ARE THE OBLIGATIONS OF A SECURED PARTY
IN SELLING REPOSSESSED EQUIPMENT?
So, your coin laundry business has gone
south! So far south that your mail is
currently being delivered by short, tuxedo-adorned mail carriers with beaks!
The failure of a business is an emotionally
and economically challenging affair.
Knowing what lies ahead, and some of the possible defenses to be considered,
may ease the pain.
Although the seller or finance company
(secured party) may hold both an assignment of the lease as collateral
security, and a security interest in the repossessed equipment, there are
situations in which the secured party cannot dispose of the business as a whole
because the lease has expired or been effectively terminated.
Consequently, the secured party will proceed
to sell the equipment (collateral) at a public or private sale. In the event any portion of the debt remains
unsatisfied, the secured party will request that you pay the deficiency. If you refuse to do so, the secured party
will seek a deficiency judgment against you in court.
Although code sections governing the
disposition of collateral may vary from state to state, for the most part,
these laws are similar since they were initially part of a package of laws
proposed to the various state legislatures as a “uniform commercial code.” It is for that reason that the group of laws
pertaining to this subject are usually to be found in the Uniform Commercial
Code of each state.
The sale of the collateral, according to the
Uniform Commercial Code, "may be as a unit or in
parcels". For example, if 32 coin
operated washers were repossessed, all of the washers may be sold as a unit or
8 parcels of 4 washers may be sold separately.
The collateral may be sold "at wholesale or retail".
More importantly, the sale may be held
"at any time and place and on any terms, provided the secured party acts
in good faith and in a commercially reasonable manner."
The Appellate Courts are occasionally called
upon to determine whether a secured party has acted in a commercially
reasonable manner. In one case which
reached the California Supreme Court, a creditor lent money to a debtor to buy
an airplane and acquired a purchase money security interest in the plane. After the debtor defaulted on the loan, the
creditor advertised the sale in a newspaper, omitted information about whom to
contact to qualify as bidder, published a corrected advertisement the day
before the auction, and as the sole bidder at the auction, bought the
airplane. The secured party purchased
the plane for $1,000,000 and thereafter resold the plane to a third party for
$1,525,000, receiving, eventually, $1,487,000 from the third party
purchaser. A deficiency was nonetheless
due in the approximate amount of $996,000.
The fair market value of the airplane, however, was determined by the
Court on the date of sale to be $3,800,000.
The secured party argued that the publication
of the one notice in the newspaper constituted adequate publicity and
compliance with the requirement that the secured party act in a commercially
The California Supreme Court, however, held
the publicity inadequate and stated:
"A dealer in the type of property
repossessed here -- a valuable airplane -- surely would advertise its auction
in the relevant market by, for example, informing brokers, placing reasonably
prominent announcements in recognized trade journals, or contacting individuals
or entities known to be seeking an airplane of the type for sale."
It is essential that the secured party
provide notice of any sale to the debtor.
The Uniform Commercial Code requires that a notice in writing be
provided "of the time and place of any public sale or of the time on or
after which any private sale . . . is to be made." The failure to provide such notice will bar
the secured party from obtaining a deficiency judgment.
The purpose of such notice has been expressed
by the courts: "to give the debtor
an opportunity either to discharge the debt and redeem the collateral, to
produce another purchaser, or to see that the sale is conducted in a
commercially reasonable manner."
The notice required under the Uniform
"must be delivered personally or
deposited in the United States mail, postage prepaid, addressed to the debtor
at his or her address set forth in the financing statement or as set forth in
the security agreement or at such other address as may have been furnished to
the secured party in writing for this purpose, or, if no address has been so
set forth or furnished, at his or her last known address . . . at least five
days before the date fixed for any public sale or before the day on or after
which any private sale . . . is to be made."
In order to monitor the activities of the
secured party, it is essential that you provide the secured party with your
current address. If you have relocated,
the secured party will be in compliance merely by sending the notice to the
addresses provided by the financing documentation; the secured party does not
have to hunt the bushes for you!
In the event a sale is intended as a public
sale, the secured party must also give at least five days notice of the time
and place of any public sale "by publication once in a newspaper of
general circulation published in the county in which the sale is to be held . .
After the sale has been held, debtors have
frequently been known to complain that the secured party should have recovered
a better price by selling at a different time or by some other method than that
selected by the secured party. The Uniform
Commercial Code specifically provides, however, that
"The fact that a better price could have
been obtained by a sale at a different time or in a different method from that
selected by the secured party is not of itself sufficient to establish that the
sale was not made in a commercially reasonable manner. If the secured party either sells the
collateral in the usual manner in any recognized market therefor or if he sells
at the price current in such market at the time of the sale or if he has
otherwise sold in conformity with reasonable commercial practices among dealers
in the type of property sold he has sold in a commercially reasonable manner."
The moral of the story? Don’t let business reversal paralyze you into
accepting the future planned for you by the secured party. Obtain counsel. Replace your emotionally-distraught state of
mind with objectivity and clear thinking!
[This column is intended to provide general information only and
is not intended to provide specific legal advice; if you have a
specific question regarding the law, you should contact an
attorney of your choice. Suggestions for topics to be discussed
in this column are welcome.]
Reprinted from The Journal
Myles M. Mattenson © 2004