Section 16 Direct Collection of Accounts From Third Parties

• Library: Secured Transactions 2005

It is well understood that one of the main goals of the Missouri UCC is to allow the secured creditor the power and right to enforce its rights in collateral held by the borrower. This is true especially when the collateral is the borrower’s claim against, or right to payment from, a third party. Section 400.9-607(a), RSMo Supp. 2004. Thus, for example, the collection of an account from an account debtor may occur after default or, if agreed to by the borrower, before default. Id.

C. (§7.17) Disabling Collateral

Revised Article 9, like its predecessor, allows the secured creditor to disable collateral in addition to relying on the remedy of repossession. In fact, there is authority that disabling collateral is an option when a borrower threatens violence and the repossession cannot be completed without a breach of the peace. See Jonaitis v. Gen. Motors Acceptance Corp., 374 F.2d 867 (7^th Cir. 1967) (“trespass will not lie against one who, with a right to repossess, disables the car . . . after being told he cannot take possession”). Disabling collateral is an important alternative when the collateral is either highly mobile, such as a car, or immobile but subject to depreciation through use, such as a piece of heavy equipment. 20C V.A.M.S. § 400.9-609 cmt. 6 (2003).

D. Foreclosure

1. (§7.18) “Commercially Reasonable” Standard

After default and when the secured creditor is in possession of the collateral, it may dispose of the collateral in a commercially reasonable manner. Section 400.9-610, RSMo Supp. 2004; Ford Motor Credit Co. v. Henson, 34 S.W.3d 448, 450 (Mo. App. S.D. 2001) (addressing commercially reasonable requirement under former Article 9). The sale can be either public or private but must be commercially reasonable “in every aspect . . . including the method, manner, time, place and terms.” Commercial Credit Equip. v. Parsons, 820 S.W.2d 315, 320 (Mo. App. W.D. 1991).

When discussing whether a secured creditor conducted a commercially reasonable foreclosure sale, price is a very important factor. For this reason, use of an expert to appraise the collateral can be very important for a secured creditor to support, and the borrower to attack, a conclusion that the secured creditor held a commercially reasonable sale. See Commercial Credit, 820 S.W.2d at 321 (holding that the sale was not commercially reasonable, in part because of testimony by the borrower’s expert that a similar tractor would sell for more than four times the price obtained by the secured creditor). But “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.” Jefferson Bank & Trust Co. v. Horst, 599 S.W.2d 201, 204 (Mo. App. E.D. 1980). In Commercial Credit, the trial court found that the sale of the tractor directly by the secured creditor, rather than through a dealer of that type of equipment, the failure to fix damage that occurred to the collateral after repossession, and the price that was far below market value supported the conclusion that the sale was not commercially reasonable. See Commercial Credit, 820 S.W.2d at 320–22. The appellate court reversed the trial court’s decision because of some unique facts, including the borrower’s decision to borrow more money to purchase an identical tractor rather than pay the creditor to obtain the repossessed tractor. Id. at 322.

The existence of an appraisal is not sufficient to definitively support or attack the commercial reasonableness of a sale. See Key Bank of Me. v. Dunbar, No. Civ.A.94-CV-2556, 1995 WL 541778 at *7 (E.D. Pa. Sept. 11 1995). But an appraisal is, nevertheless, important because it can be used to evidence critical evaluation of the collateral and sale, showing knowledge of the possibility of the sale being, or not being, commercially reasonable because of a significantly lower price. See id. Other common issues include those discussed in §§7.19–7.21 below.

a. (§7.19) Duty to Publicize

If the collateral is unique, special precautions should be taken in advertising the sale. In these situations, the secured creditor will need to be mindful of the customary methods of advertising in the respective industry of the collateral. See Contrail Leasing Parts., Ltd. v. Consol. Airways, Inc., 742 F.2d 1095, 1099 (7^th Cir. 1984) (finding that a sale was not commercially reasonable when the secured creditor failed to conspicuously place advertisements in sufficient airplane trade publications); Smith v. Daniels, 634 S.W.2d 276 (Tenn. App. 1982) (holding that a sale was commercially unreasonable because the customary practice for sale of amusement equipment in Tennessee required advertising that substantially differed from the advertising actually used by the creditor). In Missouri, there is authority that merely failing to advertise a sale does not automatically result in the sale being commercially unreasonable. See Jefferson Bank & Trust Co. v. Horst, 599 S.W.2d 201, 204 (Mo. App. E.D. 1980) (regarding the sale of a mobile home). But even minimal notice, such as notices posted in public, is advised. See Bank of Houston v. Milam, 839 S.W.2d 705 (Mo. App. S.D. 1992) (holding that three notices posted in public were adequate to support the trial court’s finding that the sale was commercially reasonable).

b. (§7.20) Timely Disposition

The time a secured creditor takes to sell the collateral can also become a significant factor in determining the commercial reasonableness of a sale. As with the method and manner of advertising, the collateral will dictate the time within which a secured creditor must conduct the sale in order for it to be commercially reasonable. At one extreme, the concern may be whether the sale was conducted too soon after the repossession, not allowing sufficient time to locate potential buyers. Key Bank of Me. v. Dunbar, No. Civ.A.94-CV-2556, 1995 WL 541778 at *6 (E.D. Pa. Sept. 11, 1995). “The failure of a secured party to take the time necessary to explore and reach the potential market is also material in determining commercial reasonableness.” Id. At the other extreme, several courts have concluded that a prolonged retention before the sale resulted in the creditor impliedly electing to retain the collateral in satisfaction of the debt, which resulted in the creditor losing the right to a deficiency. See Haufler v. Ardinger, 28 U.C.C. Rep. Serv. 893 (Mass. App. Div. 1979) (finding that the sale of machinery after the...