DRAFT
FOR DISCUSSION ONLY
UNIFORM FORECLOSURE BY POWER OF SALE ACT
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
FEBRUARY, 2000
UNIFORM FORECLOSURE BY POWER OF SALE ACT
WITH PREFATORY NOTE AND REPORTER’S NOTES
Copyright© 2000
By
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or
reporter’s notes, have not been passed upon by the National Conference of Commissioners on Uniform State Laws or
the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners and the
Drafting Committee and its Members and Reporters. Proposed statutory language may not be used to ascertain the
intent or meaning of any promulgated final statutory proposal.
DRAFTING COMMITTEE ON
UNIFORM FORECLOSURE BY POWER OF SALE ACT
CARL H. LISMAN, 84 Pine Street, P.O. Box 728, Burlington, VT 05402, Chair
LANI LIU EWART, Suite 1800, Alii Place, 1099 Alakea Street, Honolulu, HI 96813
REED L. MARTINEAU, P.O. Box 45000, 10 Exchange Place, Salt Lake City, UT 84145
ROBERT L. McCURLEY, JR., P.O. Box 861425, Tuscaloosa, AL 35486
LEWIS BART STONE, 1105 Park Avenue, New York, NY 10128, Enactment Plan Coordinator
WILLIS E. SULLIVAN, III, P.O. Box 359, 1423 Tyrell Lane, Boise, ID 83701
DALE WHITMAN, University of Missouri-Columbia, 216 Hulston Hall, Columbia, MO 65211,
Reporter
EX OFFICIO
JOHN L. McCLAUGHERTY, P.O. Box 553, Charleston, WV 25322, President
JOHN P. BURTON, P.O. Box 1357, Suite 101, 123 E. Marcy Street, Santa Fe, NM 87501,
Division Chair
AMERICAN BAR ASSOCIATION ADVISOR
PAMELA SMITH BELLEMAN, P.O. Box 1122, Richmond, VA 23218-1122
EXECUTIVE DIRECTOR
FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road, Norman, OK
73019, Executive Director
WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus
Copies of this Act may be obtained from:
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
211 E. Ontario Street, Suite 1300
Chicago, Illinois 60611
312/915-0195
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Uniform Nonjudicial Foreclosure Act
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Prefatory Note
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In 1974 the National Conference of Commissioners on
Uniform State Laws adopted the Uniform Land Transactions Act
(ULTA). ULTA covered numerous aspects of real property law,
but a major portion of it was devoted to security interests
in land. In 1985, the Conference split these mortgagerelated provisions off into a separate act, the Uniform Land
Security Interest Act (ULSIA).
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No state has adopted either ULTA or ULSIA. The present
draft seeks to accomplish two things: first, a further
separation of the foreclosure provisions of ULTA and ULSIA
(i.e., USLIA Part 5) into a distinct foreclosure statute,
and second, an extensive revision of those foreclosure
provisions. Revision is appropriate because of a number of
changes in the field of mortgage foreclosure law that have
occurred since the drafting of ULTA in the early 1970s.
These changes include considerable development by the courts
of the constitutional concept of due process of law as
applied to foreclosures; an expansion of the secondary
mortgage market to include large numbers of conventional and
commercial mortgages; a vast advance in the securitization
of both residential and commercial mortgages; and the
publication of the Restatement (Third) of Property:
Mortgages in 1997.
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A few states have adopted power of sale foreclosure
statutes in recent years, but there are still about twenty
states that have not done so. This act is offered in the
belief that non-judicial foreclosure can be both fair to
borrowers and efficient from the viewpoint of lenders, and
hence a superior form of foreclosure for all of the affected
parties.
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The delays and inefficiency associated with foreclosure
by judicial action are costly. They increase the risks of
vandalism, fire loss, depreciation, damage, and waste. The
resulting costs raise the cost of private mortgages and
significantly erode the economic value of government subsidy
programs involving mortgages. They add to the portfolio of
foreclosed properties held by secondary mortgage market
investors and government lenders, insurers, and guarantors
of mortgages. The availability of a uniform, less
expensive, and more expeditious foreclosure procedure will
ameliorate these conditions, and will facilitate the sale
and resale of secured real estate loans.
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The desirability of nonjudicial foreclosure is emphasized
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by the successful implementation of two federal statutes
that permit the U.S. Department of Housing and Urban
Development to foreclose by power of sale the mortgage loans
it holds. See Multifamily Mortgage Foreclosure Act, 12
U.S.C.A. §§ 3701-3717, adopted in 1981; Single Family
Mortgage Foreclosure Act, 12 U.S.C.A. §§ 3751-3758, adopted
in 1994; regulations applicable to both acts at 24 C.F.R. §§
27.1 - 27.123.
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Features of the present draft
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Why nonjudicial foreclosure? The fundamental premise of
this Act is that, in the great majority of cases, judicial
involvement in foreclosure is unnecessary, simply because
there is no dispute between the debtor and creditor. The
note and security agreement are indeed valid, the payments
are indeed in default, and the debtor typically has no
defense to foreclosure. Of course, there are exceptional
cases in which a defense exists and deserves to be heard,
but it makes little sense to force all foreclosures into
court because a small fraction of them involve disputes of
law or fact. Using the time of judges and the machinery of
the courts to conduct foreclosures is therefore often a
misallocation of public funds as well as a waste of the
secured creditor’s resources.
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Foreclosure is intended to accomplish two discrete
purposes: (1) to evaluate the collateral and (2) to
liquidate it. Evaluation is necessary in order to determine
whether the lender has a surplus (to be distributed to the
debtor and junior lienors) or a deficiency (to be demanded
from the debtor and others who are personally liable on the
debt). Liquidation is necessary because the lender, in
nearly all instances, is not in the business of owning real
property and does not want to retain the collateral for the
long term.
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However, there is no overarching principle that requires
the evaluation and liquidation functions to be accomplished
in a single process. Indeed, a persuasive case can be made
that when both functions are done at once, as in the case of
the traditional auction sale, both are likely to be done
inefficiently. See Debra Pogrund Stark, Facing the Facts:
An Empirical Study of the Fairness and Efficiency of
Foreclosures and a Proposal for Reform, 30 U. Mich. J. L.
Reform 639, 677-685 (1997).
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Types of foreclosure. In recognition of these facts,
this draft gives lenders the opportunity (although not the
duty) to bifurcate the evaluation and liquidation functions.
It provides for three methods of foreclosure, and permits
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the secured creditor to elect the method to be used. The
first is conventional foreclosure by means of an auction
sale. Here both evaluation (by means of the high bid at the
sale) and liquidation (by means of a foreclosure deed to the
high bidder) are combined.
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The second method authorized by this draft is foreclosure
by negotiated sale. Such a sale will be consummated in much
the same way as other real property sales; the property may
be listed by a real estate broker and advertised
extensively. This is usually a very effective way of
liquidating the property, but has not been used in this
country in the past as a method of evaluating the property
for purposes of foreclosure because of concern about the
potential for collusive price-setting between the secured
creditor and the purchaser. In the procedure authorized in
this Act, however, that concern is eliminated because the
debtor and any junior interest-holders can simply disapprove
the sale if they are dissatisfied with the price, and their
disapproval will force the creditor to abandon the
negotiated sale and resort to a different method of
foreclosure. In many cases, however, it is believed that
the price will appear adequate to those parties and they
will permit the sale to proceed.
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The third foreclosure method authorized by this draft is
foreclosure by appraisal. This method accomplishes only the
first function of foreclosure, namely the evaluation of the
collateral. It does not liquidate the property, but rather
leaves it in the hands of the secured creditor, who will
have the burden of liquidating it after the foreclosure is
completed. To offset the lender’s approximate costs in
holding and marketing the property, the lender is required
to distribute as the foreclosure amount only 90% of the
first $1 million of the property’s appraised value, and 97%
of the excess value above $1 million. These percentages are
consistent with available empirical data on lender losses
from foreclosed property acquired by credit bid at
conventional foreclosure sales.
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Foreclosure by appraisal incorporates several safeguards
to ensure the integrity of the appraisal’s result. The
lender selects the appraiser, but the appraiser must meet
reasonable professional standards of qualification and
cannot be related to the lender. In addition, a debtor or
junior interest-holder who is dissatisfied with the
appraisal’s results can seek a judicial determination of
value, which will then be applied in substitution of the
value fixed by the appraiser.
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It is believed that with all three of these foreclosure
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methods, sufficient protections have been included to assure
the legitimate interests of debtors and junior interestholders. However, at this point the drafting committee has
not made a commitment to ultimate adoption of any
foreclosure method except the auction sale. The other two
methods are presented here in an attempt to demonstrate
their functionality and to expose them to comment, but with
the recognition that the drafting committee may not see fit
to adopt them.
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Irrespective of the method of foreclosure selected by the
secured creditor, the foreclosure cannot occur less than 90
days after the giving of the original notice of foreclosure.
During this period, any person whose interests will be
extinguished by the foreclosure has the right to redeem the
collateral from the security interest, but must pay the
accelerated balance due in order to do so.
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The “residential debtor” concept. This draft preserves,
with some changes, the “residential debtor” concept employed
(and termed the “protected party”) in ULTA and ULSIA. It
recognizes two classes of debtors: residential debtors and
everyone else. Residential debtors are assumed to need
additional legal protections from foreclosing creditors that
are not essential to other persons.
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“Residential debtor” includes both a person who has an
owner-occupied home on which a security interest exists, and
anyone who is personally liable on an obligation that is
secured by the home of the obligor or someone related to the
obligor. “Home” is used here as a shorthand for
“residential real property”, which must not be larger than
ten acres nor contain more than four dwelling units.
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Thus, “residential debtor” encompasses not only the usual
consumer borrowers on home mortgage loans, but also
relatives who guarantee their loans and purchasers who take
homes subject to, or with an assumption of, existing
mortgages.
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Four specific protections are provided for residential
debtors in this draft. The first relates to the notices of
default and foreclosure that must be sent to secured
creditors. In general, debtors may agree to receive notice
by any reasonable means, including electronic mail or
facsimile. However, residential debtors are entitled to
written notice, either delivered in person or transmitted by
mail or other courier service, and they may not waive their
right to such notice. This provision recognizes that other
forms of communication are not as reliable, particularly in
residential settings.
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Second, the cure period allowed to debtors to reinstate
their loans without acceleration is ordinarily thirty days
after a notice of default is given. This period may be
reduced by agreement of the parties to as little as ten
days, but only if no debtor is a residential debtor.
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Third, the qualifications for appraisers under Section
207 (foreclosure by appraisal) differ for residential real
property than for nonresidential property. These
distinctions are imposed simply because of the different
skills involved in these two types of appraisals.
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Fourth, an optional provision, § 210(c), precludes the
entry of deficiency judgments against residential debtors.
Deficiencies may still be asserted against guarantors and
sureties who are related to such debtors.
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Systems of notice. Power of sale foreclosure statutes
presently in effect may be divided into one-notice and twonotice systems. In a two-notice system, the secured
creditor typically is required to send a notice of default,
and after the passage of some time period, a second notice
of foreclosure. Depending on the state, the first notice
may or may not coincide with an acceleration of the debt.
If it does not, the period between the first and second
notices (or some part of that period) may be thought of as a
“cure” period, during which only arrearages need be paid to
put the loan back “on stream.”
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The present draft imposes a “two-notice” system. Debtors
are given a notice of default and a 30-day period to cure
arrearages before a notice of foreclosure may be given to
them. This time period may be reduced to ten days by
agreement for nonresidential debtors, and is reduced to ten
days for all debtors if a prior notice of default has been
given and cure made within the previous twelve-month period.
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No provision is made in this draft for giving the notice
of default to junior lienholders, irrespective of whether
the debtor is a residential debtor. The drafting committee
may wish to consider whether junior lienholders should also
be entitled to such a notice, so that they can cure
arrearages in order to stave off foreclosure.
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In addition to these two notices, all affected parties
will receive further warning that the foreclosure is about
to occur. In the case of foreclosure by auction, a copy of
the advertisement of the sale must be sent to them (although
it may be included with the notice of foreclosure). If
foreclosure is by negotiated sale, the affected parties must
be given a notice informing them of the date and price of
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the proposed sale. In the case of foreclosure by appraisal,
they will receive notice of the appraisal report.
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Due process: notice and hearing. When a governmental
entity forecloses a mortgage, it is reasonably well
established that it must comply with the demands of the Due
Process Clause, including the giving of notice reasonably
calculated to inform those whose rights are affected, and
the provision of a hearing at which such persons may present
defenses to the foreclosure.
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Whether these protections are also required when a
private creditor forecloses is not settled. However,
irrespective of the requirements of Due Process, fundamental
fairness would seem to demand that all persons whose rights
may be destroyed by a foreclosure should have advance notice
of the proceeding and the opportunity to show why it should
not go forward.
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This draft therefore provides (in Sections 203 and 204)
for notice to all those whose property rights are put at
risk by a foreclosure. It also provides, in Section 210, an
opportunity for any other person who wishes to receive
notice of the foreclosure to file a request for such notice
in the public records.
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In addition, this draft provides debtors and other
affected parties (Section 208) the right to an informal
meeting with a responsible representative of the secured
creditor at a convenient location to present reasons why the
foreclosure should not go forward. This meeting, which will
be held only if it is affirmatively requested, has two
objectives. The first is to guard debtors against the
fundamental unfairness of a mistakenly-conducted foreclosure
that is legally improper. The second is to ensure that
foreclosure under this Act is compliant with the Due Process
Clause when a governmental agency forecloses. While the
hearing requirements of Due Process are not entirely clear,
it is believed that a meeting by the debtor with a
responsible representative of the governmental agency can
satisfy them.
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It might be argued that the informal meeting process
created by this draft is unnecessary because a debtor or
junior lienor can always bring an action to enjoin an
improper foreclosure. However, this step requires a good
deal of affirmative effort by the plaintiff – the retaining
of counsel, typically at significant cost, and the pursuit
of the litigation. It is not clear that this option
satisfies the demands of Due Process, nor that it is
adequate to protect unsophisticated debtors.
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Judicial intervention. In a great majority of cases,
foreclosures under this Act are expected to proceed without
judicial involvement. However, there are a number of
situations in which a party may seek and obtain the
intervention of a court. For example, a party who believes
that there has been no default under the security agreement
may seek a judicial review of that issue. Similarly, a
party who objects to the correctness of the appraisal in a
foreclosure by appraisal may seek a court determination of
fair market value.
