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May 26, 1994

MARVIK COLOUR, INC., Defendant. MARVIK COLOUR, INC., Third-Party Plaintiff, v. LINOTYPE HELLGRAPHICS COMPANY heretofore known as HELL GRAPHIC SYSTEMS, INC., d/b/a "HELL GRAPHIC SYSTEMS," Third-Party Defendant.

The opinion of the court was delivered by: MICHAEL B. MUKASEY


 Plaintiff Siemens Credit Corporation sues to collect amounts due from Marvik Colour, Inc. pursuant to a secured equipment sales agreement (the "Agreement"). Marvik moves for summary judgment, contending that Siemens disposed of the collateral without providing notice of the sale to Marvik as required under § 9-504 of the New York Uniform Commercial Code ("N.Y.U.C.C."). Marvik argues that Siemens' failure to comply with § 9-504 forfeited Siemens' right to obtain a deficiency judgment for the remainder of the debt.

 Plaintiff Siemens opposes Marvik's motion, and renews the motion for summary judgment it made in April 1991. Siemens seeks to dismiss Marvik's counterclaims on the ground that Marvik waived all claims and warranties against Siemens. In addition, third-party defendant Linotype-Hell Graphic ("Linotype") renews its motion to dismiss Marvik's third-party claims for remedies other than repair and replacement. For the reasons set forth below, Marvik's motion is denied, Siemens' motion is denied, and Linotype's motion is granted in part and denied in part.


 In March 1989, Marvik agreed to purchase a computer system from Linotype, then known as Hell Graphic Systems, for $ 561,600. (Complt Ex. A) Marvik's obligations under the Agreement were secured with a purchase money security interest in the computer system. On or about June 6, 1989, Linotype delivered the system to Marvik.

 On October 12, 1990, Linotype assigned the Agreement and security interest to Siemens. (Complt Ex. B) By letter dated October 15, 1990, Siemens directed Marvik to make payments pursuant to the Agreement. Marvik did not comply. On November 9, 1990, Siemens notified Marvik that Marvik was in default, and on December 6, 1990, Siemens filed this action to recover the payments due under the Agreement. (Complt)

 On January 31, 1991, Marvik notified Siemens that it was cancelling the Agreement, as permitted under Addendum D to the Agreement. (Ans. Ex. C) Addendum D provides, ambiguously, that Marvik may cancel the Agreement if the equipment does not perform to published specifications, within six months of "completion of equipment's performance to specifications." (Complt Ex. A at Addendum D) Marvik demanded that Siemens remove the system and refund Marvik's down payment and installation expenses within 90 days. Siemens responded that Marvik had no right to terminate the Agreement because the demand was not timely, because the equipment was performing according to published specifications, and because Marvik was contradicting its own rescission by continuing to use the equipment.

 On March 1, 1991, Marvik served its answer, alleging various defenses and counterclaims against Siemens. On March 5, 1991, Marvik commenced the third-party action against Linotype, asserting claims of breach of contract, breach of warranty, negligence and fraud. (3d-Party Complt)

 On March 20, 1991, Siemens demanded that Marvik return the equipment because Marvik had defaulted in making payments. Siemens offered to remove and dispose of the equipment. Marvik, however, would not permit Siemens to remove the equipment unless Siemens first refunded Marvik's $ 50,000 down payment and paid approximately $ 100,000 to compensate Marvik for costs incurred to install the equipment. (Pl & 3d-Party Def. 1993 Mem. at 8-9; Def. 1993 Mem. in Opp. at 16) Siemens then moved to compel Marvik to pay for its continued use of the equipment. Following a suggestion by the court, the parties entered a stipulation on August 12, 1991 whereby Marvik agreed to pay arrears and make ongoing payments into an escrow account. The distribution of the funds in the account will depend upon the outcome of this lawsuit.

 In July 1992, Marvik ceased using the equipment and returned it to Siemens. Following protracted negotiations, the parties stipulated to the terms of the return on or about October 20, 1992. (Halperin Aff. Ex. G) The stipulation permitted Siemens to dispose of the equipment in any manner consistent with the Agreement or with the N.Y.U.C.C. Linotype, acting as Siemens' agent, removed the equipment in November 1992. Linotype then refurbished and sold the computers and work stations. The rest of the equipment was scrapped or used for parts.

 According to Siemens, the sale of the refurbished items yielded $ 117,500; Siemens also proposed to credit Marvik $ 30,552 for the remaining equipment. The escrow account holds a balance of approximately $ 175,000. Siemens concedes that these amounts are in dispute and contends that a trial must be held to determine the value of any deficiency. Marvik, however, now moves for summary judgment dismissing the complaint because Siemens did not notify Marvik of the sale of the equipment as Siemens was required to do under N.Y.U.C.C. § 9-504. Siemens, in turn, moves for summary judgment dismissing all of Marvik's counterclaims because the Agreement contains a provision in which Marvik agreed to waive all claims against Siemens. Linotype moves for summary judgment with respect to all third-party claims except for those seeking repair and replacement.


