Article 9 Sales: What Secured Lenders Need to Know

Article 9 of the Uniform Commercial Code governs the rights of secured creditors when a borrower defaults. It applies to virtually all personal property used as collateral: including industrial equipment, machinery, vehicles, and inventory. When a borrower defaults, Article 9 gives the secured party the right to take possession of and sell the collateral, but only if the sale is conducted in a "commercially reasonable manner."

That phrase, commercially reasonable manner, is where lenders get into trouble. The UCC does not define it precisely. Courts interpret it based on the facts of each case. A disposition that was commercially reasonable in one jurisdiction may not satisfy a court in another.

The Notice Requirement

Before selling collateral, a secured party must send reasonable authenticated notice to the debtor and any secondary obligors. For commercial transactions (non-consumer), the UCC provides a safe harbor: notice sent at least 10 days before the earliest time of sale or disposition is presumed timely.

The notice must include: the name of the secured party, a description of the collateral, the method of intended disposition, a statement that the debtor is entitled to an accounting, and the time and place of the sale if it is a public auction.

Public vs. Private Disposition

• →Public sale (auction): Open to the public, conducted at a time and place stated in the notice. The secured party may purchase at a public sale.
• →Private sale: Sold by negotiation to one or more buyers. Does not require public notice of time and place, but must still be commercially reasonable in method, manner, and terms.

For most industrial equipment, a properly marketed public auction is both the most defensible approach and the one most likely to achieve maximum recovery. It creates an open, competitive environment that courts recognize as commercially reasonable when conducted by a qualified auctioneer with demonstrated buyer reach.

What "Commercially Reasonable" Requires in Practice

• →Adequate marketing: The collateral must be exposed to a sufficient pool of likely buyers. A notice posted on a county courthouse door does not satisfy this standard for industrial equipment.
• →Appropriate timing: Enough time must pass between notice and sale to allow buyers to arrange financing and inspections.
• →Qualified auctioneer: Courts look favorably on licensed auctioneers with documented experience in the relevant asset category.
• →USPAP appraisal: Having an independent USPAP-compliant appraisal establishes a baseline that protects against deficiency claims alleging the collateral was undervalued.

Deficiency Claims: Protecting Yourself

If the sale proceeds do not cover the outstanding debt, the lender may pursue the debtor for the deficiency. However, if the disposition was not commercially reasonable, courts may reduce or eliminate the deficiency claim, or award damages to the debtor.

The best protection is a documented, professionally executed disposition: pre-sale appraisal, proper notice, comprehensive marketing, qualified auctioneer, and full settlement accounting. This creates a paper trail that holds up in court if the debtor challenges the sale.

Working with KD on Article 9 Dispositions

KD Auctions has conducted Article 9 dispositions for banks and asset-based lenders across the country. Our process is designed to satisfy the commercially reasonable standard: USPAP-compliant pre-sale appraisal, proper notice coordination, targeted marketing to qualified industrial buyers, licensed auctioneer execution, and complete settlement accounting. If you are managing a default situation, the time to call is before you send notice, not after.