Enforcement of Article 9 Security Interests: The Commercially Reasonable Sale

U.C.C. ' 9-610(b) requires that the sale or disposition of collateral after default be commercially reasonable. A sale is commercially reasonable if it is a “disposition in any recognizable market,” is “otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition,” or is approved in a judicial proceeding, by a bona fide creditor's committee, by a representative of creditors or by an assignee for the benefit of creditors. U.C.C. ” 9-627(b) and (c).

Thus, Article 9 provides some safe harbors whereby the secured party can avoid a fact-sensitive analysis of commercial reasonableness of its actions and inactions. If the collateral cannot be sold in a “recognizable market” such as the stock market, the easiest safe harbor to invoke is a resale in accordance with the reasonable commercial practices of dealers. If the collateral is disposed of consistently with the practices of dealers of similar collateral, the disposition will be deemed to have been commercially reasonable. The secured party should retain a reputable dealer of similar collateral for the repossession and resale. This strategy may insulate the secured party from attack, but is not impenetrable. A debtor may argue that the dealer retained by the secured party did not sell the collateral in accordance with the regular practices of dealers in the industry, but in order to do so the debtor will likely have to retain an expert witness.

A frequently invoked safe harbor is when the collateral is sold pursuant to a court ordered sale. U.C.C. ' 9-627(c)(1). This provision is most often applicable when the collateral is sold pursuant to an order of the bankruptcy court, such as a sale under ' 363 of the U.S. Bankruptcy Code. A court ordered sale probably does not relieve the secured party of the Article 9 notice requirements, and the secured party should be sure to comply with them.

If the sale does not fall into any of these “safe harbors,” the sale will be subject to a commercial reasonableness test, applied on a case-by-case basis. The fact that “a greater amount” could have been obtained “in a different method from that selected by the secured party is not of itself sufficient” to prove the sale was not commercially reasonable. U.C.C. ' 9-627(a).

While Article 9 does not require a private sale, it does encourage this mode over a public sale because private sales are more likely to bring a higher price than public sales. U.C.C. ' 9-610, Official Comment 2.

Section 9-610(a) states that the secured party may sell the collateral “in its present condition or following any commercially reasonable preparation or processing.” Based on that language, one might suppose that a secured party would not be required to make any repairs. Many courts take that position. Addessi v. Wilmington Trust Co., 530 A.2d 1128 (Del. 1987). However, courts have held that it is commercially unreasonable to fail to make minor repairs and to expose the collateral to the elements and allow it to deteriorate. Ingersoll-Rand Financial Corp. v. Miller Mining Co., 817 F.2d 1424 (9th Cir. 1987). That duty follows from the obligation under U.C.C. ' 9-207 to preserve the collateral. Of course, this duty does not arise if the secured party does not have possession of the collateral due to the debtor's conduct. In re Adobe Trucking, Inc., 2011 WL 6258233. However, the Eighth Circuit has found that a secured party was not required to reassemble collateral dismantled during repossession. C.I.T. Corp. v. Duncan Grading & Constr., Inc., 739 F.2d 359 (8th Cir. 1984). See also Grumman Credit Corp. v. Rivair Flying Serv., 1992 Ok 133, 845 P.2d 182 (Okla. 1992).

Reasonable expense to make the collateral marketable is recoverable so long as the secured party presents appropriate documentation. Brown v. Ford, 280 Ark. 261, 658 S.W.2d 355 (1983).

If the agreement between the parties provides, the secured party may require the debtor to assemble the collateral and make it available at a mutually convenient location. U.C.C. ' 9-609(c), 9-609(a)(2). If the collateral is very big or costly to move, selling the collateral on-site has been approved except when the debtor's location is very inconvenient for potential purchasers. Additionally, the secured party may render the equipment unusable without repossessing it. U.C.C. ' 9-609(a)(2).

A secured party may be required to sell the collateral at retail if it has access to the retail market, because presumably it will fetch a higher price, although potentially at greater cost and delay. Ford Motor Credit Co. v. Jackson, 126 Ill. App. 3d 124, 466 N.E.2d 1330 (1984). However, secured parties typically lack facilities to store and sell the collateral on a retail basis. Accordingly, in most cases, wholesale dispositions have been determined to be commercially reasonable. Financial Federal Credit, Inc. v. Wills, 2009 U.S. Dist. LEXIS 108456 (D. Neb. 2009); Ford Motor Credit Co. v. Sagmiller (In re Estate of Sagmiller), 2000 ND 151, 615 N.W.2d 567 (N.D. 2000); Ford Motor Credit Co. v. Russell, 519 N.W.2d 460, 466 (Minn. Ct. App. 1994); Advantage Leasing Co. v. Shepperd, 1988 Tenn. App. LEXIS 847 (Tenn. Ct. App. 1988); Dischner v. United Bank Alaska, 725 P.2d 488, 490 (Alaska 1986).