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A court may also be asked to postpone a foreclosure, to
determine the priority of competing security interests, to
direct foreclosure in bulk or by parcels, to marshal assets
by directing the order in which parcels should be sold, or
to direct the order of distribution of the proceeds of a
foreclosure. In these situations the court serves as a
“safety valve,” guarding against improper or overreaching
actions by the foreclosing creditor.
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Omitted parties. Mortgage law uniformly holds that a
person who is not made a party to a judicial foreclosure is
not bound by it, and such a person’s interest survives the
foreclosure. However, in foreclosures by power of sale,
there is little legal authority as to the effect of failure
to provide notice to holders of junior interests. This
draft explicitly provides that holders of junior interests
are not bound if they are not given notice; hence, their
position is like that of an omitted party in a judicial
foreclosure.
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With respect to tenants under leases junior to a
mortgage, a further issue arises: may a tenant who has been
omitted purposely (because the lender wishes to preserve
rather than destroy the tenant’s lease) intervene in the
foreclosure for the purpose of getting the lease terminated?
Case law on this point is about evenly divided. The
position of this draft is that the tenant may not do so. In
other words, a foreclosing lender under this draft has the
choice of whether to destroy or preserve individual junior
leases, a right sometimes referred to as “pick and choose.”
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Redemption. In general, mortgaged property may be
redeemed in either of two ways: by equitable redemption
before foreclosure, and by statutory redemption after
foreclosure. All states recognize equitable redemption, but
only about half of the states have statutes permitting
redemption after foreclosure. This draft recognizes the
fundamental right to equitable redemption until the date of
foreclosure, but does not make any provision for statutory
redemption. While statutory post-sale redemption
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occasionally benefits a debtor or junior lienor, it is
believed that in the aggregate such parties are
disadvantaged by the depression in foreclosure bid prices
that results from the uncertain title status introduced by
statutory redemption.
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Title from foreclosures. No matter which method of
foreclosure is employed, this draft provides that completion
of the foreclosure process raises a presumption of
compliance with the notice, advertising, and other
procedural requirements of this act. This presumption is
conclusive in favor of good faith purchasers for value of
the collateral. However, the presumption does not make
foreclosure titles impregnable. The reason is that defects
outside the scope of the Act may exist. For example, the
debtor may not have had good title to the collateral when
the security interest was given; the security agreement
itself may be a forgery or otherwise void; or the debtor may
not in fact have been in default on the secured obligation.
The extent to which such defects will cause a court to set
aside a sale, even when the property has passed to a bona
fide purchaser, is left to other law.
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Deficiency liability. In general, this draft permits
recovery of deficiencies by the foreclosing creditor and by
“sold-out” junior lienholders (assuming, of course, that the
obligation is a recourse debt). However, an optional
subsection prohibits deficiency judgments against
“residential debtors.”
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A deficiency judgment is available to the foreclosing
creditor, no matter which of the three methods of
foreclosure is used. However, if the foreclosure is by
auction, deficiency liability is limited by the “fair market
value” concept. Any person against whom a deficiency is
sought may seek a court determination of the property’s
value as of the date of foreclosure, and the amount thus
determined is substituted for the foreclosure sale proceeds
in calculating the deficiency. This procedure recognizes
that auction foreclosure sales often do not bring a price
that approximates the market value of the property, and it
encourages foreclosing creditors to make efforts to generate
interest among potential bidders. No similar fair market
value determination is available or needed in the case of
foreclosure by negotiated sale or by appraisal.
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Note on the terminology of foreclosure. The term
“foreclosure” is often used in modern practice in a sense
that is inconsistent with its historical origins. In its
inception in England, what was “foreclosed” was the debtor’s
“equity of redemption” – that is, by foreclosure the debtor
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was precluded from redeeming his or her land from the
mortgage. Thus, one did not, properly speaking, “foreclose
a mortgage,” but rather foreclosed the equity of redemption.
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Today, however, terms “foreclose a mortgage” or
“foreclose a deed of trust” are in common use and introduce
no apparent confusion. This Act follows the modern pattern,
and refers to “foreclosing a security interest” in real
property and any accompanying personal property.
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Other issues. There are several possible provisions that
the drafting committee may wish to consider adding to this
draft. The list of such possibilities below is based in
part on the very thorough article by Professor Roger
Bernhardt, ULSIA’s Remedies on Default – Worth the Effort?,
24 Conn. L. Rev. 1001 (1992).
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! Choice of law. Mortgage foreclosure has traditionally
been considered a “real” proceeding, and therefore
inevitably governed by the law of the state in which the
real property is located. Should this view be reconsidered?
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! Preforeclosure remedies.
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! FNMA/FNMLC uniform instruments.
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! Alternative dispute resolution.
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! Bankruptcy.
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! Nonmonetary obligations.
This draft simply leaves to
other law such preforeclosure remedies as receiverships,
mortgagees in possession, and enforcement of assignments of
rents. These remedies have been the subject of recent
legislation and litigation in many states. Should a uniform
foreclosure act deal with them?
This draft makes no
express reference to the secondary market’s uniform
instruments. The cure period provisions of Section 202 are
compatible with those instruments, but nothing is said about
them. Should it be?
This draft says nothing
about the possibility of a mediated or arbitrated settlement
in lieu of foreclosure. Should these possibilities be
covered explicitly?
Conceivably, there could be an
additional form of foreclosure: foreclosure by arbitration.
Would additional references to ADR be helpful?
The mortgagor who files bankruptcy, often on
the eve of foreclosure, is a staple of modern real property
practice. However, this draft make no express reference at
all to bankruptcy. Are there references or substantive
provisions that should be added on this topic?
While most mortgage obligations
are monetary, occasionally mortgages are given to secure
nonmonetary duties. In such cases, it is necessary to
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reduce the obligation to a monetary equivalent, and this is
likely to require the intervention of a court. Hence, a
nonjudicial form of foreclosure such as provided by this Act
probably is not practical. Should the draft expressly
exclude nonmonetary obligations from its coverage?
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ARTICLE 1
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GENERAL PROVISIONS
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SECTION 101.
SHORT TITLE.
This [Act] may be cited as
the Uniform Nonjudicial Foreclosure Act.
SECTION 102.
DEFINITIONS.
In this [Act]:
(1) “Acceleration” means a notice sent or other action
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taken by the secured creditor that makes all obligations
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secured by a security agreement immediately due.
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(2) "Aggrieved party" means a party entitled to a
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remedy and includes the debtor, the secured creditor, a
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person having an interest in the real property that will be
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affected by foreclosure, and a purchaser or prospective
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purchaser at a foreclosure.
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(3) "Agreement" means the bargain of the parties as
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found in their language and by implication from other
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circumstances.
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(4) "Collateral" means the real property subject to a
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security interest.
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property covered by the security agreement.
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The term also includes any personal
(5) “Common interest community” means real property
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with respect to which a person, by virtue of ownership of a
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unit, is obligated to pay for real property taxes, insurance
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premiums, maintenance, or improvement of other real property
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described in a declaration.
“Ownership of a unit” does not
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include holding a leasehold interest of less than [20] years
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in a unit, including renewal options.
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(6) "Contract" means all of the legal rights and
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obligations resulting from the parties' agreement as
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affected by this [Act] and other applicable rules of law.
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(7) "Conveyance" means a transfer of real property
other than by will or operation of law.
(8) "Creditor" includes an unsecured creditor, a
secured creditor, and a trustee in bankruptcy or other
person who represents the interests of creditors.
(9) "Debtor" means a person who owes payment or other
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performance of an obligation secured under a security
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agreement, whether absolute or conditional, and whether or
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not the agreement imposes personal liability on the debtor.
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If the debtor and the owner of the real property securing
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the obligation are not the same person, the term means the
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owner of the real property in any provision of this [Act]
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dealing with collateral and the person or persons obligated
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in any provision dealing with an obligation.
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includes both where the context requires.
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The term
(10) "Deed" means a record, other than a lease or
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security agreement, that by its terms conveys title to an
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interest in real property.
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(11) “Default” means a failure to comply with the
debtor’s duties under a security agreement.
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(12) “Expenses of foreclosure” means the reasonable
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costs incurred by a secured creditor in connection with a
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foreclosure for mailing, advertising, title insurance binder
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or report (Section 205(a)), attorney’s fees to the extent
5
provided in the security agreement and permitted by law,
6
appraisal fees in the case of a foreclosure by appraisal,
7
and the fee of the person conducting the sale in the case of
8
a foreclosure by auction.
9
10
(13) “Mailing address” means:
(A) for a person who has executed a security
11
agreement or a guaranty, assumption agreement, or other
12
document in connection with a security agreement that was
13
delivered to the secured creditor or is in the secured
14
creditor’s possession, the address, if any, specified in
15
that document or, if the secured creditor has received
16
notice of a more recent address, that address;
17
(B) for a person not described in subparagraph (A)
18
but who is identified from examination of the public records
19
in [the office of the county recorder], the address, if any,
20
specified in the recorded document or, if the secured
21
creditor has received notice of a more recent address, that
22
address.
23
(C) for a person not described in subparagraph (A)
24
or (B), who is a tenant, subtenant, or leasehold assignee in
25
possession of all or part of the real property collateral,
3
1
the street address of the apartment or other unit possessed
2
by the person, with the envelope marked “To Tenant Residing
3
at:”;
4
(D) if the sources described in subparagraphs (A)
5
through (C) do not disclose a mailing address, the street
6
address of the real property collateral;
7
8
9
(E) the address, if any, determined pursuant to
Section 109.
(14) "Organization" means a corporation, business
10
trust, estate, trust, partnership, limited liability
11
company, association, joint venture, government;
12
governmental subdivision, agency, or instrumentality;
13
public corporation; or any other legal or commercial entity.
14
15
16
17
18
19
(15) "Party" means a person who engages in a
transaction or makes an agreement governed by this [Act].
(16) "Person" includes an individual and an
organization.
(17) "Residential debtor" means:
(A) an individual who owns residential real property
20
in which a security interest exists, all or a part of which
21
the individual occupies or intends to occupy as a residence
22
within two years after acquisition of ownership; and
23
(B) a person obligated, primarily or as a surety, on
24
an obligation secured by residential real property if, at
25
the time the obligation is incurred, that person is related
4
1
to an individual who occupies or intends to occupy all or a
2
part of the real property as a residence within two years
3
after acquisition of ownership.
4
(18) "Real property" means any estate or interest in,
5
over, or under land, including minerals, structures,
6
fixtures, and other things that by custom, usage, or law
7
pass with a conveyance of land though not described or
8
mentioned in the contract of sale or instrument of
9
conveyance; and, if appropriate to the context, the land in
10
which the interest is claimed.
11
interest of a landlord or tenant, and an interest in a
12
common interest community unless under other law of this
13
State that interest is personal property.
14
The term includes the
(19) “Record,” used as a noun, means information that
15
is inscribed on a tangible medium or that is stored in an
16
electronic or other medium and is retrievable in perceivable
17
form.
18
(20) "Record," used as a verb, means to take the
19
actions necessary to perfect an interest in real property
20
under [the recording act of this State].
21
(21) "Residential real property" means, in relation to
22
a residential debtor, real property not used primarily for
23
agricultural or commercial purposes and containing no
24
nonresidential uses for which the debtor is a lessor, and
25
which
26
(A) contains not more than [ten] acres, improved or
5
1
intended by its owner to be improved by not more than [four]
2
dwelling units or
3
(B) is a unit in a common interest community.
4
(22) "secured creditor" means a lender, seller, or
5
other person who has the right to foreclose a security
6
interest.
7
person who represents the person having the right to
8
foreclose.
9
The term includes an agent, trustee, or other
(23) "Security agreement" means a mortgage, deed of
10
trust, security deed, contract for deed, land sales
11
contract, lease intended as security, or other contract or
12
conveyance that creates or provides for an interest in real
13
property to secure payment or performance of an obligation,
14
whether by acquisition or retention of a lien, a lessor’s
15
interest under a lease, or title to the real property.
16
term includes the obligation being secured whether or not it
17
is embodied in a separate record.
18
on real property created by a record to secure an obligation
19
owed by an owner of the real property to an association in a
20
common interest community or under covenants running with
21
the real property.
22
The
The term includes a lien
(24) "Security interest" means an interest in real
23
property which is intended to secure payment or performance
24
of an obligation.
25
Comment
6
1
2
3
4
5
6
7
8
9
Introduction to definitions. American law recognizes
that many different interests can be created in real
property, and that many different sorts of documents can be
employed to make those interests security for debts and
other obligations. This Act makes nonjudicial foreclosure
available to virtually all consensually secured parties, no
matter what interest in land has been made the collateral
for the obligation and no matter what the nature of the
instrument creating the security interest.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Such conventional terms as “mortgage” and “mortgagor” are
not used in this Act, since they could easily be construed
as having a limiting effect on the Act’s coverage of
security interests.
Instead, this Act employs a set of
terms that have no common law or statutory roots tying them
to a particular form. In place of terms such as “mortgage,”
“contract for deed,” “trust deed,” etc., this Act
substitutes the general term “security agreement” (see
paragraph (23)). In place of “mortgagor” or “installment
purchaser” this Act substitutes “debtor” defined in
paragraph (9). In place of “mortgagee,” or “vendor,” this
Act substitutes “secured creditor” (see paragraph (22)).
Instead of enumerating the various types of real property
interest, such as “fee estate,” “leasehold,” and the like,
that can be used as security, this Act substitutes
“collateral” as defined in paragraph (4). The interest in
the collateral which is conveyed by the debtor to the
creditor or which is retained by the creditor is defined as
a “security interest” and not as a “lien” or as “title.”
Hence, it is irrelevant under this Act whether a state
follows the “lien theory” or “title theory” of mortgage law.
31
32
33
34
35
36
37
1. “Acceleration” may be accomplished by the secured
creditor’s sending a notice to the debtor or taking other
action that, under applicable law, makes the entire secured
obligation due. If a cure of a default is made under the
provisions of Section 202, any acceleration is set aside. A
notice of foreclosure given under Section 203 automatically
causes an acceleration.
38
39
40
41
42
43
44
45
46
47
2.
“Aggrieved party” is taken from ULSIA Section 11(1).
3. “Agreement” is taken from ULSIA Section 11(2). It
includes full recognition of usages in real property
business, the parties’ course of dealing and course of
performance, the surrounding circumstances, and any
agreement permitted under this Act to displace a state rule
of law. “Agreement” refers to the agreement in fact. The
word “contract,” defined in paragraph (6), refers to the
legal obligation resulting from an agreement. Whether an
agreement has legal consequences is determined by this Act
7
1
if applicable and otherwise by the general law of contracts.
