Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 21

FACTS Bradley Smith, on his own behalf and on the behalf of the John J. Smith Revocable Living Trust, borrowed funds from Firstbank Corporation secured with pledges of Sparton Corporation stock and other collateral. When the loans were not paid, Firstbank sold the stock in two private transactions, returned the other collateral, and remitted the excess funds collected to Smith and the trust.
Alleging that the sales were commercially unreasonable because a higher price might have been obtained in a different sale, Smith and the trust filed a suit in a Michigan state court against Firstbank. From the court's grant of the defendant's motion for summary judgment, the plaintiffs appealed.
ISSUE Were Firstbank's sales of the debtors' Sparton stock commercially reasonable?
DECISION Yes. A state intermediate appellate court affirmed the lower court's summary judgment in the bank's favor.
REASON Firstbank had valid reasons for choosing to sell the debtors' stock in private sales and worked to obtain a reasonable price for the shares. Concern about how public sales might have affected the share price supported the bank's decision to seek a private buyer. In previous sales of Sparton stock in the public market, shares were sold in a series of transactions at declining prices. Firstbank's decision to use private sales avoided this risk. The manner in which the sales were conducted was also reasonable. Firstbank sought more than one offer for the stock.
Because Sparton shares are thinly traded, however, the bank received only one offer for Smith's stock, which was at a discount. To sell this large block of the shares, Firstbank accepted the offer. The bank was able to sell the trust's shares in a second transaction for twenty-one cents more per share, even though the closing price for the shares was the same as on the day of the sale of Smith's shares. Because of the bank's efforts, Smith and the trust were able to keep "over five million dollars of collateral, as well as a net surplus on the sale of the stock."
FOR CRITICAL ANALY SIS-Economic Consideration Why does collateral have to be disposed of in a commercially reasonable manner? What factors do courts look at to determine reasonableness?