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UNIFORM FORECLOSURE BY POWER OF SALE ACT
CARL H. LISMAN, 84 Pine Street, P.O. Box 728, Burlington, VT 05402, Chair
LANI LIU EWART, Suite 1800, Alii Place, 1099 Alakea Street, Honolulu, HI 96813
REED L. MARTINEAU, P.O. Box 45000, 10 Exchange Place, Salt Lake City, UT 84145
ROBERT L. McCURLEY, JR., P.O. Box 861425, Tuscaloosa, AL 35486, Enactment Plan Coordinator
LISA KELLY MORGAN, City Place II, 185 Asylum St., Hartford, CT 06103
WILLIS E. SULLIVAN, III, P.O. Box 359, 1423 Tyrell Lane, Boise, ID 83701
DALE WHITMAN, University of Missouri-Columbia, 216 Hulston Hall, Columbia, MO 65211, Reporter
JOHN L. McCLAUGHERTY, P.O. Box 553, Charleston, WV 25322, President
JOHN P. BURTON, P.O. Box 1357, Suite 101, 123 E. Marcy Street, Santa Fe, NM 87501, Division Chair
AMERICAN BAR ASSOCIATION ADVISOR
PAMELA SMITH BELLEMAN, P.O. Box 1122, Richmond, VA 23218-1122, Real Property, Probate & Trust Section Advisor
FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road, Norman, OK 73019, Executive Director
WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus
312/915-0195
ARTICLE 1
GENERAL PROVISIONS
SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Nonjudicial Foreclosure Act.
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SECTION 102. DEFINITIONS. In this [Act]:
(1) "Acceleration" means that all obligations secured by a security agreement are immediately due.
[Reporter's Note: this definition has been revised to eliminate references to notices given or actions taken by the secured creditor.]
(2) "Address for notice" means:
(A) for a person who has authenticated a security agreement or a guaranty, assumption agreement, or other document in connection with a security agreement, the address, if any, specified in that document or, if the secured creditor has received notice of a more recent address, that address;
(B) for a person not described in subparagraph (A) but who is identified from examination of the public records in [the office of the county recorder], the address, if any, specified in the recorded document or, if the secured creditor has received notice of a more recent address, that address.
(C) for a person not described in subparagraph (A) or (B), who is a tenant, subtenant, or leasehold assignee in possession of all or part of the real property collateral, the address made known to the secured creditor by that person, or if none, the address of the office, apartment or other unit possessed by the person, with the envelope marked "To Tenant Residing at:";
(D) if the sources described in subparagraphs (A) through (C) do not disclose an address, the address of the real property collateral;
(E) the address, if any, determined pursuant to Section 109 if applicable.
[Reporter's Note: The defined term "mailing address" has been changed to "address for notice." "Authenticated" has been substituted for "executed." References to "street address" have been changed to "address." The provision in (C) for tenants, etc. to make new addresses known to the secured creditor has been added.]
(3) "Aggrieved party" means a party entitled to a remedy and includes the debtor, the secured creditor, a person having an interest in the real property that will be affected by foreclosure, and a purchaser or prospective purchaser at a foreclosure.
[Reporter's Note: The definition of "agreement" has been deleted.]
(4) "Authenticate" means to sign, to execute or adopt a symbol, or to encrypt a record in whole or in part, with present intent to identify the authenticating party and adopt, accept, or establish the authenticity of a record or term.
[Reporter's Note: This definition is new and is taken from new Article 9.]
(5) "Collateral" means the real property subject to a security interest. The term also includes any personal property covered by the security agreement.
(6) "Common interest community" means real property with respect to which a person, by virtue of ownership of a unit, is obligated to pay for real property taxes, insurance premiums, maintenance, or improvement of other real property described in a declaration. "Ownership of a unit" does not include holding a leasehold interest of less than [20] years in a unit, including renewal options.
[Reporter's Note: The definition of "contract" has been deleted.]
(7) "Conveyance" means a transfer of real property other than by will or operation of law.
(8) "Creditor" includes an unsecured creditor, a secured creditor, and a trustee in bankruptcy or other person who represents the interests of creditors.
(9) "Debtor" means a person who owes payment or other performance of an obligation secured under a security agreement, whether the obligation is absolute or conditional, primary or secondary, and whether or not the security agreement imposes personal liability on the debtor. If the debtor and the owner of the real property securing the obligation are not the same person, the term means the owner of the real property in any provision of this [Act] dealing with collateral and the person or persons obligated in any provision dealing with an obligation. The term includes both where the context requires. The term does not include a person whose sole interest in the real property is a security interest.
