978-1285770178 Case Problem Case CPC-21-09

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368 N.J.Super. 587

Page 1

368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

333 Mont. 169, 142 P.3d 797

Mark DENTON and Verna R. Denton, Plaintiffs and Appellants,

FIRST INTERSTATE BANK OF COMMERCE, n/k/a First Interstate Bank, Defendant

and Respondent.

No. 05-215.

Submitted on Briefs Feb. 8, 2006.

own, Anderson obtained a $260,000.00 Small Business Administration loan (SBA loan)

from FIB at the same time. The purpose of both loans was to purchase logging

equipment with which Anderson could start a business.

¶ 2 Anderson’s business failed and he declared bankruptcy. The Bank repossessed

and sold the equipment and applied all of the proceeds to the SBA loan. Thereafter, it

the Bank initiated proceedings against business property owned by Denton and his wife

which secured the loan. Denton then brought an action in the Fourth Judicial District

sought repayment of the Denton loan from Denton. Denton did not pay. As a result,

Court, Missoula County, claiming that the purchased logging equipment was collateral

for his loan and that FIB had unlawfully converted and impaired that collateral.

Following a bench trial, the District Court entered judgment for the Bank. Denton

appeals. We affirm.

¶ 3 A restatement of the issues on appeal is:

¶ 4 Did the District Court abuse its discretion by allowing the Bank to amend its

proposed findings of fact the day before the trial began?

¶ 5 Did the District Court err in failing to find that the Promissory Note was a contract of

adhesion?

identified in the Denton loan?

¶ 7 Did the District Court err in ruling that the Bank properly distributed the foreclosure

sale proceeds?

¶ 8 In September 1995, Anderson sought a $360,000.00 loan from FIB to purchase

request, in part because Anderson had no ability to contribute equity to the transaction.

¶ 9 Anderson notified his friend Denton, who was a valued FIB customer, that his loan

request had been denied. Denton contacted the Bank and offered to co-sign a loan for

Anderson. The Bank agreed. Thereafter, FIB divided the loan into two separate loans–

the SBA loan for $260,000.00 and the Denton loan for $101,250.00. The Promissory

Note Denton and Anderson signed indicated that Denton’s mini-warehouse operation

would serve as collateral for the Denton loan. However, the Commercial Security

Agreement signed by the two men identified the logging equipment to be purchased

with the loan proceeds as collateral for the Denton loan. The SBA loan included a

Decided Aug. 22, 2006.

Justice delivered the Opinion of the Court.

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

November 1997, Anderson petitioned for a Chapter 7 bankruptcy proceeding. On

December 9, 1997, FIB was allowed to sell the logging equipment. The proceeds from

the public auction totaled $160,000.00. FIB applied the net amount of $137,870.85 to

Anderson’s SBA loan. Anderson was granted a complete discharge of indebtedness

on March 16, 1998.

property that served as collateral for the Denton loan. On July 15, 1998, Denton

initiated the underlying action, seeking declaratory relief and a ruling that his loan took

priority over the SBA loan. Eventually, on March 26, 2002, the District Court

determined that Denton was a debtor, not a creditor, and therefore was not entitled to

protection as a purchase money secured creditor. While a determination of

District Court issued its Findings of Fact, Conclusions of Law and Judgment. The court

found that Denton knew at the time he signed the Promissory Note that, in the event

Anderson defaulted and the Bank repossessed the collateral, the sale proceeds would

be applied first to the SBA loan and thereafter, if any proceeds remained, to the Denton

loan. Moreover, the court found that under the express terms of the promissory

promissory agreement that expressly allowed impairment. Additionally, the court

determined that FIB did not fail to comply with any applicable laws pertaining to

disposing of collateral and had met all the requirements **801 of the Uniform

Commercial Code (UCC). The court also held that because Denton had no ownership

interest in the collateral, he had no basis for his theory of conversion. Lastly, the court

368 N.J.Super. 587

Page 3

368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

¶ 16 Additional facts will be discussed as needed for our analysis.

STANDARD OF REVIEW

evidence; and third, if substantial evidence exists and the effect of the evidence has not

been misapprehended, the Court may still conclude that a finding is clearly erroneous

when a review of the record leaves the Court with the definite and firm conviction that a

mistake has been made. We review a district court’s conclusions of law to determine

whether the district court correctly interpreted the applicable law. (citations omitted).

¶ 21 In accordance with the District Court’s Scheduling Order, both parties filed

proposed findings of fact and conclusions of law by November 25, 2003, one week

before trial. FIB failed to include in its November 25 original proposed findings

reference to the “General Provisions” language in the Promissory Note which expressly

stated that the Bank may “release any party … or collateral; or impair, fail to realize

¶ 22 At the start of the trial, Denton moved to quash the Bank’s amended proposed

findings and conclusions on the ground that the filing was untimely. Denton also

requested that he be allowed to amend his findings in the event the District Court

accepted the Bank’s *174 amended proposed findings and conclusions. The court

allowed the Bank’s amended findings to be received and instructed Denton to file his

raised waiver as an affirmative defense. The Bank refutes Denton’s claim, pointing out

that it raised the issue of “waiver” as an affirmative defense in its initial and amended

answers to Denton’s complaint and attached a copy of the Promissory Note containing

the “waiver” language to its Answer. The Bank further **802 argues that Denton was

not prejudiced by FIB’s amended proposed findings and conclusions because the

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

District Court granted Denton’s request to amend his own proposed findings and

conclusions in response to the Bank’s amended pleading.

