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COMMERCIAL DISCOUNT CORP. v. KING

August 13, 1982

COMMERCIAL DISCOUNT CORPORATION, ET AL., PLAINTIFFS,
v.
WILLIAM S. KING, ET AL., 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) sue defendants William S. King ("King") and Horace Rainey, Jr. ("Rainey") on their joint and several personal guaranty of certain indebtedness of Racran Corporation ("Racran"). Both sides have now moved for summary judgment. For the reasons stated in this memorandum opinion and order defendants' motion is denied and plaintiffs' motion is not ruled on.

This Court's September 23, 1980 opinion ("Opinion I") granted plaintiffs' motion for partial summary judgment on the issue of liability. Thereafter plaintiffs sold much of the collateral covered by the Racran loan agreement but failed to notify King and Rainey of that sale.

Although the King-Rainey guaranty agreement had waived any right to such notice, this Court's May 14, 1981 memorandum opinion and order, 515 F. Supp. 988 (N.D.Ill. 1981) ("Opinion II"), held a post-default waiver of notice was necessary under Illinois Uniform Commercial Code ("UCC") § 9-504(3).*fn1 Accordingly Opinion II vacated the summary judgment order solely to determine the effect of plaintiffs' failure to provide notice of the sale of collateral.

On that score, in Opinion II this Court held controlling several Illinois cases such as National Boulevard Bank of Chicago v. Jackson, 92 Ill. App.3d 928, 48 Ill.Dec. 327, 416 N.E.2d 358 (1st Dist. 1981):

  Failure to provide adequate notice does not, however,
  absolutely bar a deficiency judgment, but raises a presumption
  that the value of the secured collateral is equal to the amount
  of the debt. In order to obtain a deficiency judgment, the
  creditor has the burden of rebutting the presumption and of
  proving that the amount collected from the sale was
  commercially reasonable.

Defendants now argue for an impermissible windfall: They contend that the presumption entitled them to an outright discharge if the amount realized from the sale was not "commercially reasonable,"*fn2 even if it is demonstrated that the collateral's value was not in fact equal to the amount of the debt — if the presumption is in fact rebutted.*fn3

That thesis may be both illustrated and tested by a hypothetical example:

    1. Assume a $100,000 debt, the subject of an unconditional
  guaranty, is in default.
    2. Assume collateral is sold by the creditor without notice
  to the guarantor, realizing proceeds of $5,000.
    3. Assume the sale was not commercially reasonable (so that
  the $5,000 also was not, in the sense employed in National
  Boulevard Bank), but the creditor proves that a commercially
  reasonable sale would have brought $20,000 (or proves in some
  other way that the fair market value of the collateral at the
  time of sale was $20,000).

Defendants would have it that they would be relieved from any liability as guarantors under that set of facts, even though the maximum harm to them from the lack of commercial reasonableness of the sale was $15,000. This Court will not have it so, and nothing in the "remedial" view of UCC Article IX that controls here*fn4 (as contrasted with the "punitive" view) requires that result. In the hypothetical example this Court would impose an $80,000 liability on the unconditional guarantor.

In other words the presumption referred to in National Boulevard Bank may be rebutted by a creditor's meeting any of several burdens, at least including:

    1. proof that the sale itself was commercially reasonable
  (with nothing to show that the amount realized was less ...

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