Rules Governing Sale of Repossessed Collateral Construed

Most people are dependent on borrowed money or financing for continuing in business or for major purchases, such as a home. That is true for farmers and non-farmers alike. Typically, a lender requires the borrower to sign a written agreement giving the lender legal rights to the collateral (such as the borrower’s crops, livestock or equipment) if the borrower fails to repay the loan. The type of a lending arrangement is known as a “secured transaction” and is subject to a specific set of rules that govern the rights and obligations of the parties to the transaction. This case involved the rules governing sale of repossessed collateral after default.

The defendant and her husband purchased a livestock supply company and financed the business through the plaintiff. The loan was secured by personal property used in the business and the debtor’s home. Unfortunately, the business was not successful and the debtors defaulted on the loan. A buyer could not be found for the business.  The plaintiff bank tried to streamline the business operations and find a buyer for the business or the inventory, but was unsuccessful. The bank later disposed of the business assets at private sale locally, but the sale proceeds were insufficient to pay the amount of the outstanding obligation owed to the plaintiff. As a result, the bank eventually sought foreclosure against the defendant’s home (which had been awarded to her in a divorce decree). The defendant challenged the foreclosure on the basis that she did not receive notice of the sale of the personal property, and that the sale was not conducted in a commercially reasonable manner - requirements of the rules governing the sale of repossessed collateral. The trial court ruled for the bank on both points.

Under Iowa law, the court noted that the bank had to notify the defendant of the proposed sale of the personal property. The bank did send such notice via regular mail, but the defendant refused delivery. The appellate court, upholding the trial court, held that Iowa law focuses on the manner in which notice is sent, not received, and that sending notice by certified mail satisfied the statutory notice requirement. As such, the bank was not required to make a second attempt at delivery of notice. The court also agreed that the sales were conducted in a commercially reasonable manner. It wasn’t a certainty that a nationally advertised sales would have brought more than local sales, but the bank would have incurred additional expense in doing so. Panora State Bank v. Dickinson, No. 5-836/04-1498, 2006 Iowa App. LEXIS 93 (Iowa Ct. App. Feb. 1, 2006).