IN RE WALTER B. SCOTT SONS, INC. (Bankr.D.Idaho 9-13-2010)

ict Court to refer the case to this Court, which had been assigned Debtor's chapter 11 case. The District Court granted Debtor's motion and the matter was referred to this Court on November 9, 2009. On May 5, 2010, Debtor filed an Amended Answer and Counterclaims wherein Debtor asserted counterclaims against FFCI for violation of the UCC, breach of contract, negligent misrepresentation, and conversion.

Debtor initially requested leave from the Texas U.S. District Court to file an Amended Answer and Counterclaims, but the case was transferred to the District of Idaho before any decision on Debtor's request was rendered. On November 12, 2009, shortly after the case changed venues, the Idaho U.S. District Court granted Debtor's request for leave to amend and add counterclaims. Doc. No. 26. However, Debtor did not actually file its Amended Answer and Counterclaims until May 5, 2010, though the signature on the pleading is dated February 5, 2010. See Doc. No. 35.

The Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and § 157. FFCI's claims against Debtor and Debtor's counterclaims against FFCI are core proceedings. 28 U.S.C. 157(b)(2)(B) (C). FFCI's attorney's fees claim against the Individual Defendants as guarantors of Debtor is a non-core proceeding "related to" Debtor's chapter 11 bankruptcy case. 28 U.S.C. § 157(c)(1); see Joremi Enters., Inc. v. Hershlowitz (In re New 118th LLC), 396 B.R. 885, 890-92 (Bankr. S.D.N.Y. 2008) (invoking "related to" jurisdiction over removed state court action brought by creditor to recover from guarantor of chapter 11 debtor); Collier on Bankruptcy ¶ 3.01[3][c][ii][B] (Alan N. Resnick Henry J. Sommer eds., 16th ed.). The parties have consented to having this Court decide the various issues presented in this case, including the non-core matters, by entering appropriate orders and judgments. See 28 U.S.C. § 157(c)(2).

FFCI now moves for summary judgment on its claims and Debtor's counterclaims.

SUMMARY JUDGMENT STANDARD

In adversary proceedings before this Court the summary judgment standard articulated in Federal Rule of Civil Procedure 56 applies. See Fed.R.Bankr.P. 7056; Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 707 (9th Cir. 2008). Summary judgment is proper "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c)(2). An issue is "genuine" if the evidence is such that a reasonable jury could return a verdict for the nonmoving party, and a fact is "material" only if it might affect the outcome of the case under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

The burden is on the moving party to show the absence of a genuine issue of material fact. Id. at 256-57. In response to a properly submitted summary judgment motion, the nonmoving party must set forth specific facts showing that there is a genuine issue for trial in order to withstand summary judgment. Fed.R.Civ.P. 56(e)(2). In doing so, the nonmoving party may not rely on mere allegations or denials in its own pleading but must produce specific facts, through affidavits or other admissible discovery material, showing a genuine issue for trial. Id.; Barboza, 545 F.3d at 707 (quoting Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991)).

Where the nonmoving party will have the burden of proof at trial, the moving party may seek summary judgment by pointing to the absence of evidence to support an essential element of the nonmoving party's claim. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 325 (1986). If the nonmoving party fails to respond with sufficient evidence to create a genuine issue of material fact on the essential element, the moving party is entitled to summary judgment. Id. at 322-23.

On summary judgment, all reasonable inferences to be drawn from the underlying facts must be viewed in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)). The Court's function at the summary judgment stage is not to weigh the evidence or determine credibility, but simply to determine whether there is a genuine issue for trial. Anderson, 477 U.S. at 249.

DISCUSSION AND DISPOSITION

The posture of the instant case is somewhat unconventional. Typically, in Article 9 cases such as this, the issue of commercial reasonableness arises in the context of a secured creditor's pursuit of a deficiency judgment against the debtor. In such a case, a debtor may place the commercial reasonableness of a disposition of collateral at issue as a means of reducing or eliminating any purported deficiency. See Idaho Code § 28-9-626. Once the debtor has done so, the secured party bears the burden of establishing that the disposition was commercially reasonable. Idaho Code § 28-9-626(b). Failure by a secured party to meet this burden triggers a presumption that the value of the collateral at the time of disposition was equal to the amount of the outstanding debt, including expenses and attorney's fees, thus eliminating any deficiency. Idaho Code § 28-9-626(c) (d); In re Gomez, 01.4 I.B.C.R. 131, 131 (Bankr. D. Idaho 2001).

