DULAN v MONTANA NAT L BANK OF ROUN

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PETER A. DULAN, J R . , P l a i n i t f f and A p p e l l a n t , D e f e n d a n t and R e s p o n d e n t . Appeal from: District Court of t h e Thirteenth J u d i c i a l District, I n a n d f o r c h e County o f Y e l l o w s c o n e , Tile I f o n o r a b i e C h a r l e s Luedke, J u d g e p r e s i d i n g . C o u n s e l o f Record: For Appeliant: T e r r y L. S e i f f e r t , B i l l i n g s , Montana For Respondent: K. R o b e r t F o s t e r , Lewistown, Montana Submitted: Decided : Filed: J a n u a r y 1 8 , 1983 March 24, MAR 2 4 1983 @ Clerk - --- - 1983 Mr. C h i e f J u s t i c e F r a n k I . H a s w e l l d e l i v e r e d t h e O p i n i o n o f t h e Court. A p p e l l a n t b o u g h t Shanon S t u d i o s , a B i l l i n g s p h o t o g r a phy b u s i n e s s , Studios, Inc. i n 1964 and i n 1966 i n c o r p o r a t e d u n d e r Shanon On J u n e 2, 1971, he executed a promissory n o t e f o r $ 7 , 5 0 0 w i t h r e s p o n d e n t and a s c o l l a t e r a l a s s i g n e d t h e s t o c k of t h e c o r p o r a t i o n . On May Studios, Inc., 22, 1972, appellant t o G e r a l d L. agreed to sell Wolfe f o r $ 1 8 , 0 0 0 . Shanon his a g r e e - ment c o n t a i n e d t h e f o l l o w i n g p a r a g r a p h : "4. Unless otherwise agreed i n w r i t i n g , upon f a i l u r e o f B u y e r s t o make p a y m e n t s w i t h i n 90 d a y s of t h e d a t e s d u e h e r e u n d e r , a l l amounts p a i d by B u y e r s on t h e above p u r c h a s e p r i c e s h a l l be r e t a i n e d by S e l l e r s a s l i q u i d a t e d damages, and t h i s a g r e e m e n t s h a l l t h e r e u p o n become v o i d , i f s a i d B u y e r s r e c e i v e w r i t t e n n o t i c e o f the f a i l u r e -t o. make s a i d p a y m e n t d u e b e f o r e t h e s a i d 90th dav. Buvers havina a l l r i g h t s and o b l i g a t i o n s a c c r u i n g f r o m s a i d stock u n t i l said event occurs, i f a t all." (Emphasis added.) Also, escrow on May 22, 1972, a g r e e m e n t which the buyer appointed and the seller executed respondent an a s escrow a g e n t and i n c l u d e d t h e f o l l o w i n g p r o v i s i o n : "Upon r e c e i v i n g n o t i c e f r o m P e t e r A . Dulan, J r . , t h a t any o t h e r p a r t y h e r e undersigned has f a i l e d t o perform its p a r t of t h e agreement mentioned above, a s s e t o u t i n P a r a g r a p h Number F o u r , p a g e f i v e o f s a i d A g r e e m e n t , t h e Escrow A g e n t a t t h e e x p i r a t i o n of t e n ( 1 0 ) d a y s from t h e d a t e of r e c e i v i n g s a i d n o t i c e , s h a l l t r a n s f e r a l l s t o c k c e r t i f i c a t e s and docum e n t s h e l d i n t h i s e s ---- t o --------crow P e t e r A. Dulan, J r . " (Emphasis added.) No representative of the respondent signed this escrow agreement. On J u l y 22, 1 9 7 2 , a p p e l l a n t e x e c u t e d a r e n e w a l p r o m i s s o r y n o t e f o r $7,500. of note of Shanon The c o l l a t e r a l was l i s t e d a s " A s s i g n . Studios stock payments per schedule attached." On October 17, v l c e p r e s i d e n t of the standard r e c e i p t of Wolie, 1972, the appellant, and the r e s p o n d e n t e x e c u t e d a n e s c r o w r e c e l p t on form wherein the respondent acknowledged t h e a g r e e m e n t t o s e l l and t h e s h a r e s o f stock. The p r i o r e s c r o w a g r e e m e n t was n o t l i s t e d a s b e i n g p a r t o f the contents contained Uulan of the to escrow. The October following: "Credit Thus, arrangement note." payments the the respondent 17 escrow a l s o payments t o discharge was his to: that Peter Wolfe obligations A. made under t h e a g r e e m e n t t o s e l l t h e s t o c k and t h e s e p a y m e n t s w e r e i n turn directly applied to plaintiff's obligation under the $7,500 renewal p ro m i s s or y n o t e . E a r l y i n 1973 p u r s u a n t t o c o r r e s p o n d e n c e between t