Mount Vernon Dodge, Inc. v. Seattle-First National Bank

Citations: 570 P.2d 702; 18 Wash. App. 569; 23 U.C.C. Rep. Serv. (West) 247; 1977 Wash. App. LEXIS 2034Docket: 3910-1

Court: Court of Appeals of Washington; October 10, 1977; Washington; State Appellate Court

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Mount Vernon Dodge, Inc., an insolvent automobile dealership, filed a lawsuit against Seattle-First National Bank for alleged conversion of assets, invoking the security agreements and Article 9 of the Uniform Commercial Code (RCW 62A.9). The trial court dismissed the complaint with prejudice and awarded the bank $7,596.34 plus interest, costs, and attorney's fees. Mount Vernon Dodge raised several challenges: the denial of a jury trial, the constitutionality of the UCC's self-help provisions, the claim that repossession was not commercially reasonable, and the assertion that some repossessed property was leased equipment not covered by the lender's security.

Initially, the plaintiff filed the complaint on March 31, 1972, and a note for trial was filed by May 24, 1972. Although the trial was set for September 24, 1973, it was continued to February 19, 1974, with the case designated as 'nonjury.' A motion for summary judgment by the bank was partially granted, establishing that the security agreements were valid and that Mount Vernon Dodge was in default as of November 5, 1971. On the scheduled trial date, a dispute arose regarding the case's conduct, leading to a letter from stockholder Kenneth Cook that the court interpreted as a jury trial demand, despite no jury fee being paid. The court denied the demand, allowed counsel to withdraw, and continued the trial to May 1, 1974, imposing a $500 cost on the plaintiff.

Subsequently, the plaintiff's attorney re-entered the case, and the trial was again continued at the defendant's request due to witness unavailability. A new trial note was filed on May 9, 1974, and a demand for a jury trial was submitted on May 16, 1974, but this demand was struck by the court. The case eventually went to trial on April 15, 1975. The findings indicated that the bank had provided loans to Mount Vernon Dodge since 1969, secured by interests in all dealership assets, including vehicles, equipment, inventory, and accounts receivable.

The trial court determined that the security agreements and notes were valid obligations of Mount Vernon Dodge to Seattle-First National Bank. Earl Corwin served as president of Mount Vernon Dodge from July to November 1971, while Bryan Bickmore was the designated dealer under the franchise agreement with Chrysler Motors Corporation. In July 1971, the bank informed Mount Vernon Dodge that it would cease financing operations unless new equity capital was injected. From July to November 1971, Corwin and Bickmore sought additional capital and financing but were unsuccessful. During this period, the company did not purchase new vehicles and sold off existing inventory, indicating a decline in operations.

By October 1971, Mount Vernon Dodge breached its agreements with the bank by selling vehicles contrary to the existing security agreements. The bank demanded payment for the outstanding debts and accelerated the repayment terms. By November 1, 1971, Mount Vernon Dodge was found to be insolvent, in default of its agreements, unable to pay its rent, and had its lease canceled. It was also overdrawn on its checking accounts and lacked the means to settle its debts with the bank.

During this timeframe, representatives from Lairmont, Inc., Mr. Vogel and Mr. Cook, examined Mount Vernon Dodge's financials and negotiated to purchase Corwin's shares. On November 3 and 4, 1971, Lairmont, Inc. acquired a two-thirds interest in Mount Vernon Dodge, aware that they were buying an "empty corporate shell." Cook, who owned the lease, sought the purchase to gain access to the remaining equipment after the lease cancellation. All involved parties were cognizant of the bank's demand for payment and the company's inability to fulfill its financial obligations.

Mount Vernon Dodge, its officers, and associated individuals failed to demonstrate sufficient reliability to Seattle-First National Bank, prompting the bank to act under its Security Agreements. On November 5-7, 1971, the bank took possession of various collateral, including vehicles, equipment, inventory, and accounts receivable, with consent from Mr. Bryan Bickmore of Mount Vernon Dodge. The collateral was securely stored at Truckers International in Mount Vernon, Washington, with security measures in place.

