How Not to Sell Your Business–A Sad Tale

How Not to Handle a Business Closing

How not to sell your business. In this instance, the buyer convinced the seller to alter the sale documents before closing. Seller, unfortunately, did not return to his attorney for advice on the proposed changes.

This letter will confirm our conversation regarding the manner in which the sale of your company was handled.

From the documents that you provided me, it appears that the Exhibits to the Sale Agreement were used as the final purchase documents with some changes.

The buyer deleted the reference to the Security Agreement in the Sale Agreement and did not sign the Security Agreement provided but they completed a UCC-1 (incorrectly listing both the corporation and the individuals as debtors) and signed it without describing the collateral.

It was explained that you need a grant of a security interest such as the Security Agreement for the UCC-1 to mean anything. In some instances, the UCC-1 can be used as a security agreement if granting language is included and signed by the Debtor.

Granting language is such as the following:

Debtor hereby grants to Secured Party a security interest in all of the personal property listed on Exhibit A, attached hereto and by this reference incorporated herein, and any proceeds or replacements thereof owned or hereafter acquired by Debtor to secure payment and performance of Debtor’s present and future debts, liabilities, and obligation, or any kind or nature, to Secured Party. Debtor’s failure to pay or perform when due will be a default entitling Secured Party to all rights and remedies provided by law, including collection of accounts directly from account debtors. (Note: Attach list of property to UCC-1 and mark it as Exhibit A)

Or, broader language:

Debtor hereby grants to Secured Party a security interest in all of the debtor’s personal property and fixtures, whether now owned or hereafter acquired, including, but not limited to, all of the debtor’s interest in all equipment, inventory (including goods consigned to the debtor), goods, software, farm products, chattel paper and electronic chattel paper, accounts, deposit and commodity accounts, promissory notes, instruments, commercial tort claims, negotiable and other documents, payment intangibles, letter-of-credit rights, investment property, money, and general intangibles, all related supporting obligations and security, all proceeds thereof, and all related records, now owned or hereafter acquired by Debtor to secure payment and performance of Debtor’s present and future debts, liabilities, and obligation, or any kind or nature, to Secured Party. Debtor’s failure to pay or perform when due will be a default entitling Secured Party to all rights and remedies provided by law, including collection of accounts directly from account debtors.

In this instance, the proper Debtor is the corporation, not the individuals, because the corporation bought the collateral.

If the correction is made now after the sale, there will be a gap in the perfection of the security interest because it was not done on or before the sale occurred.

Also, the truck title (Department of Motor Vehicles) should have listed you as a secured lender and you should have had a security agreement granting security in the truck. Again, the gap issue applies if the correction occurs after the sale.

The promissory note was modified to delete the final maturity date and only requires monthly payments until the debt is paid. The interest rate was reduced to 5.5%.

In order to give you some claim against the property sold, you could create a new UCC-1 showing the corporation as the debtor, listing the granting language suggested above and the list of collateral and have the corporate officers sign it and file it. You would still have the gap issue but at least you would have something to argue about; however, you would probably lose in a dispute with a Bankruptcy Trustee or any creditor who has listed the property as collateral on an intervening loan.

Epilogue:

Buyer did not pay and Seller had only the right to sue him in order to obtain a judgment and then try to collect the judgment from Buyer’s property that was not collateral for other loans. Had the proper security agreements been left in place, Seller would have been able to foreclose on the business assets and sell them to apply on the debt owed. In Bankruptcy, the Seller could have reclaimed the property from the Bankruptcy Trustee and been able to foreclose and apply the net proceeds to the debt. Without the security agreements, Seller would only be an unsecured creditor, normally receiving pennies on the dollar.