Most business owners have heard of the bankruptcy sale, the so-called ”363 sale.” You know, like what happened to Lehman Brothers, or General Motors, or Chrysler, or Blockbuster. It gets a lot of attention. But a secured creditor is generally entitled, under Article 9 of the Uniform Commercial Code, to a sale of a distressed company’s assets without the need for bankruptcy. It doesn’t get a lot of attention in academia or the media. But, because so many secured creditors find themselves in a chapter 11 case before they can exercise their remedies, the law on the proper procedure for Article 9 sales is still immature. For a business borrower, that quieter route is the one worth understanding, because it is how a secured lender can move your company’s assets out of your hands without a judge looking at the deal first.
Put simply, once a borrower defaults, the Article 9 sales process allows a secured party to sell the collateral. Apart from a few limited situations in which the lender can simply accept the collateral in full satisfaction of the debt, a sale is how it recovers value. The lender may also sell the property at a foreclosure to themselves by bidding using funds due the lender. This is called a ”credit bid.” If it wins, it owns your assets. Compared with bankruptcy, the difference is that a 363 sale is under the court’s direct supervision. An Article 9 sale is not. In other words, the process of the sale, as well as the price, is checked after the fact.
Commercially Reasonable
That does not mean anything goes. Under section 9-610 of the UCC, every aspect of the sale - method, manner, time, place, and other terms - must be commercially reasonable. What that means is that the lender has to be selling that asset the same way other people would sell an asset like that. The sale generally has to be public, too. There is an exception to the rule that the sale must be “public”: if it is “a sale of collateral of a kind that is customarily sold on a recognized market” or is “the subject of widely distributed standard price quotations,” then the sale can be private. An article 9 sale is public when there is a ”meaningful opportunity for competitive bidding.” Hence, there has to be a public notice of the sale in advance, and the sale has to be open to the public. You have some official commentary to help you out, but if the bank and you disagree over the words “commercially reasonable” or “public,” the fight ends up in a courtroom. One such fight, Edgewater Growth Capital Partners LP v. H.I.G. Capital, Inc., decided by the Delaware Court of Chancery, shows how a court approaches it.
The Pendum Sale
You have a private equity firm that acquires and consolidates several ATM businesses. To help finance the acquisition, they go and borrow about $70 million in senior debt, on a relatively small equity check. The loan is backed by a lien on substantially all the assets of the newly formed company. Here the firm was Edgewater, the company was called Pendum, and there were millions more in subordinated debt on top. Turns out that the company missed its financial expectations and was tripping financial covenants. Here is where it gets more fun. At that point HIG Capital, which had never been involved with the company, started buying up the senior debt. As a condition of a ninth amendment, HIG insisted that Edgewater’s board of directors appointees be replaced by ‘experienced restructuring consultants.’
There are a few ways a business can handle its debt when they can’t pay. One is bankruptcy. They can get a whole group of lenders to agree to do something out of court. Or they can use the remedy under Article 9 of the Uniform Commercial Code (UCC) to sell all their assets. For Pendum, bankruptcy would have been “a disastrous route to take,” in the court’s words, and they were unable to organize a workout with the lenders. At Pendum, the board and senior lenders, led by HIG, negotiated a consensual Article 9 sale of all of Pendum’s assets. The board retained Miller Buckfire to market Pendum’s assets and conduct “a comprehensive marketing process.” That wasn’t successful by the deadline. So HIG put its collateral up for a public auction under Article 9. The notice told Edgewater, the other senior lenders, Allied Capital (the only subordinated lender) and potential buyers. HIG also ran an ad in the Wall Street Journal. Only HIG attended and bid. HIG bought the assets.
Edgewater, Pendum’s shareholder, then sued HIG. In this particular case, the shareholder is suing because of money. Back at the third amendment, Edgewater had given the senior lenders a $4 million guaranty, and it wanted out of paying it. It argued that the sale had not been public, and that even if it was, it had not been commercially reasonable. On paper, the credit agreement included language that allowed the Lender to exercise its remedies under Article 9 of the UCC on only 10 days notice. On the other hand, the sale agreement gave Pendum the first shot, letting it hire an investment bank and run the sale itself. Edgewater said that because that agreement had been negotiated privately between Pendum’s board and HIG, the sale “must have been private.” This sounds pretty convincing at first, but the court said it was wrong. Here’s the thing: Pendum’s board and HIG did agree on a private purchase agreement, but that doesn’t mean the auction was private. You have to think about incentives, there. If it’s always private whenever the board agrees to look for another buyer, and then the lender ends up buying, there’s a perverse incentive here. Lenders would have every reason to stop giving debtors room to find another buyer, and debtors would be the ones hurt. The court also pointed to the way Miller Buckfire had vigorously marketed the sale.
On commercial reasonableness, the court started from a simple idea. A reasonable sale of real property requires certain types of efforts. A reasonable sale of a pre-owned guitar requires different efforts. A reasonable sale of an undistressed company requires yet other efforts. A reasonable sale of a financially distressed company requires yet more different efforts. The question in this case was whether HIG sold the assets in a way that a financial advisor who sells distressed companies would. The lender wasn’t required to keep a basically insolvent company on the market for as long as an undistressed company would be. HIG also provided $10 million of interim financing to the business so that it could continue to operate. It followed that up by paying Pendum’s financial advisor directly and providing a ”fiduciary out” to Pendum’s board so that it could entertain superior offers after the sale deadline. The process lasted 55 days and included 67 potential buyers. Just because there is a possibility that a higher price might be obtained does not render the sale unreasonable. The price is judged in the context of the fact that the company was in a distressed state. What kept bidders away from the Pendum sale were Pendum’s unreliable financial statements, Pendum’s operational mess, Pendum’s lack of a strong revenue stream, and Pendum’s distressed situation - not the sale process. It was held that the Pendum sale was commercially reasonable in all respects.
Don’t Wait for the Lender to Exercise Its Remedies
So what does this mean for a business borrower in 2026? Owners of distressed small businesses should take into account that the value of a distressed company changes fast. As assets - cash, goodwill, operations - deteriorate, the company is a ”melting ice cube”. Under Edgewater, the lender selling your assets may take that into account, and a quick sale can be commercially reasonable. Also note that no judge ever approves an Article 9 sale. For the owner, the only recourse is to challenge the sale after the fact. To complicate matters, a lender can credit bid and become the owner of the business. The moral of this story: Don’t wait for the lender to exercise its remedies. As a business owner, don’t wait until you can’t afford your loan to talk to your lender. Pendum had three paths: bankruptcy, an out-of-court restructuring or an Article 9 sale. Most distressed borrowers face the same menu, and the choice is only really yours while there is still time to make it. If you run a business that is behind on a secured loan, you should act quickly if you want to control the outcome. If you have assets that might be valuable, get into a discussion with the lender before it’s too late.
