Online Foreclosures: Commercially Reasonable? A year ago or so a reporter asked me to comment on why more Article 9 foreclosures are not conducted on-line. I told him I wasn't sure, but I suspected the reason was concern over whether an on-line foreclosure auction would be considered commercially reasonable.

It's not that I think an on-line foreclosure auction might be commercially unreasonable. In many circumstances - if not most - I think an on-line foreclosure auction would be more commercially reasonable than a traditional auction. In fact, I think we may someday see the day when a court holds a traditional auction commercially unreasonable because a much better on-line liquidation venue is available. The problem in this circumstance is the danger in being the first to try something new - whenever a secured creditor tries any new liquidation method it takes the risk of being accused of having foreclosed its collateral in a commercially unreasonable manner. Absent judicial acceptance, new foreclosure methods are inherently risky.

I recently came across a 2006 decision from the US Bankrutpcy Court for the District of Idaho that helps: In re A.W. Logging, Inc., 2006 WL 2860808 (Bankr. D. Idaho 2006).

Les Bois Leasing leased a sawmill and loader to A.W. Logging, Inc. After A.W. Logging, Inc. filed bankruptcy, Les Bois Leasing was able to terminate the leases and liquidate the equipment. Les Bois did so by selling the equipment through an online auction service called Iron Planet. Iron Planet is a fairly well known website used for liquidating all kinds of heavy equipment and vehicles. After liquidating its equipment, Les Bois filed a proof of claim for the remaining amount due under the lease.

The Debtor claimed the use of Iron Planet to sell the equipment was not commercially reasonable. The Debtor did not object to the use of an on-line auction, per se. Instead the Debtor objected to the particular auction site used. The Debtor claimed Les Boise should have used a speciality auction website, called the Sawmill Exchange, rather than an auction site that focused on heavy equipment generally. The Court agreed that under Idaho law, the leasing company had an obligation to dispose of the equipment in a commercially reasonable manner. But, as to the choice of auction site the Court had little to say, pointing out that:

"[t]he evidence showed that Iron Planet is a well-respected auction website that specializes in the sale of heavy equipment...[T]he Court is not persuaded that...the sawmill was not exposed to a broad market."

The Court noted that several bids were placed and held that the sale of the equipment on Iron Planet was reasonable.

The case demonstrates that on-line auctions are suitable for foreclosure auctions, provided suitable thought is given to the market for the auction website and its ability to reach an adequate audience of potential buyers. A few recent law review articles have addressed the issue, and show that a secured lender should not be afraid to look at on-line auctions. For example Richard H. Nowka, Ebay Auctions of Repossessed Vehicles - A Template for Commercial Reasonableness Under Revised Article 9, 31 S. Ill. U. L.J. 281 (2007); Michael Korbut, Online Auctions of Repossessed Collateral, 31 Rutgers L.J. 29 (1999).

Labels: article 9, foreclosure, internet

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