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January 9, 1979

UNITED STATES of America, Plaintiff,
William E. CAWLEY and Berniece B. Cawley, his wife, Leroy John Score and Willa Y. Score, his wife, and Cathryn H. Pike, widow of James L. Pike, now deceased, and Edward L. Merseth and Wanda W. Merseth, his wife, Defendants

The opinion of the court was delivered by: FITZGERALD


The action was brought by the United States to recover money allegedly owed by the defendants, all of whom are guarantors to a Small Business Administration (SBA) loan made to a Washington corporation, Archdomes, Inc., (hereinafter "Archdomes").

 As was noted in findings made on the record in this action, Seattle First National Bank received Archdomes' note on June 30, 1971. The loan of $ 350,000 was disbursed to Archdomes on July 2, 1971, with the first payment scheduled for the end of August, 1971, with 120 equal monthly payments and annual interest of 7 3/4 %. The first and second payments were made. However, after October, 1971, Archdomes fell delinquent. Although the terms of the SBA bank agreement required Seattle-First National Bank to notify the SBA within thirty days of delinquent payments, for eleven months the bank failed to notify the agency. In early September, 1972, the SBA made a specific written inquiry about delinquency to the bank manager in charge of the loan and on September 19, 1972, the SBA finally received notice of the delinquent account. Fourteen months later, November 21, 1973, the agency purchased the loan from Seattle-First National Bank and on December 19, 1973, the SBA made demand on the guarantors. According to the demand, the balance as of October 31, 1973, was $ 348,435 with interest accruing at 7 3/4 % Annually. Because of the bank's delay in notifying the SBA, the agency held the bank liable for interest that accrued during the period of delay. As I noted in the findings, that amount, some $ 24,710, will be reduced from the total due from the guarantors to the agency. *fn1"


 In addition to making demands on the guarantors, the SBA began to move to liquidate Archdomes' property which had secured the loan and began to investigate the possible liquidation of stock which had also been pledged as collateral for the loan. As noted in the findings of fact, there was considerable dispute about the value of Archdomes' property which was covered by the security agreement. The SBA took the position that the value listed on the security agreement has greatly depreciated whereas the defendants contended that there had been an appreciation in the value of the property. As stated in the findings, since the parties originally agreed to a value of $ 162,734, that agreed-upon figure is the most reliable value of the property which the SBA moved to liquidate.

 A. The Commercially Unreasonable Disposition and Its Effect

 About the same time that the SBA made demand on the guarantors, the agency contacted an auction company, Morton's Supply, about the potential disposition of the property covered by the security agreement. The disposition was to be handled by Mr. James Poe of Morton's and prior to Christmas, 1973, he went to the warehouse at the Port of Pasco to look over Archdomes' former facilities. The SBA did not provide Mr. Poe with a copy of the security agreement inventory and it is apparent that Mr. Poe considered all property at the Archdomes' section of the warehouse to be covered by the security agreement. On December 26, 1973, the SBA portfolio supervisor wrote Mr. Poe regarding the Archdomes' equipment. The letter, in its entirety, stated:

This will be your authority to act as our agent to hold a Uniform Commercial Code sale of the personal property of the above firm, now located at the Port of Pasco, or to remove it elsewhere for a future sale.

 It is against this factual backdrop that the effect of SBA's sale on the amount of Archdomes' deficiency must be considered. On the threshold question of whether federal or state law defines the rights of the parties, it should be noted that although some circuits have held *fn2" that when there is a "sufficient federal interest" federal law is applicable to SBA negotiated loans, the Ninth Circuit en banc considered the state and federal policies at stake as required by United States v. Yazell, 382 U.S. 341, 86 S. Ct. 500, 15 L. Ed. 2d 404 (1966) and held that a district court should apply applicable state law. United States v. MacKenzie, 510 F.2d 39 (9th Cir. 1975). Thus, Washington's statutes and case law are determinative. Additionally, should a situation arise which has not been specifically addressed by Washington's highest court, I conclude that disposition of the issue must be founded on a projection of the existing Washington law.

 The duty of a secured creditor to dispose of collateral in a commercially reasonable manner is found at Revised Code of Washington 62A.9-504 *fn3" and the Washington Supreme Court has established the standards for such commercial reasonableness in Foster v. Knutson, 84 Wash.2d 538, 527 P.2d 1108, 1114-15 (1974), which include adequate notice of the sale to the debtor and the public. Under these standards, the SBA sale of Archdomes' collateral constituted a commercially unreasonable sale.

 However, Washington's highest court has not yet enunciated the effect of a commercially unreasonable disposition on a debtor's deficiency. The parties contend that this court should be guided by the decisions of two lower Washington courts, Grant County Tractor Co. v. Nuss, 6 Wash.App. 866, 496 P.2d 966 (1972) and Commercial Credit Corporation v. Wollgast, 11 Wash.App. 117, 521 P.2d 1191 (1974). Those cases, as well as Mount Vernon Dodge, Inc. v. Seattle-First Nat. Bank, 18 Wash.App. 569, 570 P.2d 702 (1977), are distinguishable in fact and law from the instant action, in that they do not directly address the issue of whether the value of the collateral may offset all or part of a deficiency when the debtor has not been given notice of the sale and when the secured creditor is otherwise derelict in the collateral disposition. Further, the questions left open by the Washington Supreme Court in Foster v. Knutson, above, cannot be definitively answered by lower Washington courts. *fn4" Upon reviewing the language and the holdings in Foster v. Knutson and in the three courts of appeal cases noted above, I conclude that were the Washington Supreme Court to face this issue of no notice to the debtor and a commercially unreasonable disposition, the court would hold that the secured creditor faces a rebuttable presumption that the value of the collateral is at least equal to the amount of the outstanding debts.

 The Alaska Supreme Court has recently addressed some of the same issues presented by the sale of the Archdomes' equipment in the case of Kobuk Eng., Etc. v. Superior Tank & Const., 568 P.2d 1007 (1977), and that well-reasoned decision extensively reviews the authorities in this area:

The next question deals with the effect of a sale of collateral which is not conducted in a commercially reasonable manner. Some authorities hold that the creditor is not entitled to any deficiency judgment against the debtor. For example, Anderson in his treatise on the Uniform Commercial Code states: "The creditor is not entitled to a deficiency judgment unless the sale of the collateral was conducted in a manner which was commercially reasonable." (4 Anderson, U.C.C. § 9-504:28 at 623 (1971)) Apparently, this is the view of the majority of the courts ...

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