How to Conduct an Article 9 Liquidation Auction – An Auctioneer’s Perspective

How to Conduct an Article 9 Liquidation Auction

Conducting an Article 9 liquidation auction involves following the guidelines set forth in Article 9 of the Uniform Commercial Code (UCC), which governs secured transactions in the United States. This type of auction occurs when a secured party, such as a lender, seeks to sell collateral to recover the outstanding debt owed by a debtor. 

What is an Article 9 Liquidation Auction?

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. The process must adhere to UCC requirements, which include giving proper notice to the debtor and any interested parties and conducting the sale in a commercial fairway.

How to Conduct an Article 9 Liquidation Auction?

Here is a rough outline of how to conduct an Article 9 liquidation auction:

Review Loan Documents and Security Agreement

Ensure that the secured party has a valid and perfected security interest in the collateral. This is usually in the form of a lien registered with the Secretary of State of the state in which the collateral is located. 

Check for any specific terms that might affect the sale process, such as reserve prices, conditions of sale, or rights of redemption. A clear understanding of these documents ensures the auctioneer complies with both the Uniform Commercial Code (UCC) and the expectations of the secured party.

Confirm the terms of the security agreement, including the rights to repossess and sell the collateral.

Repossession of Collateral

If necessary, repossess the collateral in a lawful manner. The repossession must not breach the peace and should comply with local laws. Some auction companies provide pick-up and repossession services and can handle the logistics of taking physical possession of the collateral and storing it until the liquidation auction can take place. 

If the collateral involves many items or pieces of equipment or inventory, it may be best to sell the collateral in its current location, if the property owner is in agreement. Obviously, if the collateral can be sold without moving it, more money will be recovered.

Provide Notice of Sale

Send a written notice of sale to the debtor and any other party with a known interest in the collateral. The UCC requires that the notice be ‘reasonable’, which typically means giving the debtor and any other interested parties sufficient time to prepare.

The notice should include:

  • The time, date, and location of the auction.
  • A description of the collateral.
  • Details about whether the sale is public or private.
  • The method of payment required.

Determine Auction Type

Decide if the sale will be public (auction) or private. Public auctions are open to any bidder, while private sales involve negotiating with specific buyers. Public auctions offer a proven method of sale that is transparent and, when conducted by an experienced, professional auction company, will help protect the lender from accusations of unethical practices.

If conducting a public auction, determine whether it will be held in person or online. The advice of a professional auction company will be of utmost importance.

Advertise the Auction

Advertise the auction in a commercially reasonable manner to attract potential buyers. This could include a legal notice as required by law, online listings, or direct notifications to interested buyers. 

Use a variety of traditional and digital outlets, including online auction sites, social media, email campaigns, industry journals, and local newspapers. Ensure that the advertisement has all legally essential information, such as the time and location of the auction, a description of the collateral, and the terms of sale.

The auction company will provide a recommended marketing budget and be responsible for all marketing, with the possible exception of legal notices posted in newspapers.

Set Auction Terms

Clearly outline the terms of the sale, including the required deposit, full payment timeline, and any other terms related to buyer obligations. The auction company will usually prepare the Terms and Conditions. 

However, in some instances, the lender’s legal council may need to include specific terms regarding the sale of the collateral.

Conduct the Auction

Assure the process is conducted in a transparent and professional manner. Ensure that all bidders have registered, and collect any deposits or bidder credentials requested by the secured party. An online auction provides the most transparent method of sale, as anyone can access the auction catalog and terms online at any time after the auction is posted online. 

Use dynamic auction strategies to entice buyers and obtain the greatest possible price. Confirm all bids and finalize transactions in accordance with the predetermined terms. Make sure bidding procedures are clear and competitive to maximize the value obtained. 

Sale Proceeds and Application

After the sale, apply the proceeds in the following order:

1)  Pay the costs associated with repossessing, preparing, and conducting the sale.

2)  Pay the outstanding debt secured by the collateral.

3)  Return any surplus to the debtor (if applicable).

If the proceeds are insufficient to cover the debt, the debtor may still be liable for the deficiency balance.

Complete Required Paperwork

Prepare and provide a bill of sale or other proof of transfer to the buyer. Professional auction companies can provide electronic invoices and reports, giving a complete accounting of what was sold, what price was recovered, and who purchased each lot in the auction.

Notify the debtor of the final outcome, including any remaining balance or surplus distribution.

Ensure Compliance with Laws

Deliver legally mandated notices to the debtor, guarantors, and other interested parties within the specified timeframe. Confirm that the auction process is conducted in a commercially reasonable manner as required by UCC standards. Keep accurate records of all actions performed, including notices sent, advertising attempts, bids received, and final disposition of collateral. Failure to comply may expose the secured party to claims for damages or a defense to a deficiency claim.

Conclusion

Following these steps will help ensure that an Article 9 liquidation auction is legally compliant and maximizes recovery for the secured party. If needed, consult with an attorney experienced in UCC and secured transactions to guide the process. Please note that this is not to be considered legal advice or a substitute for seeking legal representation from a licensed attorney. 

The above information should in no way be considered a substitute for seeking legal representation from a licensed attorney.

For more information on how auctions work or to discuss a potential collateral sale, contact Jones Swenson Auctions at (512)2613838 or email Info@JonesSwenson.com  for a no-obligation consultation.

FAQs

How does Article 9 work?

Under Article 9, if a debtor defaults on their debt, the creditor may repossess the secured property.

Is there any way for an Article 9 creditor to protect itself from liability in a foreclosure?

The lender should be fully protected in the event the borrower defaults on its obligations to the lender, assuming (a) the collateral was properly appraised, (b) the lender did a proper lien search to make sure the lender’s lien will be a first-priority security interest, (c) the documents were properly drafted and the lien perfected, and (d) the loan does not represent more than a reasonable percentage of the value of the collateral.

What is the Article 9 sale process?

Article 9 establishes a framework that allows a secured creditor to repossess and dispose of collateral in an efficient and cost-effective manner while also providing the debtor with important procedural rights. The sale is triggered by the debtor’s failure to fulfill its commitments to the lender under the applicable loan documents.

What is the difference between Article 9 Sale vs 363?

The main difference between an Article 9 sale and a 363 sale is that Article 9 sales are not subject to judicial oversight, while 363 sales require a judicial process.

What is the UCC Article 9 Friendly Foreclosure?

A friendly foreclosure, also known as an asset surrender, is a procedure under Article 9 of the Uniform Commercial Code (UCC) that allows a debtor and a secured creditor to reach a consensual agreement to sell or surrender the debtor’s collateral. This process is often used when a borrower is in default on a loan secured by personal property.

What is the UCC Article 9 Repossession?

Article 9 of the Uniform Commercial Code (UCC) governs the relationship between a debtor and a secured creditor, including the creditor’s ability to repossess collateral if the debtor defaults.

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