Secured Creditor's Sale Of Collateral The Day After Christmas Wasn't Commercially Reasonable

If you are a secured creditor trying to sell off the collateral securing your loan in a "commercially reasonable manner" under North Carolina's Uniform Commercial Code, it's not a good idea to advertise the sale right before Christmas and have the sale right after Christmas.

That's at least part of the lesson from the North Carolina Court of Appeals last week in Commercial Credit Group, Inc. v. Barber, where the Court ruled that the secured creditor's Christmas-time sale had not been commercially reasonable, and denied its request for a substantial deficiency judgment.

The Facts

Barber had given his lender a security interest in a Peterson Pacific 5400 heavy duty waste recycler, a specialized piece of commercial equipment which grinds logs into wood chips.

The recycler broke down almost immediately after Barber bought it. The dealer wasn't able to repair it, and Barber defaulted on his loan to Commercial Credit because he couldn't generate any revenue from the recycler. The creditor took possession of the broken down recycler and gave Barber written notice that it would sell it at public auction on December 27, 2007.

Commercial Credit complied literally with the terms of its security agreement with Barber, which said that a public sale "will be deemed commercially reasonable" if (1) the Debtor had ten days notice of the sale, (2) the sale was advertised twice in at least one newspaper in the area of the sale, and (3) the terms of sale were 25% down plus the balance within 24 hours.

Commercial Credit gave ten days notice. It advertised the sale twice (on December 23rd and 26th) in general publication newspapers. It stated in the ads that 25% down would be required, but with a slight variation that turned out to be a problem, and said that the sale would be "as is," which also turned out to be a problem.

Only one bidder other than Commercial Credit showed up at the December 27th sale. Commercial Credit made the only bid of $100,000. Commercial Credit sold the recycler a few months later at a private sale for $90,000 more than its bid, but still sued to recover the full $128,000 difference between its auction bid and the outstanding balance on the loan.

The trial court ruled that the sale hadn't been conducted in a commercially reasonable manner and rejected Commercial Credit's claim for a deficiency judgment. The Court of Appeals affirmed, taking issue with the content of Commercial Credit's advertising of the sale, and the timing of the advertisements about the sale.

Problems With The Timing Of The Advertisements

The Court of Appeals found fault with the timing of the ads run by Commercial Credit right before and after Christmas. Judge Robert N. Hunter said that a public sale was one where "the public has had a meaningful opportunity for competitive bidding," and that the advertisements by Commercial Credit were insufficient to generate that "meaningful opportunity":

The recycler at issue in this case has a narrow commercial use, and as a result, the pool of bidders potentially interested in this equipment was necessarily limited from the outset. This fact was then inexplicably exacerbated by Creditor’s decision to run advertisements for the auction in two general circulation newspapers just two days before and one day after the Christmas holiday. Obviously, scheduling a public auction for a highly specialized and expensive piece of inoperable machinery just two days after Christmas would almost certainly not enhance “competitive bidding” under N.C.G.S. § 25-9-610. Perhaps the best evidence of the result of Creditor’s decision was that only one other person in addition to Creditor attended the auction.

According to the Court, Commercial Credit "should have chosen a more appropriate date of sale, and tried considerably harder to market the recycler by targeting legitimate prospective buyers." It said "there is no excuse for putting forth clandestine advertisements that are misleading, obtuse, and targeted to no one during the busiest holiday season of the year."

Problems With The Content Of The Advertisements

The Court of Appeals also found fault with the terms of the sale presented by Commercial Credit. It said in its advertisement that it could "in its sole discretion require payment in full of a larger percentage of the bid price at the time of the auction." This ran contrary to the requirement of the security agreement of a 25% deposit.

Judge Hunter found this to be a material variance from the terms of the security agreement, "because there may have been buyers willing to bid if only a 25% down payment was required at sale rather than the entire bid price."

The secured creditor also said in the advertisement that the recycler was being sold "as-is, where-is, without any representations or warranties." But the recycler was covered by a 6,000 hour extended warranty and its engine was covered by a 1,970 hour warranty. The Court found this to be misleading, stating that "[i]t is common sense that an inoperable piece of machinery with a warranty is more attractive to a potential bidder than an inoperable piece of machinery without one."

