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From Banking and Finance Law Daily, December 9, 2015

Claim that airplane sale was commercially reasonable doesn’t fly

By Lisa M. Goolik, J.D.

The U.S. Court of Appeals for the First Circuit has overturned a district court decision granting Harley-Davidson Credit Corp. a $108,000 deficiency judgment against the guarantor of a defaulted loan secured by an aircraft. In accordance with the Nevada Uniform Commercial Code, the First Circuit concluded that Harley Davidson failed to meet its burden of proof on summary judgment that its sale of the repossessed aircraft was “commercially reasonable” because genuine issues of material fact existed with regard to the care and sale of the aircraft (Harley Davidson v. GalvinDec. 8, 2015, Howard, C.J.).

Commercially reasonable. Under the terms of an assigned security agreement, Harley-Davidson sought to collect a deficiency balance of more than $108,000 from a guarantor of a promissory note on a loan secured by an interest in a Cessna 421C aircraft. The deficiency balance remained due after Harley-Davidson repossessed and sold the aircraft through a third party dealer.

The guarantor disputed the extent of his liability, arguing that Harley-Davidson's disposition of the aircraft was not “commercially reasonable” as required by the security agreement and the Nevada UCC. Harley-Davidson had arranged for a dealer specializing in the sale of repossessed aircraft to find a buyer for the aircraft. However, while in the dealer’s care, the aircraft was vandalized, but not repaired, prior to its sale. The guarantor argued that the dealer’s response to the vandalism diminished the value of the aircraft, and the sale was not commercially reasonable.

On Harley Davidson’s motion for summary judgment, the district court found in favor of Harley-Davidson, concluding that the guarantor had not raised a genuine issue of material fact as to the commercial reasonableness of the sale. Stating that “selling repossessed collateral through a dealer, if such sale is ‘fairly conducted,’ is recognized as commercially reasonable,” the district court determined that Harley-Davidson satisfied its initial burden and shifted the burden of proof to the guarantor to raise a genuine issue of material fact. The district court then rejected the guarantor’s arguments, and the guarantor appealed.

Burden of proof. The First Circuit concluded that the district court prematurely shifted the burden of proof onto the guarantor. The parties agreed that Section 9-610 of the Nevada UCC places the burden on Harley-Davidson to establish that the sale of the aircraft was commercially reasonable. At summary judgment, Harley-Davidson bore the burden of proof to show that no reasonable trier of fact could find other than that the sale was commercially reasonable, explained the First Circuit.

While one method of demonstrating that a disposition is commercially reasonable is to show that the disposition was conducted “in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition,” the court could find no Nevada authority supporting a holding that a creditor's use of a dealer alone demonstrates commercial reasonableness. The sale must also be “fairly conducted,” the court determined.

Thus, the court determined, Harley Davidson had not satisfied its burden of proof to demonstrate that the sale of the aircraft was commercially reasonable. In the instant case, Harley-Davidson must show also that, when the aircraft was vandalized while in the dealer's care such that the plane could not be flown, the dealer’s disposition of the aircraft was still “in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.” Precedent suggested that it was not.

Viewing the record in the light most favorable to the guarantor, the court concluded that there was a genuine dispute of material fact such that a reasonable trier of fact could find against Harley-Davidson.

The case is No. 15-1157.

Attorneys: Timothy Chevalier (McCandless & Nicholson, PLLC) for Mark B. Galvin. Mark W. Thompson (Wong Fleming) for Harley-Davidson Credit Corp.

Companies: Harley-Davidson Credit Corp.

MainStory: TopStory Loans NevadaNews SecuredTransactions

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