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HEW Federal Credit Union v. Battle

May 10, 2001

HEW FEDERAL CREDIT UNION, APPELLANT,
v.
SHARON L. BATTLE, APPELLEE.



Before Steadman, Farrell, and Washington, Associate Judges.

The opinion of the court was delivered by: Farrell, Associate Judge

Appeal from the Superior Court of the District of Columbia (Hon. Gregory E. Mize, Trial Judge)

Argued April 17, 2001

The issue before us, one of first impression in the District of Columbia but by no means a stranger to other courts, is whether a guarantor of a secured loan who does not own the collateral is nevertheless a "debtor" within the meaning of Title 9 of the Uniform Commercial Code ("UCC"), D.C. Code § 28:9-101 et seq. (1996), so as to require the creditor to give the guarantor notice of a foreclosure sale in accordance with the UCC. In line with the vast majority of courts deciding the issue, we answer "yes." Since notice was not given to the guarantor Battle, the trial court correctly granted summary judgment to her on plaintiff/appellant's suit to enforce her guaranty.

I.

In May of 1996, co-defendant Steve M. Rhinehart executed a LoanLiner Agreement with plaintiff HEW Federal Credit Union ("HEW"). Under the agreement, HEW loaned Rhinehart $30,000 to buy a 1988 Porsche and obtained a security interest in the vehicle. As a condition of the loan, defendant Sharon Battle executed a separate Guaranty Agreement which provided that she would pay Rhinehart's loan obligation in the event he defaulted. *fn1 Rhinehart used the loan to buy a Porsche from a car dealership, and was the sole owner of the car.

Rhinehart defaulted and ultimately surrendered the vehicle to a repossession company. HEW then sold the car for $12,000. It is undisputed that Battle received no notice of the foreclosure sale beforehand. In April of 1999, HEW sued Rhinehart and Battle in Superior Court for the "deficiency balance" of $23,683.34 plus interest. A default judgment was entered against Rhinehart, but Battle moved for summary judgment on the ground that she had not been given notice of the foreclosure sale as required by D.C. Code § 28:9-504 (3). HEW responded that Battle, as a guarantor who did not own the collateral, was not a "debtor" within the meaning of D.C. Code § 28:9-105 (1)(d) and thus not entitled to notice under § 28:9-504 (3). The trial court agreed with Battle and granted her motion.

II.

Under Title 9 of the UCC, a secured creditor like HEW is granted certain rights in the event of a default on a secured obligation. Id. § 28:9-501 et seq. For example, absent contrary agreement it may take possession of the collateral, § 28:9-503; it may "sell, lease or otherwise dispose of" the repossessed collateral to recover its value, § 28:9-504 (1); and it may pursue a deficiency judgment against the debtor. Id. § 28:9-504 (2). As a condition of sale, however (and with exceptions not here relevant), "reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor." Id. § 28:9-504 (3). Because this jurisdiction follows the "absolute preclusion" rule concerning deficiency judgments, see Fleming v. Carroll Publ'g Co., 581 A.2d 1219, 1224 (D.C. 1990), a secured creditor who fails to notify the debtor of a proposed sale of repossessed property forfeits the right to recover a deficiency judgment, id. at 1223-24; Randolph v. Franklin Inv. Co., 398 A.2d 340 (D.C. 1979) (en banc); its "recovery is limited to the proceeds from the . . . sale." Id. at 343.

HEW does not dispute these principles, but contends that the notice requirement of § 28:9-504 (3) did not apply to Battle because, as a guarantor who did not own the collateral, she was not a "debtor" within the meaning of the UCC. Although Title 9 does not define "guarantor," it does define "debtor," and HEW argues that the plain language of the definition "specifically excludes . . . those who are indebted on a secured obligation but who do not own the collateral which secures the obligation" (Br. for Appellant at 5). We do not agree.

Section 28:9-105 (1)(d) states:

"Debtor" means the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral, and includes the seller of accounts or chattel paper. Where the debtor and the owner of the collateral are not the same person, the term "debtor" means the owner of the collateral in any provision of the article dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires.

The argument that "debtor" includes only one who owns the collateral seems contradicted explicitly by the first sentence of the definition, specifying that a person "who owes payment or other performance of the obligation secured" is a debtor "whether or not he owns . . . the collateral." Battle indisputably owed performance, if not actual "payment," of the "obligation secured" in the event Rhinehart failed to pay it. *fn2 HEW argues, nonetheless, that the second sentence of the definition restricts "debtor" to mean "the owner of the collateral" whenever Article 9 deals with "collateral," and that § 28:9-504 (3) deals only with that subject. This argument is unavailing. *fn3 HEW admits that Battle was an "obligor" for purposes of "any provision dealing with the obligation," and the second sentence states that "where the context so requires," "debtor" includes both the owner of the collateral and the obligor. The context of § 28:9-504 (3) demonstrates why "debtor" in that provision includes a guarantor such as Battle. As the Supreme Court of Virginia has explained:

Interpreted literally and viewed in isolation, ยง [28:]9-504 (3) might be held to deal with collateral alone. But the subsection cannot be interpreted or viewed so narrowly; it must be construed in ...


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