[Note to drafting committee: The Prefatory Note has not been revised for this draft, and therefore does not mention a few specific modifications that have been made here. It is nonetheless included for your convenience.]
UNIFORM NONJUDICIAL FORECLOSURE ACT
TABLE OF CONTENTS
[ARTICLE] 1
GENERAL PROVISIONS
SECTION 101. SHORT TITLE. 1
SECTION 102. DEFINITIONS. 1
SECTION 103. APPLICATION. 10
SECTION 104. VARIATION BY AGREEMENT. 13
SECTION 105. SUPPLEMENTAL PRINCIPLES OF LAW AND EQUITY APPLICABLE. 14
SECTION 106. NOTICE AND KNOWLEDGE. 15
SECTION 107. TRANSACTION CREATING SECURITY INTEREST. 21
SECTION 108. TIME OF FORECLOSURE. 21
[ARTICLE] 2
PROCEDURES BEFORE FORECLOSURE
SECTION 201. RIGHT TO FORECLOSE. 23
SECTION 202. NOTICE OF DEFAULT AND RIGHT TO CURE. 23
SECTION 203. NOTICE OF FORECLOSURE: MANNER OF GIVING. 29
SECTION 204. NOTICE OF FORECLOSURE: CONTENT. 33
SECTION 205. REQUEST FOR NOTICE OF FORECLOSURE. 37
SECTION 206. MEETING TO OBJECT TO FORECLOSURE. 38
SECTION 207. PERIOD OF LIMITATION FOR FORECLOSURE. 40
SECTION 208. JUDICIAL SUPERVISION OF FORECLOSURE. 41
SECTION 209. REDEMPTION. 41
[ARTICLE] 3
FORECLOSURE BY AUCTION
SECTION 301. FORECLOSURE BY AUCTION. 43
SECTION 302. EVIDENCE OF TITLE; OTHER INFORMATION. 43
SECTION 303. ADVERTISEMENT OF SALE. 44
SECTION 304. ACCESS TO COLLATERAL. 47
SECTION 305. LOCATION AND TIME OF SALE. 47
SECTION 306. FORECLOSURE OF TWO OR MORE PARCELS. 48
SECTION 307. POSTPONEMENT OF SALE. 49
SECTION 308. CONDUCT OF SALE. 50
SECTION 309. DEPOSIT BY SUCCESSFUL BIDDER. 52
[SECTION 310. UPSET BIDS. 52]
SECTION 310. PAYMENT OF REMAINDER OF BID. 53
SECTION 311. FORECLOSURE AMOUNT; DISTRIBUTION OF PROCEEDS. 54
SECTION 312. DEED TO SUCCESSFUL BIDDER; AFFIDAVIT. 54
SECTION 313. DISCONTINUANCE OF FORECLOSURE. 56
[ARTICLE] 4
FORECLOSURE BY NEGOTIATED SALE
SECTION 401. FORECLOSURE BY NEGOTIATED SALE. 58
SECTION 402. ADVERTISEMENT AND CONTRACT OF SALE. 58
SECTION 403. NOTICE OF PROPOSED NEGOTIATED SALE. 59
SECTION 404. COMPLETION OF SALE. 60
SECTION 405. RECORDING OF AFFIDAVIT AND DEED; APPLICATION OF FORECLOSURE AMOUNT. 62
SECTION 406. NOTICE OF OBJECTION TO SALE. 62
[ARTICLE] 5
FORECLOSURE BY APPRAISAL
SECTION 501. FORECLOSURE BY APPRAISAL. 65
SECTION 502. APPRAISAL. 65
SECTION 503. NOTICE OF APPRAISAL. 66
SECTION 504. COMPLETION OF FORECLOSURE BY APPRAISAL. 67
SECTION 505. RECORDING OF AFFIDAVIT; TIME OF FORECLOSURE. 69
SECTION 506. NOTICE OF OBJECTION TO FORECLOSURE. 69
[ARTICLE] 6
RIGHTS AFTER FORECLOSURE
SECTION 601. APPLICATION OF PROCEEDS OF FORECLOSURE. 72
SECTION 602. TITLE TRANSFERRED BY FORECLOSURE. 73
SECTION 603. ACTION FOR DAMAGES OR TO SET ASIDE FORECLOSURE. 74
SECTION 604. POSSESSION AFTER FORECLOSURE. 75
SECTION 605. JUDGMENT FOR DEFICIENCY. 75
SECTION 606. DETERMINING AMOUNT OF DEFICIENCY. 77
[ARTICLE] 7
MISCELLANEOUS PROVISIONS
SECTION 701. UNIFORMITY OF APPLICATION AND CONSTRUCTION. 80
SECTION 702. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT. 80
SECTION 703. EFFECTIVE DATE. 80
SECTION 704. REPEALS. 80
SECTION 705. TRANSITIONS. 80
UNIFORM NONJUDICIAL FORECLOSURE ACT
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 mortgage-related provisions off into a separate act, the Uniform Land Security Interest Act (ULSIA).
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., ULSIA Part 5) into a distinct foreclosure statute, and second, an extensive revision of those foreclosure provisions. In addition, the Act introduces two new forms of foreclosure that were not found in ULTA or ULSIA, and it eliminates ULSIA's provision, tracking UCC Article 9, that permitted nonresidential mortgages to be foreclosed by "reasonable disposition of the collateral" - a provision that was widely opposed.
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.
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.
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.
The desirability of nonjudicial foreclosure is emphasized 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.
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 instrument 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.
Foreclosure is intended to accomplish two distinct 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 junior lienors and the debtor) 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.
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).
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 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.
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 with 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. The creditor notifies the debtor and junior interest-holders of the "foreclosure amount" that it is willing to allow for the property, and they can simply disapprove the sale if they are dissatisfied with that amount. 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 amount will appear adequate to those parties and they will permit the sale to proceed.
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.
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 an employee of the lender. As with foreclosure by negotiated sale, the secured creditor notifies the debtor and junior interest holders of the "foreclosure amount" that it is willing to offer for the property. Any debtor or junior interest-holder who is dissatisfied with the amount can simply disapprove it and thereby prevent the foreclosure by appraisal from going forward.
It is believed that with all three of these foreclosure methods, sufficient protections have been included to assure the legitimate interests of debtors and junior interest-holders. 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.
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.
"Residential debtor" includes both a person who has a 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. "Home" is used here as a shorthand for "residential real property," which must be owner-occupied and contain no more than four dwelling units.
Thus, "residential debtor" encompasses not only the usual consumer borrowers on home mortgage loans, but also relatives who guarantee their loans and purchasers who buy homes subject to, or with an assumption of, existing mortgages.
Four specific protections are provided for residential debtors in this Act. 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 as the mails, particularly in residential settings.
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.
Third, the Act limits the right to cure without acceleration to once per year for a non-monetary default of the same type, but this limitation does not apply to residential debtors.
Fourth, the Act precludes the entry of deficiency judgments against residential debtors who have acted in good faith with respect to the property and the foreclosure. Deficiencies may still be asserted against guarantors of residential debtors.
Systems of notice. Power of sale foreclosure statutes presently in effect may be divided into one-notice and two-notice 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 jurisdiction, 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."
The present draft provides for 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. For nonresidential debtors this time period may be reduced to ten days by agreement, and the right to cure is eliminated if a prior notice of default has been given and cure made within the previous twelve-month period. No provision is made in this Act for giving the notice of default to junior lienholders, irrespective of whether the debtor is a residential debtor.
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 proposed sale. In the case of foreclosure by appraisal, they will receive a copy of the appraisal report.
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.
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.
This Act 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 205, 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.
In addition, this Act provides residential debtors and other affected parties (Section 206) 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, is intended to guard debtors against the fundamental unfairness of a mistakenly-conducted foreclosure that is legally improper.
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 is adequate to protect unsophisticated debtors.
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 instrument may seek a judicial review of that issue. 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.
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 in most jurisdictions 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.
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."
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 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 status of title introduced by statutory redemption.
Title from foreclosures. No matter which method of foreclosure is employed, this Act provides that completion of the foreclosure process raises a presumption of compliance with the notice, advertising, and other procedural requirements of the Act. This presumption is conclusive evidence 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 instrument 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.
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). As noted above, residential debtors who act in good faith are exempt from deficiency liability. Otherwise, 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 high bid at the foreclosure sale 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.
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 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.
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.
UNIFORM NONJUDICIAL FORECLOSURE ACT
[ARTICLE] 1
SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Nonjudicial Foreclosure Act.
SECTION 102. DEFINITIONS. In this [Act]:
[Note: several definitions have been deleted by previous decisions of the drafting committee, including ACCELERATION, AGGREIVED PARTY, AUTHENTICATE, BUSINESS DAY, DEED, and PARTY.]
(1) "Collateral" means property, real or personal, subject to a security interest.
(2) "Common interest community" means real property for which a person is obligated to pay real property taxes, insurance premiums, maintenance, or improvement of other real property described in a declaration or other governing documents, however denominated, by virtue of ownership or the holding of a leasehold interest of at least [20] years, including renewal options.
(3) "Day" means calendar day.
(4) "Debtor" means a person that owes payment or other performance of an obligation, whether absolute or conditional, primary or secondary, secured under a security instrument, whether or not the security instrument imposes personal liability on the debtor. The term does not include a person whose sole interest in the property is a security interest.
(5) "Evidence of title" means a title insurance policy, a preliminary title report or binder, a title insurance commitment, an attorney's opinion of title based on examination of the public records or an abstract, or any other means of reporting the state of title to real estate that is customary in the locality.
(6) "Expenses of foreclosure" means the lesser of the reasonable costs incurred by a secured creditor or the maximum amounts permitted by other law of this State in connection with a foreclosure for transmission of notices, advertising, evidence of title, inspections and examinations of the collateral, management and securing of the collateral, liability insurance, filing and recording fees, attorneys' fees and litigation expenses incurred pursuant to Section 207 and 601 to the extent provided in the security instrument or authorized by law, appraisal fees, the fee of the person conducting the sale in the case of a foreclosure by auction, fees of court-appointed receivers, and other expenses reasonably necessary to the foreclosure.
(7) "Foreclosing creditor" means a secured creditor who is engaged in a foreclosure under this [Act].
[This is a new definition.]
(8) "Guarantor" means a person liable for the debt of another, and includes a surety and an accommodation party.
(9) "Interest holder" means a person who owns a legally-recognized interest in real or personal property that is subordinate in priority to a security interest foreclosed under this [Act].
[This is a new definition. Note that nonpossessory interests, such as easement, covenants, etc. are included.]
(10) "Original notice of foreclosure" means the first notice of foreclosure sent pursuant to Section 204 instituting a foreclosure under this [Act].
(11) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government; governmental subdivision, agency, or instrumentality; public corporation, or any other legal or commercial entity.
(12) "Purchase-money obligation" means an obligation incurred in order to pay part or all of the purchase price of residential real property collateral. An obligation is not a "purchase-money obligation" if any part of the real property securing it is not residential real property. A "purchase-money obligation" includes an obligation:
(A) incurred to the vendor of the real property;
(B) owed to a third party lender to pay a loan made to pay part or all of the purchase price of the real property;
(C) incurred to purchase labor and materials for the construction of substantial improvements on the real property;
(D) to pay a loan all of the proceeds of which were used to repay in full an obligation of the type described in subsubsections (A) through (C).
(13) "Real property" means any estate or interest in, over, or under land, including minerals, structures, fixtures, and other things that by custom, usage, or law pass with a conveyance of land though not described or mentioned in the contract of sale or instrument of conveyance. The term includes the interest of a landlord or tenant and, unless under the law of the state in which the property is located that interest is personal property, an interest in a common interest community.
(14) "Record," used as a verb, means to take the actions necessary to perfect an interest in real property under [the recording act of this State].
(15) "Record," used as a noun, means information that is inscribed on a tangible medium or that is stored in a electronic or other medium and is retrievable in perceivable form.
(16) "Residential" means:
(A) as applied to "interest holder," an individual who holds a possessory interest, other than a leasehold interest with a duration of [one] year or less, in residential real property in which a security interest exists, and any person that is wholly owned and controlled by such an individual or individuals;
(B) as applied to "debtor," an individual who is obligated, primarily or secondarily, on an obligation secured in whole or in part by residential real property, and any person that is wholly owned and controlled by such an individual or individuals.
[This definition has been revised. In prior drafts, the defined term was "residential debtor." However, since the other definitions now distinguish between "debtor" and "interest holder," it is necessary to allow for both of these terms to be modified by "residential."]
(17) "Residential real property" means real property that, when a security instrument is entered into, is used or is intended by its owner to be used primarily for the personal, family, or household purposes of its owner and is improved, or is intended by its owner to be improved, by one to [four] dwelling units.
[The structure of this definition has been changed to provide that the property is identified as "residential" or not at the time the loan is made.]
[Vacation homes and other second or third homes are included as "residential real property, since there is no requirement that the home be the debtor's principal residence. One comment at the annual meeting questioned whether this is what we intend. The word "primarily" has been added. This will eliminate second homes, condos, etc. if they are primarily held for rental and used only occasionally for the owner's personal purposes.]
(18) "Secured creditor" means a creditor that has the right to foreclose a security interest in real property under this [Act].
[The reference to "real property" has been inserted because, to foreclose under th e Act, the creditor must have a security interest in real property. References to agents, employees, trustees, etc. have been removed on the ground that it is a truism that what one may do for oneself, one may do through an agent, and it is unnecessary to so state.]
(19) "Security instrument" means a mortgage, deed of trust, security deed, contract for deed, land sale contract, lease creating a security interest, or other contract or conveyance that creates or provides for an interest in real property to secure payment or performance of an obligation, whether by acquisition or retention of a lien, a lessor's interest under a lease, or title to the real property. A security instrument may also create a security interest in personal property. If a security instrument makes a default under any other agreement a default under the security instrument, the security instrument includes the other agreement. The term includes any modification or amendment of a security instrument, and includes a lien on real property created by a record to secure an obligation owed by an owner of the real property to an association in a common interest community or under covenants running with the real property.
[The phrase "A security instrument may also create a security interest in personal property" has been added. Thus, a security instrument must cover real property, and may cover personal property as well.]
(20) "Security interest" means an interest in real or personal property that secures payment or performance of an obligation.
(21) "Sign" means:
(A) to execute or adopt a tangible symbol with the present intent to authenticate a record; or
(B) to attach or logically associate an electronic symbol, sound, or process to or with a record with the present intent to authenticate a record.
[Note that definition was moved from Section 106 (Notice) at the request of the Style Committee. The word "sign" does not appear in the Act except in Section 106. Shouldn't the definition of "sign" be moved back to 106?]
(22) "State" means a State of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(23) "Time of foreclosure" means the time that title to real property collateral passes to the person acquiring it by virtue of foreclosure under this [Act].
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 encumber those interests as 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.
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 instrument" (see paragraph 17). In place of "mortgagor" or "installment contract purchaser" this Act substitutes "debtor" (defined in paragraph 4). In place of "mortgagee," or "vendor," this Act substitutes "secured creditor" (see paragraph 16). Instead of enumerating the various types of real property interests, such as "fee estate," "leasehold," and the like, that can be used as security, this Act substitutes "collateral" as defined in paragraph (1). The interest in the collateral that is conveyed to or retained by the creditor is defined as a "security interest" (paragraph 18) and not as a "lien" or as "title." Hence, for the purpose of foreclosures under this Act it is unimportant whether a state follows the "lien theory" or "title theory" of mortgage law.
