No. 90-099
IN THE SUPREME COURT OF THE STATE OF MONTANA
WALEN F. LILLY,
Plaintiff and Respondent,
FRED TERWILLIGER, CLARA TERWILLIGER,
JAMES BONNETT, and DEBORAH BONNETT,
Defendants and Appellants,
and
JAMES BONNETT and DEBORAH BONNETT,
Defendants and Counter-plaintiffs, JUL 2 4 1990
Appellants
-v- GLERK OF SUPREME COURT
STATE OF MONTANA
WALEN F. LILLY,
Counter-defendant/Respondent.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin,
The Honorable Frank Davis, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Pierre L. Bacheller; Billings, Montana
For Respondent:
Donald E. White; Bozeman, Montana
Submitted on Briefs: June 7, 1990
Decided: J u l y 24, 1990
Filed:
Justice John C. Harrison delivered the Opinion of the Court.
James and Deborah Bonnett, defendants and counter-plaintiffs
below, appeal the judgment issued by Judge Frank Davis, sitting in
the Eighteenth Judicial District, Gallatin County. The District
Court held that plaintiff and counter-defendant Walen ttBudll
Lilly s
sale of repossessed property was commercially reasonable and Lilly
was entitled to a deficiency judgment, but, because Lilly's notice
of the sale to the Bonnetts did not comply with the strict
requirements of foreclosure on collateral statutes, the District
Court effected an adjustment by way of set off as to the deficiency
judgment . We affirm.
Three issues are presented for review:
1. Did the trial court err in concluding that the Notice
of Repossession was defective?
2. Did the trial court err in concluding that the sale
of repossessed collateral was commercially reasonable?
3. Did the trial court err in calculating the dollar
amount to which Lilly was entitled by judgment?
In 1952, Walen ttBudtt
Lilly started a fishing shop in West
Yellowstone, Montana. Over the years "Bud ~illy's Trout Shopv1
became known nationally and internationally. With this reputation
the business prospered, grossing over $600,000 in 1981. In January
of 1982, Bud Lilly and his family sold the shop to two couples,
Fred and Clara Terwilliger and James and Deborah Bonnett, for
$275,000, allocated as follows:
1. Inventory
2. Fixtures and Physical Assets
3. Covenants not to compete
4. Guide deposits
5. Accounts receivable
6. Goodwill, consisting of Bud Lillyls
Trout Shop, all guide licenses, all
outfitters1 licenses, all special use
permits for the State of Montana,
State of Idaho and Yellowstone
National Park and the 1982 mailing
list $ 145,000.00
TOTAL
Each couple contributed $25,000 for a total down payment of
$50,000. The balance of the purchase price of $225,000 plus
interest at the rate of 12% per annum was to be paid over a twenty-
year period in monthly installments of $2,477.52. An addendum to
the contract raised the monthly payments to $2,599.62 to account
for the interest accrued from the date the parties entered the
agreement to the date of the first payment. The Terwilligers and
Bonnetts executed a promissory note for the balance of the contract
along with a security agreement and financing statements. The
financing statements were filed with the Secretary of State and
subsequently the statements were continued.
Within a few months, the Terwilligers and Bonnetts experienced
management differences. In October 1982, the Terwilligers bought
out the Bonnettsl interest in the business for $34,100. James
Bonnett testified that the decision to sell out was purely monetary
because the business could not support both the Bonnetts and
Terwilligers. At the time that the Terwilligers bought them out,
the Bonnetts attempted to obtain a release of liability from Lilly.
Lilly refused to grant the Bonnetts a release from liability
without a pledge by the Terwilligers of additional collateral or
provision of an alternative means of securing the unpaid balance
on the promissory note.
Terwilligers stopped making payments in the fall of 1986.
Lilly sent Notice of Default on December 9, 1986 and Notice of
Acceleration on January 27, 1987 to both the Bonnetts and
Terwilligers. Additionally Bud's son, Michael Lilly, a Montana
attorney, wrote the Bonnetts a letter on February 2, 1987 stating
that Fred Terwilliger had not responded to either notice and
reminding the Bonnetts they had not been released from their
obligation to Bud Lilly.
