Article 9 Foreclosure Sale Alternative

What Is an Article 9 Sale?

Article 9 of the Uniform Commercial Code (UCC) provides a framework to allow a secured party to foreclose its security interest in personal property without judicial proceedings. The secured party can dispose of the collateral through a sale, lease, or license, or it may accept the collateral in full or partial satisfaction of the secured debt. Article 9 sales are important tools for secured parties to consider, but whether an Article 9 sale is the best option depends on the facts of each case.

Advantages of Article 9 Sales

• The primary advantage of an Article 9 sale is speed. An Article 9 sale may be accomplished in weeks, while judicial process may take months or even years.
• Article 9 sales may be more cost effective, particularly if no court involvement is required.
• Article 9 provides the option of private or public sales (auctions), which provides significant flexibility for the secured party in designing a strategy that best suits the facts of each case.
• An Article 9 sale transfers to the buyer all of the debtor’s rights in the collateral and discharges the security interest and any subordinate liens.
• The secured party provides minimal representations and warranties.
• As long as the secured party conducts the sale in a commercially reasonable manner, the secured party retains the right to pursue the debtor and any guarantors for a deficiency claim.

Disadvantages of Article 9 Sales

• Article 9 sales cannot be used until after the debtor defaults.
• Notice and commercially reasonable marketing efforts are required and are the responsibility of the secured party.
• The sale does not as a matter of law cut off or eliminate claims of unsecured creditors, such as for successor liability.
• While arguably “less public” than a bankruptcy proceeding or litigation, most Article 9 sales still require some level of public disclosure of business distress.
• While Article 9 sales are often preferred to avoid litigation, the sale still can be challenged in litigation either before or after the sale closes.
• Article 9 sales cannot generally be used to effect going concern sales because (1) the secured party must have a lien on all assets to be sold at the sale, (2) sales are limited to personal property governed by Article 9, which excludes mortgaged real property, and (3) contracts of the debtor are difficult to transfer as part of such sales.

Always Be Reasonable

The most important thing to remember as a secured party is that every aspect of a sale must be “commercially reasonable.” Although analyzed on a case-by-case basis, the overarching standard is that the “practices of dealers in the type of property” should be followed. In determining whether a sale is commercially reasonable, the secured party should consider the following:

• Is there a recognized market where the collateral may be sold (e.g., sale of stock on NASDAQ)? If there is, the collateral should be sold on that market and at the price it establishes.
• Should the sale be private or public?
• Are any repairs or other cleanup of the collateral needed and will the cost to repair the collateral likely result in an increase in the sale price?
• Is a wholesale or retail marketing method appropriate?
• Should the collateral be sold together as a whole or in parcels?
• When is the right time to sell the collateral? It may be prudent to delay a sale if the goods are seasonal or there has been a sharp downturn in the relevant market.

When debtors challenge a sale’s reasonableness, it is typically for one of two reasons: (i) the sale proceeds were low, resulting in a deficiency; or (ii) the sale price was insufficient, and the debtor was deprived of the equity it had in the collateral. If a debtor can successfully show the sale was not reasonable, it can recover damages for the loss.

What About Notices?

As noted above, speed is one of the key benefits of an Article 9 sale. An Article 9 sale is typically completed in 30 to 40 days. The timing of the sale is driven by notices, so it is important to understand the notice periods. Whether a private or public sale, “reasonableness” is again the measure of how much notice needs to be given. A safe harbor provides that 10 days’ notice before a sale is sufficient when selling nonconsumer collateral. Also, the secured party needs to determine the proper notice parties. Another safe harbor is provided here — the secured party has provided proper notice if the secured party conducts a UCC financing search between 20 and 30 days before sending the notice and notifies the secured creditors identified in the search.

Smoother Sailing Tips and More Safe Harbors

In addition to the notice-timing safe harbors, Article 9 provides a form of notice. If the secured party follows the form of notice, it is deemed to have provided sufficient information.

If you are a buyer in an Article 9 sale, it is important to know that you have your own safe harbor. A buyer in the ordinary course of business takes the collateral free of security interests. Even more important is that as long as the buyer buys in good faith, the buyer takes the collateral free-and-clear even if the sale by the secured party does not strictly comply with Article 9 provisions.

When Is an Article 9 Sale the Right Option?

Article 9 sales may be particularly attractive options when the secured party has a senior lien on all UCC assets and the debtor is cooperative.