mandatory in nature but nevertheless challenges the conclusion that compliance with the notice requirement is a condition precedent to recovery of a deficiency. The Bank bases its argument on the theory that since the policy of the UCC is "commercial reasonableness," the secured party should not be deprived of his right to a deficiency without a determination as to whether his failure to comply with the notice provision has damaged the debtor in any way. Citing section 9-504(2) the Bank contends that secured parties have an absolute right to a deficiency because of the language that "unless otherwise agreed, the debtor is liable for a deficiency." (Ill. Rev. Stat. 1975, ch. 26, par. 9-504(2).) Furthermore, the Bank maintains that section 9-507(1) provides Dodge with an adequate remedy because it allows recovery "from the secured party any loss caused by a failure to comply with the provisions of this Part." (Ill. Rev. Stat. 1975, ch. 26, par. 9-507(1); see Conti Causeway Ford v. Jarossy (1971), 114 N.J. Super. 382, 276 A.2d 402, aff'd (1972), 118 N.J. Super. 521, 288 A.2d 872; Hodges v. Norton (1976), 29 N.C. App. 193, 223 S.E.2d 848.) Finally, the Bank argues that the absolute bar approach is punitive and thus runs afoul of section 1-106(1) of the Code, which encourages a liberal construction of remedies to put an aggrieved party in "as good a position as if the other party had fully performed" but to avoid "special" or "penal" damages. For those reasons the Bank requests us to adopt the rebuttable presumption approach, reverse the judgment entered on Dodge's counterclaim, and to remand this case again so that the Bank can produce evidence as to the commercial reasonableness of its sale of the repossessed vehicles. Presumably, if the Bank sustained its burden and overcame the presumption that the value received for the vehicles was equivalent to the amount of debt, it would defeat Dodge's claim for damages, in all or in part. We reject the Bank's arguments.

The decisions from various jurisdictions have shown a distinct lack of uniformity in determining the consequences of a secured party's failure to adequately notify its debtor before selling repossessed collateral. Courts> that adhere to the rebuttable presumption rule emphasize the "punitive" nature of the absolute bar approach and apparently believe that allowing a debtor to avoid paying a deficiency if he did not receive notice is a rigid technicality. (See generally Hall v. Owen County State Bank (Ind. App. 1977), 370 N.E.2d 918; Beneficial Finance Co. v. Young (Okla. 1980), 612 P.2d 1357; Fedders Corp. v. Taylor (D. Minn. 1979), 473 F. Supp. 961.) On the other hand, courts> which view proper notice as a condition precedent to the secured party's cause of action for a deficiency reason that the debtor's interests cannot be adequately protected if he is denied the opportunity to be present at the sale or to redeem the collateral himself, pursuant to section 9-506. The effect of the rebuttal presumption approach, consequently, is to put the debtor in the difficult position of refuting the secured party's evidence that the sale he did not even attend was commercially reasonable.

The Delaware Supreme Court in a recent opinion analyzed the notice issue in detail and rejected arguments similar to the ones that the Bank sets forth in this case. In Wilmington Trust Co. v. Conner (Del. 1980), 415 A.2d 773, 777, the court reviewed the different theories regarding the consequences of a secured party's failure to give proper notice under section 9-504(3) and concluded that the "apparent majority rule under the Code [is] the `absolute bar' theory." The court reasoned that this approach promotes commercial certainty and cannot be considered punitive because notice is the statutory condition precedent to the attainment of a deficiency judgment. Noncompliance with the statute means that the right to a deficiency does not come into existence; this is not properly viewed as "punishment." The Wilmington court further rejected the argument that the debtor's remedy under section 9-507(1) is adequate and should be construed as his exclusive mode of relief from the secured party's noncompliance with the Code, stating:

"The burdens placed on the creditor under the Code are minimal, while the results of his noncompliance may be very onerous to the debtor. * * * We are unable to see any unfairness in protecting the debtor's rights to the exclusion of those of the creditor when the creditor has been placed in such a high degree of control over the relationship and ...

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