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Smarter Perspectives: Disposition of Collateral

Podcast: Exploring the Many Nuances of the Article 9 Sale Process

Guest Jonathan Cuticelli, Brent Bonham, Richelle Kalnit, Ian Fredericks, Steve Katz (host)

Richelle Kalnit, Ian Fredericks, Brent Bonham and Johnathan Cuticelli each share their industry-specific expertise regarding the disposition of collateral under Article 9 of the Uniform Commercial Code.

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Steve Katz:

Hi everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco Global Smarter Perspective podcasts. As return listeners know by now, I'm your host, Steve Katz, and if this is your first time with us, well then welcome, we're really glad that you could tune in.

Steve Katz:

Our discussion today centers around something we've all seen happening across any number of industries and sectors, particularly with the added stresses of the pandemic over the past two years, and that's bankruptcy filings. As the cost of bankruptcy continues to increase, in particular, due to fees and expenses that come along with administering bankruptcy cases, secured lenders are increasingly turning to foreclosures under what's known as Article 9 of the Uniform Commercial Code, as a preferred vehicle for disposing of their collateral. Article 9, at least as I understand it, before we start this discussion, can be used utilized across the spectrum to liquidate any type of collateral, and that's exactly why we invited our four guests today, each of whom brings a different area of expertise and perspective to the discussion. So joining us are Ian Fredericks, President of Hilco Merchant Resources, Richelle Kalnit, Senior VP of Hilco Streambank, Brent Bonham, Executive VP of Hilco Commercial Industrial, and Jonathan Cuticelli, Managing Director of Hilco Real Estate. Welcome to you all, glad you're here.

Jonathan Cuticelli:

Thanks, Steve for having us.

Richelle Kalnit:

Thanks for having us.

Ian Fredericks:

Thanks for having me, Steve.

Brent Bonham:

Thanks, Steve.

Steve Katz:

Yeah, well we're really glad to have you all on, and we've got some serious Hilco brainpower in the room, to say the least, so let's kick it off. Jonathan, it would be great if you could start us off, with a quick explanation of the advantages of conducting an Article 9 sale under the Uniform Commercial Code, and also your thoughts on when and why a company should consider doing so.

Jonathan Cuticelli:

Thank you. So as you touched on Article 9, the UCC provides a statutory regulation of creating, perfecting, and enforcing security interests, and personal property and fixtures. The biggest advantages are that it allows the secured party, the ability to perfect their security interest within their loan agreement in a cost-effective, time-efficient, and non-judicial manner. There are alternative remedies protecting their rights, and the most common one is to run a judicial foreclosure, which certainly has its positives, but takes considerable time and is usually quite expensive. So by conducting a commercially reasonable UCC Article 9 sale, it expedites the process and ultimately saves all parties time and-

Steve Katz:

And just as a follow up to that, and this is as much for my understanding as anything else, but what is commercially reasonable? Maybe you can explain that within the context of real estate transactions since that's your area of expertise.

Jonathan Cuticelli:

If you were to look it up, there isn't a defined term of what is commercially reasonable, but some of the hallmarks of commercially reasonableness, is how the collateral is being sold. Public, private, in parts or as the whole, the time, the place, and manner of the collateral being sold. Meaning is it an as-is state, or are there repairs that are going to be made, et cetera, et cetera, and then time that you are actively marketing the opportunity in the marketplace, for third parties to have an opportunity to see if it's something that they're interested in purchasing.

Steve Katz:

Okay great. I think that's a good setup. Let's turn next to Richelle. Richelle, maybe you can give us some insight into why we are hearing more about Article 9 sales recently, certainly during the pandemic, other than that has something changed? And are you seeing the same trend in intellectual property? And if so, how is that playing out for businesses there?

Richelle Kalnit:

Thanks, Steve. So yeah, you touched on it with the pandemic, certainly COVID restricted availability of State Court. So the State Court was required to oversee receiverships, or to a lesser extent, assignments for the benefit of creditors, those Courts were relatively inaccessible in varying degrees, depending on the Court, in 2020 and 2021. So the benefits of a court-sanctioned process, which are often certainty, really went away during that time period, and it really caused a lot of lenders and their professionals to take a closer look at these types of alternative remedies. Coupled with that, I think we all can see that the bankruptcy process is increasingly time-intensive. So there's substantial lead up and wind down, even post-sale, when the professionals think about how to get out of the case, whether through a structured dismissal or a plan, whereas in an Article 9 transaction, you're really in and out in 30 to 45 days, or longer if you want to be, but if you want to get out of dodge quickly, this is a very efficient way to do it.

