Refreshing the page on online collateral auctions.

• Author: Gilstrap, Stephen S.

INTRODUCTION

Advances in technology have allowed for tremendous growth in the use of online auctions over the past decade. In 1998, online auction sales accounted for roughly $2.1 billion of the total $13 billion generated in sales by e-commerce. (1) In 2004, reports estimated that online auction sales would total $100 billion within three years. (2) By 2007, eBay (the world's most popular online auction site) reported that $35.6 billion in online auction sales were closed on its trading platform alone. (3) Despite this growth in the use of online auctions, however, Article 9 of the Revised Uniform Commercial Code (U.C.C.) has failed to specify whether secured creditors can use these types of auctions to sell a debtor's collateral in the case of default. (4) Article 9's silence leaves both secured creditors and debtors unsure about whether online auctions might be considered "commercially reasonable"--the standard that a secured creditor must meet in order to sell a defaulting debtor's collateral. (5)

While the popularity of online auctions has ballooned, this lack of certainty has stifled the growth of online collateral auctions (repossessed collateral auctions conducted under Article 9). (6) This uncertainty gives secured creditors an ever-present fear of litigation from unhappy debtors should they attempt to sell collateral at an online collateral auction. The potential for costly litigation, however, has not stopped all secured creditors from including online collateral auction provisions in their security agreements and selling collateral at online auction sites. (7) While no comprehensive empirical evidence exists detailing the percentage of online collateral auctions, some experts in the field estimate that this percentage is as low as five to fifteen percent. (8) Based on anecdotal accounts, however a large opportunity for growth in online collateral auctions exists, especially when studies show that over a quarter of internet users take part in online auctions. (9) The noticeable lack of case law in this area also suggests that the vast majority of debtors do not pursue litigation following online collateral auctions, possibly because the debtors themselves are capitalizing on the efficiencies and benefits associated with these auctions.

The efficiencies and benefits associated with online collateral auctions include their expedience, inexpensive nature, and potential to sell to a "tremendously large, worldwide audience." (10) Additionally, studies consistently find that online collateral auctions produce higher prices relative to traditional auctions. (11) When compared to traditional auctions, whose ability to sell these types of items is geographically limited to a local community, online collateral auctions can reach a broader population of potential bidders. This extended capacity appears to benefit the seller with little or no downside. (12)

The inefficiencies associated with slow online collateral auction growth will likely be exacerbated in the wake of the recent financial crisis. These effects have been observed in the first quarter of 2010, with one commentator noting that "personal bankruptcy filings in a dozen states increased by double-digit percentages over 2009's monthly averages." (13) Corporate bankruptcy filings are increasing as well. (14) This rise in the number of bankruptcies will result in more auctions for repossessed collateral such as cars, business capital, and other assets in order to satisfy debts owed to secured creditors.

To date, only a few pieces of scholarship have addressed the issue of whether online collateral auctions would satisfy the "commercially reasonable" requirement under Article 9. (15) While these articles provide a framework to understand how online auctions might be judged under Article 9, they fail to analyze relevant case law. (16) This omission is critical, as all cases that review the use of online collateral auctions suggest that they can be used in a commercially reasonable manner. (17)

Accordingly, this Comment attempts to move the discussion forward and fill this gap in current scholarship by using relevant case law to advocate for the commercial reasonableness of online collateral auctions. The Comment proceeds in two parts. Part I provides a brief review of Article 9's commercial reasonableness requirement. Part II reviews the relevant case law that prior scholarship fails to analyze. This Part also draws conclusions as to why the case law suggests that courts support the use of online collateral auctions. The Comment concludes by synthesizing these positive signals with regard to online collateral auctions, and it asserts that Article 9 should be amended to reflect how courts analyze online dispositions of collateral.

1. A BRIEF OVERVIEW OF ARTICLE 9 AND THE COMMERCIALLY REASONABLE STANDARD

   Many sections of Article 9, including those dealing with the disposition of collateral, are written to provide a certain amount of flexibility while protecting the interests of both the secured party and the debtor. Professor Grant Gilmore, one of the architects and original drafters of Article 9, stated at the time of its drafting that the "policy of Article 9 is to allow [the] disposition of the collateral without hampering restrictions, in the hope that ... there will develop a pattern of using commercial outlets to sell goods for the going price at the least possible cost." (18) Article 9's standard of commercial reasonableness was designed to achieve this goal.

   Specifically, the text of Article 9 states that a disposition of collateral will meet the commercially reasonable standard only if each of its factors is commercially reasonable. (19) These factors consist of "the method, manner, time, place, and other terms" of the sale. (20) The aspects that courts analyze when determining whether an auction satisfies commercial reasonableness include: the...