Article 9 generally also does not require advertising in any specific medium for any particular amount of time, but it is generally advisable to advertise in a general circulation publication in the locale of the collateral and in an industry-related publication, such as a restaurant publication, if selling restaurant equipment. In re Adobe, supra. The 2010 Amendments clarify that Internet advertising and sales are permissible. (See Proposed Revisions to Official Comment 2 for U.C.C. ” 9-610 and 9-613.) These comments refer to electronic dispositions of collateral as “commercially reasonable” and “form of notification” respectively.)

Regardless of the means of advertisement, it should include all information reasonably required for a potential purchaser to make an informed decision. By way of example, the advertisement for the sale of a vehicle should include, inter alia, the year, make, model, condition and mileage. If the collateral is equipment or other goods, there should be an opportunity for prospective buyers to pre-inspect the collateral. Westgate State Bank v. Clark, 231 Kan. 81, 642 P.2d 961 (1982). If possible, the dates and times for pre-inspection should be included in the advertisements. Id.

Another question is whether a secured party may sell the collateral piecemeal. That issue is again tested by the commercial reasonableness standard. Factors to weigh in the decision-making are whether goods of that kind are ordinarily sold piecemeal or in bulk, and which avenue will maximize the price obtained. Associates Commercial Corp. v. Hammond, 285 S.C. 277, 279, 330 S.E.2d 82 (S.C. App. 1985) (rejecting contention that collateral needed to be sold as a whole); Smith v. Daniels, 634 S.W.2d 276, 278 (Tenn. App. 1982) (coin-operated amusement machines should have been sold individually since that was practice in the industry).

A final issue is delay. Revised Article 9 rejected the line of cases that held that a substantial delay in selling the collateral constitutes a “constructive” strict foreclosure, thereby barring the secured party from pursuing any deficiency balance. U.C.C. ' 9-620, Official Comment 5. Delay is, however, still subject to the commercially reasonableness standard. Whether the delay will render a sale commercially unreasonable may turn on whether the transaction is a consumer transaction. Generally, the guideline is that if the collateral is of a sort that depreciates rapidly, the secured party should use its best efforts to dispose of the collateral as rapidly as possible. However, in non-consumer transactions, if delay causes no decline in value, then it is immaterial how long the secured party waits. Relevant, too, is the reason for the delay. A delay caused because the collateral required repair, because there was a collapse in the market making a sale imprudent at that time, or because the secured party was unable to sell will be viewed differently than a delay due to inaction. Navistar Fin. Corp. v. G & L Leasing, Inc., 1999 U.S. Dist. LEXIS 10131 (D. Kan. 1999); In re Crosby, 176 B.R. 189 (B.A.P. 9th Cir. 1994), aff'd, 85 F.3d 634 (9th Cir. 1996); Tee Vee Toons Inc. v. Prudential Secs. Credits Corp. LLC, 2005 N.Y. Misc. LEXIS 3474 (N.Y. Sup. 2005). In consumer transactions, however, the secured party must dispose of the goods within 90 days of repossession if 60% of the cash price has been paid in the case of a PMSI, or if 60% of the obligation has been paid in the case of a non-PMSI. U.C.C. ' 9-620(e).

As noted, the fact that an alternate process might have realized a higher sales price is not enough in and of itself to preclude the sale from being considered commercially reasonable. A secured party need not be right; it need only be rational. To show that its decision-making was rational, secured parties should engage experienced resellers in the relevant market who can be counted on to use proper marketing channels, prepare the collateral appropriately for resale, and maximize price, and who, more importantly, can provide sound business reasons to support each decision. While pre-sale appraisals are not necessary in reselling collateral, they are very helpful in justifying procedures and methods selected when secured parties sell expensive collateral, when secured parties anticipate a litigious obligor, when the collateral is highly specialized, or when there is unusual urgency because the obligor's landlord is about to repossess the premises or a similar exigency exists that requires rapid disposition of the collateral.

