When a lender pursues a deficiency on Article 9 collateral, the borrower’s most common defense, and often the only one with any substance, is that the lender disposed of the collateral in a commercially unreasonable manner under Texas Business & Commerce Code Chapter 9. If the borrower wins on commercial unreasonableness, the rebuttable presumption rule of § 9.626 reduces or eliminates the deficiency.
The defense is fact-intensive. It turns on exactly how the collateral was repossessed, prepared, advertised, and sold. Lenders who didn’t build the commercial-reasonableness record at the disposition stage face real risk in the deficiency suit, while lenders who built it proactively usually dispose of the defense at summary judgment.
We have prosecuted and defended commercial-reasonableness disputes in Texas since long before the current Article 9 revisions. This page lays out the issues and how we handle them.
The Statutory Framework
The commercial-reasonableness requirement lives in two places.
§ 9.610, disposition of collateral. “Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.”
§ 9.611, notification before disposition. Pre-disposition notice to the debtor, and (for secondary obligors and certain other persons) to specified other parties, is required, with content and timing requirements.
§ 9.626, action in which deficiency or surplus is at issue. This sets the rebuttable presumption rule. If the secured party fails to prove that the disposition complied with the Article 9 requirements, the amount of the proceeds is presumed to equal the amount of the secured obligation, costs, and reasonable attorney’s fees. The lender’s burden is to rebut the presumption by proving compliance.
In plain terms, the lender carries an affirmative burden in the deficiency suit. The borrower does not have to prove commercial unreasonableness; the lender has to prove commercial reasonableness once the issue is contested.
The Recurring Challenge Areas
Five recurring issue areas account for most commercial-reasonableness disputes.
Pre-disposition notice under § 9.611
Common notice challenges:
- Timing. Notice was sent too close to the disposition, depriving the debtor of a meaningful opportunity to redeem or otherwise protect its interests.
- Content. Notice failed to include statutorily required content (the parties, the secured obligation, the type of disposition contemplated, the time and place of a public sale or the time after which a private sale will be made).
- Addressee. Notice was sent to a stale address, to the wrong person, or left out required secondary recipients such as junior secured parties or secondary obligors.
- Method of delivery. Notice was sent by a method that didn’t reach the debtor or didn’t satisfy the § 9.611 safe-harbor for proper delivery.
We review the notice and delivery records at intake. Where the notice was clean, we use it offensively. Where it has issues, we evaluate whether they are material and how to address them.
Manner of sale
Common manner-of-sale challenges:
- Public vs. private sale. Was the choice between public auction and private sale appropriate for the type of collateral and market?
- Dealer-only auctions. Auctions limited to licensed dealers (for commercial vehicles or certain equipment, say) may be challenged as restricting the bidder pool.
- Geographic location. Was the sale held in a market where comparable sales typically occur, or in an inconvenient location that suppressed bidder interest?
- Advertising. Was the sale advertised in trade publications, online platforms, or other channels customary for the type of collateral?
We build the manner-of-sale record through affidavit testimony from recovery personnel, auction records, advertising records, and, where it helps, industry-practice expert testimony.
Timing of disposition
Common timing challenges:
- Excessive delay between repossession and sale. Holding collateral too long can be unreasonable, particularly for depreciating assets.
- Hasty disposition without adequate marketing time. Selling collateral too quickly can shrink the bid pool.
- Sale in unfavorable market conditions. Selling in a depressed market when the lender could have waited may be challenged in some circumstances.
These challenges are fact-specific and depend on the particular collateral type and market.
Condition of collateral at sale
Common condition challenges:
- Failure to repair or recondition. Selling equipment in non-functional or damaged condition when reconditioning was economically appropriate.
- Failure to provide records or documentation. Selling equipment without operating manuals, maintenance records, or title documentation that buyers customarily expect.
- Storage damage. Damage to the collateral during the lender’s possession that reduced sale value.
We address condition issues through affidavit testimony from the lender’s recovery personnel and through documentation of the collateral’s condition at repossession and at sale.
Price obtained
Common price challenges:
- Sale price materially below fair wholesale or appraised value. The strongest price-based challenge.
- Sale to an insider. Sales to the lender’s affiliate, or to a recovery vendor the lender has an unusual relationship with.
- Single-bidder sales. Public auctions that drew only one bid, suggesting inadequate competition.
Section 9.610(c) addresses sales to the secured party at private dispositions: a secured party may buy collateral at a public disposition, or, if the collateral is of a kind customarily sold on a recognized market or is the subject of standard price quotations, at a private disposition. Sales to the secured party outside those conditions can be challenged.
Building the Commercial-Reasonableness Record
How we build the record in practice:
At the disposition stage (when we’re involved early), we advise on notice content and delivery, manner of sale, advertising, and documentation. This work keeps commercial-reasonableness disputes from arising in the deficiency suit.
