Editor’s Note: the August edition of The Bankruptcy Strategist and the September edition of the Equipment Leasing Newsletter, each ran a substantially similar article by the authors. We are pleased to run this version here.
You represent a secured lender. You are to assist your client in its exercise of rights under UCC §9-610 to sell its collateral after it has foreclosed.
Or maybe you represent a chapter 11 debtor and are selling its assets under Bankruptcy Code §363.
Or perhaps you are a federal equity receiver selling under 28 U.S.C §2001 et seq.
Or you are an assignee for the benefit of creditors or state court receiver who is selling a company’s assets pursuant to state law.
Regardless of the hat you wear, you have business assets to sell; maybe an entire going concern to sell. How will you fulfill your duty to market the sale in a commercially reasonable manner, to obtain the highest price you reasonably can?
You knee-jerk to the newspaper ad. After all, it is common practice to advertise public sales in a general circulation newspaper once a week for several weeks leading up to the auction date. This will constitute commercially reasonable notice and is likely to help achieve robust bidding, right?
Are you certain?
Let’s step back though time, to mark progress and clarify the present.
The total daily circulation of newspapers in the United States was about 54 million in 1950. The total daily circulation in 2000 declined to about 48 million, despite the U.S. population having about doubled since 1950. According to a 2012 Pew Research Center study, the number of Americans who had read a newspaper the previous day had fallen to 23%. In 2018, the numbers are more dramatic, only “16 percent ‘often’ turn to newspapers” for their news.
It is reasonable to assume that the numbers have dropped further since 2012 among all readers, as people increasingly get their news on-line.
Of the dwindling population of newspaper readers, how many actually review the “auction mart,” “legal notice section,” or whatever the section in which your ad will appear is called? And of those who do, how many of them will care that a widget company is for sale?
The factual premises of commercial advertisement have been, and continue to be, transformed as:
To illustrate: who looks at the local newspaper alone (or maybe at all) for investment real estate or an antique car? The local newspaper may have been the best ad platform for selling these things 50 years ago, when markets were correspondingly local. Today, with respect to investment real property and antique cars, anything a local or regional newspaper can do, national on-line sites can do better. See, e.g., www.AntiqueCar.com, www.autotrader.com, and www.classiccar.com (for antique cars), and www.connectedinvestors, www.ten-x.com, www.rcm1.com (for real property), and www.dailydac.com for distressed businesses and assets of distressed businesses.
Newspaper promotion of distressed asset sales may have been the best way when Ragged Dick, Tom the Bootblack, and Phil the Fiddler walked the streets of Horatio Alger’s New York. However, times have changed, media have changed, the sizes of markets have changed, and the habits and expectations of potential purchasers (and their attorneys, accountants, and other gatekeepers) have changed.
Half a generation into the Digital Age, newspaper notice is obviously much less sufficient for advertising the sales of distressed assets.
Why, then, does the practice continue?
Not everyone adopts a new technology right away. Buggy makers lost out gradually as the horse and buggy gave way to horseless carriage. But lose they did — there are almost always losers as a new technology takes over the field. Not surprisingly, newspapers have lobbied to prevent progress. See, for example, this 2012 Texas Municipal League legislative update:
Notice to the public is an essential part of open government, but antiquated print ads published in papers with ever-declining subscription don’t appear to be the best way to promote open government. Nevertheless, newspaper organizations are ramping up their opposition to Internet publication of notices. Why? Legal notices provide revenue in an era of declining print subscriptions.
The UCC standard of commercial reasonableness for foreclosure sales of collateral influences thinking about sales outside the UCC. Those standards adjust to relevant changes in communication modes and technology and thus should bear upon the sufficiency of newspaper versus on-line marketing of asset sales.
