416 UNIT FIVE Creditors' Rights and Bankruptcy CHAPTER 21 Secured Transactions 417 In the following case, two defaulting debtors alleged that their creditor's sale of the debtors' shares of stock was commercially unreasonable. The debt- ors contended that a different type of sale or a dif. price . ferent "inducement" might have attracted a higher the same on the day of both the first CASE 21 .3 CONTINUED Chief Executive Officer testified * * * received one offer for Smith's stock , at a discount. Rather than risk public and second sales . that " discounts in large transactions , sales and a repeat of what happened in * * * * CASE ANALYSIS * * * Although plaintiffs speculate in thinly traded stocks , were common " and that he was advised by employ - 2008 , defendant made the sale . In fact , plaintiffs' contention that defendant that public sales would have resulted in a higher price, or that the private Case 21.3 Smith v. Firstbank Corp. ees of Oberon Securities that selling did not attempt to garner the best sale buyer could have been induced to Court of Appeals of Michigan, 2013 WL 951377 (2013). a "block this large would require a price it could is contradicted by the discount of 15 to 20 percent." The evidence thus does not support fact that defendant was able to sell pay a higher price, speculation and the second block of shares (the shares conjecture are insufficient to allow an pledged by the trust) for 21 cents more opposing party to survive a motion COMPANY PROFILE Since its Defendant then released the remain- the contention that defendant did not for summary disposition. founding in Jackson , Michigan, in 1900, ing collateral to plaintiffs and remit- Sparton Corporation has designed, ted to plaintiffs by cashier's check the eral was commercially reasonable, and seek multiple offers or seek to get the per share, notwithstanding that the closing price for Sparton was exactly Affirmed provides in relevant part: * * * best price for the stock . Rather , the evidence shows that defendant * * * developed, and manufactured electronic excess funds collected in the private and electromechanical devices. From sales. The value of the collateral The fact that a greater amount could LEGAL REASONING QUESTIONS prototype through shipment , Sparton retained by plaintiffs was over five have been obtained by a collec has worked with diverse companies in million dollars. tion, enforcement, disposition, or 1. What type of property was at the center of the dispute in this case? How did that property become involved in the the aerospace, medical, defense, security, Plaintiffs filed suit [in a Michigan acceptance at a different time or in a dispute ? state court] against defendant, alleg- different method from that selected 2. On what ground did the plaintiffs argue that the bank should not have been granted a summary judgment? navigation, exploration, and industrial by the secured party is not of itself sufficient to preclude the secured Why does collateral have to be disposed of in a commercially reasonable manner? Is price alone enough to prove markets. Today, Sparton is headquartered ing that the sales violated defen- in Schaumberg, Illinois. It has more than lant's contractual duties to plaintiffs party from establishing that the col- reasonableness? Why or why not ? 1,300 employees and maintains produc- because they were "commercially lection, enforcement, disposition , or . What factors did the court look at to determine reasonableness in this case? How did the court rule on the issue in tion facilities in the United States and in unreasonable" * * * . Defendant acceptance was made in a commer - Vietnam . moved the trial court for summary cially reasonable manner . this case ? IN THE LANGUAGE disposition [judgment]. * * * The trial * * * * OF THE COURT court issued an Opinion and Order * * * The circumstances surrounding PER CURIAM. [By the Whole Court] granting defendant's motion * * * previous sales of Sparton stock on the and the creditor can obtain a deficiency judgment * * * * This appeal followed. * * * * public market, and concerns about what public sales would do to the share price, PROCEEDS FROM DISPOSITION Proceeds from the disposition of collateral after default on the underly- from a court to collect the deficiency. Practically speaking, though, debtors who have defaulted on a The facts in this secured transac- At issue in the instant case is the rendered defendant's choice to sell in secured party's disposition of collateral private transactions reasonable. * * * In ing debt are distributed in the following order: loan rarely have the cash to pay any deficiency. tions case are not in dispute. Plaintiffs 2008, Wachovia [Bank] sold approxi- Note, however, that if the underlying transaction is a [Bradley Smith, on his own behalf after the debtors' default. Defendant, 1. Reasonable expenses incurred by the secured and on behalf of the John J. Smith the secured party, was authorized mately 400,000 shares of Sparton to party in repossessing, storing, and reselling the sale of accounts, chattel paper, or promissory notes, the Revocable Living Trust] borrowed by MCL [Michigan Compiled Laws] satisfy plaintiff Smith's debts. The collateral . debtor is not liable for any deficiency. As noted above, funds from [defendant Firstbank 440.9609 [Michigan's version of UCC sale required 18 separate transactions 2. Balance of the debt owed to the secured party. the debtor is also not entitled to any surplus from the Corporation] in 2002; the notes to 9-609] to take possession of the col- over a two-month period; during 3. Junior lienholders who have made written or disposition of these types of collateral, unless that right defendant were secured with pledges that period the share price declined authenticated demands. is granted by the security agreement [UCC 9-615(e)]. of Sparton Corporation stock as well lateral following plaintiffs' default. The as other collateral. Plaintiffs defaulted parties agree that plaintiffs defaulted by almost 50 percent. * * * It was not 4. Any surplus to the debtor, unless the collateral on these loans. Eventually, after many in the instant case, and that defendant commercially unreasonable for defendant consists of accounts, payment intangibles, prom- REDEMPTION RIGHTS The debtor or any other issory notes, or chattel paper [UCC 9-608(a); secured party can exercise the right of redemption of modifications and extensions, defen- was within its rights to take possession to seek a private sale to avoid this risk. [Emphasis added.] the collateral. Redemption may occur at any time dant took possession of the pledged of the pledged shares. shares of Sparton stock. Shortly there- MCL 440.9610 [Michigan's version Plaintiffs further argue, however, 9-615(a), (e)]. before the secured party disposes of the collateral, after, defendant sold the stock in two of UCC 9-610] governs the disposi- that even if defendant's choice to con- NONCASH PROCEEDS Whenever the secured party duct a private, bulk sale was reasonable, receives noncash proceeds from the disposition of enters into a contract for its disposition, or discharges private transactions: on January 12, tion of collateral after default, and the manner in which it conducted the the debtor's obligation by retaining the collateral. To 2010, it sold 602, 170 shares to a provides in relevant part: * * * brokerage firm at $4.84 per share, private sale was not . * * * The record collateral after default, the secured party must make Every aspect of a disposition of collat - does not support this contention . a value determination and apply this value in a com- redeem the collateral, the debtor or other secured party must tender the entire obligation that is owed and on February 19, 2010, it sold eral, including the method, manner, 450,000 shares to a brokerage firm at time, place , and other terms , must be An e-mail from Rick Barratt, agent of mercially reasonable manner [UCC 9-608(a)(3), 9-615(c)]. plus any reasonable expenses and attorneys' fee commercially reasonable . defendant, to Oberon Securities indi- incurred by the secured party in retaking and main $5.05 per share. The parties agree that the closing price for Sparton stock Further, MCL 440.9627 cated that, in addition to requesting taining the collateral [UCC 9-623]. on the New York Stock Exchange on [Michigan's version of UCC 9-627] that Oberon bring them a buyer, defen- DEFICIENCY JUDGMENT Often, after proper disposi- Concept Summary 21.2 on the following page p both sale dates was $6.05 per share. provides guidance for determination dant * * * " directed four investment tion of the collateral, the secured party still has not vides a review of the secured party's remedies on t of whether the disposition of collat- banker] to bring similar type offers to collected all that the debtor owes. Unless otherwise us as well." In addition, defendant's agreed, the debtor normally is liable for any deficiency, debtor's default