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1st Cir. Holds ‘Fairly Conducted’ Sale of Collateral Not Necessarily ‘Commercially Reasonable’

The U.S. Court of Appeals for the First Circuit recently held that a genuine dispute of material fact precluded summary judgment on the issue of whether the sale of collateral was “commercially reasonable,” even though there was no evidence that the sale was not “fairly conducted.”

A copy of the opinion in Harley-Davidson Credit Corp. v. Galvin is available at: Link to Opinion.

small plane on tarmacThe assignee of a loan secured by an interest in an aircraft sued the guarantor of the loan to collect $108,681.50, the deficiency that remained after the assignee sold the collateral through a third-party dealer.

Pursuant to the loan documents, the assignee repossessed the plane and moved it to Florida into the custody of the third-party dealer. While in the third-party dealer’s custody, the plane was vandalized and its avionics components were stolen.

Approximately two months later, the assignee sold the plane in “as-is” condition for $155,000. The sales agreement, however, required the seller to replace the missing components.

After deducting the cost of replacing the missing equipment and additional repairs, the assignee demanded payment of $108,681.50 from the guarantor and sued in New Hampshire federal district court to collect this deficiency based on diversity jurisdiction.

The assignee moved for summary judgment early in the action, which was denied without prejudice. After discovery, the assignee filed a second motion for summary judgment, which the district court granted, finding that the guarantor had not raised a genuine issue of material fact as to whether the sale was “commercially reasonable” because, the district court held, selling repossessed collateral through a dealer, if such sale is “fairly conducted,” is recognized as commercially reasonable.  The guarantor appealed.

On appeal, the First Circuit explained that the district court, based on its finding of commercial reasonableness, apparently determined that the assignee had met its initial burden and therefore shifted the burden of proof to the guarantor to raise a genuine issue of material fact.

The Court noted that the applicable Nevada law, which governed the loan documents, placed the burden on the creditor to prove that the sale of the collateral was commercially reasonable. Reasoning that the party bearing the burden of proof at trial also bears the burden of proof at the summary judgment stage, in this case to show that no reasonable trier of fact could find other than that the sale was “commercially reasonable,”  the First Circuit found that the district court prematurely shifted the burden of proof to the guarantor.

The Court rejected as misplaced the assignee’s reliance on a Nevada Supreme Court case, Jones v. Bank of Nevada, because that opinion did not hold that using a dealer alone qualifies a sale as “commercially reasonable” regardless of whether the sale was “fairly conducted.”  Instead, the First Circuit noted, the Jones ruling states the opposite: use of a dealer must also be “fairly conducted.”

The First Circuit reasoned that the assignee must show, under the facts at issue here where the repossessed collateral was vandalized while in the dealer’s care such that the plane could not be flown, that the dealer’s disposition of the collateral was in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

The Court rejected the assignee’s argument that the guarantor’s consent to using the dealer in question and communications leading up to the sale made the sale commercially reasonable, because the assignee cited no Nevada authorities in support of its interpretation of Nevada law.

Instead, the First Circuit found persuasive the guarantor’s argument that the missing avionics would likely have turned away buyers, concluding that a reasonable trier of fact could decide against the assignee.  It also agreed with the guarantor that there was a genuine dispute of material fact as to whether the dealer’s handling of the sale after the vandalism fell below the standard of reasonable commercial practices among such dealers.

The Court’s conclusion was not altered by damage that already existed at the time of repossession. Simply put, the Court held, a fact-finder could reasonably conclude that an airworthy plane would attract more interest and a higher price than would a non-airworthy plane that had been vandalized, even if the seller promised to repair the known damage. The Court noted that with a non-airworthy plane that has been vandalized, “the buyer may wonder what else happened to the plane and has no chance to test it out.”

Accordingly, the First Circuit concluded that because the assignee failed to show that no reasonable trier of fact could find other than that the sale was “commercially reasonable,” summary judgment should have been denied.  It reversed and remanded the case.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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