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FORD MOTOR CREDIT CO. v. LOTOTSKY

September 22, 1982

FORD MOTOR CREDIT COMPANY
v.
WALTER and FREDERICKA LOTOTSKY v. FORD MOTOR COMPANY



The opinion of the court was delivered by: DITTER

 DITTER, J.

 This motion for summary judgment presents essentially two questions: first, whether a guarantor can assert the defense of commercial reasonableness in the disposition of the collateral by the original creditor in an action to recover under a contract of guaranty; second, assuming such a defense is viable, whether the commercial reasonableness defense can be waived under Pennsylvania law. *fn1"

 The following facts are undisputed. The plaintiff, Ford Motor Credit Company, is engaged in the business commonly known in automotive circles as floor plan financing. On August 25, 1972, Lott Lincoln Mercury, Inc. became a participant in Ford Credit's Automotive Wholesale Plan (hereinafter the "Plan"). Under the Plan, Ford Credit routinely financed the purchase of vehicles for retail sale by Lott Lincoln. In conjunction with the financing Plan, the plaintiff sought and obtained a security interest in all financed merchandise pursuant to a wholesale security agreement. In addition to the purchase money security interest, the agreement provided that in the event of default, the plaintiff could repossess and sell the merchandise at public or private sale for the account of the dealer. The dealer would, of course, remain liable to the plaintiff for any deficiency in the sale of the proceeds. Comprehensive powers of attorney were also executed by Lott Lincoln to execute the Plan.

 Presumably, to insure a readily available source of funds in the event of default by Lott Lincoln, Ford Credit demanded the execution of a "Continuing Guaranty Agreement" by the defendants, husband and wife. It appears from the record that the defendants are the principal owners of the corporate stock of Lott Lincoln. Docket No. 5, Third Party Complaint at 2. *fn2" The terms of the guaranty state in essence that the defendants jointly, severally, and unconditionally guaranty that Lott Lincoln "will fully, promptly and faithfully perform, pay and discharge all [its] present and future obligations to [Ford Credit] . . .". It further provides that in event of default by Lott Lincoln on those obligations, the guarantors agreed "without [Ford Credit] first having to proceed against the Dealer . . . to pay on demand all sums due and to become due to [Ford Credit] from Dealer and all losses, costs, attorney's fees or expenses which [Ford Credit] may suffer by reason of Dealer's default." With respect to the nature of payment and availability of defenses, the agreement was equally comprehensive. It specifically provided that each guarantor "agrees to be bound by and on demand to pay any deficiency established by a sale of paper or security held with or without notice . . . and waives notice of acceptance hereof and of presentment, demand, protest, and notice of non-payment or protest as to any note or obligation signed, accepted, endorsed or assigned to you by dealer, and all exemptions, rights of dower and homestead laws and any other demands and notices required by law and we waive all set-offs and counterclaims." Moreover, the agreement provided Ford Credit with the authority to "settle, release, compound compromise, collect or otherwise liquidate any obligation or security therefor in any manner and bid and purchase at any sale without affecting the obligation of any of us hereunder."

 To its owner's dismay, and most probably Ford Credit's as well, in 1979 Lott Lincoln defaulted on its obligation under the Plan. This lawsuit was instituted when the defendants refused a demand for payment under the guaranty of the amount of deficiency after the sale of Lott Lincoln's inventory by the plaintiff. At present, it is alleged in the complaint that the amount owing is $29,550.14, plus interest and attorneys' fees.

 In the face of the sweeping language contained in the contract of guaranty, the defendants assert that the plaintiff failed to liquidate the vehicles to obtain the largest possible fund or satisfy the indebtedness. This claim can be essentially reduced to the assertion that the collateral was disposed of in a commercially unreasonable manner. *fn3" The defendants argue that guarantors have the same rights to assert this defense as the principal debtor. Contrariwise, the plaintiff takes the dual position that guarantors cannot raise the defense of commercial reasonableness, and assuming the defense is viable, the defendants are precluded from asserting it by the waivers in the guaranty agreement.

 At the outset, I note that neither the parties nor independent research has uncovered any Pennsylvania appellate court case which has addressed the issues presented herein. In the absence of such an authoritative pronouncement, my task is to predict how that court would rule. Pennsylvania Glass Sand v. Caterpillar Tractor Co., 652 F.2d 1165, 1167 (3rd Cir. 1981). Accordingly, I shall endeavor to forecast state law with an eye toward the doctrinal trends evinced by the relevant authorities. See McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 663 (3rd Cir.), cert. denied, 449 U.S. 976, 66 L. Ed. 2d 237, 101 S. Ct. 387 (1980).

 Two somewhat overlapping theories have evolved to support the validity of commercial reasonableness in the disposition of collateral as a defense by guarantors. Initially, it must be understood that a guaranty is a collateral promise or undertaking by one person to answer for the payment of some debt in the case of default of another who is liable for such payment in the first instance. *fn4" The guarantor in effect is a voucher for the principal debtor. Correlatively, if the debtor can reduce or is not liable on the debt, the guarantor similarly should not be liable. To protect the guarantor's liability from exceeding that of the debtor, the common law permitted guarantors to raise any defenses of the principal to the underlying contract except purely personal defenses. 10 S. Williston, Contracts 214 (3rd ed. 1967); 38 C.J.S. Guaranty § 88 (1943). *fn5" The nature of contract of guaranty, therefore, dictates that the debtor's defense to a payment of a deficiency based upon the creditors' negligent disposal of the collateral can be utilized by the guarantor as well.

 The second theory forms the basis for the so-called impairment of collateral defense. This defense is predicated upon the guarantor's equitable right to pay original debt. By right of subrogation the guarantor then assumes all rights of the creditor in the collateral securing the underlying debt. When the original creditor impairs the value of the collateral by sale or otherwise, the guarantor's right of subrogation is impaired. To preserve the value of the right of subrogation, the creditor is said to have an equitable duty of care in the handling and preservation of the collateral. The often-cited quotation by Judge Thompson states:

 
It is the established rule that a guarantor is discharged from his obligation by any act on the part of the guarantee which increases the guarantor's risk to in any manner injure his rights and remedies. This principle is so well recognized that further citation is needless.

 Fidelity Savings Bank v. Wormhoudt Lumber Co., 251 Iowa 1121, 1126, 104 N.W.2d 462, 466 (1960). Breach of this duty by negligent sale, therefore, gives rise to the guarantor's independent defense of impairment of collateral. *fn6"

 Although these defenses are firmly embedded in Pennsylvania common law, so too is the proposition that an explicit waiver precludes a guarantor from asserting them in an action to recover under the guaranty. With respect to the defenses of the debtor, *fn7" the general rule is that the liability of the guarantor will not exceed that of the debtor. Nevertheless, most courts recognize that the contract of guarantee is a separate undertaking, and "if the terms of the contract so state, a guarantor may assume greater liability than that of the principal." Paul Revere Protective Life Ins. Co. v. Weis, 535 F. Supp. 379, 386 (E.D. Pa. 1981) aff'd. mem., 707 F.2d 1403 (3rd Cir. 1982). *fn8" Thus, the debtor's defenses are waivable by the guarantor.

 The common law impairment of collateral defense of the guarantor is similarly subject to the terms of the guaranty. In Continental Leasing Corp. v. Lebo, 217 Pa. Super. ...


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