1. "Collateral" includes all of the interests in land and all of the items of personal property that are subject to a security interest. The interests in land are subsumed under the term defined in paragraph (12) as "real property." This Act cannot be used to foreclose on a security interest in personal property alone, but can be used to foreclose on personal property in combination with real property.
2. "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, but does not include cooperatives if they are treated as personal property under state law.
3. "Day." Days must be counted to determine the expiration of various time periods prescribed by this Act. All days including Saturdays, Sundays, and holidays are counted. However, under Section 106(o), a required act that would fall on a Saturday, Sunday, or holiday may properly be performed on the next weekday.
4. "Debtor." In most cases the person who is personally obligated to pay the secured debt (if anyone is so obligated) 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 while remaining liable on the secured obligation. In that case the definition of "debtor" includes only the transferor, while the transferee is an "interest holder," as defined in subsection 9. "Debtor encompasses guarantors, sureties, accommodation makers, assuming grantees, and other persons who are absolutely or conditionally liable on the secured debt. Hence, the term "debtor" often describes more than one person in a transaction. A person who has been released from personal liability on the secured obligation is no longer a "debtor."
5. "Evidence of title" may be denominated in a variety of ways, depending on local custom or practice. It might be termed, for example, a "foreclosure report," a "trustee's sale guaranty," or the like. Any form of title evidence customarily employed in foreclosures in the locality is acceptable.
6. "Expenses of foreclosure" includes the direct costs related to foreclosure, but does not include items not directly related to foreclosure, such as payment of property taxes, insurance premiums, or repairs. 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 instrument. See Restatement (Third) of Property: Mortgages § 2.2 (1997). However, these items are not "expenses of foreclosure." All expenses of foreclosure are limited to reasonable amounts, However, the secured party is not required to seek competitive bids for foreclosure services, or to limit foreclosure expenses to the lowest possible amounts. Attorney fees are included as expenses of foreclosure only if they are authorized by the security instrument or by other applicable law.
8. "Guarantor" is employed in this Act as a surrogate for all persons who promise to pay the debt of another.
9. "Interest holder" is a person with an interest in property that is the subject of a foreclosure under this Act, provided that the interest is subordinate to the security interest being foreclosed. Interest holders are often "debtors" as well, but are not necessarily so. For example, if a debtor borrows on the security of real estate, and subsequently sells the real estate to a non-assuming grantee, the grantee is an "interest holder" but not a "debtor." Holders of other liens on the property are also "interest holders" but are ordinarily not "debtors." Other examples of interest holders include tenants under subordinate leases, the holders of subordinate easements and covenant rights, and the owner or owners of the fee simple estate on which the security interest was imposed.
10. "Original notice of foreclosure" is the notice given at the inception of a foreclosure under this Act. If that foreclosure cannot be completed, and the secured creditor then pursues another foreclosure by the same method or a different method under this Act, the notice given in pursuance of that method is not an "original notice of foreclosure."
11. "Person" includes both natural persons (individuals) and all forms of legally-recognized organizations.
12. "Purchase-money obligation" is a significant definition for purposes of the protection against deficiency liability provided to certain residential debtors by Section 605. It includes both vendor financing and third-party loans, as well as construction loans and refinancings of purchase-money loans. However, an obligation is not "purchase-money" unless all of the real property securing it is residential real property.
13. "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 that are not estates because they do not carry with them the right of possession of the land. Leaseholds are regarded 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 state law.
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 Section 103(b)(3).
14. To "record" incorporates the requirements of the state's existing recording act.
15. A "record" is defined as in the Uniform Electronic Transactions Act.
16. "Residential" may modify either "interest holder" or "debtor." Both "residential interest holders" and "residential debtors" are regarded as needing protections from the acts of creditors that other borrowers do not need. The term "residential" applies even if the obligation is secured by other, nonresidential property in addition to "residential real property" (definition 17). If one or more "residential debtors" or "residential interest holders" own or control all of another entity, such as a trust or corporation, it is regarded as "residential" as well.
A vacation home or other "second home" qualifies as residential real property, since there is no requirement that a dwelling unit on the premises be the primary residence of the owner. "Owner" should be regarded broadly. Thus, if a house is owned by a trust and is occupied as a residence by a principal beneficiary of the trust, the house is considered to be in use for the "personal, family, or household purposes of its owner." Similarly, if a house is owned by a partnership, limited liability corporation, or other corporation, and the holder of a majority of shares or ownership interest in the entity resides in the house, it is considered to be in use for the "personal, family, or household purposes of its owner."
17. "Residential real property" is an essential term in defining "residential interest holder" and "residential debtor" (definition 16). There are two elements in the definition, one relating to the use of the property and the other to the improvements on it. "Residential real property" must be used or intended to be used primarily for personal, family, or household purposes of its owner. This definition is similar to that of the Uniform Consumer Credit Code, the Federal Trade Commission's Holder in Due Course Rule and various other consumer protection statutes. Some commercial or other nonresidential use is permitted within this definition, so long as the residential use is primary. The property may not contain more than four dwelling units, thus excluding larger apartment buildings. (Enacting states may wish to change the number of dwelling units in included property to comply with local custom.)
In addition, to be "residential real property," the real property must either be improved with one to four dwelling units at the time the security instrument is entered into, or the owner must intend at that time to so improve it in the future.
18. "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, as well as a person, such as a mortgage lender, whose claim arises initially from a cash loan. It further includes anyone to whom the right to foreclose the secured interest is assigned or transferred.
"Secured creditor" is defined in terms of the right to foreclose the security interest. Ordinarily the security interest will automatically follow the obligation, unless the two rights are intentionally separated. See Restatement (Third) of Property: Mortgages § 5.4 (1997). Hence, a transfer of a promissory note will normally transfer the right to foreclose the corresponding security interest as well. However, an intentional separation may occur. 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. Since Fannie Mae has the power to direct its servicers to foreclose, it is a "secured creditor" under this definition.
19. "Security instrument." This definition recognizes that the title given to a document by its parties does not necessarily indicate whether it is a security instrument. 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, or whether the security interest is created by granting or by retaining it. If the security instrument provides, as is ordinarily the case, that a default on another obligation, such as a promissory note, is a default under the security instrument, then the term "security instrument" includes the terms of the obligation. 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 may be immaterial for purposes of this Act. All modifications and amendments to the original documents are also part of the security instrument. Thus, "workout" or loan modification agreements are included. A lien created to assist in the enforcement of owners' obligations in common interest communities or under covenants running with land in a residential subdivision is a security instrument under this Act and can be foreclosed under its provisions.
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 possession and 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 instruments and this Act does not affect them. See Section 107.
20. "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 in any case in which a person receives or retains an interest in property for the purpose of securing an obligation owed to that person. Security interests such as judgment liens and mechanics liens may arise by virtue of statute or operation of law, but except for a lien of an owners' association on property in a common interest community, such security interests may not be foreclosed under this Act.
21. "Sign" is defined as in the Uniform Electronic Transactions Act, and includes both writing on tangible media and electronic signatures.
22. "Time of foreclosure" occurs when the foreclosure process is completed. Section 108 states the event that constitutes the "time of foreclosure" for each method of foreclosure.
SECTION 103. APPLICATION.
(a) Except as otherwise provided in subsection (b), this [Act] applies to, and authorizes the nonjudicial foreclosure of, every form of security interest in real property located in this State, whether entered into [before,] on or after the effective date of this [Act], if the original notice of foreclosure is given after the effective date of this [Act] and if the debtor has agreed in substance in the security instrument that:
(1) the security interest may be foreclosed pursuant to this [Act]; or
(2) the security interest may be foreclosed by nonjudicial process.
(b) This [Act] may not be used to foreclose or enforce:
(1) a lien created by statute or operation of law, except a lien of an owners' association on property in a common interest community;
(2) a security interest in property in a common interest community if under the law of this State that interest is personal property; or
(3) a security interest in rents or proceeds of real property.
(c) This [Act] does not preclude or govern foreclosure or other enforcement of security interests in real property by judicial or other action permitted by other law of this State. A secured creditor may not take action in pursuance of foreclosure under this [Act] if a judicial proceeding is pending in this State to foreclose the security interest or to enforce the secured obligation against a person primarily liable for the obligation. Foreclosure under this [Act] may proceed even if a judicial proceeding is pending or a judicial order has been obtained for appointment or supervision of a receiver of the collateral, possession of the collateral, enforcement of an assignment of rents or other proceeds of the collateral, or collection or sequestration of rents or other proceeds of the collateral or to enforce the secured obligation against a guarantor.
(d) If a security instrument covers both real property and personal property, the secured creditor may proceed under this [Act] as to both the real property and personal property to the extent permitted by [Article 9 of the Uniform Commercial Code].
[The references to "in this State" have been added in (a) and in (b)(2).]
Legislative Note: The bracketed word "before" in subsection (a) should be included only if the Act is replacing a preexisting nonjudicial foreclosure statute in the enacting jurisdiction. Otherwise, the word should be omitted, making the Act applicable only to security instruments entered into or amended after the Act's effective date.
Legislative Note: In some jurisdictions special statutory provisions govern the termination of installment land contracts (contracts for deed). A jurisdiction 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.
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). In theory 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, and contains the necessary reference to nonjudicial foreclosure. This Act does not specify the circumstances or methods by which a security interest may be created; those matters are left to other law.
The foreclosure provisions of this Act are available only if they are agreed to by the debtor. That agreement will ordinarily be part of the security instrument itself, but an amendment to the security instrument or some other subsequent agreement will also be sufficient. The agreement may either be by reference to the Act itself (e.g., "This mortgage may be foreclosed under the [State] Nonjudicial 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.
Subsection (b) is intended to remove from the Act's coverage security interests that are nonconsensual. For example, the Act does not apply to construction liens, judgment liens, tax liens, landlords' liens, vendors' liens, or vendees' liens, unless the lien in question arises by virtue of an express agreement for a lien between the parties.
In general, liens to assist in enforcement of covenants against owners in common interest communities (see § 102(2)) may be enforced under this Act. If such liens are regarded as being created by operation of law (for example, under a condominium statute), they comprise an exception to the general principle that the Act applies only to consensual security interests. Subsection (b)(2) excludes the foreclosure of association liens on cooperative units if such units are considered personal property, as is the case in some jurisdictions.
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; this Act does not add to or detract from those methods.
Subsection (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, to which they may resort if they wish. In some states other processes, such as strict foreclosure of mortgages, are authorized by law and may continue to be used after adoption of this Act.
The final sentence of subsection (c) is intended to 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 or supervision of a receiver, for enforcement of an assignment of rents, 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. The same is true of actions against guarantors. Even a foreclosure against other property provided by a guarantor as security for the guaranty may proceed despite the pendency of a foreclosure under this Act against the principal security for the debt.
The Act does not impose a "one-action" or "security first" rule, prohibiting commencement of an action on the debt prior to foreclosure if the debt is secured by real property, as is found in a few states. But it does prohibit simultaneous pursuit of a foreclosure under the Act and an independent action on the debt, except as noted above. In addition, if a foreclosure under this Act is completed against a residential debtor, Section 602 may exempt that person from any further liability for a deficiency.
Mortgages and other security instruments 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. Under subsection (d) this is permissible so long as the requirements of Article 9 for disposition of collateral are satisfied.
SECTION 104. VARIATION BY AGREEMENT.
(a) Except as otherwise provided in subsections (b) through (d), the parties to a security instrument may not by agreement vary the effect of a provision of this [Act].
(b) The time within which a person must respond to a notice sent by a secured creditor may be extended by agreement.
(c) The parties to a security instrument may vary the effect of a provision that by its terms permits the parties to do so.
(d) The parties by agreement may determine the standards by which performance of obligations under this [Act] is to be measured if those standards are not manifestly unreasonable.
(e) If no debtor under a security instrument is a residential debtor, an agreement by a guarantor waiving the right to receive notices under this [Act] with respect to the foreclosure of the property of a debtor who is not a guarantor is enforceable unless a waiver is unenforceable under other applicable law.
In general, the parties to a real property security instrument have freedom of contract with respect to their rights and remedies. However, for many centuries judicial policy has provided certain protections not only for the defaulting debtor but also for subordinate 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, to establish reasonable amounts of foreclosure expenses, and to establish reasonable standards of performance for obligations under this Act.
Lenders frequently demand that guarantors waive the right to receive notices related to foreclosures. Such a waiver is recognized by this Act in nonresidential transactions, but only with respect to the foreclosure of the property of the principal debtor. However, to the extent that other law, such as Article 9 of the Uniform Commercial Code, restricts the enforceability of such waivers, those restrictions govern in a foreclosure under this Act notwithstanding the waiver. See UCC 9-611(c)(2) and UCC 9-602(7) (2000 revision). A waiver is not recognized in a foreclosure of a security interest in the guarantor's own property given to secure the guaranty.
SECTION 105. SUPPLEMENTAL PRINCIPLES OF LAW AND EQUITY APPLICABLE. Unless displaced by a particular provision of this [Act], the principles of law and equity affecting security interests in real property supplement this [Act].
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 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. These principles include the law relating to acceleration, bankruptcy, capacity to contract, coercion, duress, estoppel, fraud, marshaling of assets, misrepresentation, mistake, principal and agent, redemption, subrogation, unjust enrichment, and other validating or invalidating cause.
For example, a court might "deaccelerate" an installment debt that had been accelerated under inequitable conditions (see, e.g., Federal Home Loan Mortg. Corp. v. Taylor, 318 So.2d 203 (Fla.App. 1975); might enjoin or stay a foreclosure because the granting of the security interest was tainted with fraud, duress, or lack of capacity (see, e.g., National Management Corp. v. Adolfi, 277 A.D.2d 553, 715 N.Y.S.2d 526 (2000); or 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 (see, e.g., Indiana Lawrence Bank v. PSB Credit Services, Inc.,
706 N.E.2d 570 (Ind.App.1999).
The listing of legal and equitable principles in this comment is not exhaustive, but is merely illustrative of the principles that supplement this Act.
SECTION 106. NOTICE AND KNOWLEDGE.
[Note to drafting committee: This section has been extensively revised by the reporter and the Committee on Style. Please review it with special care.]
(a) In this Section:
(1) "Address" means a physical or an electronic address, or both, as the context requires.
(2) "Address for notice" means:
(A) with respect to a notice given by a secured creditor:
(i) for a recipient that has given to the secured creditor a security instrument or other document in connection with a security instrument, the address, if any, specified in the security instrument or document;
(ii) for a recipient not described in subsubparagraph (i) that is identifiable from examination of the public records [in the office of the county recorder], or, if personal property is being foreclosed together with real property, the financing statement filings in the office of [the Secretary of State], the address, if any, specified in the recorded or filed document;
(iii) for a recipient not described in subsubparagraph (i) or (ii) that the secured creditor knows is a tenant, subtenant, or leasehold assignee of all or part of the real property collateral, the most recent address made known to the security creditor by that person or, if none, the address of the real property collateral, including the designation of any office, apartment, or other unit that the secured creditor knows is possessed by the recipient, with the notice directed to the recipient's name, if known, or otherwise "To Tenant occupying property at" the physical address or description of the real property collateral;
(iv) if the sources described in subsubparagraphs (i) through (iii) do not disclose an address, the physical address of the real property collateral, if known to the secured creditor; and
(B) with respect to notices given by persons other than a secured creditor, the address given in a document provided by the recipient to the person giving notice.
(3) "Electronic" means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.
(4) "Electronic notice" means an electronic record signed by the person sending the notice.
(5) "Electronic record" means a record created, generated, sent, communicated, received, or stored by electronic means.
(6) "Electronic signature" means an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with intent to authenticate the record.
(7) "Recipient" means a person to whom a notice is sent.
