Chittenden Trust Co. v. Andre Noel Sports

 NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
 as well as formal revision before publication in the Vermont Reports.
 Readers are requested to notify the Reporter of Decisions, Vermont Supreme
 Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
 order that corrections may be made before this opinion goes to press.


                                 No. 91-449


 Chittenden Trust Company                     Supreme Court

                                              On Appeal from
      v.                                      Chittenden Superior Court

 Andre Noel Sports, et al.                    June Term, 1992



 Matthew I. Katz, J.

 Thomas F. Heilmann and Todd D. Schlossberg of Heilmann, Ekman & Associates,
    Inc., Burlington, for plaintiff-appellant

 Geoffrey M. FitzGerald and John P. Maley of Sylvester & Maley, Inc.,
    Burlington, for defendants-appellees Andre Noel Sports, Andre Noel and
    Le Chamois Blanc

 Jesse D. Bugbee of Kissane, Yarnell & Cronin, St. Albans, for defendants-
    appellees Rosemary Noel, Romy's Ltd. and Romy's Alpen Haus

 PRESENT:  Gibson, Dooley, Morse and Johnson, JJ.


      JOHNSON, J.  This is an interlocutory appeal from two superior court
 orders, one granting summary judgment in favor of defendant debtors and
 guarantors as to whether plaintiff Chittenden Trust Company (CTC) has the
 right to obtain a deficiency judgment following its failure to provide
 notice of the sale of repossessed collateral, and the other dismissing
 remaining claims that sought damages based on, among other things, allega-
 tions that defendants fraudulently transferred some of the collateral after
 they had defaulted on their loan.  We affirm the court's refusal to allow
 CTC a deficiency judgment, but reverse its decision to dismiss all the
 remaining claims.
         Defendants, various individual and corporate debtors and guarantors
 who import, distribute and retail exclusive alpine ski clothing and
 accessories, executed two promissory notes in June of 1984 evidencing two
 loans from CTC totaling approximately $800,000.  Defendants defaulted on the
 loans, and in January of 1987, CTC filed suit and secured a writ of attach-
 ment on defendants' inventory, accounts receivable, fixtures, and equipment.
 CTC repossessed some ski apparel pursuant to the writ, but after months of
 intermittent discussion, the parties failed to agree on how to liquidate the
 merchandise.
      On November 4, 1987, CTC informed defendants that it would pursue the
 sale of the goods beginning the week of November 2, 1987, and that notifi-
 cation of the specific sale times and places would follow as soon as they
 were available.  On December 23, 1987, the bank informed defendants that a
 sale of the collateral had been advertised and was being conducted at a
 certain location.  The sale had begun approximately one month earlier, and
 an enclosed advertisement indicated that the sale would continue through
 Christmas.  CTC netted about $35,000 from the sale of the merchandise.
      Eventually, defendants moved for summary judgment, claiming that
 plaintiff had failed to provide them with proper notice of the sale.  The
 trial court granted the motion, concluding that the notice was improper,
 and, that therefore, CTC was absolutely barred from obtaining a deficiency
 judgment.  Following a hearing, the court also granted defendants' motions
 to dismiss the case on the ground that CTC's remaining claims were
 derivative of, and ancillary to, the deficiency action.  The court then
 stayed further proceedings concerning pending counterclaims, and certified
 the following questions for this appeal:
         1. Did the trial Court err in ruling that on the state
         of the record hereby presented plaintiff, Chittenden
         Trust Company, as a secured party, was barred from
         pursuing its claim for a deficiency judgment against
         defendant debtors on the grounds that it failed to give
         defendants prior notification of the time and place of
         the sale of repossessed collateral in accordance with 9A
         V.S.A. { 9-504(3)?

