What Duties Does A Marine Lender Owe In The Sale Of A Repossessed Vessel Under UCC §9-610?
Feb 26, 2021
This article is the third of our three-part series on Uniform Commercial Code (“UCC”) sections 9-207 and 9-610. These model code provisions govern the duties associated with the preservation and disposition of secured collateral. In the following article we address the duties of a marine lender associated with the marketing and sale of repossessed vessels.
In states that have adopted UCC §9-610—as most have in some form—marine lenders who resort to repossession following a default have a duty to ensure that the sale of the vessel is conducted appropriately. In the words of the model code, “every aspect of a disposition of collateral, including the method, manner, time, place and other terms, must be commercially reasonable.”
A lender cannot be faulted for asking what, exactly, is meant by “every aspect” and “commercially reasonable” in this context. The model code provisions are not a model of clarity.
The authors of the model code have offered some guidance: “[t]he fact that a greater amount could have been obtained…at a different time or in a different method… is not of itself sufficient to preclude the secured party from establishing that the… disposition… was made in a commercially reasonable manner.”1 In other words, a borrower’s allegation that the vessel could have been sold for more is insufficient, standing alone, to support a finding that a sale was not commercially reasonable2.
“[T]he primary focus of commercial reasonableness is not the proceeds received from the sale but rather the procedures employed for the sale… if the procedures were commercially reasonable, the size of the deficiency is irrelevant.”3 In the words of another court, “deficiency judgment suits should not be turned into valuation cases.”4 In practice, however, this proscription is often ignored and marine lenders find themselves defending the commercial reasonableness of their sale procedures simply because a sale price appears low.
The model code does state that collateral sales are commercially reasonable when made in the “usual manner on” or at “the price current in” any “recognized market.” But the phrase “recognized market”5 is “quite limited; it applies only to markets in which there are standardized price quotations for property that is essentially fungible”6 (e.g. stocks). Vessels, however, are certainly are not fungible. So this provision is not applicable to marine lenders who sell repossessed vessels.
The UCC does offer some limited relief from the burden of establishing “commercial reasonableness” for lenders who are willing to forgo self-help options.7 It states that a sale of collateral is commercially reasonable if it has been approved in a judicial proceeding or by certain creditor representative groups. But for lenders who have found in practice that resorting to self-help is faster and more cost effective in aggregate despite the occasional debtor challenge, this provision is of little value. In these circumstances, lenders may be obligated by their corporate duties to follow the more fiscally-sensible state procedures for self-help dispositions and hope that they are not forced by the occasional dissatisfied borrower to wade through the morass of “commercial reasonableness” under §9-610.
For the narrow class of dispositions of repossessed vessels, the courts have offered some guidance. We first offer one of our recent federal cases in the Western District of Washington, where we successfully defended against all of the borrowers’ counterclaims, including a claim under §9-610 and its state statute counterpart RCW §62A.9A.610.
In SunTrust Banks, Inc. v. Be Yachts LLC8, the lender pursued a claim for breach of contract after the borrowers failed to satisfy the deficiency balance following the repossession and sale of a 63-foot motor yacht. The defendant borrowers asserted several counterclaims against the lender, alleging, inter alia, that the lender had failed to conduct the sale in a commercially reasonable manner. The borrowers focused heavily on what they believed was a low price obtained by the lender at the sale of the luxury yacht. The borrowers and their experts believed they could have obtained between $300,000 and $700,000 more than the $1.05 million sale price if the vessel had been maintained and marketed to “commercially reasonable” standards.
The primary challenge to the lender’s sale of the vessel was the methods of marketing the vessel. The borrowers in Be Yachts presented expert testimony suggesting that the vessel was not advertised in the preeminent yacht listing publication, was not moored at a dock appropriate for luxury vessels, and that the sales commission was too low, which disincentivized buyers’ brokers from presenting it to their clients.
We presented evidence to the court that the lender’s efforts to market the vessel were, in fact, commercially reasonable. The lender had hired a professional and reputable company to manage the repossession, storage, and marketing of the yacht. The lender’s agents extensively marketed the vessel for nearly a year. The lender also commissioned two separate surveys of the vessel to determine the fair market value and appropriate counteroffers—allowing the borrower to select the initial surveyor. The vessel was initially listed at the highest possible value in the range determined by the borrowers’ surveyor, and multiple serious offers were received. The lender attempted to negotiate a higher price on all the offers, obtaining eight offers in total, most of which were between $1.0 and $1.2 million. The lender even accepted the highest offer made, but the offeror was not able to obtain the purchase funds and the sale fell through, forcing the lender to accept the next best offer before the season ended.
