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Law School Case Brief

Reeves v. Foutz & Tanner, Inc. - 1980-NMSC-095, 94 N.M. 760, 617 P.2d 149

Rule:

The Uniform Commercial Code provides a secured party in possession with two courses of action upon the default of the debtor. N.M. Stat. Ann. § 55-9-504 provides generally that the secured party may sell the collateral, but if the security interest secures an indebtedness, he must account to the debtor for any surplus (and the debtor must account for any deficiency). N.M. Stat. Ann. § 55-9-505(2) provides the secured party with the alternative of retaining the collateral in satisfaction of the obligation. Under this section, the secured party must give written notice to the debtor that he intends to keep the collateral in satisfaction of the debt. The debtor is then given 30 days to object to the proposed retention and require the sale of the property, according to N.M. Stat. Ann. § 55-9-504

Facts:

Plaintiffs Reeves and Begay were Navajo Indians whose ability to understand English and commercial matters were limited. Each of them pawned jewelry with the defendant, Foutz and Tanner, Inc. d/b/a Tanner’s Big Dollar, where they received a money loan in return for a promise to repay the loan in thirty days with interest. When plaintiffs defaulted on their loans, defendant notified plaintiffs that it intended to retain the collateral pursuant to N.M. Stat. Ann. § 55-9-505(2), and plaintiffs did not object. Defendant then moved the jewelry into its normal sale inventory. Because the jewelry was worth considerably more than the loans, the defendant was left with a substantial surplus upon its sale, which was not returned to plaintiffs. The plaintiffs filed an action in court alleging defendant secured party had sold collateral without an accounting in violation of N.M. Stat. Ann. § 55-9-504. The trial court held that defendant was indeed required to account for the surplus pursuant to N.M. Stat. Ann. § 55-9-504. On appeal, the Court of Appeals reversed, holding that once defendant indicated its intent to retain the collateral pursuant to § 55-9-505, it could dispose of the property without an accounting. The plaintiffs sought review.

Issue:

Under the New Mexico Uniform Commercial Code, was the defendant secured party required to account to plaintiffs, who pawned their jewelry, for the surplus of the sale of the collateral?

Answer:

Yes.

Conclusion:

The Supreme Court of New Mexico reversed the court of appeals' judgment and affirmed the trial court's judgment. The Court agreed with the trial court's finding that the defendant did not act in good faith in disposing of the jewelry, taking into consideration the relative bargaining power of the parties. The Court held that where a secured party intended to sell collateral in the regular course of business, rather than use the collateral for its personal use for the immediately foreseeable future, an accounting for a surplus on the collateral's sale pursuant to § 55-9-504 was required. Here, the secured party could not sell the plaintiffs' collateral without complying with § 55-9-504. 

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