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Consider this all-too-common scenario. A borrower defaults under its loan obligations and the creditor (knowing that under Illinois law it is allowed to repossess its collateral as long as it does so without breaching the peace) has its repo man grab the collateral and bring it back to his warehouse for storage. The question then arises as to what steps the creditor can take under Illinois law to turn its collateral into money.
Illinois law gives two distinct remedies for turning repossessed collateral into cash. While most creditors are familiar with the routine of repossessing the collateral and conducting a public auction in an attempt to recover the amounts owed, those same creditors are also aware of the largely disappointing results that can come from a forced auction. Fortunately, Illinois law and certain provisions of the Uniform Commercial Code provide for a second distinct remedy: the private sale.
A More Profitable Alternative
In a private sale, a creditor or its agent can market the collateral and sell it directly to a purchaser without involving an auctioneer. The allowance of private sales recognizes that forced sales of inventory, equipment or other collateral often generate only pennies on the dollar, while a properly marketed private sale can often bring in the full value of the collateral. This approach is advantageous to both the creditor (who is able to recover more of the amount owed) and the debtor (who has its deficiency reduced through the greater amount brought in by the private sale).
The public auction and private sale options share two requirements under Illinois law: the transaction must (1) have proper notice and (2) be conducted in a commercially reasonable manner. The requirement of reasonable notice not only exists for the borrower but also applies to any junior lien holders. The question that arises for most creditors is, what is proper notice? In most circumstances, the answer lies in the existing loan relationship between the parties. Most security agreements, which are the documents that gave the creditor the right to repossess the collateral in the first place, will spell out the exact amount of notice that must that be provided to the borrower for either a private sale or public auction of collateral.
The standard of commercial reasonableness exists to assure a fair value for the resale of the collateral and to stop creditors from conducting sales to friendly buyers who do not pay full value. This standard carries over to all parts of the sale process, from the marketing of the collateral to the final sales price. In some cases, commercial reasonableness will even require a creditor to ensure that the collateral is presentable for sale and to perform minor repairs if such steps would likely bring in a higher price.
Your Assumptions Could Leave Money on the Table
Many creditors operate under the assumption that repossessed collateral must be grouped together with similar collateral and sold at auction, ultimately collecting only a small portion of the actual value. This misconception is rebutted by Illinois law and applicable terms of the Uniform Commercial Code. Secured creditors who repossess collateral have the second (and often preferable) option of conducting a private sale. Although proper notice is required and the sale must be commercially reasonable, the creditor is authorized to market and sell the collateral privately.
So next time you are faced with taking back collateral, do not rush to place it with an auctioneer. Instead, consider having the collateral privately marketed and sold. You just might get more bang for your buck.
© 2012 Much Shelist, P.C.