Denying the borrowers’ motion for partial summary judgment, the court found that we had presented “significant evidence” that the lender had put forth “efforts to reach segments of the public reasonably expected to have an interest in bidding” and had “engaged in an analysis to determine a fair market price.”9 The court noted that the yacht had been listed for sale through several common listing services and had been entered into a local boat show. The court also observed that while the price obtained was much lower than the initial survey value, the surveyor had noted that “distress sales or forced liquidation sales vessels may entertain offers 60 to 70 percent of asking price.” Although the court concluded that commercial reasonableness was “a question of fact to be determined by the trier of fact”, following trial the court affirmed that the marketing and sale of the vessel was commercially reasonable.10
In another case from the Western District of Washington, Peoples Bank v. Bluewater Cruising LLC11, the debtor contended that the sale of a repossessed sailing yacht was not commercially reasonable because the listing price was too low, and the yacht was undermarketed. The court reiterated that the burden of proving commercial reasonableness was on the bank and that a low sales price “suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable.”12
The court found that the bank had presented sufficient evidence supporting a finding of commercial reasonableness to defeat the debtor’s motion for partial summary judgment. The bank had hired an experienced yacht broker to market the vessel. The broker set the listing price based on a personal inspection, the amount for which other similar vessels had recently sold, the economic climate, and pre-existing damage to the vessel’s hull. The bank also presented evidence that the broker had listed the vessel on five yacht sales websites, including its own, and contacted potential buyers who had expressed interest in purchasing similar vessels in the past. The court recognized there was a concern that the offer accepted by the bank had been received within a week of listing the yacht but found that this was not sufficient to warrant a determination of commercial unreasonableness on summary judgment.
The People’s Bank court also addressed the debtors’ valuations which presented a much higher fair market value than what was received at the bank’s sale. The court found that the valuations were not sufficient to support a finding of commercial unreasonableness because they were performed years prior to the repossession, and were performed to obtain insurance, not to determine the fair market value for sale. The court was “somewhat troubled by the fact that there was no formal appraisal conducted before the sale”, but that fact was not sufficient to warrant summary judgment to the debtor.13
These cases offer important takeaways for a marine lender who elects to use self-help under state laws to sell a repossessed vessel. Since “every aspect” of the sale must be commercially reasonable, the borrower has many lines of attacking the procedures employed. Our case summaries above do not offer an exhaustive list of the allegations the borrowers levied against their lenders when challenging the sales of their respective vessels. Below, however, we offer the essential takeaways from these cases to assist marine lenders in crafting or revising their policies and procedures.
When analyzing the fair market value of their repossessed collateral, marine lenders should engage an independent, professional, and reputable surveyor with experience in the specific type of vessel being sold. For some vessels, such as luxury yachts, a thorough survey with a sea trial by a qualified expert will help to establish an initial value.
The lender should also retain a qualified vessel broker who is familiar with the market for the type and model of vessel. The broker should prepare a market analysis, considering the vessel’s location and recent sales of comparable models, which are available from specialized listing and valuation services.
The lender should consider the values determined by each of these professionals when determining the initial listing price. Selecting the highest value of those suggested by the surveyor and the broker as the initial listing price may reduce the likelihood of undervaluation. A second survey by an alternative surveyor can be commissioned later for comparison if insufficient offers are obtained at the initial listing price.
The lender should also ensure that the broker prepares a detailed listing, with high quality photos and thorough descriptions of vessel components. The broker should also market the vessel through more than one channel. The lender should ensure that the broker is using the appropriate listing service for the type and caliber of vessel being sold. National listing services with the highest visibility should be used, in addition to smaller local listing services. A broker should also be encouraged to market the vessel directly to its own lists of potential customers and to use broker-to-broker listings.
A lender may also consider keeping the vessel on the market for a minimum number of days before any offers will be accepted to ensure sufficient marketing time. If, on the other hand, the marketing efforts do not produce sufficient offers, a lender should consider moving the vessel to a neighboring area or entering the vessel in a local boat show, if available. When offers are received, a lender should present counteroffers and attempt to negotiate a higher sales price with each interested party.
For additional recommendations, see our companion article14, where we address the lender’s duty of reasonable care in the preservation of a vessel in its possession. The recommendations we offer therein are equally applicable to the disposition of collateral. Insufficient care can devalue the vessel, reduce its marketability, and lead a court to conclude that a lender has not only violated its duty of care, but also conducted a disposition that is not commercially reasonable.
A marine lender’s duty to be commercially reasonable in every aspect of a disposition of collateral is not clearly defined. As the cases above indicate, borrowers will not hesitate to challenge a lender’s performance of this statutory duty if the price obtained at the sale appears low. But lenders can increase their odds of avoiding or defeating any such claims by taking some precautionary measures and, importantly, ensuring that adequate records are maintained for a minimum of two years following the sale of collateral.
1. UCC §9-627
2. Official Comment to 62A.9A-610, Section 10 (Relevance of Price)
3. Nat’l Hous. P’ship v. Mun. Capital Appreciation Partners. I, L.P., 935 A.2d 300, 314-15 (D.C. 2007) (internal quotations omitted)
4. Wilmington Trust Co., 760 F. Supp. 2d at 366 (S.D.N.Y. 2010).
5. UCC §9-627(b)
6. Official Comment 4, RCW 62A.9A-627. See also Foster v. Knutson, 84 Wn.2d 538 (1974); Mt. Vernon Dodge, Inc. v. Seattle-First National Bank, 18 Wn. App. 569 (1977).
7. UCC §9-627(c)
8. SunTrust Banks, Inc. v. Be Yachts, LLC, No. C18-840 MJP, 2020 WL 3545500 (W.D. Wash. June 30, 2020)
9. Cite to order on PMSJ
10. SunTrust Banks, Inc. v. Be Yachts, LLC, No. C18-840 MJP, 2020 WL 3545500 (W.D. Wash. June 30, 2020)
11. Peoples Bank v. Bluewater Cruising LLC, No. C12-00939RSL, 2014 WL 202105 (W.D. Wash. Jan. 17, 2014)
12. Id. at *7
13. Id. at *8
14. What Duties Does A Lender Owe In The Care of A Repossessed Vessel Under UCC §9-207?