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UNITED STATES v. CRISPEN

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


October 2, 1985

UNITED STATES OF AMERICA, PLAINTIFF,
v.
RAY CRISPEN, ET AL., DEFENDANTS.

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

MEMORANDUM OPINION AND ORDER

On April 7, 1980, Crispen, Inc. borrowed the sum of $167,000 from First National Bank and Trust Company of Evanston which subsequently assigned the loan to the Small Business Administration ("SBA"), as part of the Loan Guaranty Program. Ray G. Crispen and Joanne Crispen (the "Crispens") executed an SBA form guaranty and a mortgage on their home. A note evidencing the indebtedness was also signed on behalf of Crispen, Inc. by Ray G. Crispen as its President. The guaranty specifically waived the guarantor's right to notice of the time or place of sale of the collateral in the event default occurred. The guaranty further provided that it should be construed and enforced in accordance with applicable federal law.

Crispen, Inc. subsequently defaulted on the loan. Crispen, Inc. and Ray and Joanne Crispen, as guarantors, were notified of the default and demand for payment by certified mail on October 1, 1980. The corporation's letter was returned as unclaimed. The Crispens assert that they never received the letters.

The SBA sent notice to the Crispens' attorney on November 25, 1981 of a private sale of the assets to be held November 30, 1981. On October 14, 1981 there had been an independent appraisal of the Crispens equipment determining the value of the assets to be $60,000. The November sale raised $94,000, which was applied to reduce the outstanding indebtedness of Crispen, Inc.

After failing in negotiations to settle the matter of the remaining outstanding debt, the government filed this action on December 11, 1984 to foreclose on the note and accompanying instruments. The government seeks the principal sum of $89,141.98 plus interest accruing at the rate of $54.48 per day.

On May 2, 1985, the government filed its motion for summary judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. Because the motion and response refer to matters outside the pleadings, in accordance with Rule 12(c), the motion will be treated as one for summary judgment and disposed of as provided by Fed.R.Civ.P. 56.

In support of its motion, the government submitted the affidavit of Paul Huska, Loan Specialist, Liquidation Division, Small Business Administration. The affidavit attests to the Bank's assignment of note, guaranty, and mortgage to the SBA. It also attests to the default by Crispen, Inc. and the notice and demand made to the Crispens. Certification of Official Documents and Certified Transcripts of Account were also presented.

In their response to the motion for judgment on the pleadings or for summary judgment, the Crispens assert that the SBA failed to comply with Section 9-504 of the Uniform Commercial Code ("U.C.C."), Ill. Rev.Stat. ch. 26, § 9-504, which requires notice of the sale. They also assert that failure to conduct the November, 1981 sale within the bounds of commercial reasonableness as required by Section 9-504 precludes entry of summary judgment against them.*fn1

On June 13, 1985, the Crispens filed a motion for leave to file additional affirmative defenses. The motion was made to conform the answer to their response to the government's motion for judgment on the pleadings or for summary judgment. The affirmative defenses which the Crispens sought to file are: (1) Section 9-504 applies to the November, 1981 sale; (2) the sale was commercially unreasonable due to lack of notice; (3) the SBA is barred by the equitable doctrine of laches from collecting sums due under the note; and (4) the note and guaranty have contradictory terms regarding the applicable interest rate, thereby raising a material issue of fact.

After an examination of all the pleadings and affidavits, this Court concludes that there are no issues of material fact, and thus grants summary judgment under Rule 56 of the Federal Rules of Civil Procedure. The defendants' motion for leave to file additional defenses is also granted. As a matter of law, however, the affirmative defenses the defendants seek leave to file do not affect the Court's disposition of this case in granting summary judgment for the government.

            The Application of Section 9-504 and the
              Commercial Reasonableness of the Sale

The Crispens assert that the government cannot collect from them on the guaranty because the SBA failed to notify them prior to its sale of the business equipment and failed to dispose of the equipment in a commercially responsible manner as is required by Section 9-504(3) of the U.C.C. Section 9-504(3) of the U.C.C. provides:

  Disposition of the collateral may be by public or
  private proceedings and may be made by way of one
  or more contracts. Sale or other disposition may
  be as a unit or in parcels and at any time and
  place

  and on any terms but every aspect of the
  disposition including the method, manner, time,
  place and terms must be commercially reasonable.
  Unless collateral is perishable or threatens to
  decline speedily in value or is of a type
  customarily sold on a recognized market,
  reasonable notification of the time after which
  any private sale or other intended disposition is
  to be made shall be sent by the secured party to
  the debtor, if he has not signed after default a
  statement renouncing or modifying his right to
  notification of sale. In the case of consumer
  goods no other notification need be sent. In
  other cases notification shall be sent to any
  other secured party from whom the secured party
  has received (before sending his notification to
  the debtor or before the debtor's renunciation of
  his rights) written notice of a claim of an
  interest in the collateral. The secured party may
  buy at any public sale and if the collateral is
  of a type customarily sold in a recognized market
  or is of a type which is the subject of widely
  distributed standard price quotations he may buy
  at private sale.