2
3
4
5
6
4. “Collateral” includes all of the personal property
and all of the interests in land which are subjected to a
security interest. All of these interests in land are
subsumed under the term defined in paragraph (18) as “real
property.”
7
8
9
10
11
12
5. “Common Interest Community.” This definition is
taken from the Uniform Common Interest Ownership Act. It
encompasses condominiums, cooperatives, and planned
communities that include common areas supported by the
payments of individual owners.
6.
“Contract.”
See comment to “agreement” above.
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
7. “Conveyance.” This term is intended to include any
method of lifetime transfer of an interest in real property
other than by operation of law. Since a real property
security interest creates an interest in land, a mortgage or
other security interest is a “conveyance.” Similarly, if
the creditor assigns her or his claim secured by the
security interest and his interest in the real property of
the debtor, the “assignment” is a conveyance. Acts
sufficient to effect a transfer or conveyance are determined
by applicable law. The term thus covers all of the
different methods of effecting a voluntary and involuntary
inter vivos transfer. See paragraph (10) for definition of
a “deed.” Where this Act states a rule applicable both to
lifetime transfers and to transfers by will, the term
“transfer” is used.
28
29
30
31
32
8. “Creditor” includes both the person by whom the
secured obligation is initially enforceable, and also any
transferee or any representative of that person. If a
person acts through an agent, the “creditor” is the
principal.
33
34
35
36
37
38
39
40
41
42
43
44
45
9. “Debtor.” In most cases the person who is personally
obligated to pay the secured debt and the owner of the real
property securing the debt will be the same person at the
inception of the transaction. However, the owner may later
transfer the real property “subject to” the security
interest. In that case the definition of “debtor” includes
the transferee where the section refers to rights in the
real property and, depending on the context, means either
the person personally obligated or the person owning the
real property in which there is a security interest. In
addition, “debtor” covers guarantors, sureties,
accommodation makers, and other persons who are absolutely
or conditionally liable on the secured debt. Hence, the
8
1
2
3
4
5
term “debtor” often describes more than one person. A
person who has given a security interest, but has later
transferred all of his or her interest in the real property
and has been released from personal liability on the secured
obligation, is no longer a “debtor.”
6
7
8
9
10. “Deed.” The deed is the instrument by which a
freehold estate is transferred during the transferor’s life.
The formal requirements for validity of a deed are not
determined by this Act, but by the other law of this state.
10
11
12
13
14
11. A
imposed
secured
Section
debtor.
15
16
17
18
19
20
21
22
23
24
25
12. “Expenses of foreclosure” include the direct costs
of foreclosure, but do not include items not directly
related to foreclosure, such as payment of property taxes,
insurance premiums, or repairs. However, under other
applicable law a secured creditor may have the right to
expend money on the latter items and add the expenditure to
the balance of the obligation secured by the security
agreement. See Restatement (Third) of Property: Mortgages §
2.2 (1997). All expenses of foreclosure, including attorney
and appraisal fees, are limited to reasonable amounts, and
may also be limited by other specific laws of this state.
26
27
13. “Mailing address” is the address to which various
notices must be mailed by secured creditors.
28
29
30
31
14. “Organization” should be read in connection with the
definition of a person. “Organization” is intended to
include all legally recognized persons other than
individuals.
32
33
34
35
15. “Party” is intended to be a general term covering
persons engaging in transactions, whether they are
individuals or organizations. It includes persons acting
through agents.
36
37
38
39
40
41
42
43
16.
“default” is a non-compliance with the duties
by the security agreement (which includes the
obligation as well; see paragraph (23)). See also
202, which provides for notice of default to the
“Person.”
See Comment to “organization.”
17. “Residential debtor.” This term is used as a rough
synonym for “consumer.” A residential debtor is, in
essence, a person who owns and occupies a home in which a
security interest exists. Such persons are regarded as
needing protections from the acts of creditors that other
borrowers do not need. The requirement that the individual
must intend to occupy the property within two years after
9
1
2
3
acquisition is intended to accommodate a person who
purchases land with the expectation of constructing a home
on it.
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
18. “Real property.” This term refers to the legal
relationship or “interest” a person has against the world
with respect to an object, the physical land. It includes
common law estates, both freehold and nonfreehold, as well
as rents, servitudes and other interests which are not
estates because they do not carry with them the right of
possession of the land. The term is also used, if the
context warrants, to refer to the physical object (the land)
in which these interests may exist. Leaseholds are defined
as real property for the purposes of this Act, even though
for other purposes of state law (e.g., decedents’ estates)
they may be regarded as personal property. Interests of
cooperative apartment owners are not considered real
property under this definition if they are regarded as
personal property by other law of this state.
19
20
21
22
23
24
Even though rents are regarded under this Act as real
property, the procedures of this Act cannot be employed by a
creditor to reach or obtain rents prior to the time of
foreclosure; see paragraph 103(b)(6). However, a
foreclosure under the Act will pass title to the rents
accruing after the time of foreclosure; see Section 212.
25
26
19. “A record” is defined to include electronic
documents as well as those written on paper.
27
28
20. “To record” is defined to incorporate the
requirements of this state’s existing recording act.
29
30
31
32
33
34
35
36
37
38
39
40
21. “Residential real property” is an essential term in
defining “residential debtor” (paragraph 17). Unless it is
part of a common interest community, “residential real
property” may not exceed ten acres in size. It must have a
dwelling on it, or must be intended by its owner to be
improved with a dwelling in the future. It may not contain
more than four dwelling units, and the residential debtor
must occupy or intend to occupy one of them as a residence.
The owner of “residential real property” may rent one of the
dwelling units to a tenant who will reside there, but may
not rent any part of it to a tenant for a nonresidential
purpose.
41
42
43
44
45
22. “Secured creditor” includes a seller of real
property who retains a lien or title to the real property
sold for the purpose of securing the price, and also
includes a person, such as an institutional lender, whose
claim arises initially from a cash loan. It further
10
1
2
includes anyone to whom the right to payment or performance
of the secured obligation is assigned or transferred.
3
4
5
6
7
8
9
10
11
12
13
“Secured creditor” is defined in terms of the right to
enforce the obligation, not in terms of holding the security
interest. Ordinarily the security interest will
automatically follow the obligation, unless the two are
intentionally separated. See Restatement (Third) of
Property: Mortgages § 5.4 (1997). For example, Fannie Mae
routinely holds the promissory notes representing the loans
it acquires, but has the corresponding mortgages held in the
names of its servicers for convenience in foreclosing.
Under the definition in this Act, a servicer acting on
behalf of Fannie Mae would be the “secured creditor.”
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
23. “Security agreement.” This definition recognizes
that the title given to a document by its parties does not
necessarily indicate whether it is a security agreement.
The test is whether it creates a security interest. See
Comment to “security interest” below. The caption or title
and the precise form of the document are irrelevant. It
does not matter whether the document is in the form of a
contract or a conveyance of an interest in land, nor whether
the security interest is created by granting or by retaining
it. The security agreement includes the terms of the
obligation it secures, which is typically a promissory note.
Hence, whether a particular term of the parties’ agreement
(such as an acceleration clause or a due-on-sale clause) is
stated in the note or in the mortgage is immaterial. A lien
created to assist in the enforcement of owners’ obligations
in common interest communities or under covenants running
with land is a security agreement under this Act and can be
foreclosed under its provisions.
32
33
34
35
36
37
38
39
40
On the other hand, not all instruments that create or
transfer interests in real property do so for the purpose of
security. For example, most deeds, space leases, and ground
leases are given for the purpose of granting the economic
benefits of the conveyed interest to the recipient, not for
the purpose of securing performance of an obligation of the
grantor. If this is the case, these transactions are not
security agreements and this Act does not affect them. See
Section 109.
41
42
43
44
45
46
47
24. “Security interest.” As indicated in the preceding
comment, security interests can arise from documents labeled
in a variety of ways. Mortgages, leases, deeds, and
contracts may all create security interests. A security
interest arises when a person who holds an interest in real
property conveys it to another person to secure an
obligation owed to that person.
11
1
SECTION 103.
2
(a) Except as otherwise provided in subsection (b), this
3
[Act] applies to, and authorizes the nonjudicial foreclosure
4
of, every form of security interest in real property if the
5
debtor has agreed in substance, in the security agreement or
6
otherwise, that:
7
8
(1) the security interest may be foreclosed under the
provisions of [this Act]; or
9
10
11
SCOPE
(2) the security interest may be foreclosed by
nonjudicial process exercised by the secured creditor.
(b) This [Act] may not be used to foreclose or enforce:
12
(1) a construction lien, judgment lien, tax lien, or
13
other nonconsensual lien created by statute or operation of
14
law;
15
16
17
18
19
20
21
(2) a landlord's lien unless the parties expressly
agree that this [Act] applies;
(3) a vendor's or vendee's lien unless the lien is
created by an express agreement;
(4) an interest arising from an agreement not to convey
or encumber real property;
(5) a security interest in property in a common
22
interest community if under other law of this State that
23
property is personal property; or
24
25
(6) a security interest in rents or proceeds, or an
interest arising from an agreement for appointment of a
12
1
receiver, except that rents or proceeds of the collateral
2
accruing and becoming due after the time of foreclosure are
3
the property of the person acquiring title to the collateral
4
by the foreclosure (Section 212).
5
(c) This [Act] does not preclude or govern foreclosure or
6
other enforcement of security interests in real property by
7
judicial action or other processes authorized by law in this
8
state.
9
pursuance of foreclosure under this [Act] while a judicial
A secured creditor may not take an action in
10
proceeding is pending to foreclose the same security
11
interest or to enforce the same secured obligation.
12
However, foreclosure under this [Act] may proceed even if a
13
judicial proceeding is pending for appointment or
14
supervision of a receiver of the collateral, or for
15
collection or sequestration of rents or other proceeds from
16
the collateral.
17
Comment
18
19
20
21
22
23
24
25
26
27
28
This section extends the reach of this Act to all types
of consensual security interests in real property. The
caption of the document is irrelevant, so long as it creates
a security interest in real property and contains a
reference to nonjudicial foreclosure as required by
subsection (a) of this section. Even an absolute deed may
be foreclosed under this Act if it was given to create a
security interest in land, as determined by applicable law.
This act does not specify the circumstances or methods by
which a security interest may be created; those matters are
left to other law.
29
30
31
32
The foreclosure provisions of this Act are available only
if they are expressly agreed to by the debtor. That
agreement will ordinarily be part of the security agreement
itself, but a subsequent agreement will also be recognized.
13
1
2
3
4
5
6
7
8
9
The agreement may either be by reference to the Act itself
(e.g., “This mortgage may be foreclosed under the [State]
Power of Sale Foreclosure Act”) or by reference to the
concept of the Act (e.g., “This mortgage may be foreclosed
by a nonjudicial procedure exercised by the mortgagee” or
“This mortgage may be foreclosed by exercise of a power of
sale by the mortgagee”). The agreement need not contain a
precise reference to this Act, but need only refer to its
fundamental concept, nonjudicial foreclosure.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
The exclusions from the coverage of the Act stated in
Subsection (b) are intended to carve out security interests
that are nonconsensual (judgment, tax, and construction
liens) or are so far removed from ordinary real property
financing transactions that the parties would probably not
expect a mortgage foreclosure statute to apply to them
unless their agreement warned of its application. The
latter rationale applies to landlords’, vendors’, and
vendees’ liens. In general, liens to assist in enforcement
of covenants against owners in common interest communities
(see § 102(5)) or other covenants running with land, may be
enforced under this Act. However, subdivision (b)(6) of
this section excludes the foreclosure of association liens
on cooperative units if they are considered personal
property, as is true in some states.
25
26
27
28
29
30
Security interests in rents or other proceeds generated
by real property are outside the scope of this Act. Secured
creditors may employ a variety of methods for enforcement of
those interests in various states, including the direct
taking of possession of the funds by the secured creditor;
this Act does not add to or detract from those methods.
31
32
33
34
35
36
37
38
(c) preserves the existing authority of the courts to
foreclose mortgages and other real property security
interests. Nonjudicial foreclosure under this Act is simply
an option available to secured creditors, and they may
resort to judicial foreclosure if they wish. In some states
other processes, such as strict foreclosure, are authorized
by law and may continue to be used after adoption of this
Act.
39
40
41
42
43
44
45
In some states special statutory provisions govern the
termination of installment land contracts (contracts for
deed). A state adopting this Act may wish to consider
whether foreclosure of such contracts should be excluded
from its coverage, or alternatively whether the statute
providing for termination of installment contracts should be
repealed.
46
The final sentence of subsection (c) is intended to
14
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
prevent secured creditors from harassing debtors with a
foreclosure by nonjudicial process when a judicial
foreclosure or an action on the debt is pending. However,
judicial proceedings for appointment of a receiver or for
collection of rents and proceeds are not inconsistent with
foreclosure under this Act, and may be pursued
simultaneously with foreclosure against the real property
under this Act.
This Act does not impose a “one-action” rule, prohibiting
commencement of an action on the debt when it is secured by
real property, as is found in a few states. But it does
prohibit simultaneous pursuit of a foreclosure the Act and
an independent action on the debt. In addition, if a
foreclosure under this Act is completed against a
residential debtor, optional subsection 210(c) exempts that
person from any further liability for a deficiency.
17
SECTION 104.
PERSONAL PROPERTY
18
If a security agreement covers both real property and
19
personal property, the secured creditor may proceed under
20
this [Act] as to both the real property and personal
21
property.
22
23
24
25
26
27
28
29
30
31
32
33
34
Comment
Mortgages and other security agreements that chiefly
affect real property often contain terms encumbering some
items of personal property as well. It is permissible for
lenders to employ this Act to foreclose on the real
property, and to use other procedures consistent with
Article 9 of the Uniform Commercial Code to realize on the
security of the personal property. However, a lender may,
at its option, sweep the personal property into a real
property nonjudicial foreclosure under this Act. Any
argument that such a foreclosure fails to satisfy the
requirements of Article 9 for disposition of collateral is
eliminated by this section.
35
SECTION 105.
36
(a) Except as otherwise provided in subsections (b) and
37
VARIATION BY AGREEMENT.
(c), the parties to a security agreement may not vary by
15
1
2
agreement the effect of any provision of this [Act].
(b) The time within which a person must respond to a
3
notice sent by a secured creditor may be lengthened by
4
agreement.
5
6
(c) The parties may vary the effect of a provision that
by its terms permits the parties to agree to the contrary.
