Restaurant case shows consent is needed for certain uses of collateral

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Most restaurants don’t make it past the three-year mark.

Thomas Linn’s Bristol Restaurant, early on at least, seemed to be one of the few that would beat the long odds. By the middle of 2013, the New Berlin restaurant was well into its fourth year of operation.

Yet, less than a year later, Linn had lost his restaurant, seen his equipment repossessed and got into a legal battle in Waukesha County court with the previous owner, James March. Linn initially failed when he tried to press his claims before the county’s circuit court, but the ruling was reversed on April 15 by the Wisconsin Court of Appeals District 2 in James March v. Thomas D. Linn et al., 2014 AP 1784.

Specifically, the appellate judges found that the previous owner, March, had failed to act in a “commercially reasonable manner” when he took Linn’s equipment after regaining possession of the restaurant.

According to the appellate court, even if language in the original purchase agreement between March and Linn had permitted March to re-enter the restaurant in the event of a default and keep the equipment, “the circuit court erred as a matter of law in granting March summary judgment on strict foreclosure without consent.”

The facts in the case date to 2009, when the two men entered into an agreement allowing Linn to purchase the operations of the Bel Gustos restaurant in New Berlin.

The basic agreement called for Linn to pay March $2,614 every month for 72 months. Linn put down $50,000 and financed the remaining $160,000 at a 5.5 percent interest rate.

The two also drafted and signed a promissory note and security agreement. The agreement noted that Linn had “pledged as security all assets that were subject to purchase agreement” and gave March the right, in the event of a default, to repossess both the restaurant premises and equipment.

The trouble started in October 2013, when Linn asked if he could defer his payment for the next month. When later discussing the request, both men agreed that March, in a previous phone call, had approved a short payment delay.

Still, the two saw eye to eye on little else. Less than four months later, March was suing Linn for breach of contract.

March filed a petition for summary judgment following the start of discovery procedures. Linn’s response, though, suggested that some of the pertinent facts remained in dispute.

Waukesha County Circuit Court Judge Lee Dreyfus Jr. disagreed. He contended that March was entitled to both the property and the restaurant equipment that had been deemed collateral.

On appeal, Linn contended that there were still sufficient facts in dispute to avoid summary judgment. He and March agreed that there had been a phone call in late 2013 in which March had said he would allow the deferral of at least one payment.

But the two recalled the details differently.

March, in his deposition and affidavit, testified that he had permitted the payment due in November 2013 to be deferred only under the assumption that Linn would then make the December payment on time. Linn, in contrast, recalled that March had made a much looser commitment and had instead agreed to defer “at least one or two” payments indefinitely.

The appellate court sided with March to an extent. According to the decision, Linn’s assertion that March had agreed over the phone to a deferral of payments did not by itself mean that there could be “more than one reasonable inference that may be drawn” from the facts.

In the presence of the written promissory note, March’s testimony, and in the absence of any further written confirmation about what was said in the phone call between March and Linn — even if the court accepted the version of the conversation that was most favorable toward Linn — the appellate judges ruled that Dreyfus had not erred when he found that no genuine issue of fact remained.

At the same time, the appellate court was more open to Linn’s assertions that the Uniform Commercial Code and state law should have prevented March from repossessing the equipment, at least without Linn’s permission.

Even if the Uniform Commercial Code’s strict foreclosure provisions allowed March to take back possession of the restaurant, according to Linn’s appellate brief, the equipment’s status as secured collateral should have meant that the owner could not simply repossess and dispose of the equipment, or otherwise keep it, without first going through various procedural steps.

Linn referenced Wis. Stat. Section 409.620(1)(a)&(3), suggesting the law required March to first obtain his consent before taking collateral in “part or full satisfaction of debt.”

Not only did March not obtain consent, according to Linn, but there had been no indication that March had planned to use the value of the equipment as an offset against the debt owed to him.

March countered that nothing in his contract with Linn, nor in Section Wis. Stat. 409.610 UCC, required him to actually sell the equipment. The terms of the agreement between the parties, he argued, gave him the leeway to either sell the equipment, or instead, if he saw fit, continue the restaurant as an ongoing concern and keep the equipment intact.

The appellate court agreed with Linn, saying that the law of strict foreclosure might permit the premises to be repossessed. Still, the court found that, if the equipment was to be repossessed for sale or for continued use in a restaurant, UCC provisions in fact called for Linn to provide consent.

Thus, for March’s use of the equipment in the repossessed equipment in the restaurant to comply with Wis. Stat. 409.620-22, Linn would have needed to acquiesce in March’s accepting the collateral “in full or partial satisfaction” of the secured debts. But this could have happened only if Linn had granted his consent following the default.

There has been no proof that Linn ever agreed to let the equipment be taken in lieu of any outstanding debt, according to the appellate court’s decision. Therefore, March’s strict foreclosure on the restaurant equipment was invalid.

The appellate court affirmed in part and reversed in part, sending the case back to Judge Dreyfus for further proceedings consistent with the order.