Richelle Kalnit:

In a bankruptcy, we all may talk about a 30 to 45-day sale process, but the reality is that, with the pre-filing preparation, the first-day papers, and the post-sale wind-down, the entire process ends up being substantially longer than that 30 to 45 day period. Or anything in a quick sale case in a bankruptcy, you have a number of items that require substantial negotiation, including the budget for a dip or cash collateral, and each party in a bankruptcy has certain duties and obligations, and it's expected that those are fulfilled, and all of that costs, it takes time and costs money. So all of these factors combined have encouraged and really forced lenders to become more familiar with the Article 9 process for all different types of collateral.

Richelle Kalnit:

So it's yet another tool in the toolbox when collateral needs to be sold, and the question is, what is the most value-maximizing, cost-effective, timely process, that will achieve the lenders' goals? As a result of that, certainly on the IP side, we've seen an uptick in lenders looking to explore, and actually undertaking Article 9 transactions for intellectual property assets. It's particularly useful for IP, especially when you have a borrower that's not cooperative, because many forms of IP assets, such as trademarks and patent portfolios, can be conveyed to a buyer through a legal assignment. So when you have a borrower that's not cooperative, those assets, you don't need the borrower to cooperate to convey those assets through a sale to a third party. On the flip side, if you do have a cooperative borrower, and there is some vestige of an operating business, Article 9 can still be used to convey those assets, and we've seen sales that almost look like a going concern sale, where there's some type of transition services, where a website remains live, so it really can be a tool that can be used in a wide variety of transactions.

Richelle Kalnit:

We've also seen interest from lenders in utilizing Article 9 as an information-gathering exercise in advance of selling their debt. So maybe they stay on through the end of the process to an auction, or maybe they use the information that they've amassed from the sale process, to sell their debt in advance of the auction. So the point being, lenders can tailor Article 9 to meet their needs, depending on the circumstances, because it's an eminently flexible tool to dispose of collateral efficiently.

Steve Katz:

Okay. Great comprehensive explanation thanks, and relevant to that flexibility, let's turn next to Brent. Brent, you're obviously coming at this from the commercial industrial equipment side of the equation, and I know that Hilco Commercial Industrial has purchased and sold assets under the Article 9 process. Is there a case or a couple, maybe a couple of cases that you could talk about, and how your efforts and the process within those specific engagements, was really beneficial to the parties?

Brent Bonham:

Yeah, absolutely. Thanks, Steve. So, a relevant and very recent example that I can give is, Hilco Commercial Industrial was pursuing the acquisition of essentially a fleet of transportation assets, that became available as a result of a recent wind-down of the owning company. As we dug into everything that was going on behind the scenes, and who the lien holders of the various assets might be, we learned that there were several different lenders involved, each with different and specific collateral. So really, because the buyer, given their recent wind-down, not because they weren't cooperative as Richelle mentioned, but really because they weren't able to cooperate or help us effectuate the sale process, given where they were in the state of their wind down, we then worked with all of the various lien holders to conduct several simultaneous Article 9 notification processes and related sales, to perfect our interest in the acquisition of the assets that we were acquiring, thereby allowing us to be able to sell them to our third party buyers, free and clear in a reasonable timeframe.

Brent Bonham:

So the transaction itself was extraordinarily time-sensitive, given everything that was happening with the company, and the Article 9 process that we ran for the various lien holders, really did allow us to conduct those sales in a very quick timeframe, and frankly maximize the recovery for the various lien holders as well.

Steve Katz:

Right, perfect. Great case example there. Ian, let's turn to you now, can you shed some light on how the use of Article 9 plays out in the retailer wholesaler world? Which I know is largely what you focus on, perhaps maybe there's, again, another client engagement that you can use to demonstrate the work that you've done there.

Ian Fredericks:

Sure, Steve, I would say that it's different between retail and wholesale, and there haven't been too many recent examples, at least on the retail side, one of the reasons is that retail needs a lot more cooperation than I think you heard from my other colleagues. So for example, if you think about a typical retailer, they have stores, they usually lease those stores, they oftentimes will have distribution centers, or third party logistics companies where they enter into some kind of a contractual relationship with those, whether it's a lease or just a contract, so you need a lot of performance from a lot of different people, to make a retail liquidation operate efficiently and optimally, and unlike the Bankruptcy Code, Article 9 does not restrict those constituents from taking action. So in a bankruptcy of an automatic stay, that stops a landlord from kicking you out of the location, allows you to continue operating, your employees can continue to get paid, you need your employees to continue with you through a liquidation as well in the stores.

Ian Fredericks:

So it really historically has not been used for those reasons, there's just too much uncertainty and a little bit too much chaos. What I'm kind of interested to see, is a smaller retailer that's say, had a handful of stores, 10, 20 stores, with the current environment and landlords really wanting people to stay in their locations, whether you could get more cooperation, especially if you had some more mom and pop landlords, where you have a large swath of stores, I just don't see it as a workable option. On the wholesale inventory side, it's definitely something that can work. Again, you really just need to make sure that there's access to that inventory, to be able to go get it for the buyer, and that's usually something that can be worked out pretty easily, typically the lender may have to make sure or factor into the bidding, whatever cost it's going to take to sort of get the inventory out of its location, because typically if it's in a warehouse or something like that, the Warehouseman can serve a Warehouseman's lien, et cetera.

