Legal Definitions - Arkansas rule

The Arkansas rule is a legal principle that applies in cases involving secured transactions. A secured transaction occurs when a borrower pledges specific property, known as collateral, to a lender as a guarantee for a loan. If the borrower defaults on the loan, the lender can repossess and sell the collateral to recover the money owed.

Under the Arkansas rule, there is a fundamental assumption: the collateral securing a loan is presumed to be worth at least as much as the outstanding balance of the loan. This means that if a lender repossesses and sells the collateral but the sale price doesn't cover the full loan amount, the law initially assumes that the collateral *should have* been sufficient to satisfy the debt.

Consequently, if the lender wants to claim that the borrower still owes money (a "deficiency") after the sale of the collateral, the burden is on the creditor (the lender) to prove two things:

• That the collateral was actually worth less than the loan balance at the time of sale, OR
• That the sale of the collateral was conducted in a commercially reasonable manner, and despite this, it still did not generate enough funds to cover the loan amount.

This rule protects borrowers by preventing lenders from selling collateral for an unreasonably low price and then demanding the remaining balance from the borrower without proper justification.

Examples:

• Car Loan Default: Sarah buys a new car, financing a significant portion of the purchase price. The car itself serves as collateral for the loan. After a year, Sarah loses her job and can no longer make payments. The bank repossesses the car and sells it at auction for $12,000. At the time of sale, Sarah still owed $15,000 on the loan. The bank then attempts to sue Sarah for the $3,000 difference. Under the Arkansas rule, the bank must prove to the court that the car's actual market value was indeed only $12,000, or that the auction was conducted fairly and achieved the best possible price, thereby overcoming the initial presumption that the car should have been worth at least $15,000.

• Small Business Equipment Loan: A small printing company, "PrintPerfect," takes out a loan to purchase a new, high-tech printing press, using the press itself as collateral. The outstanding loan balance is $75,000. Due to unforeseen economic challenges, PrintPerfect defaults on its loan. The lender repossesses the printing press and sells it to another company for $50,000. The lender then seeks to recover the remaining $25,000 from PrintPerfect. The Arkansas rule dictates that the lender must present evidence demonstrating that the printing press's fair market value was truly $50,000 at the time of sale, or that the sale process was commercially reasonable and maximized the sale price, despite the initial legal assumption that the press was worth at least $75,000.

• Motorcycle Financing: Michael finances the purchase of a high-performance motorcycle, with the motorcycle acting as collateral for the loan. He owes $10,000 when he falls behind on payments. The financing company repossesses the motorcycle and sells it through a dealer network for $7,000. The company then tries to collect the remaining $3,000 from Michael. To succeed, the financing company must satisfy the Arkansas rule by proving that the motorcycle's actual value was $7,000, or that the sale was conducted properly and achieved a reasonable price, thereby justifying their claim for the deficiency against Michael.