A decision by the Illinois Court of Appeals reinforces the importance of providing pre-disposition notice to preserve a deficiency claim against an obligor. General Motors Acceptance Corp. v. Stoval, No. 1-06-1858, ____ N.W. 2d ____ (Ill. Ct. App. June 29, 2007).
At issue was whether a secured creditor, which otherwise was exercising its rights through applicable judicial proceedings, was required to comply with pre-sale notice requirements of Article 9. While the facts in the case were relatively routine, the important distinction was that the secured creditor sought to prosecute a replevin and collection action in state court to recover its collateral after an event of default occurred.
During the pendency of that action, the secured creditor acquired the collateral and sold it in a commercially reasonable sale. When the secured creditor sought to pursue its action for a deficiency, the defendant interposed the sole defense that he had received no prior notice of the disposition of the collateral and, therefore, the disposition of the collateral resulted in a full satisfaction of the claim.
The secured creditor argued that, upon commencement of judicial proceedings, the “self-help” provisions of Article 9 (including the “pre-disposition notice” provisions) no longer were applicable. Since no pre-sale notice was required, the secured creditor should not be prevented from pursuing its deficiency.
The court concluded that the pre-disposition notice provisions of Article 9 were not “excused” simply because the secured creditor was pursuing a judicial foreclosure. Rather, the court held that the requirement for pre-disposition notice was applicable to any disposition effected by a secured creditor (whetherthrough self-help or otherwise through a judicial proceeding).
Ultimately, the issue is not problematic; generally a secured creditor simply can provide a notice and preserve all claims. However, when the secured creditor sought to pursue its deficiency claim here, and the defendant asserted that a notice was not sent, the secured creditor did introduce a copy of the notice at trial. The secured creditor relied on its course of conduct to establish that notices always are sent to obligors prior to disposition. When the secured creditor was not able to produce a copy of the specific notice sent to the defendant for the court at trial, the court concluded that no notice was sent.
The trial court concluded that as a result of the failure, the secured creditor could not pursue a deficiency against the obligor. While the appellate court endorsed the trial court’s conclusions concerning the need to present evidence of the pre-disposition notice at trial, the appellate court did not preclude the secured creditor from pursuing a deficiency against the borrower.
The appellate court concluded that the UCC adopts a “rebuttal presumption rule” (i.e., when the secured creditor fails 3to establish compliance with the Article 9, the secured creditor is “presumed” to be barred from seeking a deficiency). The secured creditor may overcome the presumption if the secured party can prove that the sale otherwise was conducted in accordance with Article 9 and the amount received was not impacted by the violation.
The main lesson learned from this case for secured creditors is to (i) ensure that any disposition (including a disposition resulting from judicial proceedings) is preceded by a pre-disposition notice; and (ii) retain a copy of the notice, as sent, to ensure a deficiency can be pursued.