Under the UCC, the key standard is the commercial reasonableness of the sale, including the reasonableness of the marketing of the sale. UCC 9-610(b) provides that “[e]very aspect of a disposition, including the method, manner, time, place, and other terms, must be commercially reasonable.” If a debtor challenges a secured creditor’s post-sale pursuit of a deficiency claim, the secured creditor has the burden of establishing that the disposition of the collateral was commercially reasonable. See UCC 9-626((a)(2). If the secured creditor fails to prove that the disposition was commercially reasonable, it may not pursue collection of any deficiency owed to it, and may even be liable for damages. See UCC 9-626(a)(3) and UCC 9-625.
The Uniform Commercial Code does not, however, define “commercially reasonable.” Courts describe the inquiry into whether the manner of sale was commercially reasonable as fact-intensive in light of circumstances relevant to the particular case. See, e.g., Comm’l Credit Grp. v. Barber, 682 S.E.760, 765 (Ct. App. N.C. 2009) (commercial reasonableness is “an issue of fact in light of all relevant circumstances of each case”) (internal quotation omitted).
The factual intensiveness of the inquiry is underscored by UCC §9-627(b)(3), which can be described as providing a safe harbor of sellers by defining (non-exclusively) what qualifies as a “commercially reasonable manner” of disposition:
A disposition is made in a commercially reasonable manner if the disposition is made . . . in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
See UCC 9-627(b)(3).
This safe harbor requires proof of “reasonable commercial practices among dealers in the type of property” being sold. Such proof must indicate “practices” that are “reasonable” among a specific group of dealers.
Courts may want to review such evidence even where the safe harbor is not being relied upon. In Pirrotti v. Respironics, Inc., 2013 WL 321772, *15 (D. Conn. Jan 28, 2013), the court noted that the only evidence the seller presented was of two newspaper advertisements, and the absence of §9-627(b)(3) evidence deprived the court of “a comparative means of assessing commercial reasonableness” under the facts of the case. Similarly, in Wells Fargo Bus. Credit v. Environamics Corp., 934 N.E.2d 283, 289 (Mass. App. Ct. 2010), the court noted that “adjudication of the ‘commercially reasonable standard’ . . . produces inquiry into the competence and aggressiveness of the marketing effort.” Id.
Consistent with the foregoing, where a state statute prescribes a particular form of notice like newspaper notice, a court will not necessarily find that following the statute’s dictates constitute commercially reasonable notice required by the UCC. Indeed, well before the digital age, the California Supreme Court reversed a lower court’s ruling that a secured creditor conclusively satisfied its obligation to advertise sale of collateral in a commercially reasonable manner merely because it provided statutorily required notice of sale to the debtor and other secured parties. Ford & Vlahos v. ITT Comm’l Fin. Corp, 8 Cal.4th 1220 (Cal. 1994).
It follows that commercial reasonableness for the disposition of certain assets requires marketing that is both more specifically targeted and broader geographically than newspaper notice. Indeed, courts have so found:
Those entrusted to conduct commercially reasonable sales may be well advised to use available low-cost on-line asset sale platforms like DailyDAC. After all, at a fraction of the cost of a newspaper ad, and with no geographic limit, and with tens of thousands readers who have specifically expressed an interest to be made aware of such sales, such platforms certainly address concerns as to whether enough was done to alert buyers of distressed assets of the sale in question.
The statutory phrasing in UCC 9-627(b)(3) — “in conformity with reasonable commercial practices among dealers in the type of property” – does more than indicate a fact-intensive inquiry. It also denotes the sensitivity of commercial reasonableness to changing modes of information transmission. What is “reasonable” marketing for dealers depends in part on the technological aspects of the media through which marketing is accomplished. For example, faxing notice to competitors of the debtor (a group of potential purchasers not to be neglected!) was not possible or even conceived of in 1966 and therefore would not then have been judged necessary for a disposition to be commercially reasonable. In 1986, such faxing may have been key to the commercial reasonableness of the marketing of a given disposition. Such faxing likely would not be necessary or advisable in 2016.
We shall see how courts deal with the new realities of asset disposition. In the meantime, if you have a duty to dispose of assets in in a commercially reasonable manner, keep in mind that “everyone else did it” is not necessarily a good argument — in life or in law.
Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and…
Jonathan Friedland is a partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts…
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