Originally published on the Turnaround Management Association website.
Senior secured lenders want clean exits and quick resolutions, yet many continue to overweight liability
concerns in Article 9 sales, favoring the perceived finality of judicial processes over the very UCC
provisions designed to offer a more efficient, non-judicial option. In today’s distressed credit landscape,
lenders are thus caught between two competing instincts: On one hand, the need for efficient, court-
free outcomes that avoid the time, cost, and uncertainty of judicial proceedings; on the other, lingering
fears that secured-party sales may expose buyers to successor liability or trigger lender-liability claims.
These concerns, though common, are often misplaced.
This contradiction—seeking efficiency while choosing inefficiency—may not stem from any lack of clarity
in the Uniform Commercial Code (UCC) nor from creditor counsel misunderstanding its provisions.
Rather, the more plausible explanation is a kind of legacy confirmation bias. In a risk-averse world like
commercial banking, there remains a deep-rooted tendency to view what has always been done as
inherently safer than what hasn’t, even when the statute itself points to a cleaner, more efficient
alternative.
A properly executed Article 9 sale offers not just a clean exit, but one that maximizes recovery by
eliminating court-imposed dilution—legal fees, reputational risk, holding costs, and creditor
interference. This isn’t about structuring a complex transaction; it’s about following the law. When
statutory requirements are met—commercial reasonableness, notice to interested parties, and an
arm’s-length purchaser—the protections of the UCC are clear and reliable. Under these conditions, an
Article 9 sale presents no greater risk of successor liability than a 363 sale in bankruptcy, and it arguably
offers greater control, lower cost, and better outcomes for the senior secured lender.
So why all the fog? It’s time to take a clearer view of the law, the process, and the outcomes.
“If a bank client is in workout, it is unlikely that its management has the ability to right a debt-laden
company,” said former Century Bank CEO Jonathan Sloane.“Article 9 eliminates a long, arduous, and expensive workout process for banks, thereby being capital efficient.”
The Cost of Court: How Judicial Processes Dilute Recovery
Judicial proceedings promise clarity and finality, but too often deliver higher cost and delay. Chapter 11
filings come with creditor committees, trustee fees, and a deterioration of asset value. Assignments for
the benefit of creditors (ABCs) may offer speed but can devolve into litigation if junior creditors seek to
stall or extract concessions.
At the end of these processes, the value recovered by senior lenders is often heavily diluted by the very
structure and weight of the proceeding. Legal and financial advisor fees, carve-outs to unsecured
creditors, reputational exposure, and simple time delays all chip away at recovery—until what could
have been a clean exit becomes a compromised outcome, outweighed by the perceived benefits of
judicial finality.
“Even with the protections afforded by the Bankruptcy Code, the lender may end up incurring significant
legal fees,” said Vincent J. Roldan, partner in banking and financial services, bankruptcy and creditors rights with Mandelbaum Barrett PC.“Also, in a Chapter 11, the lender may have to face an aggressive unsecured creditors committee investigating liens and causes of action.”
By contrast, Article 9 provides for lenders to exit efficiently, outside of court, with recovery undiluted by
the friction and expense caused by junior creditors who have no standing beyond what the senior
secured lender has been able to recover on their loan.
When Article 9 Becomes a True Exit Strategy
Not all Article 9 sales are created equal. While the UCC permits a secured party to dispose of collateral
through either a public or private sale following default (9-610), a sale of going-concern assets typically
requires debtor cooperation. In most non–strict foreclosure scenarios, the borrower must consent to
the sale—otherwise, they retain the option to file a last-minute Chapter 11 or contest the process.
That’s why historically, going-concern Article 9 sales have been uncommon.
Two distinct paths exist:
Conventional Article 9 Sales
These typically occur when the lender is collateral-good or willing to write down the shortfall, the borrower is ready to walk away, and a buyer with financing is already in place. In this rare alignment of factors, a clean, uncontested secured party sale is possible—but it’s not the norm.
Article 9 Restructuring
This refers to a prepackaged, private sale structure, where the purchaser is identified in advance and debtor consent is built into the deal structure. Only in a private format can incentives beyond asset value be included—such as the negotiation of forgiveness of personal guarantees, future earn-outs, or performance-based participation in the Newco. These incentives align borrower and lender around a mutually beneficial transaction. For the lender, this often includes a clean asset exit plus the potential to recover deficiency balances from the new operating entity over time.
This is why the drafters of the UCC explicitly note, in Comment 2 to §9-610, that, “Private dispositions
may well result in greater realization on collateral for all concerned.”