7
8
9
10
11
12
13
14
15
16
17
18
Comment
In general, the parties to a real property security
agreement have freedom of contract with respect to their
rights and remedies. However, judicial policy has provided,
almost from time immemorial, certain protections not only of
the defaulting debtor but also of other creditors. Hence,
the rights and duties associated with foreclosure under this
Act may not be modified by agreement of the parties unless
the Act specifically so provides. In addition, the parties
are permitted to lengthen by agreement the time allowed to
respond to a notice sent by a secured creditor.
SECTION 106.
SUPPLEMENTAL PRINCIPLES OF LAW AND EQUITY
19
APPLICABLE.
20
security interests in real property, including the law
21
relative to acceleration of indebtedness, capacity to
22
contract, principal and agent, marshaling of assets,
23
subrogation, estoppel, fraud, misrepresentation, duress,
24
coercion, mistake, bankruptcy, and other validating or
25
invalidating cause supplement this [Act] unless displaced by
26
a particular provision of it.
27
28
29
30
31
The principles of law and equity affecting
Comment
An act governing foreclosure cannot anticipate all
possible forms of conduct that would cause courts to
intervene in the normal foreclosure process. Historically
foreclosure has been subject to equitable principles, and
16
1
2
3
4
5
6
7
8
9
10
11
12
this Act does not change that fact. Hence, this section
provides that the fundamental principles of the common law,
worked out over centuries, continue to apply to
foreclosures. For example, a court might “deaccelerate” an
installment debt that had been accelerated under inequitable
conditions; might enjoin a foreclosure because the granting
of the security interest was tainted with fraud, duress, or
lack of capacity; might order that multiple parcels be
foreclosed in a particular order to avoid unnecessary harm
to holders of subordinate interests under the doctrine of
marshaling; or might permit an agent to pursue or defend
against foreclosure on behalf of the principal.
13
SECTION 107.
NOTICE.
14
(a) A person has notice of a fact if:
15
(1) the person knows it;
16
(2) the person has received a notice or notification of
17
18
it; or
(3) from all the facts and circumstances known to the
19
person at the time in question the person has reason to know
20
it exists.
21
(b) Except as otherwise provided in subsection (d), to
22
send or give a notice, or to notify a person, means in the
23
manner agreed, or otherwise with any costs provided for and
24
properly addressed or directed as reasonable under the
25
circumstances,
26
27
28
(1) to deposit a record in the United States Postal
Service or with a commercially reasonable carrier; or
(2) to deliver in a reasonable manner a record for
29
transmission to or re-creation in another location or
30
information processing system; or
17
1
(3) to take the steps necessary to initiate
2
transmission to or re-creation of a record in another
3
location or information processing system.
4
(c) With respect to an electronic record, to send or give
5
a notice, or to notify a person includes to initiate
6
operations that in the ordinary course will cause the record
7
to come into existence in an information processing system
8
or at an address within that system in a form capable of
9
being processed by or perceived from a system of that type
10
by the recipient, if the recipient uses, designates by
11
agreement or otherwise has designated or holds out, that
12
system or address as a place for the receipt of
13
communications of the kind sent.
14
not sent if the sender or its information processing system
15
inhibits the ability of the recipient to print or store the
16
record.
17
arrived if properly sent has the effect of a proper sending.
18
An electronic record is
Receipt within the time in which it would have
(d) In the case of a notice required to be sent by a
19
secured creditor under Sections 202 through 207, to send or
20
give a notice or to notify a person means
21
22
23
(1) to hand-deliver the written notice to the person;
or
(2) to deposit the written notice with the United
24
States Postal Service or with a commercially reasonable
25
carrier, with any costs provided for and properly addressed
18
1
to the person’s mailing address.
2
(e) A notice to which subsection (d) applies may be
3
transmitted in a manner authorized by subsection (c) if the
4
person to whom it is sent is not a residential debtor, has
5
agreed with the secured creditor that notice may be
6
transmitted in that manner, and that manner of transmittal
7
is reasonably calculated to provide actual notice to the
8
person to whom it is sent.
9
(f) A notice to which subsection (d) applies is
10
sufficient even if the notice includes information not
11
required by law or minor errors that are not seriously
12
misleading.
13
(g) A notice is received when it comes to a person's
14
attention or is delivered to and available at a location or
15
at an
16
information processing system designated by agreement for
17
that purpose in a form capable of being processed by or
18
perceived from a system of that type by a recipient, or, in
19
the absence of an agreed location or system,
20
(1) in the case of a notice that is not an electronic
21
record, it is delivered at the person's residence, the
22
person's place of business through which the security
23
agreement was made, or at any other place held out by the
24
person as a place for receipt of communications of the kind;
25
or
19
1
(2) in the case of a notice that is an electronic
2
record, it comes into existence in a system or at an address
3
in that system in a form capable of being processed by or
4
perceived from a system of that type by a recipient, if the
5
recipient uses or otherwise has designated or holds out that
6
system or address for receipt of notices of the kind and the
7
sender does not know that the notice cannot be accessed from
8
that place.
9
(h) All notices required or permitted to be sent to
10
protected parties under this [Act] must contain a warning
11
statement [in [insert predominant minority language used in
12
the State] and in any other language found by the
13
[Commissioner of Banks] to be the principal language spoken
14
by substantial number of persons engaged in transactions
15
covered by this [Act]] as follows: "This is an important
16
notice regarding your rights in real property.
17
translated immediately."
Get it
18
Comment
19
20
21
22
23
This section is derived from the Uniform Electronic
Transactions Act, and is generally consistent with the
current draft of UCC Article 2. It combines the provisions
specifying when a person “has” notice; when a person “gives”
notice; and when a person “receives” notice.
24
25
26
27
28
29
30
31
The terms “notifies,” “gives,” or “sends” are the words
used when the essential fact is the proper dispatch of the
notice, not its receipt. When the essential fact is the
other party’s receipt of the notice, that is stated.
Subsections (b), (c), and (d) provide that proper dispatch
and not its receipt satisfies the obligation “to notify” or
“to give notice.” Subsection (g) states when a notice is
received.
20
1
2
3
4
5
6
7
8
9
10
11
12
13
In most cases, the notice requirements of this Act may be
satisfied by electronic transmission. However, when a
notice required by Sections 202 through 207 is given to a
residential debtor, electronic transmission is not
permitted. These notices are regarded as so important, and
the consequences of failure to receive them so great, that
only a paper notice that is hand-delivered, mailed, or sent
by a commercially reasonable carrier to the recipient is
satisfactory.
SECTION 108.
PERSON RELATED TO.
For purposes of this
[Act] a person is related to:
(1) an individual if that person is:
(A) an organization directly or indirectly controlled
14
by the individual, the individual's spouse, or a relative by
15
blood or marriage of the individual or the individual’s
16
spouse who shares the same residence as the individual;
17
(B) the spouse of the individual;
18
(C) a brother, brother-in-law, sister, or sister-in-law
19
20
21
22
of the individual;
(D) an ancestor or descendant of the individual or of
the individual's spouse; or
(E) any other relative by blood or by marriage of the
23
individual or of the individual's spouse if the relative
24
shares the same residence as the individual; and
25
26
27
28
29
(2) an organization if that person is:
(A) any other organization controlling, controlled by,
or under common control with the organization; or
(B) a person related to the person controlling the
organization.
21
1
2
3
4
5
6
7
8
9
10
11
12
13
Comment
The definitions of this section are important in
determining who is a residential debtor under paragraph
103(17). For example, a corporation is related to an
individual if it is under the control of the individual
(subparagraph (1)(A) of this section). Under paragraph
103(17) a person obligated on a debt secured by residential
real property occupied by an individual related to him or
her is a residential debtor. Therefore, a corporation
obligated on a security interest on real property resided in
by an individual controlling the corporation is a
residential debtor.
SECTION 109.
CORRECTION OF MAILING ADDRESS.
If a
14
secured creditor has notice that the mailing address of a
15
person to whom the secured creditor is obligated to send a
16
notice is invalid or that mail cannot be delivered to that
17
person at the person’s mailing address, the secured creditor
18
shall immediately make a reasonable effort to determine a
19
correct address for that person.
20
Comment
21
22
23
24
25
26
27
28
29
30
If a mailed notice is undeliverable, the secured creditor
has a duty to make a reasonable effort to determine a
correct address. Such efforts would ordinarily include use
of any forwarding address provided by the U.S. Postal
Service, the use of at least one generally-used telephone
directory for the area in which the real property collateral
is located, and at least one nationwide internet search
database. As technology develops, other methods of address
search may also become reasonable and hence obligatory on
secured creditors.
31
SECTION 110. TRANSACTIONS CREATING SECURITY INTERESTS.
32
Whether a transaction creates a security interest depends on
33
the intent of the parties and is determined by the facts of
34
each case.
A seller's retention of legal title to real
22
1
property after the buyer enters into possession creates a
2
security interest if the retained title is intended as
3
security.
4
lessor creates a security interest.
A lease that is intended as security to the
However:
5
(a) A contract of sale of real property that grants the
6
seller the right to retain title for not more than one year
7
after the buyer enters into possession of the real property
8
does not create a security interest.
9
(b) A transaction in the form of a lease creates a
10
security interest if the consideration that the lessee is to
11
pay the lessor for the right to possession and use of the
12
real property is an obligation for the term of the lease and
13
is not subject to termination by the lessee, and:
14
(1) the lessee is bound to become the owner of the real
15
property; or
16
(2)
the lessee has an option to become the owner of
17
the real property for no additional consideration or for
18
nominal additional consideration upon compliance with the
19
lease agreement.
20
21
(c) A lease does not create a security interest merely
because:
22
(1) the present value of the consideration the lessee
23
is obligated to pay the lessor for the right to possession
24
and use of the real property is substantially equal to or is
25
greater than the fair market value of the real property at
23
1
2
3
4
the time the lease is entered into;
(2) the lessee assumes risk of loss of the real
property;
(3) the lessee agrees to pay taxes, insurance, filing,
5
recording, or registration fees, or service or maintenance
6
costs with respect to the real property;
7
8
(4) the lessee has an option to renew the lease or to
become the owner of the real property;
9
(5) the lessee has an option to renew the lease for a
10
fixed rent that is equal to or greater than the reasonably
11
predictable fair market rent for the use of the real
12
property for the term of the renewal at the time the option
13
is to be performed; or
14
(6) the lessee has an option to become the owner of the
15
real property for a fixed price that is equal to or greater
16
than the reasonably predictable fair market value of the
17
real property at the time the option is to be performed.
18
(d) Additional consideration is nominal if it is less
19
than the lessee's reasonably predictable cost of performing
20
under the lease agreement if the option is not exercised.
21
Additional consideration is not nominal if:
22
(1) when the option to renew the lease is granted to
23
the lessee, the rent is stated to be the fair market rent
24
for the use of the real property for the term of the renewal
25
determined at the time the option is to be performed; or
24
1
(2) when the option to become the owner of the real
2
property is granted to the lessee, the price is stated to be
3
the fair market value of the real property determined at the
4
time the option is to be performed.
5
Comment
6
7
8
9
10
11
12
Subsection (a), providing that no security interest is
created by retention of title to real property by a seller
under a contract of sale for not more than one year after
the buyer enters into possession of the real property, is
intended to exclude from the coverage of this Act the common
situation in which a buyer takes possession of real property
a short time before the closing.
13
14
15
16
17
18
19
20
21
22
On the other hand, where a seller retains the title for
longer than one year after the buyer enters into possession,
the other circumstances of the case must be examined in
order to determine whether a security interest was created.
In many such cases, it will be clear that a “contract for
deed” or “installment sale” transaction was intended and
that title was retained for purposes of security. If so,
the foreclosure provisions of this Act are available to the
seller if the requirements of subsection 103(a) are
satisfied.
23
24
Subsections (b) through (d) are derived from UCC § 1-203
(ALI Council Draft, 22 Nov. 1999).
25
ARTICLE 2
26
DEFAULT AND FORECLOSURE
27
SECTION 201.
28
(a) A secured creditor has a right to foreclose if
29
30
RIGHTS AND REMEDIES
(1) a failure to comply with the debtor’s duties under
the security agreement has occurred;
31
(2) all conditions that are, by the terms of the
32
security agreement, prerequisites to foreclosure have been
33
satisfied;
25
1
(3) all notices to the debtor required by the security
2
agreement and by this [Act] as prerequisites to foreclosure
3
have been given; and
4
(4) all grace periods or cure periods available to the
5
debtor by the terms of the security agreement and by this
6
[Act] as prerequisites to foreclosure have elapsed without
7
cure being made.
8
9
(b) If a secured creditor has a right to foreclose, the
secured creditor may give notice of foreclosure (Sections
10
203 and 204), and foreclose against the collateral by
11
auction (Section 205), negotiated sale (Section 206), or
12
appraisal (Section 207).
13
elected method of foreclosure must be given by the secured
14
creditor as provided in subsection 204(8).
15
16
17
18
19
20
21
22
23
24
25
Notice of the secured creditor’s
Comment
The fundamental role of this Act is to permit secured
creditors, after giving appropriate notice, to foreclose
without the necessity of judicial process. This section
defines when foreclosure is available and serves as an
overview of the foreclosure methods open to secured
creditors under this Act.
SECTION 202.
NOTICE OF DEFAULT AND RIGHT TO CURE BEFORE
FORECLOSURE
(a) A notice of foreclosure (Section 204) may not be
given until
26
(1) a default has occurred;
27
(2) each debtor has been given notice by the secured
26
1
creditor of the nature of the default and of the fact that
2
foreclosure may be initiated if a cure of the default is not
3
effected as provided in paragraph (a)(3) within 30 days
4
after the date the notice is sent; and
5
6
7
8
9
(3) no person has, within 30 days from the date the
notice of default is sent,
(i) cured the default, if the default can be cured
by the payment of money, or
(ii) commenced and proceeded diligently with actions
10
to cure the default, if the default cannot be cured by the
11
payment of money.
12
(b) This [Act] and the right to cure a default provided
13
in this section do not derogate any right to notice or to
14
cure a default provided to any party by the security
15
agreement.
16
any period to cure provided in the security agreement run
17
concurrently unless the security agreement provides
18
otherwise.
19
person who attempts to cure a default by promptly providing
20
information upon request concerning the amount due or other
21
performance required to cure.
22
23
24
25
The period to cure provided in this section and
The secured creditor shall cooperate with any
(c) The time period specified in paragraphs (a)(2) and
(a)(3) to cure a default must be reduced to:
(1) ten days if, within twelve months before the date
of the default, any debtor has exercised the right under
27
1
subsection (a) to cure a previous default under the security
2
agreement; or
3
(2)
if no debtor is a residential debtor, any period
4
the parties agreed upon in the security agreement, but not
5
less than ten days.