At the deficiency-suit stage (when we’re brought in after disposition), we assemble the record from existing documentation, fill gaps through affidavit testimony, and prepare the summary-judgment package.
The summary-judgment package on commercial reasonableness typically includes:
- The notice of disposition with proof of mailing or delivery
- The advertising records (auction listings, trade publication ads, online listings)
- The auction or sale records (bid sheet, list of attendees, final sale price, sale terms)
- Affidavit testimony from the lender’s recovery personnel about the procedures followed
- Affidavit testimony from the auction or sale vendor about the manner of sale
- Where useful, an expert affidavit on industry practice for the relevant collateral type
- Comparable sales evidence (other recent sales of similar collateral)
- The accounting of proceeds applied to the loan
With that record, summary judgment on the deficiency typically follows.
When the Defense Has Substance
Not every commercial-reasonableness defense fails. Where the lender’s notice was genuinely defective, the manner of sale was outside industry norms, the sale was hasty, the collateral was sold in materially impaired condition without justification, or the price was materially below fair value, the defense may have substance.
We evaluate these matters honestly. Where the defense is substantial, we advise the lender on:
- A negotiated settlement that reflects the deficiency-reduction risk
- Pursuing only the portion of the deficiency that survives the rebuttable presumption analysis
- Where applicable, pursuing claims against the disposition vendor whose conduct created the deficiency-reduction exposure
Our reputation depends on being candid with clients about the strength of their case.
Build the Record or Defend Against the Defense
Whether your institution is structuring an upcoming disposition or facing a commercial-reasonableness defense in pending deficiency litigation, we can help.
For lenders pursuing deficiencies, contact the firm with the loan documents, the disposition records, and any pre- or post-disposition communications with the borrower. We’ll evaluate the commercial-reasonableness posture and outline the path forward.
Contact us to get started or call 214-368-4686.
Related Pages
- For Lenders and Financial Institutions
- Pursuing the Deficiency After Collateral Liquidation
- Promissory Note and Guaranty Enforcement
- Defeating Guarantor Defenses
- Replevin and Sequestration to Recover Collateral
- Texas Collections Law FAQs
Commercial Reasonableness FAQs
What if my institution's notice didn't go out exactly on time?
Notice timing is a question of reasonableness, not rigid days. The Article 9 safe-harbor language ("ten days") is one path to compliance, but notice sent within a reasonable time before disposition can also satisfy the rule. We evaluate the specific timing in light of the collateral type and market.
What if the collateral was sold for less than what we owed?
That fact alone does not establish commercial unreasonableness. A sale price below the outstanding balance is the normal pattern in deficiency situations. The question is whether the price was materially below the collateral's fair market value, and whether the manner of sale was commercially reasonable.
What about consumer collateral?
Consumer transactions carry additional rules under Article 9, and may also be subject to the Federal Trade Commission's Holder Rule and related consumer-protection statutes. We evaluate consumer matters with attention to those overlays, though our primary practice is commercial.
What if our recovery vendor handled the disposition?
We usually obtain affidavit testimony from the recovery vendor about the manner of sale. Where the vendor's practices were industry-standard, that testimony supports commercial reasonableness. Where they were outside the norm, we and the lender evaluate the implications.
What if the borrower demands a commercially reasonable sale and the lender disagrees about what's reasonable?
Communications during the disposition process, particularly written demands by the borrower for a specific manner of sale, can become evidence in the eventual deficiency suit. Borrowers who demanded a public auction and got a private sale, or who demanded specific advertising and got none, sometimes use those communications offensively. We review them at intake.
Can the firm help structure dispositions to avoid commercial-reasonableness disputes?
Yes. We advise lenders on disposition planning when retained early. Front-end advice usually keeps commercial-reasonableness disputes from arising at all, or substantially weakens any dispute that does.
What's the difference between failing the safe harbor and being commercially unreasonable?
The safe harbor provides a path to per-se compliance. Failing it does not automatically establish commercial unreasonableness; the lender can still prove reasonableness on the specific facts. But the safe harbor's predictability is preferable where it's available.
Can the borrower waive the commercial-reasonableness defense?
Generally no. Section 9.602 lists provisions of Article 9 that the debtor cannot waive before default, and commercial reasonableness is among them. Pre-default waivers are not enforceable. Post-default settlements that release commercial-reasonableness claims are typically enforceable.
What if the deficiency is small relative to the dispute cost?
For a small deficiency where the borrower is mounting an aggressive commercial-reasonableness defense, settling at a discount may be more economic than litigating the issue to summary judgment. We provide the analysis; you decide.
How does this issue interact with non-bankruptcy guarantor defenses?
Guarantors can typically raise the same commercial-reasonableness defense as the principal obligor. Most modern guaranty forms include waivers of impairment-of-collateral and similar defenses; whether those waivers are enforceable as to commercial reasonableness specifically is something we evaluate on the guaranty's particular language.