Here, no deficiency is being sought. The proceeds obtained at the auction were sufficient to satisfy Debtor's entire outstanding debt to FFCI and to pay a substantial amount on Debtor's obligation to the IRS. Instead, as a response to Debtor's demands in its August 26, 2008 letter, FFCI initiated this lawsuit to obtain a judgment declaring its auction was commercially reasonable and to recover the costs and attorney's fees incurred in securing such a declaratory judgment. Debtor countered with a claim for the surplus it believed it would have received had FFCI's auction been commercially reasonable, a remedy available to it under the UCC. See Idaho Code § 28-9-625. Consequently, unlike the deficiency case where the debtor bears no burden once it puts commercial reasonableness at issue, Debtor in this case bears the burden of proving its damages in the amount of the surplus it claims was lost. See discussion infra. Given these circumstances, the Court finds it appropriate to first address FFCI's Motion with respect to Debtor's counterclaims.

A. Debtor's Counterclaims

1. Violation of the UCC

FFCI is entitled to summary judgment on Debtor's counterclaim for violation of the UCC.

As previously noted, a debtor may recover damages for the loss of any surplus occasioned by a secured party's failure to comply with the UCC. Idaho Code § 28-9-625(b) (d). However, where a debtor seeks damages for the loss of a surplus, the burden is on the debtor to prove the amount of its damages. See Voutiritsas v. Intercounty Title Co. of Ill., 664 N.E.2d 170, 180 (Ill. App. 1996); 4 White Summers § 34-14, at p. 505 (6th ed. 2010); see also Idaho Code § 28-9-626(e).

Idaho Code § 28-9-626(e) provides that if a surplus is calculated under Idaho Code § 28-9-615(f), the debtor has the burden of establishing that the amount of proceeds obtained from the disposition of collateral was significantly below the amount a commercially reasonable disposition would have brought. Section 28-9-615(f) in turn states that where the transferee is the secured party and the amount of proceeds is significantly below the range of proceeds that a commercially reasonable disposition would have realized, any surplus or deficiency is calculated based on the amount of proceeds that would have been realized in a commercially reasonable disposition to a transferee other than the secured party. Section 28-9-615(f) has application in this case as FFCI, the secured party, purchased $365,000 of equipment at the auction.

Debtor has failed to set forth specific facts to show that there is a genuine issue for trial regarding damages it suffered as a result of FFCI's alleged failure to conduct a commercially reasonable sale. Other than the Frisbie affidavit and report, which have been stricken and are not properly before this Court, Debtor has produced no evidence to show that it would have received a surplus. Because Debtor has failed to make a showing sufficient to establish a genuine issue on this essential element on which Debtor would have the burden of proof at trial, FFCI's Motion will be granted with respect to Debtor's counterclaim for violation of the UCC. See Celotex, 477 U.S. at 322-23.

The Black affidavit, though offering opinion testimony as to several ways in which the auction was not commercially reasonable, does not contain an opinion concerning the amount of surplus the auction would have produced had it been held in a commercially reasonable manner (i.e., the damages allegedly suffered by Debtor).

2. Breach of contract

FFCI is also entitled to summary judgment on Debtor's counterclaim for breach of contract.

Debtor's claim is based on its allegation that FFCI violated the UCC, and that by doing so it also breached the Security Agreement. However, as noted above, Debtor has not produced evidence that may be considered on summary judgment to show it has been damaged by FFCI's alleged failure to conduct a commercially reasonable sale. "It is a fundamental premise of contract law that, although a plaintiff may have been legally wronged, the plaintiff cannot recover damages unless he was economically injured." Hancock v. Idaho Falls Sch. Dist. No. 91, 2006 WL 1207629, at *4 (D. Idaho May 2, 2006); see also Bergkamp v. Martin, 759 P.2d 941, 944 (Idaho App. 1988). As a result, FFCI's Motion will be granted as to Debtor's breach of contract counterclaim.

