Requirements for Preservation of Collateral (Security for a Promissory Note) Explained

In an action alleging the failure to preserve collateral which secured a promissory note, the Second Department determined summary judgment on the underlying promissory note should not have been granted because plaintiffs raised a question of fact about the commercial reasonableness of the handling of the collateral:

“Under both the common law and the Uniform Commercial Code, a secured party has a duty to exercise reasonable care in the custody and preservation of collateral in its possession. The obligation remains the same regardless of whether the secured party came into possession of the property before or after the debtor’s default” … .

“After default, a secured party may sell, lease, license or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing” (UCC 9-610[a]). “Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable” (UCC 9-610[b]). A secured party that disposes of collateral under section 9-610 is required to send to, among others, the debtor and any secondary obligor, notification of disposition (see UCC 9-611[b], [c]). Nugent v Hubbard, 2015 NY Slip Op 06226, 2nd Dept 7-22-15