Using Article 9 Foreclosure as an Alternative to Chapter 11

Approximately $1 trillion in high-yield debt is approaching maturity by 2028. Secured creditors and restructuring professionals are assessing their options.

According to a Ropes & Gray article on its website, Uniform Commercial Code (UCC) Article 9 foreclosure is a compelling out-of-court mechanism that offers speed, privacy, and creditor control without the expense and publicity of a Chapter 11 filing, or the litigation risk associated with liability management exercises.

Article 9 foreclosure allows secured creditors to enforce rights against pledged collateral following a default, either by retaining the collateral (strict foreclosure) or selling it through a commercially reasonable process. In most multilender structures, Required Lenders can direct the collateral agent to exercise remedies unilaterally, which binds minority lenders without court supervision.

Equity-level foreclosure transfers ownership of a holding company and its subsidiaries without disrupting underlying operations. It is generally the simpler and more attractive path. Strict foreclosure requires borrower consent. However, when obtained, it enables a clean transfer of ownership without judicial intervention.

The article identifies meaningful advantages over Chapter 11, including reduced professional fees, operational continuity, and avoidance of public disclosure. Creative post-foreclosure structuring can recreate participation incentives similar to liability management exercises without implicating pro rata provisions.

Counsel must navigate significant risks, including fraudulent transfer exposure, successor liability, tax consequences such as cancellation of debt income and Internal Revenue Section Code (IRC) 382 limitations, and junior lienholder rights. There is also risk of an intervening bankruptcy filing triggering the automatic stay.

For transactional lawyers, foreclosure warrants careful integration into deal structuring and due diligence frameworks. Tax counsel should evaluate insolvency exclusions and net operating loss limitations early. Fiduciary duty exposure and inter-creditor agreement enforceability need close attention. Minority lenders may challenge the process or seek bankruptcy as an alternative forum.