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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 93-1320

LAWRENCE E. STEINBERG,
Plaintiff-Appellant,
versus
CINEMA N' DRAFTHOUSE SYSTEMS,
INC., ET AL.,
Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of Texas

(July 22, 1994)
Before GOLDBERG, HIGGINBOTHAM, and EMILIO M. GARZA, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
We find that Texas law allows the guarantor of a secured
transaction to waive the right to a commercially reasonable sale of
collateral.
I.
This case concerns a suit for deficiency on secured notes and
guaranties. Lawrence E. Steinberg, the owner of the note, sued
Cinema 'N' Drafthouse Systems, Inc., the borrower, and John J.
Duffy, James T. Duffy, and Norma S. Duffy, the guarantors, to
recover a deficiency alleged to be due on a note executed by Cinema
'N' Drafthouse and guaranteed by the Duffys. Shares of stock in
three subsidiary corporations of Cinema 'N' Drafthouse secured the
note.

At trial, Cinema 'N' Drafthouse and the Duffys stated that
their liability was discharged by Steinberg's failure to give
adequate notice of the sale of the collateral or his alleged
failure to sell the collateral in a commercially reasonable manner.
Steinberg answered that he gave reasonable notice of the sale, that
he conducted the sale in a commercially reasonable manner, and
that, in any event, the Duffys waived the right to complain of
these matters by the express terms of the guaranty agreements.
Following a bench trial, the district court rendered a take-nothing
judgment in favor of Cinema 'N' Drafthouse and the Duffys, finding
that the sale had not been commercially reasonable.
II.
When a secured creditor elects to dispose of collateral after
the debtor's default, section 9.504(c) of the Texas Business and
Commerce Code1 requires that "[e]very manner of the disposition of
collateral, including the method, manner, time, place, and terms of
the sale, must be commercially reasonable."2 Many Texas cases have
held that "debtor," as used in section 9.504, includes guarantors
of secured transactions.3 As a result, Texas courts of appeals
1All cited Business and Commerce Code sections are identical
to their model U.C.C. counterparts.
2Tex. Bus. & Comm. Code § 9.504(c) (Vernon 1991).
3E.g., FDIC v. Moore, 846 S.W.2d 492, 495-96 (Tex.
App.--Corpus Christi 1993, writ denied); Carroll v. Gen. Elec.
Credit Corp., 734 S.W.2d 153, 154 (Tex. App.--Houston [1st Dist.]
1987, no writ); Hernandez v. Bexar County Nat'l Bank, 710 S.W.2d
684, 687 (Tex. App.--Corpus Christi 1986, writ ref'd n.r.e.); Peck
v. Mack Trucks, Inc., 704 S.W.2d 583, 585 (Tex. App.--Austin 1986,
no writ).
2

have held that guarantors sued in a deficiency action can assert
section 9.504 defenses, including the defense of commercial
reasonability,4 although the Texas Supreme Court has reserved
judgment on the question.5 The question in this case is whether a
guarantor can waive the right to assert this defense.
No Texas case has answered this precise question. Cases have
spoken to two related issues, however, and from them we can decide
how the Texas Supreme Court would rule. The first line of cases
deals with another section 9.504 defense. Section 9.504(c), in
addition to requiring a commercially reasonable sale of collateral,
requires that a debtor receive timely notice of the sale.6 Four
Texas courts of appeals7 and a panel of this court8 have held that
a guarantor cannot waive this right to notice. The Texas cases
have emphasized section 9.501(c), which says that a debtor cannot
waive the rights created by section 9.504(c).9
The second line of cases deals with the waiver of claims
asserted by guarantors under section 1.203 of the Code, the general
4See Adams v. Waldrop, 740 S.W.2d 32, 33 (Tex. App.--El Paso
1987, no writ).
5Greathouse v. Charter Nat'l Bank, 851 S.W.2d 173, 174 n.1
(Tex. 1992).
6Tex. Bus. & Comm. Code § 9.504(c) (Vernon 1991).
7FDIC v. Attayi, 745 S.W.2d 939, 948 (Tex. App.--Houston [1st
Dist.] 1988, no writ); Carroll, 734 S.W.2d at 154; Hernandez, 710
S.W.2d at 687; Peck, 704 S.W.2d at 586.
8FDIC v. Payne, 973 F.2d 403, 409 (5th Cir. 1993).
9Tex. Bus. & Comm. Code § 9.501(c) (Vernon 1991); Peck, 704
S.W.2d at 586.
3

"good faith" provision. In FDIC v. Coleman,10 a guarantor alleged
that section 1.203 required the FDIC to liquidate the security
promptly after default. The Texas Supreme Court found no violation
of the good faith requirement,11 and also held that the guaranty
waived any such a claim by not requiring the creditors to satisfy
their debt from the collateral.12 Applying Coleman, a panel of this
court found in Clay v. FDIC13 that a guaranty waived a section 1.203
claim based on the FDIC's alleged delay in foreclosing on
property.14
We are convinced that the Texas Supreme Court would follow the
second line of cases. As the dissenters noted in Coleman,15 and as
the Colorado Supreme Court held in May v. The Women's Bank, N.A.,16
the requirement that a sale be made in "good faith" is inextricably
intertwined with the requirement that a sale be "commercially
reasonable."17 Coleman reasoned that the "obligation of good faith
could be defined and applied as a matter of law only in a very few
clear cases" and would impose a "virtually impossible" burden on
10795 S.W.2d 706 (Tex. 1990).
11Id. at 708.
12Id. at 710.
13934 F.2d 69 (5th Cir. 1991).
14Id. at 71-72.
15795 S.W.2d at 711 (Mauzy, J., dissenting).
16807 P.2d 1145 (Colo. 1991).
17Coleman, 795 S.W.2d at 712-13 (Mauzy, J., dissenting);
May, 807 P.2d at 1149.
4

creditors to "protect others' interests."18 Those arguments, made
in the context of a guarantors challenge to the timing of the
creditors' sale, apply with equal force to a challenge to the
conduct of the sale. In both situations, the possibility of a
court second-guessing a creditors' actions creates uncertainty and
discourages loans.
Section 9.501(c) poses no obstacle. Section 1.102(c) of the
Code19 says that the obligation of good faith may not be disclaimed
by agreement, but neither Coleman nor Clay applied that provision
to a guarantor. We are persuaded that the Texas Supreme Court
would not apply section 9.501 to a guarantor either, because the
same rationales lie behind both sections. The First Circuit
explained the reasoning in United States v. H & S Realty Co.:20
In short, in a routine business loan the special position
accorded the debtor by the proscription of waiver serves
an important economic function; in the riskier
transaction requiring the involvement of a guarantor,
that collateral-preserving function not only diminishes
in importance but is counterbalanced by other
considerations such as the importance of facilitating the
transaction and of leaving it to the guarantor to assess
his own interest.21
While it construed a different Code provision, we read Coleman as
striking the same balance as H & S, and are convinced that the
court would treat 9.501 the same way.
REVERSED.
18Coleman, 795 S.W.2d at 710.
19Tex. Bus. & Comm. Code § 1.102(c) (Vernon 1968).
20837 F.2d 1 (1st Cir. 1987).
21Id. at 2-3.
5