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Kapor v. RJC Investment, Inc.

Supreme Court of Montana

February 12, 2019

DENEIGE KAPOR, Plaintiff and Appellant,
RJC INVESTMENT, INC., Defendant and Appellee.

          Submitted on Briefs: November 8, 2018

          APPEAL FROM: District Court of the Thirteenth Judicial District, In and For the County of Yellowstone, Cause No. DV 17-0311 Honorable Rod Souza, Presiding Judge.

          For Appellant: D. Michael Eakin, Eakin, Berry & Grygiel, PLLC, Billings, Montana

          For Appellee: Christopher T. Sweeney, Peter M. Damrow, Moulton Bellingham PC, Billings, Montana


          Beth Baker Justice.

         ¶1 Deneige Kapor appeals an order of the Thirteenth Judicial District Court, Yellowstone County, ruling as a matter of law that she has no right to claim surplus proceeds on the resale of her mobile home after she returned it to RJC Investment, Inc. ("RJC") when she could not make the payments. We restate the issues as follows:

1. Whether the District Court erred in determining that the release agreement Kapor signed terminated any further application of the Uniform Commercial Code;
2. Whether the District Court erred in determining that the release constituted an acceptance of the collateral in full satisfaction of Kapor's secured obligation; and
3. Whether the District Court correctly held that Kapor was equitably estopped from pursuing her claims. We reverse the District Court's summary judgment order and remand for further proceedings.


         ¶2 Kapor entered into an Installment Sale Contract and Security Agreement (the "Contract") with Cherry Creek Development, Inc. ("Cherry Creek") to purchase a mobile home in March 2009. The purchase price of the mobile home was $53, 500. Cherry Creek retained a security interest in the mobile home to secure Kapor's payment obligations. Kapor paid $4, 280 down and agreed to pay $544 per month for fifteen years to pay off the $49, 220 balance.

         ¶3 Cherry Creek assigned the Contract to its parent company, RJC. On multiple occasions, Kapor defaulted on her payment obligations. In March 2015, Kapor voluntarily vacated the mobile home and allowed RJC to take possession of it. When Kapor returned the mobile home to RJC, she owed $39, 791.80. Kapor signed a Full Release of Contract (the "Release"), under which she released all rights to the mobile home. The Release reads in full as follows:

I/We Deneige Phillips[1] herby [sic] release all rights to the manufactured home located at 4 Skeena St., Billings, MT 59105 described by serial number HX12359 am [sic] releasing myself and removing my name off the contract currently in place with RJC Investment, Inc. I am fully aware that by signing this I am completely removing my rights to all aspects of the home and I will not be entitled to any rights of this home and or refund of all money applied to the home including but not limited to the down payment, and all payments made on the home and the lot up to this day.

         The Release was executed by Kapor and Roy Clause, the President of RJC.

         ¶4 RJC resold the mobile home in April 2015, without notice to Kapor, for $53, 500, which Kapor alleges is $13, 708.20 more than the principal she owed when she returned the mobile home. RJC did not refund any surplus to Kapor, and disputes that a surplus was in fact realized. Kapor sued RJC for failing to pay her the surplus allegedly realized on the resale of the mobile home as required by Article 9 of the Uniform Commercial Code ("U.C.C."). RJC moved for summary judgment, asserting that the Release terminated the underlying Contract and any further application of U.C.C. Article 9. RJC alternatively asserted that Kapor was equitably estopped from pursuing her claims because she made false representations that she would not pursue her rights under the U.C.C. by signing the Release.

         ¶5 The District Court granted RJC's motion for summary judgment on three separate and independent grounds: (1) U.C.C. Article 9 no longer applied after Kapor executed the Release; (2) even if U.C.C. Article 9 applied, the Release constituted an acceptance of the collateral in full satisfaction of the secured obligation; and (3) Kapor's execution of the Release was a representation that equitably estopped her from pursuing the lawsuit.


         ¶6 We review de novo a district court's grant or denial of summary judgment, applying the criteria of M. R. Civ. P. 56. Yorlum Props. v. Lincoln County, 2013 MT 298, ¶ 12, 372 Mont. 159, 311 P.3d 748. Summary judgment "should be rendered 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." M. R. Civ. P. 56(c)(3). Where the material facts are undisputed, we "identify the applicable law, apply it to the uncontroverted facts, and determine who prevails." Yorlum Props., ¶ 12. The determination whether a party is entitled to judgment on the facts is a conclusion of law, which we review for correctness. Yorlum Props., ¶ 12.


