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.


Alan H. Martin, Practice Group Leader
714.424.2831 (office)

Edward H. Tillinghast, III
, Practice Group Leader
212.634.3050 (office)

Todd L. Padnos
, Editor
415.774.2938 (office)