What Is an Article 9 Sale? A Guide for Secured Lenders

An Article 9 sale is the sale of collateral by a secured party after the debtor defaults, carried out under Article 9 of the Uniform Commercial Code, which allows the secured party to sell, lease, license, or otherwise dispose of the collateral (UCC 9-610). Every aspect of the sale must be commercially reasonable, and before it happens the secured party generally must send notice to the debtor and certain other parties (UCC 9-611).

For a lender holding a security interest in industrial machinery, the Article 9 sale is the ordinary route from a defaulted loan to cash without a court case. This guide is general education, not legal advice: each state enacts its own version of the UCC, and the lender's counsel should direct any specific sale.

What the UCC says about an Article 9 sale

Under UCC 9-610, after default a secured party may dispose of any or all of the collateral in its present condition or after commercially reasonable preparation or processing. If commercially reasonable, it may sell by public or private proceedings, as a unit or in parcels, at any time and place and on any terms. The governing condition is one sentence: "Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable."

What makes a disposition commercially reasonable

The Code sets no minimum price. Under UCC 9-627, the fact that a greater amount could have been obtained at a different time or by a different method "is not of itself sufficient" to defeat a showing of commercial reasonableness. It describes three commercially reasonable manners of disposition:

• In the usual manner on any recognized market
• At the price current in any recognized market at the time of the disposition
• Otherwise in conformity with reasonable commercial practices among dealers in the type of property sold

Official comment 9 to 9-610 says a recognized market is one where items are fungible and prices are not individually negotiated; selling through dealer auctions or appearing in price guides is not enough. Used industrial machinery rarely fits, so the third test is usually the practical one: reach the buyers who actually purchase that equipment, give them time to inspect, and keep a record that shows it.

Public versus private disposition

Official comment 7 to 9-610 describes a public disposition as "one at which the price is determined after the public has had a meaningful opportunity for competitive bidding," and says that implies advertisement or public notice before the sale and public access to it.

• Public disposition: typically an advertised auction open to registered bidders. The notice states its time and place, and the secured party may buy at it.
• Private disposition: a negotiated sale or other non-public process. The notice states the time after which the sale will be made. The secured party may buy only if the collateral is customarily sold on a recognized market or has widely distributed standard price quotations.

An auction limited to a closed list of invited dealers is harder to call public, so a lender that may bid should settle the structure with counsel before notice goes out.

Notice: who receives it, when, and what it says

UCC 9-611 requires the secured party to send "a reasonable authenticated notification of disposition" to:

• The debtor
• Any secondary obligor, such as a guarantor
• For collateral other than consumer goods: anyone who sent the secured party an authenticated notice of a claim, and other secured parties or lienholders whose interest was of record 10 days before the notification date

Under UCC 9-612, timeliness is generally a question of fact, but in a non-consumer transaction, notice sent after default and 10 days or more before the earliest time of disposition is timely. Outside consumer-goods transactions, UCC 9-613 treats a notice as sufficient if it identifies the debtor, the secured party, and the collateral, states the method of disposition, states that the debtor is entitled to an accounting of the unpaid debt and any charge for it, and gives the time and place of a public sale or the time after which a private sale will be made. Minor errors that are not seriously misleading do not defeat it. Notice is not required for perishable collateral, collateral that threatens to decline speedily in value, or collateral customarily sold on a recognized market.

The secured party's role

The secured party, not the auctioneer, makes the decisions the statute regulates: public or private sale, notices, terms, and the overall reasonableness of the process. Under UCC 9-615, cash proceeds go first to reasonable expenses of retaking, holding, preparing, and disposing of the collateral (and attorney's fees where the agreement provides for them), then to the secured debt, then to a subordinate lienholder that sends an authenticated demand before distribution is complete. The debtor gets any surplus; the obligor is liable for any deficiency.

Under UCC 9-626, in a non-consumer case where the debtor or a guarantor puts compliance in issue, the lender must prove it. If it cannot, the deficiency is limited by reference to what a compliant sale would have brought, which is presumed to equal the full debt, expenses, and fees unless the lender proves otherwise. It can lose much or all of its deficiency.

How an auctioneer supports a lender

An industrial auctioneer works under the direction of the lender and its counsel, running the sale the lender chooses and producing the record of how it was run. At KD Auctions that usually covers:

• Valuation first: an orderly liquidation value and forced liquidation value, so the lender can weigh an auction against a private sale. KD's appraisals are prepared by our AMEA Certified Equipment Appraisers, Tim Pfister, CEA, and Peter Lenstrohm, CEA. See equipment appraisals.
• Fast access: an onsite team typically dispatched within 48 to 72 hours to inventory, photograph, and secure the equipment.
• A dated marketing record: advance advertising to KD's 500,000+ industry contacts, open bidder registration, and inspection days.
• Dates that match the notice: coordination with counsel so the notification states the actual time and place of the sale.
• Settlement documentation: a managed auction typically runs 6 to 10 weeks and closes with lot-by-lot results and a settlement statement of gross proceeds, expenses, and net.

KD Auctions has run hundreds of auctions since 1996 and is licensed and bonded in every state that requires it. Whether a sale was commercially reasonable remains a legal question for the lender and its counsel. See our lenders and trustees page.

Article 9 sale compared with other distressed sales

An Article 9 sale happens outside court. A Section 363 sale happens inside a bankruptcy case: under 11 U.S.C. 363(b), the trustee may sell estate property outside the ordinary course of business only after notice and a hearing (see how a 363 sale works). In a receivership, a court appoints a receiver and sales generally proceed under the court's orders (see receivership liquidation).

Frequently asked questions

Is an Article 9 sale the same as a foreclosure auction?

Not in the court sense. It is a disposition of personal property collateral under UCC 9-610, and Article 9 does not require a court order for the sale itself. It can be a public auction or a private sale, as long as every aspect is commercially reasonable and the required notice is sent.

How much notice must a secured lender give?

In a non-consumer transaction, UCC 9-612 treats notice sent after default and at least 10 days before the earliest time of disposition as timely. Shorter notice is not automatically defective, but its timeliness becomes a question of fact.

Can the lender buy the equipment at its own Article 9 sale?

At a public disposition, yes. At a private disposition, only if the collateral is customarily sold on a recognized market or is the subject of widely distributed standard price quotations (UCC 9-610(c)). Used machinery rarely meets that test, so a lender that may bid usually needs a genuinely public sale.

Can the borrower stop an Article 9 sale?

The borrower can redeem the collateral under UCC 9-623 by paying all secured obligations plus the lender's reasonable expenses and attorney's fees, but only before the lender has disposed of the collateral or contracted to dispose of it.

If you hold defaulted equipment collateral, call KD Auctions at 480.455.3910 or Request a Confidential Consultation. We will review the collateral, valuation, and sale structure with you and your counsel.