Hew Federal Credit Union v. Battle

Citations: 772 A.2d 252; 45 U.C.C. Rep. Serv. 2d (West) 670; 2001 D.C. App. LEXIS 109; 2001 WL 491067Docket: No. 00-CV-38

Court: District of Columbia Court of Appeals; May 10, 2001; District Of Columbia; State Supreme Court

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The court addressed whether a guarantor of a secured loan without ownership of the collateral qualifies as a "debtor" under Title 9 of the UCC, necessitating notice of a foreclosure sale. The court concluded that the guarantor, Sharon Battle, is indeed considered a "debtor" and therefore entitled to notice, aligning with the majority of courts on the issue. 

In 1996, Steve M. Rhinehart secured a $30,000 loan from HEW Federal Credit Union to purchase a 1988 Porsche, with Battle guaranteeing the loan. After Rhinehart defaulted and surrendered the vehicle, HEW sold it for $12,000 without notifying Battle. HEW later sued both Rhinehart and Battle for the deficiency balance. The trial court ruled in favor of Battle, agreeing that she was entitled to notice of the sale under D.C.Code 28:9-504(3).

HEW argued that Battle, as a non-owner guarantor, did not fit the definition of "debtor." However, the court cited D.C.Code 28:9-105(l)(d), which defines "debtor" as one who owes payment or performance of an obligation, regardless of ownership of the collateral. The court emphasized that the UCC's provisions must be interpreted to include guarantors in relevant contexts, thus affirming the trial court's decision to grant summary judgment to Battle.

The definition of "debtor" encompasses individuals who owe payment or performance of the obligation secured, regardless of ownership of the collateral. Despite HEW's argument that the term is limited to the owner of the collateral, the context of Article 9 clarifies that a guarantor, such as Battle, is included as a debtor. The second sentence of the definition confirms that when context requires, "debtor" includes both the owner and the obligor. The Supreme Court of Virginia emphasizes that 28:9-504(3) must be interpreted in conjunction with other UCC provisions. Specifically, 28:9-504(2) holds debtors liable for any deficiencies, which applies to comakers and guarantors who have a significant interest in maximizing the collateral's sale proceeds to minimize their deficiency liability. Thus, notice of impending sales is essential for these parties to protect their interests. The prevailing judicial consensus supports the inclusion of guarantors as debtors under Article 9, highlighting that distinctions in Article 9 are based on function rather than form. The economic reality is that the guarantor becomes the primary debtor when the risk of deficiency arises, rendering it inequitable for secured parties to deny this status. If the debtor and guarantor are effectively the same entity, it is unjust for creditors to circumvent their obligations under the Code by merely requiring a guaranty.

Notice requirements under 28:9-504(3) are essential for guarantors, as they provide several key opportunities: the right to redeem repossessed collateral, the ability to challenge the disposition, and the chance to identify potential buyers to maximize the sale price. This process is critical for minimizing any deficiency for which guarantors may be liable, as they often have a vested interest in ensuring the collateral is sold at the best price. The court acknowledged that creditors can easily comply with these notice requirements, particularly in relation to guarantors whose identities and locations are known. The judgment of the Superior Court was affirmed, emphasizing that the Credit Union can demand payment from Battle regardless of whether it collects from Rhinehart or enforces security interests. The UCC's Official Comment 2 clarifies that this provision applies when one party secures another's debt, highlighting the obligations of the guarantor.