Pub. 2 2014 Issue 3

summer 2014 15 UCC requirement of good faith, which is “honesty in fact and the observance of reasonable commercial standards of fair dealing.” 9 Two loan situations are particularly appropriate for agreed standards: re- petitive uniform collateral transactions and specialized collateral transactions. Repetitive uniform collateral transactions are those in which a lending institution routinely lends on the same type of collateral. In these situations, the lender is more knowledgeable about the dispo- sition methods for the type of collateral and can develop standards for its disposi- tion. Illustrative of a repetitive uniform collateral transaction is an automobile dealer flooring line. In a reported case, Ford Motor Credit Company 10 had a flooring line with a dealer. The security agreement stated the standard for a com- mercially reasonable disposition of the vehicle inventory that provided for a sale to the highest offeror of three or more au- tomobile dealers. Upon the post-default disposition of the collateral, the dealer and its guarantor challenged the com- mercial reasonableness of the disposition. The lender obtained summary judgment. The dealer and guarantor appealed. The Seventh Circuit Court of Appeals upheld the commercial reasonableness of the sale because it was the contractual standard set forth in the security agreement. The second situation is with respect to specialized types of collateral that upon default pose problematic disposition methodology. What is a commercially reasonable disposition of custom equip- ment or equipment with a limited market of potential buyers/users. For example, the equipment is one of only ten ma- chines in the US but currently in great demand by the ten users of that process. In three years, a new process is in place and only those nine other users could possibly use the equipment. Another example; what is a commercially reason- able disposition of stock of a closely held business or small family business. How is the disposition advertised or the sale conducted? The security agreement can articulate the standards for advertising and sale. Thus, those responsible for loan docu- mentation at the outset must consider how collateral would be sold in the event of default. This is not planning for failure but planning if there is failure. It is engaged thought to protect the lender from the outset, instead of using a stan- dard form that treats a Ford the same as a Bugatti. Most lenders have concern about the post-default marketability of collateral but many do not take the next step to evaluate how it would be market- ed and the conditions of the disposition. Incorporating standards for disposition into the security agreement which the UCC permits will avoid litigation costs later. Lender agreement with the borrower at loan inception is the key. In one case, the Fourth Circuit held that the disposition of collateral was commercially reasonable because the secured party took title to collateral for an independently appraised value, because that was the agreed stan- dard in the security agreement. 11 One caveat must be mentioned. If standards are established in the security agreement and the lender fails to comply with them, then the lender will lose. Nev- ertheless, lenders may save money in the long run by contemplating disposition methodologies in advance and drafting standards for commercially reasonable disposition of collateral as part of the negotiated documents with the borrower at loan origination. Alternatively, lenders could write cases studies entitled “If Only the Security Agreement Had Defined Disposition Standards.” n Steve Waterman is a partner of the inter- national law firm of Dorsey & Whitney LLP, experienced in bankruptcy reorganizations, Uniform Commercial Code litigation, Lan- hamAct enforcement litigation, receivership cases, insurance company liquidation, tribal insolvency, and stock brokerage liquidations under the Securities Investor Protection Act, Steven T. Waterman focuses his practice in the area of creditors’ rights, commercial litigation, and insol- vency proceedings. Steve has litigated cases in a number of Federal, Tribal, and State trial and appellate courts. He is co-Chair of Dorsey’s Financial Restructuring and Bankruptcy practice group and a member of the Indian and Gaming practice group. Steve has been honored as one of the Best Lawyers in America in Bankruptcy and Creditor-Debtor Rights Law and is peer review rated AV by Martindale Hubbell, among other honors. He has presented locally, regionally, and nationally to various groups with respect to insolvency, trial and valuation issues. He is currently an Adjunct Professor teaching secured transactions at the J. Reuben Clark Law School at Brigham Young University. Steve may be reached at Waterman.Steven@Dorsey.com or 801-933-7365. For relaxation, Steve enjoys wildlife and Milky Way photography. “Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” 9 UCC § 1-201(b)(20) (2010). 10 Ford Motor Credit Co. v. Solvay, 825 F.2d 1213 (7th Cir. 1987). 11 Burns v. Anderson, 123 Fed. Appx. 543 (4th Cir. 2004). Otherwise: bleness ance xpense