How To Maximize Value Of A Failing Debtor’s Assets—From A Secured Creditor’s Perspective

By: Donald L Swanson

I’m in a discussion, recently, about this question:

• What are the best ways to maximize value of the assets of a failing business, from the perspective of a debtor’s primary secured creditor?

The short answer is this:

• the best ways—by far—are debtor initiated processes; and
• the worst ways—by far—are creditor initiated processes.

I’ll try to explain, based on decades of experience.

Debtor Initiated

What follows is a summary of debtor initiated liquidation efforts — from best to worst (all of which are better than all creditor initiated efforts).

–Voluntary Liquidation

Many times, over the years, I’ve approached secured creditor’s counsel with a debtor’s voluntary liquidation proposal designed to maximize the value of debtor’s assets.  The proposal includes an auction process — often with an opening offer from a third party.

What I’ve found is that such an approach is usually WELL RECEIVED:

• creditors appreciate such an approach and, if they believe they can trust the debtor to do what’s proposed, will allow the debtor to proceed; and
• when the debtor actually does follow through as proposed:
  • value is maximized (including minimizing legal fees and other costs), in comparison with alternative approaches; and
  • everyone goes away happy (or as happy as a debtor can be in such circumstances).

Here are circumstances when such an approach PROBABLY WON’T WORK:

• when a deed of trust sale is already scheduled for this coming Tuesday — such a last-minute proposal will probably be rejected, necessitating a voluntary bankruptcy to invoke the automatic stay and initiate a bankruptcy sale process; or
• when the creditor doesn’t trust debtor to follow through — in such circumstance, an assignment for benefit of creditors is probably needed to put the assignee in control of the liquidation process.

Here is when such an approach CAN’T WORK:

• when out-of-the-money lienholders won’t cooperate — in such circumstance, a voluntary bankruptcy is needed to utilize the sale free and clear provisions of the Bankruptcy Code.

But otherwise, such a proposal opens up the possibility of cooperative action.  That’s because creditors always appreciate a debtor’s genuine efforts to maximize value. 

When making and executing such a proposal, I emphasize to creditors’ counsel that, in exchange, we are expecting grace at the other end for debtor’s limited goals.  My experience is that such an approach almost always works: that creditors are willing to extend such grace . . . except for the time they didn’t.

• A flip side is that secured creditors often offer tangible encouragements for debtor to proceed with such an approach.     

–Assignment for Benefit of Creditors (“ABC”)

The next best way to maximize value (including minimizing expenses) is an assignment for benefit of creditors (an “ABC”) — here, I’m talking about an ABC under the common law, not under state statutes with bells and whistles.

ABCs under the common law (as in Illinois, California and Massachusetts) are out-of-court processes under the law of trusts: debtor is the trustor, assignee is the trustee with fiduciary duties, and creditors are the beneficiaries.  Such ABCs have a centuries-long history of maximizing value (including minimizing expenses) for all creditors.

Delaware’s ABC statute is an example of expenses added by the single bell and whistle requirement of an assignee’s value-based bond.  That single requirement necessitates such costly items as, (i) an appraisal of assets, (ii) preparation of evidence like what’s required for first-day motions in bankruptcy, and (iii) the price of the bond.  Each of such costs, alone, is difficult to address (and might even be prohibitive) — but when added together can destroy the economic viability of the ABC process.   

The Uniform Law Commission recently approved a Uniform Assignment for Benefit of Creditors Act that will hit the state legislatures in January of 2026.  Such Uniform Act updates and codifies the common law of ABCs and, if adopted by a good number of states, will provide the uniformity needed for debtors who have assets in more than one state.

–Voluntary Bankruptcy

One thing bankruptcy is good at is this: selling debtor’s assets at top dollar.  I’ve been amazed, over the years, at the high prices that bankruptcy auctions can produce.

So, the next best way to liquidate a debtor’s assets arises when essential lienholders won’t cooperate: through debtor’s voluntary bankruptcy under standard Chapter 11, Subchapter V or Chapter 12.[Fn. 1]  Such sales can either be under § 363[fn. 2] or under a confirmed plan.  I’m partial to selling under a confirmed plan because, (i) a plan process avoids the limitations of § 363(f), and (ii) usually, creditors who want the sale to happen will allow debtor to retain important-but-limited benefits under the plan in exchange.

But like any other court-supervised process, bankruptcy is expensive.  A voluntary bankruptcy liquidation will maximize the sale value of the assets — but the corresponding expenses will be high, especially when there is opposition from, or disputes with, creditors.

Involuntary Liquidation

The absolutely-worst way to maximize value of a debtors assets is through involuntary liquidation.  In fact, the two phrases, “maximizing value” and “involuntary liquidation,” when used together are oxi-moronic.