While low price will not disqualify a sale from being commercially reasonable, it will invite closer judicial scrutiny. U.C.C. ' 9-610, Official Comment 10; U.C.C. ' 9-627, Official Comment 2. Price is a judicial smell test. One statistical analysis has found that “[i]f a court determined that a secured party received a bid price greater than or equal to 63% of the fair value of the collateral, then the court found the disposition to be commercially reasonable 85% of the time. If, however, a court determined that a secured party received a bid price less than 63% of the fair value of the collateral, then the court found the disposition to be commercially unreasonable 83% of the time.” Jack F. Williams, Debunking the Myth Engulfing Article 9 Collateral Dispositions, 9 Am. Bankr. Inst. L. Rev. 703 (Winter 2001).

Three tests commonly invoked by courts for analyzing the commercial reasonableness of sales are: 1) the proceeds test; 2) the totality of the circumstances test; and 3) the procedures test. Under the proceeds test, the court's focus is on the disparity between the sale price and the value of the collateral. Generally, the courts will not reject a sale just because of a disparity; the disparity must shock the conscience. See In re Adobe Trucking, Inc., supra.

Under the totality test, the court looks at all circumstances with the price disparity only being an important factor. The courts will look “with close scrutiny” when the price disparity is huge. Finally, under the procedures test, the court will generally uphold the sale if the secured party conducted the sale properly procedurally, although the sale yielded a very low price. It has been held under this test that a faulty sale notice to the debtor is not a procedural defect that would render a sale commercially unreasonable. In re Excello Press, Inc., 967 F.2d 1109 (7th Cir. 1989).

The conclusion is clear. Secured parties should not be cavalier about their responsibilities under Article 9, but should make each decision with the counsel of relevant experts.

The parties, including secondary obligors, may not agree to waive the requirement of commercial reasonableness. They may, however, like with the commercially reasonable preparation or processing obligations, “determine by agreement the standards measuring the fulfillment of the rights of a debtor or obligor or the duties of the secured party ' if the standards are not manifestly unreasonable.” U.C.C. ' 9-602. This provision has also been relied upon by the courts to uphold provisions in a security agreement defining what the secured party may do to conduct a commercially reasonable sale. In re Adobe, supra. It is highly recommended that secured parties take advantage of this opportunity and spell out in the loan documents what is required for a commercially reasonable sale. Unless the agreed procedure is manifestly unreasonable, it should not only be upheld, but should be upheld on a motion for summary judgment, thereby eliminating the need for a costly trial. In re Adobe, supra.

In non-consumer cases, the secured party need not prove commercial reasonableness, unless an obligor or secondary obligor raises the issue. U.C.C. ' 9-626(a)(1). In consumer cases, Article 9 defers to state law. In some states, such as Texas, the common law provides that a secured party seeking a deficiency must plead that disposition of the collateral was commercially reasonable, even if the debtor never raises the issue. In re Foley v. Capital One Bank, N.A., Tex. App. LEXIS 7637, 2012 WL 3860455 (Tex. Ct. App. 2012). Of course, if the debtor raises the issue in a consumer case the secured party must go further and prove commercial reasonableness. Id.

If the issue of commercial reasonableness is raised and the collateral was not sold in a commercially reasonable sale, the secured party may have substantially jeopardized its ability to recover any deficiency from the obligor and all guarantors, and may be liable for damages, especially in consumer transactions when substantial statutory damages will be imposed. U.C.C. ' 9-625(c).

If the secured party fails to conduct a commercially reasonable sale in non-consumer transactions, there arises a rebuttable presumption that the collateral had a value equal to the balance of the debt. U.C.C. ' 9-626(a)(4). Thus, if the secured party fails to conduct a commercially reasonable sale in non-consumer transactions, the burden shifts to the secured party to prove that the value received was, indeed, commercially reasonable, or to show what amount should be found to be a commercially reasonable value and credited to the obligor. U.C.C. ' 9-626(a). In consumer transactions, Article 9 does not impose a rebuttable presumption, but also does not preclude the presumption. Thus, in consumer transactions, states may impose the rebuttable presumption or may impose an irrebuttable presumption, as some states did for all transactions before the 1999 revisions to Article 9. Greathouse v. Charter Nat'l Bank Southwest, 851 S.W.2d 173, 17 U.C.C. Rep. 2d 1349 (Tex. 1992).

As for the buyer, however, the foreclosure sale discharges all junior liens, even if the sale is defective, so long as the buyer acts in good faith. U.C.C. ' 9-617(b) and ' 9-102(a)(32).