[Should the definition of "sign" be reinserted here and removed from Section 102?]
(8) "Written notice" means a written record signed by the person giving the notice.
(b) A person knows a fact if:
(1) the person has actual knowledge of the fact;
(2) the person has received a notice or notification of the fact; or
(3) from all the facts and circumstances known to the person at the time in question the person has reason to know the fact exists.
[Should we add: "A foreclosing creditor is not held to know a fact that the creditor would reasonably discover only by inspection of the real property collateral unless the creditor has actually made such an inspection." This would eliminate any question that tenants under unrecorded leases are cut off without receiving notice of foreclosure.]
(c) Notice is sent or given, or a recipient is notified, subject to the limitations of subsection (d):
(1) by hand delivering a written notice to the recipient or to an individual found at the recipient's address for notice who is authorized to receive service of civil process under the [Rules of Civil Procedure]; or
(2) by depositing written notice, properly addressed to the recipient's address for notice, with cost of delivery paid,
(A) with the United States Postal Service, registered or certified mail, return receipt requested;
(B) with the United States Postal Service by regular mail; or
(C) with a commercially reasonable carrier other than the United States Postal Service; or
(3) subject to subsection (g), by initiating operations that in the ordinary course will cause the notice to come into existence at the recipient's address for notice in the recipient's information processing system in a form capable of being processed by the recipient.
[Note that the foregoing subsection is slightly different from the UETA formulation, which speaks of the notice coming into existence in the recipient's information processing system or an address within that system. The formulation above requires that the notice be sent to the correct e-mail address, and not merely the correct system.]
(d) Use of the methods of notice specified in subsection (c) is limited as follows:
(1) If the recipient is an individual and the security interest covers the recipient's primary residence:
(A) if the notice is a notice of default pursuant to Section 202 or a notice of foreclosure pursuant to Section 203, both of the methods of giving notice specified in subsection (c)(2)(B) and subsection (c)(2)(C) must be used;
(B) if the notice is not a notice of default pursuant to Section 202 or a notice of foreclosure pursuant to Section 203, a method of giving notice specified in subsection (c)(1) or (c)(2) must be used;
(e) If a person giving a notice pursuant to this [Act] and the recipient have agreed to limit the methods of transmission of the notice otherwise permitted by subsections (c) and (d), that limitation is enforceable to the extent that it is consistent with subsection (d) and is otherwise permitted by law.
[Is there any other law that would come into play here? What would it be?]
(f) A person may not give an electronic notice unless the recipient uses, designates by agreement, or otherwise has designated or holds out an information processing system or address within that system as a place for the receipt of communications of that kind. An electronic notice is not sent if the sender or its information processing system inhibits the ability of the recipient to print or store the record.
(g) If, at the time of giving a required notice, a person knows that the recipient's address for notice is incorrect or that notices cannot be delivered to the recipient at that address, the person that sent the notice shall make a reasonable effort to determine a correct address for the recipient and send the notice to the address so determined.
(h) If, after giving a notice, a person acquires knowledge that the address of the recipient to which the notice was directed is incorrect or that notices cannot be delivered to the recipient at that address, the person that sent the notice shall promptly make a reasonable effort to determine a correct address for the recipient and send another copy of the notice to the address so determined, if any. The first notice, if timely sent and properly directed to the recipient's address for notice, complies with the time requirements of this [Act].
(i) A person may use methods of giving notice in addition to the methods required by subsections (c) and (d).
(j) A notice is sufficient even if it includes information not required by law or contains minor errors that are not seriously misleading.
(k) Receipt of a notice within the time in which it would have been received if properly sent has the effect of a proper giving of notice.
(l) If the recipient is an individual, a notice is received when it comes to the recipient's attention or is delivered to and available at the recipient's address for notice. If the recipient is not an individual, a notice is received when it is brought to the attention of the individual conducting the transaction, or in any event when it would have been brought to that individual's attention if the recipient had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information with the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of the individual's regular duties or unless the individual has reason to know of the transaction and that the transaction would be materially affected by the information.
[Is this subsection sufficiently clear in the context of a foreclosure?]
(m) Subject to subsection (n), a person that has sent a notice may revoke it by a subsequent notice unless the recipient has materially changed its position in reliance on the notice before receiving the revocation.
(n) A notice of foreclosure may be revoked by the secured creditor at any time before the time of foreclosure. Revocation may be accomplished only by recording a sworn affidavit in [the Office of the County Recorder] of each [county] in which the notice of foreclosure was recorded, stating that the secured creditor has revoked the notice of foreclosure. If a notice of foreclosure is revoked, all proceedings taken under that notice are void.
[(o) If this [Act] or a notice sent pursuant to this [Act] requires a performance on or by a certain day, and that day falls on a Saturday, Sunday, or legal holiday, the performance is sufficient if done on the next day that is not a Saturday, Sunday, or legal holiday.]
Legislative note: Enacting jurisdictions should review their rules of civil procedure to ensure that they provide appropriate information concerning personal service as provided by subsection (c)(1). Subsection (o) should be enacted only if the jurisdiction's statutes do not contain a similar provision of general applicability.
The terms "gives," "notifies," 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 recipient's receipt of the notice, that is stated. Subsection (c) provides that proper dispatch and not its receipt satisfies the obligation "to notify" or "to give notice." For example, if notice is given by mailing with the U.S. Postal Service, the time of deposit of the notice with the postal system is the time notice is "given" or "sent." Subsection (l) states when a notice is received.
In general, the notices required by the Act may be given by personal service, registered or certified mail, regular mail, other commercial carriers, or electronically. However, there are restrictions on the types of notices that may be sent to individuals respecting the foreclosure of their primary residences. When a notice of default or foreclosure required by Article 2 is given by a secured creditor to an individual in connection with the foreclosure of that individual's primary residence, the notice is regarded as so important, and the consequences of failure to receive it so great, that only a paper notice is permitted, and dual copies of the notice must be sent, one by commercial carrier or by registered or certified mail, and one by regular mail.
Electronic notices are not permitted to individuals whose primary residences are being foreclosed. However, electronic notices may be sent to individuals with respect to property other than their primary residences, and to entities other than individuals. In all cases, an electronic notice may be used only if the recipient uses, has agreed to, or holds out a suitable system to receive the notice. If a recipient is a "consumer," an electronic notice may not be sent unless the recipient has consented to receipt of electronic records, and that consent remains in effect, as provided in the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. section 7001(c). The definition of "consumer" in that statute encompasses some cases, such as vacation homes, in which the recipient is a person other than an individual whose primary residence is being foreclosed.
If a person sending a notice knows or later discovers that an address is incorrect, the sender has a duty to make a reasonable effort to determine a correct address. An address might be incorrect because no such address exists, because as a result of error the recipient's address has been mis-transcribed, or for other reasons. The reasonable effort to determine a correct address 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 recipient is believed to be 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 persons sending notices.
If a correction notice is sent because the sender discovers that the address used for the original notice was incorrect, any applicable time periods run from the date of the original sending.
The provisions of subsection (l) concerning receipt of notice are derived from Uniform Commercial Code section 1-201(27).
The provisions of subsection (n) concerning revocation of notices are derived from Uniform Commercial Code section 2-209(5).
SECTION 107. TRANSACTION CREATING SECURITY INTEREST. A transaction that is intended to create a security interest does so irrespective of the caption of the documents. A seller's retention of legal title to real property after the buyer enters into possession under a contract of sale creates a security interest only if the retained title is intended as security and the contract permits the seller to retain title for more than one year after the buyer enters into possession.
The creation of a security interest depends on the parties' intent. The intent in question, however, is that relating to real estate law. For example, a "synthetic lease" transaction that is intended to be regarded as a security interest for legal purposes but a lease for accounting purposes is within the scope of this Act.
The common situation in which a buyer takes possession of real property a short time before the closing under a contract of purchase is excluded from the coverage of this Act. However, if a seller may retain 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, foreclosure under this Act is available to the seller if the requirements of subsection 103(a) are satisfied.
With respect to whether a lease creates a security interest, guidance may be obtained from UCC § 1-203 (ALI Council Draft 2001).
SECTION 108. TIME OF FORECLOSURE. The time of foreclosure is:
(a) the time the affidavit required by Section 312 is recorded in the case of a foreclosure by auction;
(b) the time the affidavit required by Section 405 is recorded in the case of a foreclosure by negotiated sale; or
(c) the time the affidavit required by Section 505 is recorded in the case of a foreclosure by appraisal.
SECTION 201. RIGHT TO FORECLOSE.
(a) A secured creditor has a right to foreclose under this [Act] if:
(1) all conditions that, by law and the terms of the security instrument, are prerequisites to foreclosure have been satisfied;
(2) all notices to the debtor required by the security instrument and by this [Act] as prerequisites to foreclosure have been given; and
(3) all periods for cure available to the debtor by the terms of the security instrument and law as prerequisites to foreclosure have elapsed and no cure has been made.
(b) A foreclosing creditor may pursue foreclosure exclusively by auction, by negotiated sale, or by appraisal, or may simultaneously pursue, together with foreclosure by auction, either foreclosure by negotiated sale or by appraisal, but not both. If the creditor pursues two methods of foreclosure simultaneously, the notice of foreclosure must so state.
[Note the drafting committee: Is there any reason not to allow a creditor to pursue all three methods of foreclosure simultaneously? Allowing this would actually simplify this section. Of course, the creditor would have to notify the debtor of which methods were being used in the notice of foreclosure.]
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. If a secured creditor has a right to foreclose, the secured creditor may give notice of foreclosure (Sections 203 and 204), and foreclose against the collateral by auction (Article 3), negotiated sale (Article 4), or appraisal (Article 4). Notice of the secured creditor's elected method or methods of foreclosure must be given by the secured creditor as provided in Section 204(b)(6).
SECTION 202. NOTICE OF DEFAULT AND RIGHT TO CURE.
(a) Subject to subsections (b) [and (f)(1) if it is retained], a notice of default must be given to each debtor and each interest holder whose interest gives right of possession of the real property collateral, a and the cure period provided by this section must expire without cure being made, before notice of foreclosure is given.
[Note that only "interest holders" with the right of possession of the real estate are entitled to notice of default.]
(b) Except as provided in the security instrument, notice of default need not be given and no cure period is applicable if the default cannot be cured.
(c) A notice of default must contain:
(1) the facts establishing that a default has occurred;
(2) the amount to be paid or other performance required to cure the default, including the daily rate of accrual for amounts accruing over time, and the time within which cure must be made;
(3) the name, address, and telephone number of an individual who is or represents the secured creditor, and who can be contacted for further information concerning the default; and
(4) a statement that foreclosure may be initiated if the default is not cured in a timely manner.
(d) Within 30 days after notice of default is given to the last person entitled to such notice, any person may:
(1) cure the default if the default is curable by the payment of money, or
(2) commence to cure the default if the default cannot be cured by the payment of money, diligently proceed to cure the default, and complete the cure of the default within [90] days after
the notice of default was given.
[Is it necessary to include a reference in the text to the payment of the creditor's expenses, late fees, default interest, attorney's fees, etc. in describing the cure? This is mentioned in the comment.]
(e) If no person is proceeding diligently to cure a default that cannot be cured by the payment of money after 30 days from the date the notice of default was sent to the last person entitled to such notice, the secured creditor may immediately terminate the period allowed for cure by accelerating payment of the principal amount owing on the secured obligation or giving an original notice of foreclosure.
(f) If none of the real property to be foreclosed is residential real property:
(1) if a default cannot be cured by the payment of money and a notice of default was given by the secured creditor within one year before the date of the present default on account of a default of the same kind, no notice of default is required and no right to cure exists except as agreed by the parties; and
[The drafting committee agreed to discuss removing this provision at its next meeting.]
(2) the periods specified in subsection (d) to cure a default may be reduced as the parties agree in the security instrument, but may not be less than 10 days.
(g) A notice of default may be given notwithstanding that a notice of default has previously been given on account of a different default and is still pending.
[This provision is new.]
(g) The right to cure a default provided in this section does not impair or limit any other right to notice of default or to cure a default provided to any person by the security instrument. The period to cure provided in this section and any period to cure provided in the security instrument run concurrently unless the security instrument provides otherwise.
(h) Unless precluded from doing so by law other than this [Act], a secured creditor shall cooperate with any debtor or interest holder that attempts to cure a default by promptly providing upon request reasonable information concerning the amount or other performance due and expenses necessary for cure.
(i) If a default is cured within a period allowed by this section, or after the expiration of that period but before acceleration of the principal amount owing on the secured obligation or the giving of an original notice of foreclosure, an acceleration by the secured creditor of the principal amount owing on the secured obligation on account of that default is ineffective.
(j) During a period allowed for cure of a default under this section, a secured creditor may enforce any remedy other than foreclosure provided for by the security instrument and enforceable under law of this State other than this [Act] if enforcement does not unreasonably interfere with the ability of a debtor to cure a default under this section.
In most cases this Act requires two notices prior to foreclosure, the notice of default specified by this section and the notice of foreclosure itself, specified by Sections 203 and 204. However, no notice under this section is necessary if the default is incurable.
Illustrations of curable defaults include a borrower's failure to pay money by a specified date, failure to repair the collateral, failure to comply with local building codes, and failure to carry casualty insurance if no insurable event has occurred during the period of failure. Illustrations of non-curable defaults include a borrower's failure to maintain a specific net worth on a specified date, failure to carry casualty insurance if an insurable event has occurred during the period of failure, and transfer of the collateral in violation of an enforceable due-on-sale clause.
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 instrument, a failure to keep the real property insured as required by the security instrument, or the like. A lender may convert a nonmonetary default into a monetary default by paying the money necessary to cure and then demanding reimbursement from the borrower.
The notice under this section simply advises the debtor or debtors that a default has occurred, what must be done to cure it, and that foreclosure may ensue if it is not cured within the allowed time period. Non-debtor parties, such as subordinate lienholders, are not entitled to receive this notice, although if they otherwise become aware of the default, they may cure it if they wish.
The notice must advise the debtor of the facts establishing that a default has occurred, and must state what must be done to cure it. The performance required must be stated on a per diem basis with respect to items whose amount changes with the passage of time. To be effective under subsection (d), a cure must include reimbursement to the secured creditor of all legally recoverable expenses incurred by the secured creditor on account of the default. Examples might include attorneys' fees, late fees, and fees for property inspection. See the example notice at the foot of this comment.
Upon request, the secured creditor must cooperate by explaining the basis upon which any such fees are calculated. This Act does not deal with the enforceability of such fees, but leaves that issue to other law. Since redemption requires payment of the secured obligation in full, the cure provided by this Section is not a redemption.
The cure period runs from the date the secured party gives the notice of 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 efforts to cure are commenced within 30 days, even if a complete cure cannot be accomplished within that time. However, if those diligent efforts to cure cease before cure is completed, and in all events after 90 days if the cure is not completed, the secured creditor may then immediately proceed to accelerate the debt or to give notice of foreclosure without taking any other preliminary action.
In practical effect, the cure period may last longer than the 30 or 90 days indicated in this section. For example, suppose a nonmonetary default occurs and the debtor is given notice of the default under this section. The debtor then commences and continues diligent efforts to cure the default. At the end of 90 days, if the cure is incomplete the secured creditor is entitled to accelerate the debt or send an initial notice of foreclosure. However, suppose the creditor does not do so, and with an additional time period - say, 120 days from the date of the notice - the debtor completes the cure. This cure is effective and the secured creditor cannot thereafter accelerate or send a notice of foreclosure on account of that default. Thus the cure period is at least 30 or 90 days as provided in this section, but may be effectively extended if the secured creditor takes no action until a longer period passes. If cure is made within the time permitted by this section, subsection (i) "deaccelerates" any acceleration of the obligation that the secured creditor has initiated.
