American State Bank of Killdeer v. Hewson

Citations: 411 N.W.2d 57; 4 U.C.C. Rep. Serv. 2d (West) 1268; 1987 N.D. LEXIS 378Docket: Civ. 11419

Court: North Dakota Supreme Court; July 28, 1987; North Dakota; State Supreme Court

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Dale Hewson appeals the summary judgment from the District Court, which ruled that American State Bank of Killdeer sold his tractor with dozer collateral in a commercially reasonable manner. Hewson had taken a $40,000 loan from the Bank, secured by two drills and a 1976 Steiger tractor. After defaulting, he voluntarily surrendered the tractor in November 1985. The Bank notified him of the public sale, which was advertised, but Hewson did not redeem the tractor. It sold for $8,700 at auction, and the proceeds were applied to his loan balance. The Bank subsequently sued Hewson for the deficiency after crediting the sale proceeds. Hewson contested the deficiency, arguing the sale was not commercially reasonable and claiming the Bank assured him it would not sell the tractor for less than $20,000. The district court initially denied the Bank's summary judgment motion but later granted it after determining the sale was conducted properly. The Supreme Court of North Dakota reversed the decision, remanding the case for further proceedings, and focused on whether the summary judgment was appropriate given the factual disputes regarding the sale's commercial reasonableness. The court reiterated that summary judgment is warranted only when there are no disputed material facts and that any inferences must favor the party opposing the motion.

Hewson claims there are disputed material facts regarding whether the sale of a tractor with a dozer was conducted in a commercially reasonable manner. The Bank asserts it is entitled to a presumption of commercial reasonableness for the sale and contends that Hewson has not provided evidence to counter this presumption. According to Section 41-09-50(3), N.D.C.C. U.C.C. 9-504, a secured party must conduct the sale in a commercially reasonable manner and provide reasonable notice of the sale's details. The statute mandates that all aspects of the sale be commercially reasonable, which is a factual question, as established in various case law.

There is a division of authority regarding who bears the burden of proving the commercial reasonableness of the collateral's sale when a deficiency judgment is sought. One view is that the secured party must prove the debt and the sale's credit amount, shifting the burden to the debtor to contest the deficiency. Conversely, another view places the initial burden on the secured party to demonstrate the sale's commercial reasonableness. The preferred rule, as articulated in Fedders Corp., places the burden on the secured party when commercial reasonableness is challenged. If the secured party establishes a prima facie case for reasonableness, the burden of persuasion shifts to the debtor to present evidence of unreasonableness.

To evaluate whether the Bank met its burden of showing a commercially reasonable sale, it is necessary to consider the implications of Hewson's signed statement accepting responsibility for any deficiency balance. Furthermore, under Section 41-01-02, N.D.C.C. U.C.C. 1-102, a secured party's obligation to act in good faith and with due diligence cannot be waived by agreement, although parties may define reasonable performance standards.

Federal Deposit Insurance Corp. v. Forte establishes that certain rights and duties related to secured transactions cannot be waived or varied, except as specified in the North Dakota Century Code (N.D.C.C.) and the Uniform Commercial Code (U.C.C.). Specifically, the provisions governing the compulsory disposition and redemption of collateral outline that the parties may agree on standards for fulfilling these rights and duties, provided those standards are reasonable. The Bank's obligation to sell collateral, specifically a tractor with a dozer, in a commercially reasonable manner cannot be waived, even with a signed statement from the debtor.

Under N.D.C.C. U.C.C. 9-507(2), the Bank claims a presumption of commercial reasonableness for the sale of the tractor, asserting it was sold in a recognized market. However, Section 41-09-53(2) clarifies that merely achieving a better price at a different time or through a different method does not invalidate the commercial reasonableness of the sale. The secured party must sell in a recognized market or follow reasonable commercial practices, which are not applicable to used cars, livestock, or farm machinery due to their lack of fixed pricing and competitive bidding.

This case emphasizes that the term "recognized market" is narrow and mainly applies to items sold in markets where prices are predetermined and free from individualized bidding. Since the tractor was sold at public auction, it does not fall within the definition of "recognized market" collateral, thus not exempting it from the notice and commercial reasonableness requirements. Therefore, no presumption of commercial reasonableness is assumed from the auction sale alone.