Debtor's Redemption Rights, Deficiencies and Surpluses, and Foreclosures By a Junior Secured Party

The warranties relating to “title, possession, quiet enjoyment and the like,” warranties arising by law under Articles 2 and 2A, will apply to a sale under Article 9. U.C.C. ' 9-610(d), Official Comment 11. Secured parties may disclaim or modify these warranties. U.C.C. ' 9-610(e). “Depending on the circumstances, a disposition ' may also give rise to other statutory or implied warranties, e.g., warranties of quality or fitness for purpose.” Id. Thus, the sale of the collateral by a secured party should always be on a “where-is” “as-is” basis, without any representations or warranties. The bill of sale should reflect that the secured party is not in the business of selling the collateral at issue and took title to the collateral in connection with a foreclosure. If appropriate, the bill of sale should also reflect that the buyer has inspected the collateral and accepts it “as-is.” If the buyer was referred by the obligor or a guarantor and has acquired or will soon acquire possession of the collateral through and directly from the obligor or a guarantor, the bill of sale to the buyer should reflect that the buyer will take possession of the collateral at its own cost and expense directly from the obligor, without any obligation of the secured party to deliver possession. Finally, the bill of sale should be an integrated agreement, thereby precluding alleged oral agreements contradicting same.

If the debtor will not cooperate in providing or executing any necessary documents to transfer title, Article 9 provides a mechanism for effecting the transfer without the debtor's cooperation. U.C.C. ' 9-619(a) and (b). See also, Official Comment 2. This mechanism will not, however, be available in the case of a federal registry if the federal recording office is not required to defer to state law.

Under 9-623, an obligor may generally redeem repossessed collateral at any time until the secured party has held a public sale or entered into a contract for the sale of the collateral in a private sale or has accepted collateral in full or partial satisfaction of the obligation. U.C.C. ' 9-623(a) et seq. If the debtor elects to redeem, it must tender payment for all obligations secured by the collateral and all expenses reasonably incurred, including attorneys' fees if provided in the contract or by law. U.C.C. ' 9-623(b). The debtor may even be required to provide evidence of insurance to redeem. Mancuso v. Long Beach Acceptance Corp., 254 S.W.3d 88, (Mo. Ct. App. 2008).

In consumer transactions, the secured party must provide an explanation in an authenticated notice to the debtor for any surplus and must provide an accounting before it pursues any deficiency. U.C.C. ' 9-616. Note that the “debtor” in this case is not limited to a “consumer debtor.”

If the underlying transaction was a sale of accounts, chattel paper, promissory notes or payment intangibles, the debtor is only entitled to a surplus if the agreement so provides, and the obligor is not liable for any deficiency. U.C.C. ' 9-615(e).

In the event of a surplus, the secured party must use the surplus proceeds to satisfy junior security interests. U.C.C. ' 9-615(a)(3). The senior secured party's obligation only arises if the junior secured party gives written notification of its demand for payment before completion of distribution of the proceeds. U.C.C. ' 9-615(a)(3)(A). The senior secured party may require the junior secured party to supply reasonable proof of interest. U.C.C. ' 9-615(b).

If the secured party receives something other than cash at sale, such as a note, the secured party does not have to apply the non-cash proceeds to the debt unless its failure to do so would be commercially unreasonable. If the secured party does apply the non-cash proceeds, it must do so in a commercially reasonable manner. U.C.C. ' 9-615(c). Thus, the secured party has flexibility in valuing and applying non-cash proceeds.

The secured party may also be awarded attorneys' fees, but only if permitted under the loan documents and if not prohibited by law. U.C.C. ' 9-615(a)(1).

A junior creditor may also foreclose its lien. U.C.C. ' 9-609(a)(1). A senior lienholder may, however, insist on taking over the foreclosure process. U.C.C. ' 9-610, Official Comment 5. This is especially true if the junior's foreclosure is an event of default under the senior's documentation. U.C.C. ' 9-609(a)(1).

A foreclosure by a junior secured party does not discharge a senior's lien. U.C.C. ' 9-617(a)(3). Thus, a senior lienholder's foreclosure is more likely to yield a greater sale price, as it is free of all liens. U.C.C. ' 9-617(a)(2).

'

Frank Peretore is a member of this newsletter's Board of Editors and a founding partner of the law firm of Peretore & Peretore, P.C., with offices in New Jersey and New York. He represents national and regional financial institutions and lessors from the transactional and financing stage throughout the litigation stage in the state, federal and bankruptcy courts. He also represents creditors in general commercial litigation and commercial foreclosure matters. Peretore may be reached at 973-729-8991. This article is adapted from the author's book titled Workouts and Enforcement for the Secured Creditor and Equipment Lessor, (2008) by permission of Oxford University Press, Inc.

