Commercial Reasonableness of Creditor's Auction Disposing of Collateral Created Issue of Fact Regarding Damages

On October 4, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Capital One Equip. Fin. Corp. v. Rami Cab Corp., 2019 NY Slip Op. 32934(U), holding that the commercial reasonableness of a creditor's auction disposing of collateral created an issue of fact regarding damages, explaining:

As to plaintiffs entitlement to summary judgment on damages, defendants failed to establish a need for discovery on the issue of payments. However, as to the· commercial reasonableness of the March Sale, in an action for a deficiency judgment, where collateral has been sold in partial satisfaction of a debt, plaintiff bears the burden of demonstrating that the sale of collateral was commercially reasonable after defendant raises the issue. Defendants successfully raise the issue of commercial reasonableness by pointing to plaintiff's unexplained decision to reduce the reserve and/or credit bid pricing of the Medallions between the December Auction ($262,500) and the March Auction ($230,000).

UCC 9-610(b) states that every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable; moreover, UCC 9-602 prevents waiver of that rule. Paragraph seven of the Security Agreements state that "Any sale conducted upon the foregoing terms or.by any other method of sale (if conducted in conformity with practices of any banks disposing of similar security) shall be deemed commercially reasonable."

Plaintiff argues that it conducted the March Auction upon the foregoing terms of the Security Agreements, rendering the medallion sales commercially reasonable. While parties are free to set by agreement the standards to be used for measuring whether collateral was disposed of in a commercially reasonable manner, such standards must not be manifestly unreasonable. The Security Agreements, however, lack any constraints upon the method, manner, time or place of a public sale of collateral and appear to bless any purported public sale as commercially reasonable regardless of the manner in which it was conducted. Therefore, the commercial reasonableness of the Match Sale must be measured under UCC 9-627(b), which states:

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.

While plaintiffs reply papers describe the notice given of the March Auction, plaintiff provides no detail on how its credit bid procedure was implemented and thereby fails to meet its burden to establish commercial reasonableness of that procedure. Moreover, plaintiff cannot as it attempted on its motion-rely on UCC 9-627(b)(l), because a. one-off public auction is not a recognized market. In the end, plaintiff did not meet its prima facie evidentiary burden of establishing commercial reasonableness here. Thus, the sufficiency of defendants' opposition is inapposite on the issue.

Accordingly, the special referee shall, upon inquest, report on the commercial reasonableness of the March Sale, the amounts owed on the Notes and plaintiffs reasonable attorneys' fees. In calculating the amounts owed on the Notes, if the referee finds that the March Sale was not commercially reasonable, the referee shall report on what proceeds plaintiff would have realized had it conducted a commercially reasonable sale and shall credit defendants with the greater of (A) $230,000 per Medallion or (B) the amount of proceeds that would have been realized 4 at a commercially reasonable sale.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.