This section generally applies whether any of the debtors are residential debtors or not. However, if no debtor is a residential debtor two additional limitations are imposed on the right to cure. First, the 30-day cure period for may be reduced by the parties' agreement to as little as 10 days. Second, if the default is non-monetary, the right to cure may be exercised only if no default of the same kind has occurred within the previous year.
[Do we need a further explanation of "the same kind?" Alternatively, should we either (1) change this to all kinds of prior defaults, or (2) drop it entirely?]
The security instrument 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 of foreclosure can be given. However, any time period for cure under the security instrument and the time for cure granted by this section will run concurrently unless the parties have agreed that they will not do so. For example, if the security instrument provides for a 60-day grace period for the cure of monetary defaults, and the notice of default is given on September 1, the default may be cured any time prior to October 31.
The cure periods provided by this section inhibit acceleration and the instigation of foreclosure under this Act, but do not necessarily stand in the way of other remedies the secured creditor may have. Exercise of such other remedies is barred only if they would unreasonably interfere with the debtor's ability to cure the default. For example, if the security instrument gives the creditor a security interest in the rents generated by the real estate collateral, and if that interest is otherwise enforceable under applicable law on account of the default in question, the creditor may assert its rights against the rents despite the fact that the cure period has not expired. If in doing so the creditor notifies the tenants that they are now to pay their rents directly to the creditor, this action may result in reduced cash flow to the debtor, but since the creditor must apply the rent received toward the secured debt, the action does not unreasonably interfere with the debtor's ability to cure the default.
To: Mary and John Jones
455 South Main Street
Ashland, Example 12345
Dear Ms. and Mr. Jones:
1. This notice 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.
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.
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.
4. Your obligations under this note and mortgage are now in default as follows: (a) The payments for August 1, September 1, and October 1, 200X have not been made. (b) The premium on the homeowners insurance policy, due on October 1, 200X, was not paid by you, and was paid by First Financial Corp. on October 14, 200X in order to keep this insurance in force.
5. If you do not cure these defaults within 30 days of the date of this notice, by December 31, 200X, First Financial Corp. may initiate foreclosure proceedings against the real estate, which could result in your loss of ownership of this property.
6. You can cure these defaults within the time stated by tendering at the office of First Financial Corp., 677 First Avenue, Ashland, Example 12344 the following sums of money:
August 1, 200X payment: $1,455.00
Late fee for above payment: 72.75
September 1, 2000X payment: $1,455.00
Late fee for above payment: 72.75
October 1, 200X payment: $1,455.00
Late fee for above payment: 72.75
Reimbursement of insurance premium paid by
First Financial 10/15/0X $ 588.00
Interest on insurance premium
at 7.5% per annum to date of this notice: 5.66
Attorneys' fees in connection with this notice: $ 200.00
Total due as of 12/01/0X: $5,376.91
Additional per diem interest after 12/01/0X $ .12/per day
If First Financial Corp. is required to expend additional money on account of your defaults, you must also reimburse those expenditures in order to cure your defaults.
Payment must be made by cash, cashier's check, certified check, or postal money order.
7. If you have any questions about the defaults mentioned above or the calculation of the amounts owed, you may contact Sandra A. Mortgagee, residential loan officer for First Financial Corp. She can be contacted at 677 First Avenue, Ashland, Example 12344, telephone number 123-654-3210, e-mail address mortgageesa@firstfinancial.com.
[Signed] First Financial Corporation
Sandra A. Mortgagee, Loan Officer
SECTION 203. NOTICE OF FORECLOSURE: MANNER OF GIVING.
(a) If a secured creditor has a right to foreclose under Section 201, the secured creditor may commence foreclosure by giving notice of foreclosure. The notice must comply with subsections (b) and (c) and section 204, and is a prerequisite to foreclosure.
(b) A foreclosing creditor shall record a copy of the notice of foreclosure in [the office of the county recorder] of each [county] in which the real property collateral is located. A recorded notice of foreclosure is notice of its existence and contents to any person acquiring an interest in the real property collateral after the notice of foreclosure is recorded. In the absence of recording of the notice of foreclosure, any purported foreclosure under this [Act] is voidable.
(c) Except as otherwise provided in subsection (d), a foreclosing creditor shall give a notice of foreclosure to the following persons no later than five days after recording the notice of foreclosure pursuant to subsection (b) if they can be identified as of the time of recording of the notice of foreclosure.
(1) a person that the foreclosing creditor knows to be a debtor;
(2) a person specified by the debtor in the security instrument to receive notice on the debtor's behalf;
(3) a person that is shown by the public records in [the office of the county recorder] of the [county] in which any part of the real property collateral is located to be an interest holder in the real property collateral;
(4) if the foreclosing creditor holds and intends to foreclose on a security interest in personal property, a person who is entitled to notice with respect to the disposition of the personal property collateral under [Article 9 of the Uniform Commercial Code];
(5) a person who the foreclosing creditor knows is an interest holder in the real property collateral; and
(6) a person that has recorded in the public records in [the office of the county recorder] of the[ county] in which any part of the real property collateral is located a request for notice of foreclosure satisfying the requirements of Section 205.
(d) After the time of recording of the notice of foreclosure, if the foreclosing creditor obtains actual knowledge that a person holds an interest in the collateral that is subordinate in priority to the security instrument, the foreclosing creditor must give a notice of foreclosure to that person no later than five days after obtaining such knowledge.
(e) A foreclosing creditor may give a special notice of foreclosure to any person described in subsection (c) or (d) to avoid the termination of that person's interest in the collateral by the foreclosure. The special notice shall give the information required by section 204, but state that the recipient's interest in the collateral will not be terminated by the foreclosure.
[Note that this subsection has been revised. It now places an affirmative duty on the creditor to tell junior tenants if their leases are being preserved in a foreclosure.]
(f) A foreclosing creditor, within 10 days before or after recording a notice of foreclosure, shall affix a copy of the notice of foreclosure at a conspicuous place on the real property collateral.
(g) An original notice of foreclosure is ineffective if given after the limitation period for foreclosure of a security interest in real property by judicial proceeding has expired.
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 should ensure that the notice requirements of due process will be met.
This section does not require foreclosing creditors to resort to factual investigation of the property in order to determine where notice of foreclosure must be sent. Lenders need consult only their own records, the usual public land title records, and for personal property collateral, the office where UCC financing statements are filed. Since notice must be given to persons with recorded interests under subsection (b)(3), the practical result is that the foreclosing creditor must perform a title examination down to the date and time that the notice of foreclosure is recorded. However, there may be parties, such as grantees of the original borrower and subordinate interest holders, who have not recorded their conveyances, and the foreclosing creditor may not have knowledge of their rights. In such situations, they are not entitled to notice of foreclosure, and their rights will be cut off despite the fact that no notice of foreclosure is given to them.
This follows even if such unrecorded parties were in possession of the real property. [Under the definition of "knows," (section 106(b)), the foreclosing lender is not regarded as knowing of the presence of tenants on the premises if it could gain such knowledge only by an inspection and no inspection has been made.] However, posting of the notice of foreclosure at a conspicuous place on the real estate is required by subsection (c). Posting is reasonably likely to come to the attention of persons, such as tenants, subtenants, and leasehold assignees, who have unrecorded interests, and to give them actual knowledge.
Recording of the notice of foreclosure is required by subsection (a). Once a notice of foreclosure is recorded, the foreclosing creditor need no longer be concerned 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 the doctrine of lis pendens, and provides automatic notice to such parties. Recording of the notice is an absolute requirement for foreclosure under this Act, since numerous time periods involved in a foreclosure are measured from the time of recording. For this reason, a purported foreclosure in the absence of recording of the notice of foreclosure is voidable unless the collateral has passed into the hands of a good faith purchaser for value; see Section 208(c).
No notice of foreclosure is necessary to persons holding interests in the property with priority superior to the security instrument being foreclosed; such persons are unaffected by the foreclosure and have no need of notice.
Notice need not be given to guarantors of the secured obligation who have waived their right to notice if there are no residential debtors in the transaction and if the waiver is otherwise enforceable under applicable law. See Section 104(d).
Under subsection (e) the foreclosing creditor may use a special form of notice of foreclosure in order to avoid terminating the interest of a person entitled to notice under subsections (c) or (d) because the creditor believes that it is desirable to preserve that person's interest. A common example is a subordinate lease which the creditor believes adds to the property's value, and hence which it is undesirable to terminate. If such a special notice is given and the foreclosure is completed, the foreclosing creditor is permanently barred from foreclosing against the interest of the person to whom the special notice was given.
[Should this last statement be placed in the text?]
The only effect of a foreclosing creditor's failure to give notice to a person entitled to notice under subsection (c) is to preserve that person's interest. The failure does not impair the foreclosure's effect on the interests of other persons, and does not impair the foreclosing creditor's interest or its priority with respect to the interest of the person who was omitted from notice. The failure to give notice under this Act is analogous to the effect of omitting a necessary party to a judicial foreclosure proceeding.
SECTION 204. NOTICE OF FORECLOSURE: CONTENT.
(a) The heading of a notice of foreclosure must be conspicuous and must read as follows: "NOTICE OF FORECLOSURE. YOU ARE HEREBY NOTIFIED THAT YOU MAY LOSE YOUR RIGHTS TO CERTAIN PROPERTY. READ THIS NOTICE IMMEDIATELY AND CAREFULLY."
(b) A notice of foreclosure must contain:
(1) the date of the notice, the name of the owner of the collateral as identified in the security instrument, a legally sufficient description and, at the secured creditor's option, the street address, if any, stated in the security instrument of the real property collateral or portion thereof being foreclosed, and a description of any personal property collateral to be included in the foreclosure;
(2) information concerning the recording of the security instrument, including recording date and [book and page number] [document number];
(3) that a default exists under the security instrument, and the facts establishing the default;
(4) a statement that the foreclosing creditor is initiating foreclosure;
(5) a statement that the foreclosing creditor has accelerated or, by virtue of the notice, is accelerating the due date of the principal amount owing on the secured obligation, or a statement that the foreclosing creditor elects not to accelerate the due date.
(6) a statement that the collateral may be redeemed from the security interest by payment in full or performance of the secured obligation in full before foreclosure and the amount to be paid or other action necessary to redeem, including a per diem amount that will allow calculation of the total balance owed as of future dates and any further amount the foreclosing creditor anticipates expending to protect the collateral;
(7) a statement of the method or methods of foreclosure the foreclosing creditor elects to use, and the earliest date on which foreclosure will occur if no redemption is made;
(8) a statement that the foreclosure will terminate the rights in the collateral of the person receiving the notice of foreclosure;
(9) if applicable, an explanation of a residential debtor's right to avoid a deficiency claim by compliance with Section 604;
(10) if the foreclosure is by negotiated sale or by appraisal, an explanation of the right of the debtor and holders of subordinate interests to object to the foreclosure under Section 407 or 507;
(11) if applicable, a statement that, within 15 days after the date the notice of foreclosure is given, a debtor or an interest holder having a possessory interest in the real property collateral may request a meeting with a representative of the foreclosing creditor to object to the foreclosure as provided by Section 206; and
(11) the name, address, and telephone number of an individual who is the foreclosing creditor or a representative of the foreclosing creditor, and who can be contacted for further information concerning the foreclosure.
The amount that must be paid to redeem ordinarily will be stated as the balance owing as of a fixed date, plus a per diem amount representing the accruing interest on that balance. If a debtor seeks further information about the amount needed to redeem (for example, the basis of attorneys' fees or other expenses), the creditor must cooperate reasonably in providing that information.
Under subsection (b)(1), the foreclosing 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 foreclosing creditor may institute a subsequent foreclosure under this Act or otherwise foreclose on the remaining collateral if necessary at a later time. See Section 207 regarding foreclosure on multiple parcels.
The notice must state the facts establishing a default in reasonable detail. For example, it is not sufficient to state "borrower has not made payments when due" or "borrower has failed to comply with the covenants of the mortgage." In the case of a default in payment, the notice should specify the dates and amounts of delinquent payments. In the case of a breach of mortgage covenants, the relevant covenants should be identified, as in "borrower has failed to keep casualty insurance in force as required by paragraph 12 of the mortgage."
The notice of foreclosure automatically accomplishes an acceleration of the obligation by virtue of compliance with subsection (b)(4). Even in the exceedingly rare cases in which the security instrument contains no acceleration clause, an acceleration will still take place by operation of this Act. This should impose no inconvenience on lenders, since ordinarily no lender wishes to foreclose without acceleration. However, if the lender wishes, it can expressly disclaim an acceleration in the notice of foreclosure. Nothing in this 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.
The following is an illustrative notice of foreclosure complying with the requirements of this section.
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.
2. This property is subject to a mortgage executed by Mary and John Jones to First Financial Corp. on 23 June, 200_, and recorded in Book 456, Page 244, Official Records of Pembroke County, State of Example.
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. First Financial Corp. is now commencing foreclosure of this mortgage.
4. First Financial Corp. is hereby accelerating the unpaid balance on the 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.
5. The debtor and the holders of property interests subordinate to the mortgage of First Financial Corp. may prevent a foreclosure of the real property by paying the full balance of $137,455.34 on December 1, 200_, plus interest at the rate of $30.13 for each day thereafter to the date of payment. Payment must be made before the time of foreclosure in order to prevent foreclosure from occurring.
6. If payment is not made in this amount, First Financial Corp. elects to foreclose by auction or alternatively by appraisal. The earliest date on which foreclosure can occur is March 3, 200_.
7. If the foreclosure sale or foreclosure by appraisal proceeds, it will terminate the rights of the owner of the property, and may terminate the interests of other persons to whom this notice is directed.
8. If the sum received by First Financial Corp. from the foreclosure (or the sum credited against the mortgage indebtedness in the case of a foreclosure by appraisal) is less than the unpaid balance on the mortgage indebtedness and expenses of foreclosure, the borrowers, Mary and John Jones, may be held personally liable for any remaining unpaid sum. However, they can avoid this liability by compliance with [Section 602(c) of the Uniform Nonjudicial Foreclosure Act] by acting in good faith, which means that they must
(1) peaceably vacate the real estate collateral and relinquish any personal property collateral within 10 days after notice is given to them that foreclosure has been completed;
(2) not have committed significant affirmative waste upon the collateral and left such waste uncured at the time of foreclosure;
(3) not have significantly contaminated the collateral with hazardous materials and left such contamination uncured at the time of foreclosure;
(4) not have committed fraud against the foreclosing creditor;
(5) not have engaged in criminal activity on the secured real estate collateral that significantly reduced its value at the time of foreclosure;
(6) not have permitted significant uncured damage to be done to the collateral by other persons or natural causes as a result of their failure to take reasonable precautions against such damage; and
(7) provide reasonable access to the collateral for inspection by the foreclosing creditor and prospective purchasers after the initial notice of foreclosure is sent.
9. If the borrowers, Mary and John Jones, believe that the proposed foreclosure is 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, at telephone number 123-654-3210, or by e-mail at doej@doelawfirm.com. Ms. Doe must receive a request for a meeting within 15 days after the date of this notice given above. Upon receiving such a request she will schedule a meeting, in person or by telephone, at a mutually convenient time.
[Signed] First Financial Corp.
Sandra Mortgagee, Loan Officer
SECTION 205. REQUEST FOR NOTICE OF FORECLOSURE.
