Summary of a Recent
Judicial Development in
Secured Transactions

Sale of Collateral Must Be "Commercially Reasonable"

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In CIT Group Equipment Financing, Inc. v. FRS Farms, Inc., 745 N.W.2d 88, 2007 WL 4441052 (Wis. Ct. App. 2007), the Court of Appeals of Wisconsin affirmed the lower court's holding that a creditor's sale of repossessed collateral was not "commercially reasonable," but reversed the lower court's determination that the creditor was equitably estopped from obtaining a deficiency judgment.

Background

After FRS Farms defaulted on its equipment leases, CIT Group Equipment Financing repossessed and sold the equipment in dispute for far less than its listed value. Id. at *1. CIT then brought a claim for a deficiency judgment, but the circuit court held that CIT's sales of the equipment were not commercially reasonable and dismissed the complaint, and CIT appealed. Id.

Arguments

CIT argued that its sale of equipment was commercially reasonable, and that it should not be equitably estopped from obtaining a deficiency judgment. Id. at *2. CIT further argued that FRS Farms had failed to establish the elements of equitable estoppel. Id. at *6.

Analysis and Holdings

"Commercially reasonable"
The UCC as adopted by Wisconsin requires that disposition of collateral by a secured party after default must be commercially reasonable in every aspect, including the method, manner, time, place, and other terms. Id. at *2. Wisconsin statutes provide that a disposition of collateral is commercially reasonable if made: (a) In the usual manner on any recognized market, (b) at the price current in any recognized market at the time of the disposition, or (c) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition. Id. Both parties agreed that subsection (c) applied since there was no recognized market for the equipment, so the issue before the court was whether CIT sold the equipment "in conformity with reasonable commercial practices" among dealers in the type of property. Id. The court explained that while the amount of proceeds from the sale is relevant, the primary focus of the commercial reasonableness inquiry is the procedure employed. Id. at *3. The circuit court had made several findings of fact, such as the fact that CIT obtained no formal written appraisals of the equipment and that there were numerous conflict of interest concerns, that supported its determination that the transaction was not "commercially reasonable." Id. at *4. The court therefore affirmed the trial court's judgment on this issue. Id.

Equitable estoppel
The elements for equitable estoppel include: (1) an action or non-action that induces (2) reliance by another, either in the form of action or non-action, (3) to his or her detriment. Id. at *6. The court noted that FRS Farms did not even address the elements of equitable estoppel in the circuit court, and so failed to meet its burden. Id. Therefore the court reversed the trial court's determination that CIT was equitably estopped from obtaining a deficiency judgment. Id. at *8.

The case was decided on December 20, 2007.