         2. Did the Court err in its March 21, 1991 Order
         granting defendants' Motions to Dismiss plaintiff's
         remaining claims on the grounds that such claims derive
         from and are part of the claim for a deficiency judgment
         disposed of by the Court's Orders entered October 30,
         1990 and October 31, 1990 where plaintiff failed to
         make any showing of damages separate and apart from the
         deficiency on the underlying note?
      On appeal, CTC argues (1) that the court erred by granting summary
 judgment because there are disputed facts concerning whether notice was
 required in this instance; (2) that even if notice was required, this Court
 should abandon or narrow the absolute-bar rule it adopted in a prior
 decision; and (3) that even if it is precluded from obtaining a deficiency
 judgment, it should be allowed to pursue its other claims against
 defendants.
                                     I.
      CTC's first argument is without merit.  A secured party must give
 "reasonable notification of the time and place of any public sale" of
 repossessed collateral unless the collateral (1) "is perishable or threatens
 to decline speedily in value" or (2) "is of a type customarily sold on a
 recognized market."  9A V.S.A. { 9-504(3).  The first exception is
 applicable where a "quick resale of the collateral would better serve the
 debtor's interests" and "the time consumed in giving notice might have
 disastrous consequences" due to the possibility of a sharp price decline.
 J. White & R. Summers, Uniform Commercial Code { 25-12, at 1222 (3d ed.
 1988).  This exception rarely applies to chattels.  Rock Rapids State Bank
 v. Gray, 366 N.W.2d 570, 573 (Iowa 1985).
      The reasoning behind the "recognized market" exception is that "the
 debtor does not need the protection against a self-dealing or dishonest
 creditor because independent market forces set the sale price which is
 presumptively 'commercially reasonable.'"  J. White & R. Summers, supra, at
 1222.  This exception generally applies to widely traded stocks, bonds or
 commodities sold in recognized markets, where the prices are fixed and
 therefore not subject to manipulation by the secured party.  Id.; Hertz
 Commercial Leasing Corp. v. Dynatron, Inc., 427 A.2d 872, 876 (Conn. Super.
 Ct. 1980); Ocean Nat'l Bank of Kennebunk v. Odell, 444 A.2d 422, 425-26 (Me.
 1982); see generally Annotation, Nature of Collateral Which Secured Party
 May Sell or Otherwise Dispose of without Giving Notice to Defaulting Debtor
 under UCC { 9-504(3), 11 A.L.R.4th 1060 (1982).
      We conclude, as a matter of law, that neither of these exceptions
 applies in this instance, where no material facts are in dispute.  See
 Wheeless v. Eudora Bank, 509 S.W.2d 532, 534 (Ark. 1974) (court held, as
 matter of law, that used car did not meet either exception).  As noted, the
 repossessed collateral in this case was outdated, high-fashion ski and
 sports apparel.  The prices for the individual garments were set by the bank
 or its agent, not by a recognized market.  Furthermore, CTC had possession
 of the collateral for over six months without giving proper notice of its
 sale.  See Rock Rapids State Bank, 366 N.W.2d  at 573 (because collateral
 was not sold until three weeks after it was turned over to bank, bank failed
 to show urgency that would preclude proper notice).  Notwithstanding CTC's
 arguments as to the "volatile" nature of the collateral, the continuing
 negotiations with defendants over how to deal with the collateral, and the
 nature of the sale, a reasonable factfinder must conclude that proper notice
 was required here.
                                     II.
      Next, CTC asks us to overrule or limit our holding in Chittenden Trust
 Co. v. Maryanski, 138 Vt. 240, 246-47, 415 A.2d 206, ___ (1980), that
 reasonable notice is a condition precedent to recovery of a deficiency
 judgment.  We decline to do so.
      Neither the Uniform Commercial Code (Code) nor its predecessor, the
 Uniform Conditional Sales Act (Sales Act), provided a specific remedy for a
 secured party's failure to notify a debtor of the sale of repossessed col-
 lateral, and the vast majority of courts have declined to limit the debtor's
 remedy to that provided by { 9-507(1).  See 9A V.S.A. { 9-507(1) (debtor is
 entitled to seek recovery of loss caused by secured party's failure to com-
 ply with Code provisions); Liberty Bank v Honolulu Providoring, Inc., 650 P.2d 576, 581 (Haw. 1982) (minority view that { 9-507(1) is debtor's
 exclusive remedy "has been generally criticized").  The Court in Maryanski
 adopted the "absolute bar" rule, which it stated was the majority rule,
 because it is in accord with prior Vermont case law under the Sales Act, see
 General Acceptance Corp. v. Lyons, 125 Vt. 332, 336, 215 A.2d 513, 516
 (1965), and because strict compliance with the notice requirement is not
 unreasonable considering that it is one of the few specific requirements in
