Appeal from the Appellate Court for the Third District; heard
in that court on appeal from the Circuit Court of Knox County,
the Hon. Scott I. Klukos, Judge, presiding.
JUSTICE WARD DELIVERED THE OPINION OF THE COURT:
This appeal involves a conflict within the appellate court on the question of whether the failure of a secured creditor to give notice to the debtor or guarantor (see Commercial Discount Corp. v. Bayer (1978), 57 Ill. App.3d 295) of the sale of collateral bars the creditor from recovering a deficiency from the debtor or guarantor. The circuit court of Knox County held that the plaintiff, First Galesburg National Bank (the bank), could not recover from Louis and Jennie Joannides, the defendants, guarantors on a loan made by the bank. The appellate court affirmed. (116 Ill. App.3d 810.) The appellate court's decision was on the ground that the bank failed to give the guarantors notice of the sale of the collateral as required by section 9-504(3) of the Uniform Commercial Code (Ill. Rev. Stat. 1981, ch. 26, par. 9-504(3)). We granted the bank's petition for leave to appeal under Rule 315 (87 Ill.2d R. 315).
Tim Joannides, the defendants' son, was the owner of an automobile dealership incorporated as "Town and Country Dodge." The bank financed the dealer's new-car inventory through a "floor plan" agreement. Under the arrangement, Town and Country was given a credit line at the bank to purchase new cars, and it agreed to remit the proceeds to the bank as each car was sold.
Town and Country suffered financial reverses in 1979 and 1980, and the bank asked the dealership to seek financing elsewhere. Tim Joannides then agreed to obtain a guaranty of payment of his company's indebtedness from his parents. The bank continued the financing of Town and Country upon the making of a $50,000 guaranty by the defendants, which guaranty was executed on February 19, 1980. The financial difficulties of the dealership continued. As of May 8, 1981, the bank had determined that 32 cars had been sold by Town and Country without tendering the proceeds to the bank in compliance with the loan agreement. Upon discovering this, the bank insisted that Tim assign the titles and certificates of origin of the remaining cars to it. Between May 8 and 23 the bank sold seven of these autos. On May 23, 1981, the defendants received a letter from the bank. The letter read:
"On Friday, May 8, 1981, the doors of Town and Country Dodge were closed to the public and subsequent to that the business has been placed in bankruptcy.
The intent of this letter is to notify you that it now appears a loss will be realized and the bank will be forced to ask you to honor your guarantee of $50,000 dated February 19, 1980.
We are available at your convenience to discuss this situation if you have any questions."
The Joannides did not respond. When the bank completed the liquidation of the dealership inventory, there was a deficiency of $161,628.79 in principal and $52,829.19 in unpaid interest.
The bank then brought an action against the defendants on the guaranty. The Joannides raised four affirmative defenses, only one of which is relevant here. It is that the bank disposed of the collateral by sale without notice to the guarantors and in a commercially unreasonable manner. (See Ill. Rev. Stat. 1981, ch. 26, par. 9-504.) In denying a motion by the defendants for summary judgment, the trial court held that the question of whether the sale of collateral was commercially reasonable was a question of fact for the jury. The jury returned a verdict for the Joannides, and judgment was entered in their favor. The appellate court affirmed, but on the ground that the action was barred because the Joannides were not given notice that there would be a sale of the collateral.
Under the "absolute-bar" view, which the holding of the appellate court illustrates, a secured creditor is precluded from bringing a deficiency action against the debtor unless the debtor was given notice of the proposed sale of the collateral. The defendants contend that the absolute-bar holding is necessary to protect the debtor's right to redeem the collateral. Without it, they say, a creditor would not be deterred from failing to give notice to the debtor. Giving a remedy of damages for a failure to comply with the notice requirement (Ill. Rev. Stat. 1981, ch. 26, par. 9-507) is an inadequate deterrent because, they argue, it places a burden on the debtor to prove that the debtor sustained damages because of the failure of notice. The absolute-bar view has been followed in some holdings of the appellate court. See State National Bank v. Northwest Dodge, Inc. (1982), 108 Ill. App.3d 376; Spillers v. First National Bank (1980), 81 Ill. App.3d 199; Stensel v. Stensel (1978), 63 Ill. App.3d 639.
The bank argues in favor of the "rebuttable-presumption" or "remedial" view. Under this, if the collateral is sold without notice to the debtor or the guarantor, the presumption is that the value of the collateral sold was equal to the indebtedness. The presumption can be rebutted by a showing by the creditor that the value of the collateral was less than the indebtedness and that the sale was "commercially reasonable." The bank contends that under this view the debtor and guarantor are adequately protected from any harm arising from a lack of notice, while the debtor or guarantor is precluded from obtaining a windfall benefit from a failure to give notice. This view has been followed in a majority of the cases in which the appellate court has considered the question. See, e.g. National Boulevard Bank v. Jackson (1981), 92 Ill. App.3d 928; Chicago City Bank & Trust Co. v. Wilson (1980), 86 Ill. App.3d 452; Lakeshore National Bank v. McCann (1979), 78 Ill. App.3d 580; National Republic Bank v. Proctor (1978), 66 Ill. App.3d 534; Commercial Discount Corp. v. Bayer (1978), 57 Ill. App.3d 295; General Foods Corp. v. Hall (1976), 39 Ill. App.3d 147; Tauber v. Johnson (1972), 8 Ill. App.3d 789.
Section 9-504 of the Uniform Commercial Code provides for the right of the creditor to dispose of collateral upon default of the debtor and requires that the disposition of collateral be made in a "commercially reasonable" manner. (Ill. Rev. Stat. 1981, ch. 26, par. 9-504.) Subsection (2) codifies the right of a creditor to obtain a deficiency judgment from the debtor, providing:
"(2) If the security interest secures an indebtedness, the secured party must account to the debtor for any surplus, and, unless otherwise agreed, the debtor is liable for any deficiency." (Ill. Rev. Stat. 1981, ch. 26, par. 9-504(2).)
The paragraph which follows, subsection (3), sets out the conditions for the sale of collateral, ...