UCC Strict Foreclosure – Time Sensitive Transaction
UCC Strict Foreclosure
Our client held over $1 million in secured debt, but it was subordinated to several million dollars of senior secured debt that was in default. The senior lender had started a replevin action to repossess the debtor’s business collateral.
The debtor was in serious trouble as well. The IRS had just filed a tax lien against it for over $700,000. The debtor was running out of cash.
Our client wanted to protect its subordinated debt investment and thought the business prospects would make sense financially, if it wasn’t so highly leveraged and without the tax liability. Our client reached out to Paul Hanley of our Denver office with an eye toward purchasing the assets of the business.
Paul recommended a strict foreclosure under Sections 9-620 through 9-622 of the UCC, since the debtor was cooperative. Furthermore, if the UCC strict foreclosure could be completed within 31 days of the date the IRS tax lien had been filed, the strict foreclosure would extinguish the tax lien under Section 7425(b) of the Internal Revenue Code.
With the elimination of the tax lien an obvious incentive, our Denver team sprang into action. The goal–four transactions in 23 days.
First, two new limited liability companies were formed and capitalized–one to acquire both the senior and subordinated debt and another to purchase two parcels of real estate in which the business operated.
The two real estate acquisitions were acquired with relatively straight forward purchase contracts, with closings that occurred within 15 days.
Simultaneously, negotiations proceeded with a national bank to acquire the senior debt through a note purchase agreement. Issues arose over the scope of the collateral related documents that the bank would transfer and special documentation was needed because an airplane was part of the bank’s collateral. Despite these issues, the acquisition of the bank debt occurred within 15 days.
Finally, to complete the transaction, a strict foreclosure agreement was prepared negotiated and executed with an effective date 21 days after transaction commencement.
Over 100 employees were hired by the new company, the IRS lien on the assets was extinguished, and actions were taken to ensure the business remained operational. The net result was a relatively debt-free acquisition of a distressed business within less than 30 days, providing the business and the employees with new management and a new opportunity for success.