Unhappiness, most likely! The failure of a business is an
emotionally and economically challenging matter. Knowing what
lies ahead and some of the possible defenses to be considered may
ease the pain.
The seller or finance company (secured party) holding the
security interest in the repossessed equipment (collateral) will
proceed to sell the 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.
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 reasonable manner.
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
as follows: "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 Commercial Code
"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? When faced with economic
difficulty, consider your economic alternatives early because
with the passage of time, fewer and fewer options become
available to you.
