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.