COURT OF APPEALS OF WISCONSIN
PUBLISHED OPINION
Case No.: 99-3124 |
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Complete Title of Case: |
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Banks Bros. Corporation, Plaintiff-Respondent, v. Donovan Floors, Inc.,
Breakfall, Inc., James P. Donovan and Jo Ann
Donovan, Defendants-Appellants. |
Opinion Filed: October 3, 2000 Submitted on Briefs: September 5, 2000 Oral Argument: --- |
JUDGES: Wedemeyer, P.J., Fine and Vergeront, J.J. Concurred: --- Dissented: --- |
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Appellant ATTORNEYS: On
behalf of the defendants-appellants, the cause was submitted on the briefs of
Donald A. Schoenfeld, Miriam S. Fleming and Katherine W. Schill of
Michael Best & Friedrich LLP, of Milwaukee. Respondent ATTORNEYS: On
behalf of the plaintiff-respondent, the cause was submitted on the brief of Patrick
B. Howell and Curtis A. Paulsen of Whyte Hirschboeck Dudek S.C.,
of Milwaukee. |
COURT OF APPEALS
DECISION
DATED AND FILED
October 3, 2000
Cornelia G. Clark
Clerk, Court of Appeals
of Wisconsin
2000 WI App 253
NOTICE
This opinion is subject to
further editing. If published, the official version will appear in the bound
volume of the Official Reports.
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See Wis. Stat. § 808.10 and Rule 809.62.
STATE OF WISCONSIN IN COURT OF APPEALS
Banks
Bros. Corporation,
Plaintiff-Respondent,
v.
Donovan
Floors, Inc., Breakfall, Inc.,
James
P. Donovan and Jo Ann Donovan,
Defendants-Appellants.
APPEAL from an order of the circuit court for Milwaukee County: william j. haese, Judge. Affirmed.
Before Wedemeyer, P.J., Fine and Vergeront, JJ.
¶1 FINE, J. James P. Donovan, Jo-Ann Donovan, Donovan Floors, Inc. and Breakfall,
Inc. appeal from the trial court’s order denying their motion for relief from a
stipulated judgment of foreclosure on the Donovans’ home.[1] We affirm.[2]
I.
¶2 This case involves the
interrelationship between a debt, collateral, and provisions of Wisconsin’s
version of Article 9 of the Uniform Commercial Code, specifically Wis. Stat. §§ 409.505(2) and
409.501(3).
¶3 In 1990, Donovan
Floors and Breakfall, two companies controlled by the Donovans, owed Bank One,
Milwaukee, NA, some $245,000. James
Donovan had previously guaranteed the debt, and the Donovans had also given to
Bank One a mortgage on their house to secure the debt. Additionally, the companies gave to Bank One
security interests in their property, also as security for the debt. The debt was also secured by an assignment
of a life-insurance policy on James Donovan as well as a patent mortgage
assigned to Bank One by Breakfall.
¶4 Donovan Floors and
Breakfall defaulted on the debt, and James Donovan defaulted on his
guarantee. In late 1991, after the
defaults, Bank One sued James Donovan on his guarantee, the companies to
recover on the collateral, and the Donovans to foreclose on the mortgage. Subsequently, in early 1992, the case was
settled when Bank One and the Donovans, Donovan Floors, and Breakfall
stipulated to the entry of a judgment foreclosing on the Donovans’ home and
replevin in connection with the property given to Bank One as security for the
debt. Bank One agreed to give the
Donovans a chance to revitalize their business, and, pursuant to that
arrangement, Bank One, the Donovans, Donovan Floors, and Breakfall executed two
forbearance agreements pursuant to which Bank One deferred its immediate
enforcement of the judgment.
¶5 In early 1993, Bank
One assigned the debt and the security to the predecessor of Banks Bros.
Corporation. A month later, Banks, the
Donovans, Donovan Floors, and Breakfall signed an agreement entitled: “Notice
of Assignment of Judgment, Security Interest, and Mortgage, and Agreement for
Surrender of Collateral and Other Property, and Reduction of Indebtedness.” (Uppercasing
and underlining omitted.) Under that
“Notice of Assignment,” the parties agreed, as material here, that:
• The Notice of Assignment “shall also constitute notice pursuant to § 409.505(2), Wis. Stats., that BANKS intends to retain possession of certain collateral pledged and surrendered by BREAKFALL and DONOVAN FLOORS, and satisfies the debt as to BREAKFALL only.” (Uppercasing in original.)
• As consideration for the surrender of the property, the debt, which then stood at some $267,000, was to be “reduced by the sum of $25,000.”
• In return for an additional $25,000 reduction of the debt owed by James Donovan and Donovan Floors, Donovan Floors surrendered to Banks three cars, one van, and one truck.
• “BANKS, DONOVANS, BREAKFALL, and DONOVAN FLOORS hereby agree that upon surrender” of the property specified in the Notice of Assignment, “BREAKFALL shall be released from all further liability to BANKS, but that JAMES DONOVAN and DONOVAN FLOORS shall remain liable to BANKS for the balance due in the amount of $217,169.38 ... and that JO-ANN DONOVAN shall remain liable to BANKS to the extent of her interest in the homestead and other marital property.” (Uppercasing in original.)
