Debtors protected from sham sales of foreclosed property

Business Wire, Dec 16, 1994

SAN FRANCISCO--(BUSINESS WIRE)--Dec. 16, 1994--The tenets of ``good faith and commercial reasonableness'' are alive and well in California in situations involving sales of repossessed property, the California Supreme Court ruled Thursday.

The court held that the auction and sale of a repossessed multimillion-dollar aircraft must be advertised in a commercially reasonable manner to comply with the California Uniform Commercial Code. The creditor, in the case cited, failed to do that, according to the unanimous decision, written by Justice Stanley Mosk.

According to the decision (Ford & Vlahos vs. ITT Commercial Finance Corp.), ITT Commercial Finance Corp. repossessed a $3.8 million Lockheed Hercules C-130A aircraft that had been collateral for a loan. In 1987, the lender, ITT, put the aircraft up for sale in Chandler, Ariz. The auction of the aircraft was advertised five days prior to the sale in the Arizona Republic and one day prior to the sale in the Phoenix Gazette.

Those publications, the trial court, San Francisco Superior Court, indicated, did not circulate among potential buyers of the aircraft. ITT itself was the sole bidder in the auction, buying the aircraft for $1 million. ITT then advertised the aircraft in Trade-A-Plane, ``the bible of aircraft sales in this country.'' A few months later, ITT resold the aircraft for a large profit, according to the factual findings of the trial court.

The trial court found, according to the opinion, that the ``aircraft's sale (was) commercially unreasonable because (it was) accompanied by insufficient publicity...'' Also, the trial court found the notices of sale ``legally insufficient'' for a number of reasons cited in the opinion.

To sell a valuable property like the C-130A, ``...a responsible dealer would employ more extensive advertising than placing a legal notice in agate type in an obscure newspaper,'' the California Supreme Court's decision said.

In yet another area, the opinion said, ``The purpose of the Uniform Commercial Code, in California and elsewhere, was to create ... the fairest and most efficient framework possible for transactions... As regards fairness, concepts of reasonableness and good faith are immanent in the code.''

``In this case,'' the California Supreme Court concluded, ``substantial evidence supported the trial court's conclusion that the Phoenix newspapers, with their limited circulation, did not provide a forum likely to bring bidders and a fair price for the foreclosed aircraft, and the sale hence was commercially unreasonable.''

The attorney for Ford & Vlahos was Stephen L. Joseph of Kline & Joseph in Washington, D.C., and for ITT Commercial Finance, Jerome B. Falk Jr. of Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin in San Francisco. -0-

NOTE TO EDITORS: A narrative account of the seven-year court proceedings and the consumer protection afforded to borrowers will follow. Seven consumer associations entered amicus briefs on behalf of the plaintiffs in the Supreme Court filing.

CONTACT: Wood Works, San Francisco

John Wood, 415/764-1041