Part Three of a Three-Part Article

This is the third installment of a three-part article designed to provide secured parties with an overview of their enforcement rights and remedies as set forth in Article 9 of the UCC. Part One covered the recovery and repossession of a secured party's collateral. Part Two addressed the acceptance of collateral in full or partial satisfaction of debt, and the notice components of a commercially reasonable sale. This installment focuses on the details of a commercially reasonable sale under Article 9, including the terms of sale of collateral, debtor's redemption rights, deficiencies and surpluses, and foreclosures by a junior secured party.

The Commercially Reasonable Sale

U.C.C. ' 9-610(b) requires that the sale or disposition of collateral after default be commercially reasonable. A sale is commercially reasonable if it is a “disposition in any recognizable market,” is “otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition,” or is approved in a judicial proceeding, by a bona fide creditor's committee, by a representative of creditors or by an assignee for the benefit of creditors. U.C.C. ” 9-627(b) and (c).

Thus, Article 9 provides some safe harbors whereby the secured party can avoid a fact-sensitive analysis of commercial reasonableness of its actions and inactions. If the collateral cannot be sold in a “recognizable market” such as the stock market, the easiest safe harbor to invoke is a resale in accordance with the reasonable commercial practices of dealers. If the collateral is disposed of consistently with the practices of dealers of similar collateral, the disposition will be deemed to have been commercially reasonable. The secured party should retain a reputable dealer of similar collateral for the repossession and resale. This strategy may insulate the secured party from attack, but is not impenetrable. A debtor may argue that the dealer retained by the secured party did not sell the collateral in accordance with the regular practices of dealers in the industry, but in order to do so the debtor will likely have to retain an expert witness.

A frequently invoked safe harbor is when the collateral is sold pursuant to a court ordered sale. U.C.C. ' 9-627(c)(1). This provision is most often applicable when the collateral is sold pursuant to an order of the bankruptcy court, such as a sale under ' 363 of the U.S. Bankruptcy Code. A court ordered sale probably does not relieve the secured party of the Article 9 notice requirements, and the secured party should be sure to comply with them.

If the sale does not fall into any of these “safe harbors,” the sale will be subject to a commercial reasonableness test, applied on a case-by-case basis. The fact that “a greater amount” could have been obtained “in a different method from that selected by the secured party is not of itself sufficient” to prove the sale was not commercially reasonable. U.C.C. ' 9-627(a).

While Article 9 does not require a private sale, it does encourage this mode over a public sale because private sales are more likely to bring a higher price than public sales. U.C.C. ' 9-610, Official Comment 2.

Section 9-610(a) states that the secured party may sell the collateral “in its present condition or following any commercially reasonable preparation or processing.” Based on that language, one might suppose that a secured party would not be required to make any repairs. Many courts take that position. Addessi v. Wilmington Trust Co. , 530 A.2d 1128 (Del. 1987). However, courts have held that it is commercially unreasonable to fail to make minor repairs and to expose the collateral to the elements and allow it to deteriorate. Ingersoll-Rand Financial Corp. v. Miller Mining Co. , 817 F.2d 1424 (9th Cir. 1987). That duty follows from the obligation under U.C.C. ' 9-207 to preserve the collateral. Of course, this duty does not arise if the secured party does not have possession of the collateral due to the debtor's conduct. In re Adobe Trucking, Inc., 2011 WL 6258233. However, the Eighth Circuit has found that a secured party was not required to reassemble collateral dismantled during repossession. C.I.T. Corp. v. Duncan Grading & Constr., Inc. , 739 F.2d 359 (8th Cir. 1984). See also Grumman Credit Corp. v. Rivair Flying Serv., 1992 Ok 133, 845 P.2d 182 (Okla. 1992).

Reasonable expense to make the collateral marketable is recoverable so long as the secured party presents appropriate documentation. Brown v. Ford , 280 Ark. 261, 658 S.W.2d 355 (1983).

If the agreement between the parties provides, the secured party may require the debtor to assemble the collateral and make it available at a mutually convenient location. U.C.C. ' 9-609(c), 9-609(a)(2). If the collateral is very big or costly to move, selling the collateral on-site has been approved except when the debtor's location is very inconvenient for potential purchasers. Additionally, the secured party may render the equipment unusable without repossessing it. U.C.C. ' 9-609(a)(2).