[Reporter's Note: The last sentence of this definition has been added.]
(10) "Days" means calendar days unless business days (Monday through Friday") are specified.
[Reporter's Note: The definition of "days" has been added.]
(11) "Deed" means a record, other than a lease or security agreement, that conveys real property.
[Reporter's Note: This definition has been revised. The former version said "that by its terms conveys title to an interest in real property."]
(12) "Default" means a failure to comply with the debtor's duties under a security agreement.
(13) "Expenses of foreclosure" means the reasonable costs incurred by a secured creditor in connection with a foreclosure for transmission of notices, advertising, title insurance binder or report (Section 205(a)), filing and recording fees, attorney's fees to the extent provided in the security agreement or authorized by law, appraisal fees in the case of a foreclosure by appraisal, the fee of the person conducting the sale in the case of a foreclosure by auction, and litigation expenses in connection with the procedures authorized by Section 205(h) or Section 210.
[Reporter's Note: "Transmission of notices" has been substituted for "mailing;" filing and recording fees and litigation expenses have been added.]
(14) "Organization" means a 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.
(15) "Party" means a person who engages in a transaction or makes an agreement governed by this [Act].
(16) "Person" includes an individual and an organization.
(17) "Residential debtor" means:
(A) an individual who owns residential real property in which a security interest exists, all or a part of which the individual occupies as a residence or intends to occupy as a residence within two years after acquisition of ownership; and
(B) an individual obligated, primarily or secondarily, on an obligation secured by residential real property.
(18) "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; and, if appropriate to the context, the land in which the interest is claimed. The term includes the interest of a landlord or tenant, and an interest in a common interest community unless under other law of this State that interest is personal property.
(19) "Record," used as a noun, means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(20) "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].
(21) "Residential real property" means, in relation to a residential debtor, real property used primarily for personal, family, or household purposes and improved or intended by its owner to be improved by not more than [four] dwelling units.
[Reporter's Note: This definition is revised, and adopts the "personal, family, or household" formulation used in many consumer protection statutes. The reference to the number of acres has been deleted. The reference to common interest communities has been deleted on the ground that, if such units are always real property, they are already covered by the preceding part of the definition.]
(22) "Secured creditor" means a creditor who has the right to foreclose a security interest. The term includes an agent, trustee, or other person who represents the person having the right to foreclose.
[Reporter's Note: This definition has been revised to eliminate the enumeration of "a lender, seller, or other person who ... ."]
(23) "Security agreement" means a mortgage, deed of trust, security deed, contract for deed, land sales 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. The term includes any modifications or amendments to such contracts or conveyances, and includes the obligation being secured whether or not it is embodied in a separate record. The term 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.
[Reporter's Note: The reference to modifications and amendments has been added.]
(24) "Security interest" means an interest in real property that secures payment or performance of an obligation.
[Reporter's Note: The previous version of this definition contained the phrase "intended to secure...". This phrase has been deleted.]
Comment
Introduction to definitions. American law recognizes that many different interests can be created in real property, and that many different sorts of documents can be employed to make those interests security for debts and other obligations. This Act makes nonjudicial foreclosure available to virtually all consensually secured parties, no matter what interest in land has been made the collateral for the obligation and no matter what the nature of the instrument creating the security interest.
Such conventional terms as "mortgage" and "mortgagor" are not used in this Act, since they could easily be construed as having a limiting effect on the Act's coverage of security interests. Instead, this Act employs a set of terms that have no common law or statutory roots tying them to a particular form. In place of terms such as "mortgage," "contract for deed," "trust deed," etc., this Act substitutes the general term "security agreement" (see paragraph (23)). In place of "mortgagor" or "installment purchaser" this Act substitutes "debtor" defined in paragraph (9). In place of "mortgagee," or "vendor," this Act substitutes "secured creditor" (see paragraph (22)). Instead of enumerating the various types of real property interest, such as "fee estate," "leasehold," and the like, that can be used as security, this Act substitutes "collateral" as defined in paragraph (4). The interest in the collateral which is conveyed by the debtor to the creditor or which is retained by the creditor is defined as a "security interest" and not as a "lien" or as "title." Hence, it is irrelevant under this Act whether a state follows the "lien theory" or "title theory" of mortgage law.
1. "Acceleration." This act does not specify how acceleration is accomplished; that depends on the terms of the security agreement and other applicable law. In most cases acceleration results from the secured creditor's sending a notice to the debtor or taking other action. If a cure of a default is made under the provisions of Section 202, any acceleration is set aside. A notice of foreclosure given under Section 203 automatically causes an acceleration unless the secured creditor specifies in the notice of foreclosure that the obligation is not being accelerated.