Public auctions, by contrast, offer no opportunity for alignment. They’re often perfunctory—poorly
marketed and limited to liquidation outcomes.
Robert J. Doyle, SVP Special Assets at First Mutual Holding Co., offers a lender’s view: “The advantages
outweigh the risk and cost of going in the direction of using the traditional judicial system to pursue
either foreclosure or involuntary bankruptcy as the method to secure judgment as well as the recovery
and sale of collateral. As a creditor, the UCC Article 9 process has a better chance of fully recouping the
outstanding debt—and in less time—than what can be provided by the judicial system.”
Successor Liability: Continuity of Operations vs. Continuity of Ownership
Successor liability is the specter that haunts many potential Article 9 transactions. The concern: If the
buyer of the business continues to operate it, might they be liable for the debts of the prior entity?
The UCC answers this clearly. Section § 9-617 states that the disposition of collateral:
- Transfers to the buyer all the debtor’s rights in the collateral.
- Discharges the lien under which the sale is made.
- Discharges any subordinate lien or security interest.
Moreover, under § 9-617(b), a good faith transferee takes free of prior claims—even if the secured party
failed to comply with the procedural requirements of Article 9.
Successor liability claims don’t arise from Article 9 itself—they arise from botched processes. A properly
run public sale—or a private sale with appraisal-based valuation, buyer independence, proper notice,
and seller consent—is statutorily insulated.
To analogize: No one assumes the buyer of a foreclosed home becomes liable for the seller’s second
mortgage. Why should business assets be any different?
It’s important to distinguish between continuity of operations and continuity of ownership. Courts
applying successor liability theories typically focus on whether equity holders engineered a transfer to
shed liabilities while retaining control. But when the Article 9 buyer is a former operator or
manager—not an equity holder—their willingness to continue the business and pay the most for its
assets should not raise liability concerns. In fact, they’re often the only party with both the knowledge
and incentive to preserve going-concern value, which directly serves the senior secured creditor’s
interest in maximizing recovery.
Courts have consistently distinguished between continuity of operations and continuity of ownership
when evaluating successor liability. The majority rule across U.S. jurisdictions is clear: Continuity of
ownership must be present before liability can attach. As articulated by the Supreme Court of Ohio in
Welco Industries, Inc. v. Applied Cos., successor liability does not arise where the buyer and seller share
no ownership, even if the buyer continues to operate the same plant, with the same officers,
employees, and product lines. Likewise, in Winsor v. Glasswerks PHX, L.L.C., the Arizona Court of Appeals
noted that a substantial majority of states have rejected the “continuity of enterprise” exception as an
independent basis for imposing liability. Only a minority of jurisdictions have entertained such theories,
focusing on operational continuity alone, as in Medina v. Unlimited Systems, LLC and certain Connecticut
decisions interpreting Call Center Technologies.
Importantly, even in those minority jurisdictions, courts emphasize factual indicators of bad faith or
ownership overlap. Properly structured Article 9 sales—those conducted through the secured lender,
with independent valuation, third-party buyer status, and no value flowing to prior equity—avoid these
pitfalls. In other words, the very elements that define a commercially reasonable Article 9 restructuring
are those that mitigate successor-liability exposure, even under broader interpretations.
In these cases—where no value flows to equity and the sale passes through the senior secured
creditor—successor liability claims are far less likely to prevail. The “mere continuation” doctrine, often
cited in such cases, requires that the new entity be, in essence, the same as the old—typically meaning
that the same people control it as equity holders. Courts applying this theory focus on ownership
continuity, not merely operational similarity.
When the buyer in an Article 9 sale is a former employee, manager, or operator—someone with no
ownership interest in the defaulted entity—successor liability claims are not likely to succeed. Courts
have recognized that such individuals often represent the highest and best buyer, motivated to preserve
operations and pay maximum value for the assets, which directly supports the lender’s recovery.
Where the sale is conducted through the secured creditor, with no residual value flowing to equity and
no evidence of a sham transaction, successor liability claims have been consistently rejected.
The perceived tension between commercial law (UCC) and common law is arguably more apparent than
real. While the UCC is designed to protect senior creditors and ensure transactional finality, equitable
doctrines of successor liability remain available to address bad-faith transfers. But even under common
law, courts don’t impose successor liability simply because operations continue. The key threshold is
continuity of ownership—not operations.