Ill.Rev.Stat. ch. 26, § 9-504(3). The government contends that the guaranty was "unconditioned" and free of the restrictions relating to method, manner, time, and place of disposing of the collateral and that, in any event, the Crispens specifically waived those defenses in signing the guaranty.

Although Section 9-501 of the U.C.C. clearly bars such a waiver by the debtor,*fn2 a series of cases involving actions by the government to recover on SBA loan guarantees, and construing language similar to that found in the guaranty signed by the Crispens, have allowed such waivers. Guarantors have been precluded from raising such defenses against the government on the principle that the guaranty is "unconditional".

For example, in United States v. Lattauzio, 748 F.2d 559, 562 (10th Cir. 1984), the court held that guarantors on an SBA loan waived the commercial reasonableness defense of Section 9-504 in signing the guaranty. Similarly, in United States v. Kurtz, 525 F. Supp. 734 (E.D.Pa. 1981), aff'd without opinion, 688 F.2d 827 (3d Cir. 1982), cert. denied, 459 U.S. 991, 103 S.Ct. 347, 74 L.Ed.2d 387 (1982), the court held that a guarantor on an SBA guaranty waived by contract the protections afforded by the U.C.C., including the right to notice. The court specifically recognized Section 9-501's proscription on waiver, but based its decision on the tendency of courts to permit SBA loan guarantors to waive Section 9-504 protections. Id. at 745-46. An identical waiver was also upheld in National Acceptance Co. of America v. Wechsler, 489 F. Supp. 642, 548 (N.D.Ill. 1980).*fn3

As with any contract, the language of the guaranty must be examined to determine the rights and obligations of the parties. Where the terms of a contract of guaranty are unequivocal, the plain language of the guaranty controls. The guaranty must be interpreted according to the language used because it is presumed that the parties meant what their language clearly imparts. IIT Diversified Credit Corp. v. Kimmel, 508 F. Supp. 140 (N.D.Ill. 1981).

In United States v. Fisher, 460 F. Supp. 297 (E.D.Wisc. 1978), the court found the commercial reasonableness defense was precluded by the express language of the guaranty. The guaranty agreement involved in Fisher granted the following powers to the lender:

  In the event of the nonpayment when due, whether
  by acceleration or otherwise, of any of the
  liabilities, or in the event of default in the
  performance of any obligation comprised in the
  collateral, to realize on the collateral or any
  part thereof, as a whole or in such parcels or
  subdivided interests as Lender may elect, at any
  public or private sale or sales, for cash or on
  credit or for future delivery, without demand,
  advertisement or notice of the time or place of
  sale or any adjournment thereof (the Undersigned
  hereby waiving any such demand, advertisement and
  notice to the extent permitted by law), or by
  foreclosure or otherwise, or to forbear from
  realizing thereon, all as Lender in its
  uncontrolled discretion may deem proper, or to
  purchase all or any part of the collateral for
  its own account at any such sale or foreclosure,
  such powers to be exercised only to the extent
  permitted by law.

Fisher, 460 F. Supp. at 298-99.

The language of the Crispens' guaranty is exactly the same as the language of the guaranty in Fisher. The guaranty here provides the following powers to the lender, in pertinent part:

  In the event of the nonpayment when due, whether by
  acceleration or otherwise, of any of the
  Liabilities, or in the event of default in the
  performance of any obligation comprised in the
  collateral, to realize on the collateral or any
  part thereof, as a whole or in such parcels or
  subdivided interests as Lender may elect, at any
  public or private sale or sales, for cash or on
  credit or for future delivery, without demand,
  advertisement or notice of the time or place of
  sale or any adjournment thereof (the Undersigned
  hereby waiving any such demand, advertisement and
  notice to the extent permitted by law), or by
  foreclosure or otherwise, or to forbear from
  realizing thereon, all as Lender in its
  uncontrolled discretion may deem proper, and to
  purchase all or any part of the collateral for its
  own account at any such sale or foreclosure, such
  powers to be exercised only to the extent permitted
  by law. . . .

