Friday, March 22, 2013

FYI: 1st Cir Rules in Favor of Bank in Deficiency Collection Dispute Involving Chattel Mortgage

The U.S. Court of Appeals for the First Circuit recently upheld summary judgment in favor of a bank that extended a first preferred ship mortgage on a yacht, ruling that the lender was contractually permitted to use any of a number of options available under the mortgage to repossess and sell the yacht, including selling the yacht under "applicable law," which here was the Florida Uniform Commercial Code. 

In so doing, the Court ruled that, because one of the bank's options was to sell the yacht under applicable law, and because the notice of sale provided to the borrower complied with the UCC, Borrower was liable for any deficiency owed even though the notice borrower received did not indicate the time and place of the sale, as required by another provision of the first preferred ship mortgage that the Court determined did not apply under the circumstances.


A copy of the opinion is available at:


Defendant borrower ("Borrower") purchased a custom-made yacht with a loan from plaintiff lender ("Bank") that was executed in Massachusetts, Borrower's place of residence and the location of the yacht.   After Borrower defaulted on the loan, Bank issued Borrower a formal notice of default, and repossessed the yacht.  Bank eventually moved the yacht to Florida, where Bank listed the vessel for sale. 


Almost a year after sending Borrower the notice of default, Bank sent Borrower a second notice ("Notice of Sale") indicating its plan to sell the yacht.  The Notice of Sale informed Borrower that Bank intended to sell the yacht in accordance with Florida's Uniform Commercial Code ("UCC") and that "[t]he vessel . . . will be sold by way of private sale sometime after the date of this letter."  The Notice of Sale did not specify the date, time, or place of sale.  Around two months later, Bank sold the yacht for less than what was owed on the loan, and Bank later filed suit against Borrower in federal court in Massachusetts for the deficiency. 


Borrower moved for summary judgment, arguing that Bank was not entitled to any deficiency, because Bank allegedly violated the terms of the first preferred ship mortgage by supposedly failing to provide Borrower proper notice of the sale under a particular provision of the mortgage.  Bank responded that it provided proper notice in accordance with a different provision of the same first preferred ship mortgage.


The lower court denied Borrower's motion, but granted summary judgment on its own in Bank's favor on the issue of liability.  Borrower appealed.  The First Circuit affirmed.


In rejecting Borrower's various assertions, the First Circuit ruled that Borrower was liable for the deficiency under the terms of the first preferred ship mortgage contract.  The Court disagreed with Borrower's arguments that:  (1) Bank was required to provide Borrower ten days' notice as to the time and date of a sale in all sales, including those conducted under the Uniform Commercial Code, pursuant to a provision in the mortgage (the "Umbrella Notice Provision") providing that in the event of default Bank may repossess and sell the yacht "at any place and at such time as [Bank] may specify and in such manner as [Bank] may deem advisable . . . [as long as Bank gives Borrower] notice thereof (10) days in advance of the time and place of sale"; and (2) because the Notice of Sale failed to indicate the time and place of sale, the Notice of Sale was insufficient, thus prohibiting Bank from collecting a deficiency. 


Instead, the First Circuit agreed with Bank that, because Bank sold the yacht under a different provision of the first preferred ship mortgage (the "Stand-Alone Remedy") which provided that "[Bank] may exercise any 'rights, privileges and remedies granted by applicable law," the Umbrella Notice Provision that Borrower relied on did not apply in this case.   


Specifically, in reaching its conclusion, the Court applied basic principles of contract interpretation, noting in particular that the plain language of the first preferred ship mortgage agreement expressly allowed Bank to choose from among seven different options in the event of default.  Examining the mortgage's "Rights and Remedies on Default" provision, the First Circuit noted that the provision specified that the "Mortgagee may, at its option, do any one or more of the following," including repossess and sell in accordance with the Stand-Alone Remedy or the Umbrella Notice Provision.  In so doing, the Court pointed out that the Umbrella Notice Provision was part of a self-help remedy, whereas the Stand-Alone Remedy allowed Bank to employ statutory remedies that have their own notice and procedural requirements, thereby "making it unnecessary to restate them in the contract itself."


Another provision the First Circuit found significant provided that each remedy listed in the first preferred ship mortgage was cumulative, and in addition to any remedies specifically conferred by the mortgage itself, by law or statute.   The Court thus concluded that Bank had at its disposal all rights available to it by law, whatever the source, and could exercise those rights alone or together with its other rights.


Accordingly, determining that Bank's choice to conduct the sale of the yacht under Florida's UCC rendered the Umbrella Notice Provision inapplicable, the Court ruled that Borrower's argument lacked merit and that the lower court correctly granted summary judgment in Bank's favor. 




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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