h e parties, appellant signed a financing statement granting respondent a s e c u r i t y i n t e r e s t i n t h e s t o c k held i n escrow. R e s p o n d e n t f i l e d t h i s document w i t h t h e s e c r e t a r y o f on March 1 4 , 1 9 7 3 . state O r i g i n a l l y , a s s i g n m e n t o f t h e s t o c k was l i s t e d on t h e a c t u a l s t o c k c e r t i f i c a t e . The bank f e l t t h a t t h e a s s i g n m e n t s h o u l d b e made on a s e p a r a t e document. This t r a n s p i r e d e v e n t h o u g h on J u l y 22, 1 9 7 2 , a p p e l l a n t e x e c u t e d a r e n e w a l p r o m i s s o r y n o t e i n which t h e c o l l a t e r a l was l i s t e d a s t h e a s s i g n m e n t o f t h e n o t e f r o m Wolfe f o r h i s p u r c h a s e o f the business. The a s s i g n m e n t o f t h e s t o c k a n d t h e a s s i g n m e n t of t h e n o t e e v i d e n c e On advising May 6, 1974, appellant A p r l l payments. two that d i f f e r e n t t y p e s of c o l l a t e r a l . respondent Wolfe had Consequently, sent appellant n o t made appellant's a letter t h e Pliarch and p a y m e n t s on h i s n o t e t o r e s p o n d e n t w e r e d e l i n q u e n t i n t h e amount o f $558.88. The t o t a l amount s t l l l owing on t h e n o t e was $ 1 , 4 2 7 . 4 4 . On August 21, 1974, r e s p o n d e n t s e n t a n o t h e r l e t t e r t o a p p e l l a n t by c e r t i f i e d m a i l which s t a t e d t h e f o l l o w i n g : " T h i s l e t t e r is t o a d v i s e you t h a t a demand is b e i n g p l a c e d on you i n t h e amount o f $ 1 , 4 9 9 . 3 8 w h i c n i s r e l a t i v e t o y o u r n o t e o f May 22nd, 1 9 7 2 , i n t h e This o r i g i n a l . amount of $ 7 , 5 0 0 . G O . i n c l u d e s p r i n c i p a l of $1,427.44 and i n t e r e s t of $ 7 1 . 9 4 . This pays i n t e r e s t t h r o u g h August 3 1 s t , 1974, and i f n o t d r e c e i v e d by t h a- a- w e w i l l t h e n p r o t -t e teed a g a i n s t t h e s t o c k c e r t i f i c a t e c o n s i s t i n g o f 4995 s h a r e s o f S h a n o n S t u d i o s t o c k w h i c h y o u a s s i g n e d t o t h e Montana N a t i o n a l Bank." ( E m p h a s i s a d d e d . ) The letter. record lie responded suggesting 1974, payment indicates methods obligations. suggestions with proved that appellant a letter by which Appellant received dated Wolfe ineffective, the September 10, meet his could testified this that if respondent these should c o n t a c t him. On O c t o b e r 3 , 1 9 7 4 , r e s p o n d e n t s e n t a n o t h e r l e t t e r t o appellant by certified mail to the address the previous l e t t e r had b e e n s e n t t o , advising appellant t h a t the stock would sold be advertised and on October 17, 1974. p r o c e e d s would b e a p p l i e d t o a p p e l l a n t ' s p a s t - d u e loan. r e c o r d shows t h a t t h i s l e t t e r was r e t u r n e d u n c l a i m e d . is c o n £ 1i c t i n g testimony regarding whether the that h e had notified an attorney The There appellant n o t i f i e d t h e respondent of h i s change of address. testified The Appellant with the firm t h a t represented t h e respondent. On Wolfe, a b o u t November 1974, the stock was sold t h e same p e r s o n who was b u y i n g t h e s t o c k u n d e r original contract, lant's 14, for t h e remaining note t o respondent ($1,590). to the amount d u e on a p p e l T h e r e was a b o u t $ 8 , 5 0 0 d u e on t h e o r i g i n a l c o n t r a c t b e t w e e n Wolfe and appellant. Appellant at indicated trial that had he known the stock would be s o l d t o s a t i s f y t h e amount r e m a i n i n g on h i s n o t e h e would h a v e p a i d i t i n f u l l . On December alleging that 7, 1977, respondent appellant filed its breached a complaint fiduciary duty to a p p e l l a n t by f r a u d u l e n t l y f o r e c l o s i n g o n t h e s t o c k w i t h o u t notice of such foreclosure. a c t u a l damages and $ 1 5 , 0 0 0 answered denying alleging that Appellant sought $6,000 i n p u n