Collateral Liquidation and The Uniform Commercial Code

The scope of this article is to address the liquidation of collateral including, private auctions (restricted to dealers/brokers/sellers license for used automobiles), sealed bids, and sale to the public, in a fact-finding, issue-raising analysis under the Uniform Commercial Code (hereinafter UCC). The Uniform Commercial Code is a comprehensive modernization of numerous miscellaneous laws and uniform acts relating to sale of property, commercial paper, security interests, and allied subjects. Its purpose is to clarify and modernize the law in these areas and to make uniform the law among various jurisdictions. The Uniform Commercial Code has been adopted throughout the United States by each of the states. However, there may be differences from state to state in which revision of the UCC has been adopted. Further differences may exist as to interpretation by the courts of each jurisdiction. Therefore, this article will address the issue of private auctions under the UCC in a general fashion. Consultation with your local counsel is necessary to determine the precise interpretation of the UCC in any given jurisdiction.
The UCC provides that a secured party, after default, may sell, lease or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation and/or processing. The proceeds of disposition shall be applied in the order following, to:

(a) the reasonable expenses of retaking, holding, preparing for sale or lease, selling, leasing and the like and, to the extent provided for in the agreement and not prohibited by law, the reasonable attorneys' fees and legal expenses incurred by the secured party;

(b) the satisfaction of indebtedness secured by the security interest under which the disposition is made;

(c) the satisfaction of indebtedness secured by any subordinate security interest in the collateral if written notification of demand therefore is received before distribution of the proceeds is completed. If requested by the secured party, the holder of a subordinate security interest must seasonably furnish reasonable proof of his interest, and unless he does so, the secured party need not comply with his demand.

The UCC goes on to provide that "Disposition of the collateral may be by public or private proceedings..." The UCC does not contain a blanket prohibition against private auctions. To the contrary the UCC authorizes private proceedings.

The next tiers of our evaluation will be "What are the distinctions between public and private proceedings; and, provided there are distinctions between public and private categorizations, what effect are these?

The United States Court of Appeals, Seventh Circuit in Ford Motor Credit Company vs. Solway, 825F2d1213, 4UCC Rep Serv. 2nd 630, 1987 discussed the public vs. private categorizations in detail. In this case Ford Motor Credit Company took possession of the inventory of a retail automobile dealership that was in default under a secured financing agreement. The inventory was sold at wholesale auctions to other dealers. Ford Motor Credit Company next filed this suit against the guarantor of the debt for the deficiency in the amount owed by the dealership. The district judge granted Ford Motor Credit Company's motion for summary judgment. The guarantor contends on appeal that Ford Motor Credit Company violated the Uniform Commercial Code by failing to give him reasonable notification of the sale and by failing to make a commercially reasonable disposition of the collateral.

Under 9-504(3), if the disposition of the collateral is to be by a "public sale," the secured party must send the debtor notice of the "time and place" of the sale; if by "private sale or other intended disposition" then the provision requires only notice of the "the time after which" the disposition is to be made. The notice that FMCC sent to Solway provided that the disposition would be "at a private sale, on or after" April 12, 1980. It did not specify the place of the proposed sale. This would be insufficient if the sale at the Arena Auto Auction was a "public sale" for the purposes of 9-504(3).

The UCC does not define the difference between a public and a private sale. The Illinois courts have not had occasion to create such a definition. The Illinois Code Comment to 9-504(3) states, "A public sale under this subsection contemplates a sale by auction." That does not imply the converse, That every auction is necessarily a public sale.

The issue was explored in Morrell Employees Credit Union vs. Uselton, 28 UCC Rptg. Serv. 269, (Tenn. Ct. App. 1979). In that case, the Credit Union posted four notices on the grounds of the John Morrell Company that a repossessed automobile would be sold at a certain place and time. Only offers from members of the Credit Union would be entertained. A member informed the president of the Credit Union that he would pay $5,400.00 for the automobile. At the appointed time of the sale, the president of the Credit Union stood in the presence of a few people, announced the amount of the offer and asked if anyone would offer more. No one did. The car was sold to the bidder.

Because the UCC does not define "public sale" or "private sale," the court looked to the definition of "public sale" in comment C to section 48 of the Restatement of Security: "one to which the public is invited by advertisement to appear and bid at auction for the goods to be sold." The court held that the sale by the Credit Union was a "private sale," declining to equate " 'public' to 'members of the Morrell Employees Credit Union.' "

In this case attendance at the Arena Auto Auction was limited to retail automobile dealers. FMCC directed its promotional efforts for the auctions only at Ford retail dealers. To term the auction a "public" sale would certainly not conform with the usual meaning of the word "public." In Morrell's terms, the public consists of more than retail automobile dealers. The public was not "invited by advertisement" to bid for the cars; FMCC directed its advertising only to Ford dealers. The public was not even permitted to attend the auction.