2. "Address for notice" is the address to which various notices must be sent by secured creditors.
3. "Aggrieved party" is taken from ULSIA Section 11(1).
4. "Authenticate" is taken from UCC Article 9 (2000 revision). The definition is broad enough to cover digital and other electronic signatures as well as written signatures.
5. "Collateral" includes all of the interests in land and all of the items of personal property that are subjected to a security interest. The interests in land are subsumed under the term defined in paragraph (18) as "real property." This Act cannot be used to foreclose on a security interest in personal property alone.
6. "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, except that cooperatives which are only personal property are excluded.
7. "Conveyance." This term is intended to include any method of lifetime transfer of an interest in real property other than by operation of law. Since a real property security interest creates an interest in land, a mortgage or other security interest is a "conveyance." Similarly, if the creditor assigns her or his claim secured by the security interest and his interest in the real property of the debtor, the "assignment" is a conveyance. Acts sufficient to effect a transfer or conveyance are determined by applicable law. The term thus covers all of the different methods of effecting a voluntary and involuntary inter vivos transfer. See paragraph (10) for definition of a "deed." Where this Act states a rule applicable both to lifetime transfers and to transfers by will, the term "transfer" is used.
8. "Creditor" includes both the person by whom the secured obligation is initially enforceable, and also any transferee or any representative of that person. If a person acts through an agent, the "creditor" is the principal.
9. "Days" must be counted to determine the expiration of various time period prescribed by this act.
10. "Debtor." In most cases the person who is personally obligated to pay the secured debt and the owner of the real property securing the debt will be the same person at the inception of the transaction. However, the owner may later transfer the real property "subject to" the security interest. In that case the definition of "debtor" includes the transferee where the section refers to rights in the real property and, depending on the context, means either the person personally obligated or the person owning the real property in which there is a security interest. In addition, "debtor" covers guarantors, sureties, accommodation makers, and other persons who are absolutely or conditionally liable on the secured debt. Hence, the term "debtor" often describes more than one person. A person who has given a security interest, but has later transferred all of his or her interest in the real property and has been released from personal liability on the secured obligation, is no longer a "debtor."
11. "Deed." The deed is the instrument by which a freehold estate is transferred during the transferor's life. The formal requirements for validity of a deed are not determined by this Act, but by the other law of this state.
12. A "default" is a non-compliance with the duties imposed by the security agreement (which includes the secured obligation as well; see paragraph (23)). See also Section 202, which provides for notice of default to the debtor.
13. "Expenses of foreclosure" include the direct costs of foreclosure, but do not include items not directly related to foreclosure, such as payment of property taxes, insurance premiums, or repairs. However, under other applicable law a secured creditor may have the right to expend money on the latter items and add the expenditure to the balance of the obligation secured by the security agreement. See Restatement (Third) of Property: Mortgages § 2.2 (1997). All expenses of foreclosure, including attorney and appraisal fees, are limited to reasonable amounts, and may also be limited by other specific laws of this state. Attorney fees are included only if they are authorized by the security agreement or by other applicable law.
14. "Organization" should be read in connection with the definition of a person. "Organization" is intended to include all legally recognized persons other than individuals.
15. "Party" is intended to be a general term covering persons engaging in transactions, whether they are individuals or organizations. It includes persons acting through agents.
16. "Person." See Comment to "organization."
17. "Residential debtor." This term is used as a rough synonym for "consumer." A residential debtor is, in essence, a person who owns and occupies a home in which a security interest exists. Such persons are regarded as needing protections from the acts of creditors that other borrowers do not need. The requirement that the individual must intend to occupy the property within two years after acquisition is intended to accommodate a person who purchases land with the expectation of constructing a home on it.
18. "Real property." This term refers to the legal relationship or "interest" a person has against the world with respect to an object, the physical land. It includes common law estates, both freehold and nonfreehold, as well as rents, servitudes and other interests which are not estates because they do not carry with them the right of possession of the land. The term is also used, if the context warrants, to refer to the physical object (the land) in which these interests may exist. Leaseholds are defined as real property for the purposes of this Act, even though for other purposes of state law (e.g., decedents' estates) they may be regarded as personal property. Interests of cooperative apartment owners are not considered real property under this definition if they are regarded as personal property by other law of this state.
Even though rents are regarded under this Act as real property, the procedures of this Act cannot be employed by a creditor to reach or obtain rents prior to the time of foreclosure; see paragraph 103(b)(6). However, a foreclosure under the Act will pass title to the rents accruing after the time of foreclosure; see Section 212.
