Opinion ID: 2971797
Heading Depth: 2
Heading Rank: 3

Heading: Commercially Reasonable Disposition

Text: Johnson’s second argument raised on appeal is that Bank One violated Kentucky law by failing to dispose of the PurchasePro stock in a commercially reasonable manner. Following the U.C.C., Kentucky law requires that “[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” Ky. Rev. Stat. Ann. § 355.9-610. The purpose of the provision is to protect the debtor’s interest by ensuring he will “receive the market price of his collateral.” Ocean Nat’l Bank v. Odell, 444 A.2d 422, 426 (Me. 1982). The law also provides a “recognized market” safe harbor, which states that: [a] disposition of collateral is made in a commercially reasonable manner if the disposition is made: (a) In the usual manner on any recognized market; (b) At the price current in any recognized market at the time of disposition; or (c) Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition. Ky. Rev. Stat. Ann. § 355.9-627(2). The U.C.C. comments define a “recognized market” as “one in which the items sold are fungible and prices are not subject to individual negotiation. For example, the New York Stock Exchange is a recognized market.” U.C.C. § 9-610 cmt. 9. Sales on a recognized market are commercially reasonable “because the price on the recognized market represents the fair market value [of the collateral] from day to day.” Nelson v. Monarch Inv. Plan of Henderson, Inc., 452 S.W.2d 375, 377 (Ky. 1970); see also FDIC v. Blanton, 918 F.2d 524, 52728 (5th Cir. 1990) (“A recognized market assures a fair price through neutral market forces, and thus obviates the debtor’s need for protection through redemption, appraisal, or monitoring the sale.”). Therefore, where the collateral is sold in a recognized market, Kentucky courts have found the transaction to be commercially reasonable as a matter of law. Bailey v. Navistar Fin. Corp., 709 S.W.2d 841, 842 (Ky. Ct. App. 1986). Courts in other states have held similarly that a sale on a recognized market is per se commercially reasonable. See Blanton, 918 F.2d at 529 (noting that under Texas law, sale of collateral on a recognized market is commercially reasonable); Suffield Bank v. LaRoche, 752 F. Supp. 54, 59 (D.R.I. 1990) (holding that the sale of pledged stock on the American Stock Exchange “ensured that its sale was commercially reasonable and beyond the scrutiny of this Court”). Moreover, the law provides that “[t]he fact that a greater amount could have been obtained by . . . disposition . . . at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the . . . disposition . . . was made in a commercially reasonable manner.” Ky. Rev. Stat. Ann. § 355.9-627(1). Applying the U.C.C. provisions to this case, the district court was correct to find that Bank One’s disposition of the PurchasePro shares through a sale on the NASDAQ national market was No. 03-6062 Layne, et al. v. Bank One, Kentucky, et al. Page 8 commercially reasonable. Johnson rehashes his arguments about preserving collateral value to contend that delaying the sale of the pledged stock from February was commercially unreasonable. Appellant’s Br. at 45. Johnson’s argument, however, misinterprets the statute. Section 9-610 does not impose an obligation on a lender to liquidate and sell the collateral stock at a specific time during the life of the loan. Put another way, § 9-610 does not address whether a lender should dispose of its collateral, but rather once that decision has been made, how the disposition should occur. When Johnson’s loan fell below the LTV ratio, Bank One attempted to restructure the loan and secure additional collateral rather than sell the shares. Under the pledge agreement and Kentucky law, Bank One was not under any obligation to sell the stock at that point. In late May, after repeated negotiations with Johnson fell through, Bank One decided to begin the liquidation process, which was completed by July.9 The sale of the stock was on the NASDAQ, a recognized market, and thus ensured that Johnson received the fair market value 10 for his stock shortly after the decision to liquidate was made, which is all that § 9-610 requires. Therefore, we conclude that the sale of Johnson’s PurchasePro stock was commercially reasonable and the district court’s grant of summary judgment on this issue is affirmed. 9 Johnson argues in the alternative that the delay from the time of the liquidation decision in May until July was commercially unreasonable because the stock value dropped during these months. This argument is similarly unpersuasive. As § 355.9-627(1) states, the mere fact that a higher value could have been obtained earlier, by itself, is not sufficient to show that a transaction was commercially unreasonable. Moreover, there is no evidence in the record that Bank One unreasonably delayed the sale of the stock. The record demonstrates that during the month and a half between the decision to liquidate and the actual sale, Bank One was in discussions with PurchasePro’s counsel to ensure that the sale of stock owned by Layne and Johnson was not in violation of any securities laws. Specifically, Bank One delayed the sale to ensure compliance with Rule 144 requirements. 17 C.F.R. § 230.144(b); see Rice v. Liberty Surplus Ins. Corp., Nos. 03-6071, 03-6091 & 03-6092, 2004 WL 2413393, at  (6th Cir. Oct. 28, 2004) (noting that under Rule 144 restricted stock may not be sold unless issuing corporation files a letter with the SEC certifying that the conditions of the rule have been met). Because the stock was lightly traded in the market, the shares were sold over a four-day period to avoid dumping a large block and further depressing the price. Such a delay is not commercially unreasonable. Finally, Johnson’s argument rests on the unproven assumption that Bank One should have known that a delay in the sale of the shares would necessarily result in a lower market value. PurchasePro shares were highly volatile, and it was plausible that the price could have rebounded. As a result, it could be commercially reasonable for Bank One to have delayed the sale to see if the market would return. See U.C.C. § 9-610 cmt. 3 (explaining that the U.C.C. “does not specify a period within which a secured party must dispose of collateral,” because there may be times when it is “prudent not to dispose of goods when the market has collapsed”). 10 Johnson argues that the recognized-market exception cannot be per-se reasonable as to timing because it would allow a lender to delay potentially a sale for years, which would be an unreasonable result. Appellant’s Br. at 45. We need not address the issue about whether a disposition of collateral on a recognized market is per-se reasonable, because the facts in this case reveal that Bank One sold the stock shortly after negotiations with Johnson broke down, after ensuring compliance with the securities laws and taking into account market volume. See supra note 9. Addressing Johnson’s issue, however, in the situation where a loan has been called, the lender has an incentive to sell the collateral for the greatest value possible so as to pay off the outstanding debt. The situation where a lender would hold off on the sale of collateral until the price drops precipitously and thereby risk the ability to recover its loan would be rare. The comment to § 9-610 states, however, that where a secured party does not dispose of collateral and “there is no good reason for not making a prompt disposition, the secured party may be determined not to have acted in a ‘commercially reasonable’ manner.” U.C.C. § 9-610 cmt. 3. Though the language seems at odds with § 9-627(a), the comment to that section states there is no inconsistency, but rather while a low price is insufficient of itself to prove commercial unreasonableness, in such a situation “a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable.” U.C.C. § 9-627 cmt. 2. Despite this language, courts have been reluctant to second-guess the timing of the disposition of collateral in most situations, even where the price has declined precipitously. See, e.g., Air Atl. Inc., 452 N.E.2d at 1147 (finding that a five-year delay from the decision to liquidate until the actual sale of stock was not commercially unreasonable, even where “the market declined ‘ruinously’ and the decline was ‘notorious’”). No. 03-6062 Layne, et al. v. Bank One, Kentucky, et al. Page 9