90 Second Lesson: What is a “UCC Article 9” Sale?

QUESTION:

Jack B. emailed, asking, “Please explain what an Article 9 sale is. My lawyer said that if I give a security interest to a lender, it can do an Article 9 sale.  What is an Article 9 sale?”

ANSWER:

Well, Jack, the Uniform Commercial Code, or “UCC,” governs all commercial transactions in the United States. Article 9 of the UCC specifically governs the relationship between a debtor and its secured creditors, also referred to as “secured transactions.” Debtors are given credit, which may come in numerous forms, and they put up collateral in exchange. Generally, a secured creditor may seek to enforce its rights on its collateral upon a debtor’s default. A secured creditor’s remedies include an Article 9 sale, which is the right to sell the debtor’s collateral to a third party in a private or public sale while avoiding any judicial proceedings.

A secured creditor may pursue an Article 9 sale notwithstanding a debtor’s desire to find some alternative to ceasing operations and liquidating its assets. This can prove to be an extremely effective tool in facilitating commercial transactions compared to unsecured transactions wherein a creditor may be forced to resort to outdated methods of debt collection like sheriff sales or physical repossessions. In other instances, particularly where a borrower wants to avoid liability on a personal guaranty to the secured creditor, the borrower may cooperate in the process in what is sometimes called a “friendly foreclosure.”

Article 9 details exactly how to create a secured transaction between a creditor and debtor and requires three (3) essential components: (A) Value must be given, this is typically a line of credit; (B) the Debtor must have rights in the collateral, the individual using their property as collateral (car, house, a deposit account, etc.) must actually own it; and (C) the Creditor must be granted rights to the collateral, which usually takes the form of a Security Agreement. 

If you have entered into a secured transaction, maybe for a car you financed or a large amount of inventory you put on credit, the UCC sets the ground rules and facilitates remedies for all parties when default, or other issues, arise.

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[Editors’ Note: This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

• Help, My Business is In Trouble!
• What Kind of Loan?
• The Intersection of Bankruptcy and the UCC

You may also like:

• Dealing With Defaults Under Article 9 of UCC: A Player’s Guide for the 21st Century
• 90 Second Lesson: Selling Collateral in a 363 Sale vs Article 9 Sale

This is an updated version of an article originally published on March 15, 2019. It has recently been edited by Joseph Wittman]

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