Bud Lilly took the business back in March, 1987. On March 30,
1987, illy sent a Notice of Repossession to both couples,
informing them that a sale of I1inventory,fixtures, and equipmentu
to James Criner for $60,000 was contemplated. either party made
objection to the sale. However, the notice made no mention of the
sale of the name "Bud LillylsTrout Shop, Inc.,I1 the goodwill, the
covenant not to compete, the mailing list, and the outfitter's and
guide's licenses. Lilly sold the business to Criner for $60,000.
Lilly then filed a complaint on May 26, 1987 in an effort to
collect the amount remaining unpaid by the Bonnettsl and
Terwilligers' breach of contract. The defendants answered,
asserting as an affirmative defense that Lillytssale to Criner was
commercially unreasonable because proper notice was not given that
all assets would be sold, and Lilly was therefore not entitled to
a deficiency judgment.
Trial was had before Judge Davis, sitting without a jury. The
Terwilligers, who filed for relief under Chapter 7 of the U.S.
Bankruptcy Code, were dismissed from the suit by stipulation. The
trial court found that Lillyls sale to Criner was commercially
reasonable although flawed by a procedural technicality of proper
notice. The trial court concluded Lilly was entitled to a judgment
of $217,000 less an offset of $145,000 for the value of the
business1 goodwill, for an aggregate judgment of $72,000 with
interest.
Defendants James and Deborah Bonnett now appeal from this
judgment.
Issue 1: Did the trial court err in conclu-
ding that the notice of repossession was
defective?
Lilly, in accordance with the terms of the sales agreement,
sent Notice of Default to both the Bonnetts and Terwilligers after
they missed two monthly payments in the fall of 1986. When neither
of the buyers cured the default, Lilly, again according to terms
of the agreement, sent them both a Notice of Acceleration which
provided the Terwilligers and Bonnetts fifteen days to pay the
entire balance owing of $220,700.85. Receiving no response to
either the Notice of Default or the Notice of Acceleration, Lilly
finally sent each buyer a Notice of Repossession which stated:
PLEASE TAKE NOTICE and you are hereby
notified that on the 21st day of March, 1987,
the undersigned took possession of all
inventory, fixtures and equipment conveyed by
that certain Sales Agreement dated the 30th
day of January, 1982, wherein The Trout Shop,
Inc. is named as seller and you are named as
buyer, and pursuant to Section 30-9-502 MCA.
The sale of said inventory, fixtures, and
equipment is contemplated by the undersigned
pursuant to Section 30-9-504 MCA. James
Krinner [sic] has offered to purchase said
property for the sum of $60,000.00. You are
requested to notify the undersigned's counsel,
Michael J. Lilly, at 222 East Main Street,
Suite 301, Bozeman, Montana, 59715, of your
objection to said purchase of inventory,
fixtures and equipment within five (5) days of
the date of this notice.
DATED this 30th day of March, 1987.
/s/
WALEN F. LILLY
The Bonnetts contend that they made no objection to the
proposed sale because the Notice of Repossession made no mention
of the proposed sale to Criner of the covenant not to compete, the
goodwill, the name "Bud Lillyls Trout Shop, Inc. ," licenses, and
mailing list. The notice advised only that Lilly contemplated a
sale of the l'inventory, fixtures and equipment1'for $60,000.00.
The trial court found that
Lilly made little or no effort to find a buyer
other than Criner, but he advised Bonnett as
to that potential, e.g. , a sale of only the
"inventory, fixtures and equipment." There
was no evidence that Bonnett would have
objected to the proposed sale as being
commercially unreasonable, or any inquiry as
to what was to be done with the principal
asset--the goodwill, valued in 1982 by both
seller and buyers, at $145,000! ! Bonnett knew
of his potential liability for a deficiency.
It was incumbent upon him to at the very least
make an inquiry about a $145,000 asset.
The Uniform Commercial Code addresses notice requirements for
a sale at 5 30-9-504(3) (a), MCA:
Disposition of the collateral may be by
public or private proceedings ... 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.
This Court, quoting from the official U.C.C. comment to 5 30-
9-504, MCA, previously recognized that the purpose of the notice
requirement is to ensure that "[plersons entitled to receive it
will have sufficient time to take appropriate steps to protect
their interests by taking part in the sale or other disposition if
they so desire." Wippert v. Blackfeet Tribe (1985), 215 Mont. 85,
89, 695 P.2d 461, 464.
