TERRY L. MYERS, Chief Judge.
This is an adversary proceeding in which Financial Federal Credit Inc. ("FFCI") seeks a declaratory judgment to the effect that its auction of certain logging equipment was commercially reasonable. Chapter 11 debtor in possession Walter B. Scott & Sons, Inc. ("Debtor"), who pledged the logging equipment as collateral to secure financing from FFCI, and Debtor's four principals—Dennis Scott, James Scott, Bonnie Scott, and Kelly Scott (collectively "Individual Defendants")—assert counterclaims against FFCI for violation of the Idaho Uniform Commercial Code ("UCC"), breach of contract, negligent misrepresentation, and conversion.
Before the Court is FFCI's Motion for Summary Judgment as to all claims and counterclaims. Doc. No. 36 ("Motion"). In conjunction with its Motion, FFCI moves to strike Debtor's submissions made in opposition to FFCI's summary judgment Motion. See Doc. No. 48. After a July 20, 2010 hearing, the Court took the matters under advisement. Upon consideration of the record, the arguments, and the applicable authorities, the Court will grant FFCI's Motion in part, and deny it in part.
Before reaching the summary judgment issues, the Court must first identify what portion of the record may be properly considered. FFCI requests that the Court strike the materials submitted by Debtor in opposition to FFCI's Motion. FFCI asserts several grounds in support of its motion to strike.
First, FFCI contends that the materials submitted by Debtor, including its brief, should be stricken as untimely filed under Local Bankruptcy Rule 7056.1. Local Rule 7056.1 applies to motions for summary judgment in adversary proceedings.
Debtor did not comply with LBR 7056.1. Its brief and supporting materials were filed only seven days prior to the hearing date. In addition, Debtor failed to file a statement of disputed and undisputed facts. The question is whether Debtor's noncompliance with LBR 7056.1 warrants striking its response in total. The Court finds that it does not.
Here, allowing Debtor's submissions despite its failure to comply with LBR 7056.1 will not unnecessarily prolong the litigation or result in any significant prejudice to FFCI. FFCI filed its reply brief five days after Debtor's submissions were filed, two days before the hearing. Had Debtor complied with LBR 7056.1 by filing its response 14 days before the hearing, FFCI would have had until seven days before the hearing to file its reply brief, giving FFCI seven days in which to prepare and file its reply. See LBR 7056.1(b)(3).
In opposing FFCI's Motion, Debtor filed an affidavit and appraisal report from Doug Frisbie. Doc. Nos. 46 and 42, respectively. Frisbie offers opinion testimony concerning the value that would have been received for the subject logging equipment had the auction been conducted in a commercially reasonable manner. FFCI argues that the Frisbie submissions should be stricken because Debtor failed to identify Frisbie as an expert witness during discovery. FFCI asserts that Debtor did not reveal Frisbie as an expert until it filed his affidavit in opposition to FFCI's Motion, and that this untimely disclosure violates the Court's Pretrial Order.
Rules 26 and 37 of the Federal Rules of Civil Procedure are applicable in adversary proceedings. See Fed. R. Bankr.P. 7026 & 7037.
On January 11, 2010, the Court issued a Pretrial Order in this case. Doc. No. 34. Therein, the Court ordered that expert reports be provided by February 8, 2010, and that any and all discovery be completed no later than June 7, 2010. Though Debtor identified Frisbie as a potential fact witness before the instant case came before this Court,
As a preliminary matter, the Court finds that Frisbie's affidavit testimony is proffered as expert testimony under Fed. R.Evid. 702. Frisbie's appraisal and opinion concerning the value that would have been received for the logging equipment had the auction been conducted in a commercially reasonable manner require "specialized knowledge." See Fed.R.Evid. 702. Accordingly, Debtor was required to disclose Frisbie as an expert witness and provide an expert report concerning his testimony by the date prescribed by this Court in its Pretrial Order. Debtor failed to do so. Therefore, Debtor may not rely on Frisbie's submissions to defend against summary judgment unless its failure to disclose was substantially justified or harmless. See Fed.R.Civ.P. 37(c)(1).
Debtor's failure is neither substantially justified nor harmless. Debtor provided no cogent explanation for its failure to disclose Frisbie as an expert, and the prejudice to FFCI is apparent. The cutoff for discovery has passed and trial has been set for October 6, 7, and 8, 2010. By not disclosing Frisbie as an expert until filing its opposition to FFCI's Motion, more than a month after discovery had closed, Debtor has deprived FFCI of the ability to depose Frisbie, solicit from its own expert additional opinions to address Frisbie's conclusions, or conduct other expert-related discovery. FFCI's motion to strike will be granted as to the Frisbie submissions and the same will not be considered by the Court for purposes of deciding FFCI's
Debtor also submitted an affidavit of Troy Black in opposition to FFCI's motion. Doc. No. 45. Black's affidavit contains several opinions regarding measures not taken by FFCI that were allegedly necessary for the logging equipment auction to be commercially reasonable. FFCI objects to consideration of the Black affidavit on the grounds that Black is not qualified to render such opinions.
Under Rule 702 of the Federal Rules of Evidence, "[i]f scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise...." Black is the president of an auction and appraisal company, a member of both local and national associations for professional auctioneers, and has approximately 17 years of appraisal and auction experience. Given Black's experience and qualifications, the Court finds him qualified to testify regarding the auctioning of equipment and other items generally.