i t i v e damages. any b r e a c h appellant of fiduciary was not Respondent relationship entitled in to and punitive damages. The finding District that Court respondent dismissed acted in appellant's good a p p e l l a n t o f t h e f o r e c l o s u r e and s a l e . faith complaint, in notifying From t h i s d i s m i s s a l , appellant brings t h i s appeal. Three i s s u e s a r e p r e s e n t e d on a p p e a l : Did t h e r e s p o n d e n t b r e a c h a f i d u c i a r y d u t y when i t 1. f o r e c l o s e d on t h e s t o c k ? Did t h e r e s p o n d e n t g i v e p r o p e r n o t i c e o f 2. the sale of t h e s t o c k ? Was t h e f o r e c l o s u r e s a l e c o n d u c t e d i n a commer- 3. c i a l l y r e a s o n a b l e manner? The breached appellant contends first that the respondent i t s f i d u c i a r y d u t y t o t h e a p p e l l a n t when i t f o r e - c l o s e d on t h e s t o c k h e l d i n e s c r o w . An e s c r o w a g e n t i s a f i d u c i a r y and c a n n o t b r e a c h t h i s c o n f i d e n c e t o a c t f o r i t s own a d v a n t a g e . Wolfe bought Appellant the amount i n default. amount remaining stock a s s e r t s t h i s breach in the T h i s was on the foreclosure substantially contract between is c l e a r a s sale for the than the appellant and less Wolfe. The respondent contends that acted it completely within the s t a t u t o r y authority vested i n a secured c r e d i t o r when a d e b t o r d e f a u l t s . A security interest is defined as an interest in p e r s o n a l p r o p e r t y which s e c u r e s payment o r performance o f a n S e c t i o n 30-1-201(37), obligation. A security interest MCA. a t t a c h e s b i n d i n g t h e c r e d i t o r a n d t h e d e b t o r when t h e r e i s a n agreement between t h e p a r t i e s t h a t it a t t a c h , given to the collateral. the debtor, and the S e c t i o n 30-9-204(1), security interest debtor has value is rights in the I n the present case MCA. a t t a c h e d on J u n e 2, 1 9 7 1 , when the T h e r e was c l e a r l y a n a g r e e m e n t b e t w e e n s t o c k was p l e d g e d . the parties that the security interest attach t o the stock, t h e a p p e l l a n t was g i v e n c r e d i t o r a n e x t e n s i o n t h e r e o f , a n d the appellant Further, owned the stock when attachment the s e c u r i t y i n t e r e s t continued notwithstanding the sale t o Wolfe. occurred. in the collateral S e c t i o n 30-9-306 ( 2 ) MCA. W a l s o n o t e t h a t t h e s e c u r i t y a g r e e m e n t became b i n d e ing b e f o r e t h e p a r t i e s e n t e r e d i n t o t h e escrow arrangement. The s e c u r i t y i n t e r e s t a t t a c h e d o n J u n e 2 , 1 9 7 1 . entered into the escrow agreement on The p a r t i e s October 17, 1972. C o n s e q u e n t l y , t h e s e c u r i t y i n t e r e s t would r e m a i n a t t a c h e d t o t h e s t o c k i n t h e escrow account. T h u s , we h o l d t h e s e c u r i t y i n t e r e s t h a d a t t a c h e d a n d remained s o while t h e s t o c k w a s i n escrow. Upon d e f a u l t t h e respondent a c t e d w i t h i n its s t a t u t o r y r i g h t s t o f o r e c l o s e on the collateral t o s a t i s f y appellant's obligation. 30-9-504, Section MCA. The e s c r o w a r r a n g e m e n t was a c o n v e n i e n t means t o h a v e payments from Wolfe, for the corporation, credited against appellant's original indebtedness to the respondent. It should not, however, create an obstacle for a secured party in exercising its statutory rights to foreclose on col- lateral when the debtor defaults. Moreover, the fiduciary duties respondent owed to the appellant, as an escrow agent, did not conflict with this right. The particular instruction that appellant asserts would require the respondent to return possession of the stock certificate to appellant, if Wolfe defaulted on a payment, was in the May 22, 1972, escrow agreement between appellant and Wolfe. However, the respondent was merely appo~nted as depository. It