• Refining the Definition of "Commercial Reasonableness" Under UCC Article 9 Regal Finance Co., Ltd. v. Tex Star Motors, Inc., --- S.W.3d ---, 2010 WL 3277132, 53 Tex. Sup. Ct. J. 1034 (Tex. 2010)
  • February 18, 2011 | Authors: Brian A. Kilpatrick; Gordon M. Shapiro
  • Law Firm: Jackson Walker L.L.P. - Dallas Office
  • In Regal Finance Co., Ltd. v. Tex Star Motors, Inc., the Texas Supreme Court issued an opinion concerning the appropriate standard for “commercial reasonableness” under Article 9 of the UCC when secured creditors dispose of collateral (repossessed vehicles in this case) and seek to recover a deficiency judgment after foreclosure and sale.  Rejecting a court of appeals’ decision which essentially transformed the standard to a “reasonable dealer” standard, at least insofar as the jury charge in that case was concerned, the Supreme Court held that a “reasonable dealer” standard was only one, non-exclusive method of proving commercial reasonableness.

    Tex Star, a used car dealer, had entered into a loan agreement with Regal Finance, in which various used cars served as collateral for the loan. When Tex Star defaulted on the contract, Regal Finance repossessed the cars, sold them at auction pursuant to Article 9 for less than the amounts owed, and sued Tex Star for the deficiency.

    Article 9 of the UCC requires a secured creditor to act in good faith and in a commercially reasonable manner when disposing of secured collateral through public sale such as an auction. Several examples of commercially reasonable practices or “safe harbors” are listed in Article 9.  These safe harbors are not the exclusive means of proving commercial reasonableness. 

    The trial court instructed the jury on the meaning of good faith and commercial reasonableness.  As part of these instructions, the jury charge read:

    Every aspect of the disposition, including method, manner, time, place and other terms must be commercially reasonable. A sale is commercially reasonable if it conforms to reasonable commercial practices among dealers in the type of property that was subject of the sale. (emphasis added)

    The jury found that Regal Finance sold some of the vehicles in good faith and a commercially reasonable manner (but not all), and awarded Regal Finance a judgment for $4 million.  On appeal, the court of appeals interpreted the word “if” in the jury instruction to mean “only if” and effectually transformed the safe harbor example into a mandatory “reasonable dealer” standard.  Measured against this standard, the court of appeals found that Regal did not offer evidence that it acted as a reasonable dealer would have and reversed the trial court’s judgment.

    In an 8-1 decision, the Texas Supreme Court reversed.  The Court noted that the above instruction appears to trace the language of Article 9, specifically Sections 9.610(b) and 9.627(b)(3).  The Court disagreed that the “if” created a mandatory standard. Rather, the Court found that when read in the context of the entire instruction, the “reasonable dealer” standard was a non-exclusive example and allowed for alternative methods to prove commercial reasonableness. In this instance, the Court held that Regal Finance introduced legally sufficient evidence that it acted in a commercially reasonable manner even though it did not act as a reasonable dealer would have.

    The dissent characterized the Court’s analysis as a departure from the well-established rule that evidentiary sufficiency be measured against the jury charge.  The majority disagreed, noting that “we simply disagree about what the charge requires” and how to read or interpret such charge.  Read in context, the Court believes that the language “if” did not mean “only if” and the jury was properly instructed on the Article 9 standard.

    Accordingly, when drafting jury instructions under Article 9 regarding commercial reasonableness of sale, one should be cautious to use non-exclusive language and list the various examples, or safe harbors, as non-exclusive methods of proving commercial reasonableness.  Although the creditor was ultimately saved by the Supreme Court in this case, a better crafted jury instruction would have avoided the reversal at the court of appeals level, and perhaps even better enabled the jury to decide the ultimate issue and not deny some of the claims.