Conducting Foreclosure Sales Under U.C.C. Article 9

Conducting Foreclosure Sales Under U.C.C. Article 9

 
Article 9 secured parties reserve security interests in their debtors collateral as a means of securing the debtors repayment. Sometimes the debtor, however, will default under the security agreement, and the secured party will be forced to repossess the collateral. After seizing the collateral, the secured party has two choices if the debtor does not redeem it: (1) strict foreclosure or (2) foreclosure by sale.
 
Ms. Livingston writes: Beyond sending reasonable notification of the disposition, the secured party must make a commercially reasonable disposition of the collateral. Article 9 specifies that [e]very aspect of a disposition, including the method, manner, time, place, and other terms, must be commercially reasonable. Within this rubric of reasonableness, the statute gives secured parties great latitude in determining the appropriate method and timing of the disposition: [A] secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms. The secured party also has the option to sell, lease, license, or otherwise dispose of all or part of the collateral. In addition, the creditor may decide to dispose of the collateral as is or to spruce it up before disposition. The drafters wanted to give secured parties wide flexibility in deciding how, where, and when to dispose of the collateral, recognizing that the collaterals condition and the market situation with respect to particular collateral will vary widely from case to case. For example, in some cases, the secured party might want to hold off on selling the collateral until market conditions improve whereas in other situations, a prompt disposition might produce the best price.

Creditors faced with complying with the amorphous standard of commercial reasonableness may find some comfort in the Code safe harbor sections. Article 9 states that a collateral disposition is considered commercially reasonable if it is made (1) in the usual manner on any recognized market; (2) at the price current in any recognized market at the time of disposition; or (3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition. Subsections [U.C.C. § 9-627](b)(1) and (2) are fairly limited as a recognized market generally means securities exchanges where the prices are standardized by the market. U.C.C. § 9-627, cmt. 4. Subsection (b)(3), however, provides some guidance to secured parties disposing of property other than securities. It suggests that the creditors should look to common dealer practices in disposing of the particular collateral. For instance, if the collateral consists of a collection of antique shaving mugs that dealers normally sell through specialty publications or on eBay, then the secured party should emulate that approach.

Another safe harbor for commercial reasonableness provides that dispositions approved (1) in a judicial proceeding; (2) by a bona fide creditors committee; (3) by a representative of creditors; or (4) by an assignee for the benefit of creditors are deemed commercially reasonable. Thus, where the debtor is in bankruptcy, the secured creditor might seek advance approval from the bankruptcy judge or the creditors committee before disposing of the collateral
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