## Facts

- Four related Texas oilfield-service businesses with “Adobe” in their names (the Adobe businesses) entered a five-year revolving credit and security agreement with a lender group led by PNC Bank, N.A. (PNC) in 2006 for $37.5 million, later increased to $47.5 million in 2007.
- The lenders received a security interest in the Adobe businesses’ assets, including equipment and inventory, to secure repayment.
- The credit agreement selected New York law to govern the parties’ rights, including remedies after default.
- When oil prices fell sharply, the Adobe businesses ceased operations and defaulted under the credit facility.
- In December 2008, PNC gave notice of a public foreclosure sale to the Adobe businesses and advertised the sale for one day in three newspapers: *The Dallas Morning News*, the *Odessa American*, and the *Midland Reporter-Telegram*.
- The Adobe businesses refused to turn over the collateral before the sale, limiting PNC’s ability to present the equipment for inspection and marketing.
- PNC conducted a public foreclosure sale and was the successful bidder with a credit bid of about $41 million.
- Appraisals of the collateral differed substantially, valuing the assets at approximately $33.85 million on the low end and $81 million on the high end.
- After efforts in state court to prevent or unwind the sale, one Adobe entity filed Chapter 11 in 2010. The litigation was removed to the bankruptcy court, where the Adobe businesses asserted that the foreclosure sale was not commercially reasonable and that the transfer was avoidable as a fraudulent transfer.

## Issues

1. Under the New York UCC, was PNC’s disposition of collateral “commercially reasonable” in method, manner, time, place, and other terms?
2. Did alleged flaws in the sale process—limited advertising, lack of repairs/cleanup, limited inspection access, use of a public sale, and few bidders—render the sale commercially unreasonable?
3. Was the $41 million credit-bid price so inadequate that the sale failed commercial-reasonableness standards and therefore constituted a fraudulent transfer for less than reasonably equivalent value?

## Decision

- The court applied New York law under the agreement’s choice-of-law clause.
- The court held that the foreclosure sale was commercially reasonable under New York UCC Article 9, considering both the sale procedures and the price obtained.
- The court rejected the Adobe businesses’ attacks on the advertising, inspection/condition of the collateral, the decision to hold a public sale, and the limited bidder participation as grounds to invalidate the sale.
- The court concluded the sale price did not “shock the conscience” in light of the competing valuations and market conditions.
- Because the disposition was commercially reasonable, the court held the transfer was not avoidable as a fraudulent transfer for less than reasonably equivalent value.
- Judgment was entered for PNC and the other defendants.

## Legal Principles

- Under New York UCC Article 9, “every aspect” of a secured party’s disposition after default must be commercially reasonable, including the method, manner, time, place, and other terms of the sale.
- Commercial reasonableness is evaluated from the full context of the sale; no single factor (such as the number of bidders) is necessarily dispositive.
- A foreclosure price generally will not invalidate an Article 9 sale unless it is so low that it shocks the court’s conscience or suggests unfairness.
- A secured creditor is not required to obtain the highest possible price or incur additional expense to refurbish collateral; reasonableness depends on the circumstances, including practical limits caused by the debtor’s refusal to surrender or cooperate.
- A commercially reasonable Article 9 disposition commonly supports a finding that the debtor received reasonably equivalent value for purposes of fraudulent-transfer analysis.

## Conclusion

In *In re Adobe Trucking, Inc.*, the bankruptcy court held that PNC’s prepetition public foreclosure sale—noticed to the debtors and advertised in Texas newspapers, conducted amid a severe industry downturn, and yielding a $41 million credit-bid price—met New York UCC Article 9’s commercial-reasonableness requirement and therefore could not be set aside as a fraudulent transfer based on alleged lack of reasonably equivalent value.


In re Adobe Trucking, Inc., 2011 WL 6258233 (2011)