In rare instances, after the disposition of collateral there will be proceeds in excess of the secured obligations. For those fortunate secured creditors that must address this situation, it is important to be prepared for how to proceed in accordance with Revised Article 9.
The excess proceeds must be turned over to junior lienholders when the secured creditor receives an authenticated demand for proceeds from the junior lienholders. Section 400.9-608(a)(1)(C), RSMo Supp. 2004. A cautious secured creditor’s collection practice will require the junior lienholders to provide reasonable proof of the interest or lien within a reasonable time. Section 400.9-608(a)(2). A failure to provide reasonable proof of the interest or lien will relieve the secured creditor from the obligation to turn the excess proceeds over to the junior lienholders. Id. This approach is suggested in order to avoid any liability for failure to give the excess proceeds to the debtor or obligor. Section 400.9-608(a)(4).
It is important to note that there is case authority that allows senior lienholders to demand proceeds of the sale or pursue litigation for conversion. See, e.g., Consol. Equip. Sales, Inc. v. First State Bank & Trust Co. of Guthrie, 627 P.2d 432 (Okla. 1981). This approach is often criticized and should not be followed in Missouri because it is understood that the sale of the collateral by a junior lienholder is subject to the senior lienholders’ interests. See First Nat’l Bank of Steeleville v. Erb Equip. Co., 921 S.W.2d 57 (Mo. App. E.D. 1996) (citing Frierson v. United Farm Agency, Inc., 868 F.2d 302 (8th Cir. 1989)).
7. (§7.41) Deficiency Claim
Once the disposition of the collateral is complete, the secured creditor will be able to calculate any deficiency that remains. At that point, the secured creditor will be able to weigh the risks and rewards, if any, of pursuing a deficiency judgment against the debtor and obligors.
A decision to pursue a deficiency lawsuit against a debtor or obligors must involve careful drafting. Missouri law is very clear that a deficiency judgment will not be awarded if a secured creditor is unable or fails to affirmatively plead that it provided the debtor and obligors “reasonable notice” of the disposition of the collateral under the UCC. See Cub Credit Corp. v. Mopec, Inc., 78 S.W.3d 205, 210–13 (Mo. App. W.D. 2002); Textron Fin. Corp. v. Trailiner Corp., 965 S.W.2d 426 (Mo. App. S.D. 1998). A failure to plead the satisfaction of the UCC’s reasonable notice requirement will result in a bar on consideration of any evidence relating to notice outside the pleadings. Cub Credit Corp., 78 S.W.2d at 213. Thus, the failure will prevent the secured creditor from obtaining a deficiency judgment against the debtor and obligors, despite its efforts to conduct a commercially reasonable sale.
The often-mentioned requirement to conduct a commercially reasonable sale is also an important part of pre-filing analysis. Revised Article 9 restricts a deficiency claim if the secured creditor fails to conduct a commercially reasonable sale. Section 400.9-626(a)(3), RSMo Supp. 2004. Courts construing former Article 9 made clear the expectation that a secured creditor must affirmatively prove compliance with the provisions of Article 9, including the obligation to conduct a commercially reasonable disposition of the collateral. See Citizens Nat’l Bank v. Robertson, 101 S.W.3d 302, 303–04 (Mo. App. E.D. 2003) (construing requirements of former Article 9) (citing Ford Motor Credit Co. v. Henson, 34 S.W.3d 448 (Mo. App. S.D. 2001)). The courts required affirmative proof of compliance with the UCC regardless of whether the debtor or obligors pled an affirmative defense of non-compliance. Id. at 304. This requirement of affirmative proof evolved because “the secured party has superior knowledge of the facts surrounding the sale and is the moving party in a deficiency action.” Id. This requirement, though, directly contradicts Revised Article 9’s rebuttable presumption rule in § 400.9-626(a). 20C V.A.M.S. § 400.9-626(a)(1) cmt. 3 (2003) (“Under paragraph (1), the secured party need not prove compliance with the relevant provisions of this Part as part of its prima facie...
