No. 92-430
IN THE SUPREME CllURT OF THE STATE OF MONTANA
1993
BLAINE BANK OF MONTANA,
a Montana Corporation,
Plaintiff and Respsndent,
RUSSELL HAUGEN, DONN R. HAUGEN,
and DELL HAUGEN, d/b/a QUALITY
ENTERPRISES, a Montana partnership,
and DORIS HAUGEN,
Defendants and Appellants.
APPEAL FROM: District Court of the Seventeenth Judicial District,
In and for the County of Blaine,
The Honorable Leonard Langen, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Chris R. Young; Young, Brown & Richardson,
Havre, Montana
For Respondent:
Ward E. Taleff, John P. Paul; Alexander,
Baucus & Linnell, Great Falls, Montana
1 Submitted on Briefs: March 25. 1993
Decided: A U ~ U S ~
Justice Karla M. Gray delivered the opinion of the Court.
Russell and Donn Haugen appeal from an order of the
Seventeenth Judicial District Court, Blaine County, denying their
motion to preclude entry of deficiency judgment. We affirm.
We restate the issues on appeal as follows:
1. Did the District Court err by allowing the Haugens to
file an action to recover damages, if any, resulting from a
judicial foreclosure sale which violated 3 25-13-704(2), MCA,
instead of precluding deficiency judgment?
2. Did the District Court err by declining to preclude
deficiency judgment based on its determination that the Haugens did
not own personal property located in the Shanty Motel when it was
sold by Blaine Bank?
In May 1984, Blaine Bank of Montana (Blaine Bank) loaned
$113,868.16 to Russell Haugen. The promissory note listed the
borrower as "Russell Haugen d/b/a Quality enterprise^.'^ To secure
the loan, Blaine Bank obtained and perfected a security interest in
vehicles and equipment owned by Russell and Doris Haugen (the
Haugens). As further security for the loan, the Haugens assigned
their purchasersf interest in a 1981 contract for deed between
themselves and S-M Corporation for the purchase of the Shanty Motel
located in Havre, Montana. They also executed a quit claim deed
for the motel in favor of Blaine Bank to be recorded in the event
of default.
On February 24, 1988, Blaine Bank filed a complaint against
Russell Haugen, his sons Donn and Dell Haugen, and ~uality
Enterprises, a partnership allegedly formed by the three men.
Blaine Bank asserted that the defendants had defaulted on the
May 1984 loan. It elected to accelerate the outstanding debt and
declared the entire unpaid balance, totaling $116,621.12, due.
Blaine Bank also sought to foreclose its security interest in
the collateral and requested that Russell, Donn, and Dell Haugen be
required to pay any resulting deficiency. The complaint named
Doris Haugen as a defendant on the basis of her interest in the
collateral. Russell, Donn, and Doris Haugen asserted a number of
affirmative defenses and counterclaims.
A jury trial was held on November 13, 1989. The jury returned
a verdict against all the named defendants and against Russell,
Donn, and Doris Haugen on their defenses and counterclaims. The
District Court subsequently entered judgment in favor of Dell
Haugen, having determined that he was not a partner in Quality
Enterprises, and therefore, not liable on the promissory note.
On January 17, 1990, the District Court filed a judgment and
decree of foreclosure awarding Blaine Bank $132,427, representing
the principal and interest on the debt, plus costs and attorney
fees. The court also foreclosed the Haugens' interest in the
contract for deed and personal property collateral, directed that
the collateral be sold at a judicial foreclosure sale, and required
Russell and Donn Haugen to pay any deficiency. No appeal was
taken.
Blaine Bank subsequently purchased the Haugens' purchasers'
interest in the contract for deed for $60,700 at a judicial
foreclosure sale held April 18. It also purchased the vehicles and
equipment at a judicial foreclosure sale held August 30 for
$18,000; although this sale was held in Blaine County, virtually
all the property was located in Missoula County. A deficiency
remained after the proceeds from the sales were applied to the
judgment .
In addition to defaulting on the Blaine Bank loan, the Haugens
had defaulted on the contract for deed for purchase of the Shanty
Motel. They failed to cure their default and relinquished
possession of the motel to Henry and Sandra Erickson (the
Ericksons), successors to S-M Corporation, in January 1990.
On April 16, 1990, two days prior to purchasing the Haugens'
purchasers' interest in the contract for deed at the foreclosure
sale, Blaine Bank agreed to purchase the Ericksonsl sellersg
interest in the contract and the "real and personal property
comprising the Shanty Motel.Ig Although no sale documents are of
record, Blaine Bank apparently purchased the motel property
according to the terms of the April 16 agreement. In October 1991,
Blaine Bank sold the Shanty Motel, including the personal property
located inside it, to Narayan and Vibhuti Joshi (the Joshis).