 Marvik's motion for summary judgment is predicated upon Siemens' failure to comply with N.Y.U.C.C. § 9-504(3), the provision that governs the disposition of collateral after default. That section explicitly requires the secured party to provide notice of sale to the debtor:

Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor, if he has not signed after default a statement renouncing or modifying his right to notification of sale.

 N.Y.U.C.C. § 9-504(3) (McKinney 1990). It is undisputed that Siemens and its agent, Linotype, failed to notify Marvik of the sale of the computers and work stations.

 The U.C.C. does not prescribe a remedy for a failure to comply with § 9-504(3), and the New York Court of Appeals has not yet addressed this issue. Among New York's lower courts and in other jurisdictions, authority is split. The Appellate Division Second Department has imposed an "absolute bar" to recovery of a deficiency judgment. See Long Island Bank v. Knight, 122 Misc. 2d 878, 879, 473 N.Y.S.2d 901, 902 (2d Dep't 1983); Avis Rent A Car System, Inc. v. Franklin, 82 Misc. 2d 66, 67, 366 N.Y.S.2d 83, 85 (2d Dep't 1975); see also Credit Car Leasing Corp. v. De Cresenzo, 138 Misc. 2d 726, 732-33, 525 N.Y.S.2d 492, 497 (N.Y. Co. 1988); Leasco Data Processing Equip. Corp. v. Atlas Shirt Co., 66 Misc. 2d 1089, 1090-91, 323 N.Y.S.2d 13, 15-16 (N.Y. Co. 1971). Under the absolute bar rule, when a secured creditor sells collateral without notice to the debtor, the creditor may not thereafter seek a deficiency judgment from the debtor to cover the difference between the value of the collateral and the amount owed. Some 11 states have adopted this view. See Robert M. Lloyd, The Absolute Bar Rule in UCC Foreclosure Sales: A Prescription for Waste, 40 U.C.L.A. L. Rev. 695, 745 (1993) (hereinafter "Lloyd").

 In contrast, the First and Fourth Departments have held that a failure to give notice merely results in a "rebuttable presumption" that the amount recovered was equal to the debt. See Telmark, Inc. v. Lavigne, 124 A.D.2d 1055, 1055, 508 N.Y.S.2d 737, 738 (4th Dep't 1986); General Electric Credit Corp. v. Durante Bros. & Sons, Inc., 79 A.D.2d 509, 510-11, 433 N.Y.S.2d 574, 577 (1st Dep't 1980); Security Trust Co. v. Thomas, 59 A.D.2d 242, 245-47, 399 N.Y.S.2d 511, 512-14 (4th Dep't 1977); see also In re Winer, 39 Bankr. 504, 510-11 (S.D.N.Y. 1984); Long Island Trust Co. v. Williams, 133 Misc. 2d 746, 754, 507 N.Y.S.2d 993, 999 (N.Y. Co. 1986), aff'd, 142 Misc. 2d 4, 539 N.Y.S.2d 612 (1st Dep't 1988). The rebuttable presumption rule allows the secured creditor to recover a deficiency judgment if it proves at trial the amount of the debt, the fair market value of the collateral, and the resulting deficiency. In the most recent analysis of New York's treatment of § 9-504(3), Judge Easterbrook of the Seventh Circuit wrote an opinion adopting the rebuttable presumption approach, predicting that the New York Court of Appeals would do the same. See In re Excello Press Inc., 890 F.2d 896, 903-04 (7th Cir. 1989) (applying New York law in a bankruptcy appeal). Some 26 other states subscribe to this rule. Lloyd, supra, at 745.

 A third approach, known as the "setoff" rule, has been applied by the Appellate Division Third Department. See Stanchi v. Kemp, 48 A.D.2d 973, 974, 370 N.Y.S.2d 26, 28 (3d Dep't 1975). The setoff rule allows the debtor to prove any damages sustained as a result of the creditor's failure to give notice of the sale of collateral, and the deficiency is reduced by the amount of those damages. This approach applies § 9-507(1) of the N.Y.U.C.C., which provides that where a secured party does not proceed in accordance with requirements relating to the disposition of collateral, the debtor "has a right to recover from the secured party any loss caused by a failure to comply." N.Y.U.C.C. § 9-507(1) (McKinney 1990). Only three other jurisdictions have adopted this rule as the exclusive remedy for violations of the notice requirement. Lloyd, supra, at 746.

 When courts determine which of the three rules to apply, they should attempt to safeguard the interests of the debtor in a manner that is fair to the secured creditor. The debtor needs to be notified of the sale so that he can 1) redeem the collateral before the sale; 2) bid on the collateral at the sale; 3) monitor the commercial reasonableness of the sale; or 4) file a Chapter 11 petition in order to stop the sale. See Lloyd, supra at 715-16; Long Island Trust Co., 133 Misc. 2d at 753. Thus, an effective remedy should deter the secured creditor from violating the notification provision of § 9-504(3). At the same time, the remedy should not unduly penalize the ...

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