Ian Fredericks:

So there are some other considerations, but it's definitely feasible in the wholesale context. Maybe it's workable in a small retail context with a handful of stores, in a large retail operation with a lot of stores, I don't really see it as a viable option, and it certainly can be combined. One of the things that you can do with sort of the... Where Richelle's dealing with IP, or Brent's dealing with industrial assets or manufacturing assets, you can put all three of those together in kind of one Article 9. So where I've seen it work for wholesale, is where you do have some other assets for sale, and you can either push all of those together and sell them as a bulk transaction, or you can sell the individual parts, you can market it as both, so it gives you a lot of the same flexibility. You would have the maximized value in that wholesale inventory context, where you can put it to together with other assets.

Steve Katz:

That's a great way to connect all the pieces, thanks, Ian. We have just a couple of minutes left, so I think I'm going to direct this last question back to Richelle. It definitely seems like businesses should be familiarizing themselves with all of the intricacies of Article 9 sales process, by talking with experts such as yourselves, but if they don't and a situation is imminent, I think it'd be helpful for listeners to understand how important it is, to either quickly determine that going down the Article 9 path is the optimal approach, and if not, whether options are open to them. So Richelle, could you maybe just address that in the couple of minutes we have left?

Richelle Kalnit:

Absolutely Steve. So I think what's actually good for the lenders here, and their lawyers who are working the midnight shift is to understand that I think imminency is a relative term. So I think most lenders, they see this coming. They know that the credit is troubled, it's in forbearance, they've done an amendment, they've been around the block with these borrowers, so they've got a little bit of time to kind of explore their options. I think what ultimately needs to happen is flexibility. Ian mentioned the stay in bankruptcy, you don't have that in an Article 9 transaction. So I think it's just, as you're preparing to go down the path of an Article 9, if all of a sudden, you have creditors taking action against you and you need to pivot to a bankruptcy, it's just being prepared for all of that, being ready to address the situations that come up, so that you are able to respond accordingly.

Richelle Kalnit:

Can you take some type of control of the assets, so that creditors cannot collect against them? With inventory, probably not, they're held in a third-party warehouse. It's not like the lender's going to go in and grab the inventory, they can't do that, for many reasons, but what can they do for less tangible assets? Well, they certainly already have the right to be able to transfer a patent portfolio. Can they protect themselves with respect to valuable domain names and obtain the registrar credentials from a cooperative borrower? Possibly, all of these things are worth exploring if you've got a troubled credit.

Steve Katz:

Okay great. Well listen, it's a complicated topic to be sure, but thank you to each of you for simplifying it for our listeners today. If I could ask each of you, let's start with Jonathan, to just provide your best form of contact, if anybody who's listening in today would like to reach out specifically to any of our esteemed speakers today. Jonathan, go ahead.

Jonathan Cuticelli:

Absolutely. Jonathan Cuticelli, my area of specialty is in the Real Estate world. I can be reached via email at jcuticelli@hilcoglobal.com, and it's J-C-U-T-I-C-E-L-L-I@hilcoglobal.com, and my phone number is (203) 561-8737.

Steve Katz:

Great, Richelle?

Richelle Kalnit:

Sure. Richelle Kalnit, my focus is on Intellectual Property assets. My email address is R-K-A-L-N-I-T@hilcoglobal.com, and the best number for me is (917) 328-7030.

Steve Katz:

Perfect. Brent?

Ian Fredericks:

Yep. Brent Bonham, with my area of expertise being in Commercial and Industrial assets. Best way to reach me is via email it's bbonham@hilcoglobal.com. That's B-B-O-N-H-A-M@hilcoglobal.com, and the best telephone number to reach me is (616) 328-6890.

Steve Katz:

Okay, and lastly Ian.

Brent Bonham:

Thanks Steve. Ian Fredericks, I'm President of the Retail Group, mostly on the inventory side, whether it's inventory wholesale or retail, ifredericks@hilcoglobal.com. That's I-F-R-E-D-E-R-I-C-K-S, and my mobile number's (847) 687-9375.

Steve Katz:

All right, perfect. Jonathan, Richelle, Brent, and Ian, thanks so much for joining us, and listeners, we hope that this Hilco Global Smarter Perspective podcast, provided you with at least one key takeaway that you can put to good use in your business, or share with a colleague or client to make them that much more successful moving forward. Until next time I am Steve Katz, for Hilco Global.

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