My Equipment Has Been Repossessed!
What Happens Next?

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 6 machines were repossessed, all of the machines may be sold as a unit or 3 parcels of 2 machines 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.

[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 Fabricare
Myles M. Mattenson © 2006