3. Negligent misrepresentation

Under Idaho law, the tort of negligent misrepresentation is strictly and narrowly confined to professional relationships involving an accountant. See Mannos v. Moss, 155 P.3d 1166, 1174 (Idaho 2007) (citing Duffin v. Idaho Crop Imp. Ass'n, 895 P.2d 1195, 1203 (Idaho 1995)). No such relationship is involved in this case. Therefore, FFCI's Motion will be granted with respect to Debtor's negligent misrepresentation counterclaim.

4. Conversion

Debtor claims FFCI is liable to it for the conversion of certain "logging carriages" in which FFCI allegedly had no security interest, but which it nevertheless repossessed and sold at auction. FFCI asserts that it is entitled to summary judgment on Debtor's conversion counterclaim because the Collateral description in the Security Agreement sufficiently described the logging carriages.

The logging carriages are not listed in Schedule A, see Doc. No. 36-6, Ex. B, nor are they specifically mentioned in the UCC-1 financing statement FFCI filed to perfect its security interest, see Doc. No. 36-7, Ex. G (incorporating Schedule A). However, the Security Agreement contains the following language:

Debtor does hereby assign, transfer, pledge and grant to Secured Party a security interest/lien in/upon all property listed on any schedule to this Agreement (the "Property"), and in all goods, inventory, equipment, accounts, fixtures and other property, wherever located, now or hereafter belonging to Debtor or in which Debtor has any interest, and in all proceeds, insurance proceeds, substitutions, replacement parts, additions and accessories of and/or to all of the foregoing (collectively, including the Property, the "Collateral").

This litigation presents no issue regarding the manner of perfection, only issues as between Debtor and FFCI for which the Security Agreement controls. See Idaho Code § 28-9-201.

(Emphasis added.) FFCI contends that this language, and in particular the term "equipment," adequately encompassed the logging carriages. Debtor disagrees.

This Court has previously addressed the sufficiency of collateral descriptions, most recently in Gugino v. Wells Fargo Bank Northwest, N.A. (In re Lifestyle Home Furnishings, LLC), 09.2 I.B.C.R. 41 (Bankr. D. Idaho 2009). In that case, the Court reiterated that the standard for determining whether a collateral description is adequate is set forth in Idaho Code § 28-9-108. Id. at 42. That section provides that a description of collateral reasonably identifies the collateral, and is thus sufficient, if it identifies the collateral by "category" or "a type of collateral defined in the uniform commercial code." Idaho Code § 28-9-108(2) (3). One type of collateral defined by the UCC is "equipment." That term is defined as "goods other than inventory, farm products or consumer goods." Idaho Code § 28-9-102(33). The logging equipment fits within this description. Therefore, the Security Agreement sufficiently identified the logging carriages as collateral securing Debtor's obligation to FFCI. FFCI's Motion will therefore be granted on Debtor's conversion counterclaim.

Having concluded that summary judgment in FFCI's favor is appropriate on all of Debtor's counterclaims, the Court now turns to FFCI's affirmative claims to determine whether those claims are subject to similar relief.

B. FFCI's Claims

1. Commercial reasonableness

The Court's conclusion that FFCI is entitled to summary judgment on Debtor's counterclaim for violation of the UCC does not end the commercial reasonableness inquiry. That conclusion is based on Debtor's failure to establish a genuine issue for trial as to its damages and, thus, does not address whether the auction was indeed commercially reasonable. As the party seeking declaratory relief, FFCI carries the burden of proving that its auction of the Collateral was commercially reasonable.

FFCI asserts two alternate arguments in support of its position that it is entitled to summary judgment on the issue of commercial reasonableness. FFCI first contends that the Security Agreement sets forth the controlling standards for determining whether the auction was commercially reasonable, and that the undisputed facts demonstrate that FFCI complied with those contractual standards. Alternatively, FFCI argues that even if the Security Agreement is not controlling, the undisputed facts show that the auction was commercially reasonable.

Debtor contends that the standards for determining the commercial reasonableness of the disposition of collateral, such as the auction in this case, are exclusivelyset by Idaho Code § 28-9-627(b), and that genuine issues of fact exist as to whether FFCI complied with those standards in this case.

a. Contract standards

The provisions of the Idaho UCC at issue are plain and unambiguous. The UCC requires that every aspect of a sale of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. Idaho Code § 28-9-610(b). The obligation of commercial reasonableness in the disposition of collateral may not be "disclaimed" by agreement. Idaho Code § 28-9-602. However, parties may determine by agreement the standards by which the fulfillment of commercial reasonableness is to be measured if such standards are "not manifestly unreasonable." Idaho Code § 28-9-603(a). See, e.g., Fin. Fed. Credit Inc. v. Boss Transp., Inc., 456 F. Supp.2d 1367, 1373-74 (M.D. Ga. 2006) (interpreting Ga. Code Ann. § 11-9-603(a) (2001), which is identical to Idaho Code § 28-9-603(a)).

