Buying at a UCC Sale – A Due Diligence Checklist
January 26, 2010
So you saw a notice in the Tribune that some bank is holding a sale pursuant to the terms of the Illinois Uniform Commercial Code (“”UCC””). The items being sold are assets from your competitor’s company. You are not only happy to see that your competitor has failed, but also that you have an opportunity to pick up some assets at a discounted price. However, buying from a UCC sale is not like buying from a distributor or a dealer. There are many traps for the uneducated buyer. This article will alert you to the different diligence items to check before buying.
Upon a purchase of assets at a UCC sale, the buyer will receive a secured party bill of sale for the assets. The sale will almost certainly come with few or no representations or warranties by the secured party seller. This is truly a “”caveat emptor”” situation. Although nothing can take the place of having good counsel review the diligence for a buyer at a UCC sale (attorneys at Levenfeld Pearlstein are particularly adept at this), below are the major items of importance when buying at a UCC sale. Please note, this is not an exhaustive list, and each sale may present its own unique items of diligence to be examined:
UCC SEARCH: Run a UCC search in the state of formation of the debtor whose assets are being sold or get a copy of the search that the secured party used to hold the sale. The search should be current (within 20 days of the date of the sale). Get copies of all filings made. If there are any UCC filings against the debtor, make sure the filings are subsequent to the filings of the secured party holding the sale. Also, review the filing made by the secured party. You want to make sure that the secured party had a perfected lien against the assets being sold.
TAX LIEN AND JUDGMENT SEARCH: Run a tax lien and judgment search against the debtor in the county where the debtor is located. If there are any tax liens or judgments, check the dates to make sure they are subsequent to the secured party holding the sale. If you find a judgment, check to see if any charging liens or citations have been issued against the debtor. If you find a tax lien, make sure the proper notice of sale was given. UCC sales where a tax lien exists require more notice than a normal sale. Although most secured parties holding a UCC sale are alert to bankruptcy filings by their debtors, it may also be prudent to run a bankruptcy search just to make sure the debtor has not yet filed bankruptcy. A bankruptcy filing prior to a UCC sale would make any sale held void absent a court order from the bankruptcy court allowing the sale or modifying the automatic stay of the bankruptcy.
UCC NOTICE: Ask the secured creditor to see the list of parties to which it sent notice of the UCC sale. In order to wipe out any junior liens (and to preserve the possibility of pursuing a guarantor of any deficiency balance that remains after the sale) secured parties are required to send notice to the debtor, any party that has appropriately filed a UCC against the debtor, any party that has an interest in the goods being sold and any guarantor. Failure to give proper notice could mean the purchase may be subject to a lien of the party that did not get notice.
LOAN DOCUMENTS: Ask to see copies of the secured party’s loan documents that show the debtor has pledged the assets being sold. Also ask for a copy of the default notice. A buyer at a UCC sale should check to make sure the secured party holding the sale has the authority to sell the assets and that it has a lien against the assets being sold. Some loan documents also dictate the length of time necessary for the notice of a UCC sale.
ARTICLES OF ORGANIZATION/FORMATION: Order a copy of the articles of organization/formation of the debtor to make sure the secured creditor filed its UCC statement properly. The names should match exactly.
BIDDING PROCEDURES: Review the bidding procedures carefully. Many secured creditors require bidders to be qualified and/or pre-approved or they may require a deposit to be made in certified funds prior to the sale.
MISCELLANEOUS DILIGENCE ISSUES: Be sure you understand who has possession of the goods you are bidding on and how you will be able to take possession. Many times a landlord is involved who will require payment or is giving only a very limited time to remove the goods. A secured creditor can conduct a UCC sale even if it does not have possession of the goods. Also, be careful to note what is not getting sold in addition to what is getting sold. Sometimes lenders or even the debtor withhold key assets from a sale for various reasons. One such example is intellectual property rights. If the trademark or a license to use an item is not getting sold, make sure if you are buying the goods, you can still use what you are buying.
In the example above, an ad was run in the Tribune. This means that the secured party was having a public sale. However, UCC sales can be done privately as well. Private sales may be subject to a higher level of scrutiny if contested, so extra caution should be used when buying at a private sale.
Finally, the bill of sale may be negotiated, but do not expect much to change. Remember, this is like a fire sale. You will be buying as-is, where-is. Viewing the merchandise before bidding is a must. “