FFCI maintains that despite Black's experience with auctions in general, he is not qualified to opine as to the auction of logging equipment specifically, as he has no experience with the sale of such equipment. The Court disagrees. That Black has not demonstrated experience with the auctioning of logging equipment specifically may ultimately be relevant to deciding the weight to be afforded Black's testimony, but it does not provide an adequate basis for striking his affidavit for purposes of summary judgment. Thus, with regard to the Black affidavit, FFCI's motion to strike will be denied.
FFCI moves to strike several other affidavits offered by Debtor in opposition to summary judgment.
In sum, only the Frisbie affidavit and report are stricken. The Debtor's remaining submissions, including the Black affidavit, are properly before the Court. Upon this record the Court will determine whether summary judgment in favor of FFCI is appropriate.
Beginning in July 2004, FFCI provided financing to Debtor for the purchase and acquisition of equipment. Between 2004 and 2006, Debtor executed four promissory notes and corresponding security agreements in favor of FFCI. The Individual Defendants each personally guaranteed payment on the notes by executing a Guaranty. Doc. No. 36-6, Ex. D (collectively "Guaranties"). On September 11, 2006, Debtor's total indebtedness to FFCI was consolidated into a single promissory note in the amount of $1,066,660. Doc. No. 36-6,
(the "Collateral"). FFCI filed a UCC-1 Financing Statement with the Idaho Secretary of State on September 21, 2006, to perfect its security interest in the Collateral. Doc. No. 36-7, Ex. G. A copy of Schedule A was attached to the UCC-1 Financing Statement.
The Security Agreement provided that in the event of default,
In addition, the Security Agreement provided that Debtor
The Guaranties signed by the Individual Defendants contained a similar indemnification provision.
Debtor defaulted on its payments to FFCI. FFCI worked with Debtor to arrange the repossession and auction of the Collateral in order to pay off Debtor's outstanding debt to FFCI. An auction was set for February 12, 2008, in St. Maries, Idaho. On January 15, 2008, FFCI sent a Notice of Disposition of Collateral by Public
The auction was held February 12, 2008, as scheduled. Thirty-six items of equipment were purchased by third parties and FFCI. FFCI credit bid $365,000 for several pieces of equipment that it later resold to third party purchasers for $363,000. Including FFCI's credit bid, the total amount bid for the sold equipment was $786,500. That amount was first applied to the $704,550.22 Debtor owed FFCI, which was comprised of the $656,694.83 balance owing on the Note as of the auction date, travel and collection expenses of $3,128, auction expenses of $2,220, and recovery and repossession expenses of $42,507.39. The remaining $81,949.78 was paid to the Internal Revenue Service based on a tax lien that had been filed against Debtor.
In a letter dated August 26, 2008, Debtor requested payment from FFCI for damages of $1,513,550 on the basis that the auction of the equipment was not commercially reasonable. Doc. No. 36-9, Ex. O. FFCI responded by filing a complaint against Debtor and the Individual Defendants in the United States District Court for the Southern District of Texas on September 4, 2008, seeking a judgment declaring that the auction was commercially reasonable under the UCC, and awarding costs and attorney's fees. See Doc. No. 36-9, Ex. P.
On Debtor's motion, the District Court ordered a change of venue to the United States District Court for the District of Idaho; the case was transferred on May 28, 2009. Debtor subsequently filed a voluntary petition for chapter 11 relief on September 9, 2009, and shortly thereafter moved the Idaho U.S. District 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
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, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The burden is on the moving party to show the absence of a genuine issue of material fact. Id. at 256-57, 106 S.Ct. 2505. 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, 106 S.Ct. 2548, 91 L.Ed.2d 265 (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, 106 S.Ct. 2548.
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, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (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, 106 S.Ct. 2505.
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
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.
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., 279 Ill.App.3d 170, 215 Ill.Dec. 773, 664 N.E.2d 170, 180 (1996); 4 White & Summers § 34-14, at p. 505 (6th ed. 2010); see also Idaho Code § 28-9-626(e).
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.
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, 114 Idaho 650, 759 P.2d 941, 944 (1988). As a result, FFCI's Motion will be granted as to Debtor's breach of contract counterclaim.
Under Idaho law, the tort of negligent misrepresentation is strictly and narrowly confined to professional relationships involving an accountant. See Mannos v. Moss, 143 Idaho 927, 155 P.3d 1166, 1174 (2007) (citing Duffin v. Idaho Crop Imp. Ass'n, 126 Idaho 1002, 895 P.2d 1195, 1203 (1995)). No such relationship is involved in this case. Therefore, FFCI's Motion will be granted with respect to Debtor's negligent misrepresentation counterclaim.
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
(Emphasis added.) FFCI contends that this language, and in particular the term "equipment," adequately encompassed the logging carriages. Debtor disagrees.
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.
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 exclusively set 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.
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.
Here, the Security Agreement addressed a commercially reasonable sale of the Collateral. The relevant language of the Security Agreement provides:
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 or preparing 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
This determination is consistent with the policy concerns articulated in the Official Comment to Idaho Code § 28-9-602:
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.
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:
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
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.
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. BAP2004)).
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.
