QUESTION:

Jack B. emailed, asking, “Please explain what an Article 9 sale is. My lawyer said that if I give a security interest to a lender, it can do an Article 9 sale.  What is an Article 9 sale?”

ANSWER:

Well, Jack, Article 9 of the Uniform Commercial Code governs the relationship between a debtor and its secured creditors. Generally, a secured creditor may seek to enforce its rights on its collateral upon a borrower’s default. A secured creditor’s remedies include an Article 9 sale, the right to sell the collateral to a third party in a private or public sale without judicial proceedings.

The secured creditor may pursue the Article 9 sale notwithstanding the borrower’s desire to find some alternative to ceasing operations and liquidating its assets. In other instances, particularly where a borrower wants to avoid liability on a personal guaranty to the secured creditor, the borrower may cooperate in the process in what is sometimes called a “friendly foreclosure.”

[Editor’s note for more information, we recommend Help, My Small Business Is In Trouble!, Dealing with Defaults – What to Do and Not Do When Your Company Violates its Loan Agreement and Negotiating a Loan Agreement.

This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters.]