Enforcing Your Security Agreement: Conducting Proper and Effective UCC Article 9 Sales.

By Douglas J. Ferguson, Esq.

March, 2021

Commercial loan transactions are comprised by several key loan documents, including the loan agreement and the promissory note, and may include additional instruments to secure the obligations due under the promissory note such as a personal guaranty, mortgage and security agreement.  The Uniform Commercial Code (“UCC”) defines “security agreement” as “an agreement that creates or provides for a security interest.”  See UCC Article 9 § 102(a)(74).  Once the Lender has a security agreement in place “attaching” the collateral, the additional step of filing a UCC-1 Financing Statement is required to “perfect” the security interest. 

In the event that it becomes necessary for the Lender to enforce its security agreement, the Article 9 of the UCC permits the Lender to sell the collateral in an effort to recover the defaulted obligation.  However, the Lender must adhere to several guidelines to properly effectuate the sale of the collateral.

First, the Lender should repossess the collateral, although it is not required.  See UCC Article 9 § 609.  Article 9 of the UCC permits the Lender to take possession after default by either exercising its right to self-help repossession, or requiring the debtor to assemble and deliver the collateral, or resorting to a judicial foreclosure.  See UCC Article 9 § 609(b) and (c).  If choosing self-help repossession, the Lender must ensure that there is no breach of the peace during the repossession of the collateral.

Second, the Lender is required to send “reasonable authenticated notification of disposition”, i.e., notice of intent to sell the collateral.  See UCC Article 9 § 611(b).  Notice must be sent to the debtor, any other obligor on the loan, and any other party with an interest in the collateral.  See UCC Article 9 § 611(c).  The notification requirement of Section 611 necessitates that the Lender conduct a UCC search to determine if any other secured parties have a security interest or lien on the collateral perfected by the filing of a financing statement.  A secured creditor is deemed to have satisfied this notice requirement if it performs such a search between 20 and 30 days before the proposed sale date.  See UCC Article 9 § 611(e).  Notice is considered “reasonable” where it is sent after default and at least 10 days before the proposed sale date.  See UCC Article 9 § 612(b).

Third, the Lender is required to dispose of the collateral in a “commercially reasonable” manner.  Article 9 does not define “commercially reasonable” but mandates that the time, manner, place and other terms be commercially reasonable.  See UCC Article 9 § 610 (b).  Commercial reasonableness will be determined on a case-by-case basis.  So long as the sale occurs in a commercially reasonable manner, the Lender may dispose of the collateral by public or private sale, by one or more contracts, and as a unit or in parcels.  See UCC Article 9 § 610 (b).  The Lender may sell the collateral in its present condition or following any commercially reasonable preparation or processing.  See UCC Article 9 § 610 (a).  Given the undefined nature of commercial reasonableness, the goal of the sale process from the Lender’s perspective should always be to maximize the proceeds from the sale.

Finally, the Lender must apply the proceeds of the sale in the manner provided for under Article 9 Section 615.  Proceeds must be applied first to any reasonable expenses of retaking, holding, or preparing the collateral for disposition, disposing of the collateral, and any other reasonable expenses associated therewith.  See UCC Article 9 § 615 (a)(1).  This may include reasonable attorney’s fees and expenses so long as it is provided for in the security agreement and not otherwise prohibited by law.  See UCC Article 9 § 615 (a)(1).  Next, Lender must apply the sale proceeds to the satisfaction of the obligations secured by the security interest under which the disposition was made, i.e. Lender’s defaulted loan.  See UCC Article 9 § 615 (a)(2).  Lastly, Lender must apply proceeds to the satisfaction of obligations secured by any subordinate interest holder, but only if Lender received demand from said subordinate interest holder before distribution of the proceeds is completed.    See UCC Article 9 § 615 (a)(3).

Following the mandates of Article 9 of the UCC Code is critically important to properly enforcing a Lender’s security interest and liquidating the collateral.  Failure to do so can have a wide range of results, from incurring damages as a result of a breach of the peace in a repossession context, to being saddled with a rebuttable presumption that the amount of proceeds that should have been produced from a sale of the collateral is equal to the secured obligations plus costs in the context of a Lender’s failure to conduct a sale in a commercially reasonable manner.  See UCC Article 9 § 626(a)(4).  Ensuring compliance with the UCC at the disposition stage is equally as important as ensuring that the necessary instruments have been properly executed at loan origination and that the security interest is and remains perfected. 

Eisenberg, Gold & Agrawal, P.C. is an experienced creditor’s rights firm with the expertise required to navigate the nuances of conducting UCC Article 9 sales, all while minimizing risk and ensuring maximum recovery for its clients.