Delaware Court Provides Critical Guidance as to the Commercial Reasonableness of a UCC Article 9 Foreclosure Sale

by Sheppard Mullin Richter & Hampton LLP

Secured lenders often resort to non-judicial foreclosure sales of personal property upon a borrower’s default. Article 9, Part 6 of the Uniform Commercial Code requires that every aspect of such a sale must be commercially reasonable. However, the courts have historically provided little guidance as to what exactly constitutes a commercially reasonable sale. Fortunately, the Delaware Chancery Court recently issued a decision, entitled Edgewater Growth Capital Partners, L.P. v. H.I.G. Capital, Inc., C.A. No. 3601-CS (Del.Ch. Apr. 18, 2013), in which the court analyzed the meaning of this “commercial reasonableness” requirement and provided helpful guidance to borrowers and secured creditors alike.

Edgewater Growth Capital Partners, LP (“Edgewater”) acquired a company called "Pendum" through a leveraged buy-out. Additionally, Edgewater was a guarantor of a portion of the acquisition financing held by Pendum. Following numerous defaults under and modifications to the senior loans, it became clear that Pendum could not continue as a going concern, and that an asset sale was the last and best option. Pendum thereupon negotiated a Foreclosure Sale Agreement with its lead senior secured creditor, H.I.G. Capital, Inc. (“HIG”), pursuant to which Pendum was authorized to hire a consultant to identify potential buyers for its assets. However, this search produced no interested buyers and Pendum’s assets were ultimately purchased by an affiliate of HIG at an auction at which such affiliate was the only bidder. Edgewater subsequently argued that the asset sale was not conducted in a commercially reasonable manner.

The court analyzed the commercial reasonableness of the sale by asking whether it was conducted “in conformity with reasonable commercial practices among dealers in [that] type of property” as required under the Uniform Commercial Code as adopted in Illinois. The court focused, in large part, on HIG’s concession to allow Pendum to select and hire the financial consultant charged with identifying potential buyers. It found that the consultant performed an involved market test, pursuant to which it identified and contacted 67 potential buyers, had second round contact with 44 potential buyers, conducted management meetings with and disclosed non-public information to a smaller set of potential buyers, and additionally placed 2 ads in the Wall Street Journal. Despite such efforts, none of these potential buyers elected to bid for Pendum’s assets. The court further stressed that Edgewater failed to identify even a single potential buyer that had not been contacted by the consultant prior to the sale.

The court also found that there was no evidence to show that the price paid for the assets was unreasonable, as contended by Edgewater, clarifying that whether a greater purchase price could have been obtained under other circumstances is not dispositive in determining the commercial reasonableness of a given sale. Moreover, the court found it telling that Edgewater itself declined to bid at the auction, presumably because it concluded that the assets were not worth more than the final sale price. The court further explained that, in determining reasonableness, the economic status of the company itself must be considered, and here Pendum was insolvent, had been run by poor leadership and was facing major operational issues, all of which contributed to the reasonableness of a 55-day sale period granted by HIG. Finally, the court expressed frustration with Edgewater’s litigation strategy, opining that Edgewater filed its lawsuit solely to bully HIG into abandoning its guaranty claims against Edgewater.

While there will always exist questions of fact as to whether an Article 9 asset sale is commercially reasonable, Edgewater provides guidance to both debtors and their creditors as to a strategy found by one of the nation’s leading voices on corporate law to be commercially reasonable. Thus, secured creditors can take comfort in knowing that following the program discussed in Edgewater will likely mitigate, if not eliminate, the risk that a court may later determine the sale was not commercially reasonable, whereas borrowers can use the case as a shield against disposition strategies that provide lesser safeguards than those used in Edgewater.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Written by:

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.