 the Code relating to the sale of collateral. Maryanski, 138 Vt. at 246-47,
 415 A.2d  at 210.  CTC argues that this decision is inconsistent with
 subsequent decisions of this Court, the overwhelming majority of other
 jurisdictions, and the policies and provisions of the Code.  We disagree.
      This Court has consistently, and recently, reaffirmed the principle,
 first articulated in Maryanski, that a secured party cannot recover any
 deficiency from a debtor or guarantor absent reasonable notice.  See, e.g.,
 Vermont Indus. Devel. Auth. v. Setze, ___ Vt. ___, ___, 600 A.2d 302, 304-05
 (1991); Vermont Nat'l Bank v. Hamilton, 149 Vt. 477, 480, 546 A.2d 1349,
 1351 (1988).  Further, notwithstanding CTC's arguments to the contrary,
 recent decisions by this Court have not undermined the Maryanski holding.
      In Allard v. Ford Motor Co., 139 Vt. 162, 422 A.2d 940 (1980), decided
 approximately seven months after Maryanski, a debtor brought an action for
 conversion and unlawful disposition of collateral against the secured party
 that repossessed and sold his car without giving him notice.  This Court
 held that, in the absence of actual damages, the debtor's recovery was
 limited to the minimum specified in 9A V.S.A. { 9-507(1). Id. at 164, 422 A.2d  at 942 (citing { 9-507(1)).  This holding merely stands for the
 proposition that when a debtor brings a separate affirmative action against
 a secured party for illegal disposition of collateral, and there are no
 actual damages, the debtor's recovery is limited by { 9-507(1).  Allard says
 nothing about defense of a secured party's action to recover a deficiency
 judgment.  See First State Bank of Morrilton v. Hallett, 722 S.W.2d 555, 556
 (Ark. 1987) (majority position is that { 9-507 is a separate affirmative
 action by a debtor to recover damages and is not applicable to a creditor's
 action to recover a deficiency judgment, which depends on whether the
 creditor has complied with statutory notice and disposition requirements).
 The nature of the actions and the underlying facts in the other Vermont
 cases cited by CTC are even more remote than those in Allard.
      CTC overstates its argument when it claims that the "overwhelming"
 majority of jurisdictions have rejected the absolute-bar rule, which is fast
 becoming an "anachronism" in Article 9 jurisprudence.  In fact, the courts
 are "deeply divided" over what remedy should be accorded to debtors when
 creditors seek a deficiency judgment after failing to give reasonable notice
 of the sale of seized collateral.  Fleming v. Carroll Publishing Co., 581 A.2d 1219, 1224 (D.C. App. 1990); Liberty Bank, 650 P.2d  at 581-82 ("sharp
 disagreement among jurisdictions as to proper remedy").  There are three
 views.  Under the "set-off" rule, favored in only a very few jurisdictions,
 the secured party who fails to give proper notice may nevertheless obtain a
 deficiency judgment, subject only to a set-off for damages resulting from
 the lack of notice. Connecticut Bank and Trust Co. v. Incendy, 540 A.2d 32,
 37 (Conn. 1988).  Most jurisdictions have rejected this rule because it
 places on the debtor the burden of proving damages under { 9-507(1), and
 thus provides little incentive for creditors to comply with the notice
 requirement.  See id.
      Perhaps a slight majority of jurisdictions follow the "rebuttable-
 presumption" rule, under which "the fair market value of the collateral
 [sold without notice] is rebuttably presumed to equal the amount of the
 remaining debt."  Bank of Chapmanville v. Workman, 406 S.E.2d 58, 65 (W. Va.
 1991).  To recover a deficiency, the secured party must prove otherwise.
 Some courts have turned to this rule because the remedy provided by the
 "absolute-bar" rule is punitive in nature, involves a forfeiture, and
 creates a penalty that has no relation to the "commercial reasonableness" of
 the sale.  Id. at 64; Emmons v. Burkett, 353 S.E.2d 908, 910-911 (Ga.
 1987)(absolute bar rule is harsh and contrary to intent of UCC because
 debtor may receive windfall and creditor may be arbitrarily penalized).
      Many jurisdictions, however, have continued to adhere to the absolute-
 bar rule, see, e.g., Wilmington Trust Co. v. Conner, 415 A.2d 773, 779 (Del.
 1980); Havelock Bank of Lincoln v. McArthur, 370 N.W.2d 116, 118-19 (Neb.
 1985), and at least one jurisdiction has recently abandoned the rebuttable-
 presumption rule in favor of the absolute-bar rule.  See Hallett, 722 S.W.2d  at 556.  These courts point out that allowing a deficiency judgment
 after repossession of collateral is in derogation of the common law, and,
 therefore, strict compliance with statutory requirements is a condition
 precedent to obtaining such a judgment.  See, e.g., Cherry Manor, Inc. v.
 American Health Care, Inc., 797 S.W.2d 817, 821 (Mo. Ct. App. 1990).  Viewed
 in this light, the absolute-bar rule does not punish, but rather precludes
 the secured party from invoking the operation of remedial statutory