(a) Any person may record in [the office of a county recorder] a request for notice of foreclosure of a security instrument that has been recorded in that [office]. The request must state:
(1) the [date, book, and page] [document number] of the security instrument's recording;
(2) the names of the parties to the security instrument;
(3) a legally sufficient description of the real property collateral affected by the security instrument;
[Query: Is the description really necessary, or is a reference to the original mortgage sufficient?]
(4) the name and address of the person requesting notice of foreclosure; and
(5) the legal interest, if any, held by the person recording the request for notice.
(b) A person that records a request under subsection (a) is entitled to be given notice of foreclosure under Section 203(a). Recording a request does not affect the title to the real property collateral and does not constitute constructive notice to any person of an interest in the real property collateral held or claimed by the person requesting notice. A person that records a request for notice under this section may subsequently record an amendment supplementing or correcting the person's name, address, or other information in the request, or withdrawing the request.
(c) A foreclosing creditor is liable for a penalty of $500 to a person that is not given timely notice of foreclosure if that person has recorded a request for notice of foreclosure meeting the standards of this section. If a recorded request for notice states that the person recording the request has an interest in the real property collateral and the person is not given timely notice of foreclosure, the person's interest in the collateral, if any, is preserved from termination by the foreclosure. No other remedy or sanction may be imposed against the foreclosing creditor on behalf of such person.
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 that foreclosure had been commenced. Even a person with no legal interest in the collateral may record a request under this section.
SECTION 206. MEETING TO OBJECT TO FORECLOSURE.
(a) A residential debtor may request a meeting to object to a foreclosure. The request must be made by a notice received by the foreclosing creditor within 30 days after the notice of foreclosure is given to that debtor. If the foreclosing creditor receives a request for a meeting, the foreclosing creditor or a responsible representative of the foreclosing creditor shall schedule and attend a meeting with the person requesting it at a mutually agreeable time. The representative may be an employee, agent, servicer, or attorney of the foreclosing creditor and must have authority to terminate the foreclosure if the representative determines that there is no legal basis for foreclosure. The meeting may be held in person or by telephone, video conferencing, or other reasonable means, at the election of the foreclosing creditor. If the meeting is held in person, it must be held at a location reasonably convenient to a parcel of the real property collateral unless the person requesting the meeting and the creditor or representative mutually agree on a different location. If the foreclosing creditor receives requests from more than one person, the creditor or representative may attempt to arrange a consolidated meeting, and the persons requesting meetings must cooperate reasonably with the foreclosing creditor's effort to do so.
(b) A meeting conducted pursuant to this section is informal and the rules of evidence do not apply. The parties may be represented by legal counsel. The foreclosing creditor or representative must have access to records that provide evidence of the grounds for foreclosure. The creditor or representative shall consider the objections to foreclosure stated by the person requesting the meeting. Within 10 days after the meeting the creditor or representative attending the meeting shall give to each person who requested the meeting a written statement indicating whether the foreclosure will be discontinued or will proceed and the reasons for the determination. Neither the objections to foreclosure stated by the person requesting the meeting nor the reasons stated by the creditor or representative preclude any person from raising those or other grounds for objecting to or supporting foreclosure in any subsequent judicial proceeding. A statement or representation made by a person at the meeting may not be introduced as evidence in any judicial proceeding. Each party must bear its own expenses in connection with the meeting.
(c) Neither the foreclosing creditor nor the representative incurs liability for making a determination that is adverse to the person who requested the meeting.
The objective of the informal meeting process provided by this section is to ensure both fairness and the appearance of fairness to residential debtors who are at risk of losing their homes in a foreclosure. The meeting is not automatic, but is scheduled only if a residential debtor requests it. Foreclosing creditors have no obligation under this Act to conduct similar meetings at the request of nonresidential debtors, but of course may do so if they wish.
The responsible representative of the foreclosing 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 instrument 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.
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, at least with respect to an attack by a residential debtor, if the foreclosing 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 to residential debtors. However, since there is no requirement of a meeting with non-debtor holders of subordinate interests in the collateral or with nonresidential debtors, such persons may still be able to raise Due Process claims unless the foreclosing creditor grants them a meeting or hearing voluntarily.
The foreclosing creditor and representative cannot be not held liable for making a determination adverse to the debtor, even if their determination is shown to be wrong. However, the foreclosing creditor may still be held liable for actually proceeding with the foreclosure if a legal basis for foreclosure did not exist or the foreclosure was conducted wrongfully. See Section 601. In order to encourage free exchange of information at the meeting, statements by the representative of the creditor or admissions by the debtor at the meeting cannot be used in a later judicial proceeding.
SECTION 207. PERIOD OF LIMITATION FOR FORECLOSURE. The time of foreclosure may not be less than 90 days nor more than one year after an original notice of foreclosure is recorded under Section 203 and not less than 30 days after any subsequent notice of foreclosure. The one-year period of limitation may be extended by agreement of the foreclosing creditor and all persons whom notice of foreclosure was required to be given, other than persons excluded from foreclosure by notice issued under Sections 203(e), 407(b), or 507(b). The one-year and 30-day periods of limitation are tolled during the period that any court order temporarily enjoining or staying the foreclosure is in effect, and during any stay under the United States Bankruptcy Code, 11 U.S.C. § 101 et. seq.
This section constrains the time that may elapse between the giving of an original notice of foreclosure and the foreclosure itself. The minimum time is 90 days, which gives the debtor an opportunity to redeem the collateral. The maximum time is one year, a period designed to prevent a foreclosing creditor's lengthy inaction from leading the debtor to believe that the foreclosure will not occur. The one-year limitation is applicable to all parcels of real estate described in the original notice of foreclosure.
SECTION 208. JUDICIAL SUPERVISION OF FORECLOSURE. Before the time of foreclosure, an aggrieved person may commence a proceeding in a court of competent jurisdiction for any violation of this [Act] or of other law or principle of equity in the conduct of the foreclosure. The court may issue any order within the authority of the court in a foreclosure of a mortgage by judicial action, including injunction and postponement of the foreclosure.
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 the foreclosing creditor, by a person who was entitled to notice of foreclosure under Section 203, or by any other aggrieved party, such as a prospective or actual purchaser of the collateral.
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; and direct the order of distribution of the proceeds of the foreclosure.
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.
SECTION 209. REDEMPTION. A person having the right to redeem collateral from a security interest under principles of law and equity may not redeem after the time of foreclosure. Unless precluded from doing so by law other than this [Act], a foreclosing creditor shall cooperate with any person who attempts to redeem the collateral from the security interest before the time of foreclosure by promptly providing upon request reasonable information concerning the amount due or performance required to redeem.
Redemption is the right of every debtor and interest holder to avoid foreclosure by paying or performing the secured obligation prior to foreclosure. This section embodies the fundamental concept of foreclosure - that its effect is to cut off the right of foreclosed parties to redeem the collateral from the security interest.
SECTION 301. FORECLOSURE BY AUCTION.
A secured creditor that elects to foreclose by auction shall comply with the requirements of this [Article] and [Articles] 1, 2 and 6.
[The Committee on Style considered this and the other two similar introductory sections (in Articles 4 and 5) to be unnecessary and deleted them. However, in their absence, we really don't have anything that says that the whole of the article must be followed by the foreclosing creditor.]
This section describes the procedures for foreclosure by auction, the traditional method of foreclosing land security interests in the United States. It contains several features that are designed to make the auction sale more attractive to purchasers. These features include the obtaining and exposure to prospective purchasers of evidence of title, the potential for making other information and reports available, and the authority of the foreclosing creditor to advertise the sale in other ways in addition to the traditional newspaper advertisement.
SECTION 302. EVIDENCE OF TITLE; OTHER INFORMATION.
(a) [If a secured creditor elects to foreclose by auction,] The foreclosing creditor shall obtain evidence of title, and make a copy thereof available upon request to any prospective bidder at the foreclosure. The evidence of title must have an effective date no earlier than the time of recording of the original notice of foreclosure, and must be issued no later than [30] days after the time of such recording. Unless the evidence of title is an attorney's opinion, it must state that the issuer is willing to provide evidence of title to the real property collateral to a person who acquires title by virtue of the foreclosure, and the exceptions and exclusions from coverage to which the evidence of title issued to that person will be subject.
(b) The foreclosing creditor may, but is not required to, make reports and information concerning the collateral other than evidence of title available to prospective bidders at the foreclosure.
(c) The foreclosing creditor is not liable to any person because of error in any information disclosed to prospective bidders unless the information was prepared by the foreclosing creditor and the foreclosing creditor had actual knowledge of the error at the time the information was disclosed.
This section's purpose is to encourage intelligent and knowledgeable bidding at foreclosure sales. Since no one can bid intelligently without first reviewing the evidence of title, it is sensible for the foreclosing creditor to pay for that evidence once, rather than expecting multiple bidders to purchase it individually. (The foreclosing creditor's expense can be included with other costs of foreclosure and added to the secured debt.) A potential bidder, after reviewing the evidence of title, may wish to contact the issuer and obtain a commitment running directly to the bidder.
Foreclosing creditors are encouraged, but not required, to disclose other information they may have concerning the property being foreclosed. Subsection (c) should facilitate this sort of disclosure by limiting the creditor's potential liability for errors in the information. Subsection (c) does not impose liability for erroneous information, but rather states the conditions in which liability does not exist. A foreclosing creditor may wish to disclaim liability even for errors of which it has actual knowledge, and nothing in this Act precludes an effective disclaim of this type.
SECTION 303. ADVERTISEMENT OF SALE.
(a) After giving notice as required by Sections 203 and 204, a foreclosing creditor shall advertise foreclosure sale under this [Article]
[in a manner that complies with the publication requirements of the law of this State for judicial foreclosure of security interests in real property.]
[by placing an advertisement in a newspaper having general circulation in each [county] where any part of the real property collateral is located. The advertisement must be published at least once per week for three consecutive weeks, with the last publication not less than seven nor more than 30 days before the advertised date of sale.]
(b) No later than 21 days before the advertised date of sale, the foreclosing creditor shall give a copy of the advertisement required by subsection (a) to the persons to whom notice of foreclosure was required to be given pursuant to Section 203. The advertisement may be sent with the notice of foreclosure or may be sent separately in the manner prescribed for notices under Section 106. The foreclosing creditor may, but is not required to, enter the real property collateral and post on it a copy of the advertisement or a sign containing information about the sale.
(c) An advertisement required by subsection (a) must state or contain:
(1) the date, time, and location [by street address and, if applicable, by floor and office number,] of the foreclosure sale;
(2) that the sale will be made to the highest qualified bidder;
(3) the amount or percentage of the bid that will be required of the successful bidder at the completion of the sale as a deposit, and the form in which the deposit may be made if payment other than by cash or certified check will be accepted;
(4) a legally sufficient description, the [property tax map number] [parcel identifier number] of the real property to be sold, and the street address, if any, or the location if there is no street address, of the real property;
(5) a brief description of any improvements on the real property and any personal property collateral to be sold;
(6) the name, address, and telephone number of an individual who is the foreclosing creditor or a representative of the foreclosing creditor, who can provide information concerning the collateral and the foreclosure if the foreclosing creditor is not an individual;
(7) that a copy of the evidence of title, any available reports concerning the collateral, which may be listed specifically, and additional information are available from the person identified pursuant to paragraph (6);
(8) whether access to the collateral for the purpose of inspection before foreclosure is available to prospective bidders and, if so, how to obtain access; and
(d) An advertisement required by subsection (a) may also state or contain any other information concerning the collateral or the foreclosure that the foreclosing creditor elects to include.
The advertising requirement stated in this section represent the minimum requirements. The foreclosing creditor may advertise the property in any other reasonable manner, and the cost of such advertisements is a proper foreclosure expense. For example, the foreclosing creditor may post information about the sale on an internet site that provides information about foreclosures, whether the site is operated by a private party or by an entity of state or local government.
The provision in subsection (b) concerning the posting of a sign or advertisement on the real property creates a legal license for the secured creditor or its representative to enter on the premises for that purpose, even if contrary to the wishes of the owner or persons in possession.
The following is an example of a sufficient advertisement.
A foreclosure sale will be held on March 27, 200_ at 10:00 am at the offices of Street and Black, Attorneys at Law, 1250 Main Street, Suite 400, Ashland, Example 12344. Sale will be made to the highest qualified bidder. The successful bidder must make a deposit of five percent of the bid immediately upon completion of the sale. The deposit must be in the form of a cashier's check or certified check.
The real property to be sold is Lot 13, Block B, Ridgefield Addition No. 2 (Parcel Number 134552), as shown in Plat Book 33, Page 141, Official Records of Pembroke County, State of Example, with a street address of 455 South Main Street, Ashland, Example 12345. The real property consists of a two-story single-family house with a detached garage. No personal property is being sold with the real property.
For additional information concerning the property, contact Ann Adams, Loan Foreclosure Specialist, First Financial Corp., 677 First Avenue, Ashland, Example 12344, telephone number 123-654-1889. Prospective bidders may obtain copies of a preliminary title insurance report and an appraisal of the property by contacting Ms. Adams. The property is vacant, and prospective bidders may obtain access for purposes of inspecting it by contacting Ms. Adams. The property is located in Special Street Improvement District No. 34, as established by the City of Ashland, State of Example, and special assessments of $605 per year are assessed against it until the year 200_.
SECTION 304. ACCESS TO COLLATERAL.
If a foreclosing creditor has authority to grant access to the real property collateral, the creditor shall reasonably accommodate a person who contacts the creditor, expresses an interest in bidding at the foreclosure sale, and requests an opportunity to inspect the collateral.
A debtor typically has no legal obligation to allow access to the real property prior to the foreclosure for the purposes of allowing prospective buyers to inspect. However, the debtor or the debtor's tenant may voluntarily grant such access, or the right of access may be granted by the terms of the security instrument. In the case of a residential debtor, the granting of reasonable access is an element that is considered in assessing the debtor's good faith, and hence the debtor's freedom from deficiency liability under Section 602.
SECTION 305. LOCATION AND TIME OF SALE. An auction sale under this [Article] must be conducted:
(a) at a date and time permitted for a sale under judicial foreclosure of a security interest in real property in this State;
(b)in a [county] where some of the real property collateral is located; and
[(c) at a location where a sale under judicial foreclosure of a security interest in real property may be held in this State.]
[(c) at:
(1) a main door of the [county] courthouse, or other location in the courthouse if prominent signs indicate that location; [or]
(2) the site of the real property collateral; or
[(3) a location that is readily accessible to the public and bears a standard street address.]]
SECTION 306. FORECLOSURE OF TWO OR MORE PARCELS.
(a) Collateral consisting of two or more parcels of real property may be foreclosed by auction separately or in combination as provided in the security instrument. If the security instrument does not specify the manner of sale of two mor more parcels, the auction may be conducted:
(1) by separate sale of each of the parcels; or
(2) at the time notice of foreclosure is recorded, if two or more parcels are contiguous, are being used in a unitary manner, are part of a unitary plan of development, or are operated under integrated management:
(A) by combining the parcels in a single auction; or
(B) by conditionally offering the parcels both in combination and separately, and accepting the higher of the two aggregate bids.
(b) If the entire real property collateral is not made the subject of a single auction. the foreclosing creditor shall discontinue sales of parcels or combinations of parcels when the total amount of bids received is sufficient to pay the secured obligation and the expenses of foreclosure.
This section deals with the question whether multiple parcels should be offered for sale separately or together. There is no corresponding provision in the Act for foreclosure by negotiated sale or by appraisal. The Act does not constrain the choice of the foreclosing creditor in those situations, since debtors and holders of junior interests can send a notice of objection and prevent the foreclosure from proceeding if they do not agree with the foreclosing creditor's choice.
