Lender May Wait for Judgment Before Disposing of Collateral under UCC

Many times lenders recover their collateral by performing foreclosure sales of personal property and then bringing suit against the borrower or guarantor for the balance due. This approach works but in a litigious society it can open up the lender to challenges by the borrower or a guarantor who will complain that the lender did not provide notice of the sale, sold the property at too low a price, did not provide notice of inspection, failed to advertise, or failed to mitigate damages. The complaints can be endless and are part of an overall effort to claim that the personal property was not sold in a commercially reasonable manner,

In the case of Valley Commercial Capital, LLC v Radar Aviation, Inc., 2015 WL 106162, 2015 U.S. Dist. LEXIS 1403 (S.D. W. Va. Jan. 7, 2015), the court in a non-published opinion held that a creditor may wish to file suit to recover a judgment and then sell the property.

In cases involving personal property as collateral for a debt I have sought judicial approval for the sale of the personal property prior to the sale. This protects the lenders in cases of complaints afterwards. It is easier to obtain judicial approval of a personal property sale than it is to later prove that the sale was commercially reasonable. The latter approach can be a fact question for a jury.

In Texas in cases of a real property foreclosure a debtor or guarantor could offset a deficiency judgment by the fair market value of the real property. In some cases where the borrower is going to challenge the lender at all fronts the safest course of action would be to file suit and seek a judgment and let the sheriff sell the property at an execution sale. Most likely the debtor will file bankruptcy to stop the lawsuit. However, once there is a final judgment the borrower’s ability to contest the debt or execution become limited.

If the collateral is a significant real estate development where the developer has gone south then the lender should consider using the receivership statute and let the court appoint a state court receivership to handle the property and its disposition. This will place the decisions over the collateral in the hands of the receiver instead of the lender whose actions would be challenged by the borrower.