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Soriano v. Hitchcock

A-6249-99T5 (N.J. Super. App. Div. 2001) (Unpublished)

UCC; SECURITY INTERESTS—Failure to dispose of collateral in a commercially reasonable manner may be of no consequence to the secured party if it can show that the collateral was worth less than the debt.

A seller of a business sued its buyer seeking the balance due on a promissory note executed by the buyer in connection with the sale. At the time of sale, the seller took back a promissory note and a stock pledge agreement securing repayment of the note. Under the terms of the agreement, all stock in the company reverted to the seller if the buyer defaulted under the terms of the note. After a default, the escrow agent turned the shares of stock over to the seller. At the time of the default, the company had federal and state tax liens filed against it that exceeded the amount owed to seller. In addition, the company’s main asset, its liquor license, had been seized by the state and sold at auction. The company had no remaining valuable assets. When the seller sued the buyer to collect on the note, the buyer claimed that, under the Uniform Commercial Code, the seller’s retention of the stock and his failure to conduct a commercially reasonable sale operated to satisfy the debt. Both parties moved for summary judgment. The lower court held, that under the N.J.S. 12A:9-504, a secured party may, but is under no obligation to, sell the collateral. The seller could still, under that statute, file suit to recover under the note. The lower court noted that, even if a sale was attempted, there was no value to the stock since the company had liens filed against it. The Appellate Division agreed that the seller’s continued possession of the stock did not constitute an election by the seller to retain the stock in satisfaction of the debt. It added that a creditor is not barred from recovering a deficiency judgment when it fails to sell collateral in a commercially reasonable manner, if the creditor can overcome the presumption that the collateral was at least equal in value to the debt it secured. Here, the seller demonstrated that the stock was worthless, so there was no point in attempting to sell it.

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