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?”
Well, Jack, Article 9 of the Uniform Commercial Code governs the relationship between a debtor and its secured creditors, such as the creditor’s ability to enforce its interests in movable and intangible property and fixtures. When a borrower defaults, a secured creditor may seek to enforce its rights on its collateral and sell its collateral to a third party in a private or public sale without judicial proceedings. An Article 9 sale is different from a 363 sale, as it gives the secured creditor more control and doesn’t require the costly proceedings of a chapter 11 bankruptcy.
The secured creditor may pursue the Article 9 sale notwithstanding the borrower’s desire to find alternatives 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 what is often called a “friendly foreclosure,” in which the borrower voluntarily hands its deed over to the lender in relief of its debt and liens.
This 90 Second Lesson is based, in substantial part, on material reprinted from “Commercial Bankruptcy Litigation 2d” and “Strategic Alternatives for and Against Distressed Businesses,” with permission of Thomson Reuters.]
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