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December 13, 1982


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


Commercial Discount Corporation ("CDC") and Leasematic, Inc. ("Leasematic," a CDC subsidiary) sued William S. King ("King") and Horace Rainey, Jr. ("Rainey") on their joint and several personal guaranty of Racran Corporation ("Racran") indebtedness. King and Rainey have moved for reconsideration of this Court's August 13, 1982 opinion ("Opinion III," 545 F. Supp. 455) denying their motion for summary judgment. In reliance on the principles announced in Opinion III, CDC and Leasematic have moved for summary judgment against King and Rainey for $2,020,986.28 plus interest. For the reasons stated in this memorandum opinion and order, the King-Rainey motion is denied and the CDC-Leasematic motion is granted.

Procedural History

This Court's September 23, 1980 memorandum opinion and order ("Opinion I") granted summary judgment on the issue of liability against King. Opinion I at 1 said there was "no dispute . . . as to King's execution and delivery of the guaranties nor as to their validity." King himself posed no issues of fact material to his liability,*fn1 raising questions only as to the measure of plaintiffs' recovery. Id. at 2.

King then moved to vacate the summary judgment decision because of supplemental affirmative defenses arising out of events occurring after plaintiffs' original motion was fully briefed. Those new defenses were based on plaintiffs' failure to provide notice of the sale of certain collateral in which they had a security interest. This Court's May 14, 1981 memorandum opinion and order ("Opinion II") granted King's motion to vacate but struck all but one of the new defenses.*fn2 515 F. Supp. 988 (N.D.Ill. 1981).

King's first defense claimed plaintiffs' failure to give notice of sale was an absolute bar to their obtaining a deficiency judgment. This Court ruled, however, it was bound by the law as announced by the Illinois Appellate Court for the First District: that such failure to provide notice simply created a rebuttable presumption that the proceeds from the collateral sale equaled the value of any outstanding debt. 515 F. Supp. at 990, citing 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 defense was therefore insufficient as a matter of law. 515 F. Supp. at 990.

King's second defense embraced the rule of National Boulevard Bank. But that rule could benefit King only if the UCC notice requirement, Section 9-504(3), were applicable to guarantors (as "debtors" for statutory purposes) and only if the right to notice were not effectively waived in the guaranty. Opinion II held a debtor's pre-default waiver of the right to notice was void under the UCC. 515 F. Supp. at 990. Citing Commercial Discount Corp. v. Bayer, 57 Ill. App.3d 295, 14 Ill.Dec. 647, 372 N.E.2d 926 (1st Dist. 1978) ("Bayer"), Opinion II then held Section 9-504(3) was applicable to guarantors (qua "debtors"), so that the parties were required to deal with the deficiency issue in the context of the National Boulevard Bank presumption.*fn3 515 F. Supp. at 990-92.

Opinion III denied defendants' summary judgment motion and deferred ruling on plaintiffs' cross-motion for the same relief. Defendants had contended the National Boulevard Bank presumption entitled them to an outright discharge if the collateral were sold below its fair market value, even if plaintiffs proved the fair market value were in fact less than Racran's outstanding debt. Opinion III rejected defendants' "Draconian approach" and held plaintiffs could rebut National Boulevard Bank's presumption by showing either (1) the sale in fact realized the collateral's fair market value or (2) the collateral's fair market value, even though greater than the sale proceeds, was less than the amount owed. 545 F. Supp. at 456-57. Defendants' summary judgment motion was denied because plaintiffs posed factual issues as to the collateral's fair market value. Id. at 457. And because plaintiffs had not themselves identified which of several possible amounts they sought to recover, Opinion III deferred ruling on their motion for summary judgment. 545 F. Supp. at 458.

In sum Opinions I-III placed CDC and Leasematic within reach of winning summary judgment on their deficiency claim against King and Rainey. CDC-Leasematic had only to show beyond genuine factual dispute what deficiency existed after properly crediting King and Rainey for the sold collateral and Racran's seized inventory. Opinion III, 545 F. Supp. at 458. Defendants now urge the key support for that result is itself undermined.

Defendants' Motion for Reconsideration

Defendants rely for their new contention on a decision by a division of the Illinois Appellate Court for the First District handed down just before Opinion III (but not then known to the parties or this Court), State National Bank of Evanston v. Northwest Dodge, Inc., 108 Ill. App.3d 376, 64 Ill.Dec. 26, 438 N.E.2d 1345 (1st Dist. 1982). Defendants argue (Mem. ¶ 7) Northwest Dodge shows "the First District no longer follows the rebuttable presumption rule enunciated in National Boulevard Bank of Chicago v. Jackson." They say the First District has now adopted the rule barring a deficiency judgment when a secured creditor fails to give notice before disposing of repossessed collateral. In effect defendants argue King's first supplemental affirmative defense, destroyed in the fire of Opinion II, has risen like a Phoenix from the ashes.

But the step from Northwest Dodge to defendants' desired result is an unjustified quantum leap, for the reasons treated in the next section of this opinion. At a minimum it is unclear whether Northwest Dodge stands for a rule universally applicable to failures to notify debtors (let alone guarantors). And even if the case were so construed, this Court would then have to predict the Illinois Supreme Court's resolution of the notification issue, in light of what would be a split within the First District as well as among Illinois Appellate Districts. If put to that prognosis, this Court considers the Illinois Supreme Court would follow the National Boulevard Bank presumption rule — at least where a secured creditor in a commercial (non-consumer) transaction fails to notify a guarantor before selling collateral.

1.  Northwest Dodge

Northwest Dodge involved an agreement between a bank and an automobile dealer under which:

    1. The bank purchased at a discount the dealer's
  retail installment contracts on sales of
  recreational vehicles.
    2. The dealer was given a 3% participation in
  the finance income from the installment contracts,
  one-third of which was credited to the dealer's
  reserve account at the bank.

108 Ill. App.3d at 378, 64 Ill.Dec. at 28, 438 N.E.2d at 1347. In 1976 the bank sued, claiming the dealer had failed to pay its proportionate share of refunds on prepaid accounts, as required by another provision of the agreement. In turn the dealer counterclaimed for damages allegedly caused by the bank's debiting its reserve account for "deficiencies" arising from the bank's sale, without notice, of certain repossessed vehicles. Id. See also 86 Ill. App.3d 90, 91-92, 41 Ill.Dec. 655, 656, 408 N.E.2d 1, 2 (1st Dist. 1980).

In affirming a trial court judgment for the dealer on its counterclaim, the court emphasized the special contractual circumstances present (108 Ill. App.3d at 379, 64 Ill.Dec. at 29, 438 N.E.2d at 1348, footnotes omitted):

  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. By
  exercising its right to dispose of collateral
  under Article 9, however, the Bank was obligated
  to comply with the notice provision of section
  9-504(3). . . .

That deliberate emphasis tends to suggest Northwest Dodge may be limited to circumstances in which a non-notifying creditor has deliberately opted to be bound by the strictures of Section 9-504(3) rather than pursuing its alternative contractual remedy. That possible construction of Northwest Dodge, and its impact on this case, have not been addressed by the parties.

Perhaps a more significant limitation of Northwest Dodge derives from the court's rationale for choosing the "absolute bar" rule for creditors' failure to provide Section 9-504(3) notice. It was led to its choice by a solicitous concern for debtors (108 Ill. App.3d at 383, 64 Ill.Dec. at 31, 438 N.E.2d at 1350):

  The debtor's right to redeem the collateral or to
  be present at its disposition is too important to
  be neutralized by construing the notice
  requirement as anything less than a condition
  precedent to the ...

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