This judicial reasoning is supported by case law across multiple jurisdictions. In Ed Peters Jewelry Co. v. C
& J Jewelry Co., the First Circuit held that a buyer who acquired assets through a commercially
reasonable Article 9 foreclosure sale—despite continuing the same business—was not liable for the
seller’s debts, emphasizing that there was no continuity of ownership.
In In re Acme Sec., Inc., a Georgia bankruptcy court upheld a private Article 9 sale to former insiders with
no equity stake, rejecting successor liability claims where the transaction followed UCC procedures and
showed no intent to evade creditors.
In In re Call Center Technologies, Inc., the court emphasized that continuity of ownership—not
operations—was the central factor in determining exposure to successor liability.
Scholarly analysis in the Uniform Commercial Code Law Journal reinforces this view: When an Article 9
sale is executed through the senior secured creditor, with no value flowing to equity and a buyer
independent of ownership, courts consistently reject successor liability claims—not because of formal
technicalities, but because the economic substance of the transaction does not support them.
Lender Liability: Why Article 9 Reduces Exposure
Another concern for banks is the potential for lender liability: being sued by a borrower or third party
for acting in bad faith, exerting undue control, or structuring a self-serving transaction.
But Article 9 Restructuring, done correctly, actually reduces this risk.
- The debtor consents to the transaction and often receives a meaningful incentive.
- The valuation is conducted by a third-party appraisal firm.
- The buyer is independent and not under common control with the seller.
- The decision to proceed with a private sale is protected under the Business Judgment Rule.
The Business Judgment Rule insulates lenders and fiduciaries who act in good faith and with reasonable
care, even if outcomes are imperfect. A lender choosing the most viable exit path, supported by
documentation and third-party analysis, is well within this protection.
Pre-Packaging = Aligned Incentives + Undiluted Value
Article 9 Restructuring is not just a transaction—it’s a resolution framework.
When all parties are aligned:
- The borrower cooperates to preserve value.
- The lender exits cleanly, with upside potential.
- The purchaser gets operating assets free of entanglement.
- Jobs and going concern value are preserved.
And all of this happens without a courtroom, without judicial fees, and without the moral hazard of
elevating junior creditors who are out of the money.
“Locking in the key players and fashioning a bank’s exit via an Article 9 Restructuring can efficiently limit
the costs and remove the unpredictability inherent in judicial proceedings,” said Aaron L. Hammer,
partner at Kilpatrick Townsend & Stockton LLP
But Can’t Someone Still Sue?
Yes. Anyone can sue anyone for anything. But Article 9 sales, when executed correctly, mitigate risk responsibly. The key is not eliminating all possibility of challenge, but operating within a process that:
- Aligns incentives.
- Follows the law.
- Documents value.
Abuses of the process exist, just as abuses exist in any restructuring tool. But when applied properly,
Article 9 restructuring remains one of the most cost-effective, jobpreserving, and recovery-maximizing
options in the bank’s toolbox.
Conclusion: It’s Time to Rethink the Forecast
The clouds that seem to hang over secured party sales are perceptual, not legal. The Uniform
Commercial Code provides a clear, codified path that offers senior lenders protection, finality, and
greater efficiency than a judicial process. Lenders often equate the courtroom with finality and the
auction block with certainty—but it’s time to reexamine those assumptions. Neither of those deliver
what a well executed going concern Article 9 secured party sale can: a clean, efficient, and high-value
resolution. Through either a traditional going concern sale because incentives were organically aligned,
or through an Article 9 restructuring which can create the necessary incentives to align them, the senior
secured lender ends up in a better place than through other options.
When Article 9 is executed properly:
- The lender exits at full asset value.
- The borrower cooperates instead of litigates.
- The purchaser takes clean title.
- The economy retains a functioning business.
“Bringing in turnaround advisors early on to focus on strategic actions is key to preserving value in a
transaction,” said Nick Welch of BDO. “The benefits from a focus on sourcing fresh capital, renegotiating
vendor terms, effectively managing short term cash flow and rationalizing underperforming assets far
outweighs potential stagnation and value-drain that is often caused by addressing combative parties,
overstretched debtor management teams and carrying costs. Early action and a focused, strategic
approach unlocks real enterprise value and delivers measurably better outcomes for the senior secured
lender among other parties.”
It’s not just a legal process. It’s a market-based solution grounded in clarity, cooperation, and the
statutory authority of the UCC.
It’s time to stop forecasting clouds on the horizon of secured party sales. The UCC was drafted to assure
senior secured lenders—with clarity and comparable finality—that a sunny disposition is possible, even
without judicial process.