 provisions.  Wilmington Trust Co., 415 A.2d  at 780.  Further, although the
 Code does not contain a provision barring creditors from collecting a
 deficiency when they have violated notice requirements, it provides that
 other rules of law may control unless specifically displaced.  Wilmington
 Trust Co., 414 A.2d  at 779; see 9A V.S.A. { 1-103.
      The law of this state, both before and after adoption of the Code, has
 been to deny deficiency judgments in situations where the creditor has
 failed to provide reasonable notice of the sale of repossessed collateral.
 This rule is simple, certain, and easily administered, and it provides
 greater incentive for creditors to comply with { 9-504(3), which seeks to
 give debtors an opportunity to protect their interests by taking part in
 the sale of the collateral.  Although we recognize that there are policy
 considerations and statutory arguments that favor the rebuttable-presumption
 rule, they are not so compelling as to persuade us to abandon our long-held
 rule.  See J. White & R. Summers, supra, { 25-19 at 1245-46 (stating
 statutory arguments that can be made for either rule); Westgate State Bank
 v. Clark, 642 P.2d 961, 968 (Kan. 1982) (listing arguments supporting each
 rule).  There may be rare instances where the nature of de minimis
 violations makes invocation of the rule inappropriate, see, e.g., Barnhouse
 v. Hawkeye State Bank, 406 N.W.2d 181, 185-86 (Iowa 1987) (deficiency
 judgment not barred where bank sold a bucket of bolts and a broken engine
 analyzer to bystanders as it was seizing collateral), but this case does not
 present such an instance.  Therefore, the court's first certified question
 is answered in the negative.
                                    III.
      Finally, CTC argues that even if it has no right to a deficiency
 judgment, the court erred by dismissing its remaining claims that defendants
 fraudulently concealed or transferred some of the collateral following their
 default on the loans.  The trial court dismissed the claims, which sounded
 in breach of contract and statutory and common-law fraud, because they are
 "inextricably intertwined and functionally indistinct from the deficiency
 action."  The court reasoned that CTC may be entitled to a writ of replevin
 against defendants or others who may have possession of additional
 collateral, but that CTC's alleged damages with regard to the remaining
 claims could be made only by reference to the underlying note.  Thus,
 according to the court, these claims are merely an "end run" attempt by the
 bank to obtain a deficiency judgment.  We conclude that the court
 prematurely dismissed CTC's remaining claims.
      A deficiency judgment imposes liability on a debtor for the unpaid
 balance of a secured obligation after sale of the collateral has failed to
 yield the full amount of the underlying debt.  In re Pittsburgh-Duquesne
 Dev. Co., 482 F.2d 243, 246 (3d. Cir. 1973).  "Thus, a proceeding for a
 deficiency judgment is an attempt to recover something more than and
 distinct from the security provided by the debtor."  Id.  Accordingly, a
 creditor who is barred from obtaining a deficiency judgment because of the
 failure to provide notice of the sale of repossessed collateral is not
 precluded from seeking to recover collateral that was not repossessed.
 Fleming, 581 A.2d  at 1225.  For example, as the trial court noted, the
 creditor is free to initiate a replevin action against the debtor or others
 with respect to the collateral not repossessed.  Recovery of collateral in
 such a situation is not an award of a deficiency, but merely provides the
 creditor with the collateral for which it bargained.
      If a creditor's suit to recover unrepossessed collateral is not a
 deficiency action, it follows that a suit seeking damages in the amount of
 the collateral that the creditor is unable to repossess due to debtor
 misconduct is also not a deficiency action.  See Dixon v. Borg-Warner
 Acceptance Corp., 368 S.E.2d 800, 802 (Ga. Ct. App. 1988) (no deficiency
 sought in action for value of collateral which was not, and could not have
 been, repossessed by secured party); In re Gerber, 51 Bankr. 526, 529 (D.
 Neb. 1985) (creditor barred from pursuing deficiency claim was entitled to
 remaining collateral or, if unrecoverable, its value).   Recovery under
 either action would be based on the value of the unrepossessed collateral,
 not the balance of the debt due.  Thus, there is no basis for concluding
 that an action to recover the value of fraudulently conveyed collateral is
 more "inextricably intertwined" with a deficiency claim than an action to
 recover the property itself.  See Chase Commercial Corp. v. Datapoint,
 Corp., 774 S.W.2d 359, 365, 368 (Tex. Ct. App. 1989) (creditor precluded
 from recovering deficiency permitted to pursue claim against debtor for
 fraudulent assignment of the collateral). (FN1)
      Moreover, a distinction that would allow creditors to recover
