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Thomson Reuters Bankruptcy Series: Article 9 Foreclosures

April 23, 2020Publications / Mentions
Thomson Reuters

Goulston & Storrs bankruptcy attorney, Doug Rosner, recently worked with Thomson Reuters to create a three-part series that explains some of the various options for companies in financial distress. This third video in the series discusses Article 9 foreclosures. 

Full Transcript:

Hello and welcome. This is a video to introduce the topic of consensual article nine foreclosure sales. My name is Doug Rosner, I'm a bankruptcy and restructuring partner at Goulston and Storrs in Boston, Massachusetts. In this video, I'm going to discuss some examples of consensual article nine foreclosure sales and the advantages to both the borrower as well as to the lender and also the buyer of the assets.

An alternative for a company that's experiencing financial difficulty is to cooperate with its senior secured lenders in a UCC article nine foreclosure sale. So the UCC is the Uniform Commercial Code, which has been adopted by, I believe, all the states or most of the states in the United States. Article nine is the article of the UCC that governs secured lending.

A UCC foreclosure sale is a remedy that the lender has if their borrower defaults and the remedy is to undertake a UCC foreclosure sale and foreclose on the personal property collateral. What a consensual UCC foreclosure sale allows is for possibly a going concern sale but within the context of an article nine foreclosure. So because it's an article nine foreclosure, it's the lender that's leading the sale process as opposed to the borrower selling its company and the advantage of a UCC foreclosure process is the buyer may feel more comfortable that that sale might be better insulated from attack under article nine of the UCC, as opposed to buying directly from the borrower or the company itself.

A simple example of an article nine UCC foreclosure sale is when you have a middle-market company, let's say that's in default under its loan, and one lender. So a recent example was we represented a company that actually bought the assets out of a foreclosure article nine foreclosure sale. So in that case, the lender conducted a public auction of the assets of its borrower and the borrower cooperated in that public auction. And the article nine lender established a sale process that was very much like a chapter 11 bankruptcy sale process. And they had a deadline for everybody to make their offers. And they had a form of asset purchase agreement that all of the parties were to use for the sale process. And so our client, among several others, submitted offers to buy the assets of this operating company as part of the article nine foreclosure sale that they've secured. The lender then conducted an auction, the auction took place in the offices of their counsel. And at that auction, it was just like any other like a bankruptcy auction. The secured lender announced what the highest initial bid was. And then everybody else in the room was able to bid against that stalking horse bid. So at the auction, our client bid among several other bidders. And ultimately, we won the auction and acquired the assets from the secured lender, again with the cooperation of the borrower. And we were able to acquire those assets as a going concern. And because it's an article nine foreclosure sale, we could acquire those assets free and clear of any subordinate liens. And I don't believe there were any in that case, but sometimes there are subordinate liens. So by being able to acquire it free and clear, and knowing that it was a public auction process, there were several bidders, we were comfortable that even if that sale were challenged down the road, that a court would find that the sale was commercially reasonable and that it was marketed properly.

The cooperative foreclosure sale can also occur in the real estate context. So there instead of a UCC sale, you have a real estate foreclosure in a real estate mortgage loan restructuring. Typically, again, the borrower is cooperating with the secured lender, and that can take one of many different shapes and it could be a consensual foreclosure sale, where the secured lender goes through the state law process of foreclosing on the real estate, and the borrower cooperates in that process. It could be what we call a deed in lieu of foreclosure, where the borrower agreed to deed the property to the secured lender in satisfaction of the loan. Or a third way to go about doing a consensual sale is what we would call a cooperative sale process where the borrower itself undertakes or conducts the sale in cooperation with the secured lender. And when the borrower finds a buyer, the proceeds of that sale go to the secured lender. And the advantage of doing a foreclosure sale is to the extent there are any junior liens or junior encumbrances on the property, the foreclosure sale would wipe out those junior encumbrances if there are no junior encumbrances and a deed in lieu to the lender, where the lender takes title to the property can be undertaken. Or you can conduct a sale by the borrower itself.