              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


     1
      All cited Business and Commerce Code sections are identical
to their model U.C.C. counterparts.
     2
      Tex. Bus. & Comm. Code § 9.504(c) (Vernon 1991).
     3
      E.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


     4
      See Adams v. Waldrop, 740 S.W.2d 32, 33 (Tex. App.—El Paso
1987, no writ).
     5
      Greathouse v. Charter Nat'l Bank, 851 S.W.2d 173, 174 n.1
(Tex. 1992).
     6
      Tex. Bus. & Comm. Code § 9.504(c) (Vernon 1991).
     7
      FDIC 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.
     8
      FDIC v. Payne, 973 F.2d 403, 409 (5th Cir. 1993).
     9
      Tex. 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


     10
          795 S.W.2d 706 (Tex. 1990).
     11
          Id. at 708.
     12
          Id. at 710.
     13
          934 F.2d 69 (5th Cir. 1991).
     14
          Id. at 71-72.
     15
          795 S.W.2d at 711 (Mauzy, J., dissenting).
     16
          807 P.2d 1145 (Colo. 1991).
     17
      Coleman, 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.

     18
          Coleman, 795 S.W.2d at 710.
     19
          Tex. Bus. & Comm. Code § 1.102(c) (Vernon 1968).
     20
          837 F.2d 1 (1st Cir. 1987).
     21
          Id. at 2-3.

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