¶ 24 An abuse of discretion occurs when the district court judge acts arbitrarily without

employment of conscientious judgment or exceeds the bounds of reasoning resulting in

¶ 25 FIB having adequately put Denton on notice of its intention to assert a waiver

defense early in this litigation, the District Court’s decision to allow the Bank to amend

its proposed findings and conclusions to amplify its previously-claimed defense on the

eve of trial was not an abuse of discretion, especially in light of the court’s agreement to

allow Denton to amend his proposed findings and conclusions. Therefore, we find no

defense of impairment. Denton argued in his Objection and Response to the Bank’s

amended proposed findings that this waiver provision “falls directly under the definition

of a contract of adhesion, and is therefore unenforceable.” The District Court did not

make a finding nor render a specific legal conclusion on whether the Promissory Note

was, or was not, a contract of adhesion; however, given the District Court’s findings and

General Provisions clause was difficult to find in the Promissory Note; 4) the terms of

the General Provisions clause were unconscionable; 5) he did not voluntarily and

intentionally relinquish the rights contained in the General Provisions clause and,

therefore his waiver was invalid; and 6) the General Provisions clause was inapplicable

because the Bank changed the actual terms of the Note without Denton’s consent.

if the accommodation party signed a contract containing a waiver of such a defense. It

also asserts that because Denton acknowledged that he had studied the Promissory

Note before signing it, he cannot now claim that he was unaware of the existence of the

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

to execute the Note “with the prudence and care of a reasonable businessman” and that

he cannot avoid the effects of the Note by failing to exercise such care or to read the

document in its entirety before signing it.

**803 ¶ 30 A contract of adhesion is a contract whose terms are dictated by one

contracting party to another who has no voice in its formulation. Contracts of adhesion

constituted contracts of adhesion and, therefore, the challenged mandatory arbitration

provision could not be enforced. Kloss, ¶ ¶ 27, 32. We explained:

Contracts of adhesion arise when a standardized form of agreement, usually drafted by

the party having superior bargaining power, is presented to a party, whose choice is

either to accept or reject the contract without the opportunity to negotiate its terms….

reasonable expectations of the party, but, when considered in its context, is unduly

oppressive, unconscionable, or against public policy.

Kloss, ¶ 24.

¶ 32 We determined that the contracts in Kloss were adhesion contracts based on the

following facts and reasons, among others: 1) they were standardized form contracts

investors but did not explain the arbitration clause to Kloss; and 5) Kloss did not read

the contract but relied on Husted to explain it to her (routine practice between Kloss and

Husted); therefore, she was unaware of the arbitration provision.

¶ 33 The analysis in Kloss is relevant to the case at bar, but it favors the Bank and not

Denton. As argued by FIB, inequality in bargaining *177 power does not equate to

unsuccessful in such attempt given his standing as a “valued FIB client.”

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

¶ 41 The Bank also asserts that substantial credible evidence was presented at trial to

support the District Court’s conclusion that Denton “was fully informed of the structure of

the loan, and the requirement that FIB grant a prior lien ‘position’ to the SBA on the

collateral,” and that he consented to such loan structure. FIB argues that in the face of

disputed evidence such as was presented in this case, it is the province of the District

Court to weigh the credibility of the witnesses and the evidence presented, and absent

clearly erroneous findings and legally incorrect conclusions, the District Court’s

determination of this issue must be affirmed.

¶ 42 The District Court specifically found based on the trial testimony of Bank loan

officer Dean Gillmore that Gillmore had explained to Denton that his loan was junior to

¶ 43 Our review of the record confirms that significant evidence was presented that

would allow the District Court to conclude that Denton knew his loan would hold a

second position lien to the SBA loan. While Denton’s testimony conflicts with that of

the Bank’s loan officer, it is the District Court’s province to weigh conflicting evidence.

Therefore, we will not second-guess the District Court’s determination regarding the

¶ 45 Did the District Court err in ruling that the Bank properly distributed the foreclosure

sale proceeds?

¶ 46 The District Court concluded that FIB did not breach its duty to preserve the value

of the collateral as required by , nor did it fail to comply with any applicable law when it

disposed of the collateral. The court also concluded that the requirements of the UCC

concluded that FIB had distributed the collateral funds in a legally correct and

commercially reasonable manner.

¶ 48 , addressed a secured party’s right to dispose of collateral after default and the

effect of disposition. It provided in relevant part that:

(1) A secured party after default may sell, lease, or otherwise dispose of any or all of the

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

leasing, and the like and, to the extent provided for in the agreement and not prohibited

proceeds is complete….

(3)(a) Disposition of the collateral may be by public or private proceedings and may be

made by way of one or more contracts. Sale or other disposition may be as a unit or in

parcels and at any time and place and on any terms, but every aspect of the disposition

including the method, manner, time, place, and terms must be commercially

accordance with the Bankruptcy Code. This, in conjunction with additional credible

testimony by bank officials, supports the District Court’s conclusion that the Bank

complied with applicable laws regarding the repossession**806 and sale of the

collateral and the disbursement of proceeds.

¶ 50 Denton also challenges the District Court’s decision regarding attorney’s fees, and

seeks fees and costs on appeal. Having ruled in favor of FIB, we need not address this

claim.

CONCLUSION

¶ 51 For the foregoing reasons we affirm the District Court.