         ¶7 1. Whether the District Court erred in determining that the release agreement Kapor signed terminated any further application of the Uniform Commercial Code.

         ¶8 Kapor argues that the execution of the Release did not terminate RJC's duty under § 30-9A-608(1)(d), MCA, to pay her the surplus proceeds from the resale of the mobile home. Kapor maintains that the plain language of § 30-9A-602(5), MCA, prohibited the parties from waiving or varying the U.C.C. rule that required RJC to account to Kapor for the surplus. RJC relies on § 28-1-1601, MCA, and common law to argue that the parties executed the release "in accordance with their express intention to discharge their obligations to one another and go their separate ways."

         ¶9 "'The fundamental tenet of modern contract law is freedom of contract'-parties are free to 'agree to terms governing their private conduct as long as those terms do not conflict with public laws.'" Lenz v. FSC Secs. Corp., 2018 MT 67, ¶ 17, 391 Mont. 84, 414 P.3d 1262 (quoting Arrowhead Sch. Dist. No. 75 v. Klyap, 2003 MT 294, ¶ 20, 318 Mont. 103, 79 P.3d 250). Under generally applicable laws of contract, a creditor may agree to extinguish a debtor's obligations through a release. Section 28-1-1601, MCA.

         ¶10 Montana first adopted the Uniform Commercial Code in 1963. 1963 Mont. Laws, ch. 264. The U.C.C. is meant "to simplify, clarify, and modernize the law governing commercial transactions." Section 30-1-102(1)(a), MCA. It must be liberally construed "to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties" and "to make uniform the law among the various jurisdictions." Section 30-1-102(1)(b), (c), MCA. The parties here do not dispute that the U.C.C. governed the original sale of the mobile home and underlying security agreement. The District Court relied on principles of general contract law when it concluded that the Release Kapor signed terminated the U.C.C.'s application because Kapor no longer was a debtor once she relinquished her interest in the mobile home. Citing Watters v. Guaranty National Insurance Company, 2000 MT 150, ¶ 39, 300 Mont. 91, 3 P.3d 626, the court reasoned that the Release was a discharge or settlement of Kapor's obligation and that Kapor's "removing [her] name off of the contract" eliminated any security interest. The court rejected the notion that the U.C.C. does not allow a mutual release.

         ¶11 Title 30, chapter 9A, part 6, MCA, governs default in secured transactions.[2] Sections 30-9A-608(1)(d) and -615(4)(a), MCA, provide that a "secured party shall account to and pay a debtor for any surplus" from proceeds of the sale of collateral. Section 30-9A-602(5), MCA, expressly forbids a debtor from waiving protections the U.C.C. provides for accounting for payment of surplus proceeds of collateral.

[I]n the context of rights and duties after default, our legal system traditionally has looked with suspicion on agreements that limit the debtor's rights and free the secured party of its duties. . . . The suspicious attitudes of the courts have been grounded in common sense. This section . . . codifies this long-standing and deeply rooted attitude. The specific rights of the debtor and duties of the secured party may not be waived or varied except as stated.

Section 30-9A-602, MCA, cmt. 2.[3]

         ¶12 The U.C.C.'s introductory provisions provide in part that, "[u]nless displaced by the particular provisions of [the U.C.C.], the principles of law and equity . . . shall supplement its provisions." Section 30-1-103, MCA. The Official Comments to § 30-1-103, MCA, provide that "while principles of common law and equity may supplement provisions of the [U.C.C.], they may not be used to supplant its provisions." Section 30-1-103, MCA, cmt. 2.1 (emphasis in original). Provisions of the U.C.C. preempt other principles of law even without "explicit displacement" in the code's text when those other principles are inconsistent with the purposes, policies, or text of the U.C.C. Section 30-1-103, MCA, cmt. 2.1. The U.C.C.'s provision regarding waiver and variance is specific and displaces general provisions of law regarding release, as it states expressly that a party may not waive her right to recover surplus proceeds of collateral. Section 30-9A-602(5), MCA.

         ¶13 The District Court's analysis overlooked the operation of § 30-1-103, MCA. The parties are free to "discharge their obligations to one another and go their separate ways." See Lenz, ¶ 17. Except as allowed under other U.C.C. provisions, that discharge or release cannot, however, waive or vary RJC's duty to account for or Kapor's right to receive any surplus proceeds from the resale of the mobile home. The express statutory provision in the U.C.C. displaces other non-U.C.C. contract law that could result in a waiver of the duties or rights associated with the accounting for and payment of the surplus proceeds of collateral.

