R & J of Tennessee, Inc. v. Blankenship-Melton Real Estate, Inc.
166 S.W.3d 195, 2004 Tenn. App. LEXIS 760, 55 U.C.C. Rep. Serv. 2d (West) 278 (2004)
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Rule of Law:
Under Tennessee's Uniform Commercial Code, a secured party seeking a deficiency judgment against a secondary obligor must provide reasonable notification of collateral disposition and conduct the sale in a commercially reasonable manner, bearing the burden of proof on both and operating under a rebuttable presumption that non-compliance precludes a deficiency.
Facts:
- On February 23, 2000, Blankenship-Melton Real Estate, Inc. obtained a loan of $40,133.00 from the Bank of Henderson County, secured by a 1999 Bryant boat, a New Holland tractor, a 1999 Ford F150 truck, and a 1994 mobile home.
- Walden Blankenship, as president of Blankenship-Melton, executed a personal guaranty, promising to remain personally liable on the promissory note, listing his home address as 2820 Shady Hill Road, Lexington, TN.
- The loan eventually went into default, and prior to assignment, the Bryant boat was sold with proceeds applied to the debt, leaving the truck, tractor, and mobile home as collateral.
- On November 6, 2001, Johnny Melton, acting as agent for R & J of Tennessee, Inc., purchased the promissory note from the Bank for $26,455.39, at which point Blankenship-Melton was already in default.
- When R & J purchased the note, the collateral was in use by other individuals; Steve Melton (Blankenship-Melton's secretary) was living in the mobile home, Larry Melton (a director) was driving the Ford truck daily, and the tractor was inoperable and stored at Larry Melton’s residence.
- In June 2002, Johnny Melton sent a notice of public sale for June 21, 2002, to Mr. Blankenship via certified mail at his old address on Shady Hill Road, despite Mr. Blankenship having subsequently moved without notifying the Bank.
- R & J proceeded with the sale on June 21, 2002, without receiving a return receipt confirming delivery of the notice to Mr. Blankenship, and the notice was subsequently returned to R & J on June 28, 2002, marked “not deliverable as addressed.”
- On the date of the public sale, only Johnny Melton (for R & J) and Larry Melton were present, and R & J was the only bidder, purchasing the mobile home for $8,000, the truck for $11,000, and the tractor for $1,000, without advertising the sale in a public newspaper or utilizing an independent appraisal.
Procedural Posture:
- R & J of Tennessee, Inc. filed a civil warrant against Walden Blankenship in the General Sessions Court of Henderson County, seeking a deficiency judgment pursuant to the personal guaranty.
- The General Sessions Court found in favor of Mr. Blankenship.
- R & J of Tennessee, Inc. appealed the decision to the Circuit Court of Henderson County.
- The Circuit Court conducted a de novo bench trial.
- The Circuit Court entered a deficiency judgment against Mr. Blankenship in the amount of $10,847.29.
- Mr. Blankenship filed a timely notice of appeal to the Court of Appeals of Tennessee.
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Issue:
Does a secured party's failure to provide reasonable notification of disposition and conduct a commercially reasonable sale of collateral preclude its entitlement to a deficiency judgment against a secondary obligor under Tennessee's UCC Article 9?
Opinions:
Majority - alan e. highers, j.
No, a secured party is not entitled to a deficiency judgment against a secondary obligor when it fails to provide reasonable notification of collateral disposition and fails to conduct a commercially reasonable sale. The court determined that R & J failed to provide reasonable notice by mailing it to Mr. Blankenship's old address and proceeding with the sale without receiving any indication of delivery, especially when the notice was returned undeliverable. While actual receipt is not always required, the secured party must take 'reasonably required steps' to inform the obligor, and continuing with the sale after ten days without confirmation of receipt was insufficient given R & J's awareness of non-delivery, consistent with Mallicoat v. Volunteer Fin. & Loan Corp. Furthermore, the court found the sale to be commercially unreasonable based on the 'aggregate of circumstances.' R & J waited over seven months to conduct the sale, during which time the collateral continued to be used and depreciate, demonstrating a lack of good faith. Additional factors contributing to unreasonableness included the failure to advertise the sale in a newspaper, lack of an experienced auctioneer, R & J being the sole bidder, and not obtaining an independent appraisal of the collateral. These cumulative failures meant R & J did not meet its burden of proving commercial reasonableness, triggering the rebuttable presumption that the value of the collateral equaled the outstanding debt. The case was remanded for the trial court to determine statutory damages for inadequate notice and whether R & J could overcome the presumption regarding the fair market value of the collateral.
Analysis:
This case significantly reinforces the stringent requirements placed on secured parties under UCC Article 9 for both notice and commercial reasonableness in collateral disposition. It clarifies that 'reasonable notification' requires more than mere mailing if the secured party becomes aware that the notice has not been received, implying a duty for further reasonable efforts to locate the debtor. The decision emphasizes the 'aggregate of circumstances' approach to commercial reasonableness, providing a robust framework for evaluating the entire sale process, including delays, care of collateral, advertising, and appraisal. This ruling enhances protection for debtors and secondary obligors, placing a substantial burden on secured parties to conduct sales transparently and efficiently to preserve their right to a deficiency judgment.