The notice that Lilly sent to the Bonnetts met all the
requirements of 5 30-9-504, MCA, giving the Bonnetts reasonable
notification of the time after which the private sale was to have
been made. In fact, the notice went beyond the statutory
requirements by including the name of the prospective buyer and the
intended selling price. Moreover, the notice met its stated
purpose, that is, to give the Bonnetts an opportunity to protect
their interests by taking part in the sale if they so desired. As
the trial court noted, Bonnetts knew of their potential liability
for a deficiency and should have inquired about the $145,000
goodwill asset when they received the Notice of Repossession.
The promissory note executed by the Bonnetts and Terwilligers
was secured by a security agreement. The security agreement listed
inventory, fixtures and equipment as the collateral pledged. The
financing statement filed with the Secretary of State listed the
covered collateral as "All inventory and fixtures, and additions
thereto." Nowhere in either the security agreement or financing
statement were the licenses, covenant not to compete, mailing list,
goodwill, or the name "Bud Lillyls Trout Shopw listed as
collateral.
The trial court agreed that the licenses, covenant not to
compete, mailing list, goodwill and name were not specifically
secured by the security agreement and financing statement. The
trial court did find, however, that such property was secured
collateral under the Sales Agreement.
The Uniform Commercial Code specifies the conditions necessary
to a security interest:
(1) .a security interest is not
enforceable against the debtor or third
parties with respect to the collateral and
does not attach unless:
(a) the collateral is in the possession
of the secured party pursuant to agreement or
the debtor has signed a security agreement
which contains a description of the collateral
(b) value has been given; and
(c) the debtor has rights in the
collateral.
Section 30-9-203(1), MCA.
Because the Sales Agreement does not contain a description of
the licenses, covenant not to compete, mailing list, goodwill, or
name as collateral it fails to meet the requirements of subsection
(1)(a), of S 30-9-203, MCA, for creating a security interest. A
provision in the Sales Agreement clearly identifies Lillyls
security as the seller:
9. Sellerls Security. It is understood
and agreed that Buyer shall execute a
promissory note and Security Agreement in
favor of Seller and its assigns for the unpaid
balance of the purchase price. Said Security
Agreement shall designate the inventory and
fixtures, and any additions thereto, as
collateral for the unpaid purchase price. ..
(Emphasis added.)
The licenses, covenant not to compete, mailing list, goodwill,
and name "Bud Lilly's Trout Shopw are not collateral under the
U.C.C. and are, therefore, not subject to the notice requirements
of 5 30-9-504(3) (a), MCA.
We find that the Notice of Repossession was not defective.
The trial court's finding that the notice was flawed was erroneous.
In light of the fact that Lilly does not contest the trial court's
decision to effect an adjustment by way of a setoff, the error was
harmless.
Issue 2: Did the trial court err in concluding
that the sale of repossessed collateral was
commercially unreasonable?
The trial court found that the Bonnetts' evidence that the
Criner sale was not commercially reasonable was not persuasive.
The Bonnetts presented two owners of fly fishing businesses in West
Yellowstone who gave their expert opinions that the Bud Lilly Trout
Shop was worth more than the $60,000 Criner paid for it. Lilly
presented testimony from his son, Gregory, who operates a similar
business in Bozeman. Gregory testified that although he had
earlier expressed an interest in the business, at the time his
father repossessed Bud Lillyts Trout Shop it was in such a state
that Gregory thought $60,000 was too much to pay. The trial court
noted neither of Bonnetts' experts knew the distressed state of Bud
Lilly's Trout Shop in April, 1987; only Lilly and Criner knew that
in less than six years the business, through bad management and
nonmanagement, had declined from a $600,000 annual gross income
business to a point where the buyers could not even make relatively
modest payments. The court found that under the circumstances the
sale to Criner was commercially reasonable.
Lilly, as the secured party, carries the burden of proving
that his disposition of the collateral was commercially reasonable.
Bank of Sheridan v. Devers (1985), 217 Mont. 173, 176, 702 P.2d
1388, 1390 (quoting Farmers State Bank v. Mobile Homes Unlimited
(1979), 181 Mont. 342, 347, 593 P.2d 734, 737). However, this
Court will not disturb the findings of the trial court unless such
findings are I1clearly erroneous. Rule 52, M.R. Civ.P. ; Farmers
State Bank, at 350, 593 P.2d at 738.