Over the years, I’ve seen lots of involuntary liquidations, and they almost always end in an economic disaster for everyone — even for lienholders believed to be well secured. 

In more recent times, lienholders with little to no experience at liquidating a debtors assets seem to have a high regard for their own ability to produce an excellent economic result through forced liquidation.  That confidence rarely ends well.

Here are examples of forced liquidations — from least-bad to worse.

–Replevin

A primary result of a creditor’s replevin action is to force debtor into bankruptcy.  This achieves the benefit of invoking, (i) debtor’s disclosures that bankruptcy requires, and (ii) debtor’s accountability for past and future conduct that bankruptcy imposes upon a debtor.

When a debtor actually allows the replevin to proceed toward its natural conclusion, that’s a time for the secured creditor to say, “Uh-oh.”  What the allowing-to-proceed typically means is this: debtor does not see economic value in trying to preserve the property.  And it’s useful to note that replevin actions are most commonly used during times of economic stress for everyone in the debtor’s field of business. 

Here are two examples from my experience of the, “Uh-oh”:

• creditor retains a lawyer, files a replevin, posts a replevin bond, takes possession of all debtor’s equipment, moves the equipment to a secure site (causing damage to much of the equipment and to the facilities from which it was removed), stores and insures the equipment, prosecutes the replevin to a favorable conclusion, prepares the equipment for sale, advertises the sale, conducts the sale, and achieves a total sale price that is only-slightly greater than the costs of all the above; and   
• many years ago, I represented regionally a nationwide equipment lender who, when confronted with the prospect of getting a large quantity of its equipment collateral back from a defaulted debtor in a time of economic stress for that industry, would say: “We can’t effectively liquidate that much collateral, and we don’t want it back!”

–Deed of Trust Foreclosure (Non-Judicial)

A deed of trust foreclosure process for real property has the same effect as a replevin for personalty: either the debtor files bankruptcy to preserve the economic value of the collateral, or it’s “uh-oh” time for the creditor.  That’s because, when debtor allows a deed of trust sale to proceed, that process:

• rarely produces a top-value bid; and
• almost always results in the foreclosing creditor’s own credit bid being the successful bid.

Here’s why.  Making a bid in a foreclosure sale requires due diligence that is both time consuming and costly.  Then, when most foreclosure sales are stopped by debtor’s last-minute bankruptcy filing, potential buyers quickly learn that the due diligence effort is a waste of time and money — and they stop doing it, figuring they can negotiate with the credit bidder after the sale, if the sale actually does happen.   

–Mortgage Foreclosure (Judicial)

Judicial foreclosure of a mortgage (or of a deed of trust) typically takes time — a long time.  And that’s a problem for every lienholder, other than those with large amounts of equity to absorb the accrual of interest and costs during the foreclosure process.

But if that process can somehow be expedited under applicable law, then it can be similar to what’s described above for non-judicial deed of trust foreclosures.

–State Court Receivership

A state court receivership typically has a limited function:

• to displace debtor’s untrustworthy management with a receiver for the purpose of preserving property while litigation proceeds (the litigation is, typically, a mortgage foreclosure);
• to liquidate the property, by a receiver’s sale, after a successful conclusion of the litigation; and
• to distribute the net liquidation proceeds (after all costs of the receivership are paid) to creditors in the order of their relative priorities—but rarely does anyone other than the petitioning lienholder receive anything from a receivership. 

Receivership is an important tool in the limited circumstances for which it is designed.  But outside such limited circumstances, receiverships are cumbersome, costly and ineffective to maximize value.

–Involuntary Bankruptcy

Only an unsecured or under-secured creditor can join an involuntary bankruptcy petition under § 303(b) as petitioner.  That’s because an involuntary bankruptcy is designed to protect unsecured creditors. 

A primary occasion for creditors to file an involuntary petition is when they suspect that debtor’s assets are going south and that a bankruptcy is needed to (i) prevent such action in the future, and (ii) utilize the powers of the Bankruptcy Code to recover transferred assets as preferences, or as fraudulent transfers, or as etc.

In-the-money secured creditors (including under-secured creditors) will usually want to focus, instead, on direct action to recover their collateral — even if such such creditors believe their collateral is being wrongfully transferred away.  That’s because:

• only the bankruptcy estate will have the post-petition power to avoid transfers; and
• any avoided transfer is likely to be free and clear (under § 551) of the secured creditor’s pre-petition lien.

Further, an involuntary petitioner incurs the possibility of significant liability for a mistaken petitioning effort, under such provisions as § 303(i).

Conclusion

So, there it is: a hierarchy of methods for a secured creditor to liquidate its collateral — from most-effective at maximizing value to least-effective.

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Footnote 1.  Chapter 7 does not work because a Chapter 7 trustee will abandon fully encumbered assets, instead of selling them.

Footnote 2.  A sale under Chapter 12 is also under § 1206.

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