## Facts

- Two borrowers pledged Indian jewelry to a pawnbroker as collateral for 30-day loans with interest.
- The jewelry’s value substantially exceeded the loan amounts.
- The borrowers defaulted.
- The pawnbroker sent notices stating it would retain the collateral in satisfaction of the debt under U.C.C. § 9-505(2) (as enacted in New Mexico); for purposes of decision, proper notice and receipt were assumed.
- Neither borrower objected within the statutory 30-day period.
- After the objection period, the pawnbroker sold the jewelry in the ordinary course of its business.
- The pawnbroker did not account to the borrowers for any surplus from the sales.
- The trial court ruled for the borrowers; the court of appeals reversed; the state supreme court granted review.

## Issues

1. Whether a secured party that gives a § 9-505(2) notice of intent to retain collateral may nonetheless sell the collateral in the ordinary course without complying with § 9-504’s disposition and surplus-accounting requirements.
2. Whether a debtor’s failure to object to a § 9-505(2) notice eliminates the debtor’s right to surplus when the secured party actually sells the collateral.

## Decision

- The Supreme Court of New Mexico reversed the court of appeals and reinstated the trial court’s judgment for the borrowers.
- A secured party that, in substance, disposes of collateral by sale must proceed under § 9-504 and account for any surplus.
- The pawnbroker could not use the § 9-505(2) retention procedure to cut off surplus rights while treating the collateral as inventory for resale.

## Legal Principles

- After default, U.C.C. § 9-504 (disposition) and § 9-505(2) (retention in satisfaction of debt) are alternative remedies with different consequences for debtor rights.
- A sale under § 9-504 requires the secured party to account to the debtor for any surplus (and permits recovery of any deficiency).
- Retention under § 9-505(2) requires notice and an opportunity to object; if properly completed and genuinely executed as retention, the debt is satisfied and the debtor has no claim to surplus.
- Courts look to the secured party’s actual conduct and intent; formal use of § 9-505(2) does not authorize a later sale that avoids § 9-504 duties.
- A debtor’s failure to object to a retention notice does not eliminate surplus rights where the secured party does not truly retain the collateral but instead sells it.

## Conclusion

Because the pawnbroker sold the collateral in the ordinary course rather than truly retaining it in satisfaction of the debt, the transaction was governed by § 9-504, and the pawnbroker was required to account to the borrowers for any surplus from the sales.


Reeves v. Foutz & Tanner, Inc., 617 P.2d 149 (N.M. 1980)