Preserving Your Right to Deficiency after the Repossession and Sale of Collateral

Any bank or business that provides financing for the purchase of vehicles or equipment will inevitably be faced with the task of enforcing its rights against the secured collateral. Often, the collateral's value will be insufficient to pay the entire obligation due.  The Uniform Commercial Code allows for the recovery of a deficiency balance in the absence of full recovery from a collateral sale.  However, the UCC's legal formalities must be observed in order to preserve your right to any deficiency.   

Ohio Revised Code 1309.610 (UCC 9-610) allows a creditor to dispose of secured collateral after a default.  However, the disposition of the secured collateral must be "commercially reasonable".  Ohio Revised Code 1309.610(B) states that:

Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, at any time and place, and on any terms.

While the UCC allows disposition of the collateral at a public or private sale, the UCC requires that proper notices be sent to all obligors on the debt.¹  The UCC also requires that the notice be sent in a timely manner.  Ohio Revised Code 1309.612(B) (UCC 9-612) requires that "[a] notification of disposition sent after default and ten days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition."

Even if you provide timely notice of disposition to all obligated parties, you must also provide the proper information promulgated by the UCC.  Ohio Revised Code 1309.613 (UCC 9-613) outlines the proper form and contents of the notification to obligated parties.  That section provides that, in a non-consumer goods transaction, the contents of the notification are sufficient if it:

• (a) Describes the debtor and the secured party;
• (b) Describes the collateral that is the subject of the intended disposition;
• (c) States the method of intended disposition;
• (d) States that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting; and
• (e) States the time and place, by identifying the place of business or address or by providing other information that, in each case, reasonably describes the location, of a public disposition or the time after which any other disposition is to be made.

UCC 9-613 also provides an example of a proper notification for further reference.

Once the collateral has been repossessed and the proper notifications have been sent to all obligors, the collateral must be sold in a "commercially reasonable" manner.  Ohio Revised Code 1309.627(B) (UCC 9-627) outlines what makes a disposition of collateral "commercially reasonable":

A disposition of collateral is made in a commercially reasonable manner if the disposition is made:

1. In the usual manner on any recognized market;
2. At the price current in any recognized market at the time of the disposition; or
3. Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition

It is also important to note that "commercially reasonable" does not necessarily mean the higher sale price was obtained at a sale. 1309.627(A) (UCC 9-627) states that "[t]he fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner."

Once the sale has been conducted, another notification must be sent to the obligors to comply with the UCC.²  UCC 9-616 requires that the creditor must send the obligors a notice of the deficiency balance or surplus due.  While the UCC allows for a procedure to pay a surplus to the debtor after a sale, it is much more likely that a deficiency balance will be due the creditor.  Ohio Revised Code 1309.616(A)(1) (UCC 9-616) outlines what must be included in the explanation of the deficiency:

• (a) States the amount of the surplus or deficiency;
• (b) Provides an explanation in accordance with division (C) of this section of how the secured party calculated the surplus or deficiency;
• (c) States, if applicable, that future debits, credits, charges, including additional credit service charges or interest, rebates, and expenses may affect the amount of the surplus or deficiency; and
• (d) Provides a telephone number or mailing address from which additional information concerning the transaction is available.

Why is it important to follow these processes and procedures in disposing of collateral?  Failure to follow the processes set forth in the UCC can preclude a creditor from recovering a deficiency balance and be left with only the proceeds recovered at sale.³  For example, a creditor may be barred from collecting a deficiency by failing to send an incorrect notice of sale, failing to send a timely notice of sale, failing to notify the proper obligors, failing to provide a calculation of the surplus or deficiency, selling the collateral at price well below the established market value, among many more pitfalls.  Moreover, if a debtor is challenging the amount of deficiency in a court proceeding, the creditor bears the burden of proving compliance with the UCC.⁴ 

Fortunately, many larger institutions already have automated processes in place to ensure compliance with the UCC provisions on the disposition of secured collateral.  However, if your business does not routinely dispose of secured collateral, the governing UCC provisions can present a quagmire of pitfalls that can greatly impact your recovery efforts.  An in-depth understanding of the procedures outlined here is necessary to ensure that full remedies are available.