The case presently before us results from the Haugens' second
attempt to preclude Blaine Bank from obtaining a deficiency
judgment. The District Court previously had granted the Haugens'
motion for relief from judgment on the basis that Blaine Bank's
recording of the quit claim deed given with the Haugensg assignment
of their purchasersg interest in the contract for deed eliminated
the bank's right to a deficiency judgment under the terms of the
assignment. Blaine Bank appealed and we reversed and remanded for
further proceedings, concluding that the recording of the quit
claim deed had no legal effect because the Haugens had forfeited
all their rights in the motel property with the prior cancellation
of the contract for deed with the Ericksons. Thus, at the time of
the decree of foreclosure of the Haugens' interest in the contract
for deed, the Haugens had no interest to be foreclosed. Blaine
Bank of Montana (1991), 249 Mont. 381, 816 P.2d 447 (Haugen I).
On remand, the Haugens again moved the District Court to
preclude deficiency judgment, arguingthatthe sale of the vehicles
and equipment violated 5 25-13-704(2), MCA, and was not
commercially reasonable under 5 30-9-504(3), MCA. They also
asserted that the deficiency judgment should be precluded because
Blaine Bank sold their personal property, consisting of motel
furniture and bedding, located inside the Shanty Motel. The
District Court denied the motion to preclude deficiency judgment,
but fashioned an alternative remedy for the unlawful sale of the
vehicles and equipment. The Haugens appeal.
Did the District Court err by allowing the Haugens to file an
action to recover damages, if any, resulting from a judicial
foreclosure sale which violated 5 25-13-704(2), MCA, instead of
precluding deficiency judgment?
The District Court determined that the sale of vehicles and
equipment violated 5 25-13-704(2), MCA, because the property was
capable of manual delivery but was not within the view of those
attending the sale. In fashioning a remedy, the court determined
that setting aside the sale was impractical here due to the sale of
the property to various purchasers in various locations and that
precluding the deficiency judgment altogether was too severe a
penalty for Blaine Bank's wrongdoing. The court allowed the
Haugens to file an action for any damages they suffered by reason
of the unlawful sale.
The Haugens assert that a judicial foreclosure sale conducted
under Montana's execution statutes, §§ 25-13-101, et sea., MCA, is
analogous to a secured creditor's sale of collateral under
5 30-9-504 (3) , MCA, of Montana's Uniform Commercial Code (Ucc) . On
that basis, they contend that the UCC remedy for commercially
unreasonable sales should apply to preclude Blaine Bank from
obtaining a deficiency judgment. They rely on Wippert v. Blackfeet
Tribe (1985), 215 Mont. 85, 695 P.2d 461, Westmont Tractor Co. v.
Continental I, Inc. (1986), 224 Mont. 516, 731 P.2d 327, and Bank
of Sheridan v. Devers (1985), 217 Mont. 173, 702 P.2d 1388, which
are all UCC cases.
Initially, we observe that the District Court did not
determine whether the sale of the vehicles and equipment was
commercially reasonable under the UCC. The court determined only
that the sale violated 5 25-13-704(2), MCA, and fashioned its
remedy accordingly. The Haugens do not contend that the District
Court erred in declining to address the applicability of the UCC's
commercially reasonable standard to the sale. Indeed, they concede
that the sale of the vehicles and equipment was governed by the
execution statutes and not the UCC.
Despite their concession that the UCC did not govern the sale,
the Haugens urge this Court to require the District Court to apply
the UCC remedy barring deficiency judgment to a violation of
§ 25-13-704(2), MCA. They cite no authority requiring preclusion
of deficiency judgment when it is impractical to set aside a sale
of collateral that violates 5 25-13-704(2), MCA, however, and we
find no basis for limiting the District Court to the UCC remedy of
precluding deficiency judgment in non-UCC cases.
Furthermore, Blaine Bankwould not be precluded from obtaining
a deficiency judgment even if the UCC were applied. It is true
Westmont Tractor, and Bank
that on the facts presented in W i ~ ~ e r t ,
of Sheridan, we concluded that a secured party is precluded from
obtaining a deficiency judgment for failing to give adequate notice
of the sale as required by § 30-9-504(3), MCA. However, we have
also recognized that a total bar to a deficiency judgment is
unwarranted in some cases.
In Ottersen v. Rubick (l99O), 246 Mont. 93, 98, 803 P.2d 1066,
1069, for example, we observed that barring a deficiency judgment
sometimes suggests that the creditor proceeded in bad faith or with
unclean hands. When that factor is absent and only a minor portion
of the collateral is sold improperly, 5 30-9-507(1), MCA, provides
an adequate remedy. Ottersen, 803 P.2d at 1069.
Here, Blaine Bank has been in litigation over its claims
against the Haugens for five and one-half years. It has proceeded
diligently in attempting to enforce its rights and the record
contains no suggestion that any of its actions were taken in bad
faith or with unclean hands. Furthermore, the judgment and decree
of foreclosure entered against the Haugens amounted to $132,427
(plus costs and attorney fees). The vehicles and equipment
improperly sold were sold for $18,000--only 15 percent of the total
amount of the judgment. Under these circumstances, we hold that
the District Court was not required to preclude Blaine Bank from
obtaining a deficiency judgment.
