Can a Secured Creditor Refuse to Sell the Collateral?

Any secured creditor, large or small, may encounter a situation in which it is preferable to retain or recover the collateral in a transaction without having to sell the collateral itself. The purpose of this article is to make creditors aware of what is and is not possible to do under Florida law. Below is a synopsis of what Florida courts have decided on the subject as well as the requirements secured parties must meet when choosing to accept the collateral itself in satisfaction of the obligation. Understanding the realities of the law in this area will help secured creditors to properly manage expectations and identify the legal options available to them.

Florida Law on Retaining Collateral

Most secured creditors are aware of their ability, under the law, to take possession of the collateral and dispose of it. Fla. Stat. 679.609(1). Many secured creditors are also aware that under Florida law, a secured party may then sell, lease, license or otherwise dispose of any or all of the collateral. Fla. Stat. § 679.610. However, many will be unaware of the precise procedure and requirements for retaining the collateral itself. If the debtor consents and no one otherwise objects, a secured party may accept the collateral in full or partial satisfaction of the obligation. Fla. Stat. § 679.620.

It is important for the secured party to understand the steps which must be taken in order to accept the collateral itself as full or partial satisfaction of the obligation. A debtor is deemed to consent to the acceptance of collateral in partial satisfaction of the obligation if the debtor agrees to the terms of acceptance in a record authenticated after the default. A debtor is deemed to consent to the acceptance of collateral in full satisfaction of the obligation if the debtor agrees to the terms in a record authenticated after default or the debtor is sent an unconditional proposal to accept the collateral and then fails to object within 30 days after it is sent. Note, the proposal must include a notice letting the debtor know that if he or she does not object within the 30 days, the debtor will be deemed to have consented to the proposal.

The secured party must also send a notification of proposal to accept the collateral to other parties with an interest in the collateral. Fla. Stat. § 679.621. These other parties include anyone who:

• The secured party has received an authenticated notification of a claim of an interest in the collateral before the debtor consented to the acceptance;
• Any secured party who held a security interest or other lien on the collateral which was perfected by a financing statement 10 days before the debtor consented to the acceptance;
• Any secured party with a security interest in the collateral perfected by compliance with a statute, regulation or treaty 10 days before the debtor consented to the acceptance; and
• Any secondary obligor.

If one of these parties chooses to object, that objection must be received by the secured party within 20 days after the notification of proposal to accept was sent out. And despite all of this, a secured party still needs to dispose of the collateral within 90 days of taking possession or within any longer period to which the debtor and all secondary obligors agree. Fla. Stat. § 679.620(6).

Keeping the Collateral

Some creditors have attempted to find loopholes they can use to retain the collateral without selling it. One of these is transferring the collateral to itself as a way of “disposing” it. This is ill-advised. Florida courts have held that once the creditor repossesses the collateral, he cannot refuse to sell it; he must take it in satisfaction of the debt or dispose of it in a commercially reasonable manner and credit the debtor’s account. Spellman v. Independent Bankers’ Bank of Florida, 161 So. 3d 505, 507 (Fla. 5th DCA 2014). This appeared to be final and close off any alternative options for a secured party looking to avoid selling the collateral.

However, a more recent ruling does provide secured creditors with some hope. In Hohns v. Thompson, 350 So. 3d 788, 791 (Fla. 5th DCA 2022) (emphasis added), the court held that a secured party in possession of the debtor’s collateral may, after default, propose to retain the collateral in satisfaction of the obligation as an alternative to sale. Unlike the court in Spellman, which focused its analysis to what qualifies as the disposition of property under Section 679.620, Florida Statutes, the court in Thompson undertook a broader analysis encompassing all relevant section of the statute and more directly tackling the issue of what a secured party may do with collateral outside the context of a sale.

The end result? Secured creditors now have an avenue to retake possession of collateral in full or partial satisfaction of the obligation and as an alternative to sale.

What if the Collateral Exceeds the Debt?

In some cases, a secured creditor may succeed in regaining possession of the collateral but find that its value exceeds that of the debt. When this happens, the debtor is entitled to the remaining equity in the collateral. J.E. Joyner, Inc. v. Ettlinger, 421 So. 2d 656, 657 (Fla. 1st DCA 1982). In Ettlinger, the secured party had already obtained permanent possession over two tractors as collateral. Id. After the court found the value of the tractors exceeded that of the lien, the debtor was entitled to the remaining equity in the two tractors. Id. All secured creditors should be cognizant of this case and the other discussed above to avoid running afoul of Florida law governing secured transactions.

TLDR

Secured parties do, as one court recognized, have a wide array of remedies available to them which they may employ in any sequence. Spellman, 161 So. 3d at 507. Although difficult to track from the comprehensive language of Florida law, the remedy of retaining collateral in satisfaction of a debt includes two basic requirements. These are: (1) a secured party must ensure that they obtain a debtor’s consent and (2) a secured party must properly notify all others with interest in the collateral before taking the collateral itself. Creditors seeking to keep the collateral without a sale can rely on the Thompson decision but must also be cognizant of what the debtor is owed in situations where the collateral’s value exceeds the debt itself. Keeping these things in mind will help ensure secured parties avoid missing basic requirements under Florida law and hobbling their own efforts to collect.