A sale of farm machinery took place during the off season, alongside less expensive recreational items, which may not have attracted typical buyers for costly equipment. The Bank claims entitlement to a presumption of commercial reasonableness under Section 41-09-53(1), N.D.C.C., asserting that it notified Hewson of the public auction for the tractor with dozer. However, the court disagrees, referencing State Bank of Towner v. Hansen, which establishes that a presumption of fair market value arises only when a creditor fails to dispose of collateral in a commercially reasonable manner. The court clarifies that notice alone does not suffice to establish this presumption, as notice and commercial reasonableness are distinct obligations aimed at protecting injured parties under the Uniform Commercial Code.

The court must evaluate if the district court properly granted summary judgment based on the evidence presented. The Bank has the burden to prove that the sale's terms were commercially reasonable, which includes demonstrating that the resale price reflected the collateral’s fair value. The principle emphasizes the secured party's duty to secure the best possible price for the debtor without needing to employ extraordinary measures. The Bank cites several facts to support its claim of a commercially reasonable sale: Hewson voluntarily surrendered the tractor, acknowledged his redemption rights, agreed to the auction terms, received notice of the sale, and the auction had substantial attendance and was conducted by a licensed auctioneer. The tractor sold for $8,700, and the Bank credited Hewson's account with the proceeds.

Comparable equipment sold at a public auction six months later for $8,000 raised concerns regarding the manner in which the tractor with dozer was sold. Hewson contends that the Bank did not conduct the sale in a commercially reasonable manner, as the tractor was sold alongside unrelated recreational items in an unheated building during winter, which led to a sale price significantly below its fair market value of $20,000. Hewson's affidavit included an advertisement of the auction, highlighting that the tractor was the only piece of farm equipment sold and that its condition was not adequately represented.

According to Section 41-09-53, simply obtaining a better price through a different sale method does not automatically prove a sale was not commercially reasonable; however, the key issue is whether the Bank demonstrated that the $8,700 sale price was fair and reasonable. The Bank's argument based on comparable sales does not conclusively establish the value of the tractor. Prior case law supports the property owner's competency to testify about value, and the significant disparity between the auction price and the estimated value of the tractor suggests that a genuine issue of material fact exists. This issue should be decided by a jury rather than through a summary judgment.

Consequently, the district court's summary judgment is reversed, and the case is remanded for further proceedings. Justice Vande Walle emphasizes a distinction between the secured party's obligations regarding notice of sale and the burden to prove the commercial reasonableness of the sale.

In State Bank, Etc. v. All-American Sub, Inc., 289 N.W.2d 772 (N.D.1980), the court determined that a secured party's failure to provide notice of sale leads to a presumption that the collateral's fair market value equals the debt amount, preventing any deficiency unless the secured party can demonstrate otherwise. The court emphasized that this failure shifts the burden to the secured party, requiring them to prove the sale reflected the fair and reasonable value of the property credited to the debtor's account. 

The ruling clarified that while the burden to rebut the presumption arises from the lack of notice, a secured party who provides notice must still prove that every aspect of the sale was commercially reasonable, which includes demonstrating fair and reasonable value. Thus, both parties face a burden of proof; however, the secured party who does not provide notice carries a heavier burden due to the presumption of fair market value. 

Additional notes included the acknowledgment by Hewson of voluntarily surrendering a tractor and the details of an auction sale advertisement listing various items for sale.

Key points include the terms of sale for an auction conducted by Rockland Stroh, doing business as Manning Sales, with Ron Schoch as the auctioneer. The auction emphasizes cash payments and stipulates that it is not responsible for accidents. Relevant legal provisions from the North Dakota Century Code (N.D.C.C.) regarding the disposition of collateral are cited, indicating that such dispositions can occur through public or private means, with a requirement for commercial reasonableness in every aspect. Notification requirements are outlined, particularly for non-consumer goods, where reasonable notice must be provided to the debtor and any other secured parties with a claim. Provisions regarding the secured party's ability to purchase collateral at sales and the obligations of good faith and reasonableness are highlighted. Additionally, it is noted that if a secured party does not comply with these provisions, the debtor can seek recovery for losses incurred. The excerpt references the potential for further legal considerations regarding the Statute of Frauds and the Parol Evidence Rule in relation to an appeal involving claims of promised protections.