The security instrument controls the manner of sale of multiple parcels. If it does not speak to the issue, the foreclosing creditor may in all cases sell the parcels separately. In its discretion, it may instead sell them in combination, or conditionally offer them separately and in combination, if they are contiguous, are being used in a unitary manner, are part of a unitary plan of development, or are operated under a single management. This test is applied as of the date the notice of foreclosure is given, and is intended to assure that the parcels have a sufficient relationship to one another that some prospective purchasers will probably be interested in buying more than one parcel. Note that the term "integrated management" does not necessarily require that the same business entity is managing the parcels; the test is whether as a practical matter the same management controls the parcels and operates them in an integrated fashion, even if it does so through multiple business entities. Likewise, the fact that the same entity conducts the management of two or more parcels does not necessarily establish that they are under "integrated management."
A court order marshaling assets will supersede the provisions of this section.
SECTION 307. POSTPONEMENT OF SALE.
(a) An individual conducting an auction under this [Article] may postpone the auction for any cause the foreclosing creditor considers appropriate. Announcement of the postponement, and the time and location of the rescheduled sale, must be given orally at the place previously scheduled for the sale and within a reasonable time after the scheduled time for commencement of the sale. No other advertisement or notice of the postponed time and place of sale is required. No postponement may be for a period of more than 30 days. Subsequent postponements of the sale may be made in the same manner.
(b) If an auction cannot be held at the time stated in the notice of sale by reason of stay under the United States Bankruptcy Code, 11 U.S.C. 101 et. seq., or a stay order issued by any court of competent jurisdiction, the foreclosing creditor may reschedule the auction to occur at a time when the stay is no longer in effect. The rescheduled sale must be advertised, and a copy of the advertisement must be sent to the persons entitled thereto, as provided by Section 302.
[Subsection (b) is new and is derived from the Idaho foreclosure statute.]
The foreclosing creditor may elect to postpone the auction for up to 30 days. This may be deemed expedient, for example, because of inclement weather, the absence of sufficient bidders, or damage occurring to the property. A judicial stay, or an automatic stay in bankruptcy, acts as a postponement, but is not subject to the 30-day limitation. Postponements may not result in the date of the auction extending beyond the period of limitation stated in Section 207.
SECTION 308. CONDUCT OF SALE.
(a) An auction sale under this [Article] must be conducted by a person designated by the foreclosing creditor.
(b) The person conducting an auction, before commencing the auction:
(1) must make available to prospective purchasers copies of the evidence of title; and
(2) may verify that persons intending to bid have money in an amount and form necessary to make the deposit stated in the advertisement, but shall not disclose the amount that any bidder is prepared to deposit.
(d) The auction must be conducted
[under the following rules:
(1) Any person, including a debtor and the foreclosing creditor, may bid at the auction. The individual conducting the auction may bid on behalf of the foreclosing creditor or any other person by whom he or she is authorized, but may not bid for his or her own account. The foreclosing creditor may bid by credit any amount up to the balance owing on the secured obligation, including the expenses of foreclosure.
(2) A fixed bid of a person not attending the auction may be submitted by a writing received at least 24 hours before the scheduled time of the auction by the person designated in the advertisement of sale to provide information about the property. The bid must be accompanied by a deposit satisfying the requirements of Section 310. The bid must be read aloud by the person conducting the auction before the auction is opened to oral bids.
(3) Sale must be made to the person bidding the highest amount who complies with this section.]
(4) The auction is completed by the announcement of the person conducting the auction that the property is "sold."
[in the manner prescribed by law in this State for the judicial foreclosure of a mortgage on real property.]
In addition to the evidence of title, which must be made available, the person conducting the auction may make other reports or information available to prospective bidders as provided in Section 302(b). The foreclosing creditor is protected against liability for errors in such information as provided in Section 302(c).
The foreclosing creditor may make a credit bid up to the amount owing on the secured obligation, and may make a cash bid to the extent necessary to exceed the amount owing if the foreclosing creditor wishes to do so.
Bids sent by record by persons not attending the auction must be fixed - that is, for a specific amount. Contingent bids (i.e., bids with amounts dependent on the amounts of other bids made at the auction) are not permitted.
SECTION 309. DEPOSIT BY SUCCESSFUL BIDDER. Immediately after the sale is complete, the successful bidder, if other than the foreclosing creditor, at an auction under this [Article] must pay a deposit to the person conducting the sale. The deposit must be at least 10 percent of the amount of the bid or such lower amount as the advertisement of sale stated would be accepted. The deposit must be paid in cash, by certified check, or in such other form of payment as was stated to be acceptable in the advertisement of sale or is acceptable to the person conducting the sale.
[SECTION 310. UPSET BIDS.
[At the last meeting of the drafting committee a decision was taken to delete the provision for upset bids. It has been left in this draft so that Prof. Billings, who originally proposed its use but who was not present at the last meeting, can comment on it.]
(a) An upset bid is a bid by which a person offers to purchase the collateral that has theretofore been sold at a foreclosure by auction under this [Act]. The amount of an upset bid must exceed the highest bid at the auction sale or the last previously received upset bid by a minimum of 5 percent or $1,000, whichever is greater.
(b) An upset bid may be made by any person, including a person who has made a previous bid, by notice to the foreclosing creditor. The notice must give the name, address, and telephone number of the upset bidder and the amount of the upset bid, identify the property on which the bid applies, and be directed to the attention of the person named in the notice of foreclosure pursuant to Section 302 (c)(6).
(c) An upset bid must be received by the foreclosing creditor no later than 10 days after the time of foreclosure or 10 days after receipt of the most recent previous upset bid.
(d) An upset bid must be accompanied by a deposit, in the form of cash or certified check payable to the foreclosing creditor, in an amount of the greater of 10 percent of the upset bid amount or $1,000.
(e) Successive upset bids made be made. Receipt of each such bid must be followed by a period of 10 days within which a further upset bid may be received.
(f) If a foreclosing creditor receives an upset bid in compliance with this section, the last previous bidder, whether an upset bidder or a bidder at an auction sale, is released from any further obligation on account of that bid, and any deposit made by the bidder must be returned immediately, together with a notice from the foreclosing creditor informing the bidder that the bid is ineffective because of the receipt of an upset bid. If an upset bid is received and no timely further upset bid is received, the upset bidder is obligated to purchase the collateral for the amount of the upset bid.
(g) The person named in the notice of foreclosure pursuant to Section 303(c)(6) shall maintain a record of all upset bids received and, upon inquiry from any person, shall advise that person of the status of the most recent bid received and the time remaining for receipt of a further upset bid.
(h) If a bid at a foreclosure by auction or an upset bid is made and no further upset bid is received by the foreclosing creditor within the time permitted by subsection (b), the foreclosing creditor shall immediately notify the last previous bidder that the bid of that bidder is final and binding.]
SECTION 310. PAYMENT OF REMAINDER OF BID.
(a) The successful bidder at an auction under this [Article] shall pay the remainder of the bid to the person conducting the sale within [seven] days after [notice is given under Section 309(h)] the date of the auction.
(b) If payment of the remainder of the bid is not timely made, the foreclosing creditor may cancel the sale and reschedule the auction as provided in Section 307(b), or may terminate the foreclosure under Section 314. In either event the deposit of the successful bidder may be forfeited and distributed in the same manner as the proceeds of a sale, but no person has any other remedy against the defaulting bidder.
SECTION 311. FORECLOSURE AMOUNT; DISTRIBUTION OF PROCEEDS. The highest amount bid at a sale [if no upset bid is received, or the last upset bid] is the foreclosure amount. The foreclosure must be applied by the foreclosing creditor as provided in Section 601 within 30 days after the time of foreclosure. After receiving but before applying the proceeds of sale, the secured creditor may, but is not required to, invest them in a reasonable manner.
[Note that this section has been redrafted to make the high bid the "foreclosure amount." Section 601 has been modified so that foreclosure expenses are paid out of the "foreclosure amount" only in the case of foreclosures by auction. Query: is 30 days a sufficient time? What if litigation is necessary?]
SECTION 312. DEED TO SUCCESSFUL BIDDER; AFFIDAVIT.
(a) Upon payment by the successful bidder of the full balance of the bid, the foreclosing creditor shall:
(1) record and deliver a deed, a bill of sale with respect to personal property if applicable, and such other documents as may be necessary to record the deed, all without warranty of title, conveying the collateral to or as directed by the successful bidder; and
(2) execute and record in [the office of the county recorder] an affidavit containing the following:
(A) identification of the security instrument foreclosed, including the [book and page number] [document number] at which it was recorded, if any;
(B) identification the debtor;
(C) a sufficient description of the collateral and identification of the [book and page number] [document number] at which the notice of foreclosure was recorded;
(C) identification of persons to whom notice of foreclosure was given and the [book and page number] [document number] at which documents reflecting their interests in the collateral were recorded, if any;
(D) a statement as to which, if any, of the persons identified pursuant to subsubparagraph (C) were given special notice of foreclosure preserving their interests from termination by the foreclosure;
(E) a statement that the foreclosing creditor has complied with all provisions of this [Act] for a foreclosure by auction; and
(F) identification of the person acquiring title to the collateral by virtue of the foreclosure, and a statement that title has passed to that person.
(b) When recorded, the deed and bill of sale, if any, transfer title to the collateral to or as directed by the successful bidder as provided in Section 602.
The following is an illustration of a sufficient affidavit under this section. [AFFIDAVIT TO BE ADDED]
Title to the collateral does not pass to the auction purchaser until the recording of the affidavit. However, the successful bidder is under an obligation to complete the purchase or risk the loss of the deposit. If a casualty loss occurs to the collateral after the auction, but before the recording of the affidavit, there is no legal basis for a discharge of the bidder from the obligation to purchase. Hence, it is advisable for the successful bidder to obtain casualty insurance on the property immediately after the auction is concluded.
SECTION 313. DISCONTINUANCE OF FORECLOSURE.
(a) A foreclosing creditor may elect to discontinue foreclosure at any time before:
(1) the completion of the auction [the expiration of upset bid period] in the case of a foreclosure by auction; or
(2) the time of foreclosure, in the case of a foreclosure by negotiated sale or by appraisal.
(b) To discontinue foreclosure, the foreclosing creditor shall give notice to the persons to whom notice of foreclosure was required to be given under Section 203(b), advising them that the foreclosure has been discontinued and whether the foreclosing creditor will:
(1) pursue another foreclosure by the same method;
(2) continue to foreclose by another method under this [Act] pursuant to a notice of foreclosure previously given;
(3) commence foreclosure by a different method authorized by this [Act] pursuant to a new notice of foreclosure;
(4) commence foreclose by judicial proceeding; or
(6) abandon foreclosure.
(b) If a notice sent by a foreclosing creditor under this section includes all elements required for a notice of foreclosure under Sections 203 and 204, no additional notice of foreclosure is necessary to pursue a further foreclosure under this Act.
[Should this section be moved to Article 2 or Article 6, since it contains information relevant to all 3 methods of foreclosure?]
The foreclosing creditor's election to foreclose by auction, negotiated sale, or appraisal is not necessarily a final decision. Under this section the creditor can change course and foreclose by a different method instead. If the original (or a previous) notice of foreclosure reserved the right to proceed by more than one method, the creditor who discontinues foreclosure under this section need not give a new notice of foreclosure. Otherwise, a new notice of the foreclosure must be given if the foreclosure method is changed.
SECTION 401. FORECLOSURE BY NEGOTIATED SALE. A secured creditor that elects to foreclose by negotiated sale shall comply with the requirements of this [Article] and [Articles] 1, 2 and 6.
This section provides for foreclosure by negotiated sale, a method that may in some cases be quicker and more efficient than the traditional auction sale. However, it may be employed only if no objection is made to it by those whose interests will be terminated by it. Those persons are entitled to notice of the negotiated sale, and if they make a timely objection to it, the sale cannot proceed unless the foreclosing creditor excludes their interests from the effect of the foreclosure. If foreclosure by negotiated sale cannot be completed because of such objections, the foreclosing creditor may either pursue a new foreclosure by negotiated sale or resort to one or more of the other methods of foreclosure. In all events the foreclosure must be completed within the period of limitation of Section 207.
SECTION 402. ADVERTISEMENT AND CONTRACT OF SALE.
(a) The foreclosing creditor may advertise the collateral for sale to prospective purchasers by whatever methods the foreclosing creditor considers appropriate and may list the collateral for sale with brokers. The foreclosing creditor may, but is not required to, enter the real property collateral and post on it a sign containing information about the sale.
(b) The foreclosing creditor may enter into a conditional contract of sale with a prospective purchaser or, if the collateral is sold in parcels, with more than one purchaser. The contract shall state the gross amount, before expenses of sale, that the purchaser will pay for the collateral. The foreclosing creditor's obligation to sell under the contract is subject to the following conditions:
(1) that no objection to the foreclosure amount is made under Section 404; and
(2) that no redemption of the collateral from the security interest is made before the time of foreclosure.
The foreclosing creditor has wide discretion in advertising of the property. Newspapers, broadcast media, magazines, the internet, and other reasonable methods may be used.
The contract of sale negotiated by the foreclosing creditor may provide for a cash sale or may provide for installment payments or other forms of financing by the foreclosing creditor.
SECTION 403. NOTICE OF PROPOSED NEGOTIATED SALE. If a foreclosing creditor enters into a conditional contract of sale as provided in Section 402, the foreclosing creditor shall give notice of the proposed sale at least 30 days before the date of the proposed sale to the persons specified in Section 203. The notice of proposed sale must state:
(a) the date on or after which the foreclosing creditor proposes to sell the collateral;
(b) the foreclosure amount, net of all expenses of foreclosure and sale, that the foreclosing creditor offers to credit against the secured debt and distribute to other persons entitled thereto, which amount may be greater or less than the selling price stated in the contract;
(c) that if the sale is completed, title to the collateral will be transferred to the purchaser under the contract as of the time of foreclosure and the stated foreclosure amount will be applied as provided in Section 601.
(d) that the person receiving the notice may inspect a copy of the contract of sale by communicating with an individual who is or represents the foreclosing creditor, and whose name, address, and telephone number are given in the notice;
(e) that if a debtor or [interest holder] [holder of a lien] whose interest in the collateral is subordinate in priority to the foreclosing creditor's security interest objects to the sale, the debtor or interest holder may give the foreclosing creditor a notice so stating, and if the notice is received by the foreclosing creditor no later than seven days before the date of the proposed sale, the foreclosing creditor must discontinue the foreclosure by negotiated sale unless the foreclosing creditor elects to preserve that person's interest from termination by the foreclosure or discharges the person's interest.
The foreclosure amount must be stated net of foreclosure and sale expenses; in other words, the foreclosing creditor is left with the responsibility for paying the foreclosure expenses and any other costs associated with performance of the contract of sale. The foreclosure amount may be more or less than the actual price the purchaser agrees to pay, and is determined entirely in the foreclosing creditor's discretion. The foreclosing creditor might arrive at the foreclosure amount by taking the actual selling price and reducing it by the various expenses of foreclosure and sale that the foreclosing creditor expects to pay. In effect, the foreclosing creditor is offering to apply this foreclosure amount against the secured indebtedness, and the persons who are entitled to object must decide whether this amount is acceptable to them. The purchase price stated in the negotiated sale contract provides some basis for the subordinate interest holders to judge whether the foreclosure amount stated by the foreclosing creditor is acceptable. If one or more of them believes that a different form of foreclosure will produce a higher amount, there is a logical basis for the making of an objection to the proposed negotiated sale. However, there is no requirement that a person objecting give a reason for the objection, nor that the objection be reasonable or made in good faith. As a matter of self-interest, those with the right to object will not do so if they consider the proposed foreclosure amount reasonable.