A secured party may be required to sell the collateral at retail if it has access to the retail market, because presumably it will fetch a higher price, although potentially at greater cost and delay. Ford Motor Credit Co. v. Jackson , 126 Ill. App. 3d 124, 466 N.E.2d 1330 (1984). However, secured parties typically lack facilities to store and sell the collateral on a retail basis. Accordingly, in most cases, wholesale dispositions have been determined to be commercially reasonable. Financial Federal Credit, Inc. v. Wills, 2009 U.S. Dist. LEXIS 108456 (D. Neb. 2009); Ford Motor Credit Co. v. Sagmiller (In re Estate of Sagmiller), 2000 ND 151, 615 N.W.2d 567 (N.D. 2000); Ford Motor Credit Co. v. Russell , 519 N.W.2d 460, 466 (Minn. Ct. App. 1994); Advantage Leasing Co. v. Shepperd, 1988 Tenn. App. LEXIS 847 (Tenn. Ct. App. 1988); Dischner v. United Bank Alaska , 725 P.2d 488, 490 (Alaska 1986).

Article 9 generally also does not require advertising in any specific medium for any particular amount of time, but it is generally advisable to advertise in a general circulation publication in the locale of the collateral and in an industry-related publication, such as a restaurant publication, if selling restaurant equipment. In re Adobe, supra. The 2010 Amendments clarify that Internet advertising and sales are permissible. (See Proposed Revisions to Official Comment 2 for U.C.C. ” 9-610 and 9-613.) These comments refer to electronic dispositions of collateral as “commercially reasonable” and “form of notification” respectively.)

Regardless of the means of advertisement, it should include all information reasonably required for a potential purchaser to make an informed decision. By way of example, the advertisement for the sale of a vehicle should include, inter alia, the year, make, model, condition and mileage. If the collateral is equipment or other goods, there should be an opportunity for prospective buyers to pre-inspect the collateral. Westgate State Bank v. Clark , 231 Kan. 81, 642 P.2d 961 (1982). If possible, the dates and times for pre-inspection should be included in the advertisements. Id.

Another question is whether a secured party may sell the collateral piecemeal. That issue is again tested by the commercial reasonableness standard. Factors to weigh in the decision-making are whether goods of that kind are ordinarily sold piecemeal or in bulk, and which avenue will maximize the price obtained. Associates Commercial Corp. v. Hammond , 285 S.C. 277, 279, 330 S.E.2d 82 (S.C. App. 1985) (rejecting contention that collateral needed to be sold as a whole); Smith v. Daniels , 634 S.W.2d 276, 278 (Tenn. App. 1982) (coin-operated amusement machines should have been sold individually since that was practice in the industry).

A final issue is delay. Revised Article 9 rejected the line of cases that held that a substantial delay in selling the collateral constitutes a “constructive” strict foreclosure, thereby barring the secured party from pursuing any deficiency balance. U.C.C. ' 9-620, Official Comment 5. Delay is, however, still subject to the commercially reasonableness standard. Whether the delay will render a sale commercially unreasonable may turn on whether the transaction is a consumer transaction. Generally, the guideline is that if the collateral is of a sort that depreciates rapidly, the secured party should use its best efforts to dispose of the collateral as rapidly as possible. However, in non-consumer transactions, if delay causes no decline in value, then it is immaterial how long the secured party waits. Relevant, too, is the reason for the delay. A delay caused because the collateral required repair, because there was a collapse in the market making a sale imprudent at that time, or because the secured party was unable to sell will be viewed differently than a delay due to inaction. Navistar Fin. Corp. v. G & L Leasing, Inc., 1999 U.S. Dist. LEXIS 10131 (D. Kan. 1999); In re Crosby , 176 B.R. 189 (B.A.P. 9th Cir. 1994), aff'd , 85 F.3d 634 (9th Cir. 1996); Tee Vee Toons Inc. v. Prudential Secs. Credits Corp. LLC, 2005 N.Y. Misc. LEXIS 3474 (N.Y. Sup. 2005). In consumer transactions, however, the secured party must dispose of the goods within 90 days of repossession if 60% of the cash price has been paid in the case of a PMSI, or if 60% of the obligation has been paid in the case of a non-PMSI. U.C.C. ' 9-620(e).

As noted, the fact that an alternate process might have realized a higher sales price is not enough in and of itself to preclude the sale from being considered commercially reasonable. A secured party need not be right; it need only be rational. To show that its decision-making was rational, secured parties should engage experienced resellers in the relevant market who can be counted on to use proper marketing channels, prepare the collateral appropriately for resale, and maximize price, and who, more importantly, can provide sound business reasons to support each decision. While pre-sale appraisals are not necessary in reselling collateral, they are very helpful in justifying procedures and methods selected when secured parties sell expensive collateral, when secured parties anticipate a litigious obligor, when the collateral is highly specialized, or when there is unusual urgency because the obligor's landlord is about to repossess the premises or a similar exigency exists that requires rapid disposition of the collateral.

