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."