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."Continue Reading Secured Creditor’s Sale Of Collateral The Day After Christmas Wasn’t Commercially Reasonable

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