In this case, Dutch Point Credit Union challenged the sale of its collateral by a mechanic’s shop that resulted in extinguishing the credit union’s perfected lien.

The credit union granted a loan secured by debtor’s Datsun automobile. The credit union properly placed its lien on the vehicle. After the loan was granted, the vehicle was in an accident during the same year.

The vehicle was towed and repaired by Caron Auto Works (hereinafter Caron). Debtor abandoned the vehicle when it was at Caron.

Caron filed a notice of intent to sell the vehicle with the Connecticut Department of Motor Vehicles, however, no notice of the intended sale was sent to the credit union as a secured party.

The Connecticut statute does not require a notice of intent to sell be sent to any secured party. Caron did publish a notice of the sale in a newspaper of general circulation, although the credit union neither read the published notice of sale, nor did the credit union have any actual knowledge of the proposed sale.

The credit union’s collateral was sold at auction for $2,800; the credit union was owed in excess of $2,500, but the credit union received none of the proceeds from the sale and a new title was issued to the purchaser without a continuation of the credit union’s lien.

The credit union sued several parties, including Caron and the party who purchased the vehicle. The credit union maintained that the state statute was unconstitutional as it failed to require any actual notice of the sale be sent to it as a secured lien holder.

The court ruled against the credit union and found that although the credit union had not received actual notice of the proposed sale of its collateral, the credit union failed to present sufficient evidence that the lack of notice violated constitutional provisions of fairness.

The court held that the publication notice in the newspaper ought to have been adequate notice to the credit union (even though the credit union was entirely unaware of the newspaper notice of sale).

Held: the credit union’s perfected security interest in the subject vehicle was effectively terminated upon sale by Caron and the credit union’s remedy would be to collect the deficiency from the original debtor. Dutch Point Credit Union v. Caron Auto Works, Inc., et al. (Connecticut Superior Court, District of Hartford, No. 367362).

EDITOR’S COMMENT

Although the case above interpreted a Connecticut statute, your state may have a similar law that does not require actual notice of the proposed sale of collateral be given to the secured lender. Every credit union should be aware of its own applicable state law as to whether or not notice of the sale is required to be given a lien holder.

Some states do require that actual notice of the sale be supplied to secured parties by the party scheduling the sale. The court ruling above could be detrimental to secured parties if your state has enacted a similar statute.

Consult with your attorney as to whether the applicable laws of your state could result in similarly extinguishing your security interests. If so, additional precautions must be taken, albeit costly to the credit union, to regularly review public notices of sale and ascertain if any of the credit union’s collateral is being sold.

This type of constant review of public sale notices by the credit union would be very time consuming and require additional personnel. In addition, the credit union may not always be aware as to where the public notice was published; any newspaper of general circulation is generally acceptable, and if the debtor has moved from the credit union’s area, the notice might be published in a newspaper of general circulation where the debtor then resides.

The Connecticut statute and the case above create an almost impossible task for a credit union and all other secured lenders. A far better maneuver would be for secured lenders to petition their state legislatures to change any State statute that does not, at a minimum, provide notice of the intended sale of collateral to all secured parties.

Author: Charles R. Harroun, Attorney at Law