There are times when a person may
borrow money to be able to buy (or lease) something, such as a motor
vehicle. In turn, the person borrowing
the money may be required to give a security interest in the item purchased, as
collateral to guaranty the debt to the lender.
If the money owed is not repaid to the lender as agreed, the lender may
have the right to take possession of the item and sell it as may be
commercially reasonable. If the money
obtained from the sale is not enough to pay off the debt, the lender may sue
the borrower for the amount still owed.
The plaintiff says that is what
happened in this case. The defendant,
however, denies that the sale of the (item) was done in a commercially
reasonable manner.
When there is a dispute as to whether
the sale of the secured collateral, in this case, the (item), took place in a
commercially reasonable manner, the plaintiff[2]
— the creditor — has the burden of proving by the greater weight of the
believable evidence that the method, manner, time, place and terms of the sale
were commercially reasonable.[3]
What do I mean when I say that you must
measure plaintiff’s conduct in selling the (item) against the standard of
commercial reasonableness? Commercially
reasonable would be a sale in the usual manner in any recognized market,[4]
or a sale in conformity with reasonable commercial practices among dealers in
the type of property sold.[5] If there is no recognizable public market for
the item, but the plaintiff is aware of a particular buyer with a need for the
item, a private sale might be commercially reasonable. However, ordinarily, the preferred method is
a public sale. That would be a sale by
auction[6]
where the public, particularly including the knowledgeable trade public, is
invited by earlier advertisement to appear and bid for the item to be
sold. The item should be available for
inspection by bidders before the sale.
The notice of sale “(1) . . . must be published sufficiently in advance
of the sale to allow [potential] interested bidders an opportunity to
participate. (2) it must be aimed at the
market reasonably expected to have an interest in purchasing collateral; (3) it
must set out the exact time and place of the sale[7];
(4) it must sufficiently describe the collateral to be sold so as to allow
potential bidders the opportunity to make an informed decision; and (5) it must
be published in such a manner as to assure the best possible price.”[8] Reasonable notice must also have been given
to the defendant of the time and place of the proposed sale.[9]
“Factors to be considered include the
probable value of the security as determined by a reputable appraisal or
reliable indicia of value consistent with the nature of the collateral; the
cost of notice; the specialty or general nature of the market for the kinds of
goods constituting the security; and the place of notice/place of sale.”[10]
The item must be offered and sold for cash to the highest responsible bidder,
and bidders must know of the other bids and be permitted to raise their bids.[11] The place of the sale must be accessible to
the general public.
The fact that a better price could have
been obtained by a sale at a different time or in a different method than that
selected by the plaintiff is not of itself sufficient to establish that the
sale was not made in a commercially reasonable manner.[12] However, the plaintiff has “the obligation to
make a good faith effort to obtain the highest possible price for the item.”[13] A substantial difference between the price
received and the (item’s) fair market value is relevant in deciding whether the
sale was commercially reasonable.[14] In determining the fair market value, it is
the price at which the property would change hands between a willing buyer and
a willing seller when the former is not under any compulsion to sell, both
parties having reasonable knowledge of the relevant facts.[15]
If the secured party either sells the collateral in the usual manner in
any recognized market or if he/she sells at the price current in such market at
the time of his/her sale or if he/she has otherwise sold in conformity with
reasonable commercial practices among dealers in the type of property sold,
he/she has sold in a commercially reasonable manner.[16]
The number of bidders at the sale may
also be meaningful.
Judge the conduct in selling the (item)
by considering how well plaintiff has succeeded in realizing the maximum resale
price without creating a great expense for that sale in keeping with prevailing
trade practices among reputable and reasonable businesses engaged in the same
or similar enterprises.[17] Decide whether plaintiff has shown by the
greater weight of the evidence that it sold the (item) in a commercially
reasonable manner. In calculating the
amount due the plaintiff, the expenses of reparation and sale could be added to
the indebtedness before crediting the fair market value of the security if
there had been an appropriate sale.[18] The plaintiff has “the burden of showing that
a commercially reasonable sale of the collateral would have yielded less than
the balance due.”[19]
If you find that the sale was not
conducted in a commercially reasonable manner, the next issue is whether the
plaintiff is entitled to a deficiency.
If plaintiff has not established that
the sale was commercially reasonable, there is “a presumption that the value of
the collateral is equal to the amount of debt.
Unless this presumption is rebutted, no debt remains.”[20]
To
“overcome the presumption that the value of the collateral at least equaled the
debt it secured, . . . plaintiff may introduce independent proof of the fair
and reasonable value of the collateral (plus or minus any payments or charges
incurred in disposing of the collateral) and comparing it with the price
achieved at the actual sale.”[21] The defendant may also present evidence as to
the proof of value.[22]
If you find that plaintiff has not
rebutted the presumption that the fair and reasonable value of the collateral
was equal to the amount of the debt, you must find in favor of the
defendant. If, on the other hand,
plaintiff has satisfied its burden of showing that the fair and reasonable
value of the collateral was less than the amount of the debt, you must find in
plaintiff’s favor for the deficiency owed by the defendant.
However, defendant may be entitled to
damages for “the difference between the amount actually recovered and the
amount that should have been recovered had there been a commercially reasonable
sale.”[23] Thus, the deficiency found to be due and
owing to plaintiff may be offset by defendant’s damages.
[4]Some
cases have held that there is no recognized market for used automobiles. Norton
v. Natl. Bank of Commerce, 398 S.W.
2d 538 (Ark. 1966); Commun. Mgmt. Assn.
v. Tousely, 505 P.2d 1314 (Co.
1973); Turk v. St. Petersburg Bank and T.
Co., 281 So. 2d 534 (Fla. 1973); Nelson v. Monarch Invest. Plan, 452 S.W. 2d 375 (Ky. 1970); Alliance Discount Corp. v. Shaw, 171 A. 2d 548 (Pa. 1961).
[18]Midlantic National Bank v. Coyne, 222 N.J. Super. 649, 655 (Law Div.
1987). While there is no appellate court
decision on the issue of whether the nature of the debtor’s relief is for the
court or jury, in the case of Midlantic
National Bank v. Coyne, the Honorable Leo Yanoff presented the issue to the
jury.
[23]Midlantic National Bank v. Coyne, 222 N.J. Super. 649, 655 (Law Div. 1987). While there is no appellate court decision on
the issue of whether the nature of the debtor’s relief is for the court or
jury, in the case of Midlantic National
Bank v. Coyne, the Honorable Leo Yanoff presented the issue to the jury.
