Bar News - July 15, 2015
Federal Practice & Bankruptcy: Poor Man’s Chapter 11: Sale of Assets under UCC Article 9
By: Peter Tamposi
A “friendly foreclosure” under Article 9 of the Uniform Commercial Code (NH RSA 382-A:9-101, et seq.) is in many cases the best way to acquire assets from a financially troubled company.
The process can be accomplished in as little as a few weeks and will generally cost a fraction of what you would spend acquiring the same assets through a sale under the bankruptcy code. Much like a sale in bankruptcy, the acquirer of the assets takes them free and clear of all junior secured claims against the purchased assets and can often preserve the going-concern value of those assets by putting them quickly, even seamlessly, back to work.
Because the seller of the assets is not the debtor, but rather one of its secured creditors, the key to purchasing such assets is an accommodating lender, typically a bank, which also has sophisticated counsel. The upside for the bank/seller in such a transaction is that they get something more than the liquidation value of their collateral, which is all they would get in a Chapter 7 bankruptcy (voluntary or involuntary) or through normal collection methods.
By the time the bank is seriously considering an Article 9 sale, their borrower is in default, their collateral often is overleveraged and their guarantors frequently are insolvent or even non-existent. Because the purchaser under Article 9 can typically buy the assets while the debtor is still in “business,” he or she is willing to pay the bank more than the liquidation value of the assets. Therefore, the bank wins, and the buyer wins.
Unfortunately, if the bank wins and buyer wins, naturally someone loses – that would be the junior secured and unsecured creditors, who typically receive nothing or very little from the sale proceeds. Likewise, the guarantors are typically still on the hook after the sale, and the process does not end the woes of the original borrower, as their debt to the bank is seldom satisfied, and the sale does not prevent any creditors from pursuing the debtor.
However, because the debtor usually has no assets remaining after such a sale, legal actions are seldom fruitful. It should also be noted that while the purchaser takes the assets free and clear of any liens, he or she must deploy those assets in such a way as to minimize claims of successor liability or de facto merger.
A Simpler Sale
Compared to a sale of assets under Section 363 of the Bankruptcy Code, a sale under Article 9 is remarkably simple. The bank should first declare the credit to be in default and “call” the loan. The bank will then send a notice of the sale to all other secured creditors (typically all of which will be junior creditors) and guarantors of the obligations. See Section 9-611.
Notably, unsecured creditors, such as trade creditors, credit cards, etc., do not need to receive any notice of the sale.
The notice itself is also rather simple – it need only contain the name of the debtor and secured party, a description of the collateral, the nature of disposition (public or private), a provision that the debtor is entitled to an accounting, and the time and place of any public disposition, or the date after which the items will be sold by private disposition. See Section 9-613.
Neither the sale price nor the name of the purchaser of the assets need be provided in the notice. For non-consumer transactions, a 10-day notice prior to the disposition of assets is sufficient. See section 9-612.
If the IRS is a secured creditor, they are entitled to receive a 25-day notice pursuant to 26 USC §7425. The IRS also enjoys special priorities outlined in 26 USC §6324.
Once the notice requirements have been satisfied, the assets can be transferred by an asset purchase agreement between the bank and lender, which is often nothing more elaborate that a simple secured party bill-of-sale.
Although the buyer does not get the imprimatur of a bankruptcy judge declaring that the assets have been sold free and clear of all junior liens, the state law automatically so provides, if the seller follows the procedure to the letter and conducts the sale in a commercially reasonable manner.
Of course, with most procedures involving troubled credits, there are opportunities for derailment. These include, but are not limited to, injunctive relief by the debtor or junior creditors and/or claims against the purchaser for successor liability.
Those pitfalls are beyond the scope of this article, but one should be mindful of them. In most cases, the process can be handled quickly and cheaply and ultimately result in the acquisition of assets at a fraction of the cost and risk than experienced in bankruptcy and over a dramatically shorter period of time.
Peter Tamposi is the managing member of the Tamposi Law Group and has almost 20 years of experience counseling clients in business restructuring, bankruptcy, commercial litigation and insolvency matters. He may be reached by email or at 603-204-5513.