6
(d) If cure is made as provided in subsections (a) or (c)
7
of this section, any acceleration of the secured obligation
8
by the secured creditor is ineffective and the obligation is
9
owed as if no acceleration had occurred.
10
(e) The debtor and other persons have the right to redeem
11
the collateral from the security interest under applicable
12
principles of law.
13
time of foreclosure.
Redemption may not be made after the
14
(f) An original notice of foreclosure may not be given
15
under Sections 203 and 204 after the limitations period for
16
foreclosure of a mortgage by judicial proceeding has
17
expired.
18
Comment
19
20
21
22
23
24
25
26
This Act requires two notices prior to foreclosure, the
one specified by this section and the notice of foreclosure
itself, specified by Sections 203 and 204. The notice under
this section simply advises the debtor or debtors that a
default has occurred and that foreclosure may ensue if it is
not cured within 30 days. Non-debtor parties, such as
subordinate lienholders, are not entitled to receive this
notice, although they may cure the default if they wish.
27
28
29
30
31
The 30-day period runs from the date the secured party
gives the debtor notice of the default. If the default is
monetary, it must actually be cured within 30 days. In the
case of a nonmonetary default, however, acceleration and
foreclosure can be avoided if continuing and diligent
28
1
2
3
4
5
6
7
8
9
10
efforts to cure are made, even if a complete cure cannot be
accomplished within 30 days. However, if those diligent
efforts to cure cease before cure is completed, the secured
creditor may then immediately proceed to give notice of
foreclosure (Sections 203 and 204) without taking any other
preliminary action. Illustrations of nonmonetary defaults
include the commission of waste by the debtor, a transfer of
the property in violation of a covenant in the security
agreement, a failure to keep the real property insured, or
the like.
11
12
13
14
15
16
17
18
The security agreement may provide debtors with
additional protections, such as rights to notice and grace
periods, beyond those provided by this Act. Such
protections must be observed before notice foreclosure under
Sections 203 and 204 can be given. However, any time period
for cure under the security agreement and the time for cure
granted by subsection (a) will run concurrently unless the
parties have agreed that they will not.
19
20
21
22
23
24
25
In general, this section allows a 30-day cure period, but
under subsection (c) it may be reduced to 10 days if any
debtor has exercised the cure right during the previous
twelve months. If no residential debtor is involved, the
security agreement may reduce the cure period to as little
as 10 days. If the transaction involves a residential
debtor, the 30-day period may not be shortened by agreement.
26
27
28
If cure is made within the time permitted, subsection (d)
“deaccelerates” any acceleration of the obligation that the
secured creditor has initiated.
29
30
31
32
33
34
35
36
37
The common law equitable concept of redemption is
recognized by this Act, but is not spelled out in detail;
that is left to other law. See Restatement (Third) of
Property: Mortgages § 6.4 (1997). This Act does not deal
with the enforceability of fees, such as late fees and
prepayment fees, but leaves those issues to other law.
Since redemption requires payment of the secured obligation
in full, the cure provided by subsection (a) is not a
redemption.
38
39
40
41
Under this Act, no post-foreclosure redemption is
permissible, and the title to the collateral emerging from
foreclosure is not conditional or subject to revocation on
account of any later payment of the obligation.
42
43
44
45
Subsection (f) makes the statute of limitations for
judicial foreclosure of mortgages applicable to foreclosures
under this Act. For this purpose, the giving of an initial
notice of foreclosure under Sections 203 and 204 is the
29
1
2
3
4
equivalent of the filing of a judicial foreclosure action.
SECTION 203.
NOTICE OF FORECLOSURE: MANNER AND EFFECT OF
GIVING.
(a) Except as otherwise provided in subsection (e),
5
notice of foreclosure must be sent by the secured creditor
6
to the following persons if they can be identified as of the
7
time of recording of the notice of foreclosure:
8
(1) each debtor;
9
(2) any person specified by the debtor in the security
10
11
agreement to receive notice on the debtor’s behalf;
(3) any person who is shown by the public records [in
12
the office of the County Recorder] of the county in which
13
any part of the real property collateral is located to hold
14
an interest in the collateral which is subordinate in
15
priority to the security agreement;
16
(4) if the secured creditor holds and will foreclose on
17
security interests in personal property, any person who is
18
shown by the filings under [the Uniform Commercial Code] in
19
[the office of the Secretary of State] to hold an interest
20
in the collateral which is subordinate in priority to the
21
security agreement;
22
(5) any person who has recorded in the public records
23
[in the office of the County Recorder] of the county in
24
which any part of the real property collateral is located a
30
1
request for notice of foreclosure meeting the standards of
2
Section 211;
3
(6) any tenant, subtenant, or assignee who is residing
4
in and is in possession of any part of the real property
5
collateral under a lease having an original term of [one]
6
year or less.
7
(b) If the notice of foreclosure is deposited in the
8
United States Postal Service, it must be sent both by
9
regular mail and by registered mail, return receipt
10
requested.
11
(c) The secured creditor shall record in the [Office of
12
the Recorder of Deeds of the county or counties in which any
13
of the real property collateral is located] a copy of the
14
notice of foreclosure.
15
the real property collateral after the notice of foreclosure
16
is recorded is deemed to have been given notice of
17
foreclosure, except that such a person is deemed not to have
18
been given notice if the secured creditor notifies the
19
assignee or subtenant, within 30 days after the secured
20
creditor receives actual knowledge of the existence of the
21
person’s interest, that the interest will not be terminated
22
by the foreclosure.
23
may occur either before or after the foreclosure.
24
25
Any person acquiring an interest in
Notification by the secured creditor
(d) Failure of the secured creditor to record the notice
of foreclosure prevents operation of the automatic notice
31
1
provided by subsection (c) to persons acquiring interests in
2
the collateral.
3
(e) The secured creditor may elect not to give notice of
4
foreclosure to one or more of the persons entitled to notice
5
under this section.
6
person described in paragraphs (a)(1) through (5) who is not
7
given notice of foreclosure survives and is unaffected by
8
the foreclosure.
9
not given notice of foreclosure is discharged.
An interest in the collateral held by a
The personal liability of a debtor who is
The secured
10
creditor is liable for the actual damages sustained by a
11
person who has recorded request for notice of foreclosure
12
meeting the standards of Section 211, but who is not given
13
notice of foreclosure.
14
(f) Except as otherwise provided in subsection (e),
15
failure of the secured creditor to send notice of
16
foreclosure to the persons and in the manner specified in
17
this section has no adverse effect on the secured creditor’s
18
position with respect to the collateral or the secured
19
obligation.
20
(f) A secured creditor may, but is not required to, send
21
notice of foreclosure to any person whom the secured
22
creditor knows or believes may have an unrecorded interest
23
in the collateral which is subordinate in priority to the
24
security agreement.
32
1
Comment
2
3
4
5
6
7
8
This section is designed to provide a fair opportunity to
receive notice of foreclosure for all persons who may be
adversely affected by it. In the case of governmental
lenders and others whose actions fall under the Due Process
Clause of the federal constitution, compliance with this
section is believed to ensure that the notice requirements
of due process will be met.
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
In general, this section does not require secured
creditors to resort to factual investigation in order to
determine where notice of foreclosure must be sent. Lenders
need consult only their own records and the usual public
land title records (e.g., the recorder’s office, the court
clerk’s office, and for personal property collateral, the
office where UCC financing statements are files). An
exception exists for residential tenants holding possession
under leases for one year or less. If the creditor wishes
to eliminate such leases they must be given notice of
foreclosure, even if their leases are not recorded; this can
usually be done with a mailing to the property address. In
any event, the survival of such leases often will not be a
major concern of the foreclosing creditor, given their short
term.
24
25
26
27
28
29
30
31
32
33
Except for tenants under the short-term residential
leases just mentioned, only tenants who have recorded
evidence of their leasehold interests are entitled to notice
of foreclosure. The foreclosing creditor is not held to
constructive notice of the existence of other tenants, and
is not required to give notice even to other tenants of
which it has actual knowledge unless their interests are of
record. Foreclosure will destroy such non-recorded
interests even though their holders received no notice of
the foreclosure sale.
34
35
36
37
38
39
40
Recording of the notice of foreclosure is required. Once
a notice of foreclosure is recorded, the foreclosing
creditor need no longer worry about giving notice to persons
who acquire interests in the collateral after the time of
recording but before the foreclosure sale. The recorded
notice is analogous to lis pendens, and provides automatic
notice to such parties.
41
42
43
44
No notice of foreclosure is necessary to persons holding
interests in the property with priority superior to the
security agreement being foreclosed; such persons are
unaffected by the foreclosure and have no need of notice.
45
Since the result of failing to send notice to persons
33
1
2
3
4
5
6
7
8
9
with subordinate interests in the real property is to leave
their interests unaffected by the foreclosure (subsection
(e)), the secured creditor has the power to “pick and
choose” which interests it wishes to wipe out by
foreclosure. This power is most likely to be exercised in
the case of leases that the creditor views as desirable from
a landlord’s viewpoint, and which the creditor therefore
wishes to preserve in foreclosure.
SECTION 204.
NOTICE OF FORECLOSURE: CONTENT.
A notice
10
of foreclosure must be headed follows: “NOTICE OF
11
FORECLOSURE. THIS IS A NOTICE THAT YOU MAY LOSE YOUR RIGHTS
12
TO CERTAIN REAL PROPERTY.
13
CAREFULLY.”
14
15
READ IT IMMEDIATELY AND
(a) The notice must contain:
(1) the date of the notice, the name of each debtor,
16
the legal description and street address, if any, of the
17
real property collateral or portion thereof to be subjected
18
to foreclosure, and a description of any personal property
19
collateral to be included in the foreclosure;
20
21
22
(2) identification of the security agreement and the
particular security interest to be foreclosed;
(3) the facts establishing that the security agreement
23
is in default and a statement that the secured creditor
24
plans to foreclose;
25
(4) a statement that the secured creditor has
26
accelerated or, by virtue of the notice, is accelerating the
27
maturity of the secured obligation;
28
(5) a statement that the collateral may be redeemed
34
1
from the security interest by payment or performance of the
2
secured obligation in full before foreclosure, and the
3
amount to be paid or other action necessary to redeem;
4
(6) a statement that the secured creditor elects to
5
foreclose by auction (Section 205), by negotiated sale
6
(Section 206), or by appraisal (Section 207);
7
(7) the date on which foreclosure will occur if no cure
8
or redemption is made, and the time and place of foreclosure
9
if foreclosure will be by auction;
10
(8) a statement that the foreclosure will extinguish
11
the rights in the collateral of the person receiving the
12
notice of foreclosure, and the name of any person whose
13
rights the secured creditor has elected not to terminate by
14
the foreclosure (Section 203(f));
15
(9) a statement as to whether the debtor and any other
16
person who is personally liable on the secured obligation
17
will or will not be held liable for any deficiency; and
18
(10) and explanation of the right of the debtor to
19
request a meeting with a representative of the secured
20
creditor on the propriety of the foreclosure within fifteen
21
days after the date the notice of foreclosure is given
22
(Section 208).
23
24
25
26
Comment
The following is an illustrative notice of foreclosure
complying with the requirements of this section.
NOTICE OF FORECLOSURE
35
1
2
3
THIS IS A NOTICE THAT YOU MAY LOSE YOUR RIGHTS
TO CERTAIN REAL PROPERTY.
READ IT IMMEDIATELY AND CAREFULLY
4
5
6
7
8
1. This notice is given December 1, 200_, and affects
real property located at Lot 13, Block B, Ridgefield
Addition No. 2, in the City of Ashland, County of Pembroke,
State of Example. The street address of this property is
455 South Main Street, Ashland, Example 12345.
9
10
11
12
2. This property is subject to a first mortgage executed
by Mary and John Jones to First Financial Corp. on 23 June,
1999, and recorded in Book 455, Page 244, Official Records
of Pembroke County, State of Example.
13
14
15
16
17
3. The mortgage and its accompanying promissory note
require payments to First Financial Corp. of $1,455.00
principal and interest on the first day of each calendar
month. The payments for August 1, September 1, and October
1, 200_ have not been made.
18
19
20
21
22
23
4. First Financial Corp. is now accelerating the unpaid
balance on this promissory note. This means that the entire
balance of $137,455.34 is now due and payable. Interest
will continue to accrue on this balance at the rate of 7.5%
per annum, and will be added to the principal due until paid
in full.
24
25
26
27
28
29
30
5. The debtor and the holders of property interests
subordinate to the mortgage of First Financial Corp. may now
prevent a foreclosure of the real property only by paying
the full balance of $137,455.34 plus any accrued interest to
the date of payment. Payment must be made before the time
of foreclosure given in the next paragraph in order to
prevent foreclosure from occurring.
31
32
6. If payment is not made in this amount, First Financial
Corp. elects to foreclose by auction.
33
34
35
7. It is expected that the auction will be held on March
1, 200_ on the west steps of the Pembroke County Court House
and the real property will be sold to the highest bidder.
36
37
38
8. If that foreclosure sale is held, it will extinguish
the rights to the real property of all persons to whom this
notice is directed.
39
40
41
42
9. If the sum bid at the foreclosure sale is less than
the unpaid balance on the mortgage indebtedness and expenses
of foreclosure, the borrowers, Mary and John Jones, will not
be held personally liable for any remaining unpaid sum.
36
1
2
3
4
5
6
7
8
9
10
10. If the borrowers, Mary and John Jones, believe that
the proposed foreclosure is legally improper, they may
request a meeting with Jane A. Doe, attorney at law, who
represents First Financial Corp. in this matter, to discuss
their objections with her. She can be contacted at 123 Main
Street, City of Ashland, State of Example, or at telephone
number 123-654-3210. This meeting must be requested within
15 days after the date of this notice given above. Upon
receiving such a request she will schedule a meeting at a
mutually convenient time.
11
12
---------------------------------------------------------------
13
14
15
16
17
18
19
20
21
22
Under subdivision (1), the secured creditor may foreclose
against all of the collateral or only part of it. The
security interest will continue to exist on the part omitted
from the foreclosure until the secured obligation is fully
discharged and the expenses of foreclosure are paid. If a
portion of the collateral is not covered by the initial
foreclosure, the secured creditor may institute a subsequent
foreclosure under this Act or otherwise foreclose on the
remaining collateral if necessary at a later time. See
Section 213 regarding foreclosure on multiple parcels.
