Deficiency Actions against Guarantors

Recently, the Michigan Court of Appeals in Dearborn Capital Corporation v Facundo Bravo, (Docket No. 284274 released 9/22/09) issued a decision that serves as a harsh reminder to creditors of the consequences of failing to observe the letter of the UCC when selling collateral.

Creditor DCC held a security interest in equipment that was subject to a bankruptcy sale and resulted in a pot of money to be held until a determination was made as to the extent of the secured claim. DCC then accepted a deeply discounted settlement amount and sought to collect additional funds from the defendant guarantor. However, by not notifying the guarantor prior to accepting the bankruptcy settlement, DCC forfeited its right to recover the deficiency against the guarantor. §9-611.

Whether representing creditors or defending against such collections, the following points from this case bear mentioning:

· The duty to notify is not altered by the fact that the collateral may change form into identifiable proceeds from a disposition;

· Whether a disposition of collateral is “commercially reasonable” is irrelevant if the requisite notice is not given - - the court doesn’t even get to this question if the notice was not provided;

· Provisions in guaranties providing a waiver of notice are unenforceable unless the agreement is made after a default. (UCC §9-602)