The question remains as to the propriety of the remedy
fashioned by the District Court. Initially, we observe that
foreclosure proceedings, including the entry of a deficiency
judgment, are equitable in nature. see Wash.-Ida.-Mont. Retirement
v. Galleria (1989), 239 Mont. 250, 265, 780 P.2d 608, 617. Courts
sitting in equity are empowered to determine all the questions
involved in the case and to do complete justice; this includes the
power to fashion an equitable result. Galleria, 780 P.2d at 617.
The Haugens contend that the remedy imposed by the District
Court is inequitable because they bear the burden of proving
damages in the supplemental action. They argue that because Blaine
Bank improperly sold the collateral, it should be required to prove
that the property's fair market value was obtained at the sale. To
support this argument, they assert that a secured creditor seeking
deficiency judgment has the burden of proving the commercial
reasonableness of the disposition of collateral under the UCC,
relying on Farmers State Bank v. Mobile Homes Unlimited (1979), 181
Mont. 342, 593 P.2d 734. This contention is flawed for the same
reason articulated above. This is not a UCC case, and the Haugens
have cited no authority requiring application of UCC remedies or
standards to a judicial foreclosure sale that violates
25-13-704( 2 ) , MCA.
There is nothing inequitable in requiring the Haugens to prove
the damages, if any, they have sustained. Nor is there anything
equitable in requiring the District Court to preclude Blaine Bank
from its deficiency judgment now worth in excess of $150,000 due to
a violation in the sale of vehicles and equipment worth
approximately $18,000.
The remedy fashioned by the District Court is much like the
limited UCC remedy set forth in 3 30-9-507(1), MCA. Under that
provision, a debtor has the right to recover from a secured party
any loss caused by a failure to dispose of the collateral in
accordance with the UCC. Here, the District Court's remedy allows
the Haugens to recover any damages incurred by the unlawful sale of
the vehicles and equipment.
Under these facts and circumstances, we conclude that the
District Court did not err in allowing a supplemental proceeding to
determine the amount of damages, if any, sustained by the Haugens
as a result of the unlawful sale.
Did the District Court err by declining to preclude deficiency
judgment based on its determination that the Haugens did not own
personal property located in the Shanty Motel when it was sold by
Blaine Bank?
The District Court determined that the Haugens relinquished
possession of the personal property located inside the Shanty Motel
to the Ericksons when they abandoned the motel property in January
of 1990. The Haugens contend that they remained the owners of the
personal property when Blaine Bank sold the motel to the Joshis.
They first argue that the 1981 contract for deed conveyed only the
real property comprising the Shanty Motel, and therefore, that the
Ericksons became the owners of the realty, but not the personal
property, when the contract for deed was terminated.
While it is true that the 1981 contract for deed for the
Shanty Motel did not expressly convey the personal property along
with the motel realty, it is clear that the Haugens gained their
interest in the property by virtue of entering into the contract
for deed. At the hearing on the motion to preclude deficiency
judgment, the Haugens' attorney conceded that the property in
dispute had always been in the motel. Thus, when the Haugens
defaulted on the contract and relinquished possession of the motel
to the Ericksons, they forfeited not only their interest in the
motel realty but also in the personal property.
The Haugens' forfeiture of their interest in the personal
property is in accord with our holding in Hauaen I. There, we
determined that the Haugens did not possess any interest in the
motel property after failing to cure their default on the contract
for deed and relinquishing possession of the motel prior to the
court's judgment of foreclosure in favor of Blaine Bank. Hauaen,
816 P.2d at 448-49.
The Haugens also argue that the certificate of sale relating
to the judicial foreclosure of their purchasers1 interest in the
contract for deed purported to sell only the motel1s realty, and
therefore, that they remained the owners of the personal property.
This argument is without merit. As discussed above, the Haugens
forfeited all their interest in the motel property to the Ericksons
prior to the judicial foreclosure sale of their purchasers1
interest in the contract for deed. As a result, Blaine Bank gained
no interest in the motel at the sale. Blaine Bank's interest in
the Shanty Motel is derived solely from its pre-foreclosure sale
agreement to purchase the motel--including, according to the sales
agreement, both the "real and personal property comprising the
Shanty M~tel~~--frorn Ericksons on April 16, 1990. Thus, Blaine
the
Bank owned the personal property when it sold the Shanty Motel to
the Joshis.
We conclude that the District Court did not err in determining
that the Haugens did not own any personal property located in the
Shanty Motel when it was sold to the Joshis. Thus, the sale
provides no basis for precluding Blaine Bank from obtaining a
deficiency judgment.
Aff inned.
We concur:
August 17, 1993
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:
Chris R. Young, Esq.
Morrison, Young, Brown & Richardson
P.O. Box 1070
Havre, MT 59501
Ward E. Taleff, Esq.
Alexander, Baucus & Linnell
P.O. Box 2629
Great Falls, MT 59403
ED SMITH
CLERK OF THE SUPREME COURT
S T A q OF,MONTANA
BY:
Depu