23
24
25
26
27
28
29
30
31
32
33
34
35
The notice of foreclosure automatically accomplishes an
acceleration of the obligation by virtue of compliance with
subdivision (4). Even in the exceedingly rare cases in
which the security agreement contains no acceleration
clause, an acceleration will still take place by operation
of this Act. This should impose no inconvenience on
lenders, since no rational lender wishes to foreclose
without acceleration. However, nothing in the Act prevents
a lender from voluntarily “deaccelerating” as part of a
workout agreement with a borrower, even after the notice of
foreclosure has been given. Such a deacceleration is
possible, if the lender is willing, up to the time of
foreclosure.
36
SECTION 205.
FORECLOSURE BY AUCTION.
If a secured
37
creditor elects to foreclose by auction, the requirements of
38
this section must be satisfied.
39
(a) The secured creditor shall procure a title insurance
40
binder or preliminary title report on the real property
41
collateral from a title insurance company or agency.
37
The
1
binder or report must be issued at or after the time of
2
recording of the notice of foreclosure (Section 203(e)), and
3
state the willingness of the company issuing it to insure
4
the title to the real property collateral and the exceptions
5
and exclusions from coverage to which the title insurance
6
will be subject.
7
person for inaccuracy of the binder or report.
8
binder or report is not required if a binder or report is
9
not reasonably available immediately before the foreclosure
The secured creditor is not liable to any
A title
10
sale.
11
or report available to any prospective foreclosure purchaser
12
upon request. The secured creditor, at its option, may also
13
make available to prospective foreclosure purchasers other
14
reports and information affecting the collateral which it
15
possesses, but is not liable to any person for any
16
inaccuracy in any report not prepared by the secured
17
creditor.
18
The secured creditor shall make a copy of the binder
(b) The secured creditor, after giving notice as required
19
by Sections 203 and 204, shall advertise the foreclosure
20
sale by placing an advertisement in
21
22
ALTERNATIVE A
[a publication complying with the publication
23
requirements of existing state law affecting judicial lien
24
sales.
25
frequency and period of time required for publication of
The advertisement must be published for the
38
1
2
3
notices of foreclosure of judicial liens in this state.]
ALTERNATIVE B
[a newspaper circulated in the county where the real
4
property collateral or some part of it is located.
The
5
newspaper must have a circulation of at least 10 percent of
6
the population of that county, or if no published newspaper
7
has that circulation, the advertisement must be published in
8
the newspaper having the largest circulation in that county.
9
The advertisement must appear in the section of the
10
newspaper where the type of real property being sold is
11
generally advertised for sale.
12
published on at least four days during a two-week period,
13
with the last publication at least seven days, but not more
14
than 30 days, before to the sale.
15
more than 45 days before to the sale, the advertisement must
16
be submitted on any internet site maintained by the
17
[Secretary of State] of this State for the purpose of
18
disseminating information concerning foreclosures of real
19
property, posted in a prominent place on each parcel of the
20
real property collateral if posting can be accomplished
21
without a breach of the peace, and sent to the persons who
22
were entitled to notice of foreclosure under Section 203.
23
copy of the advertisement may be included with the notice of
24
foreclosure, and otherwise must be sent in the manner
25
prescribed for notices by Section 107.
39
The advertisement must be
Not less than 21 days nor
A
The secured creditor
1
may, but is not required to, advertise the sale in any
2
additional reasonable manner that it deems desirable.]
3
4
(c) The advertisement must state or contain:
(1) the date, time, and location, by street address and
5
by floor and office number, if applicable, of the
6
foreclosure sale.
7
8
9
(2) that the sale will be made to the highest qualified
bidder;
(3) the legal description, location by street address,
10
if any, and the [property tax map number] [parcel identifier
11
number] of the real property to be sold;
12
13
14
(4) a brief description of the real property and any
personal property collateral to be sold;
(5) an address and telephone number for the secured
15
creditor, if an individual, or an employee, agent, or
16
attorney of the secured creditor who can provide information
17
concerning the collateral;
18
(6) a statement that additional information, a copy of
19
the title insurance binder or report, if available, and
20
other information or reports concerning the collateral,
21
which may be listed specifically, are available from the
22
person identified in paragraph (5);
23
(7) whether access to the collateral for the purpose of
24
inspection before foreclosure is available to prospective
25
bidders and, if so, how to obtain access; and
40
1
(8) identification of any interests in the real
2
property collateral held by a persons to whom notice of
3
foreclosure was not given, and whose interests will
4
therefore survive the foreclosure
5
(9) any other information that, in the judgment of the
6
secured creditor, may be of interest to prospective
7
purchasers of the collateral.
8
(d) If the secured creditor is authorized to grant access
9
to the collateral, the secured creditor shall reasonably
10
accommodate persons who contact the person designated in
11
paragraph (c)(5), express an interest in bidding at the
12
foreclosure sale, and request an opportunity to make
13
inspections of the collateral.
14
15
(e) The sale must be conducted during ordinary business
days and hours at a location in a county where
16
ALTERNATIVE A
17
[sales of property subject to judicial liens may be sold
18
19
20
in this state.]
ALTERNATIVE B
[some of the real property collateral being foreclosed is
21
located, is readily accessible to the public, and bears a
22
standard street address.]
23
(f) The sale must not be held less than 90 days after the
24
giving of an original notice of foreclosure (Sections 203
25
and 204), and not less than 30 days after a notice of
41
1
foreclosure given pursuant to a postponed sale (subsection
2
(k)) or a sale resulting from a change in the method of
3
foreclosure.
4
agent, or attorney of the secured creditor.
5
one hour after the time and at the place designated for sale
6
in the advertisement and the notice of foreclosure, the
7
person conducting the sale shall exhibit or distribute
8
copies of the title insurance binder or report, if any, and
9
shall commence the conduct the sale
The sale must be conducted by an employee,
10
11
12
ALTERNATIVE A
[in the manner prescribed by law in this state for the
foreclosure of judicial liens.]
13
14
15
At or within
ALTERNATIVE B
[in the following manner:
(1) Any person except the individual conducting the
16
sale may bid at the sale, including any debtor and the
17
secured creditor.
18
tendering cash, any amount up to the balance owing on the
19
secured obligation and the expenses of foreclosure.
20
The secured creditor may bid, without
(2) Written bids may be submitted before the opening of
21
the sale, and must be read aloud before the sale is opened
22
to oral bids.
23
(3) Each person bidding may be required by the person
24
conducting the sale to make a deposit, in advance of
25
bidding, of as much as 10 percent of the amount to be bid.
42
1
Deposits must be made in cash or by bank cashier’s or
2
certified check payable to the secured creditor.
3
secured creditor bids, it is required to make a cash deposit
4
only in the applicable percentage of the amount by which its
5
bid exceeds the balance owing on the secured obligation at
6
the time of the sale.
7
8
9
If the
(4) Sale must be made to the person bidding the highest
amount.
(5) The deposits of unsuccessful bidders must be
10
returned to them at the conclusion of the sale.
11
of the successful bidder must be applied in settlement of
12
the bid, or if the successful bidder fails to complete the
13
sale as required by paragraph (6), must be applied to pay
14
the costs and expenses of a postponed sale, and any balance
15
applied to reduce the secured obligation.
16
The deposit
(6) The successful bidder shall pay the remainder of
17
the bid to the person conducting the sale within three
18
business days after the day of the sale.
19
made, the sale is cancelled, and the secured creditor shall
20
conduct a postponed sale as provided in subsection (k).]
21
If payment is not
(g) The time that the auction sale is completed by the
22
auctioneer’s announcement that the property is “sold” is the
23
time of foreclosure.
24
less the expenses of foreclosure, is the foreclosure amount.
25
The proceeds of the sale must be distributed by the person
26
conducting the sale in the following order:
The highest amount bid at the sale,
43
1
(1) to the expenses of foreclosure;
2
(2) to discharge the secured obligation;
3
(3) to discharge, in the order of their priority, all
4
liens [and encumbrances] subordinate to the foreclosed
5
security interest held by persons who were given notice of
6
foreclosure;
7
8
(4) to the debtor or the debtor’s assigns.
(h) The person conducting the sale may apply for an order
9
of the [district] court directing the order of distribution
10
of the proceeds of the sale, and may invest the proceeds in
11
a reasonable manner pending the issuance of the court’s
12
order.
13
proceeds.
14
Any investment earnings must be added to the
(i) Upon payment by the successful bidder of the full
15
balance of the bid, the secured creditor shall issue and
16
deliver to the successful bidder a deed, without warranty of
17
title, conveying the collateral to the successful bidder,
18
and a copy of the title insurance binder or preliminary
19
title report, if any.
20
collateral, subject only to interests in the collateral
21
superior to the foreclosed security interest and to
22
interests in the collateral subordinate to the foreclosed
23
security interest whose holders were not given notice of
24
foreclosure.
25
The deed passes title to the
(j) Delivery of the deed creates a presumption of actual
44
1
compliance with this section and Sections 203 and 204 of
2
this [Act].
3
faith purchasers for value of the collateral.
The presumption is conclusive in favor of good
4
(k) The person conducting the sale may, for any cause the
5
person considers appropriate, postpone the sale from time to
6
time until it is completed.
7
postponement must be given at the time and place previously
8
scheduled for the sale.
9
than five business days, whether by the person conducting
Oral announcement of
If the sale is postponed for more
10
the sale or by order of a court of this state or the United
11
States, the sale must be readvertised with the new time and
12
place of sale in the manner required by this section, and a
13
copy of the advertisement must be sent to the persons and in
14
the manner prescribed by Sections 203 and 204.
15
(l) Before completion of the sale, the secured creditor
16
may elect to terminate foreclosure by auction and to
17
foreclose by negotiated sale (Section 206), by appraisal
18
(Section 207), or by judicial action.
19
described in Sections 203 and 204 must be given, stating
20
that foreclosure by auction is being terminated and
21
specifying the method of foreclosure being elected.
Notice in the manner
22
Comment
23
24
25
26
27
28
29
This section describes the procedures for foreclosure by
auction, the traditional method of foreclosing land security
interests in the United States. However, it imposes several
requirements that are designed to make the auction sale more
attractive to purchasers. These requirements include the
obtaining and exposure to prospective purchasers of a title
insurance report or binder, the potential for making other
45
1
2
3
information and reports available, and the use of internet
site advertising in addition to the usual newspaper
advertisement.
4
5
6
7
8
9
10
With respect to several aspects of the foreclosure sale,
the Act provides legislatures with the option to adopt
existing state procedures governing judicial lien sales or
to adopt the specific provisions contained in the Act.
These aspects include the location of the sale, the media
employed to advertise it, and the frequency and number of
advertisements.
11
12
13
14
The person conducting the sale may elect to postpone it.
This may be deemed expedient, for example, because of
inclement weather, the absence of sufficient bidders, or
damage occurring to the property.
15
16
17
18
19
20
21
22
23
24
The balance owing on the secured obligation (subsection
(g)) is not necessarily limited to principal and accrued
interest on the secured debt. It may include late fees,
default interest, prepayment fees, and other fees to the
extent permitted by other law of this state; the
enforceability of such fees is not governed by this Act. It
may also include expenditures made by the secured creditor
to protect the collateral, such as property tax payments,
insurance premiums, and expenditures to correct waste. See
Restatement (Third) of Property: Mortgages § 2.2 (1997).
25
26
27
28
29
30
31
32
33
34
35
36
[Any surplus from the sale, after payment of the
foreclosure costs and discharging the secured obligation, is
distributed to subordinate parties in the order of their
priority. Subsection (g) speaks of distribution to holders
of “liens and encumbrances.” Should distribution be limited
to liens, which typically are expressed as a liquidated sum
of money? What of liens for obligations that are not
liquidated or are conditional, such as a mortgage securing a
guaranty? What of non-lien junior interests, such as
easements, covenants, and leases? It would be necessary to
have a judicial determination of the dollar value equivalent
of such encumbrances. Should this be done?]
37
38
39
40
41
42
43
The secured creditor’s election to foreclose by auction
is not necessarily a final decision. Under paragraph
(k)(l), the creditor can change course and foreclose by
negotiated sale or by appraisal instead. However, all of
the persons who were entitled to notice of the foreclosure
must be given new notices if the foreclosure method is
changed.
44
SECTION 206.
FORECLOSURE BY NEGOTIATED SALE.
46
If secured
1
creditor elects to foreclose by negotiated sale, the
2
requirements of this section must be satisfied.
3
(a) The secured creditor may advertise the collateral for
4
sale to prospective purchasers by whatever methods the
5
secured creditor considers appropriate.
6
(b) The secured creditor may enter into a conditional
7
contract of sale with a prospective purchaser or, if the
8
collateral is sold in parcels, with more than one purchaser.
9
A condition of the secured creditor’s obligation to sell
10
under the contract is that no objection to the cash price is
11
made under subsection (f). The sale must be completed not
12
less than 90 days after an original notice of foreclosure is
13
given (Sections 203 and 204), and not less than 30 days
14
after a notice of foreclosure resulting from a subsequent
15
attempt to foreclose by negotiated sale under paragraph
16
(g)(1) is given.
17
(c) The contract of sale must state the equivalent cash
18
price, net of all commissions and other selling expenses,
19
for which the collateral is being sold, but the price may be
20
paid in installments or otherwise financed by the secured
21
creditor if the secured creditor and the purchaser agree.
22
The cash price thus stated is the foreclosure amount.
23
(d) The secured creditor shall send notice of the
24
proposed sale at least 30 days before the proposed sale to
25
the persons specified in subsection 203(a), by the methods
47
1
of notification specified in subsection 107(d).
2
of proposed sale must state or contain:
3
4
(1) the date on which the secured creditor proposes to
sell the collateral;
5
6
The notice
(2) the equivalent cash price stated in the contract of
sale;
7
(3) that if the sale is completed, the stated cash
8
price will be applied to the secured obligation and the
9
balance distributed as provided in subsection 205(g);
10
(4) that the person receiving the notice may inspect a
11
copy of the contract of sale by contacting an individual
12
whose name, address, and telephone number are given in the
13
notice;
14
(5) that the person receiving the notice should notify
15
the secured creditor by sending a record objecting to the
16
cash price no less than seven days before the date of
17
proposed sale if the person believes that the cash price
18
does not reflect the fair market value of the collateral.
19
(e) If the secured creditor receives no record objecting
20
to the proposed sale from any person who has been given
21
notice of the proposed sale, objecting to the cash price, by
22
a date seven days before the date of proposed sale, the sale
23
may be completed by the secured creditor in accordance with
24
the contract of sale.