The Court ruled that the "gross disparity" between the amount recovered by Commercial Credit when it resold the collateral and the amount it bid at the sale "was a direct result of commercially unreasonable advertising methods."

You Can Count On This Case For A Good Discussion Of The Law Of Agency

The Business Court's decision yesterday in Leiber v. Arboretum Joint Venture, LLC, 2009 NCBC 16 (N.C. Super. Ct. July 8, 2009) involved the law of agency: whether a German Count named Spreti had been acting as Plaintiff's agent when the Defendant LLCs and partnerships sent Plaintiff's share of distributions to Spreti. A large chunk of the money was then stolen by Spreti.

Plaintiff Leiber, a German citizen, had put money at the urging of Spreti in a number of United States investments (the "AAC entities"). The AAC entities were operated by two other Germans, Count and Countess Arco. Over a fifteen year period, the AAC entities sent hundreds of thousands of dollars of Leiber's distributions and tax refunds to Spreti. 

Spreti paid some of the money he received to Leiber, but kept hundreds of thousands of dollars of Leiber's money for himself. Leiber knew that his payments were sent to Spreti, but he never objected to this practice and apparently wasn't very attentive to his investment.  Leiber began to suspect Spreti's misconduct, but Spreti committed suicide the night before the two were to meet to discuss matters.

The specific distributions at issue in the case were payments to Leiber for redemption of his interests in two of the AAC entities. Spreti received both of these payments.  One was a Wachovia Bank check for $151,274 and the other a Bank of America check for $254,858.  Spreti forged Leiber's indorsement on the checks, cashed them, and kept the money.

After Spreti's suicide, Leiber sued the AAC entities, alleging that they had improperly sent the checks to Spreti.  He also sued Wachovia and Bank of America, alleging that they had improperly paid the checks over Spreti's forged indorsement.

Agency Issues

The defense of the AAC entities was that Spreti had been acting as Leiber's agent, and they therefore had acted appropriately in sending Leiber's distributions to Spreti. The opinion contains a thorough discussion of the law of agency, including actual authority, apparent authority, apparent agency, agency by estoppel, and ratification.

Judge Tennille determined that although Leiber had not expressly authorized Spreti to act as his agent, there were a number of legal theories on which Spreti would be deemed to be Leiber's agent:

  • Spreti had implied actual authority to act for Leiber, because Spreti had acted as Leiber's only contact with the AAC entities for 15 years; and Leiber knew that his checks were being sent to Spreti and had never objected to that practice.
  • Spreti had apparent authority to act on Leiber's behalf, because Leiber had held Spreti out to the AAC entities as having authority to act for him by using Spreti to manage his investments in the AAC entities for 15 years.
  • An apparent agency relationship existed between Leiber and Spreti, because Leiber's silence regarding the checks sent to Spreti caused the AAC entities "to believe an agency relationship existed" and the AAC entities had relied on Leiber's action to their detriment.
  • Because Spreti was the general partner of two of the AAC partnerships, he was deemed to be Leiber's agent.

The Court further determined that even if there were no agency relationship, Leiber's fifteen year silence regarding the checks was a ratification of Spreti's unauthorized acts. The Court granted summary judgment on all of Leiber's claims against the AAC entities, as they all depended on the argument that Spreti had not been authorized to receive checks on Leiber's behalf.

The Forged Indorsements

The Bank of America check on which Spreti forged Leiber's indorsement had been deposited by Spreti at his account at a German bank, Oberbank.  Oberbank transferred the check to Wachovia for collection. Wachovia then presented the check to Bank of America for payment, and Bank of America made payment in full.

Bank of America crossclaimed against Wachovia on its liability for the payment of this check, contending that Wachovia had breached the presentment warranty of N.C.G.S. §25-3-417(a)(1), which is a warranty that there are no unauthorized or missing indorsements on a check presented for payment.  Presentation warranties are breached if a check contains a forged indorsement.

Judge Tennille ruled that the presentment warranty had been breached, and that Wachovia was liable to Bank of America on its crossclaim  He observed that Wachovia was free to go "down the collection chain" to the German bank at which the check had been deposited.  Under the UCC, final liability "rests ultimately on the initial depository bank which presumably could have guarded against the loss by inspecting the indorsement more closely."