If you run a company that owes more than it can pay and your lender holds a lien on nearly everything the business owns, the honest answer to what happens next is that it depends, but there are few easy answers if the business is in a general state of insolvency. Most owners have heard of the “363 sale” in bankruptcy, the process that sold off the assets of Lehman Brothers, General Motors, Chrysler and Blockbuster. Far fewer know that forced sales can occur without the need for bankruptcy, through execution of a security interest in a borrower’s collateral under Article 9 of the Uniform Commercial Code. These sales don’t typically attract the same press as a 363 sale. Because most secured lenders end up in a chapter 11 case before they can use Article 9, there is less law on how one should be run, and the rules are fuzzy.
UCC Sale
Once a business defaults, its creditor can foreclose on the collateral and sell it to try to recover some or all of the debt. Except in limited cases where the creditor accepts the collateral in full satisfaction of the debt, a sale is how it gets value out. A bankruptcy sale happens under a judge’s eye. A “UCC sale,” by contrast, is a process in which the lender takes the driver’s seat, the court has no role in the sale, and, as in a 363 sale, the lender can credit bid what it is owed and end up owning the collateral.
But the lender can’t do just anything. This sale, or more accurately, the details of the sale, have to be “commercially reasonable.” Section 9-610 applies that to the method, manner, time, place and other terms, and the benchmark is reasonable practice among dealers in that type of property. In other words, what do all the other dealers in those assets do? The sale must also generally be public, meaning that the sale will be advertised so anyone interested in the asset has a chance to see it and then have an opportunity to bid in it. A private sale is allowed only when the collateral is customarily sold on a recognized market or has widely published standard price quotes. And because no judge signs off in advance, the “commercial reasonableness” analysis turns on hindsight. If the borrower (or another interested party) later decides they don’t like the results of the sale, they can raise a claim that the sale was improper. That means everyone on the seller side has to try to anticipate the arguments the borrower or guarantor is going to make, and build their defense into the process from the start.
Edgewater Growth Capital Partners LP V. H.I.G. Capital, Inc.
A Delaware Court of Chancery case, Edgewater Growth Capital Partners LP v. H.I.G. Capital, Inc., shows how this works. Edgewater, a private equity fund, put together a company, Pendum, out of a bunch of different ATM-servicing businesses. Edgewater had a relatively modest amount of equity, a ton of senior debt, and millions more in junior debt. The roughly $70 million of senior debt carried a lien on substantially all of the company’s assets. Pendum’s performance didn’t meet Edgewater’s expectations and it started breaching financial covenants. Each time Pendum got in trouble, it went to the lenders and signed another amendment. After the seventh amendment, HIG Capital, which had not been involved before, started purchasing the senior debt. As a part of the ninth amendment HIG forced Edgewater to replace its directors with restructuring professionals.
With another default coming, there were three options: bankruptcy, an out-of-court restructuring, or an Article 9 sale. Bankruptcy would have been “a disastrous route to take,” and the lenders could not be united behind an out-of-court deal, so the board and the senior lenders, led by HIG, opted for a consensual Article 9 sale, and they pretty much hammered out the deal themselves. The board turned to Miller Buckfire to run a marketing process. Miller Buckfire did a comprehensive process, but did not produce a buyer by the deadline. HIG began a public sale. It sent notice to Edgewater, the other senior lenders, the only subordinated lender and the potential buyers Miller Buckfire had identified. HIG also put a notice in The Wall Street Journal. Auction day arrived, and HIG was the only bidder, so it purchased the assets. Then Edgewater sued.
Edgewater had executed a $4 million guaranty under the terms of a prior amendment, and it wanted to escape that obligation. It argued that if Pendum’s assets were sold under a private agreement that the Pendum board and HIG negotiated, then the sale wasn’t a “public sale.” Alternatively, even if the sale was public, it had not been run in a commercially reasonable way. The court disagreed on both counts. In its view, the foreclosure is still a public one even if it is arranged under a private sale agreement. You can’t get an otherwise public sale to become private just by negotiating privately. Ruling otherwise would discourage lenders from giving debtors extra time to find a buyer, which would end up hurting debtors.
On reasonableness, the court said a distressed company cannot be measured against a healthy one. The time it takes to market a distressed business may be different from the time it would take to market a business that was not facing insolvency. And the price that makes sense for a distressed business is not the price it would command if the business were healthy. The question, then, was whether HIG used a method of marketing Pendum’s assets that a financial advisor who markets distressed companies would use. A lender does not have to prop up a failing business for as long as a healthy one might take to test the market. Here, HIG provided $10 million of interim financing to Pendum, it paid Pendum’s financial advisor’s fees, and it agreed to a “fiduciary out” that allowed the board of directors of Pendum to review higher offers received after the submission deadline, and all of this took place over a 55 day period and with conversations with 67 parties. For pricing, the court found that the mere existence of the possibility of a higher price does not render a sale process commercially unreasonable and the price obtained must be assessed in the context of Pendum’s distressed circumstances. Ultimately, the court held that the sale process was commercially reasonable in all respects. The real problems were Pendum’s unreliable financial reporting, operational mess, poor revenue and distressed condition. These were the main things that frightened the buyers away, not the sale process itself.
People in restructuring call a distressed company on the auction block a “melting ice cube”: it is going to lose value over time, and in some cases, it will lose value very quickly. Cash, goodwill and operating capability wear away, and after Edgewater a seller may take that into account. The longer it takes, the less value it holds.
So what does this mean for an owner whose business is buried in debt in 2026? First, just make sure you understand that an Article 9 sale is a legitimate alternative to bankruptcy. If it comes, the process is going to be held to a different standard than it would for an otherwise healthy business, and a quick sale at a disappointing price can stand. The sale process still has to be commercially reasonable in all respects. Second, the time to act is before the lender moves. Some companies in distress can negotiate an out-of-court restructuring with their creditors, but doing so requires a level of consensus among the lenders that may not exist. Pendum never got there. That is why you need to plan ahead if you are an owner that thinks your business is headed in the wrong direction, because expecting to be rescued at the last minute is unrealistic. Either way, sooner or later the owner has to decide whether it’s worth plowing through the debt service and trying to weather the downturn or whether the numbers no longer make sense.