• The Donovans and Donovan Floors “agree that all of the property which had previously been pledged to BANK ONE for the loan which is herein assigned by BANK ONE to BANKS shall remain encumbered and secured to BANKS as collateral for the balance due.” (Uppercasing in original.)
• Banks agreed to extend the Forbearance Agreement conditioned on its receipt of certain specified payments according to a payment schedule set out in the Notice of Assignment.
The
parties to the Notice of Assignment had a falling out, and Banks never received
any money under the payment schedule.
Ultimately, after some six years of strained relationships between Banks
and the Donovans, Banks scheduled a sheriff’s sale of the Donovans’ home. The Donovans and their companies then
brought the motion that underlies this appeal, seeking an order under Wis. Stat. § 806.07(1)(e) relieving
them from the judgment of foreclosure, and dismissing Banks’ “claim for a money
judgment against James P. Donovan.”[3] As noted, the trial court denied their
motion.
II.
¶6 Although the Donovans
and their companies asserted a number of reasons in support of their motion
seeking relief from the foreclosure judgment, only one is pursued on this
appeal—they contend, as phrased in their motion before the trial court, that
“[t]he Foreclosure Judgment was completely satisfied when Banks Bros. retained
the Personal Property. (Wis. Stats. § 409.505(2)).” They argue that the satisfaction of the Breakfall debt that was
memorialized in the Notice of Assignment operates, by virtue of Wis. Stat. § 409.505(2), also as a
satisfaction of the debt as to both Donovan Floors and the Donovans. Whether they are correct turns on an
analysis of § 409.505(2) and Wis. Stat.
§ 409.501(3).
¶7 The facts material to
our decision are not disputed.
Accordingly, our review is de novo. See Thelen v. DHSS, 143 Wis. 2d 574, 577,
422 N.W.2d 146, 147 (Ct. App. 1988) (interpretation of statute on undisputed
facts is question of law subject to de novo review). We apply statutes to give effect to their
plain meaning. See DNR v. Wisconsin Power & Light Co.,
108 Wis. 2d 403, 408, 321 N.W.2d 286, 288 (1982).
¶8 Wisconsin
Stat. § 409.505(2) provides, as
material to this appeal:
[A] secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of such proposal shall be sent to the debtor if the debtor has not signed after default a statement renouncing or modifying the debtor’s rights under this subsection .... If the debtor ... objects in writing within 21 days from the receipt of the notification ... the secured party must dispose of the collateral under s. 409.504. In the absence of such written objection the secured party may retain the collateral in satisfaction of the debtor’s obligation.
As
we have seen, the Donovans and Donovan Floors argue that this provision
transforms the satisfaction of the debt as to Breakfall into a total
satisfaction of the debt as to all of the debtors, and, therefore, the
foreclosure judgment should be set aside because there is no underlying debt. Acknowledging that they signed the Notice of
Assignment, and thus agreed that the debt would be satisfied as to Breakfall
only, the Donovans and Donovan Floors contend that their agreement is forbidden
by Wis. Stat. § 409.501(3), which
as material here, provides:
To the extent that they give rights to the debtor and impose duties on the secured party, the rules stated in the sections and subsections referred to in pars. (a) to (e) may not be waived or varied ... but the parties may by agreement determine the standards by which the fulfillment of these rights and duties is to be measured if such standards are not manifestly unreasonable:
...
(c) Section 409.505(2) which deals with acceptance of collateral as discharge of obligation;
Banks,
on the other hand, argues that Wis.
Stat. § 409.505(2) itself gives to the creditor and debtor the
authority to modify the rights fixed by that subsection, when it provides: “[A]
secured party in possession may, after default, propose to retain the
collateral in satisfaction of the obligation.
Written notice of such proposal shall be sent to the debtor if the
debtor has not signed after default a statement renouncing or modifying the
debtor’s rights under this subsection.”
§ 409.505(2) (emphasis added).
¶9 Banks’ syllogism is
this: Wis. Stat. § 409.505(2)
permits the secured creditor to “propose to retain the collateral in
satisfaction of the obligation,” and, if the secured creditor seeks to do that,
the secured creditor must send to the debtor “[w]ritten notice of such
proposal.” In such a case, the debt
would be satisfied in full. Section
409.505(2), however, gives to the debtor the power to “renounc[e] or modify[]”
the rights that the debtor has under the subsection, so long as the agreement “renouncing
or modifying” those rights is “signed” by the debtor “after default” on the
debt. Thus, Banks argues, although the
Notice of Assignment was described as a notice under § 409.505(2), it was also
a contemporaneous agreement (or, to use the terminology of § 409.505(2), a
“statement”), executed after default, between Banks, Donovan Floors, and the
Donovans by which the Donovans and Donovan Floors renounced and modified their
right under § 409.505(2) to complete satisfaction of the debt, and by which
they agreed that the satisfaction of the debt would run to Breakfall only. We agree with Banks.
