The Code has two requirements for foreclosure sales: (1) The secured party must give reasonable notification of the impending sale and (2) the secured party must engage in a commercially reasonable disposition of the collateral. In a recent decision by the 5th Cir. Ct. of Appeals, the court focused on the second requirement, finding that a foreclosure sale passed muster under both the "procedures" and "proceeds" tests.
The end point of any secured transaction that has gone awry is often the secured party's disposition of the collateral at a foreclosure sale. Although the debtor's redemption of the collateral and so-called strict foreclosure are also possible outcomes post-default, a foreclosure sale is the most frequent way in which the secured party gets paid, at least in part, for the debt owed. Article 9 of the Uniform Commercial Code allows secured parties great flexibility in conducting the foreclosure sale and recognizes that different kinds of collateral may necessitate different modes of disposition. See U.C.C. § 9-610 (Official Text 2013) (stating that after default, "a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing."). The Code, however, has two requirements for foreclosure sales designed to protect the debtor's interest in a successful disposition: (1) The secured party must give reasonable notification of the impending sale to the debtor and certain other parties (U.C.C. § 9-611 (b)) and (2) the secured party must engage in a commercially reasonable disposition of the collateral (U.C.C. § 9-610 (b)). In a recent decision by the Fifth Circuit Court of Appeals, the court focused on the second requirement, finding that the foreclosure sale passed muster under both the "procedures" and "proceeds" tests for assessing the commercially reasonableness of dispositions. Adobe Trucking, Inc. v. PNC Bank (In re Adobe Trucking, Inc.), 2014 U.S. App. LEXIS 314 (5th Cir. Jan. 8, 2014) (hereinafter "Adobe") [an enhanced version of this opinion is available to lexis.com subscribers]. In Adobe, the lender PNC Bank and the debtor Adobe Trucking, Inc. had entered into a revolving credit and security agreement in 2006 for a multi-million dollar line of credit secured by security interests in the debtor's oil rigs. Adobe, 2014 U.S. App. LEXIS 314, at *2. In 2008, the debtor was in default under the security agreement, and the secured party chose to exercise its default remedies. 2014 U.S. App. LEXIS 314, at *4. The Bank demanded that the debtor relinquish possession of the collateral, but the debtor refused to cooperate. By December 31, 2008, the Bank gave the debtor notice of a public foreclosure sale to be held at 11:00 a.m. on January 16, 2009. 2014 U.S. App. LEXIS 314, at *4. On January 6, 2009, the Bank placed notices of the impending sale in various local newspapers and on their respective websites. The notices gave the time and place of the sale and a detailed description of the collateral. 2014 U.S. App. LEXIS 314, at *5. The plot thickened when less than an hour before the sale, the owners of the real property on which the rigs were located (i.e., the debtor's landlords) filed a state court action against the debtor and the Bank, claiming liens on the collateral. Adobe, 2014 U.S. App. LEXIS 314, at *5. The foreclosure sale proceeded, and the Bank tendered the winning bid of $41 million. 2014 U.S. App. LEXIS 314, at *5. After the debtor filed for bankruptcy on November 23, 2010, the landlords' state court action was removed to the bankruptcy court. The parties challenged the commercial reasonableness of the Bank's foreclosure sale. 2014 U.S. App. LEXIS 314, at *6. Applying New York law, the bankruptcy court held that the agreement between the debtor and the Bank allowing the Bank great latitude in conducting the foreclosure sale was not manifestly unreasonable and that the sale itself was commercially reasonable under either the "proceeds" or "procedures" test. 2014 U.S. App. LEXIS 314, at *9-11. On appeal, the district court affirmed the bankruptcy court decision, and a further appeal to the Fifth Circuit Court of Appeals followed. 2014 U.S. App. LEXIS 314, at *14-15. The Court of Appeals affirmed the lower court rulings.
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