Chapter XII. Nonbankruptcy Alternatives

• Jurisdiction: United States

XII. Nonbankruptcy Alternatives

A. UCC Article 9 Sale

A"friendly foreclosure" by a secured lender may be effectuated through a sale of collateral pursuant to Article 9 of the Uniform Commercial Code. A borrower may be motivated to simply turn over the collateral to the lender in a private surrender by the presence of a personal guaranty, or by a desire to save jobs and preserve the business. An Article 9 sale may be a quick means of effectuating resolution of the crisis between lender and borrower, but it must happen pursuant to commercially reasonable terms and through a commercially reasonable process. The lender sends a notice of sale to the borrower; typically, the sale is pre-arranged to a buyer of the assets, who participates in the process. Because there is no court process, and therefore no court approval, the buyer runs the risk of successor liability. However, to the extent the lender and buyer follow the state-law mandated processes, the risk of liability is reduced. This process is used less frequently than the § 363 sale process conducted in a chapter 11 bankruptcy case, because often a chapter 11 sale will insulate a buyer from successor liability and claims against the assets. However, chapter 11 is a much more expensive and public process, and, while quicker than disposition through a chapter 11 plan, a § 363 sale still requires a certain amount of time depending on each court's local rules and the vagaries of each judge and case.

An Article 9 sale can be accomplished quickly and is simpler and much less costly than bankruptcy. But strict notice requirements must be followed, and other risks must be considered. For instance, the secured creditor runs a risk that its claim is not properly perfected or secured, and a potential buyer assumes additional risk because its purchase of the assets is not "free and clear" of all other liens and claims. The secured creditor controls the terms and conditions of the sale. It has the option of conducting either a public or a private sale, and it may credit bid for the collateral being sold. However, the burden is on the secured creditor to ensure that every aspect of the sale is "commercially reasonable," including the "method, manner, time, place, and other terms."²⁷⁵

If the issue is ever litigated, the entire process is scrutinized to ensure that the secured creditor has met this standard, and this burden "requires the secured party to establish considerably more than that a presumptively fair price...