(Emphasis added.)

Most significantly, the Seventh Circuit has recently held that a guarantor waived her right to notice and to a commercially reasonable sale when she signed a guaranty whose language was also apparently identical to the language at issue in this case. United States v. Meadors, 753 F.2d 590, 593-94 (7th Cir. 1985). Although the Seventh Circuit relied in part on Indiana law, it expressly stated that "[f]ederal law governs questions involving rights of the United States arising under nationwide federal programs." Id. at 592. Obviously, this Court is bound by decisions of the Seventh Circuit.

This Court, in reviewing the terms of the SBA's guaranty in light of the principles and case law set forth above, finds that although Section 9-504 does apply, the Crispens expressly waived Section 9-504 by signing the guaranty.

Even if this Court were to conclude that the SBA had an obligation to send notice to the Crispens despite their waiver of Section 9-504, there still would remain no genuine issue of material fact with respect to their actual receipt of reasonable notice and with respect to the commercial reasonableness of the disposition of Crispen, Inc.'s assets. First, despite the Crispens' assertion that they did not receive the notice of default and demand for payment sent by certified letter dated October 1, 1981, the SBA has submitted the certified mail receipts signed by Joanne Crispen indicating that she did indeed receive both her letter and that sent to her husband on October 10, 1981. Thus, there is no basis in fact for the Crispens' denial that they received the October 1 letters absent an affidavit that the signatures were not those of Joanne Crispen.

Second, the SBA affidavit attests that its letters of November 6, 13, and 25, 1981, sent to the Crispens' attorney, gave the Crispens actual notice of the sale.*fn4 It is well settled that a secured creditor can satisfy the notice requirement by sending notification to a proper party; it is not necessary that the debtor receive it.*fn5 J.J. White & R.S. Summers, Uniform Commercial Code § 26-10 (2d ed. 1980).

To be considered "genuine" for Rule 56 purposes, a material issue must be established by "sufficient evidence supporting the claimed factual dispute." First National Bank of Arizona v. Cities Service Co., Inc., 391 U.S. 253, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968). Moreover, to defeat the government's summary judgment motion, the defendants were obligated to submit affidavits or other admissible evidence to dispute the facts established by the government's affidavits; they cannot rely on mere denials. United States v. Bob Stofer Oldsmobile-Cadillac, Inc., 766 F.2d 1147, 1150-52 (7th Cir. 1985); Berghoff Restaurant Co., Inc. v. Lewis W. Berghoff, Inc., 499 F.2d 1183, 1186 (7th Cir. 1974). The Crispens have not done so.*fn6

Nor do the Crispens contend that their attorney did not receive the November 25, 1985 letter notifying them of the impending sale of assets. Thus, the Crispens received all the notice to which they were entitled under Section 9-504 even if they did not waive Section 9-504. National Acceptance Co. of America v. Medlin, 538 F. Supp. 585, 587 (N.D.Ill. 1982). (Notice sent to attorney fulfills the purposes of the notice requirement of Section 9-504(3).)

Finally, that the sale itself was commercially reasonable is established by the fact that the ultimate recovery credited to the loan balance was substantially in excess of the appraised auction value. And, even if the sale price was too low, as the Crispens contend, absent fraud, mistake, or illegal practices in the sale, it can still be commercially reasonable. Bryant v. American National Bank & Trust Co. of Chicago, 407 F. Supp. 360, 366 (N.D.Ill. 1976). Even the Crispens do not contend that the SBA engaged in such conduct. Instead, they merely assert on information and belief that the $94,000 amount realized by the SBA on the sale of Crispen, Inc.'s assets was "substantially lower than the SBA could have received had it properly advertised and otherwise pursued recognized markets for the assets of Crispen, Inc." (Affidavit of Ray Crispen, 16.) Statements in affidavits made upon information and belief may, of course, be disregarded as not meeting the personal knowledge requirement of Rule 56. Automatic Radio Manufacturing Co. v. Hazeltine Research, 339 U.S. 827, 831, 70 S.Ct. 894, 896, 94 L.Ed. 1312 (1950); Cohen v. Ayers, 449 F. Supp. 298, 321 (N.D.Ill. 1978), aff'd, 596 F.2d 733 (7th Cir. 1979).

