100 Wn. App. 94, SECURITY STATE BANK v. BURK

[No. 24611-2-II. Division Two. March 24, 2000.]

SECURITY STATE BANK, Respondent, v. FRED A. BURK, ET AL., Appellants.

[1] Judgment - Summary Judgment - Review - Role of Appellate Court. An appellate court reviewing a summary judgment engages in the same inquiry as the trial court. The court determines whether there are disputed issues of material fact and whether the moving party is entitled to judgment as a matter of law after considering all facts and reasonable inferences therefrom most favorably toward the nonmoving party. Questions of law are reviewed de novo.

[2] Secured Transactions - Default - Disposition of Collateral - Guarantor - Status. For purposes of RCW 62A.9, the guarantor of a note is a "debtor" and is entitled to raise all the defenses available to the principal debtor regarding the disposition of seized collateral.

[3] Secured Transactions - Default - Disposition of Collateral - Commercial Reasonableness - Guarantor - Waiver. Under RCW 62A.9-501(3)(b), the guarantor of a debt cannot waive the requirement of RCW 62A.9-504(3) that a creditor dispose of a defaulting debtor's collateral in a commercially reasonable manner.

[4] Secured Transactions - Default - Disposition of Collateral - Commercial Reasonableness - Burden of Proof. A creditor has the burden of proving that the disposition of the collateral from a defaulted loan is done in a commercially reasonable manner, as required by RCW 62A.9-504(3).

[5] Secured Transactions - Default - Disposition of Collateral - Commercial Reasonableness - Question of Law or Fact. Whether a creditor has disposed of the collateral from a defaulted loan in a commercially reasonable manner, as required by RCW 62A.9-504(3), is a question of fact.

[6] Judgment - Summary Judgment - Affidavit - Late Filing - Discretion of Court. Whether to consider an untimely filed affidavit submitted in connection with a motion for summary judgment is a decision within the trial court's discretion.

Nature of Action: Action to recover a deficiency on a loan that was in default. After seizing and selling the debtor's inventory that was the collateral for the loan, the creditor sought to enforce a guaranty and to foreclose on a deed of trust that the guarantor had executed.

Superior Court: The Superior Court for Thurston

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County, No. 98-2-02347-1, Christine A. Pomeroy, J., entered a summary judgment in favor of the creditor on March 26, 1999.

Court of Appeals: Holding that the guarantor could not waive the statutory requirement that the creditor dispose of the debtor's collateral in a commercially reasonable manner, that a genuine issue of fact exists as to whether the creditor disposed of the collateral in a commercially reasonable manner, and that the trial court did not abuse its discretion in considering an untimely filed affidavit submitted by the guarantor, the court reverses the judgment and remands the case for further proceedings.

James Arthur Connolly of Connolly, Tacon & Meserve, for appellants.

Richard Antoine Paroutaud of Mano, McKerricher, Paroutaud. Hunt & Sprague, PC., for respondent.

SEINFELD, J. - RCW 62A.9-504(3) of the UNIFORM COMMERCIAL CODE (U.C.C.) requires a creditor to dispose of a defaulting debtor's collateral in a "commercially reasonable" manner. We hold that an Article 9 guarantor may assert noncompliance with this requirement as an affirmative defense to a creditor action to enforce the guaranty, notwithstanding the guarantor's waiver of defenses arising out of the creditor's "unjustified impairment" of the collateral. Because the guarantors here, Fred and Randelle Burk, raised an issue of material fact as to creditor Security State Bank's commercially reasonable disposition of the debtor's

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collateral, we reverse the summary judgment in favor of the Bank and remand for trial.

FACTS

The Burks are officers and principals of Tri County Truck & Diesel, Inc. Tri County borrowed $165,000 from the Bank, providing its inventory as security. The Burks also executed a personal guaranty and a deed of trust on real property in Thurston County. On the second page of the guaranty, the guarantor agrees to waive:

any and all rights or defenses arising by reason of ... (d) any right to claim discharge of the indebtedness on the basis of unjustified impairment of any collateral for the indebtedness ... or (f) any defenses given to guarantors at law or in equity other than actual payment and performance of the indebtedness.

Clerk's Papers at 10.

Tri County defaulted on the debt and the Bank seized the inventory, but allegedly damaged part of it in the process. After selling the goods at public auction for $5,257.50, the Bank filed a complaint to enforce the guaranty and to judicially foreclose on the deed of trust. In their answer, the Burks asserted the affirmative defense that the Bank had not disposed of the collateral in a commercially reasonable manner.

On January 11, 1999, the Bank moved for summary judgment and the court set a February 12 hearing date. Fred Burk filed a responsive affidavit on February 4. In the affidavit and in an attached letter to his attorney, he alleged that the seized inventory had a value of over $515,944 but that the Bank had damaged much of it during the seizure. He alleged that the Bank had (1) ignored his offer to box the new inventory, (2) failed to inventory the repossessed goods, (3) failed to keep the parts separated by product line, (4) literally tossed inventory into the back of a rental truck, and (5) removed the new inventory from its protec-

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five packaging and stacked it in a manner that exposed it to damage.