While low price will not disqualify a sale from being commercially reasonable, it will invite closer judicial scrutiny. U.C.C. ' 9-610, Official Comment 10; U.C.C. ' 9-627, Official Comment 2. Price is a judicial smell test. One statistical analysis has found that “[i]f a court determined that a secured party received a bid price greater than or equal to 63% of the fair value of the collateral, then the court found the disposition to be commercially reasonable 85% of the time. If, however, a court determined that a secured party received a bid price less than 63% of the fair value of the collateral, then the court found the disposition to be commercially unreasonable 83% of the time.” Jack F. Williams, Debunking the Myth Engulfing Article 9 Collateral Dispositions, 9 Am. Bankr. Inst. L. Rev. 703 (Winter 2001).

Three tests commonly invoked by courts for analyzing the commercial reasonableness of sales are: 1) the proceeds test; 2) the totality of the circumstances test; and 3) the procedures test. Under the proceeds test, the court's focus is on the disparity between the sale price and the value of the collateral. Generally, the courts will not reject a sale just because of a disparity; the disparity must shock the conscience. See In re Adobe Trucking, Inc., supra.

Under the totality test, the court looks at all circumstances with the price disparity only being an important factor. The courts will look “with close scrutiny” when the price disparity is huge. Finally, under the procedures test, the court will generally uphold the sale if the secured party conducted the sale properly procedurally, although the sale yielded a very low price. It has been held under this test that a faulty sale notice to the debtor is not a procedural defect that would render a sale commercially unreasonable. In re Excello Press, Inc., 967 F.2d 1109 (7th Cir. 1989).

The conclusion is clear. Secured parties should not be cavalier about their responsibilities under Article 9, but should make each decision with the counsel of relevant experts.

The parties, including secondary obligors, may not agree to waive the requirement of commercial reasonableness. They may, however, like with the commercially reasonable preparation or processing obligations, “determine by agreement the standards measuring the fulfillment of the rights of a debtor or obligor or the duties of the secured party ' if the standards are not manifestly unreasonable.” U.C.C. ' 9-602. This provision has also been relied upon by the courts to uphold provisions in a security agreement defining what the secured party may do to conduct a commercially reasonable sale. In re Adobe, supra. It is highly recommended that secured parties take advantage of this opportunity and spell out in the loan documents what is required for a commercially reasonable sale. Unless the agreed procedure is manifestly unreasonable, it should not only be upheld, but should be upheld on a motion for summary judgment, thereby eliminating the need for a costly trial. In re Adobe, supra.

In non-consumer cases, the secured party need not prove commercial reasonableness, unless an obligor or secondary obligor raises the issue. U.C.C. ' 9-626(a)(1). In consumer cases, Article 9 defers to state law. In some states, such as Texas, the common law provides that a secured party seeking a deficiency must plead that disposition of the collateral was commercially reasonable, even if the debtor never raises the issue. In re Foley v. Capital One Bank, N.A., Tex. App. LEXIS 7637, 2012 WL 3860455 (Tex. Ct. App. 2012). Of course, if the debtor raises the issue in a consumer case the secured party must go further and prove commercial reasonableness. Id.

If the issue of commercial reasonableness is raised and the collateral was not sold in a commercially reasonable sale, the secured party may have substantially jeopardized its ability to recover any deficiency from the obligor and all guarantors, and may be liable for damages, especially in consumer transactions when substantial statutory damages will be imposed. U.C.C. ' 9-625(c).

If the secured party fails to conduct a commercially reasonable sale in non-consumer transactions, there arises a rebuttable presumption that the collateral had a value equal to the balance of the debt. U.C.C. ' 9-626(a)(4). Thus, if the secured party fails to conduct a commercially reasonable sale in non-consumer transactions, the burden shifts to the secured party to prove that the value received was, indeed, commercially reasonable, or to show what amount should be found to be a commercially reasonable value and credited to the obligor. U.C.C. ' 9-626(a). In consumer transactions, Article 9 does not impose a rebuttable presumption, but also does not preclude the presumption. Thus, in consumer transactions, states may impose the rebuttable presumption or may impose an irrebuttable presumption, as some states did for all transactions before the 1999 revisions to Article 9. Greathouse v. Charter Nat'l Bank Southwest , 851 S.W.2d 173, 17 U.C.C. Rep. 2d 1349 (Tex. 1992).

As for the buyer, however, the foreclosure sale discharges all junior liens, even if the sale is defective, so long as the buyer acts in good faith. U.C.C. ' 9-617(b) and ' 9-102(a)(32).

