The largest source of litigation concerning Article 9 of the Uniform Commercial Code is what the UCC calls “disposition of collateral after default,” commonly referred to as UCC foreclosures.

Revised Article 9 (which became effective in North Carolina and most of the country on July 1, 2001) continues the requirement that every aspect of a disposition of collateral must be “commercially reasonable,” including the “method, manner, time, place and other terms.”

There are some favorable provisions for foreclosing creditors in Revised Article 9, including one which makes clear that the mere fact that a low price was obtained at a foreclosure sale is not enough to show that the sale was not conducted in a commercially reasonable manner. However, in the uncertain world of litigation, if a judge thinks that a debtor has been poorly treated, the judge will often find a way to rule in favor of the debtor.

On its face, the UCC standard of “commercial reasonableness "is a fact-specific standard which purports to consider all aspects of a sale, and which focuses primarily on the reasonableness of the process, not the results. However, a professor who has conducted statistical analysis of the case law in this area argues that in fact “the only significant factor is the winning bid price”. If a bid price is equal to or exceeds 63% of the fair value of the collateral, then the secured party wins almost nine out of every ten cases. If a bid price is lower than 63% of the fair value of the collateral, then the secured party loses about eight out of every ten cases.” Jack F. Williams, “Debunking the Myth Engulfing Article 9 Collateral Dispositions,” ABI Law Review Vol. 9, pp. 703-731.

In many cases, the secured creditor will be the only bidder at a UCC foreclosure sale. There is a temptation to keep bids very low, to preserve a large deficiency which might be recovered from guarantors or from further action against the debtor. As this case analysis points out, courts will allow some discount from "fair value" to reflect the costs incurred by the creditor in recovering, foreclosing upon, refurbishing and remarketing the collateral, and the uncertainty of the creditor's recovery from the ultimate disposition of the collateral; however, if a court perceives that the creditor is truly “lowballing” its bid at the sale, they are likely to rule in favor of the debtor.

If you have any questions regarding this bulletin, please contact Judy Thompson at 704.342.5299 or jdthompson@poynerspruill.com.

This electronic publication is published by Poyner & Spruill LLP to provide general information about significant legal developments. Because the facts in each situation vary, the legal precedents noted herein may not be applicable to individual circumstances.