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 1 Uniform Nonjudicial Foreclosure Act 2 Prefatory Note 3 4 5 6 7 8 9 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). 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 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. 26 27 28 29 30 31 32 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. 33 34 35 36 37 38 39 40 41 42 43 44 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. 45 The desirability of nonjudicial foreclosure is emphasized i 1 2 3 4 5 6 7 8 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. 9 Features of the present draft 10 11 12 13 14 15 16 17 18 19 20 21 22 23 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. 24 25 26 27 28 29 30 31 32 33 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. 34 35 36 37 38 39 40 41 42 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). 43 44 45 46 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 ii 1 2 3 4 5 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. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 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. 24 25 26 27 28 29 30 31 32 33 34 35 36 37 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. 38 39 40 41 42 43 44 45 46 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. 47 It is believed that with all three of these foreclosure iii 1 2 3 4 5 6 7 8 9 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. 10 11 12 13 14 15 16 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. 17 18 19 20 21 22 23 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. 24 25 26 27 28 29 30 “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. 31 32 33 34 35 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. 36 37 38 39 40 41 42 43 44 45 46 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. iv 1 2 3 4 5 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. 6 7 8 9 10 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. 11 12 13 14 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. 15 16 17 18 19 20 21 22 23 24 25 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.” 26 27 28 29 30 31 32 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. 33 34 35 36 37 38 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. 39 40 41 42 43 44 45 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 v 1 2 the proposed sale. In the case of foreclosure by appraisal, they will receive notice of the appraisal report. 3 4 5 6 7 8 9 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. 10 11 12 13 14 15 16 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. 17 18 19 20 21 22 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. 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 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. 38 39 40 41 42 43 44 45 46 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. vi 1 2 3 4 5 6 7 8 9 10 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. 11 12 13 14 15 16 17 18 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. 19 20 21 22 23 24 25 26 27 28 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. 29 30 31 32 33 34 35 36 37 38 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.” 39 40 41 42 43 44 45 46 47 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 vii 1 2 3 4 5 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. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 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. 22 23 24 25 26 27 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.” 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 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. 43 44 45 46 47 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 viii 1 2 3 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. 4 5 6 7 8 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. 9 10 11 12 13 14 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). 15 16 17 18 ! 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? 19 20 21 22 23 24 ! Preforeclosure remedies. 25 26 27 28 29 ! FNMA/FNMLC uniform instruments. 30 31 32 33 34 35 ! Alternative dispute resolution. 36 37 38 39 40 ! Bankruptcy. 41 42 43 ! 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 ix 1 2 3 4 5 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? x 1 ARTICLE 1 2 GENERAL PROVISIONS 3 4 5 6 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 7 taken by the secured creditor that makes all obligations 8 secured by a security agreement immediately due. 9 (2) "Aggrieved party" means a party entitled to a 10 remedy and includes the debtor, the secured creditor, a 11 person having an interest in the real property that will be 12 affected by foreclosure, and a purchaser or prospective 13 purchaser at a foreclosure. 14 (3) "Agreement" means the bargain of the parties as 15 found in their language and by implication from other 16 circumstances. 17 (4) "Collateral" means the real property subject to a 18 security interest. 19 property covered by the security agreement. 20 The term also includes any personal (5) “Common interest community” means real property 21 with respect to which a person, by virtue of ownership of a 22 unit, is obligated to pay for real property taxes, insurance 23 premiums, maintenance, or improvement of other real property 24 described in a declaration. “Ownership of a unit” does not 1 1 include holding a leasehold interest of less than [20] years 2 in a unit, including renewal options. 3 (6) "Contract" means all of the legal rights and 4 obligations resulting from the parties' agreement as 5 affected by this [Act] and other applicable rules of law. 6 7 8 9 10 11 (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 12 performance of an obligation secured under a security 13 agreement, whether absolute or conditional, and whether or 14 not the agreement imposes personal liability on the debtor. 15 If the debtor and the owner of the real property securing 16 the obligation are not the same person, the term means the 17 owner of the real property in any provision of this [Act] 18 dealing with collateral and the person or persons obligated 19 in any provision dealing with an obligation. 20 includes both where the context requires. 21 The term (10) "Deed" means a record, other than a lease or 22 security agreement, that by its terms conveys title to an 23 interest in real property. 24 25 (11) “Default” means a failure to comply with the debtor’s duties under a security agreement. 2 1 (12) “Expenses of foreclosure” means the reasonable 2 costs incurred by a secured creditor in connection with a 3 foreclosure for mailing, advertising, title insurance binder 4 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