## Facts

- Michael and Charlene Munao owned and operated a successful Illinois restaurant known as the “Dilly Deli.”
- The Munaos sold the restaurant business to Nicholas Lagattuta, Dennis J. Lullo, and Lullo Food Service Company (the Buyers) for $104,000, consisting of $46,000 paid at closing and a promissory note for the balance.
- To secure the promissory note, the Munaos took a security interest in the restaurant’s equipment, inventory, and fixtures (the collateral); the security agreement did not include goodwill.
- Lullo Food Service Company also entered into a lease for the restaurant premises with the Munaos, and Lagattuta and Lullo personally guaranteed the lease obligations.
- After the sale, the Buyers changed the restaurant’s name and operations and, according to the Munaos, reduced the quality of the food and service (including use of cheaper ingredients and other changes that the Munaos believed harmed the restaurant’s reputation).
- The Buyers eventually defaulted on both the promissory note and the lease.
- After default, Lagattuta returned the restaurant keys to the Munaos. The Buyers claimed this key return was part of an agreement releasing them from further liability; the Munaos denied any release and asserted the keys were required before any settlement discussions.
- After regaining possession, the Munaos obtained an appraisal valuing the collateral at $9,067.07.
- The Munaos reopened and operated the restaurant for a period, then closed it after incurring losses, and later sold the premises and remaining assets. They credited $9,067.07 against the note balance.
- The Munaos sued to recover the remaining balances due under the note and the lease. After a bench trial, the court entered deficiency judgments for the Munaos, awarded the Buyers a $9,067.07 credit on the note, and rejected the Buyers’ counterclaim for an alleged surplus.

## Issues

1. Whether the Munaos’ repossession, operation of the restaurant, and later sale of assets amounted to an election to accept the collateral in full satisfaction of the debt (strict foreclosure), barring any deficiency.
2. Whether alleged failures to comply with U.C.C. Article 9 disposition requirements barred a deficiency judgment or instead created a rebuttable presumption as to collateral value.
3. Whether the restaurant’s goodwill should have been treated as collateral or otherwise valued and credited when calculating any deficiency or surplus.
4. Whether return of the keys created an enforceable agreement releasing the Buyers from liability on the promissory note and lease.

## Decision

- The appellate court affirmed the trial court’s deficiency judgments for the Munaos on the promissory note and the lease, including the $9,067.07 credit on the note.
- The court held the Munaos did not accept the collateral in full satisfaction of the debt because acceptance (strict foreclosure) required the secured party to provide statutory written notice, which was not done.
- The court held that any Article 9 noncompliance did not automatically eliminate a deficiency; it raised a rebuttable presumption that the collateral’s value equaled the debt, and the Munaos rebutted that presumption with competent evidence of the collateral’s fair market value (the appraisal credited by the trial court).
- The court rejected the Buyers’ goodwill argument because goodwill was not included in the security agreement and, in any event, the evidence supported a finding that any goodwill had been damaged or dissipated by the time of default.
- The court upheld the trial court’s finding that there was no agreement to discharge the Buyers’ obligations based on surrender of the keys, deferring to the trial court’s credibility determinations.

## Legal Principles

- Acceptance of collateral in full satisfaction of an obligation under former U.C.C. § 9-505(2) requires the secured party to give the debtor the written notice specified by statute; repossession and use of collateral, without that notice, does not by itself establish strict foreclosure.
- In Illinois, a secured party’s failure to comply with Article 9 notice or disposition requirements generally triggers a rebuttable presumption that the collateral’s value equals the outstanding debt, rather than an automatic bar to a deficiency.
- The secured party may recover a deficiency by producing reliable evidence of the collateral’s fair market value sufficient to overcome the presumption.
- The collateral subject to a security interest is determined by the security agreement’s description; intangible value such as goodwill is not treated as collateral when it is not included in the agreement.
- Whether the parties formed an agreement releasing liability (such as an accord based on surrender of keys) is a fact question reviewed with deference to the trial court unless the finding is against the manifest weight of the evidence.

## Conclusion

In *Munao v. Lagattuta*, the Illinois Appellate Court affirmed deficiency judgments for the restaurant sellers after the buyers defaulted, holding that repossession and temporary operation of the business did not constitute strict foreclosure absent the statutory written notice, that any Article 9 defects created only a rebuttable presumption rebutted by appraisal evidence of collateral value, that goodwill was not part of the collateral and had been compromised by the buyers’ conduct, and that the trial court reasonably found no agreement releasing the buyers upon return of the keys.


Munao v. Lagattuta, 691 N.E.2d 818 (1998)