SECURED TRANSACTIONS
Fall Semester 2015
PROBLEM SET 21
Disposition/Sale of Collateral
Secured Party’s Liability for Noncompliance/Deficiency Judgments
Strict Foreclosure
Carefully read the following:
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Chapters 18 and 19 of UNDERSTANDING SECURED TRANSACTIONS
§§ 9-601 through 9-628
1.
Your law school classmate Dennis Green calls you and says: “I have a client, Joe Smith,
who owes me $20,000 in fees on a criminal matter for which I represented his kid. I have a
security interest in his accounts receivable (he has a plumbing business). The $20,000 in fees is
now past due. One of his big customers, JCN, owes Joe $30,000 for work Joe did last month on
a commercial plumbing job. I plan to call JCN and tell them to pay me the $20,000 directly, in
satisfaction of their account obligation. Can I do that?” What’s your response?
2.
Just before lunch, you get a call from Joe Smith at Neighborly Finance:
We have a security interest in a Ferrari owned by Anne Bray, who still owes us $120,000.
We repossessed the Ferrari and turned it over to Midwest Auto Auctions, which conducts
“dealer auctions” of used cars. We gave notice to Bray that the Ferrari would be sold in a
private sale after November 1, 2015.
On October 25, we got a call from Frank Bowman, who identified himself as a friend of
Bray and stated that he would buy the Ferrari for $110,000. We told him that Neighborly
Finance has a policy of disposing of vehicles only in dealer auctions.
On November 5, 2015, Midwest Auto Auctions conducted a dealer-only auction at which
the Ferrari sold for $100,000. We then called Bray and demanded that she make
arrangements to pay the $20,000 deficiency. She said that she doesn’t owe us any
deficiency because we acted in a commercially unreasonable manner by turning down an
offer that was higher than the price we ultimately sold the car for. She also says that we
acted unreasonably because we sold the car without first fixing the stereo or the air
conditioning system (which is true — we sold it “as is”). Did we mess up, or can we get
a deficiency from Bray, and if so, for how much?
What’s your advice to Joe Smith? What additional information, if any, do you need?
3.
During lunch with Sara Jones at First Bank, she tells you that First Bank wants to
implement a policy in which it would sell any repossessed cars in online auctions using e-Bay
Motors. She says: “I was at a bank conference last week, and heard from a friend that they were
clearing 5% higher prices using e-Bay Motors for collateral sales. My boss is enthusiastic about
that number.” What potential problems would you see with such a policy? What advice would
you give to First Bank if they determined to implement such a policy? Would a sale by e-Bay
Motors be a public sale or a private sale? Why would it matter?
4.
After lunch, you get an e-mail from Dan Arthur at Atlantic Commercial Finance:
Two years ago, ACF extended a line of credit to Lambert Contracting, secured by all of
its present and after-acquired equipment. Three months ago, Lambert went into default.
ACF repossessed a bulldozer and a crane, and sold them separately in two public auction
sales. The high bidder for the bulldozer was ABC Builders. We ended up purchasing the
crane by way of a credit bid. As it turns out, we did not give Lambert proper notice of
the sale, and Lambert has now brought an action seeking to invalidate the sale and
recover possession of the bulldozer and the crane. Can Lambert actually set aside the
sales?
What’s your response? What additional information, if any, do you need?
5.
Later in the day, you get another call from Dennis Green:
Four years ago, I loaned Sam Rubble (the son of a friend of mine, Barney Rubble)
$60,000 to finance his law studies, and took a security interest in Barney’s Mercedes
(which he had won in a contest) to secure Sam’s repayment obligation. Last semester,
however, Sam flunked out of law school for good, and I repossessed the Mercedes. With
accrued interest, Sam owes me $70,000, and the car is worth (at most) $50,000. Sam
can’t get a job, and so any deficiency judgment against him would be worthless. I’ve
always wanted a Mercedes, so I want to just keep the car. Can I retain title to the car in
satisfaction of the debt? If I do keep the car, can I preserve the right to recover a $20,000
deficiency judgment against Sam if he does get a job?
What’s your advice?
6.
You get another call from Bubba Charles at Putnam County Bank:
One of our borrowers, Tiger Fans (which sells ceiling fans), has operated its store using a
line of credit from us. We have a security interest in all of their inventory. Yesterday,
the owner of Tiger Fans called us and said “I’m shutting down the store.” Twenty
minutes later, he came in and handed me the keys to the store and disappeared. We’ve
decided to open the store this morning and have a “going out of business” sale. We’ll
pay the store’s two employees to sell the rest of the inventory to regular customers, with
all the money being applied toward the line of credit (we’ll pay them a commission for
each sale). They are confident they can have all of the inventory sold within two weeks.
Anything else that’s left after that, we’ll just donate to local charities. Let me know if
you see any problem with our proceeding this way.
How do you respond to Bubba? What should he do differently?