The Bank replied to Fred Burk's affidavit the next day. It argued, among other things, that (1) the court should not consider the Burk affidavit because it was untimely filed, (2) the Burks waived the defense in their guaranty, and (3) the Bank conducted the inventory liquidation in a commercially reasonable manner.

The trial court granted summary judgment in favor of the Bank.

I. LIABILITY OF GUARANTOR

The Burks argue that the trial court erred in granting summary judgment because there was a genuine issue of material fact as to whether the Bank conducted the liquidation of Tri County's inventory in a commercially reasonable manner under RCW 62A.9-504(3). They further argue that a guarantor's waiver has no effect where the creditor negligently wastes the collateral it repossesses.

[1] Summary judgment is proper where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Bishop v. Miche, 137 Wn.2d 518, 523, 973 E2d 465 (1999); Taggart v. State, 118 Wn.2d 195, 198-99, 822 E2d 243 (1992). When reviewing a grant of summary judgment, the appellate court engages in the same inquiry as the trial court, considering facts and reasonable inferences therefrom in the light most favorable to the nonmoving party and reviewing questions of law de novo. Bishop, 137 Wn.2d at 523.

A guarantor can waive certain defenses. See Fruehauf Trailer Co. of Canada Ltd. v. Chandler, 67 Wn.2d 704, 70910, 409 E2d 651 (1966). In Fruehauf, the guarantor asserted a defense of release or discharge of the principal debt. 67 Wn.2d at 709. The Fruehauf court held that the guarantor contracted away the defense by the clear terms of the guaranty and, thus, was obligated to compensate the creditor for a fixed amount of the creditor's loss attributable to the debtor's breach. 67 Wn.2d at 710.

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But Fruehauf is substantively distinguishable because it did not implicate Article 9 of the U.C.C. This case does.

RCW 62A.9-50K3) states in pertinent part:

To the extent that they give rights to the debtor and impose duties on the secured party, the rules stated in the subsections referred to in (a) through (e) of this subsection may not be waived or varied except as provided with respect to compulsory disposition of collateral (subsection (3) of RCW 62A.9-504 and RCW 62A.9-505) and with respect to redemption of collateral (RCW 62A.9-506) but the parties may by agreement determine the standards by which the fulfillment of these rights and duties is to be measured if such standards are not manifestly unreasonable:

(b) subsection (3) of RCW 62A.9-504 and subsection (1) of RCW 62A.9-505 which deal with disposition of collateral!;.]

RCW 62A.9-504(3) states, in pertinent part, that "every aspect" of the disposition of the collateral "must be commercially reasonable."

[2] A guarantor is a debtor within the meaning of Article 9 of the U.C.C. McChord Credit Union v. Parrish, 61 Wn. App. 8, 12, 809 E2d 759 (1991). " 'As a general rule, the surety is not liable to the creditor unless his principal is liable and, accordingly, he may plead any defense which the principal might have used if the action had been brought against him.' " McChord Credit Union, 61 Wn. App. at 13-14 (quoting A. STEARNS, THE LAW OF SURETYSHIP 7.1, at 200 (5th ed. 1951)). Thus, a guarantor "possesses all the defenses available" to the principal debtor. McChord Credit Union, 61 Wn. App. at 13.

In McChord, the creditor sued the guarantor for the deficiency after it sold the collateral securing the principal debtor's loan. 61 Wn. App. at 11. The creditor had not given notice of the sale to the principal debtor or to the guarantor. McChord Credit Union, 61 Wn. App. at 11. But the guarantor had waived the notice requirement. McChord Credit Union, 61 Wn. App. at 10 n.1.

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Observing that an Article 9 debtor may not waive the notice requirement unless it does so in writing after default, RCW 62A.9-504(3), the McChord court rejected the creditor's contention that the guarantor waived the defense of lack of notice under the U.C.C. 61 Wn. App. at 13-14. The court concluded that the principal debtor's statutory right to notice extended to the guarantor notwithstanding the language of the guaranty. McChord Credit Union, 61 Wn. App. at 13-14. As the McChord court noted, even if the guarantor "did personally waive the requirement that he i. be given notice, he did not waive the requirement that notice be given to the principal debtor[.]" 61 Wn. App. at 14.

We believe the language and policy underpinnings of the U.C.C. support application of the same reasoning to the reasonableness of the manner in which a creditor Bank liquidates the collateral. Just as a surety is entitled to notification, a "surety who bears responsibility for any deficiency is entitled to a commercially reasonable disposition." 1A PETER F. COOGAN, ET AL, SECURED TRANSACTIONS UNDER THE UNIFORM COMMERCIAL CODE 8.06A[2][b], at 8-131 (1991).