The debtor and junior interest holders also have the right to protect themselves from the foreclosure by redeeming any time prior to the time of foreclosure.
SECTION 404. COMPLETION OF SALE.
(a) A foreclosing creditor may complete the sale in accordance with the contract of sale, subsection (b), and Sections 405 and 406 unless the creditor receives a notice objecting to the proposed foreclosure by negotiated sale seven or more days before the proposed date of sale from a person who holds an [interest] [lien] in the real property collateral that is subordinate in priority to the foreclosing creditor's security interest.
(b) Upon compliance by the purchaser with a contract for sale under this [Article], on or after the proposed date of sale, the foreclosing creditor shall deliver to the purchaser or a nominee designated by the purchaser a deed, a bill of sale if applicable, and other documents necessary to consummate the sale or that the parties agreed the foreclosing creditor would supply. The foreclosing creditor shall also execute an affidavit containing the following:
(1) identification of the security instrument foreclosed, including the [book and page number] [document number] at which it was recorded, if any;
(2) identification the debtor;
(3) a sufficient description of the collateral and identification of the [book and page number] [document number] at which the notice of foreclosure was recorded;
(4) identification of persons to whom notice of foreclosure was given and the [book and page number] [document number] at which documents reflecting their interests in the collateral are recorded, if any
(5) a statement as to which, if any, of the persons identified pursuant to subparagraph (4) were given notice under Section 204(e) or 406(a)(1) preserving their interests from termination by the foreclosure;
(6) a statement that the foreclosing creditor has complied with all provisions of this [Act] for a foreclosure by negotiated sale; and
(7) identification of the person acquiring title to the collateral by virtue of the foreclosure, and a statement that title has passed to that person.
The affidavit that the foreclosing creditor must record along with the deed to consummate the foreclosure must identify the subordinate interests in the property that are being terminated by the foreclosure. If the foreclosing creditor exercises the "opt out" right provided by Section 407(b), the particular subordinate interest that was "opted out" will be listed in the affidavit as not having been terminated by the foreclosure.
The negotiated sale may not actually be completed on the proposed date of sale, but in all events must be completed within the period of limitation provided by Section 207. If the negotiated sale is not completed until after the proposed date of sale, the right of the debtor and junior interest holders to object to the sale is not revived.
In most cases the contract purchaser may wish to accept title to the collateral in its own name. However, if the purchaser desires to pass title directly to some other entity as a result of the foreclosure, the foreclosing creditor may designate such an entity as its nominee in the deed, bill of sale if any, and affidavit that are recorded to signify the completion of the foreclosure.
SECTION 405. RECORDING OF AFFIDAVIT AND DEED; APPLICATION OF FORECLOSURE AMOUNT. On or after the date of delivery of the deed, the affidavit, deed, and bill of sale if any required under Section 404 must be recorded in [the county recorder's office]. When the affidavit, deed, and bill of sale if any are recorded, the deed and bill of sale transfer title to the collateral to the contract purchaser or a nominee designated by the contract purchaser as provided in Section 602. The foreclosure amount stated in the notice of proposed negotiated sale pursuant to Section 403(b) must be applied as provided in Section 601 within 30 days after the time of foreclosure.
[Query: is 30 days a sufficient time? What if litigation is necessary?]
SECTION 406. NOTICE OF OBJECTION TO SALE.
(a) If, seven or more days before the proposed date of sale under this [Article], a foreclosing creditor receives notice of objection to the sale from any person who holds [an interest in] [a lien on] the real property collateral subordinate in priority to the foreclosing creditor's security interest, the foreclosing creditor must:
(1) discontinue the foreclosure pursuant to Section 313, in which case the notice of objection has no further effect;
(2) give notice, before the time of foreclosure, to the person who made the objection that the person's interest in the collateral will be preserved from termination by the foreclosure. If the foreclosing creditor gives such notice:
(A) the objection of the person to whom such notice is given may be disregarded by the foreclosing creditor;
(B) the foreclosure by negotiated sale may be completed;
(C) the affidavit recorded under Section 405 must identify that interest in the collateral of the person objecting as not being terminated by the foreclosure; and
(D) that person is entitled to none of the foreclosure amount; or
(3) if the interest of the person who made the objection is capable of being discharged for a liquidated sum of money, tender that sum to the person and thereby discharge the interest.
[This last provision is new, and provides a further way of getting rid of an objector.]
(b) If the foreclosing creditor makes a tender as provided in section (a)(3) and keeps the tender in effect, the person to whom the tender is made must provide the foreclosing creditor with a suitable document in recordable form evidencing that the person's interest has been discharged.
(c) After expiration of the time for objection specified in Section 404(a), a person to whom notice of foreclosure under Section 203 and notice of proposed sale under Section 403 were sent may not assert that the foreclosure amount was inadequate.
Under subsection (a), the foreclosing creditor may neutralize an objection to the sale simply by notifying the objector that the sale will be subject to, and will not terminate, the objector's interest in the collateral. In this way the foreclosing creditor can "opt out" of foreclosing a particular interest, just as if that person's interest had been preserved by the giving of a special notice of foreclosure under Section 203(e). The holder of such an interest cannot reasonably object to the sale's consummation, since the foreclosure will not affect that interest. The affidavit that the foreclosing creditor must record in order to consummate the foreclosure must identify the subordinate interests in the property that are being terminated by the foreclosure. If the foreclosing creditor exercises the "opt out" right mentioned above, the particular subordinate interest that was "opted out" will not be listed in the affidavit as not having been terminated by the foreclosure.
An alternative way for the foreclosing creditor to neutralize an objection to the sale, provided by subsection (a)(3), is to tender the amount owed to the objector. This procedure is permissible only if the objector's interest can be discharged for a liquidated sum. Most mortgages and other liens fit this description. However, if the objector's interest is a lien securing performance of an act other than payment of money, or is a lease, easement, covenant, or other interest with no liquidated amount, the "buy-out" procedure is not available to the foreclosing creditor.
A debtor or subordinate interest-holder who has been given the appropriate notices of foreclosure and of the proposed negotiated sale, and who does not prevent consummation of the sale by making a timely objection to it, is prohibited from attacking the sufficiency of the foreclosure amount thereafter. In effect, such parties are estopped to question the foreclosure amount. However, the amount might nonetheless be attacked in a subsequent bankruptcy proceeding as a preference or a fraudulent conveyance.
SECTION 501. FORECLOSURE BY APPRAISAL. A secured creditor that elects to foreclose by appraisal shall comply with the requirements of this [Article] and [Articles] 1, 2 and 6.
This section provides for foreclosure by appraisal as an alternative to foreclosure by auction or negotiated sale. Unlike the latter two methods, foreclosure by appraisal transfers title to the collateral directly to the foreclosing creditor or its nominee. In that respect it is similar to strict foreclosure at common law. An important difference, however, is that the creditor must notify all subordinate interest-holders of the amount, net of all expenses of foreclosure, that it is willing to pay for the property, and the foreclosure can proceed only if no objection is made to it by those whose interests will be terminated by it. If they make a timely objection, the sale cannot proceed unless the foreclosing creditor excludes those making an objection from the effect of the foreclosure. If foreclosure by appraisal cannot be completed because of such objections, the foreclosing creditor may either pursue a new foreclosure by appraisal or resort to one or more of the other methods of foreclosure. In this way foreclosure by appraisal under this Section is similar to foreclosure by negotiated sale under Article 4. In all events the foreclosure must be completed within the period of limitation imposed by Section 207.
SECTION 502. APPRAISAL.
(a) The foreclosing creditor shall obtain a written appraisal of the collateral. The debtor and other persons in possession of the real property collateral must provide reasonable access to the real property to the appraiser. The appraisal report shall state the appraiser's conclusion as to the fair market value of the collateral as of a date not more than 60 days before the date of foreclosure stated in the notice of foreclosure.
[The language has been revised to require that the effective date of the appraisal must be no more than 60 days prior to the proposed foreclosure date.]
(b) The appraisal must be made by an independent appraiser who is not an employee or affiliate of the foreclosing creditor and who is designated as a certified or licensed appraiser by the [Appraisal Certification Board] of this State with respect to the type of property to be appraised.
In a foreclosure under this Article the foreclosing creditor must obtain an appraisal of the collateral by a certified appraiser and forward it to the debtor and other holders of subordinate interests in the collateral. The purpose of the appraisal is to assist the junior interest-holders in deciding whether or not to object to the amount of the creditor's offered foreclosure amount. However, that amount may be either lower or higher than the appraised value, and is determined entirely in the foreclosing creditor's discretion. If one or more of the subordinate interest-holders believes that a different form of foreclosure will produce a higher amount, they have a logical basis for making an objection to the proposed foreclosure by appraisal.
The reference to "the type of property to be appraised" is included in subsection (b) because appraiser certification systems in some jurisdictions make distinctions between, for example, residential and commercial appraisers. In such jurisdictions the appraiser employed under this Article must have the proper credentials for the type of property to be appraised.
Since persons in possession of the real property collateral have a duty to provide reasonable access to the appraiser, they may be subjected to a judicial order upon the petition of the foreclosing creditor if they fail to do so voluntarily.
SECTION 503. NOTICE OF APPRAISAL. The foreclosing creditor shall give notice of the appraisal at least 30 days before the proposed date of the foreclosure to the persons specified in Section 203. The notice of appraisal shall be accompanied by a copy of the appraisal report and shall state:
(a) the date on or after which the foreclosing creditor proposes to foreclose by appraisal;
(b) the foreclosure amount, net of all expenses of foreclosure, that the foreclosing creditor offers to credit against the secured obligation and to distribute to other persons entitled thereto, which amount may be greater or less than the appraised value of the collateral;
(c) that if the foreclosure by appraisal is completed, title to the collateral will vest in the foreclosing creditor or its nominee as of the time of foreclosure, and that the stated foreclosure amount will be applied as provided in Section 601;
(d) that the person receiving the notice may obtain further information concerning the foreclosure and the appraisal by communicating with an individual who is or represents the foreclosing creditor, and whose name, address, and telephone number are given in the notice;
(e) that if a debtor or [interest holder] [holder of a lien] whose interest in the collateral is subordinate in priority to the foreclosing creditor's security interest objects to the foreclosure by appraisal, the debtor or interest holder may give the foreclosing creditor a notice so stating, and if the notice is received by the foreclosing creditor no later than seven days before the date of the proposed sale, the foreclosing creditor must discontinue the foreclosure by appraisal unless the foreclosing creditor elects to preserve that person's interest from termination by the foreclosure or discharges the person's interest.
The foreclosure amount must be stated net of foreclosure expenses; in other words, the foreclosing creditor is left with the responsibility for paying the foreclosure expenses and any other costs associated with the appraisal and foreclosure. The foreclosure amount may be more or less than the appraised value, and is determined entirely in the foreclosing creditor's discretion. The foreclosing creditor might arrive at the foreclosure amount by taking the appraised value and reducing it by the various expenses that the foreclosing creditor expects to pay for the appraisal and for holding and marketing the property. In effect, the foreclosing creditor is offering to apply this foreclosure amount against the secured indebtedness, and the persons who are entitled to object must decide whether this amount is acceptable to them. The appraisal report provides some basis for the subordinate interest holders to judge whether the foreclosure amount stated by the foreclosing creditor is acceptable. If one or more of them believes that a different form of foreclosure will produce a higher amount, there is a logical basis for the making of an objection to the proposed foreclosure by appraisal. However, there is no requirement that a person objecting give a reason for the objection, nor that the objection be reasonable or made in good faith. As a matter of self-interest, those with the right to object will not do so if they consider the proposed foreclosure amount reasonable.
The debtor and junior interest holders also have the right to protect themselves from the foreclosure by redeeming any time prior to the time of foreclosure.
SECTION 504. COMPLETION OF FORECLOSURE BY APPRAISAL.
(a) A foreclosing creditor may complete the foreclosure as provided in subsection (b) and Sections 505 and 506 unless the creditor receives a notice objecting to the proposed foreclosure by negotiated sale seven or more days before the proposed date of sale from a person who holds an [interest] [lien] in the real property collateral that is subordinate in priority to the foreclosing creditor's security interest.
(b) On or after the proposed date of sale, the foreclosing creditor shall also execute an affidavit containing the following:
(1) identification of the security instrument foreclosed, including the [book and page number] [document number] at which it was recorded, if any;
(2) identification the debtor;
(3) a sufficient description of the collateral and identification of the [book and page number] [document number] at which the notice of foreclosure was recorded;
(4) identification of persons to whom notice of foreclosure was given and the [book and page number] [document number] at which documents reflecting their interests in the collateral are recorded, if any
(5) a statement as to which, if any, of the persons identified pursuant to subparagraph (4) were given notice under Section 204(e) or 506(a)(1) preserving their interests from termination by the foreclosure;
(6) a statement that the foreclosing creditor has complied with all provisions of this [Act] for a foreclosure by appraisal; and
(7) identification of the person acquiring title to the collateral by virtue of the foreclosure, and a statement that title has passed to that person.
[Is it necessary or desirable for the foreclosing creditor to execute and record a deed to itself, in addition to the affidavit?]
The affidavit that the foreclosing creditor must record to consummate the foreclosure must identify the subordinate interests in the property that are being terminated by the foreclosure. If the foreclosing creditor exercises the "opt out" right provided by Section 507(b), the particular subordinate interest that was "opted out" will be listed in the affidavit as not having been terminated by the foreclosure.
The affidavit need not actually be recorded on the proposed date of foreclosure, but in all events must be recorded within the period of limitation provided by Section 207. If the affidavit is not recorded until after the proposed date of foreclosure, the right of the debtor and subordinate interest holders to object to the sale is not revived.
In most cases the foreclosing creditor may be willing to accept title to the collateral in its own name. However, if the creditor wishes title to pass directly to some other entity as a result of the foreclosure, it may designate such an entity as its nominee in the affidavit that it records to signify the completion of the foreclosure.
SECTION 505. RECORDING OF AFFIDAVIT; TIME OF FORECLOSURE. On or after the proposed date of foreclosure, the affidavit required by Section 504 must be recorded in [the county recorder's office]. When recorded, the affidavit transfers title to the collateral to the foreclosing creditor or its nominee as provided in Section 602. The foreclosure amount stated in the notice of appraisal pursuant to Section 503(b) must be applied as provided in Section 601 within 30 days after the time of foreclosure.
[Query: is 30 days a sufficient time? What if litigation is necessary?]
SECTION 506. NOTICE OF OBJECTION TO FORECLOSURE.
(a) If, seven or more days before the proposed date of foreclosure under this [Article], a foreclosing creditor receives notice of objection to the foreclosure from any person who holds [an interest in] [a lien on] the real property collateral subordinate in priority to the foreclosing creditor's security interest, the foreclosing creditor must:
(1) discontinue the foreclosure pursuant to Section 313, in which case the notice of objection has no further effect;
(2) give notice, before the time of foreclosure, to the person who made the objection that the person's interest in the collateral will be preserved from termination by the foreclosure. If the foreclosing creditor gives such notice:
(A) the objection of the person to whom such notice is given may be disregarded by the foreclosing creditor;
(B) the foreclosure by appraisal may be completed;
(C) the affidavit recorded under Section 505 must identify that interest in the collateral of the person objecting as not being terminated by the foreclosure; and
(D) that person is entitled to none of the foreclosure amount; or
(3) if the interest of the person who made the objection is capable of being discharged for a liquidated sum of money, tender that sum to the person and thereby discharge the interest.
