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

August 13, 1982


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


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 than
  fair market value); or

    2. even though the price obtained at the sale was not
  "commercially reasonable" in the National Boulevard Bank
  sense, proof of what a "commercially reasonable" price (that
  is, fair market value) would have been.

That second alternative is effectively confirmed by UCC § 9-507(1), under which a debtor (here a guarantor) may recover damages caused by failure of notice — a provision whose thrust is that a creditor may recover only the difference between the amount owed and the fair market value of the collateral. It is also buttressed by defendants' waiver of commercial reasonableness of the manner of dealing (see n.1), so that the only issue open to contest is what price could reasonably have been obtained (fair market value under the circumstances). To adopt defendants' contrary contention would create the bizarre situation in which a presumption (that the value of the secured collateral equals the debt) is rebuttable only by facts that lead to an opposite inference (proof that the amount realized from the sale was "commercially reasonable") but not by facts directly contradicting the presumption (proof of what the fair value of the secured collateral really was).

Thus the proper test on the parties' cross-motions is whether there are material issues of fact as to the fair market value of the collateral. Once defendants' Draconian approach is rejected as unsupported by the law, there is no question that plaintiffs have posed such issues. Defendants cannot then prevail on their summary judgment motion.

On the other side of the coin, there are indeed material issues of fact as to the precise values involved, but at most the values (even taking all reasonable inferences in favor of defendants) are these:

    1. $544,225 was the price ultimately obtained for the
  equipment upon resale.*fn5 Defendants' argument that the
  price is "suspect" because CDC released a co-guarantor from
  liability under his guaranty is a non sequitur-that argument
  could only reduce, not enhance, the fair market value
  allocable to the equipment. All other evidence points to
  values well below the $544,225 figure, so that defendants
  could not complain of a summary judgment based on a credit in
  that amount.

    2. $150,000 (60,000 tons at $2.50 per ton) is, under the
  evidence, the highest amount rationally attributable to
  Racran's "inventory" — a 60,000 ton mountain of material
  ("dust," "goop" or what you will) arguably capable of being
  reworked to recover some value. All higher speculative
  figures fail, even with all reasonable inferences drawn in
  defendants' favor:

    (a) $6.00 a ton, the amount that Racran received when it was
    selling the dust, has no probative force. It is a gross
    receipt figure that does not take into account the cost of
    moving the mountain, a cost that would have had to be borne
    either by the seller (thus reducing that value) or by the
    purchaser (thus reducing the price). Taking transportation
    into account generates at most the $150,000 figure already
    referred to.

    (b) All figures proffered by defendants did not take into
    account either the cost of processing or the cost of

  In fact under the circumstances faced by CDC at the time of
  sale — obligated as it was to vacate the premises within a very
  short time — even the $6 per ton or the $2 to $2.50 per ton
  figures were unrealizable. CDC bought the mountain for $7,000,
  having been unable to find a purchaser. It ultimately had to
  abandon the property (a reasonable reflection of the absence of
  fair market value, for any rational creditor will of course act
  to maximize its current cash realization rather than creating a
  larger and likely-to-be-disputed claim against a guarantor).
  Thus the $150,000 represents the maximum credit allowable to
  defendants for the "inventory."*fn6


Defendants' motion for summary judgment is denied. On the other hand, plaintiffs' argument has essentially been that they are entitled to recover one of several possible amounts, so it is unclear to the Court whether they are prepared to accept summary judgment for the amount indicated in this opinion, waiving any larger claim (in the technical sense, the existence of material fact disputes affecting the amount to which plaintiffs are entitled would preclude summary judgment as to any specific amount). Accordingly final ruling on plaintiffs' motion is deferred pending advice from plaintiffs in that respect.

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