Magento – Magento get product collection via custom observer

You can add this in the upsell template o in the observer (but in this case you still have to modify the upsell template).

$byCategory = array();
$noCategory = array();
foreach ($this->getItemCollection()->getItems() as $item) {
    $categoryIds = $item->getCategoryIds();
    $categoryFound = false;
    if (is_array($categoryIds)) { //if item has categories
        foreach ($categoryIds as $categoryId) { //match the item with the categories
             if ($categoryId == Mage::app()->getStore()->getRootCategoryId()) {
                  continue;
             }
             if (!isset($byCategory[$categoryId])) {
                 $byCategory[$categoryId] = array();
             }
             $byCategory[$categoryId][] = $item;
             $categoryFound = true;
        }
    }
    if (!$categoryFound) {//if the item is not in a category
        $noCategory[] = $item;
    }
}

Now add the products that are not in a category at the end of the array so you won't duplicate any of the code below.

if (count($noCategory) > 0) {
    $byCategory[0] = $noCategory;
}

Now you should have the items split by categories.
To display them do this:

<?php foreach ($byCategory as $categoryId=>$items) : ?>
    <?php if ($categoryId) : ?>
        <?php $category = Mage::getModel('catalog/category')->setStoreId(Mage::app()->getStore()->getId())->load($categoryId)?>
        <a href="<?php echo $category->getUrl()?>"><?php echo $category->getName()?></a>
    <?php else : ?>
        <span><?php echo $this->__('Not Categorized')?></span>
    <?php endif;?>
    <?php foreach ($items as $item) : ?>
         <!-- HTML for displaying a product goes here -->
    <?php endforeach;?>
<?php endforeach ;?>

To answer the question. You would use this (not very different than your version):

$productCollection = Mage::getResourceModel('catalog/product_collection')
                        ->addAttributeToSelect(array('name', 'image', 'price'))
                        ->addAttributeToFilter('status', array('eq' => Mage_Catalog_Model_Product_Status::STATUS_ENABLED));

Mage::getSingleton('cataloginventory/stock')
    ->addInStockFilterToCollection($productCollection);

$this->_productCollection = $productCollection;

But I don't know exactly what causes your error, because it seems related to the fact that the getSubmitUrl/getAddToCartUrl product param is boolean false, and not to the collection per se.