Following reports of thefts from the original location, the bank relocated the collateral to a secured warehouse on West Hazel Street. Despite concerns, no thefts or damages occurred during this period. On November 10, 1971, Bickmore notified Chrysler Motors Corporation of the termination of the Dealer Franchise due to Mount Vernon Dodge's insolvency, effective by November 1, 1971. On November 11, 1971, the bank sent a certified notice to Mount Vernon Dodge and other relevant parties regarding the upcoming sale of the collateral, in compliance with RCW 62A.9-504(3), scheduled for on or after November 22, 1971.

Seattle-First National Bank engaged the parts and service managers of Mount Vernon Dodge to inventory and sort parts and accessories, selling acceptable items back to Chrysler Motors Corporation and remanufactured parts to Tam Engineering Company. Unsold items comprised obsolete and junk parts. On November 16, 1971, the bank advertised a public sale of Mount Vernon Dodge’s inventory, including new and used vehicles, to local dealers and other interested parties, reserving the right to accept bids to ensure optimal pricing. Key individuals associated with Mount Vernon Dodge, including Mr. Lloyd Vogel and Mr. Bryan Bickmore, were fully informed about the sale's details and attended the event, where Vogel placed bids on behalf of himself and Lairmont, Inc., purchasing nine vehicles without objection to the sale process. The sale took place on November 18, 19, and 22, 1971, with 23 bidders participating. The bank assessed all bids for reasonableness, rejecting six bids for automobiles that were deemed insufficient, subsequently approving minor repairs to enhance their sale value, resulting in higher sale prices. The miscellaneous parts were sold with multiple bids received. Additionally, the bank reviewed accounts receivable and notified debtors to redirect payments to them, following up with reminders to those who did not respond.

A third letter was sent to account debtors demanding payment, warning that unpaid accounts would be referred to a collection agency if not settled. Except for disputed accounts or those with legitimate setoffs, unpaid receivables were assigned to Skagit Bonded Collections for collection. All actions regarding the collateral's handling and sale were conducted according to standard practices of Seattle-First National Bank and the banking industry, ensuring a commercially reasonable process. As of November 5, 1971, Mount Vernon Dodge owed Seattle-First National Bank $129,055.95. The bank incurred $5,825.34 in reasonable expenses related to the collateral's sale and collection efforts. The bank realized $91,378.23 from the sale of vehicles, $17,726.69 from parts and accessories, and $6,033.75 from accounts receivable. After accounting for a contingency reserve of $12,146.28, a deficiency of $7,596.34 remained owed by Mount Vernon Dodge. In terms of the jury trial, the plaintiff acknowledged the initial jury demand was properly denied in March 1974, but contested the denial of a subsequent demand in September 1974. The plaintiff argued that the case's removal from the trial calendar reinstated their right to demand a jury trial, but the trial court, aware of the prior denial, found the second demand inappropriate.

The court's order denied the motion for a second jury demand from Mount Vernon Dodge, affirming that it would not reconsider Judge Soderland's prior ruling. Consequently, the jury demand made on May 16, 1974, was stricken, as the right to a jury trial can be waived, and this waiver remained unchallenged. The court referenced multiple case precedents (e.g., Park v. Mighell, Shores Co. v. Iowa Chem. Co.) to support that a waiver binds the parties even upon retrial after an appeal. It acknowledged California's position in Taylor v. Union Pac. R.R. Corp., which states that a waiver can only be retracted at the trial court's discretion, a principle echoed by Washington case law (e.g., Balise v. Underwood).

Furthermore, the plaintiff's initial failure to demand a jury or pay the requisite deposit constituted a waiver of the right to a jury trial, and the court found no error in denying the jury demand based on the circumstances, indicating that procedural changes in the trial schedule do not reinstate waived rights.

