In the field of distressed asset acquisition, Uniform Commercial Code (UCC) foreclosure sales offer a number of advantages for buyers. As long as the transaction involved is “commercially reasonable,” Article 9 of the UCC enables lenders to sell collateral after the borrower’s default, using any terms and time table. As a result, all assets acquired at a UCC foreclosure sale will transfer to the buyer without first-lender liens or junior liens.While UCC foreclosures represent an optimal acquisition strategy, it is important that buyers perform due diligence of all assets and processes in the transaction. Even in transactions involving a cooperating distressed company, buyers rarely receive warranties or representations on assets. In addition to performing due diligence on those assets, buyers typically ensure that they will gain the benefits from the sale and that the sale will proceed in a predetermined manner. Furthermore, due diligence of a distressed company’s real estate arrangements and trade liabilities can further elucidate the financial implications of assets acquired in a UCC foreclosure sale.
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.