had not legally accepted the escrow. Hence, this instruction did not bind the respondent. It was not until October 17, 1972, that respondent legally became the escrow depository. This is evidenced by the formal escrow receipt executed on that date. It acknowl- edged receipt of the agreement to sell and the shares of stock. The agreement was on a standard form and made no reference to the Nay 22, 1972, escrow. The appellant further asserts that the respondent did not comply with the Uniform Commercial Code in failing to give notice of the foreclosure sale. The respondent argues that in Montana such notice only needs to be sent and, moreover, that the August 21, 1974, letter apprised the appellant of respondent's intentions to proceed against the stock. Section 30-9-504(3), MCA, provides ". . . reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private s a l e or other intended d i s p o s i t i o n i s t o be made s e n t by S e c t i o n 30-1-201(26), . . ." the secured party t o the debtor added.) s h a l l be (Emphasis defines notice as: MCA, ". . . t a k i n g s u c h s t e p s a s may be r e a sonably r e q u i r e d t o inform t h e o t h e r i n o r d i n a r y c o u r s e whether o r n o t such o t h e r a c t u a l l y comes t o know of i t . A person ' r e c e i v e s ' n o t i c e o r n o t i f i c a t i o n when: . . . "(b) i t is d u l y d e l i v e r e d a t any o t h e r p l a c e h e l d o u t by him a s t h e p l a c e f o r r e c e i p t of s u c h communication." I n James T a l c o t t , 529 P.2d 404, the 352, there UCC actual notice. is Inc. v. Reynolds we s p e c i f i c a l l y h e l d no requirement that ( 1 9 7 4 ) , 1 6 5 Mont. t h a t according the It requires the creditor debtor to receive t o take reasonable s t e p s t o a s s u r e t h a t t h e d e b t o r is n o t i f i e d . We proper. steps quired hold that notice N o t i c e was taken by of sent to the the the respondent sale appellant. were t o n o t i f y t h e a p p e l l a n t of a c c o r d i n g t o t h e UCC, s a l e when those the 1974, l e t t e r was s e n t . to the address By r e s p o n d i n g t h e a d d r e s s of the stock was Further, the reasonably re- foreclosure. the appellant received i t was d e l i v e r e d appellant held of Also, n o t i c e of the t h e August 21, to that letter, the delivery out as a place for r e c e i v i n g com~nunications. Finaily, t h e s t e p s t a k e n by t h e r e s p o n d e n t t o n o t i f y t h e a p p e l l a n t were s u c c e s s f u l i n g i v i n g a c t u a l n o t i c e . August l e t t e r informed a p p e l l a n t of tions to dispose of the collateral the respondent's to satisfy the The intenappel- l a n t ' s obligation. Finally, the was not collateral appellant conducted contends in a the sale commercially of the reasonable manner a s mandated by section 30-9-504(3), The MCA. respondent merely s o l d t h e s t o c k t o t h e o r i g i n a l purchaser f o r an amount s u b s t a n t i a l l y l e s s than i t s worth and t h e s a l e was not a d v e r t i s e d . The respondent a s s e r t s t h a t t h e p r i c e i t s e l f does n o t warrant a holding unreasonable. that a particular s a l e was commercially The a p p e l l a n t m u s t prove t h a t the manner of t h e s a l e was commercially unreasonable. Under ceedings, the UCC, every a s p e c t of i n c l u d i n g method, manner, m u s t be commercially r e a s o n a b l e . the f o r e c l o s u r e pro- time, p l a c e and terms, S e c t i o n 30-9-504(3), MCk. The f a c t t h a t a b e t t e r p r i c e could be obtained a t a d i f f e r e n t s a l e or a d i f f e r e n t method or manner of d i s p o s i t i o n does n o t e s t a b l i s h t h a t t h e s a l e was commercially unreasonable. S e c t i o n 30-9-507(2), MCA. T h i s Court i n t e r p r e t e d i n the T a l c o t t case, supra. of the t h e s e two s e c t i o n s of W held t h a t t h e r e a s o n a b l e n e s s e s a l e is not determined by p r i c e but t h e manner which t h e s a l e was conducted. is