The importance of the commercial reasonableness requirement "lies in the fact that the amount of the deficiency judgment will be inversely proportional to the sales price[.]" 4 JAMES J. WHITE AND ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE 34-10, at 430 (4th ed. 1995). The requirement protects "against an unfairly low price." WHITE, supra, at 430. "The price that the secured creditor receives from sale of the collateral is of crucial importance to the debtor because any deficiency is determined by deducting the proceeds of sale from the outstanding debt." WHITE, supra, at 430.

[3] The law does not allow an Article 9 debtor to waive the commercial reasonableness requirement, RCW 62A.9501(3)(b); RCW 62A.9-504(3). A number of courts have extended this right to the guarantor as well.1 The authori-


1 See, e.g., United States v Willis, 593 F2d 247, 255-56 (6th Cir 1979) (holding that guarantor may invoke defense of commercial reasonableness), United Mis-


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ties holding that a guarantor cannot waive the commercial reasonableness defense are persuasive.

This holding also provides some protection to other of the debtor's creditors. A contrary ruling could dilute the incentive for a creditor to exercise care in dealing with a debtor's assets if the creditor knew it had a financially solvent guarantor. See United States v. Cawley, 464 F. Supp. 189, 195 (E.D. Wash. 1979) ("if a secured creditor could always recover against the guarantors, there would be no restraints on a repossessing secured creditor whenever there were guarantors"). The wasted assets are then no longer available to cover the debtor's other obligations. See WHITE, supra, at 432-33 (remaining proceeds from sale of collateral available for junior secured creditors). For example, assuming the truth of the allegations in this case, Tri County's inventory was potentially sufficient to pay its debt to the Bank with more than $300,000 remaining to pay creditors and help restore the failing business to financial health. Consequently, the broad waiver language of the guaranty does not bar the Burks from asserting the commercial reasonableness defense.

The Bank further argues that National Bank v. Equity Investors, 81 Wn.2d 886, 917, 506 E2d 20 (1973), supports its position. But Equity Investors is inapposite; it did not discuss a guarantor's liability in light of Article 9. 81 Wn.2d at 917-18.

The absolute nature of the Burks' guaranty simply allowed the Bank to proceed directly against the Burks rather than first seek recovery from Tri County. See Willis, 593


souri Bank v. Gagel, 815 F. Supp. 387, 393 (D. Kan. 1993) ("the reasoning of the cases holding that strict compliance with the notice requirements is a prerequisite to recovery against the guarantor applies with equal force to the statutory obligation to dispose of the collateral in a commercially reasonable manner"); United States v. Hunter, 652 E Supp. 774, 778-80 (D. Kan. 1987) (reasoning that guarantor cannot waive reasonableness requirement under Kansas version of Article 9); May v. Women's Bank, N.A., 807 R2d 1145, 1151 (Colo. 1991) (holding that guarantor is debtor under Colorado version of Article 9 and thus cannot waive the commercial reasonableness requirement); 68A AM. JUR. 2D, Secured Transactions, 769, at 624 (1993) (recognizing authorities holding that "absolute character of the guaranty" does not foreclose defense of commercial unreasonableness). But see United States v. Kurtz, 525 F. Supp. 734, 746-47 (E.D. Pa. 1981) (holding that guarantor can waive protections otherwise provided by law).


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F.2d at 254. But once the Bank elected to repossess Tri County's inventory, the Bank became subject to Article 9's requirements as to the proper disposition of the collateral. Gagel, 815 F. Supp. at 392 n.6; see also COOGAN, supra, 8.06[2][c], at 8-134 ("Having elected to sell the collateral, the creditor must do so in a commercially reasonable manner."). "The creditor is required to use its best efforts to sell the collateral for the highest price." Rotta v. Early Indus. Corp., 47 Wn. App. 21, 24, 733 E2d 576 (1987) (citing Foster v. Knutson, 84 Wn.2d 538, 549, 527 E2d 1108 (1974)).

[4, 5] "The burden of proving commercial reasonableness is on the creditor, who is in the better position to know and control the nature of resale, and is the one asserting the deficiency judgment." Rotta, 47 Wn. App. at 24. And "[w]hen the propriety of the disposition of collateral by the secured party is contested, the issue of commercial reasonableness is a question of fact to be determined by the trier of fact." Mount Vernon Dodge, Inc. v. Seattle-First Nat'l Bank, 18 Wn. App. 569, 587, 570 E2d 702 (1977) (citing Jones v. Morgan, 58 Mich. App. 455, 228 N.W.2d 419, 422 (1975); Pruske v. National Bank of Commerce, 533 S.W.2d 931, 937 (Tex. Civ App. 1976), abrogated on other grounds, Greathouse v. Charter Nat'l Bank-S.W, 851 S.W.2d 173, 176-77 (Tex. 1992)); see also Service Chevrolet, Inc. v. Sparks, 99 Wn.2d 199, 204-05, 660 E2d 760 (1983); McChord Credit Union, 61 Wn. App. at 12. "Such traditionally factual questions should be determined as a matter of law only in the 'clearest of cases.' " Service Chevrolet, Inc., 99 Wn.2d at 205 (citing Browning v. Ward, 70 Wn.2d 45, 48, 422 E2d 12 (1966)); Timms v. James, 28 Wn. App. 76, 79, 80, 621 E2d 798 (1980).