Idaho Code § 28-9-602 states, in relevant part:

Except as otherwise provided in section 28-9-624, to the extent that they give rights to a debtor or obligor and impose duties on a secured party, the debtor or obligor may not waive or vary the rules stated in the following listed sections:

. . .

(7) Sections 28-9-610(b), 28-9-611, 28-9-613 and 28-9-614, which deal with disposition of collateral[.]

Idaho Code § 28-9-603(a) provides:

The parties may determine by agreement the standards measuring the fulfillment of the rights of a debtor or obligor and the duties of a secured party under a rule stated in section 28-9-602 if the standards are not manifestly unreasonable.

In interpreting the Idaho UCC the Court is cognizant of the legislature's direction to liberally construe and apply the UCC to promote its underlying purposes and policies, which include making "uniform the law among the various jurisdictions." Idaho Code § 28-1-102. While the Court looks first to Idaho decisional authority, this directive anticipates reference to judicial decisions of other jurisdictions construing the common text of the UCC. See, e.g., Hopkins v. Lojek (In re Scheu), 356 B.R. 751, 755 n. 11 (Bankr. D. Idaho 2006) (citing with approval the Ninth Circuit Bankruptcy Appellate Panel's interpretation of a provision of the California UCC identical to Idaho's version).

Here, the Security Agreement addressed a commercially reasonable sale of the Collateral. The relevant language of the Security Agreement provides:

Debtor agrees that any public or private sale shall be deemed commercially reasonable (i) if notice of any such sale is mailed to Debtor (at the address for Debtor specified herein) at least ten (10) days prior to the date of any public sale or after which any private sale will occur; (ii) if notice of any public sale is published in a newspaper of general circulation in the county where the sale will occur at least once within the ten (10) days prior to the sale; (iii) whether the items are sold in bulk, singly, or in such lots as Secured Party may elect; (iv) whether or not the items sold are in Secured Party's possession and present at the time and place of sale; and (v) whether or not Secured Party refurbishes, repairs or prepares the items for sale. Secured Party may be the purchaser at any public sale.

Under the terms of the Security Agreement, only two things are required for a sale to be deemed commercially reasonable: (1) notice of the sale to Debtor at least ten days prior to the date of any public sale or after which any private sale will occur; and (2) publication of a notice of sale in a newspaper of general circulation in the county where the sale will occur at least once within the ten days prior to the sale. The remaining terms in the Security Agreement identify actions FFCI need not take for the sale to be commercially reasonable, including refurbishing, repairing orpreparing the collateral items for sale. The Court is thus tasked with deciding whether these standards satisfy Idaho Code § 28-9-603(a).

The Court finds that the standards in the Security Agreement are, on their face, manifestly unreasonable. While the Security Agreement addresses the notification to be given Debtor and the advertisement of any public sale, it is either silent as to any other aspects of the sale or expressly disavows obligations on the part of FFCI. In this way, the Security Agreement limits FFCI's duties related to the disposition of collateral to just the notice and advertising requirements, and frees FFCI from duties related to all other aspects of a sale. Such restraints are tantamount to a waiver or variation of Debtor's right to commercial reasonableness in every aspect of a sale, including method, manner, time, place, and other terms. See Idaho Code § 28-9-610(b). Debtor's right to commercial reasonableness with respect to these other aspects, and FFCI's corresponding duty to comply, may not be so waived or disclaimed. See Idaho Code § 28-9-602 (parties "may not waive or vary" described provisions). Idaho Code § 28-9-603(a) only permits agreements concerning the standards measuring the fulfillment of the rights of a debtor and the duties of a secured party, it does not allow the waiver of such rights and duties.

