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?”
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facilitating commercial transactions compared to unsecured transactions wherein a creditor may be forced to resort to outdated methods of debt collection like sheriff sales or physical repossessions.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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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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