25
price must be distributed as provided in subsection 205(g),
Upon completion of the sale, the cash
48
1
except that no fee may be paid to the person conducting the
2
sale.
3
for cash payment of the selling price in full to the secured
4
creditor at the time of completion of the sale, the secured
5
creditor shall nonetheless distribute cash funds to those
6
other than itself entitled to the proceeds of sale under
7
subsection 205(g).
8
purchaser such form of deed, contract for deed, or other
9
conveyance as the parties agree.
If the terms of the contract of sale do not provide
The secured creditor may deliver to the
The conveyance must be
10
recorded in the [county recorder’s office] and the time of
11
delivery of the conveyance is the time of foreclosure.
12
conveyance passes title to the collateral, subject only to
13
interests in the collateral superior to the foreclosed
14
security interest and to interests in the collateral
15
subordinate to the foreclosed security interest whose
16
holders were not given notice of foreclosure.
17
conveyance and the cash price are not thereafter subject to
18
attack by any person to whom timely notice of the proposed
19
sale was given.
20
create a presumption of compliance with this section and
21
Sections 203 and 204 of this [Act].
22
conclusive in favor of good faith purchasers for value of
23
the collateral.
The
The
Delivery and recording of the conveyance
The presumption is
24
(f) If the secured creditor receives notification by
25
record from any person who has been given notice of the
49
1
proposed sale, objecting to the cash price, before the date
2
of proposed sale, the sale must not be completed and the
3
secured creditor shall proceed as provided in subsection
4
(g).
5
(g) If the secured creditor is unable to complete the
6
proposed sale, whether because of receipt of a notice
7
objecting to the cash price as provided in subsection (f) or
8
for any other reason, the secured creditor shall send notice
9
to the persons specified in subsection 203(a), by the
10
methods of notification specified in subsection 107(d),
11
advising them whether the secured creditor will:
12
13
(1) attempt another foreclosure by negotiated sale
under this section; or
14
(2) foreclose by auction under Section 205; or
15
(3) foreclose by appraisal under Section 207; or
16
(4) foreclose by judicial proceeding.
17
Comment
18
19
20
21
22
23
24
25
26
27
28
29
This section provides a method of negotiated sale which
may in some cases be quicker and more efficient than the
traditional auction sale. However, since this method of
foreclosure requires no independent test of the property’s
market value, it may be employed only if there being no
objection to the price by those whose interests will be
wiped out by it. Those persons are entitled to notice of
the negotiated sale, and if they make a timely objection to
the proposed price, the sale cannot proceed. In that event,
the secured creditor may either attempt to make a new
negotiated sale or resort to foreclosure by auction (Section
205) or appraisal (Section 207).
30
31
32
33
If no objection is made to the price, it is in effect
conclusively deemed to be at least equal to the fair market
value of the property, and those who received notice of it
cannot subsequently make a collateral attack on it.
50
1
2
3
4
5
6
7
8
9
10
11
12
13
The secured creditor may use real estate brokers, various
forms of advertising, and any other marketing devices it
considers desirable. However, the cash price to be credited
against the debt must be a price net of commissions and
other sale expenses. For example, if the contract of sale
provides for a gross price of $100,000, but the secured
creditor will be liable for a commission of $6,000, escrow
and closing fees of $500, and title insurance expense of
$1,000, the cash price is $92,500. This is the figure of
which the debtor and junior interest holders must be
notified, and to which they must not object if foreclosure
by negotiated sale is to go forward.
SECTION 207.
FORECLOSURE BY APPRAISAL.
If a secured
14
creditor elects to foreclose by appraisal, the requirements
15
of this section must be satisfied.
16
(a) The secured creditor shall order an appraisal of the
17
collateral.
The appraisal must be made within 60 days
18
before the date of foreclosure stated in the notice of
19
foreclosure (Section 204), and must state the fair market
20
value of the collateral after deduction for any liens or
21
encumbrances superior to the security interest being
22
foreclosed.
23
(b) The appraisal must be made by an appraiser who is not
24
related to the secured creditor (Section 108) and holds the
25
following qualifications:
26
27
28
29
30
(1) If the collateral is residential real property, the
appraiser shall be:
(A) designated as a certified residential appraiser
by the [Appraisal Certification Board] of this State; and
(B) a member of the National Association of
51
1
Independent Fee Appraisers or its successor organization
2
with an IFA designation or a member of the Appraisal
3
Institute with an SRA designation.
4
5
(2) If the collateral is not residential real property,
the appraiser shall be:
6
7
(A) designated as a certified general appraiser by
the [Appraisal Certification Board] of this State; and
8
9
(B) a member of the National Association of
Independent Fee Appraisers or its successor organization
10
with an IFAS designation or a member of the Appraisal
11
Institute with an MAI or SRPA designation.
12
(c) The secured creditor shall send notice of the
13
appraisal report to the persons specified in subsection
14
203(a) by the methods of notification specified in
15
subsection 107(d), at least 30 days before the time of
16
foreclosure.
17
accompanied by a copy of the appraisal report and state:
The notice of the appraisal report must be
18
(1) the proposed date of foreclosure;
19
(2) the appraised value, as stated in the appraisal
20
21
22
report;
(3) that title to the collateral will vest in the
secured creditor on the date of foreclosure; and
23
(4) the foreclosure amount
24
(5) that the foreclosure amount will be applied to the
25
secured obligation and the balance distributed in the order
26
provided in subsection 205(g).
52
1
(d) Any person to whom notice of an appraisal report is
2
sent under subsection (c) who believes that the appraisal
3
report does not properly reflect the fair market value of
4
the collateral may commence an action under Section 209 for
5
a determination of the fair market value of the collateral.
6
The action must be commenced before the recording of the
7
affidavit required by subsection (e).
8
determination of fair market value must be substituted for
9
the appraised value shown in the appraisal report.
10
The court’s
(e) The date of foreclosure must be not less than 90 days
11
after an original notice of foreclosure is given (Sections
12
203 and 204).
13
creditor shall record an affidavit in the [county recorder’s
14
office] containing the following:
On the date of foreclosure the secured
15
(1) identification of the security interest;
16
(2) identification of the debtor and of persons who
17
hold subordinate interests in the collateral to whom notice
18
of foreclosure was given under Section 203 and their
19
interests; and
20
21
22
(3) a statement that title to the collateral has passed
to the secured creditor.
(f) Recording of the affidavit passes title to the
23
collateral to the secured creditor, subject only to
24
interests in the collateral superior to the foreclosed
25
security interest and to interests in the collateral
53
1
subordinate to the foreclosed security interest whose
2
holders were not given notice of foreclosure (Section
3
203(f)).
4
thereafter subject to review.
5
creates a presumption of compliance with this section and
6
Sections 203 and 204 of this [Act].
7
conclusive in favor of subsequent good faith purchasers for
8
value of the collateral. The time of recording of the
9
affidavit shall be the time of foreclosure.
10
The appraised value of the collateral is not
Recording of the affidavit
The presumption is
(g) The foreclosure amount a sum equal to [90] percent of
11
the first [$1 million] of appraised value and [97] percent
12
of the amount of the appraised value exceeding [$1 million],
13
minus the expenses of foreclosure.
14
must be distributed by the secured creditor in the order
15
provided in subsection 205(g).
The foreclosure amount
16
Comment
17
18
19
20
21
22
23
24
This section provides a method of foreclosure that does
not involve any sale to a third party. Instead, title to
the collateral passes directly to the secured creditor. The
foreclosure amount is determined by reference to a fair
market value appraisal by an appraiser unrelated to the
secured creditor. However, anyone affected by the
foreclosure may elect to seek and obtain a judicial
determination of value instead.
25
26
27
28
29
The operation of this section is in many ways similar to
strict foreclosure, a process that is often employed to
foreclose mortgages in Connecticut and Vermont. However,
under this section no judicial involvement is necessary
unless an aggrieved party seeks a review of the appraisal.
30
31
32
33
The foreclosure amount is 90% of the first one million
dollars of the appraised value, and 97% of any excess of
value over and above one million dollars. This reduction
from the appraised value is made to reflect the fact that
54
1
2
3
4
5
6
7
8
9
10
11
12
lenders usually have significant costs in holding and
disposing of real property that they acquire in foreclosure.
The largest category of such costs usually consists of a
brokerage commission and other marketing expenses in
connection with a resale of the property. Other costs
include property taxes, insurance, maintenance, and
management services during the lender’s holding period. The
percentage reduction provided in the Act is a reasonable
approximation of these costs. While in a given case the
lender’s costs might be greater or smaller than the
percentage reduction provided in the Act, it has the great
advantage of certainty and simplicity.
13
14
15
16
17
18
The operation of this section may be illustrated as
follows. Assume that the appraised value of the collateral
is $600,000 and that expenses of foreclosure total $20,000.
The foreclosure amount is therefore 90% of $600,000, or
$540,000, less the expenses of foreclosure of $20,000.
Hence the foreclosure amount is $520,000.
19
SECTION 208.
MEETING ON PROPRIETY OF FORECLOSURE.
20
(a) A debtor or any other person to whom notice of
21
foreclosure is required to be given (Section 203(a)) may
22
request a meeting to challenge the legal propriety of the
23
foreclosure.
24
secured creditor no later than 15 days after the notice of
25
foreclosure is given.
26
request for a meeting, the secured creditor shall cause a
27
responsible representative to schedule a meeting with the
28
person requesting it at a mutually agreeable time.
29
representative may be an employee, agent, servicer, or
30
attorney of the secured creditor.
31
at a location reasonably convenient to the real property
32
collateral unless the person requesting the meeting and the
33
representative mutually agree on a different location.
The request must be made by notice to the
If the secured creditor receives a
55
The
The meeting must be held
If
1
more than one request for a meeting is received, the secured
2
creditor may attempt to arrange a consolidated meeting, and
3
the persons requesting meetings shall cooperate reasonably
4
with the secured creditor’s effort to do so.
5
(b) A meeting under subsection (a) is informal, and the
6
rules of evidence do not apply.
The parties may, but need
7
not, be represented by attorneys.
8
have access to the secured creditor’s records that provide
9
evidence of the grounds for foreclosure and shall consider
The representative shall
10
the objections to foreclosure of the person or persons
11
requesting the hearing.
12
that the foreclosure is legally improper, the representative
13
shall order a discontinuation of the foreclosure.
14
the representative may permit the foreclosure to continue.
15
Within ten days after the meeting the representative shall
16
prepare and mail to the person or persons who requested the
17
meeting a written statement of the determination and the
18
reasons therefor.
19
the person requesting the meeting, and the reasons stated by
20
the representative do not preclude any person’s raising of
21
other grounds for or objections to foreclosure in any
22
subsequent judicial proceeding.
23
own expenses in connection with the meeting.
24
25
If the representative determines
Otherwise
The objections to foreclosure stated by
Each party shall bear its
(c) If a person requesting a meeting under subsection (a)
is dissatisfied with the determination made by the
56
1
representative, that person may commence an action seeking
2
review of the determination under Section 209.
3
must be commenced before the time of foreclosure.
4
The action
Comment
5
6
7
8
9
10
The objective of the informal meeting process provided by
this section is to ensure both fairness and the appearance
of fairness to debtors and others who are at risk of losing
their interests in a foreclosure. The meeting is not
automatic, but is scheduled only if someone to whom notice
of foreclosure is required to be given requests it.
11
12
13
14
15
16
17
18
19
20
21
22
The responsible representative of the secured creditor is
required to determine whether the person requesting the
meeting has a legal basis for stopping the foreclosure.
This section does not list all of the possible bases for
taking such action, and they are left to other law.
Illustrative bases would include the fact that the security
agreement is a forgery not executed by the debtor, that the
secured obligation has already been paid in full, and that
the debtor is not in default. A failure by the secured
party to comply with the requirements of this Act would also
be a basis for terminating the foreclosure, at least until
the violations of the Act had been rectified.
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
The law is not entirely clear, but it is believed that
the meeting required by this section will satisfy the
hearing demands of the Due Process Clause if the secured
creditor is a governmental entity and hence subject to that
Clause. Existing cases establish that the “hearing” need
not be formal and need not be before a judicial officer. An
employee of the same agency that is conducting the
foreclosure is acceptable, at least if that officer is
impartial and not in the chain of decision-making that
decided to foreclose in the first instance. See Johnson v.
U.S. Department of Agriculture, 734 F.2d 774 (11th Cir.
1984); Lisbon Square v. U.S., 856 F.Supp. 482 (E.D.Wis.
1994). (The latter case sustained the Federal Multifamily
Mortgage Foreclosure Act, 12 U.S.C. § 3701 et seq., despite
its failure to provide a neutral decision-maker.) Since
governmental agencies can provide for such a neutral
“responsible representative” by regulation or administrative
action, the informal meeting required by this section should
satisfy their Due Process obligations.
42
SECTION 209.
JUDICIAL SUPERVISION OF FORECLOSURE.
43
(a) At any time before the time of foreclosure, any
57
1
person entitled to notice of foreclosure under subsection
2
203(a) or any other aggrieved party may commence a judicial
3
proceeding in [district] court to enjoin or direct the
4
conduct of the foreclosure.
5
within the scope of authority of the court in a foreclosure
6
by judicial action, including injunction and postponement of
7
the foreclosure.
8
9
10
11
12
13
The court may make any order
In making such an order, the court may:
(1) review and modify a determination made by the
responsible representative of the secured creditor under
Section 208; and
(2) determine the fair market value of the collateral
if the foreclosure is by appraisal under Section 207.
(b) After the time of foreclosure, any aggrieved party
14
may commence a judicial proceeding in [district] court
15
seeking the following relief:
16
(1) damages against the secured creditor as
17
compensation for any violation of this [Act] or other
18
principles of law or equity in the conduct of the
19
foreclosure;
20
(2) that the foreclosure be set aside to correct a
21
violation of this [Act] or to satisfy principles of law and
22
equity, but the foreclosure may not be set aside for a
23
violation of this [Act] to the extent that the collateral
24
has been acquired by a good faith purchaser for value and
25
the presumption of compliance provided for in subsections
26
205(j), 206(e), or 207(f) is applicable.
58
1
(d) No action may be brought for damages for violations
2
of this [Act] or to set aside a foreclosure under this [Act]
3
more than [five] years after the time of foreclosure.
4
Comment
5
6
7
8
9
10
11
12
13
The objective of this Act is to provide a fair procedure
under which foreclosures can take place without judicial
supervision. However, cases will inevitably arise in which
a party believes that judicial involvement or supervision of
the foreclosure is necessary. This section provides for
such involvement if requested by a person who was entitled
to notice of foreclosure (Section 203), or any other
aggrieved party, such as a prospective or actual purchaser
of the collateral.