"The purpose of giving a debtor notice of a public sale is to provide him with the opportunity to gather with and bid in the presence of other potential purchasers, and to observe that the sale is conducted in a commercially reasonable manner." Thus the debtor must receive notice of where and when the public sale is to be held. Because the debtor is not entitled to participate at a private sale, by contrast, the secured party need only send him notice of the date after which the private sale is to be made. Had Solway attended the auction, he may have been able to participate, but only because of the fact that he was a retail automobile dealer. A debtor who was simply a member of the public would not have been able to participate in the sale. The fortuity that Solway might have been able to participate in the sale cannot change its character from a private to a public sale.

The Court in Ford Motor Credit Company vs. Solway clarified the distinction between public and private sale. A later Illinois case, Robinson vs. Ford Motor Credit Company, United States District Court, N.D.,Ill, 8 UCC Rep. Serv. 2d 290 (1989), concentrated on the different procedural UCC requirements in the public sale vs. private sale dichotomy. The Robinson court decision contains an enlightening discussion concerning procedural differences between public and private sale. The court stated that Section 9-504(3) of the UCC requires the secured party to give notice to the debtor before disposing of collateral:

Section 9-507(1) of the Code provides the debtor a right to recover damages caused by the secured party's failure to provide the debtor with "reasonable notification" of the sale. The sole issue to be decided in FMCC's motion for summary judgment is whether FMCC gave Robinson "reasonable notification" of the sale of his car.

"Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale or reasonable notification of the date and time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor, if he has not signed after default a statement renouncing or modifying his right to notification of sale."

The UCC does not contain a definition of "reasonable notification." Section 9-504(3) draws a distinction between "reasonable notification" in the context of a "public sale" and "resonable notification" in the context of a "private sale." Where the disposition of collateral is to be by a "public sale," the statute requires the secured party to send the debtor notice of the "time and place" of the sale; if the collateral is to be sold via "private sale or other intended disposition", 9-504(3) requires only notice of the "time after which" the disposition is to be made. In interpreting whether "reasonable notification" has been given to the debtor, courts have recognized this distinction.

The text of the UCC does not define the difference between a "public sale" and a "private sale." The difference between the two types of sales is described in the informative comments to the Code. The Illinois Code Comment to 9-504 (Ill. Ann. Stat., ch. 26, 9-504, Illinois Code Comment, at 342, (Smith-Hurd 1974) states in pertinent part: "A public sale under this subsection contemplates a sale by auction. See Official Comment to 2-706. Pre-Code Illinois decisional law was in accord" (citations omitted). Official Comment 4 to 2-706 (Ill. Ann. Stat., ch. 26, 2-706, Official Comment 4, at 530) (Smith-Hurd 1963) states: "By 'public' sale is meant a sale by auction. A 'private' sale may be effected by solicitation and negotiation conducted either directly or indirectly."

"The purpose of giving a debtor notice of a public sale is to provide him with the opportunity to gather with and bid in the presence of potential purchasers, and to observe that the sale is conducted in a commercially reasonable manner." Specific notice of when and where the public sale is to be held is thus required to achieve this purpose. In a private sale, unlike a public sale, the debtor is not entitled to participate. Accordingly, the secured party need only provide the debtor with notice of the date after which the private sale is to be made.

In our present analysis of the UCC we have established (1) Private sale (private automobile auctions) are authorized; (2) There must be reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor, if he has not signed after default a statement renouncing or modifying his right to notification.

To further our analysis, we must recognize that the UCC in Article 9-504(3) creates an exception to the notice requirement. The Code provides there must be reasonable notification of public sale or reasonable notification of the time after which any private sale...is to be made shall be sent by the secured party...unless collateral is perishable or threatens to decline speedily in value or if of a type customarily sold on a recognized market. Given the fact that there are trade publications concerning used automobile prices (N.A.D.A., Blue Book, Red Book, Black Book, etc.) and a purported constant market at private auto auctions, may notice to the debtor be waived if a sale is to occur of a repossessed auto at a private auction under the recognized market exceptions? One's first hunch would be notice may be waived, that a recognized market exists...BEWARE, the great majority of available known case law indicates the contrary:

The Tennessee Court of Appeals, held in Bob Bales Ford, Inc. vs. Martin, 31 UCC 789 (1981) the appellee argues, in its brief, that no notice was required since automobiles are such collateral as that sold on a recognized market. This issue has not been addressed in this jurisdiction before but other jurisdictions have consistently held that automobiles do not fall in this category. It is said in Nelson v. Monarch Invest. Plan of Henderson, Inc., Ky., 452 SW2d 375 [7 UCC Rep 394, 397] (1970):

