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United States v. Warwick

decided: December 22, 1982.

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
WESLEY J. WARWICK AND EUNICE B. WARWICK, DEFENDANTS-APPELLANTS



Appeal from the United States District Court for the Western District of Wisconsin. No. 79 C 236 -- Barbara B. Crabb, Judge.

Cummings, Chief Judge, Wood, Circuit Judge, and Marovitz, Senior District Judge.*fn*

Author: Wood

WOOD, Circuit Judge.

This is an appeal from a district court decision awarding judgment of $40,368.68 plus interest to the Small Business Administration (SBA) on a promissory note in the amount of $60,000 given to assist in the establishment of an automobile painting business. The two issues on appeal are 1) whether the district court properly held that appellants had not adequately proved their defense that they were sureties, rather than principals, on the note, and were thus subsequently released by actions of the SBA and, 2) whether the district court properly determined that the appellants had not adequately proved their defense that the sale of the property mortgaged in connection with the note was "commercially unreasonable." Because we agree with the district court's determination that the appellants were principals on the note and that the sale was conducted in a commercially reasonable fashion, we affirm.

I.

For convenience, we adopt the district court's statement of facts, undisputed by appellants, as set forth below:

In February, 1976, the Small Business Administration (SBA) made a $60,000 conditional loan commitment to Eugene L. Blowers and Wesley J. Warwick, a partnership d/b/a MAACO Auto Painting. SBA's commitment was made pursuant to an application submitted by both Blowers and Warwick, showing Eugene Blowers as Co-owner/Manager of the proposed business, with Wesley Warwick as Co-owner, . . . .

On April 28, 1976, both defendants and Eugene Blowers and Gloria Blowers signed a note to SBA in connection with the loan to the partnership. The men signed as partners; the women signed as wives.

The note included the provision that upon nonpayment of the debt or any part thereof, the SBA was empowered to sell all of the collateral at public or private sale, "without demand, advertisement or notice of the time or place of sale or of any adjournment thereof, which are hereby expressly waived," and that the debtors waived "all right of redemption or appraisement whether before or after sale." The note included the additional provision that the SBA's security rights "shall not be impaired . . . by any indulgence, including but not limited to (a) any renewal, extension, or modification which Holder may grant with respect to the Indebtedness or any part thereof . . . ."

Also on April 12, 1976, defendants and Eugene Blowers and Gloria Blowers executed a security agreement making all machinery, equipment, furniture, fixtures, inventory and accounts receivable collateral on the April 26 note. On the same day, the two men executed a Certificate of Partners, an SBA document required of partnership applicants for loans. Attached to the document was a partnership agreement certified by both men as being a true copy of their agreement of partnership. The agreement stated that each partner would share equally in the profits and losses of the firm; that one partner would be elected as managing partner to administer the general affairs of the firm; and that the partnership could form a corporation for the purpose of carrying on its business, but that if it did so, both partners would remain liable permanently for the obligations assumed by the partnership.

On October 26, 1976, pursuant to a request for deferral from Eugene Blowers based upon delays in the release of the $60,000 SBA deferred the first payment on the loan to January 28, 1977. Defendants' consent was not obtained for the deferral, although the Modification Agreement provided for the signatures of all four of the obligors on the original loan and the cover letter advised Eugene Blowers that the Modification Agreement must be received in the SBA office before the deferment could become effective. The SBA files do not contain any signed copies of the Modification Agreement.

At the end of 1976, the auto painting business was incorporated. An Assumption Agreement was entered into by the new corporation, Blowers-Warwick Enterprises, Inc., taking over the assets and liabilities of the partnership. The agreement was signed by both defendants and by Eugene and Gloria Blowers and it provided that nothing in the agreement operated to release the original partners of any of the obligations to SBA on the original note, security agreement, financing statement or assumption agreement.

The new corporation did not make its first payment to SBA on January 28, 1977, as required. It did make a $450 payment on February 8, 1977. On March 30, 1977, Eugene Blowers requested a reduced payment schedule for the first half of 1977. Defendants' consent to the new schedule was not obtained although, as before, Eugene Blowers was advised that a signed Modification Agreement must be received by SBA before the deferment could become effective.

Under the proposed modification agreement, monthly payments would be $450 for the first six months of 1977, with the $921 monthly payments resuming in the second half of 1977. The balance generated by the smaller $450 payments would be due at the loan's maturity.

The corporation made one additional $450 payment on May 18, 1977 and no others. It submitted a check for $900 in June, 1977, but the check proved to be uncollectible.

In preparation for the sale, the president of Delta Auction Company, Jasper Johns, made a brief visual inspection of the property to be auctioned. His initial appraisal was that the property might bring about $3000. Johns had had prior experience in the sale of spray painting equipment. He did not consult any equipment manuals or seek any additional appraisals of the equipment. He considered primarily the size of the equipment, the probable difficulty and expense of removing it, and the expense of transporting it to another location. He considered also the fact that the property would be sold "as is," with no warranties.

Delta Auction Company mailed out approximately 1000 notices of the auction, using its regular mailing list, the Yellow Pages of telephone books from the tri-state area including Tennessee, Mississippi, and Arkansas, and a list of MAACO franchise holders furnished it by SBA. A copy of the notice was sent to defendants who received it on December 16, 1977. The notice advertised the sale as a "Foreclosure Auction" and showed the property to be sold as

BINKS 26' DUST PROOF SPRAY BOOTH, APPROX. 60 X 15 COMPLETE FOR PAINTING CARS (2) 10 HP AIR COMPRESORS [sic] DECLOSER 7 GALLON CAPACITY PAINT MIXING MACHINE WITH TABLE 100 GALLONS AUTO PAINT (2) 5 GALLON PAINT BUCKETS PAINT REGULATOR 7 SECTIONS METAL SHELVING 8 SELECTION COKE BOX MANY MISC. ITEMS TOO NUMEROUS TO MENTION

Johns placed two advertisements of the [auction] in the Commercial Appeal in Memphis. The advertisements ran on Sunday, December 11, ...


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