14
15
16
17
18
19
20
21
22
23
The court’s powers are analogous to those applicable in
judicial foreclosure proceedings. For example, the court
may enjoin the foreclosure; set a new foreclosure date;
determine the priority of interests in the collateral;
direct that the foreclosure be in bulk or by parcels; direct
the sequence of foreclosure of parcels in order to marshal
assets for the benefit of the holders of interests in the
collateral subordinate to the security interest; and direct
the order of distribution of the proceeds of the
foreclosure.
24
25
26
27
28
The procedural aspects of injunctions against foreclosure
– temporary restraining orders, preliminary injunctions, and
permanent injunctions, and associated bond requirements –
are not spelled out in this Act, but are left to other state
law.
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
After the foreclosure has occurred, the powers of a court
to change the result are more limited. Damages may be
assessed against the secured creditor if it has failed to
comply with this Act or other relevant legal duties in
carrying out the foreclosure. For example, if there was
proof that notices were not properly given as required by
Section 203, the court might award damages against the
secured creditor to the debtor or third parties whose
interests were extinguished by the foreclosure. However,
the court must respect the presumptions of compliance
contained in Sections 202, 203, and 204 of the Act. For
example, if the collateral had passed into the hands of a
bona fide purchaser (BFP), the court would not be authorized
to issue an order taking the collateral out of the BFP’s
hands in order to order a reforeclosure on account of
failure to give proper notices.
59
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
The conclusive presumption of compliance applies only to
the notice and foreclosure provisions of this Act, and not
to other legal faults in the foreclosure. For example, if
the secured creditor engaged in activities intended to chill
the bidding, the court might set the sale aside. The same
result might follow if it were proved that the security
agreement was void, that the secured debt had already been
paid in full, or that there was no default at the time of
the foreclosure.
Courts should employ their powers to grant damage awards
or to set aside sales only in cases in which the violation
of this Act or the principles of law and equity are
sufficiently serious that it is likely that they had a
substantial detrimental impact on the foreclosure amount.
No remedies should be awarded for minor violations that had
no significant effect on the outcome of the foreclosure.
17
SECTION 210. DEFICIENCY.
18
(a) After the date of foreclosure, the secured creditor
19
and any other person whose security interest in the
20
collateral was extinguished by the foreclosure may commence
21
an action for a money judgment for a deficiency against any
22
person liable therefor.
23
may not obtain a deficiency judgment if it disclaimed a
24
deficiency in the notice of foreclosure.
25
party commences an action for a deficiency, the court may
26
consolidate the actions.
27
The foreclosing secured creditor
If more than one
(1) The deficiency owed to the secured creditor is the
28
positive number, if any, determined by subtracting the
29
foreclosure amount from the balance owing on the secured
30
obligation, including all principal, interest, and legally
31
enforceable loan fees, but not including expenses of
32
foreclosure.
60
1
(2) The deficiency owed to any person other than the
2
secured creditor whose security interest in the collateral
3
was destroyed by the foreclosure is the positive number, if
4
any, determined by subtracting the proceeds of the
5
foreclosure distributed or distributable to such person from
6
the balance owing on that person’s secured obligation,
7
including all principal, interest, and legally enforceable
8
loan fees, but not including expenses of foreclosure.
9
(b) In an action for a deficiency following a foreclosure
10
by auction, any person liable for the deficiency may
11
petition the court for a determination of the fair market
12
value of the collateral at the time of foreclosure.
13
court shall hold a hearing at which all interested parties
14
may present evidence of fair market value.
15
without a jury shall determine fair market value.
16
court determines that the fair market value of the
17
collateral was greater than the proceeds of the sale, the
18
fair market value must be substituted for the foreclosure
19
sale proceeds in making the calculations required by
20
subsections (a) and (b) with respect to all parties against
21
whom a judgment for a deficiency is entered.
22
determination of fair market value under this section may
23
not be made by the court if the foreclosure was by
24
negotiated sale (Section 206) or by appraisal (Section 207).
25
The
The court
If the
A
[(c) No judgment for a deficiency or for the remaining
61
1
balance owing on the secured obligation may be entered on
2
behalf of the secured creditor against a residential debtor
3
after a foreclosure conducted under this [Act].
4
subsection does not bar deficiency judgments on behalf of
5
persons other than the secured creditor whose interests have
6
been extinguished by the foreclosure, and does not bar
7
deficiency judgments against sureties or guarantors of the
8
secured obligation, whether or not they are related to
9
residential debtors.]
This
10
Comment
11
12
13
14
15
16
17
18
19
20
21
22
A judgment for a deficiency is intended to assist the
secured creditor in collecting any portion of the obligation
that is not discharged by the foreclosure. Since only
persons who are “liable therefor” can be subjected to a
deficiency judgment, it is necessary for the secured
creditor to establish the personal liability of the person
who is sued. A deficiency may be recovered against a debtor
or against anyone else, such as a surety or guarantor, who
is liable on the secured obligation. Both the foreclosing
creditor and subordinate secured creditors whose security
interests have been destroyed by a foreclosure can bring
actions for deficiencies.
23
24
25
26
27
28
29
30
31
A deficiency action by the foreclosing creditor is
governed by paragraph (a)(1). The formula stated there does
not deduct for expenses of foreclosure, since these expenses
are already deducted in arriving at the foreclosure amount.
Deficiency actions by “sold-out” junior lienors are governed
by paragraph (a)(2). Under that subsection, the amount
distributed to the junior lienor, rather than the full
foreclosure amount, is considered as offsetting the
obligation owed to the lienor.
32
33
34
35
36
37
38
39
If the foreclosure was by auction, subsection (b)
provides that the defendant in the deficiency action is
entitled to have the fair market value of the property
determined by the court. If this procedure is used and the
fair market value is found to be greater than the sale
proceeds, the fair market value must be used in computing
the deficiency. This subsection recognizes that
foreclosures by auction often do not bring fair market
62
1
2
3
4
5
6
7
8
9
10
11
prices, and in effect limits the amount of the deficiency as
if a fair market price had been bid. This limitation
applies both to deficiencies sought by both the foreclosing
creditor and sold-out junior lienors. No fair market value
determination is applicable if the foreclosure was by
negotiated sale or by appraisal, since the determination is
unnecessary and superfluous in those procedures; in a
negotiated sale foreclosure, any aggrieved party may stop
the foreclosure simply by objecting to the price, and in the
foreclosure by appraisal, any aggrieved party can obtain a
judicial review of the appraisal amount.
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Subsection (c) is provided for optional enactment. It
prohibits deficiency judgments against protected parties.
In reality, such judgments are rarely obtained in any event,
and are often uncollectible. From a consumer’s viewpoint, a
deficiency judgment, which may burden the debtor for many
years, seems to “add insult to the injury” of loss of one’s
home. On the other hand, lenders may argue that the threat
of a deficiency judgment, even if it will rarely be
enforced, provides a useful inducement to borrowers to
engage in meaningful “workout” efforts. Even if a
deficiency judgment cannot be obtained by the foreclosing
creditor under subsection (c), the holders of “sold-out”
junior liens may still obtain and collect deficiency
judgments.
26
SECTION 211.
27
(a) Any person may record in the [county recorder’s
28
office] of any county in which part of the real property
29
collateral is located a request for notice of foreclosure of
30
a security agreement that has been recorded.
31
must state:
32
33
REQUEST FOR NOTICE OF FORECLOSURE.
The request
(1) the date, book and page of the security agreement’s
recording;
34
(2) the names of the parties to the security agreement;
35
(3) a legal description of the real property collateral
36
affected by the security agreement; and
63
1
2
3
(4) the name and address of the person requesting
notice of foreclosure.
(b) The recording of a request under subsection (a)
4
entitles the person requesting notice to be given notice of
5
foreclosure under subsection 203(a), but does not affect the
6
title to the real property collateral and does not
7
constitute constructive notice to any person of any interest
8
in the real property collateral held or claimed by the
9
person requesting notice.
A person recording a request for
10
notice under this section may subsequently record an
11
amendment correcting the person’s name or address or
12
withdrawing the request.
13
Comment
14
15
16
17
18
This section permits anyone who wishes to become eligible
for receipt of a foreclosure notice. For example, a tenant
under an unrecorded lease could record a request for notice
under this section, and thus could ensure learning of a
pending foreclosure.
19
SECTION 212.
POSSESSION AFTER FORECLOSURE.
A person who
20
acquires a possessory interest in collateral by foreclosure
21
under this [Act] is entitled to possession of the collateral
22
24 hours after the time of foreclosure, and to any rents or
23
proceeds of the collateral accruing and becoming due after
24
the time of foreclosure.
25
interest in real property collateral by foreclosure under
26
this [Act] may immediately commence an action under [the
27
forcible entry and detainer statute of this State] to gain
A person who acquires a possessory
64
1
possession of the real property.
2
Comment
3
4
5
6
7
8
9
10
11
12
13
14
15
16
This Act is silent on whether a secured creditor may
demand possession of the collateral prior to the time of
foreclosure; that question is left to other law. However,
one who acquires property in a foreclosure proceeding under
this Act is entitled to possession 24 hours later, provided
that the interest acquired is a possessory one. For
example, a foreclosure of a reversion in land that is
subject to a lease would not entitle the person obtaining
the reversion through foreclosure to possession until the
reversion became possessory. By the same token, if the
holder of the reversion is also entitled to rents from the
real property, all rents accruing after the time of
foreclosure belong to the person acquiring title through the
foreclosure.
17
18
19
20
21
22
23
This section permits one who obtains title in a
foreclosure conducted under this Act to obtain possession by
use of the same process as is available to landlords to take
possession from tenants. The section is significant because
in its absence, there is doubt in a number of states whether
the landlord-tenant procedure is available to foreclosure
purchasers.
24
SECTION 213.
25
(a) Collateral consisting of more than one parcel of real
26
27
28
29
FORECLOSURE OF MULTIPLE PARCELS.
property must be foreclosed as follows:
(1) All parcels located in the same county of this
State must be included in a single foreclosure.
(2) If parcels are located in more than one county of
30
this State, the secured creditor may foreclose separately on
31
the parcels located in each county, or in its discretion may
32
combine the parcels in more than one county in a single
33
foreclosure if the parcels so combined are contiguous, are
34
being used in a unitary manner at the time of notice of
35
foreclosure is given, are part of a unitary plan of
65
1
2
3
development, or are operated under a single management.
(b) When two or more parcels of real property collateral
are included in a single foreclosure:
4
(1) If foreclosure is by auction, each parcel must be
5
offered separately at the sale unless the secured creditor
6
determines in good faith that it is probable that a greater
7
aggregate price can be obtained by offering two or more
8
parcels in bulk in a single auction.
9
conditionally offered both in bulk and by parcels, and the
The collateral may be
10
person conducting the sale shall accept the higher of the
11
two aggregate bids.
12
for the secured obligation, and if the collateral is offered
13
in bulk, no bid may be accepted that is less than [one-half]
14
[two-thirds] of the balance owing on the secured obligation.
15
If sale is made by parcels, the auction must be discontinued
16
when the aggregate bids received are sufficient to pay the
17
expenses of foreclosure and the secured obligation.
18
If the collateral is the only security
(2) If foreclosure is by negotiated sale, the secured
19
creditor shall make a good faith effort, in negotiations, to
20
sell no more parcels than are necessary to produce a sale
21
price that will fully pay the expenses of foreclosure and
22
the secured obligation;
23
(3) If foreclosure is by appraisal, each parcel must be
24
separately appraised, and the secured creditor shall take
25
title to only the number of parcels that are necessary to
26
produce a foreclosure amount under subsection 207(g) that
66
1
will fully pay the expenses of foreclosure and the secured
2
obligation.
3
(c) If the entire real property collateral is not made
4
the subject of a single foreclosure, a secured creditor may
5
foreclose parcels or groups of parcels successively under
6
this [Act] until the expenses of foreclosure and the secured
7
obligation are fully paid.
8
Comment
9
10
11
12
13
14
15
16
17
18
19
This section requires that multiple parcels in the same
county must be foreclosed in a single proceeding. Only a
sufficient number of parcels should be foreclosed to cover
the secured creditor’s debt and the expenses of foreclosure.
In the case of a foreclosure by auction, the parcels must be
offered separately unless the secured creditor determines
that a greater price can be obtained by offering them in
bulk. Even when that determination is made, only enough
parcels should be included in the bulk package that the bid
can reasonably be expected to cover the foreclosure expenses
and the secured debt.
20
21
22
23
24
25
The secured creditor’s determination to offer multiple
parcels in bulk rather than separately need not be
demonstrably correct or even objectively reasonable, but it
must be made in subjective good faith; that is, the secured
creditor must honestly believe that the criterion of
paragraph (b)(1) is satisfied.
26
27
28
29
The same principle, that only enough parcels should be
foreclosed to satisfy the expenses and the secured debt,
governs foreclosure by the other two methods, negotiated
sale and appraisal.
67
1
ARTICLE 3
2
EFFECTIVE DATE AND REPEALER
3
SECTION 301.
UNIFORMITY OF APPLICATION AND CONSTRUCTION.
4
In applying and construing this Uniform Act, consideration
5
must be given to the need to promote uniformity of the law
6
with respect to its subject matter among States that enact
7
it.
8
9
SECTION 302.
EFFECTIVE DATE.
___________________.
This [Act] takes effect on
It applies to [security agreements
10
entered into] [foreclosures as to which an initial notice of
11
foreclosure is given] on or after that date.
12
13
14
SECTION 303.
SPECIFIC REPEALER, PROVISIONS FOR
TRANSITION.
(a) The following acts and all other acts and parts of
15
acts inconsistent herewith are hereby repealed: [here should
16
follow the acts to be specifically repealed].
17
(b) [Security agreements validly entered into]
18
[Foreclosures commenced] before the effective date specified
19
in Section 302, and the rights, duties, and interests
20
flowing from them remain valid thereafter. [Security
21
interests created before the effective date specified in
22
Section 302 may be foreclosed under any statute or other law
23
amended or repealed by this [Act] as if the repeal or
24
amendment had not occurred.]
68
1
Comment
2
3
4
5
6
7
If the effective date of the Act is expressed in terms of
commencement of new foreclosures, rather than entering into
new security agreements, it will probably be necessary to
augment the bracketed language in subsection (b) by defining
what is meant by “commencement” of a foreclosure under
preexisting law.
69