UCC Article 9 Requirement of Disposing of Collateral In A Commercially Reasonable Manner

n collection cases involving secured debt, a court may preclude judgment if the plaintiff did not properly notify or dispose of the collateral in a commercially reasonable manner. In one of my recent cases where I opposed a lender’s motion for summary judgment, I cited this requirement in our opposing brief:

The Court in Coxall v. Clover Commercial Corp., 4 Misc.3d 654, 658-59 (Civ. Ct., Kings Co. 2004) summarized the law and procedures that govern here:
“After [the creditor] took possession of the [collateral], it was obligated to deal with the [collateral] in accordance with the requirements of [Uniform Commercial Code] Article 9 . . . For the secured party who chooses to sell the collateral, Article 9 imposes two overriding requirements: the secured party must send “a reasonable authenticated notification of disposition” to the debtor (Revised UCC § 9–611 [b]; see also Former UCC § 9–504[3] ); and the sale must be “commercially reasonable” (Revised UCC § 9–610[b]; see also Former UCC § 9–504[3].) The Court has determined that [the creditor] failed to comply with these requirements . . . “The purpose of the notice requirement is ‘to give the debtor an opportunity to protect his interest in the collateral by exercising any right of redemption or by bidding at the sale, to challenge any aspect of the disposition before it is made, or to interest potential purchasers in the sale, all to the end that the merchandise not be sacrificed by a sale at less than the true value.’ ” . . . . “The notification must be reasonable as to the manner in which it is sent, its timeliness (i.e., a reasonable time before the disposition is to take place), and its content.” . . . The notification must be “authenticated”, as that term is defined (see Revised UCC § 9–102[a][7] ), a requirement not in issue here. “[W]hether a notification is sent within a reasonable time is a question of fact.” (Revised UCC § 9–612[a].) “A notification that is sent so near to the disposition date that a notified person could not be expected to act on or take account of the notification would be unreasonable.” (case citations and comments omitted.)

“It is a venerable principle in New York law that a creditor holding collateral security for an obligation that is guaranteed holds that collateral in trust for the guarantor, and must preserve it for the benefit of the guarantor.” Port Distributing Corp. v. Pflaumer, 880 F.Supp. 204, 208-209 (S.D.N.Y 1995) (citing, The Merchant’s Bank of Syracuse v. Comstock, 55 N.Y. 24 (1873)).
In Port Distributing Corp., the U.S. District Court summarized the reason for this rule:
“The reason for this rule is apparent—creditors may not shift unjustly the burden of a debt upon a guarantor. As one authority has observed:

A surety has an interest in any property transferred by the debtor of the creditor to secure a debt for which the surety is liable. A guarantor or a surety has the right to expect that the terms upon which the guaranty or suretyship contract was made will remain unchanged, including terms relating to collateral security furnished by the debtor or obligor. Where collateral securities are held by the creditor for the debt, he holds them in trust for the surety, who is entitled to their benefit, and to have them applied in extinguishment pro tanto of his liability. Since a surety has a right of substitution or subrogation in the event that he pays the debt, and can then compel the creditor to assign to him collateral security held for the debt for his indemnity, a creditor has no right to release or discharge such securities, and to throw upon the surety the burden of the debt which might otherwise have been paid in whole or in part out of the principal, or primary, obligor . . . A creditor who releases (rather than merely impairs) collateral without the consent of the guarantor discharges the guarantor from his or her obligations under the guarantee . . . This equitable doctrine has found its way into the New York Uniform Commercial Code. U.C.C. § 3–606 provides, for example, in relevant part, that: (1) The holder discharges any party to the instrument to the extent that without such party’s consent the holder . . . (b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against who he has a right of recourse.” Id.

 

If you have any legal questions or need help with a secured transaction under UCC Articl 9 or litigating issues regarding collateral, please contact Attorney Scott Lanin at (212) 764-7250 x 201 or use the contact form in the right sidebar.