S. M. Flickinger Co. v. 18 Genesee Corp.

OPINION OF THE COURT

Simons, J. P.

On August 30, 1976 plaintiff entered into a "Super Duper Finance Agreement” with the corporate defendant, 18 Gene-see Corporation, and the individual defendants, its stockholders. By its terms, plaintiff subleased store premises to 18 Genesee Corporation to operate a Super Duper food market franchise and it agreed to loan the corporation $230,000 to finance the operation. The corporation executed a note for that amount and the individual stockholders guaranteed it. The corporation also executed a security agreement covering inventory and fixtures.

On March 28, 1978 plaintiff wrote to the defendants that the corporation was in default and that by its letter it was giving 30 days’ notice of termination as the agreement required. In the alternative, plaintiff suggested that it would mitigate against further losses to defendants by immediately taking possession of the store, the fixtures and the inventory. The inventory was to be "taken at the existing retail prices and adjusted to cost by deducting 15% thereof. Meat and produce inventory will be taken at cost using S.M. Flickinger’s existing cost figures.” Plaintiff asked defendants to sign the letter and return it if they agreed to plaintiff’s proposal for immediate possession. All defendants signed the letter and plaintiff took possession of the store, inventory and fixtures.

It then initiated this action seeking summary judgment on the note. Defendants opposed the motion and moved to dismiss the proceeding contending that the proceeding to collect the debt was regulated by the provisions of the Uniform Commercial Code, that plaintiff had failed to comply with the provisions of section 9-504 of that statute in taking possession of the collateral and that therefore plaintiff had forfeited its rights to any deficiency judgment.

Special Term held that the obligation on the note and guarantee were independent of any condition in the Super Duper finance agreement. It granted plaintiff judgment for $177,554.79 plus interest and it denied defendants’ cross motion to dismiss the action. We are unanimous in holding that the provisions of the Uniform Commercial Code apply and that there must be a reversal. We differ only in our interpretation as to what the statute requires before plaintiff may recover a deficiency judgment.

A secured party in plaintiff’s position may ignore its statutory right to take possession of collateral property after default (see Uniform Commercial Code, § 9-503) and may instead seek a judgment on the debt itself. If it does so, the execution of the judgment and levy on the property owned by the debtor, including collateral listed in the security agreement, are not governed by the default provisions of article 9 (see Official Comment 6, Uniform Commercial Code, § 9-501; Bilar, Inc. v Sherman, 572 P2d 489 [Col]). Where, however, the secured party exercises its right to take possession of the collateral upon default, as plaintiff did by its letter of March 28, 1978, it must conform to the requirements of article 9 (see Security Trust Co. of Rochester v Thomas, 59 AD2d 242; Roebuck v Walker-Thomas Furniture Co., 310 A2d 845 [DC]).

A majority of the court believe that the parties’ rights must be determined by applying section 9-504 of the Uniform Commercial Code; the minority would apply section 9-505 and permit a jury trial on whether the corporate debtor waived the provisions of that section.1 There are no reported cases in New York deciding the issue.2

Section 9-504 provides that after the debtor defaults on a debt a secured party may sell, lease or otherwise dispose of any collateral in the manner provided in the statute and the debtor shall be liable for the deficiency, if any. The disposition may be "by public or private proceedings”, but every aspect of it must be "commercially reasonable” (Uniform Commercial Code, § 9-504, subd [3]). In this case all defendants, maker and guarantors, executed the letter of March 28 consenting to plaintiff’s proposal to retake the collateral and, as to the inventory, they consented to plaintiff’s suggested method of disposition. Not only was it within their power to set the standards by which their rights and duties were to be measured (see Uniform Commercial Code, § 9-501, subd [3]), but it was reasonable that they do so when dealing with food commodities, many of them perishable. Having accepted the terms in the March 28 letter, defendants may not now complain about the method of disposition or value placed on the inventory. The only issue is whether plaintiff credited this inventory value against the debt when making their claim.

The fixtures are another matter. Plaintiff’s March 28 letter contained no proposal for their disposition and defendants’ consent extended no further than agreeing to possession. Plaintiff has failed to comply with the provisions of section 9-504, which require that after taking, the collateral shall be disposed of in a commercially reasonable manner after notice to the debtor. This failure to comply does not deprive plaintiff of its deficiency judgment, but it must prove, at trial, the amount of the debt, the fair market value of the security and the resulting deficiency (Security Trust Co. of Rochester v Thomas, 59 AD2d 242, supra).

The dissenters take a different view. They hold, as have other jurisdictions, that section 9-505 applies. Since plaintiff failed to proceed as section 9-504 requires with notice to the debtor and sale after it took possession of the collateral, the minority believe that plaintiff must be held to have elected to take the collateral as full satisfaction of the debt, thereby forfeiting its claim against the corporate debtor unless a jury finds that it waived the provisions of section 9-505.

Subdivision (2) of section 9-505 provides in part: "a secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of such proposal shall be sent to the debtor if he has not signed after default a statement renouncing or modifying his rights under this subsection.” (Emphasis added.)

By its terms the statute makes the election to retain the collateral in full satisfaction and discharge of the debt optional with the creditor and it provides that the option is to be exercised by written notice to the debtor. There was no communication between the parties to this action, however, which may be construed as an election by the creditor to take the collateral in full satisfaction of the debt, and an election should not be implied when the means for certainty are spelled out in the statute. The concern, of course, is that the creditor, having proceeded without notifying the debtor of his intention, may act to the debtor’s disadvantage. But section 9-505 was not designed to protect the debtor from a wrongful sale (see Jones v Morgan, 58 Mich App 455). If the secured party fails to comply with the provisions of article 9, the debtor may protect his rights by the remedies available pursuant to section 9-507. He may restrain or compel disposition of the collateral, or if disposition has already occurred, he may charge the creditor with any loss occasioned by its unauthorized conduct. Neither the provisions nor the purposes of the code require that plaintiff forfeit its entire claim, however, and the code should not be interpreted to permit the uncertainty of a jury trial on that issue here.

The order insofar as it granted plaintiff’s motion for summary judgment as to all defendants on the issue of liability only should be affirmed and the matter remitted to fix the amount of the debt due.

1 The dissenters would hold that the unconditional guarantors are obligated to pay the debt in any event, the only issue being the amount of the deficiency judgment.

2 Northern Fin. Corp. v Chatwood Coffee Shop (NY Supreme Ct, Nunez, J.), reported at 4 UCC Reporting Service (p 674) holds that where a creditor retains collateral without a sale, there is a triable issue of whether the property was retained in full satisfaction of the debt.