United States v. H & S Realty Co., Etc.

Citations: 837 F.2d 1; 5 U.C.C. Rep. Serv. 2d (West) 539; 1987 U.S. App. LEXIS 17403; 1987 WL 33727Docket: 87-1061

Court: Court of Appeals for the First Circuit; July 24, 1987; Federal Appellate Court

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The appeal in United States v. H. S. Realty Co. centers on the capacity of a guarantor to waive the commercial reasonableness requirement outlined in section 9-504(3) of the Uniform Commercial Code (U.C.C.). The issue of whether a guarantor can waive this requirement, not explicitly addressed by the U.C.C. drafters, has led to varying interpretations. The district court provided a comprehensive analysis, which the appellate court largely affirms, while adding further insights.

The court references Camden National Bank v. St. Clair, indicating that the Maine Law Court equated an accommodation maker with a debtor regarding certain defenses under section 9-504(3). The district court inferred that this would apply similarly to guarantors. However, the appellant argues that Maine courts would extend protections to guarantors under public policy, which the appellate court disputes, noting that the focus of the law appears to be on the debtor’s right to redeem collateral rather than guarantor protections.

The appellate court highlights that the St. Clair decision relied heavily on California law, suggesting that compliance with notice requirements is essential for a creditor's right to recover from a debtor. The district court found persuasive the rationale from United States v. Kurtz, which indicated that California courts permit guarantors to waive protections related to their security interests. The appellate court concludes there is no substantial evidence suggesting the district court misinterpreted Maine law on this issue.

The court examined whether opposing authorities presented factors that would warrant a finding of error regarding the appellant's waiver of rights. The appellant's lengthy and explicit waiver was given significant weight, with no countervailing considerations found to shift the balance. Although the U.C.C. aims to protect debtors and minimize economic waste in collateral disposition, this protection remains intact regardless of whether a guarantor waives commercial reasonableness. The presence of a guarantor suggests a lender's perception of transaction risk, which may justify the need for unusual security or flexibility. In riskier transactions, the importance of protecting the debtor diminishes, allowing guarantors to evaluate their own interests. The appellant argued against the lack of protection for guarantors, referencing a precedent that highlighted potential for creditors to circumvent their duties. However, the court found this perspective overly broad, suggesting the U.C.C. should not act as an insurer for all parties involved. It was deemed speculative to assume that guarantors would waive protections against their interests, with waivers likely reflecting a calculated decision to sacrifice collateral protection for perceived benefits. Ultimately, the court affirmed the district court's conclusion that the appellant waived any defense of commercial unreasonableness in a deficiency judgment action, not addressing whether genuine issues of material fact existed regarding the commercial reasonableness of the collateral's disposition.

Appellant attempted to raise the issue of whether Key Bank breached its duty under Me. Rev.Stat. Ann. tit. 11, Sec. 9-207 to exercise reasonable care in the custody and preservation of collateral, but failed to acknowledge the district court's finding that H. S Realty was asserting only a commercial reasonableness defense. The court considered two main issues: whether the district court erred in determining that Key Bank and the SBA acted in good faith according to the U.C.C. standard of "honesty in fact," and whether there were any genuine material facts regarding a breach of good faith or a "willful act or failure to act" that would negate the waiver established by the guaranty agreement. 

The court viewed the "honesty in fact" standard and the "willful act or failure to act" waiver exception as interconnected; evidence of dishonesty in actions taken by Key Bank could suggest an intent to harm appellant by reducing collateral value. The appellant's invocation of a broader "good faith" standard from the Restatement (Second) of Contracts was ambiguous in terms of whether the standard required willfulness, recklessness, negligence, or inadvertence. Key Bank was under an implied duty to manage the loan and collateral in good faith, avoiding willful negligence that could lead to loss.

The court concluded that the Restatement's approach did not enhance the U.C.C. standard, and any alleged loss through non-negligent error was irrelevant. The investigation into Key Bank's actions revealed that while they suspected wrongdoing by Donoghue, they did not initiate an investigation due to a lack of concrete evidence and regular payments being made. Ultimately, there was no evidence of dishonest motives or intent to harm appellant. The ruling was affirmed, with notes on conflicting interpretations of similar issues in California courts.