UCC Foreclosure Sales - Benefits and Due Diligence

For parties seeking to purchase distressed assets, a Uniform Commercial Code (UCC) foreclosure sale may offer an attractive alternative to the traditional court-administered bankruptcy sale process. When a borrowing company defaults on its debt, Article 9 of the UCC allows lenders to sell the firm’s collateral “at any time and place and on any terms,” requiring only that the transaction be “commercially reasonable.” A UCC foreclosure, which allows for a much quicker sale, generally takes only 30 to 90 days and requires less financial expense.

UCC foreclosure sales do not facilitate the transfer of physical property, instead serving as a means to carry out a “friendly foreclosure” in which the borrowing company transfers its business to the buyer in a private sale. It can be a useful option for a midsize business whose going-concern value is less than its debt, but more than the value of its hard assets.

This type of foreclosure sale allows a buyer to obtain assets free of all liens and with limited risk of fraudulent conveyance. However, it does not provide representations or warranties for the purchased assets. For this reason, buyers must carry out due diligence for the purchased assets and make certain that both parties follow the proper sales process. This includes giving notice of the sale to all junior lienholders and ensuring that all aspects of the sale are “commercially reasonable,” including the time, place, terms, and method of the transaction. These considerations are especially crucial if a buyer intends to operate the business following the sale, as this introduces potential complications such as real estate arrangements and issues of trade and successor liability.

Asking the Right Questions - An Important Skill Set for Attorneys

In 2010, Diversity Journal named attorney Suzzanne Uhland to its list of "Women Worth Watching." A partner in the firm of O’Melveny & Myers, LLP, serving in its San Francisco and Newport Beach, California, offices, Ms. Uhland possesses two decades of experience in corporate financial law matters such as insolvency, restructuring, and Chapter 11 bankruptcy. Her legal abilities have won praise from The Best Lawyers in America, Chambers and Partners USA, and other professional publications.

Among the most valuable skills any attorney can develop is the ability to ask pertinent questions of clients. In order to provide the best possible representation, an attorney needs to build a thorough understanding of a client’s business operations, ongoing concerns, and individual objectives. In a 2013 interview with the publication Law360, Ms. Uhland noted that she advised new colleagues to be sure to ask the right questions.

Experienced attorneys in all fields point to a few essential questions to ask. These include questions involving the client’s preferred methods of communication, the client’s greatest fears about the matter at hand, and why the client chose to approach a particular attorney. Attorneys should also find out about a corporate client’s management, production, and tax challenges. And, echoing Suzzanne Uhland’s advice to Law360, experts consistently urge attorneys to discuss exactly what each client hopes to accomplish, and how the attorney and client will know that they have attained that goal.