Indiana Creditor Rights: What Constitutes A Commercially Reasonable

Lenders who take possession of collateral based on a default on a loan are often concerned about ensuring that the sale of such collateral would be found to be commercially reasonable by a court if challenged. Of interest to Indiana creditors and Indiana creditor lawyers, the Indiana Court of Appeals recently had the opportunity to address commercially reasonable sales in Moore v. Wells Fargo Constr. 907 N.E.2d 1038 (Ind. Ct. App. 2009). In Moore, the lender provided a company with an approximately $558,000 loan for the refinance of an excavator. However, to secure the loan, each of the principals of the company also executed a security agreement and personal guaranty for the indebtedness. When the company defaulted on the loan, the lender took possession of the excavator, which it planned to sell to satisfy a portion of the outstanding debt. The lender sent a Notice of Disposition of Collateral to both the company and a principal against whom the lender planned to pursue a deficiency action against. The lender had some difficulty selling the excavator, but it provided notice to both the company and the individual each time it attempted to sell the excavator. Eventually, the excavator was sold for $54,000, although an earlier higher offer had been countered by the lender, and the lender filed a deficiency action against the individual. After a decision in favor of the lender, the individual argued that the sale of the excavator had not been conducted in a commercially reasonable manner. Id. at 1039.

In determining the commercial reasonableness of the sale, the Court referred to its prior decision in Walker v. McTague, where the court recognized that the Uniform Commercial Code does not define commercially reasonable sale. Id. at 1041 (quoting Walker v. McTague, 737 N.E.2d 404, 410 (Ind. Ct. App. 2000)). In Walker, the court noted that where a fair sale price is not obtained, price alone is not determinative, and the court will consider “whether there were legitimate causes for the low price or whether the low price was caused by the secured party’s failure to proceed in a commercially reasonable manner” as well as “whether the collateral is sold on a retail or wholesale market . . . the number of bids received or solicited . . . that the time and place of the sale is reasonably calculated to bring a satisfactory turnout of bidders.” Id. (quoting Walker, 737 N.E.2d at 410. The Court also noted that the court in Walker recognized the factual nature of such determinations. Id. (citing Walker, 737 N.E.2d at 410).

The Court in Moore went on to determine that the trial court did not abuse its discretion in finding that the lender’s sale of the excavator was commercially reasonable, even given that the excavator was sold for a substantially lower price than the amount of the loan. Id. at 1043. The Court considered the fact that the lender had to hire a third party to find the excavator, found it in an inoperable state and had to spend money to make it “minimally operational” and to move it. Id. at 1042. In addition, the Court noted that the lender notified the individual before each sale. Id. Also, the lender obtained an inspection and appraisal before the sale, and the market was constricted based on the size and transport costs of the excavator. Id. Although the lender had initially listed the excavator for a substantially greater price than it was ultimately sold and had received offers which were higher than the final sale price, these offers were received several years earlier, and no response from the original offerors were sent once the lender made a counter-offer. Id. The Court summarized this evidence saying that it:

shows that . . . [the lender] . . . conducted research before setting a price on the excavator; investigated the condition of the excavator, the cost of necessary repairs, the cost of transporting it; performed the repairs necessary to make the excavator minimally operational; and twice listed the excavator for each public and private sale before finding a private buyer.

Id. at 1043. Based on all these factors, the Court of Appeals affirmed the trial court’s finding that the sale was “conducted in a commercially reasonable manner.” Id.

Jeremy L. Fetty is an associate at Parr Richey whose practice focuses on corporate law, utility law, municipal law, and labor and employment law. The statements contained herein are for information purposes only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have questions regarding this article, please contact an attorney.