Pub. 2 2014 Issue 3

www.uba.org 14 I n a 1931 collection of essays published in the United Kingdom under the title “If It Had Happened Otherwise,” a group of respected historians considered alternate versions of historical events. Notably within the collection was one written by Winston Churchill entitled “If Lee Had Not Won the Battle of Gettys- burg.” The essays were not a different perspective of the facts but alterative fic- tional facts that would have changed the course of history. At times as I review documents of defaulted loans I wonder if, only if, the loan had been documented otherwise. For dysfunction we use the idiomatic phrase that “the left hand doesn’t know what the right hand is doing.” Be- cause I practice law within a finance and restructuring group, some do loan documentation or front-end work, and others do default work or back-end work. The same is true for lenders: some doing front-end origination work and others being back-end special assets work. At times, the front-end does not know what the back-end is doing. A better understanding of one major back-end issue may result in a better front-end product and save us from asking “if.” The most common defense of an obligor to a deficiency action in a non-real estate secured transaction is that the sale of the collateral was not commercially reasonable. Article 9 of the Uniform Commercial Code 1 requires that “every aspect of a disposition of collater- al, including the method, manner, time, place, and other terms, must be commer- cially reasonable.” 2 If unchallenged by a debtor, then commercial reasonableness of the disposition is presumed. 3 However, once the debtor asserts commercial rea- sonableness, then the lender must prove that the disposition was commercially reasonable. 4 Establishing compliance is costly. The obligation cannot be avoided by a waiver in the loan documentation because the UCC invalidates pre-default waivers of commercial reasonableness. 5 The UCC describes three types of non-judicial dispositions that are com- mercially reasonable. If the sale is: (1) in the usual manner on any recognized market; or (2) at the price current in any recognized market; or (3) in conformity with reasonable commercial practices among dealers in the type of property. 6 The term recognized market applies to very few sales, meaning that lenders are generally required to satisfy the third alternative. The litigation cost to prove conformity with reasonable commercial practices is expensive. Instead of litigating the third standard, one option lenders should consider is contracting in the loan documents the standards for determination of com- mercial reasonableness. This must be done at the outset of the transaction - the front-end. The security agreement is something more than prescribed legalese for the creation of a security interest. Lenders may contract with debtors in the security agreement on the post-default standards for com- mercial reasonableness of a collateral disposition. The UCC permits lenders and borrowers to agree upon standards measuring compliance with commer- cial reasonableness, provided those “standards are not manifestly unrea- sonable.” 7 The drafters of the UCC leave to the courts to determine what is manifestly unreasonable but that may be easier to divine than commercial reasonableness and costs less to litigate. 8 Drafted standards for commercial rea- sonableness are subject to the general 1 References in this article are to the Uniform Commercial Code (“UCC”), as adopted in Utah. Utah Code § 70A-1-101 et seq. 2 UCC § 9-610(b) (2010). 3 UCC § 9-626 (2010). 4 UCC § 9-626 (2010). If It Had Been Documented O Commercial Reasonab Documentation in Adva to Reduce Litigation Ex By Steve Waterman, Partner of the law firm of Dorsey & Whitney LLP 5 UCC § 9-602 (2010). 6 UCC § 9-627 (2010). 7 UCC § 9-603 (2010). 8 See Morgan Buildings and Spas, Inc. v. Turn-Key Leasing, Ltd., 97 S.W.3d 871 (Tex.App. 2003).