Commercial Litigation: Notice of a Secured Party Sale

hawkerIn a recent case, Regions Bank v. Thomas D. Thomas, et al., No. W2011-02320-COA-R3-CV (Tenn. Ct. App., March 4, 2013), the Tennessee Court of Appeals addressed the process for disposition of collateral under the Uniform Commercial Code (“UCC”). In August 2004, LGT Aviation, Inc. (“LGT”) obtained a loan in the amount of $2,351,700 from Regions Bank. The loan was secured by a 1981 Hawker HS 125-700A aircraft and guaranteed jointly and severally by two individuals and a family trust. One of the guarantors was the sole shareholder of LGT and the aircraft was acquired for his personal use. Among other things, the loan documents required that LGT maintain insurance on the aircraft in the amount of the outstanding loan balance.

In August 2006, LGT allowed the insurance policy on the aircraft to lapse. Region’s Bank contacted LGT multiple times regarding the insurance coverage, and on numerous occasions, requested proof of insurance. The bank advised the borrower that failure to maintain insurance was a default under the loan agreement and that it would take steps to enforce its rights. The borrower continued its failure to have coverage in place, and pursuant to the loan agreement, the bank accelerated payment of the loan. Despite the bank’s efforts, the borrower did not respond to the bank or repay the loan. Accordingly, on October 9, 2007, the bank filed suit against LGT and the guarantors. In addition, during pendency of the lawsuit, Regions Bank repossessed the aircraft, made repairs, and in December 2008, it sold the aircraft at auction for $875,000. Interestingly, LGT continued to timely make all payments due on the loan until the aircraft was sold.

LGT and the guarantors eventually responded to the lawsuit and the case proceeded to a trial without a jury. In June 2011, the trial court issued a judgment in favor of Regions Bank. LGT and the guarantors appealed to the Tennessee Court of Appeals, raising multiple issues, including whether there was a material beach of the loan agreement, whether the bank’s repossession violated the UCC, whether the default was cured by the bank’s conduct, whether the bank failed to give proper notice of the sale, and whether the trial court erred in awarding interest.

The Court of Appeals focused on the notice issue: whether the bank failed to provide proper notice of the disposition of the aircraft as required by Article 9 of the UCC as adopted in Tennessee, Tenn. Code Ann. §§ 47–9–101 through 47–9–709. The Court of Appeals reversed the trial court’s finding that the bank provided sufficient notice of the sale of the aircraft to the debtor. The court recognized that the debtor completely ignored the bank’s communications and had opportunities to protect the collateral. Nevertheless, the court, finding that the bank did not provide reasonably sufficient notice of disposition, stated that “Regions’ correspondence to [the debtor] was at best ambiguous with respect to whether, when, and by what means Regions intended to dispose of the aircraft.” Because the bank violated the notice provision of the UCC, the court held that disposition of the aircraft was not commercially reasonable. The case was remanded back to the trial court.

The procedure for a secured party to give notice as to the disposition of collateral is not complicated; however, as exemplified in Regions Bank v. Thomas, courts require that a secured party specifically adhere to the process set forth in Article 9 of the UCC. The UCC permits a secured party, after default, to dispose of collateral in a “commercially reasonable manner.” Tenn. Code Ann. § 47–9–610. A secured party must notify the debtor, guarantors, and certain other persons prior to disposition of the collateral by sending a “a reasonable authenticated notification of disposition.” Tenn. Code Ann. § 47–9–611. The reasonable time for sending notice is a question of fact, but at least 10 days before disposition is sufficient. Tenn. Code Ann. § 47–9–612. Likewise, whether the contents of the notice are sufficient is a questions of fact; however, the contents of a notice are deemed sufficient if the notice contains the following:

(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 of a public disposition or the time after which any other disposition is to be made.

Tenn. Code Ann. § 47–9–613. To be sure, the statute sets forth a proposed notification form, which, when completed, provides all of the information necessary to comply with the statute.

If you have questions regarding the particulars of a secured party sale or disputes concerning secured transactions, contact the Thompson Burton Litigation & Dispute Resolution team.