t h e UCC considered commercially In o t h e r words, if reasonable, then the White Summers in the s a l e price is reasonable. However, Professors and in their t r e a t i s e on t h e UCC p l a c e some importance on t h e p r i c e t h a t was a c t u a l l y received f o r t h e c o l l a t e r a l . . . They s t a t e : ll. Notwithstanding t h e s t a t e m e n t i n 507-(2) t h a t low r e s a l e p r i c e alone i s n o t enough, t h e c r u c i a l i s s u e which one g l e a n s from t h e 'method, manner, time1 l a n g u a g e and from t h e s e v e r a l c a s e s i n t e r p r e t i n g 9 - 5 0 4 ( 3 ) is j u s t that--was the p r i c e s u f f i c i e n t ? The d e b t o r who a s k s a c o u r t t o ignore 9-507 ( 2 ) probably expects t o o much, but t h e c a s e s s u g g e s t t h a t given an unusually low r e s a l e p r i c e l i t t l e more is needed f o r t h e c o u r t s t o f i n d t h e s a l e commercially unreasonable . . ." mercial (1980). White and Summers, Uniform ComCode 2d Ed., § 26-11 at 1116 Some recent cases recognize that the resale price should be a factor in determining the commercial reasonableness of a sale. Miller (E.D. Pa. In Mercantile Financial Corporation v. 1968), 292 F.Supp. 797, 7 UCC 402, the court recognized that: "Although S 9-507(2) clearly provides that a discrepancy between a price received by a creditor disposing of assets pursuant to 9-504 and an isolated price later shown to have been obtainable, is not alone sufficient to grant a debtor affirmative relief under 9-507(1), certainly such a discrepancy, if substantial, is relevant to a determination of whether a challenged sale was 'commercially reasonable'. [citing cases] The evidence here established that the price received for the goods sold by the plaintiff [secured party] was substantially less than both the price originally paid for them by G.F.&M. and the price which the purchaser of the assets subsequently received for them on resale, i.e., approximately $57,000.00. This evidence strongly suggested that the plaintiff did not obtain the fair market value for these goods at the time of the sale, and the plaintiff did not rebut this inference." 292 F.Supp. at 801. Thus, in light of the above authority and the fact that "reasonable price" is the objective of a commercially reasonable disposition, we hold that a large discrepancy in price can be considered within the parameters of section 309-504(3), MCA. We also conclude that the complaining party has the burden of proving the price received was less than the fair market value of the collateral. In this case, besides the evidence regarding the value of the stock, the appellant made little effort to prove the actual sale was commercially unreasonable. The record is replete with speculations of the value of the stock when it was d i s p o s e d . The a p p e l l a n t a s s e r t e d t h a t t h e a s s e t s o f t h e c o r p o r a t i o n were v a l u e d s a l e of t h e c o l l a t e r a l . that Wolfe did not a t $22,279.79 However, do w e l l a p p e l l a n t s o l d i t t o him. the year before t h e t h e r e was a l s o t e s t i m o n y with the business after the M o r e o v e r , Wolfe f i l e d c o r p o r a t e b a n k r u p t c y a p p r o x i m a t e l y two and o n e - h a l f y e a r s a f t e r i t was sold. Thus, we h o l d t h a t t h e a p p e l l a n t d i d n o t p r o v e t h a t t h e s a l e was c o n d u c t e d i n a c o m m e r c i a l l y u n r e a s o n a b l e manner p u r s u a n t t o s e c t i o n 30-9-504(3), MCA. W e f u r t h e r hold t h a t t h e r e is s u b s t a n t i a l e v i d e n c e t o s u p p o r t t h e l o w e r c o u r t ' s c o n c l u s i o n t h a t a p p e l l a n t d i d n o t meet h i s b u r d e n o f e s t a b l i s h i n g t h a t t h e s t o c k was w o r t h a n amount g r e a t e r t h a n t h a t f o r w h i c h i t was s o l d . Af f i r m e d . =344nat wcw&@Jp Chief J u s t i c e W concur: e .*As --.+," J , x - , Justices

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