Bonnetts argue that the sale was commercially unreasonable
because Lilly held a private rather than a public sale, Lilly did
not advertise the sale or solicit bids, Lilly did not have the
business appraised, and the $60,000 sale price was inadequate.
Bonnetts were apprised of the private sale, including the identity
of the buyer and the purchase price, well in advance of the sale.
Bonnetts made no objection to the private sale after receiving the
notice.
The U.C.C. dictates that every aspect of the disposition of
collateral, including the method, manner, time, place and terms
must be commercially reasonable. Section 30-9-504 (3), MCA. The
fact that a better price could have been obtained by a sale at a
different time or in a different method does not in itself
establish that the sale was commercially unreasonable. Section
30-9-507 (2), MCA.
This Court has previously interpreted these two sections to
mean that the "reasonableness of the sale is not determined by
price but the manner in which the sale was conducted. In other
words if the sale is considered commercially reasonable, then the
price is reasonable.I1 Dulan v. Montana Natll Bank of Roundup
(1983), 203 Mont. 177, 185, 661 P.2d 28, 32.
After some discussion the Dulan Court went on to state that
a discrepancy in price can nonetheless be considered to be within
the parameters of 5 30-9-504(3), MCA, and that the burden of
proving that the price received was less than the fair market value
of the collateral falls on the complaining party. Dulan at 186,
661 P.2d at 32.
The evidence of the complaining party herein falls short of
its burden. The Bonnetts were advised of the private sale yet made
no objection. As to Lillyls failure to advertise, solicit bids,
or secure an appraisal, testimony indicated that because the
fishing season was imminent, it was important for Lilly to act
quickly. Finally, as to the price Lilly received for the business,
as the trial court noted, the state of business was such that the
Terwilligers could not even make relatively modest payments. In
light of this evidence, the $60,000 price Criner paid is
reasonable.
We agree with the trial court that Bonnetts' evidence that the
Criner sale was not commercially reasonable was not persuasive.
We hold that the Bonnetts did not prove that the sale was conducted
in a commercially unreasonable manner pursuant to 5 30-9-504(3),
MCA. There is substantial evidence to support the trial court's
conclusion that Bonnett did not meet his burden of establishing
that Bud LillylsTrout Shop at the time of sale to Criner was worth
more than the price for which it was sold.
Issue 3: Did the trial court err in
calculating the amount to which Lilly was
entitled by judgment.
The trial court concluded that the amount of deficiency
judgment should be determined as follows:
Amount due on unpaid portion
of promissory note: $217,000
Less offset for price of goodwill: ($145,000)
Total amount of deficiency judgment: $72,000
Bonnetts take issue with the trial court's calculations in two
respects. First, Bonnetts assert that the amount remaining unpaid
on the promissory note as reflected in the escrow ledger is
$214,000 rather than $217,000. Secondly, Bonnetts suggest that
the court failed credit them for the amount Lilly received for
resale of the assets to Criner.
Lilly notes that he does not agree with the offset for
goodwill, but elected not to appeal that issue.
The amount of the deficiency judgment appears to have been
arrived at as follows:
Amount due 01-27-87 $220,700.85
Amount Due on 04-13-87 (date of first
Criner payment) (108 days)
$220,700.85 + (108/365) ($220,700.85) ( . 12) 228,573.24
Credit for First Criner Payment ($20,000.00) (20,000.00)
Amount Due After First Criner Payment 208,573.24
Amount Due on 10-01-87 (date of second
Criner payment) (170 days)
$208,573.24 + (170/365) ($208,573.24) ( . 12) 220,230.48
Credit for Second Criner Payment ($10,000.00) (10,000.00~
Amount Due on 10-01-88 (date of third
Criner payment (365 days)
$210,230.48 + (365/365) ($210,230.48) ( . 12) 235,458.13
Credit for Third Criner Payment ($30,000.00) (30,000.00)
Total Due After Third & Final Criner Payment 205,458.13
Total Due on 04-21-89
(171 days)
$205,458.13 + (171/365) ($205,458.13) ( . 12) 217,008.81
Thus, the price paid by Criner has been credited and $217,000
the correct starting figure. We find no error in the trial
court's calculations.
We affirm.
Ltbv-~uT?h Justice
We concur:
AJ
&Justices