The document also addressed the constitutionality of the self-help provisions under RCW 62A.9-503, which permit secured parties to repossess collateral without prior notice or a judicial hearing. Mount Vernon Dodge argued that this provision violated due process rights under both the Fourteenth Amendment and the Washington State Constitution. The court disagreed, citing that the majority of courts have upheld the constitutionality of such self-help measures, further supporting its position with references to various federal and state cases affirming the validity of these provisions.

The court emphasized the necessity of self-help provisions in the Uniform Commercial Code (UCC) to safeguard creditor interests, arguing their absence would lead to higher costs for debtors, increased interest rates, greater court burdens, and reduced credit availability. It determined these provisions comply with due process as they do not involve state intervention in private creditor remedies. The valid security agreements permitted creditors to repossess collateral without notice or judicial proceedings, which is not a due process violation under the U.S. or Washington Constitutions.

The debtor challenged the creditor's disposal of collateral as not "commercially reasonable," citing several grievances: alleged breach of peace in taking inventory, lack of proper sale advertising, selective notification to certain dealers, inadequate collateral description, failure to assess the local market before resale, conducting a private sale, improper seizure of leased items, and absence of expert testimony at trial regarding asset disposal methods. The trial court's findings countered these claims, asserting that the UCC's self-help provisions balance preventing dishonest transactions and avoiding excessive restrictions on honest ones.

The court referenced the necessity for creditors to provide reasonable notification of sales and to conduct sales in a commercially reasonable manner, as outlined in RCW 62A.9. It found that the debtor was given reasonable notification regarding the sale of inventory, thus fulfilling the first requirement. While the UCC does not define "commercially reasonable," it entrusts that definition to the court, which has previously discussed the obligations of creditors and debtors in related cases. The secured party’s responsibility is to secure the best possible price for the collateral, but they are not required to take "extraordinary means" to do so.

Proof of fair market value is generally sufficient to establish commercial reasonableness in a sale, but the focus is primarily on the sale procedures rather than just the proceeds. A secured creditor must ensure that the manner, method, time, place, and terms of the sale align with commercially accepted standards to avoid sanctions under Article 9. While price is a relevant factor in assessing commercial reasonableness, it is not the sole determinant. Courts have established that the mere possibility of obtaining a better price through different methods or timing does not inherently prove that a sale was commercially unreasonable. Secured parties are expected to exert best efforts to maximize collateral sale prices while considering the debtor's interests. Private sales are permissible, especially for items like vehicles that have a recognized market. A case cited does not prohibit private sales in situations where the creditor does not purchase the collateral and where the items are traded in a recognized market. The creditor's lack of retail automobile sales capabilities and related services does not render the sale commercially unreasonable, as the Uniform Commercial Code recognizes that secured parties can sell through dealers to achieve better returns. Overall, a commercially reasonable sale takes into account the total circumstances, including disposal costs and operational overhead.

Achieving the highest price for collateral must not result in expenses exceeding the price difference. When the disposition of collateral by a secured party is challenged, commercial reasonableness is evaluated as a factual question for the trier of fact. The trial court determined that the creditor met the burden of proof, and its findings, supported by substantial evidence, will not be overturned on appeal. The court confirmed that the creditor did not improperly seize leased equipment that was not collateral under security agreements, as they only took possession of collateral in which they had a security interest. Although a bank officer testified to a mistaken seizure of certain equipment, it was later returned, and it was established that the equipment belonged to the debtor. Upon reviewing the evidence, the appellate court found no error in the trial court's conclusions and affirmed the judgment.

Regarding procedural rules, a party may demand a jury trial by serving a written demand and paying the required fee before the case is set for trial; failure to do so waives the right to a jury trial. In terms of collateral disposition after default, a secured party may sell or lease collateral following commercially reasonable practices, with reasonable notification required to the debtor and other interested parties unless the collateral is perishable. The secured party is not liable for failing to comply with provisions unless it is shown that they did not act in accordance with established practices. A sale conducted in a recognized market or at current market prices is deemed commercially reasonable. Judicial approval of a disposition also establishes its reasonableness, but such approval is not mandatory.