Asset sales within a bankruptcy case are common, and can provide numerous advantages to buyers, sellers, and even secured parties. However, bankruptcy is expensive, and it’s not always the optimal solution for debtors and secured creditors to pursue. Bankruptcy involves administrative expenses, filing fees, and attorney fees. And sometimes the costliest item is the time risk involved in having a court oversee a debtor’s operations and the asset sale process.

Another viable alternative for secured creditors is to force a sale of their collateral pursuant to Article 9 of the Uniform Commercial Code. After a default, a secured creditor is entitled to conduct an asset sale of its collateral and apply the proceeds to its borrower’s debt to it. The sale must be public unless “the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations.” Public sales must be advertised with reasonable notice to all “interested parties” including the borrower, guarantors, and subordinated secured parties.

Above all, all aspects of an Article 9 sale must be “commercially reasonable,” which term is undefined under the UCC. However, courts typically assess the reasonableness of a sale based on the type of property being sold. For example, the reasonableness of the sale of a yacht will be different than the sale of a commercial warehouse. For more valuable or unique types of property, a secured party may be required to hire a broker or investment banker to market the property and/or advertise it to appropriate parties.

Finally, aside from the notice and marketing efforts, the price itself must be reasonable. Court have made clear that this does not mean a sale is not commercially reasonable simply because it was possible to obtain a higher price. Rather, courts will look at all relevant factors, including whether the assets being sold were distressed.

An Article 9 sale results in a conveyance to a buyer of whatever rights the debtor had in the assets. The secured party sale results in a discharge of the both the secured party’s lien and all subordinate liens. Thus, a critical element of a buyer’s due diligence is confirming that the secured party’s lien is a first, perfected security interest and covers all essential assets owned by the debtor. Certain assets not covered by the secured party’s lien or under the Uniform Commercial Code (for example, real estate or intellectual property such as patents and trademarks) may require a separate agreement or judicial action to transfer all assets necessary for the buyer to conduct the distressed company’s business.

The Article 9 sales is an important option for secured lenders to consider when determining how to realize on a debtor’s collateral. It is relatively inexpensive and quick for all parties involved, and comes free of the negative publicity that frequently accompanies a bankruptcy filing. Moreover, if a secured party can arrange the borrower’s cooperation, such a sale often comes with a release of a debtor’s principals from personal guaranties. Thus, in such circumstances, borrowers may favor them as well.

While not appropriate in all circumstances, Article 9 asset sales should be considered by secured lenders in workout scenarios.