Creditor May Repossess Collateral And Sue For Full Debt Simultaneously, And Generally Is Not Compelled To Accept Short Sale
If you work for a commercial lending institution and have ever wondered (1) whether you must accept a short sale of non-real estate collateral and/or (2) whether you first must obtain a judgment before repossessing that collateral, then SFG v. N59CC, 2010 U.S. Dist. LEXIS 20931 (N.D. Ind. 2010) (.pdf) will be of benefit to you.
Enforcement measures. SFG involved the standard parties to a commercial loan enforcement action: a lender (the plaintiff), and a borrower and guarantors (the defendants). The loan was for $1,020,000, and the collateral was an aircraft. Upon the loan default, the lender filed a lawsuit based upon the promissory note and security agreement. While the suit was pending (before judgment), the lender repossessed the aircraft. Later, the lender filed a motion for summary judgment seeking the entire amount of the debt. The SFG opinion dealt with the borrower/guarantors’ objection to the motion.
Parallel tracks fine. The UCC, which governed the lender’s remedies, did not require the lender to choose between two remedies of money judgment and repossession. The lender was “well within its authority to pursue a judgment against [borrower and guarantors] for the default while simultaneously repossessing the aircraft.” Ind. Code § 26-1-9.1-601 states that, after a debtor defaults, a secured party may “reduce a claim to judgment, foreclose, or otherwise enforce the claim.” The secured party’s rights are “cumulative and may be exercised simultaneously.” (But be sure to check your security agreement for self-help and repossession rights and/or limitations.)
Double recovery? Theoretically, the pursuit of multiple remedies could give rise to the recovery of more than the original debt. However, SFG reminds us that the “check on a plaintiff’s right to pursue multiple remedies . . . is the requirement that a plaintiff proceed in a commercially reasonable manner and apply the proceeds of the disposition to the amount owed by the defendant.” See I.C. § 26-1-9.1-608 through 610. This means, among other things, that the lender in SFG must later account to the defendants for any proceeds of the sale of the aircraft.
Short sale lost. While the motion for summary judgment was pending, a “short sale” offer for the aircraft surfaced that would have netted $570,000 to the lender. The defendants conceded that the aircraft was worth more but were inclined to move forward anyway, assuming the lender committed to structure a settlement for the payment of the remaining balance (the deficiency). For a variety of reasons, the lender allegedly failed to “seal the deal,” so the sale never occurred. The defendants claimed that, to their detriment, the lender failed to act in a commercially reasonably manner. The defendants contended that any judgment amount should therefore be reduced by $570,000.
Commercially reasonable? Judge Simon devoted a substantial portion of his opinion to a discussion of whether the contemplated short sale was “commercially reasonable” or whether the lender’s alleged failure to agree to the short sale was “commercially reasonable.” In the end, Judge Simon overruled the defendants’ objection to the motion for summary judgment on the grounds that issues of commercial reasonableness were not ripe for adjudication.
If [lender] fails to conduct its sale of the plane in a commercially reasonable manner, [borrower or guarantors] may then bring an action to recoup any loss. In the meantime, because [borrower and guarantors] concede liability and the amount of damages under the agreements, summary judgment in this action is proper.
Short sale not mandated. The defendants’ only chance of making any hay out of the lost short sale in SFG will be if, post-judgment, the lender fails to liquidate the aircraft for more than $570,000.00. Conceivably, the defendants in SFG could then pursue a claim against the lender to recover the difference - by establishing that the lender failed to act in a commercially reasonable manner for not accepting the prior short sale. Even then, however, there would be a multitude of factors that will go into the validity of such a claim, including an examination of the proposed short sale terms and conditions as compared to those of the subsequent liquidation sale. Under the circumstances in SFG, the creditor was not initially compelled to accept the short sale.