VFS Fin., Inc. v. Shilo Mgmt. Corp.

277 Or.App. 698

372 P.3d 582

VFS FINANCING, INC., a Delaware corporation, Plaintiff–Respondent

v.SHILO MANAGEMENT CORPORATION, an Oregon corporation; and Mark S. Hemstreet, an Oregon resident, Defendants–Appellants.

C137477CV

A158165.

Court of Appeals of Oregon.

Argued and Submitted Jan. 19, 2016.

Decided April 20, 2016.

Charles R. Markley, Portland, argued the cause for appellants. With him on the briefs were Ridgway K. Foley, Jr., and Greene & Markley, P.C.

Joseph VanLeuven, Portland, argued the cause for respondent. With him on the brief were Kevin H. Kono and Davis Wright Tremaine LLP.

Before ARMSTRONG, Presiding Judge, and EGAN, Judge, and SHORR, Judge.

SHORR, J.

Defendant Shilo Management Corporation (Shilo) is a borrower, and defendant Mark Hemstreet is a guarantor, of a large commercial loan that was used to purchase a corporate airplane. The airplane also served as collateral to secure the loan. After Shilo defaulted on the loan, plaintiff VFS Financing, Inc., the creditor, filed this action to (1) recover amounts due on the promissory note against Shilo, (2) obtain a money judgment against Hemstreet for the amount of the guaranty, and (3) repossess the property securing the loan, the airplane. Plaintiff obtained possession of the airplane early in the litigation, but did not immediately sell it. After obtaining possession, plaintiff continued to pursue money damages on the breach of the promissory note and guaranty claims. Plaintiff filed a motion for summary judgment on those claims. Defendants opposed the motion and argued that they had retained an expert who would testify that plaintiff's failure to sell the airplane in a timely and commercially reasonable manner, which could have reduced or eliminated the debt, created a material issue of fact that prevented summary judgment on plaintiff's note and guaranty claims. The trial court disagreed, held that there were no material issues of fact, and granted summary judgment to plaintiff.

Defendants appeal and assign error to the trial court's grant of summary judgment to plaintiff. For the reasons discussed below, we reject defendants' arguments and affirm the trial court's ruling.

We begin with the standard of review. We may affirm a grant of summary judgment if, when viewing the summary judgment record and taking all reasonable inferences in favor of the party opposing summary judgment, we conclude that there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Jones v. General Motors Corp., 325 Or. 404, 420, 939 P.2d 608 (1997) ; ORCP 47 C. No genuine issue of material fact exists if, when viewing the record in the manner most favorable to the adverse party, “no objectively reasonable juror could return a verdict for the adverse party.” ORCP 47 C. A fact is only material if it is “one that, under applicable law, might affect the outcome of a case.” Zygar v. Johnson, 169 Or.App. 638, 646, 10 P.3d 326 (2000), rev. den., 331 Or. 584, 19 P.3d 356 (2001).

Applying that standard here, we state the relevant facts in the light most favorable to defendants, the adverse parties. In the latter part of 2007, Shilo borrowed $4,000,000 from plaintiff, which was memorialized in a promissory note. At that and all times relevant to this decision, plaintiff was a subsidiary of GE Capital Corporation. As noted, the purpose of the loan was to purchase a Cessna jet airplane, which was to be used as a corporate airplane for Shilo's business affairs, and the airplane served as collateral for the loan.

Defendant Shilo had some issues repaying the note in 2010 and had its first default on the loan. As part of a negotiation of those issues, Hemstreet, a Shilo principal, provided plaintiff with a partial personal guaranty of up to $1,500,000 of Shilo's debt to plaintiff. After that point, Shilo continued to have issues making payments and was in default again in 2011, 2012, and 2013. As a result of the continued defaults, plaintiff filed this lawsuit in October 2013.

Plaintiff brought a claim against Shilo for breach of the promissory note. It brought a claim against Hemstreet for breach of the guaranty. In addition, plaintiff brought a claim for “claim and delivery,” seeking possession of the airplane that served as collateral for Shilo's debt. Early in the litigation, plaintiff obtained possession of the airplane, but did not sell the airplane prior to entry of the judgment in the trial court. As noted, plaintiff moved for summary judgment on the note and guaranty claims. In opposing summary judgment, defendants argued, as they do before us, that plaintiff's failure to sell the airplane in a “commercially reasonable manner” and in “good faith” prevented plaintiff from obtaining summary judgment on its note and guaranty claims. Defendants argued that they had retained an expert who would testify that plaintiff had not acted commercially reasonably or, as a result, in good faith because plaintiff did not attempt to sell the airplane while it pursued its note and guaranty claims. Defendants contended that created an issue of fact that prevented summary judgment for plaintiff.

