The Newspaper Notice

Looking Back, Looking Around And Looking Ahead

According to a 2012 Pew Research Center study, the number of Americans who read a newspaper the previous day had fallen to 23%. See http://tinyurl.com/h95udkl. It is reasonable to assume that the numbers have dropped further since 2012 among all readers, as people increasingly get their news online.

The factual premises of commercial advertisement have been, and continue to be, transformed as: 1) print gives way to electronic; 2) paid gives way to free; and 3) markets continue to become less local.

The bottom line is that times have changed, media have changed, the sizes of markets have changed, and the habits and expectations of potential purchasers (and their attorneys, accountants, and other gatekeepers) have changed. Half a generation into the Digital Age, newspaper notice is obviously much less sufficient for advertising the sales of distressed assets. Why, then, does the practice continue?

UCC Framework

The UCC provides the standards of commercial reasonableness for foreclosure sales of collateral influences thinking about sales outside the UCC. These standards adjust to relevant changes in communication modes and technology and thus should bear upon the sufficiency of newspaper versus online marketing of asset sales.

Under the UCC, the key standard is the commercial reasonableness of the sale, including the reasonableness of the marketing of the sale. UCC 9-610(b) provides that “[e]very aspect of a disposition, including the method, manner, time, place, and other terms, must be commercially reasonable.” If a debtor challenges a secured creditor's post-sale pursuit of a deficiency claim, the secured creditor has the burden of establishing that the disposition of the collateral was commercially reasonable. See UCC 9-626((a)(2). If the secured creditor fails to prove that the disposition was commercially reasonable, it may not pursue collection of any deficiency owed to it, and may even be liable for damages. See UCC 9-626(a)(3) and UCC 9-625.

The UCC does not, however, define “commercially reasonable.” Courts describe the inquiry as whether the manner of sale was commercially reasonable as fact-intensive in light of circumstances relevant to the particular case. See, e.g., Comm'l Credit Grp. v. Barber, 682 S.E.760, 765 (Ct. App. N.C. 2009) (commercial reasonableness is “an issue of fact in light of all relevant circumstances of each case”) (internal quotation omitted).

The factual intensiveness of the inquiry is underscored by UCC ' 9-627(b)(3), which can be described as providing a safe harbor of sellers by defining (non-exclusively) what qualifies as a “commercially reasonable manner” of disposition: “A disposition is made in a commercially reasonable manner if the disposition is made ' in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.” See UCC 9-627(b)(3).

This safe harbor requires proof of “reasonable commercial practices among dealers in the type of property” being sold. Such proof must indicate “practices” that are “reasonable” among a specific group of dealers.

Courts may want to review such evidence even where the safe harbor is not being relied upon. In Pirrotti v. Respironics, Inc., 2013 WL 321772, *15 (D. Conn. Jan 28, 2013), the court noted that the only evidence the seller presented was of two newspaper advertisements, and the absence of ' 9-627(b)(3) evidence deprived the court of “a comparative means of assessing commercial reasonableness” under the facts of the case. Similarly, in Wells Fargo Bus. Credit v. Environamics Corp., 934 N.E.2d 283, 289 (Mass. App. Ct. 2010), the court noted that “adjudication of the 'commercially reasonable standard' ' produces inquiry into the competence and aggressiveness of the marketing effort.” I .

Consistent with the foregoing, where a state statute prescribes a particular form of notice like newspaper notice, a court will not necessarily find that following the statute's dictates constitute commercially reasonable notice required by the UCC. Indeed, well before the digital age, the California Supreme Court reversed a lower court's ruling that a secured creditor conclusively satisfied its obligation to advertise sale of collateral in a commercially reasonable manner merely because it provided statutorily required notice of sale to the debtor and other secured parties. Ford & Vlahos v. ITT Comm'l Fin. Corp., 8 Cal.4th 1220 (Cal. 1994).

Commercially Reasonable Disposition Requiring More Than Newspaper Notice

It follows that commercial reasonableness for the disposition of certain assets requires marketing that is both more specifically targeted and broader geographically than newspaper notice. Indeed, courts have so found.

In DiGiacomo v. Green (In re Inofin Incorporated), 512 B.R. 19, 89 (Bankr. D. Mass. 2014), the assets to be disposed of were retail installment sales contracts. The sale was advertised in The Boston Herald . In finding the sale not to have been commercially reasonable, the court observed that the auctioneer failed to contact the debtor's competitors or to place ads in relevant trade publications.

In Ford & Vlahos v. ITT Comm'l Fin. Corp., 8 Cal.4th 1220, 1229 (Cal. 1994), the court held that “[a] dealer in the type of property repossessed here ' a valuable airplane ' surely would advertise its auction in the relevant market by, for example, informing brokers, placing reasonably prominent advertisements in recognized trade journals, or contacting individuals or entities known to be seeking an airplane of the type for sale.”

In Comm' Credit Grp, Inc. v. Barber, 682 S.E.2d 760, 767 (N.C..App. 2009), the court affirmed the trial court's conclusion that the sale of a non-operative heavy-duty waste recycler was not commercially reasonable. In addition to noting the deficiencies of the newspaper ads (running in one newspaper immediately before and after Christmas), the court referred to the “esoteric nature of the recycler and the fact that it was inoperable,” and ruled that the seller should have tried harder to market it “by targeting legitimate prospective buyers.” Id.

In United States v. Conrad Pub. Co., 589 F.2d 949, 954 (8th Cir. 1978), the court found the advertising of a sale of printing equipment to be insufficient where the sale was not promoted in national or regional trade publications, bidders were not given sufficient time to travel, invitations to bid were not sent to potential publisher-bidders, and only two advertisements were made in North Dakota newspapers.

Those entrusted to conduct commercially reasonable sales may be well advised to use available low-cost online asset sale platforms. After all, at a fraction of the cost of a newspaper ad, and with no geographic limit, and with tens of thousands of readers who have specifically expressed an interest to be made aware of such sales, such platforms certainly address concerns as to whether enough was done to alert buyers of distressed assets of the sale in question.

Commercial Reasonableness of Notice Changes As Technological Modes Evolve

The statutory phrasing in UCC 9-627(b)(3) ' “in conformity with reasonable commercial practices among dealers in the type of property” ' does more than indicate a fact-intensive inquiry. It also denotes the sensitivity of commercial reasonableness to changing modes of information transmission. What is “reasonable” marketing for dealers depends in part on the technological aspects of the media through which marketing is accomplished. For example, faxing notice to competitors of the debtor (a group of potential purchasers not to be neglected!) was not possible or even conceived of in 1966 and therefore would not then have been judged necessary for a disposition to be commercially reasonable. In 1986, such faxing may have been key to the commercial reasonableness of the marketing of a given disposition. Such faxing likely would not be necessary or advisable in 2016.

We shall see how courts deal with the new realities of asset disposition. In the meantime, if you have a duty to dispose of assets in a commercially reasonable manner, keep in mind that “everyone else did it” is not necessarily a good argument.

Christopher M. Cahill is CEO of DailyDAC, LLC, an Internet venue for secured lenders, bankruptcy trustees, receivers, and assignees to post public notice of their sales. Jonathan P. Friedland founded the company and is also a partner with Sugar Felsenthal Grais & Hammer LLP. Cahill is head of the bankruptcy practice group of Lowis & Gellen LLP. The authors thank Frank A. LoGalbo of Lowis & Gellen LLP for his research assistance.