This determination is consistent with the policy concerns articulated in the Official Comment to Idaho Code § 28-9-602:

[I]n the context of rights and duties after default, our legal system traditionally has looked with suspicion on agreements that limit the debtor's rights and free the secured party of its duties. . . . The context of default offers great opportunity for overreaching. The suspicious attitudes of the courts have been grounded in common sense. This section, like former Section 9-501(3), codifies this long-standing and deeply rooted attitude. The specified rights of the debtor and duties of the secured party may not be waived or varied except as stated.

Because the Security Agreement provisions attempt to waive or vary the commercial reasonableness requirement as to aspects of the auction beyond notice to Debtor and advertisement of the sale, the Court finds those provisions manifestly unreasonable. See Solfanelli v. Corestates Bank N.A., 203 F.3d 197, 202 (3d Cir. 2000) ("An Agreement provision attempting to expunge a commercial reasonableness requirement is per se `manifestly unreasonable.'"). Accordingly, the Court must evaluate the auction under the standards provided in the UCC.

b. UCC standards

In the absence of an enforceable agreement between the parties, the determination of whether the disposition of collateral was made in a commercially reasonable manner is governed by Idaho Code § 28-9-627:

A disposition of collateral is made in a commercially reasonable manner if the disposition is made:

. . .

(3) Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

Idaho Code § 28-9-627(b).

Debtor contends that the auction sale was not commercially reasonable in three respects: (1) how the auction was publicized; (2) the condition of the equipment when it was auctioned and whether FFCI should have cleaned, repaired, or allowed the cleaning and repair of the equipment prior to auction; and (3) the manner in which the auction itself was conducted. Though many of the facts surrounding these aspects of the auction appear not to be in dispute, the parties disagree as to the "reasonable commercial practices among dealers" in logging equipment of the type sold at the auction. See Idaho Code § 28-9-627(b).

The parties have produced conflicting expert opinion testimony addressing whether the auction conformed with reasonable commercial practices for auctioning off the type of logging equipment at issue. FFCI submitted the affidavit of Garry Montague, owner of an auction company with more than 35 years experience marketing and selling equipment, Doc. No. 36-10, while Debtor responded with the affidavit of Troy Black, president of an auction and appraisal company with approximately 17 years of appraisal and auction experience. Doc. No. 45.

In light of these submissions, the Court finds that Debtor has produced sufficient facts to establish a genuine issue for trial as to the commercial reasonableness of the auction. To determine the reasonable commercial practices applicable in this case, and thus whether the auction was ultimately commercially reasonable, the Court will be required to weigh the opinions of the parties' respective expert witnesses. Weighing evidence in this manner is inappropriate at the summary judgment stage. Such analysis is more properly reserved for trial where the Court will have the benefit of live testimony and cross-examination. Therefore, FFCI's Motion will be denied as to its claim for declaratory relief on the commercial reasonableness of the auction.

2. Attorney's fees

Because FFCI is not entitled to summary judgment on the issue of commercial reasonableness, FFCI's Motion must also be denied with respect to FFCI's claim for attorney's fees and costs under the Security Agreement and Guaranties.

In short, the Court will grant summary judgment to FFCI dismissing all four of Debtor's counterclaims, and deny summary judgment on FFCI's claim for a declaratory judgment and an award of costs and attorney's fees. The sole issue remaining for trial is whether the auction was commercially reasonable. However, because the Court grants summary judgment on all of Debtor's counterclaims, the only economic recovery potentially available is an award for costs and reasonable attorney's fees to the prevailing party, either under the Security Agreement and Guaranties or pursuant to applicable Idaho law. See Kilborn v. Haun (In re Haun), 396 B.R. 522, 527 (Bankr. D. Idaho 2008) ("A prevailing party in a bankruptcy proceeding may be entitled to an award of attorney fees in accordance with applicable state law if state law governs the substantive issues raised in the proceedings.") (quoting Bertola v. N. Wis. Produce Co. (In re Bertola), 317 B.R. 95, 99 (9th Cir. BAP 2004)).

In its pleadings, Debtor requests attorney's fees under Idaho Code § 12-120(3). See Doc. No. 35.

CONCLUSION

Based on the reasons set forth above, FFCI's Motion will be granted as to Debtor's counterclaims for violation of the UCC, breach of contract, negligent misrepresentation, and conversion. The Motion will be denied with respect to FFCI's claim for declaratory relief on the issue of commercial reasonableness, and FFCI's claim for costs and attorney's fees.

Counsel for FFCI will submit an appropriate order.

DATED: September 13, 2010