The trial court granted plaintiff summary judgment. It concluded that any expert testimony that plaintiff did not act commercially reasonably or in good faith in disposing of the collateral did not create a fact issue for the jury on plaintiff's claims on the note and guaranty. Accordingly, the trial court granted plaintiff's motion for summary judgment because there were no disputed issues of fact and plaintiff was entitled to judgment as a matter of law on its remaining claims. Defendants assign error to that ruling and renew their argument that their expert created a fact issue as to whether plaintiff acted commercially reasonably and in good faith in the sale of the collateral, which they contend should have prevented plaintiff from obtaining summary judgment on its note and guaranty claims.

Turning to the substantive law that applies, the parties appear to agree, and we also conclude, that the New York enactment of the Uniform Commercial Code (UCC) applies.¹ Article 9 of the UCC addresses, among other things, the rights and duties of a secured party with respect to a debtor that has defaulted on a loan and provided property as security. Article 9, section 601, provides that, following a default on a loan,

“[a] secured party:

“(1) may reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure[.]”

UCC § 9–601(a)(1). The UCC further provides that those rights are “cumulative and may be exercised simultaneously.” UCC § 9–601(c). Thus, under the plain text of the statute, a secured party may, among other things, pursue a claim on the debt or seek to foreclose on the underlying security interest. Further, the text provides that those rights are cumulative such that the creditor may seek to enforce one remedy and ignore another or seek to enforce more than one remedy at the same time.²

In their answer, defendants raised a general affirmative defense that plaintiff had violated the duty of good faith and fair dealing. At summary judgment, they argued more specifically that plaintiff had acted in a commercially unreasonable manner and in bad faith when plaintiff pursued its claim on the note without also seeking to sell the secured airplane. As discussed below, we agree that the UCC imposes on parties to a commercial contract an “obligation of good faith in its performance and enforcement” and requires “the observance of reasonable commercial standards of fair dealing.” UCC § 1–304 ; UCC § 9–102(43). As a general matter, New York UCC law provides that a party may raise as a defense to a breach of contract claim that the claim is unenforceable because the party seeking to enforce the contract acted in bad faith or in violation of reasonable commercial standards of fair dealing. See, e.g., Super Glue Corp. v. Avis Rent A Car Sys., Inc., 132 A.D.2d 604, 605–06, 517 N.Y.S.2d 764, 766 (1987) (concluding that acting in bad faith is generally a “disqualifying factor as distinguished from a liability-imposing factor”). The specific issue here, however, is whether a plaintiff acts in bad faith or in a commercially unreasonably manner when it pursues a valid note or guaranty claim, but does not also move quickly to sell the collateral that secures the note or guaranty.

Defendants essentially argue that it is commercially unreasonable and bad faith for a plaintiff not to move forward with a sale of the collateral while the plaintiff pursues its claims for damages on the note and guaranty.

That argument is undercut by the statutory text that gives the secured party the right to pursue any “or” all of its remedies “cumulative [ly].” UCC § 9–601(a)(1) ; UCC § 9–601(c). Significantly, New York's appellate courts have directly rejected defendants' argument. In First International Bank of Israel, Ltd. v. L. Blankstein & Son, Inc., the New York Court of Appeals held that a “bank did not act in a commercially unreasonable manner when it proceeded against the notes rather than selling the diamonds it also held as collateral.” 59 N.Y.2d 436, 447, 465 N.Y.S.2d 888, 452 N.E.2d 1216, 1221 (1983) ; see also Marine Midland Bank v. Hakim, 247 A.D.2d 345, 345, 669 N.Y.S.2d 212, 213 (1998) (holding that “[p]laintiff's decision to sue on the note while retaining the collateral was within its rights” under UCC Article 9 and plaintiff was not required to “play the market” by selling nonperishable collateral during the litigation on the unpaid debt); Chem. Bank v. Alco Gems Corp., 151 A.D.2d 366, 368, 543 N.Y.S.2d 426, 428 (1989) (noting that a bank could elect to sue on the debt while retaining the secured gems in its possession and such conduct was commercially reasonable). New York law controls and provides that, as a matter of law, it is not commercially unreasonable for a secured party to litigate damage...