NH District Court: Sale of repossessed aircraft below book still commercially reasonable absent bad faith

Contributed by Kevin Braun of Bingham McCutchen LLP:

United States District Court for the District of New Hampshire holds that creditor’s sale of a repossessed aircraft at well below book value was commercially reasonable where there was no proof of diminished value due to non-repair or proof of bad faith on behalf of seller.  Harley-Davidson Credit Corp. v. Galvin, 2014 U.S. Dist. LEXIS 123435 (D.N.H. 2014).

On April 24, 2008, RASair (the “Borrower”) obtained a $250,000 loan from Eaglemark Savings Bank (the “Lender”), for the purchase of a Cessna 421C (the “Aircraft”), evidenced by an Aircraft Secured Promissory Note (the “Promissory Note”) and secured by a first priority security interest in the aircraft under a security agreement (the “Security Agreement”).  Mark Galvin (the “Guarantor”) personally guaranteed the Borrower’s performance under the loan.  The Lender ultimately assigned the Promissory Note and Security Agreement to Harley-Davidson (the “Assignee”).

In August 2010, the Borrower defaulted on the Promissory Note, leading to Assignee’s repossession of the Aircraft.  The Assignee placed the Aircraft in the custody of a dealer specializing in sales of repossessed aircrafts.  Before the dealer could sell the Aircraft, someone vandalized its audio panel.  However, the dealer ultimately sold the Aircraft for $155,000.  The Assignee applied the sale proceeds to the outstanding obligations of the Borrower and Guarantor, sending a deficiency notice for the remaining balance to both parties.  This case resulted from the Borrower’s and Guarantor’s failure to pay the remaining balance.

The Guarantor argued that he was not liable for the remaining balance because the Assignee failed to sell the Aircraft in a commercially reasonable manner.  The Guarantor’s argument rested on three premises:  (1) the Assignee did not repair the vandalism on the Aircraft until after the sale, significantly diminishing the value recouped, (2) the Assignee acted in bad faith by turning legitimate buyers away from the Aircraft and by hiding the vandalism from the Guarantor, and (3) the Assignee sold the Aircraft for far below its book value.

The court analyzed the Guarantor’s claims one by one.  The court found no basis for Guarantor’s first claim that the unrepaired vandalism resulted in significant diminishing of recouped value.  Guarantor had relied primarily on his own affidavit in arguing that the vandalism resulted in a difference in sale price.  However, neither the affidavit nor anything in the record contained factual basis for the claim. 

The court identified the same problem with the Guarantor’s second premise.  The Guarantor provided no evidence to prove that the Assignee hid the vandalism.  Furthermore, the Guarantor did in fact learn of the vandalism approximately a month before the sale, and he took no action to object to the sale.  Similarly, Guarantor provided no proof that the Assignee turned legitimate buyers away from the Aircraft.  The court found Assignee’s lack of marketing to be a non-factor, as the record contained evidence suggesting that the Assignee did not market the plane because of a known defect in the autopilot. 

Finally, as to Guarantor’s third premise, the court emphasized that the possibility of a greater sale price is not outcome-determinative regarding the commercial reasonableness of collateral disposition.  Here, the Guarantor’s claim failed because, (1) over a year prior to the sale, he received a price quote well below book value, (2) he was informed of the Aircraft’s poor paint condition, and (3) the plane further depreciated in the year since the quote. 

Finding no merit to Guarantor’s arguments, the court concluded that the Assignee had disposed of the Aircraft in a commercially reasonable manner.