[This last provision is new, and provides a further way of getting rid of an objector.]
(b) If the foreclosing creditor makes a tender as provided in section (a)(3) and keeps the tender in effect, the person to whom the tender is made must provide the foreclosing creditor with a suitable document in recordable form evidencing that the person's interest has been discharged.
(c) After expiration of the time for objection specified in Section 504(a), a person to whom notice of foreclosure under Section 203 and notice of appraisal under Section 503 were sent may not assert that the foreclosure amount was inadequate.
Under subsection (a), the foreclosing creditor may neutralize an objection to the foreclosure simply by notifying the objector that the sale will be subject to, and will not terminate, the objector's interest in the collateral. In this way the foreclosing creditor can "opt out" of foreclosing a particular interest, just as if that person's interest had been preserved by the giving of a special notice of foreclosure under Section 203(e). The holder of such an interest cannot reasonably object to the sale's consummation, since the foreclosure will not affect that interest. The affidavit that the foreclosing creditor must record in order to consummate the foreclosure must identify the subordinate interests in the property that are being terminated by the foreclosure. If the foreclosing creditor exercises the "opt out" right mentioned above, the particular subordinate interest that was "opted out" will not be listed in the affidavit as not having been terminated by the foreclosure.
An alternative way for the foreclosing creditor to neutralize an objection to the sale, provided by subsection (a)(3), is to tender the amount owed to the objector. This procedure is permissible only if the objector's interest can be discharged for a liquidated sum. Most mortgages and other liens fit this description. However, if the objector's interest is a lien securing performance of an act other than payment of money, or is a lease, easement, covenant, or other interest with no liquidated amount, the "buy-out" procedure is not available to the foreclosing creditor.
A subordinate interest-holder who has been given the appropriate notices of foreclosure and notice of appraisal, and who does not prevent consummation of the foreclosure by appraisal by making a timely objection to it, is prohibited from attacking the sufficiency of the foreclosure amount thereafter. In effect, such parties are estopped to question the foreclosure amount. However, the amount might nonetheless be attacked in a subsequent bankruptcy proceeding as a preference or a fraudulent conveyance.
SECTION 601. APPLICATION OF PROCEEDS OF FORECLOSURE.
(a) The foreclosing creditor shall apply the proceeds of foreclosure and any investment earnings thereon in the following order:
(1) to pay or reimburse the expenses of foreclosure in the case of a foreclosure by auction;
(2) to pay the obligation secured by the foreclosed security instrument;
(3) to pay, in the order of their priority, [the value of all interests terminated] [the amounts of all liens terminated] by the foreclosure; and
(4) to the interest holder who owned the collateral at the time of foreclosure.
(b) If the foreclosing creditor, in applying the proceeds of the sale, acts in good faith and without actual knowledge of the invalidity or lack of priority of the claim of a person to whom distribution is made, the foreclosing creditor is not liable for an erroneous distribution. The foreclosing creditor may maintain an action in the nature of interpleader, in a court of competent jurisdiction sitting in a [county] in which some part of the real estate collateral is located, for an order directing the order of distribution of the proceeds of the sale.
The balance owing on the secured obligation is not 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 the state; the enforceability of such fees is not governed by this Act. It may also include expenditures made by the foreclosing 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).
Any surplus from the sale, after payment of the foreclosure costs and discharging the secured obligation, is distributed to the holders of subordinate interest who were given notice of the sale, and to the debtor, in the order of their priority. Distribution is not limited to persons who hold liens, but rather is made to the holders of all interests that have a positive value, such as tenants under leases that have "bonus value." If agreement cannot be reached about the value of such interests, a judicial determination of their value may be necessary. Persons having interests superior in priority to the security instrument being foreclosed are not entitled to receive any of the proceeds of the sale, since it does not affect their interests.
If the foreclosing creditor is uncertain about the priority of junior interests, it may apply for a court determination of priority. Pending such determination the foreclosing creditor may invest the proceeds of sale in a reasonable manner. Any investment earnings must be added to the proceeds.
SECTION 602. TITLE TRANSFERRED BY FORECLOSURE. A foreclosure under this [Act] transfers the debtor's title to the collateral to the successful bidder under [Article] 3, the contract purchaser under [Article] 4, or the foreclosing creditor under [Article] 5, subject only to interests in the collateral having priority over the security interest foreclosed and the interests of persons entitled to notice under subsection 202(c) who were not given notice of the foreclosure or whose interests were preserved from foreclosure by notice issued under Sections 203(e), 407(b), or 507(b). The interests of all of other persons in the collateral are terminated.
This section fulfills the fundamental purpose of foreclosure: to transfer title to the collateral to the foreclosing creditor or other person who prevails in the foreclosure process, and to eliminate all of the interests subordinate to the security interest being foreclosed that were held by persons who were made parties to the foreclosure. Interests superior in priority to the security interest will survive the foreclosure, as will subordinate interests if their holders are not properly given notice of the foreclosure or if the foreclosing creditor gives them an appropriate notice to preserve their interests from the effect of foreclosure.
Ordinarily a foreclosure will terminate all subordinate interests except those that have been intentionally or inadvertently omitted from notice, as stated in subsection (a). However, one equitable exception to this principle exists. If an owner of the equity of redemption in the real estate purchases at the foreclosure sale, the interests subordinate to the foreclosed mortgage are preserved. If this were not the result, a debtor could collude with the holder of a first mortgage and unjustly cleanse the title to the land of the junior liens. See Restatement (Third) of Property (Mortgages) § 4.9 (1997).
SECTION 603. ACTION FOR DAMAGES OR TO SET ASIDE FORECLOSURE.
(a) Subject to subsection (c), after the time of foreclosure an aggrieved person may commence a proceeding in a court of competent jurisdiction seeking the following relief:
(1) damages against a foreclosing creditor for any violation of this [Act] or an applicable law or principle of equity in the conduct of the foreclosure; or
(2) that the foreclosure be set aside to correct a violation of this [Act] or to satisfy an applicable law or principle of equity.
(b) Recording of the deed and affidavit pursuant to Section 312, the deed and affidavit pursuant to Section 405, or the affidavit pursuant to 505 conclusively establishes compliance with all applicable notice and procedural requirements of this [Act] in favor of good faith purchasers for value of the collateral. If the title derived from foreclosure is not held by a good faith purchaser for value, a person attacking the foreclosure on grounds of noncompliance with the notice or procedural requirements of this [Act] has the burden of production and persuasion.
[Is the phrase "procedural requirements" sufficiently clear? Are there some violations of the Act that should be assertable even against a BFP?]
(c) An action may not be commenced:
(1) for damages for violation of this [Act] more than three years after the time of foreclosure; or
(2) for an order to set aside a foreclosure conducted under this [Act] more than one year after the time of foreclosure.
After the foreclosure has occurred, the powers of a court to change the result are limited. Damages may be assessed against the foreclosing creditor if it has failed to comply with this Act or other legal duties in carrying out the foreclosure. For example, if there is proof that notices were not properly given as required by Section 203, the court might award damages against the foreclosing creditor to the debtor or to third parties whose interests were terminated by the foreclosure without notice. However, the court must recognize that compliance with procedural provisions of the Act, such as the giving and publication of required notices, is conclusive, as provided in subsection (b). 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, but could nonetheless grant an award of damages.
Courts should employ their powers to grant damage awards or to set aside foreclosures 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 remedy should be awarded for minor violations that had no significant effect on the outcome of the foreclosure.
SECTION 604. POSSESSION AFTER FORECLOSURE. A person that acquires an interest in real property by foreclosure under this [Act] may commence an action under [the forcible entry and detainer statute of this State] to gain possession of the real property against any person whose interest in the real property was terminated by the foreclosure.
This Act does not address the question whether a foreclosing creditor may demand possession of the collateral prior to the time of foreclosure; that question is left to other law. However, one who acquires real property in a foreclosure proceeding under this Act is entitled to possession against persons, such as former tenants, whose leases have been terminated by the foreclosure. If part of the real property is possessed by tenants whose leases were terminated and part by tenants whose leases were preserved in the foreclosure, the person acquiring the property in foreclosure may dispossess the former tenants only. The process ordinarily available to landlords to remove tenants from possession may be employed. In the absence of such a provision, there is doubt in a number of states whether the landlord-tenant procedure is available to foreclosure purchasers.
SECTION 605. JUDGMENT FOR DEFICIENCY.
(a) Except as provided in subsection (b), after the time of foreclosure the foreclosing creditor and any other person whose security interest in the collateral was terminated by a foreclosure under this [Act] is entitled to a money judgment against any person liable for a deficiency.
(b) A debtor is not liable to a foreclosing creditor for a deficiency after a foreclosure under this [Act] if:
(1) the foreclosing creditor waived the right to a deficiency; or
(2) the debtor is a residential debtor and the secured obligation was a purchase-money debt, unless the debtor is found by the court not to have acted in good faith.
(c) For purposes of this section, a residential debtor acted in good faith if the debtor:
(1) peaceably vacated the real estate collateral and relinquished any personal property collateral within 10 days after the time of foreclosure and the giving of a notice demanding possession by the person entitled to possession by virtue of the foreclosure;
(2) did not commit significant affirmative waste upon the collateral and leave such waste uncured at the time possession was relinquished to the person entitled to possession by virtue of the foreclosure;
(3) did not significantly contaminate the collateral with hazardous materials and leave the contamination uncured at the time possession was relinquished to the person entitled to possession by virtue of the foreclosure;
(4) did not commit fraud against the foreclosing creditor;
(5) did not engage in criminal activity on the secured real estate collateral that significantly reduced its value at the time possession was relinquished to the person entitled to possession by virtue of the foreclosure;
(6) did not permit significant uncured damage to be done to the collateral by other persons or natural causes as a result of the debtor's failure to take reasonable precautions against the damage; and
(7) provided reasonable access to the collateral for inspection by the foreclosing creditor and prospective purchasers after the initial notice of foreclosure was sent.
(d) The burden of proof as to the absence of good faith on the part of a residential debtor is on the person seeking a deficiency judgment against the debtor. The absence of good faith by one residential debtor does not make any other residential debtor liable for a deficiency.
(e) If liability of a residential debtor for a deficiency is barred by subsection (b)(2), liability of a guarantor of the residential debtor's obligation is also barred.
(f) This section does not prohibit recovery of a deficiency by a person other than the foreclosing creditor.
A judgment for a deficiency is intended to assist the foreclosing 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 a creditor seeking a deficiency to establish the personal liability of the person against whom the deficiency is claimed. A deficiency may be recovered against a debtor or against anyone else, such as a guarantor, who is liable on the secured obligation. Both the foreclosing creditor and subordinate creditors whose security interests have been terminated by a foreclosure can bring actions for deficiencies.
This section prohibits deficiency judgments against residential debtors (and their guarantors) on purchase-money obligations if they have acted in good faith, as defined in subsection (c). Lenders often assert that the threat of a deficiency judgment, even if it will rarely be enforceable as a practical matter, provides a useful inducement to borrowers to behave responsibly. This Act adopts that principle; under the "good faith" concept here, the threat of a deficiency may dissuade the debtor from committing waste or fraud, or engaging in other acts detrimental to the foreclosing creditor's interests. "Good faith" is an individualized determination, and in a particular case some debtors may have acted in good faith although others did not.
Even if a deficiency judgment cannot be obtained by the foreclosing creditor, the holders of "sold-out" junior liens may still obtain and collect deficiency judgments under subsection (d). .
A foreclosing creditor may waive the right to a deficiency, and if so, will not be permitted to recover the deficiency. The waiver might be found in the security instrument, in the notice of foreclosure, or in some other agreement or communication between the parties.
SECTION 606. DETERMINING AMOUNT OF DEFICIENCY.
(a) Subject to subsection (c), the deficiency to which a foreclosing creditor is entitled after a foreclosure under this [Act] is the balance remaining, if any, after subtracting the foreclosure amount as determined under Section 311, 405, or 503, as applicable, from the balance owing on the secured obligation, including principal, interest, legally recoverable fees and charges, and in the case of a foreclosure by auction, the expenses of foreclosure.
[Note that in the case of foreclosure by negotiated sale or appraisal, the secured creditor is not allowed to consider the expenses of foreclosure in calculating the deficiency. This is because the creditor will already have deducted its estimate of those expenses in setting the foreclosure amount.]
(b) In an action for a deficiency brought by the foreclosing creditor following a foreclosure by auction, a person against whom the action is filed may petition a court of competent jurisdiction for a determination of the fair market value of the collateral at the time of foreclosure. After a hearing at which all interested parties may present evidence of fair market value, the Court shall determine the fair market value of the collateral as of the time of foreclosure. The determination must be made by [the court without a jury] [by a jury unless the right to trial by jury is waived by all parties to the proceeding]. If the Court determines that 90 percent of the fair market value of the collateral was greater than the bid accepted at the foreclosure sale [or the last upset bid], 90 percent of the fair market value must be substituted for the foreclosure amount in making the calculations required by subsection (a) with respect to all parties against whom a judgment for a deficiency is entered.
[ One comment at the annual meeting suggested that the "fair value" limitation on deficiencies be confined to residential real property. Under the present draft, all types of real property get the benefit of the "fair value" determination.]
A deficiency action by the foreclosing creditor is governed by subsection (a). The formula stated there does not deduct for expenses of foreclosure in the case of foreclosures by negotiated sale or auction, since the creditor's estimate of those expenses will already have been deducted by the creditor in arriving at the foreclosure amount. Deficiency actions by "sold-out" junior lienors are governed by subsection (b). 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.
If the foreclosure was by auction, subsection (c) 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 90 percent the fair market value is found to be greater than the highest bid (including any upset bid), 90 percent of the fair market value must be used in computing the deficiency. This subsection recognizes that foreclosures by auction often do not bring fair market prices, and in effect limits the amount of the deficiency as if 90 percent of fair market value had been bid. The 90 percent level is adopted in order to approximate the cost to the foreclosure purchaser of holding and liquidating the collateral.
This limitation applies only to a deficiency sought by the foreclosing creditor. It does not apply to deficiencies sought by sold-out junior lienors, since they have no control over the method of foreclosure employed. No fair market value determination is available or necessary if the foreclosure was by negotiated sale or by appraisal, since under those procedures, any subordinate interest holder may force a discontinuation of the foreclosure simply by objecting to it.
SECTION 701. UNIFORMITY OF APPLICATION AND CONSTRUCTION. In applying and construing this Uniform Act, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among States that enact it.
SECTION 702. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT. This [Act] modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001 et seq., except that nothing in this [Act] modifies, limits, or supersedes Section 7001(c) of that Act or authorizes electronic delivery of any of the notices described in Section 7003(b) of that Act.
SECTION 703. EFFECTIVE DATE. This [Act] takes effect on ___________________.
[Legislative Note: It is recommended that the effective date be delayed after the date of enactment, in order to allow time for members of the bar and the affected industries to become familiar with the Act and to modify existing forms and procedures.]
SECTION 704. REPEALS. The following acts and all other acts and parts of acts inconsistent with this [Act] are repealed: [Here should follow the statutes to be specifically repealed. Statutes governing judicial foreclosure should not be repealed.]
SECTION 705. TRANSITIONS. Security interests created before the effective date of this [Act] may be foreclosed under any statute or other law repealed or amended by this [Act] as if the repeal or amendment had not occurred.
[Legislative note: Adopting jurisdictions may find it necessary to amend their recording acts in order to permit the recording of notices of foreclosure, requests for notice of foreclosure, and affidavits of foreclosure that are required by this Act .]