By: Kevin Braun and Greg Norton, Morgan Lewis
The commercially reasonableness requirement of §9-1607(3)(a) of the Maine U.C.C. (§9-607(c)(1) of the U.C.C.) did not apply to Secured Lender’s decision not to pursue collateral and instead sue on the personal guaranty of a guarantor. Finance Authority of Maine v. Grimnes, 2020 WL 2764564 (Supreme Judicial Court of Maine, May 28, 2020).
Harbor Technologies (the “Note Issuer”) executed a promissory note and security agreement pledging assets of the company to be held as collateral to secure a note held by Finance Authority of Maine (the “Secured Lender”). Martin Grimnes (the “Guarantor”) executed a personal guaranty of the Note Issuer’s obligations to the Secured Lender. The guaranty stated in part, that upon an event of default, the Secured Lender could pursue recovery against the Guarantor “without proceeding or exhausting any other remedies which it may have and without resorting to any security held by it”.
The Note Issuer defaulted on the loan and the Secured Lender did not proceed against the collateral but rather sued on the note and sued the Guarantor on his guaranty for the amount due.
The Guarantor agreed that the language of the guaranty permits the Secured Lender to proceed against him without first attempting to recover on the collateral, however he argued that the Maine U.C.C. required the Secured Lender to demonstrate that its decision not to proceed against the collateral was commercially reasonable, citing 11 M.R.S. §9-1607(3)(a):
“[a] secured party shall proceed in a commercially reasonable manner if the secured party … [u]ndertakes to collect from or enforce an obligation of an account debtor or other person obligated on collateral.”
The Guarantor claimed that he is an “account debtor” or “other person obligated on collateral”. The Secured Lender argued that Article 9 of the Maine U.C.C. does not apply to the situation because its claim arises from the independently enforceable guaranty signed by the Guarantor. The trial court agreed with the Secured Lender and the Guarantor appealed.
The Supreme Judicial Court of Maine stated that an account debtor or other person obligated on collateral “would refer to entities obligated to [the Note Issuer] on collateral pledged as security for the [Secured Lender]’s note”, such as a person indebted to the Note Issuer on an account. Since the Secured Lender didn’t seek collection from persons obligated to the Note Issuer, the protections of §9-1607(3)(a) did not apply. In addition, the commercial reasonableness requirement of §9-1607(3)(a) of the Maine U.C.C. applies when a secured party chooses to enforce its security interest in collateral, not to the situation where the Secured Lender determines not to do so. Here, the Secured Lender opted not to enforce its security interest and chose to obtain a judgement on the guaranty which is not subject to the commercial reasonableness requirement of §9-1607(3)(a) of the Maine U.C.C. The judgement of the lower court was therefore affirmed.