¶10 Somewhat surprisingly,
there are no cases directly on point—that is, dealing with a situation where,
as here, a secured creditor has satisfied a debt as to some but not all
debtors, and where, after default, all the debtors agreed to that arrangement
in a statement signed by them. Wisconsin Stat. § 409.505(2),
however, clearly grants to debtors the right to renounce or modify the normal quid
pro quo for what is, in essence, strict foreclosure under § 409.505(2):
full satisfaction of the debt. Thus, a
treatise in the area notes:
Upon default and repossession, the secured creditor may wish to avoid the headache of resale and therefore accept the collateral in complete satisfaction of the debt under 9-505(2). The creditor so foregoes [sic] any right to a deficiency. This alternative of “strict foreclosure” was known to the common law and was available under the Uniform Conditional Sales Act.
…
All judges appear to agree that if the debtor has expressly agreed after default that the secured creditor may take the collateral at an agreed valuation in partial satisfaction of the debt, the secured creditor may still recover the balance owing. This would be a “modification” permissible under 9-505(2), second sentence. But in the absence of such a modifying agreement, some courts appear to hold that the case automatically falls in 9-505(2) as a full strict foreclosure bars any further recovery by the secured creditor.
4 James J. White & Robert S. Summers, Uniform
Commercial Code, § 34–9, at 425, 428
(4th ed. 1995) (emphasis in original; footnotes omitted).[4] Stated another way, in return for the
relatively inexpensive and expeditious application of the secured property to
the debt, the secured creditor forgoes the right to chase the debtor for any
deficiency. After default on the debt, however, debtors may renounce that quid
pro quo for something more valuable—time within which to reorganize a
business with the hope of saving it.
That is what was done here.
¶11 Understandably, the
Donovans and Donovan Floors would love to have their cake (the chance to save
their business given to them by Banks’ agreement to hold off on its right to
claim the assets pledged for the debt) and eat it also (keep those
assets). But that is not the way Wis. Stat. § 409.505(2) works. Banks had a right under that section to
immediate strict foreclosure of all the pledged assets. It gave up that right in consideration for a
partial payment on the debt and the concomitant partial satisfaction. The Donovans and Donovan Floors have no
legal or moral ground to complain; they agreed to that arrangement, and did so
in a statement signed after default.
This makes the arrangement legal under § 409.505(2).[5]
By the Court.—Order affirmed.
[1] Mrs. Donovan’s first name is alternatively spelled in the record as “Jo Ann,” “JoAnn,” and “Jo-Ann.” Documents on which her signature appears spell it “Jo-Ann.” Accordingly, so do we.
[2] We appreciate both parties having supplied us with copies of non-Wisconsin law and treatise excerpts upon which they relied.
[3] Wisconsin Stat. § 806.07(1) provides:
Relief from judgment or order. (1) On motion and upon such terms as are just, the court, subject to subs. (2) and (3), may relieve a party or legal representative from a judgment, order or stipulation for the following reasons:
(a) Mistake, inadvertence, surprise, or excusable neglect;
(b) Newly-discovered evidence which entitles a party to a new trial under s. 805.15 (3);
(c) Fraud, misrepresentation, or other misconduct of an adverse party;
(d) The judgment is void;
(e) The judgment has been satisfied, released or discharged;
(f) A prior judgment upon which the judgment is based has been reversed or otherwise vacated;
(g) It is no longer equitable that the judgment should have prospective application; or
(h) Any other reasons justifying relief from the operation of the judgment.
[4] The “all judges” comment refers to S.M. Flickinger Co., Inc. v. 18 Genesse Corp., 423 N.Y.S.2d 73 (N.Y. App. Div. 1979), where the issue is discussed by both the majority and the dissent, but neither discussion is material to the holding.
[5] The Donovans, Donovan Floors, and Breakfall argue that a change in the Uniform Commercial Code, not yet adopted in Wisconsin, reflects the correctness of their argument. What was covered in Uniform Commercial Code § 9-505(2) is now in, as material here, § 9-620. The new provision reads, as material to our discussion: “[A] secured party may accept collateral in full or partial satisfaction of the obligation it secures only if: (1) the debtor consents to the acceptance under subsection (c).” U.C.C. (Revised) § 9-620(a). Consent by the debtor is, again as material to our discussion, defined by the new provision as follows: “[A] debtor consents to an acceptance of collateral in partial satisfaction of the obligation it secures only if the debtor agrees to the terms of the acceptance in a record authenticated after default.” Id. § 9-620(c)(1). Although the Official Comment to this revision states: “Section 9-620, unlike former Section 9-505, permits a secured party to accept collateral in partial satisfaction, as well as full satisfaction, of the obligations secured,” see id. § 9-101, cmt. 4(i), this comment ignores the clear import of the “if the debtor has not signed after default a statement renouncing or modifying the debtor’s rights under this subsection” from § 9-505(2) (Wis. Stat. § 409.505(2)), which, without ambiguity, authorizes the debtor to renounce or modify its rights under § 9-505(2) (Wis. Stat. § 409.505(2)).