Commercial Reasonableness, Notice Requirements, and the 10-Day Safe Harbor

Introduction

Partner loan programs and investor loan programs are core features of fund finance. A secured lender extends credit to individual participants—employees, partners, or investors—who invest in private equity or other investment funds through various fund vehicles. A borrower’s loans are secured by the borrower’s limited partnership interests (or other equity interests) in such vehicles. Foreclosure on that collateral after default is governed by Part 6 of Article 9 of the Uniform Commercial Code (UCC).

A recent federal court decision addressed a lender’s foreclosure rights in the context of pledges of limited partnership interests. The decision clarifies three issues central to partner and investor loan programs: (1) that the UCC’s 10-day notice safe harbor is not a mandatory minimum; (2) that sale price alone does not determine commercial reasonableness; and (3) that beginning a sale before a noticed date does not satisfy notice requirements.

Key Findings by the Court

The 10-Day Safe Harbor is Not a Contractual Minimum

The court held that a credit agreement’s language deeming 10 days’ notice “reasonable” merely tracked the UCC §9-612(b) safe harbor standard and does not create a contractual minimum. A lender’s obligation was only to provide “reasonable” notice.

Sale Price Alone Does Not Establish Commercial Unreasonableness

The court dismissed claims that marketing collateral using outdated valuations violated the duty of commercial reasonableness. The court held that commercial reasonableness turns on the totality of the circumstances, and that a price disparity alone must “shock the court’s conscience” to state a claim. Courts applying New York law have upheld sales at or above 50% of fair market value.

Retroactive Notice is Unreasonable as a Matter of Law

The court held that informing a borrower retroactively of a collateral disposition does not satisfy the UCC’s requirements to...