Debtor's Redemption Rights, Deficiencies and Surpluses, and Foreclosures By a Junior Secured Party

The warranties relating to “title, possession, quiet enjoyment and the like,” warranties arising by law under Articles 2 and 2A, will apply to a sale under Article 9. U.C.C. ' 9-610(d), Official Comment 11. Secured parties may disclaim or modify these warranties. U.C.C. ' 9-610(e). “Depending on the circumstances, a disposition ' may also give rise to other statutory or implied warranties, e.g., warranties of quality or fitness for purpose.” Id. Thus, the sale of the collateral by a secured party should always be on a “where-is” “as-is” basis, without any representations or warranties. The bill of sale should reflect that the secured party is not in the business of selling the collateral at issue and took title to the collateral in connection with a foreclosure. If appropriate, the bill of sale should also reflect that the buyer has inspected the collateral and accepts it “as-is.” If the buyer was referred by the obligor or a guarantor and has acquired or will soon acquire possession of the collateral through and directly from the obligor or a guarantor, the bill of sale to the buyer should reflect that the buyer will take possession of the collateral at its own cost and expense directly from the obligor, without any obligation of the secured party to deliver possession. Finally, the bill of sale should be an integrated agreement, thereby precluding alleged oral agreements contradicting same.

If the debtor will not cooperate in providing or executing any necessary documents to transfer title, Article 9 provides a mechanism for effecting the transfer without the debtor's cooperation. U.C.C. ' 9-619(a) and (b). See also, Official Comment 2. This mechanism will not, however, be available in the case of a federal registry if the federal recording office is not required to defer to state law.

Under 9-623, an obligor may generally redeem repossessed collateral at any time until the secured party has held a public sale or entered into a contract for the sale of the collateral in a private sale or has accepted collateral in full or partial satisfaction of the obligation. U.C.C. ' 9-623(a) et seq. If the debtor elects to redeem, it must tender payment for all obligations secured by the collateral and all expenses reasonably incurred, including attorneys' fees if provided in the contract or by law. U.C.C. ' 9-623(b). The debtor may even be required to provide evidence of insurance to redeem. Mancuso v. Long Beach Acceptance Corp. , 254 S.W.3d 88, (Mo. Ct. App. 2008).

In consumer transactions, the secured party must provide an explanation in an authenticated notice to the debtor for any surplus and must provide an accounting before it pursues any deficiency. U.C.C. ' 9-616. Note that the “debtor” in this case is not limited to a “consumer debtor.”

If the underlying transaction was a sale of accounts, chattel paper, promissory notes or payment intangibles, the debtor is only entitled to a surplus if the agreement so provides, and the obligor is not liable for any deficiency. U.C.C. ' 9-615(e).

In the event of a surplus, the secured party must use the surplus proceeds to satisfy junior security interests. U.C.C. ' 9-615(a)(3). The senior secured party's obligation only arises if the junior secured party gives written notification of its demand for payment before completion of distribution of the proceeds. U.C.C. ' 9-615(a)(3)(A). The senior secured party may require the junior secured party to supply reasonable proof of interest. U.C.C. ' 9-615(b).

If the secured party receives something other than cash at sale, such as a note, the secured party does not have to apply the non-cash proceeds to the debt unless its failure to do so would be commercially unreasonable. If the secured party does apply the non-cash proceeds, it must do so in a commercially reasonable manner. U.C.C. ' 9-615(c). Thus, the secured party has flexibility in valuing and applying non-cash proceeds.

The secured party may also be awarded attorneys' fees, but only if permitted under the loan documents and if not prohibited by law. U.C.C. ' 9-615(a)(1).

A junior creditor may also foreclose its lien. U.C.C. ' 9-609(a)(1). A senior lienholder may, however, insist on taking over the foreclosure process. U.C.C. ' 9-610, Official Comment 5. This is especially true if the junior's foreclosure is an event of default under the senior's documentation. U.C.C. ' 9-609(a)(1).

A foreclosure by a junior secured party does not discharge a senior's lien. U.C.C. ' 9-617(a)(3). Thus, a senior lienholder's foreclosure is more likely to yield a greater sale price, as it is free of all liens. U.C.C. ' 9-617(a)(2).

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Frank Peretore is a member of this newsletter's Board of Editors and a founding partner of the law firm of Peretore & Peretore, P.C., with offices in New Jersey and New York. He represents national and regional financial institutions and lessors from the transactional and financing stage throughout the litigation stage in the state, federal and bankruptcy courts. He also represents creditors in general commercial litigation and commercial foreclosure matters. Peretore may be reached at 973-729-8991. This article is adapted from the author's book titled Workouts and Enforcement for the Secured Creditor and Equipment Lessor, (2008) by permission of Oxford University Press, Inc.