In the legal framework of secured transactions, the duty of good faith is the invisible thread that binds every action a lender takes during the foreclosure process. Under UCC Article 9, this duty is not merely a suggestion of honesty; it is a technical requirement that the secured party act in a way that is consistent with reasonable commercial standards of fair dealing. When a lender proceeds with a collateral sale, the judiciary evaluates whether the process was designed to achieve a fair market outcome or simply to satisfy the debt at the expense of the borrower equity. Aligning these sales with industry-standard realization is the only way to prove that the lender has acted in good faith and satisfied their fiduciary-like obligations to all stakeholders. This guide explores the intersection of good faith and commercial reasonableness, providing a roadmap for executing defensible asset dispositions in 2026.
The Dual Standard of Good Faith and Commercial Reasonableness
The UCC defines good faith as honesty in fact and the observance of reasonable commercial standards of fair dealing. While commercial reasonableness focuses on the mechanics of the sale, the duty of good faith examines the intent and integrity behind those mechanics. A lender can follow the letter of the law regarding notices and timing but still fail the good faith test if they intentionally chill the bidding or withhold critical asset information from potential buyers. To meet this dual standard, secured parties must ensure that their disposition strategy is designed to maximize the value of the collateral. This often requires engaging independent advisors who can provide an objective, third-party perspective on what constitutes fair dealing in a specific industry.
- Honesty in Fact: Ensuring that all representations made to the court, the debtor, and bidders are accurate and complete.
- Fair Dealing: Adhering to the established practices that a merchant in the same industry would follow when selling similar goods.
- Fiduciary Responsibility: Recognizing that the lender acts as a steward of the collateral value until the sale is finalized.
- Conflict Mitigation: Actively identifying and removing any factors that could give the appearance of self-interest or collusion.
Pro-Tip: Document the rationale behind every major decision in the sale process. If you decide to reject a specific bid or skip a certain marketing channel, have a written explanation ready that shows how the decision was intended to benefit the overall realization.
Industry Standards as the Benchmark for Good Faith
Courts do not evaluate good faith in a vacuum; they use industry standards as the technical benchmark. If a lender is selling specialized manufacturing equipment, the duty of good faith requires them to look at how that equipment is typically sold in the secondary market. Failing to utilize the specialized channels, trade publications, and buyer networks that define that industry can be viewed as a breach of fair dealing. This is why industry-specialized auction expertise is a vital component of a good faith defense. By mirroring the behavior of a professional dealer in the specific asset class, the lender provides the court with objective proof that their actions were aligned with market realities rather than arbitrary shortcuts.
- Market Alignment: Selecting auction dates and locations that correspond with peak activity periods in the relevant industry sector.
- Professional Standards: Utilizing licensed and bonded professionals who are recognized experts in the collateral category.
- Customary Terms: Offering sale terms, such as inspection periods and deposit requirements, that are standard for the asset type.
- Data Integrity: Providing comprehensive technical packages that allow buyers to perform standard industry due diligence.
Pro-Tip: In your sale report, explicitly state which industry standards you followed. Mentioning specific trade associations or market indices shows the court that you actively sought to align with professional norms.
Transparency in the Marketing and Bidding Process
Transparency is the most visible evidence of good faith in a UCC sale. A secretive or poorly publicized sale is a major red flag that suggests the lender is trying to acquire the assets at a discount or favor a specific buyer. To demonstrate good faith, the marketing process must be robust, verifiable, and inclusive. Lenders should utilize transparent bidding platforms that provide a clear record of all participant activity. This level of openness proves to the debtor and the court that the final sale price was determined by the market and not by backroom negotiations.
- Broad Outreach: Demonstrating that the sale was advertised to a wide and relevant audience of potential purchasers.
- Equal Access: Ensuring that all registered bidders have access to the same information and the same opportunities to inspect the collateral.
- Verifiable Bidding: Maintaining a log of all bids received, including the time, amount, and identity of the bidder.
- Clear Procedures: Publishing the rules of the auction in advance and sticking to them throughout the process.
Pro-Tip: Use an online bidding portal that generates a real-time log of every bid. This digital footprint is almost impossible to challenge in court and serves as definitive proof of a fair and open process.
Avoiding the Appearance of Self-Dealing
The duty of good faith is most heavily scrutinized when the lender or an affiliate is a potential buyer. While credit bidding is a standard right in a public auction, the lender must take extra precautions to ensure they do not discourage other bidders. Any action that chills the bidding, such as setting an unreasonably high deposit or a very short closing window, can be interpreted as a breach of good faith. By working with independent experts, lenders can create an arm-length environment that protects them from allegations of self-dealing. An independent firm ensures that the lender is treated as just another bidder in a competitive field, which is the gold standard for good faith in a credit bid scenario.
- Independent Management: Hiring a third-party firm to handle all inquiries and qualify all bidders to remove the lender from the process.
- Fair Credit Bidding: Setting credit bids at levels that are supported by professional appraisals and market data.
- Open Disclosure: Clearly stating the lender right to bid in all marketing materials and sale notices.
- Objective Reserve Prices: Establishing reserves based on independent valuations rather than the outstanding loan balance.
Pro-Tip: If the lender intends to credit bid, have the auctioneer announce it clearly at the start of the sale. Transparency about the lender participation actually encourages other bidders by showing that there is a floor for the asset value.
Documenting the Duty of Good Faith
Because good faith is often a matter of judicial interpretation, meticulous documentation is the only way to build a technical defense. A compliance-ready report should go beyond the numbers to describe the efforts made to act fairly. This includes records of all communications with the debtor, logs of bidder questions and answers, and evidence of how the lender handled competing interests. By maintaining a thorough record through specialized foreclosure services, lenders can show a consistent pattern of fair dealing that satisfies the court.
- Communication Logs: Recording all interactions with the borrower and junior creditors regarding the sale process.
- Q&A Transcripts: Providing a record of all questions asked by potential buyers and the answers provided to ensure consistent disclosure.
- Procedural Consistency: Documenting that the same rules were applied to every participant without exception.
- Expert Affirmations: Including statements from the auction team that the process followed industry best practices for fair realization.
Pro-Tip: Save copies of all email blasts and digital ads as they appeared in real time. Visual proof of the marketing effort is far more persuasive than a simple list of placements.
Conclusion
In 2026, the duty of good faith is the ultimate benchmark for the success of a UCC Article 9 disposition. It requires lenders to look beyond the mechanics of the sale and consider the integrity of the entire process. By aligning every aspect of the disposition with industry-standard realization, secured parties can prove that they have acted with the fair dealing and honesty that the law requires. This commitment to good faith not only protects the lender from litigation and loss of deficiency rights but also ensures the highest possible recovery from the collateral. When you prioritize transparency and professional standards, you build a recovery strategy that is both profitable and legally unassailable. To ensure your next sale meets the technical standards of good faith, consult with our advisory experts for a comprehensive strategy session.