         ¶14 RJC's argument that the Release terminated application of the U.C.C. altogether also falters. When a debtor's underlying obligation is satisfied, the security interest generally ceases to exist, at which point the property that secured the indebtedness "is no longer collateral, and the application of Article 9 becomes very limited." Albrecht v. Zwaanshoek Holding EN Financiering, B.V., 816 P.2d 808, 813 (Wyo. 1991) (citing 68 Am. Jur. 2d, Secured Transactions, § 529 (1973)). Cf. § 30-1-201(2)(jj), MCA (a security interest "secures payment or performance of an obligation"). But "Article 9 may still require the creditor to . . . account for a surplus realized from the collection of an account or from the disposition of the collateral." Albrecht, 808 P.2d at 813. Kapor's relationship to RJC was one of debtor to creditor through a secured transaction governed by U.C.C. Article 9. When Kapor defaulted on her obligations under the Contract, RJC's rights and responsibilities as a creditor also were governed by U.C.C. Article 9. RJC's argument that Article 9 no longer governed the parties' relationship following execution of the Release is based on its representation that it agreed in the Release "to absolve [Kapor] from any further contractual obligation she owed to RJC." As support for this statement, RJC cites the affidavit of Roy Clause, not any language in the Release itself. The Release did not, by its express terms, lift the parties' relationship from that of debtor and creditor under U.C.C. Article 9 or render obsolete the protections afforded a debtor under §§ 30-9A-608(1)(d) and -615(4)(a), MCA. We conclude that the District Court erred when it granted RJC summary judgment on the ground that the U.C.C. no longer applied after Kapor signed the Release.

         ¶15 2. Whether the District Court erred in determining that the release constituted an acceptance of the collateral in full satisfaction of Kapor's secured obligation.

         ¶16 After a debtor defaults, a secured creditor in possession of the collateral has three options. First, the creditor may file suit on the obligation and reduce its claim to judgment. Section 30-9A-601(1)(a), MCA (a secured party "may reduce a claim to judgment, foreclose, or otherwise enforce the claim [or] security interest . . . by any available judicial procedure"). Second, the creditor "may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing." Section 30-9A-610(1), MCA. Third, the creditor "may accept collateral in full or partial satisfaction of the obligation it secures[.]" Section 30-9A-620(1), MCA.

         ¶17 The District Court held in the alternative that the Release constituted RJC's acceptance of the collateral in full satisfaction of the secured obligation under § 30-9A-620(1), MCA.[4] Known as strict foreclosure, the statute sets forth "a procedure by which the secured party acquires the debtor's interest in the collateral without the need for a sale or other disposition" of the collateral. Section 30-9A-620, MCA, cmt. 2. When strict foreclosure occurs, the secured party loses its right to hold the debtor liable for any deficiency, and the debtor loses its right to a surplus that it would have received had the collateral been disposed of for more than the indebtedness. 9C Frederick H. Miller & Carl S. Bjerre, Uniform Commercial Code Series, § 9-620:1 [Rev] (2018).

         ¶18 Enacted in 1999, the provision replaced former § 30-9-505, MCA, to eliminate the requirement that the secured party present a "proposal" for retention to which the debtor had a fixed time to respond. 1999 Mont. Laws, ch. 305, § 117. Under prior law, a secured party's delay in disposing of collateral often led to the debtor's claim that the creditor should be deemed to have elected to retain the collateral in satisfaction of the obligation. Courts adopted varying approaches to resolving such claims. See Drayer L. Bott, Commercial Law and Practice Guide ch. 32, § 32.03[2][b][ii] (Barry L. Zaretsky, Gerald T. McLaughlin, & Neil B. Cohen eds., 2018). Some courts held that "[a]n election to take the collateral in full satisfaction [of the debt] will not be implied; it must be made by written notice to the debtor." Chrysler Credit Corp. v. Mitchell, 464 N.Y.S.2d 96, 97 (N.Y.App.Div. 1983). Others found that the secured party had made an implied election to retain the collateral in full satisfaction, either by an unreasonably long retention of collateral (Bradford v. Lindsey Chevrolet Co., 161 S.E.2d 904, 906 (Ga.Ct.App. 1968)) or by proof of the secured party's manifest intent to accept the collateral in satisfaction of the obligation (Nelson v. ...

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