Commercially Reasonable Sale Method Proposed By Debtor is Golden

Article 9 of the Uniform Commercial Code requires a secured party to dispose of collateral in a commercially reasonable manner. In KeyBank, N.A. v. Hartmann, 2014 U.S. Dist. Lexis 19760 (E.D. Ky. Feb. 18, 2014), the court was faced with the issue of whether the bank sold the collateral in a commercially reasonable manner when it used the method suggested by the Debtors but used a third-party to sell the collateral instead of the debtors who were in the business of selling that type of collateral.

In KeyBank, the borrowers managed a company that sold and serviced luxury boats. The company had a ten million revolving line of credit with KeyBank which had a perfected security interest in the company’s assets and was personally guaranteed by debtor and his wife. Debtors filed for bankruptcy and the bank recovered possession of six yachts. Debtors offered to broker the sale of the yachts and the bank refused. However, the bank used the same proposal suggested by debtors but with a third party broker. The third party broker sold the yachts and obtained a higher price than debtors’ proposal. When the issue of commercially reasonableness came up in the bank’s motion for summary judgment against the debtors under the guarantee, the Court granted summary judgment for the bank and held that the sale was commercially reasonable because the bank obtained a better price, maximized the sales price and used the method suggested by the debtors.

The moral of the story for the debtors is to be careful what you wish for, because you might get it. Commercial reasonableness and insuring that the appropriate notices have been given are key components to review when collateral is sold under Article 9 of the Uniform Commercial Code. Using a method suggested by the debtor may be found to be commercially reasonable and the debtor may not be able to complain later about the method of the sale. The opinions of this blog are solely the author’s and any comments, suggestions and replies should be sent to john@jrjoneslaw.com.

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