C.A. No. 07A-09-004 (Del. March 27, 2009)
Shannon Hicklin, the defendant in the underlying case (“Hicklin”), appealed a deficiency judgment of the Court of Common Pleas, arising from the repossession and sale of her car that had been financed by Onyx Acceptance Corporation, the plaintiff in the underlying transaction (“Onyx”). Hicklin appealed to the Superior Court and argued, among other things, that the trial court applied an incorrect standard in determining the reasonableness of the sale of the car after repossession under the Delaware Uniform Commercial Code (“UCC”). The Superior Court affirmed the judgment of the Court of Common Pleas and Hicklin appealed to the Supreme Court, which concluded that the trial court did not apply the correct standard for the sale.
When Hicklin fell behind in payments on her car, Onyx repossessed the car and sold it at a private auction for $1500. After deducting the costs of repossession and the sale from the balance owned by Hicklin, a deficiency of more than five thousand dollars remained and Onyx sued Hicklin to collect that amount. The trial court held that because the price paid for the car at the private auction was greater than 50% of the car’s adjudicated value, the sale was commercially reasonable and that Hicklin remained liable to Onyx for the deficiency. On appeal to the Superior Court, Hicklin argued that the trial court applied the common law “shock the conscience” standard to the sale rather than the UCC’s commercially reasonable standard. The Superior Court rejected Hicklin’s argument finding that the trial court did not rely solely on the “shock the conscience” standard but also considered other evidence to conclude the sale was commercially reasonable.
On appeal to the Supreme Court, Hicklin claimed that Onyx failed to establish that the auction was commercially reasonable because it did not introduce evidence of the prevailing practice in disposing of repossessed automobiles or show that the time, place and manner of the sale were commercially reasonable. In response, Onyx contended that the commercial reasonable test is flexible and permits a secured creditor, acting in good faith, to exercise business judgment and flexibility in deciding how to dispose of collateral. Onyx further contended that it was not required to introduce evidence of the prevailing trade practice in disposing of repossessed automobiles and that even without such evidence it demonstrated that the time, place and manner of the sale were commercially reasonable.
The Court noted that Onyx could prove that the sale of the car was commercially reasonable in one of two ways. It could show that every aspect of the sale (including the time, manner and place) was commercially reasonable under Section 9-610(b) of the UCC or it could take advantage of the safe harbor in Section 9-627(b)(3) of the UCC by showing that the car was sold in accordance with the accepted practices of reputable dealers in that type of property. The Court stated that it would be improper to reason backwards from the price paid for the property in the sale to determine that the sale as commercially reasonable and expressly overruled prior cases that held to that effect.
The Court then addressed Onyx’s argument that because private auctions generally yield higher prices and the car was sold to the highest bidder at the private auction the sale must have been commercially reasonable. The Court indicated that, even if private auctions generally result in higher prices, Onyx provided no evidence to demonstrate that the procedures employed by the company conducting the auction at which Hicklin’s car was sold would have resulted in higher prices and, without such evidence, a secured party cannot satisfy its burden of establishing commercial reasonableness.
Next, the Court noted that Onyx could not avail itself of the safe harbor of Section 9-627(b)(3) of the UCC because Onyx did not provide any evidence that the sale was in conformity with accepted practices in the trade. The Court also addressed Onyx’s implication that, because it acted in good faith when it sold the car, the sale was commercially reasonable or its good faith was a substantial factor that the Court could consider in evaluating commercial reasonableness. The Court explained that good faith is the minimum standard that all secured parties are required to satisfy under Section 1-304 of the UCC, that Article 9 of the UCC goes beyond that standard by requiring commercial reasonableness and that a showing of good faith in selling repossessed collateral, without more, cannot establish commercial reasonableness of the sale.
Finally the Court addressed the consequences of a secured party’s failure to establish that a sale was commercially reasonable. In this regard, the Court noted that the UCC establishes a rebuttable presumption that secured parties in non-consumer transactions are entitled to deficiency judgments, even if they fail to comply with other provisions of Article 9 of the UCC. The Court, however, indicated that, because Hicklin bought her car in a consumer transaction, the rebuttable presumption did not apply in this case. The Court quoted Section 9-626(b) of the UCC for the proposition that the UCC left to the courts the determination of the proper rule in consumer transactions and that courts may continue to apply established approaches. Based on Section 9-626(b) of the UCC and prior Delaware case law, the Court held that a secured party’s failure to prove a commercially reasonable disposition of repossessed consumer goods will absolutely bar a recovery of a deficiency.
The Court, therefore, reversed the Superior Court’s order affirming the judgment of the Court of Common Pleas as it related to the deficiency judgment entered in favor of Onyx. The full opinion is available here.