 unrepossessed collateral from debtors, but forbid them from recovering the
 value of such collateral from debtors who have fraudulently transferred the
 collateral, might encourage debtor misconduct.  In any event, it would not
 further the purposes of the notice provision, which are to allow debtors the
 opportunity to redeem repossessed collateral or to ensure that proper steps
 are taken to bring a fair return on the sale of the collateral.  Adams v. B
 & D Builders & Developers, Inc., 144 Vt. 353, 356, 477 A.2d 628, 631 (1984).
 Finally, such a distinction would frustrate Vermont's fraudulent conveyance
 statute, 9 V.S.A. {{ 2281-2282, which voids fraudulent conveyances of
 property made to circumvent the rights of creditors, and which also allows
 for an award of damages.
      None of the cases cited by defendants persuades us that CTC's failure
 to give notice regarding repossessed collateral bars its fraud claims as to
 unrepossessed collateral.  In Sedalia Mercantile Bank & Trust Co. v. Loges
 Farms, Inc., 740 S.W.2d 188, 195-96 (Mo. Ct. App. 1987), the court held that
 the creditor bank could not avoid the consequences of its failure to provide
 notice of a foreclosure sale by seeking damages for the debtors' previous
 fraudulent misrepresentation of their financial status in the original
 financial statement.  In that case, the fraud did not directly concern the
 collateral.  There was no proof, or even allegation, that the debtors had
 fraudulently concealed or transferred collateral to avoid its repossession.
 The case went to trial, and the creditor failed to prove that the alleged
 false financial statement led to any monetary loss suffered by the bank.
 Here, on the contrary, CTC has alleged that defendants' fraudulent
 conveyances prevented them from repossessing the additional collateral it
 now seeks.
      Defendants also rely on a single, unsupported statement in Chemical
 Sales Co., Inc. v. Diamond Chemical Co., Inc., 766 F.2d 364, 369 (8th Cir.
 1985), which suggests that a creditor barred from a deficiency judgment may
 not seek recovery in excess of the value of the repossessed collateral.
 Assuming that is the holding of the court, we disagree with it.  As noted,
 the bar against a deficiency judgment does not extend to collateral not
 repossessed.  For the same reason, we reject In re Boehne, 82 Bankr. 525,
 (W.D. Mo. 1988), to the extent that it bars any recovery, regardless of the
 circumstances, once a creditor sells any collateral without notice.  That
 case, however, can be distinguished on other grounds.  There, the creditor
 was awarded certain personal property, which had secured its loan, and a
 money judgment for approximately $70,000.  The creditor sold the property
 without proper notice for approximately $27,000.  The creditor then
 attempted to obtain a lien on certain real estate, only to discover that the
 debtors had recently conveyed the property to relatives for no
 consideration.  The court ruled that the creditor's failure to provide
 notice of the sale of the collateral precluded it from pursuing its
 fraudulent conveyance action.  Id. at 529.  Unlike the situation here,
 however, the debtors' alleged fraud did not concern the collateral for which
 the parties had bargained.
      According to defendants, the fact that CTC claims that the value of the
 remaining collateral is equal to defendants' remaining liability on the
 note indicates that CTC's fraud claims are nothing more than an attempt to
 obtain a deficiency judgment.  We disagree.  CTC's amended complaint asks
 the court for compensatory damages, punitive damages, an order voiding the
 fraudulent conveyances, and an order requiring the holders of the collateral
 and any profits or proceeds earned therefrom to turn them over to CTC.  In
 any event, regardless of what CTC asks for, it can only recover damages
 resulting from the fraudulent conveyance of unrepossessed collateral, not
 the difference between the amount of the note and the money secured through
 the sale of repossessed collateral.  We hold today that a creditor barred
 from obtaining a deficiency judgment may pursue claims alleging that the
 debtor fraudulently conveyed unrepossessed collateral to defeat the claims
 of the creditor.  The second certified question is answered in the
 negative.
      The superior court's denial of a deficiency judgment and dismissal of
 claims on the note are affirmed.  The court's dismissal of CTC's remaining
 claims is reversed to the extent that the claims seek additional collateral
 or damages because of the fraudulent conveyance of that collateral.  The
 case is remanded for further proceedings consistent with this decision.


                                    FOR THE COURT:

             





                                         _________________________________
                                         Associate Justice


FN1.     Abrogated on other grounds by Greathouse v. Charter Nat'l. Bank -
 S.W., 1992 WL 148109 (Tex.).