This Court holds that the waiver in the guaranty is valid against the Crispens. Alternatively, even if the proscription on the Section 9-504 waiver were enforced, the requirements imposed by the U.C.C. were in fact fulfilled by the SBA.

The Doctrine of Laches

The Crispens assert that the equitable doctrine of laches must bar the government from seeking a deficiency. The Crispens claim the loan is subject to all the defenses in law and in equity which existed against the First National Bank of Evanston.

The Crispens' assertion is without merit. It is well established that the United States is not subject to the defense of laches. United States v. Summerlin, 310 U.S. 414, 416, 60 S.Ct. 1019, 1020, 84 L.Ed. 1283 (1940) (The United States had been assigned a claim against an estate, and the Court held that the doctrine of laches and the statute of limitations could not be asserted against the United States). Courts have consistently adhered to this principle.*fn7

Applicable Interest Rate

The Crispens assert that the note and guaranty are contradictory in their terms. They allege that the note requires that upon default the interest rate shall be fixed at the prime rate at the time of default. The guaranty purportedly fixes the rate at 2% per annum above the prime rate. The government contends that the wording of the guaranty only describes the note and that the terms of the note control. This Court agrees.

In any event, the purported contradiction in interest rates does not bar the government's right to recovery. The Crispens must be deemed to have knowledge of the terms of the instruments when they executed them. Even if the Crispens are correct in their contention that the interest rate provided by the guaranty contradicts that provided by the note, the government here is seeking the interest rate provided by the note. The Crispens do not contend that the interest rate provided in the note is ambiguous.

Upon examining the note, this Court finds that the note is unambiguous in its provision that the interest rate shall be frozen to the prime rate at the time of default. It provides:

  In the event of default . . ., the rate of
  interest on both the guaranteed and unguaranteed
  portions of the unpaid principal balance shall
  become fixed at the rate in effect as to the
  initial date of default.

Based upon the plain language of each instrument together with the Crispens' pleadings and affidavits, this Court concludes that there are no genuine issues of material fact regarding the applicable interest rate due and owing to the government.

Conclusion

For the foregoing reasons, this Court finds that no genuine issues of material fact exist regarding the rights of the government and the Crispens under the guaranty. The SBA's disposition of the equipment of Crispen, Inc. was commercially reasonable. The doctrine of lathes is a defense not available against the United States. Furthermore the Crispen's have failed to raise an issue of fact regarding the fixed interest rate they are liable to pay. The government's motion for summary judgment against the Crispens is, therefore, granted.

Judgment will enter as follows:

  Summary judgment is entered in favor of the Small
  Business Administration in the principal sum of
  $89,141.98 plus interest accruing at the rate of
  $54.48 per day from default to the date of this
  opinion. The government has a valid and
  subsisting lien on all of the property covered by
  the mortgage for the amounts due the United
  States, and prior and superior to the claims or
  interest of any of the defendants. If the amounts
  due are not paid within 30 days from the date of
  this opinion, the government has the right to
  foreclose on and sell the mortgaged real property
  of the Crispens. The Court recognizes the
  government's lien upon the mortgaged property and
  adjudges the lien to be superior to the claims
  and interests of the Crispens. The Crispens, and
  all persons claiming by, through, and under them
  subsequent to the commencement of this action are
  barred and foreclosed of all title and equity of
  redemption in and to the mortgaged property. The
  United States Marshal may sell the property and
  take from the proceeds the amount of $89,141.98
  plus interest accruing in the amount of $54.48
  per day from the date of default until the date
  of this opinion. Also, such moneys as the
  government may expend for taxes, insurance
  premiums, title costs or other necessary actions
  to carry out the covenants contained in the note,
  guaranty and mortgage, together with the costs of
  this action, with interest on the sum due as
  allowed by law to the date of sale may also be
  retained from the proceeds. The United States
  Marshal may employ an auctioneer to conduct such
  a sale. The Small Business Administration has the
  right to bid on the real property. Upon the
  saleof the property a Marshal's Certificate of
  Sale must be issued to the purchaser at the sale.
  If the amount paid to the government from the
  proceeds of such foreclosure sale is insufficient
  to pay the sums due the government under this
  decree, then a judgment shall be issued against
  the Crispens for the amount of the deficiency.
  The Crispens are enjoined from committing waste
  upon the real property or doing any other act
  which may impair the value of the property.

It is so ordered.


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