The record shows that the Bank adequately advertised the sale of Tri County's assets. But the Bank has not rebutted the Burks' contention that it negligently damaged the goods; nor has it shown that it attempted to assess the value of or assign any reserve prices to the collateral before conducting the sale. Given the vast difference between the $5,257.50 obtained at sale and the Burks' claimed value of

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$515,944, there is a reasonable inference that the Bank did not handle the goods and their sale in a commercially reasonable manner.

"Summary judgment is only appropriate when the record demonstrates there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." James F. O'Connell & Assocs. v. Transamerica Indem. Co., 61 Wn. App. 103, 110, 809 E2d 231 (1991) (citing Meaner v. Dodd, 111 Wn.2d 174, 177-78, 759 E2d 455 (1988)). "Even where the evidentiary facts are undisputed, if reasonable minds could draw different conclusions from those facts, then summary judgment is not proper." Chelan County Deputy Sheriffs' Ass'n v. County of Chelan, 109 Wn.2d 282, 295, 745 E2d 1 (1987) (citing Money Savers Pharmacy, Inc. v. Koffler Stores (Western) Ltd., 37 Wn. App. 602, 608, 682 E2d 960 (1984)). Viewing the evidence in a light most favorable to the Burks, there is a genuine issue of material fact as to whether the Bank disposed of the collateral in a commercially reasonable manner. Consequently, the trial court erred in granting summary judgment.

II. TIMING OF BURK'S AFFIDAVIT

In the alternative, the Bank argues that this court should affirm on the basis that the Burks did not timely file their responsive affidavit to its summary judgment motion. The Burks concede that the affidavit was untimely but argue that the late filing did not prejudice the Bank.

CR 56(c) states in pertinent part: "The adverse party may file and serve opposing affidavits, memoranda of law or other documentation not later than 11 calendar days before the hearing." In its February 5 reply to Fred Burk's February 4 affidavit, the Bank argued that (1) the trial court should not consider the Burk affidavit because of its untimeliness, and (2) the Burks waived all defenses as a result of the guaranty. Nonetheless, the trial court considered the untimely affidavit and then granted summary judgment in favor of the Bank.

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[6] A trial court has discretion regarding the acceptance of an untimely filed affidavit. Brown v. Peoples Mortgage Co., 48 Wn. App. 554, 559, 739 E2d 1188 (1987); Jobe v. Weyerhaeuser Co., 37 Wn. App. 718, 684 E2d 719 (1984); CR 56(f) (court may allow continuance if party cannot produce timely affidavits). And the Bank does not argue that the trial court abused its discretion. Moreover, both sides used their opportunity to brief the pertinent issues and argue their respective positions. The Bank prevailed. Thus, the Bank has not demonstrated prejudice. See Brown v. Safeway Stores, Inc., 94 Wn.2d 359, 364, 617 E2d 704 (1980); Cole v. Red Lion, 92 Wn. App. 743, 749, 969 E2d 481 (1998).

The Bank relies on the proposition that this court can affirm summary judgment on any grounds found within the pleadings and proof. Carey v. Reeve, 56 Wn. App. 18, 23, 781 E2d 904 (1989). But the Bank provides no authority supporting the proposition that an appellate court should reverse a trial court's discretionary ruling regarding late documents in order to uphold the trial court's incorrect substantive ruling. Carey, cited by the Bank, upheld the trial court's ruling on alternative substantive grounds; it did not reverse the trial court's procedural ruling to affirm its substantive ruling. 56 Wn. App. at 25-26. See also Safeway Stores, 94 Wn.2d at 364 (a reviewing court will not reverse a lower court on the basis of an untimely filing absent a showing of prejudice).

As the Bank has failed to show that the trial court either abused its discretion or caused it prejudice when it considered the untimely Burk affidavit, this contention lacks merit.

III. ATTORNEY FEES

In their reply brief, the Burks request attorney fees. The matter of attorney fees is more appropriately considered after a determination of the outcome below. Thus, we direct the trial court, following its proceedings, to decide the fee issue. See RAP 18.l(h)(i).

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We reverse the summary judgment of dismissal and remand for trial.

ARMSTRONG, A.C.J., and HUNT, J., concur.