" 'First, the Code dispenses with notice when the collateral to be sold "is of a type customarily sold on a recognized market." 85-9-504(3). We cannot approve the bank's contention that a used car falls in this category. Obviously the Code dispenses with notice in this situation only because the debtor would not be prejudiced by the want of notice. Thus a "recognized market" might well be a stock market or commodity market, where sales involve many items so similar that individual differences are nonexistent or immaterial, where haggling and competitive bidding are not primary factors in each sale, and where the prices paid in actual sales of comparable property are currently available by quotation. We agree with the view taken in Pennsylvania, that there is no recognized market for used cars.' "

The Maryland Court of Appeals, in Maryland National Bank vs. Wathen, 29 UCC Rep 727 (1979) held "Initially we note that an automobile does not come within the exceptions set forth in subsection (3); it is not perishable, subject to a speedy decline in value, nor "of a type customarily sold on a recognized market." A recognized market has been described as a "stock market or a commodity market, where sales involve many items so similar that individual differences are nonexistent or immaterial, where haggling and competitive bidding are not primary factors in each sale and where the prices paid in actual sales of comparable property are currently available by quotation." There is no recognized market for used cars. The price of the same model used car will vary according to its condition or the whim of the purchaser. We conclude then that 9-504(3) requires reasonable notification of the time and place of any proposed sale and further that the requirement that the sale be commercially reasonable does not afford the debtor sufficient assurance that full value will be given for the collateral."

The Colorado Court of Appeals has held that "FDIC also contends no notice prior to sale was required as the collateral was "of a type customarily sold on a recognized market" as exempted under 544.9504(3). The contention is untenable as in Beneficial Finance Co. of Black Hawk County v. Reed, supra, Iowa, 212 NW2d 454, 458 [13 UCC Rep 974, 979], we held: "a used automobile does not fall within the category of collateral 'of a type customarily sold on a recognized market.' " There being no recognized market for used automobiles, it follows no recognized market exists for the sale of used mobile homes. In analysis, what is the effect of a private sale, are deficiencies barred?

Assuming notice is proper, a creditor may seek a deficiency judgment arising out of a private sale provided the sale was commercially reasonable. Numerous cases have addressed this issue. The Illinois Court has held "Evidence of commercial reasonableness includes the manner, time and place of the sale, condition of the repossessed car, the purchase price and the purchaser. Where plaintiff showed that a car was sold at a private sale in a recognized market for the used car industry, bids were received from three automobile dealers and the highest, $1,300, was accepted, plaintiff met its burden of proving that the sale was commercially reasonable. Defendant's evidence that the "Red Book" value of the car at the time of sale was $2,600 retail and $2,100 wholesale did not affect this result. While value is acceptable evidence, the price element alone does not establish the commercial reasonableness of a sale, and mere inadequacy of price in the absence of fraud, mistaken or illegal practice does not vitiate (fault) the sale."

The Washington Court of Appeals has held that the primary focus of commercial reasonableness is not the proceeds received from the sale but the procedures employed for the sale. While the element of collateral was commercially reasonable, price is not the sole determinative factor. A commercially reasonable sale endeavors to consider the total situation. Where each and every aspect of taking, holding and preparing seized collateral for disposition and the disposition of the collateral by public sale on a bid basis, including the time, place, advertisement, method, manner, terms and prices obtained and the disposition and collection of the accounts receivable were performed in accordance with the standard custom and practice of the banking and financial industry, the aggregate effect of the disposition was, as a matter of law, commercially reasonable.

Even assuming that creditor had disposed of new and used cars, trucks, and campers by private sale, such a sale would not necessarily render the disposition of the collateral not commercially reasonable. A private rather than public sale of such collateral, consisting of items which are customarily sold in a recognized market and are the subject of widely distributed standard price quotations, is permissible under 9-504(3) where the sale is otherwise commercially reasonable and the creditor does not participate as a purchaser.

A bank's disposition of collateral consisting of new and used cars, campers and trucks was not rendered commercially unreasonable by its failure to sell the vehicles as a retail dealer. The bank was not licensed to engage in the retail sale of automobiles as required by state law, nor did it have ability to offer warranties to customers, to accept or handle trade-ins, or to provide any type of continuing service by way of repairs or replacements. The creditor was not engaged in retail automobile sales and was not required to be so engaged to dispose of such collateral under UCC 9-504 and 9-507.

The Indiana Court of Appeals has held that whether a secured party's sale of the collateral was held in a commercially reasonable manner is a question of fact. While one of the most important factors to be weighed in deciding whether or not sale or disposition of collateral was commercially reasonable is the price received by the secured party, it is expressly provided in UCC 9-507 that the sale price is not the only item to be considered. This means that a secured creditor may not be held liable to the debtor or be deprived of a commercially reasonable sale or disposition even where a low sale price is received. However, even though a low sale price itself is insufficient to overturn a sale, a closer scrutiny will generally be given sales in which there is a substantial difference between the sale price and the fair market value to determine whether there were legitimate causes for the low price or whether it was caused by the secured party's failure to proceed in a commercially reasonable manner.