19. "A record" is defined to include electronic documents as well as those written on paper.
20. "To record" is defined to incorporate the requirements of this state's existing recording act.
21. "Residential real property" is an essential term in defining "residential debtor" (paragraph 17). "Residential real property" must be primarily used, or intended to be used within two years of acquisition, for personal, family, or household purposes. 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. The property may not contain more than four dwelling units, thus excluding larger apartment buildings. Some commercial or other nonresidential use is permitted within this definition, so long as the residential use is primary.
22. "Secured creditor" includes a seller of real property who retains a lien or title to the real property sold for the purpose of securing the price, and also includes a person, such as an institutional lender, whose claim arises initially from a cash loan. It further includes anyone to whom the right to payment or performance of the secured obligation is assigned or transferred.
"Secured creditor" is defined in terms of the right to enforce the obligation, not in terms of holding the security interest. Ordinarily the security interest will automatically follow the obligation, unless the two are intentionally separated. See Restatement (Third) of Property: Mortgages § 5.4 (1997). For example, Fannie Mae routinely holds the promissory notes representing the loans it acquires, although it has the corresponding mortgages held in the names of its servicers for convenience in foreclosing. Since the servicer acts as Fannie Mae's agent with authority to enforce the promissory note, the servicer would be the "secured creditor."
23. "Security agreement." This definition recognizes that the title given to a document by its parties does not necessarily indicate whether it is a security agreement. The test is whether it creates a security interest. See Comment to "security interest" below. The caption or title and the precise form of the document are irrelevant. It does not matter whether the document is in the form of a contract or a conveyance of an interest in land, nor whether the security interest is created by granting or by retaining it. The security agreement includes the terms of the obligation it secures, which is typically a promissory note. Hence, whether a particular term of the parties' agreement (such as an acceleration clause or a due-on-sale clause) is stated in the note or in the mortgage is immaterial for purposes of this act. All modifications and amendments to the note and mortgage are also part of the security agreement. A lien created to assist in the enforcement of owners' obligations in common interest communities or under covenants running with land is a security agreement under this Act and can be foreclosed under its provisions.
On the other hand, not all instruments that create or transfer interests in real property do so for the purpose of security. For example, most deeds, space leases, and ground leases are given for the purpose of granting the economic benefits of the conveyed interest to the recipient, not for the purpose of securing performance of an obligation of the grantor. If this is the case, these transactions are not security agreements and this Act does not affect them. See Section 109.
24. "Security interest." As indicated in the preceding comment, security interests can arise from documents labeled in a variety of ways. Mortgages, leases, deeds, and contracts may all create security interests. A security interest arises when a person who holds an interest in real property conveys it to another person to secure an obligation owed to that person.
SECTION 103. SCOPE
(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 if the debtor has agreed in the security agreement that:
(1) the security interest may be foreclosed under the provisions of [this Act]; or
(2) the security interest may be foreclosed by nonjudicial process exercised by the secured creditor.
(b) This [Act] may not be used to foreclose or enforce:
(1) a nonconsensual lien created by statute or operation of law;
(2) a security interest in property in a common interest community if under other law of this State that property is personal property; or
(3) a security interest in rents or proceeds, or an interest arising from an agreement for appointment of a receiver, except that rents or proceeds of the collateral accruing and becoming due after the time of foreclosure are the property of the person acquiring title to the collateral by the foreclosure (Section 212).
(c) This [Act] does not preclude or govern foreclosure or other enforcement of security interests in real property by judicial action or other processes authorized by law in this state. A secured creditor may not take any action in pursuance of foreclosure under this [Act] while a judicial proceeding is pending to foreclose the same security interest or to enforce the same secured obligation. However, foreclosure under this [Act] may proceed even if a judicial proceeding is pending for appointment or supervision of a receiver of the collateral, for collection or sequestration of rents or other proceeds of the collateral, or to collect the secured obligation from a guarantor, surety, or accommodation maker.
[Reporter's Note: The listing of excluded nonconsensual liens (mechanics' liens, etc.) in Subsection (b) has been moved to the comment. Subsection (c) has been changed to permit actions against sureties and guarantors even when foreclosure under the Act is pending.]
Comment
This section extends the reach of this Act to all types of consensual security interests in real property. The caption of the document is irrelevant, so long as it creates a security interest in real property and contains a reference to nonjudicial foreclosure as required by subsection (a) of this section. Even an absolute deed may be foreclosed under this Act if it was given to create a security interest in land, as determined by applicable law. This Act does not specify the circumstances or methods by which a security interest may be created; those matters are left to other law.
The foreclosure provisions of this Act are available only if they are expressly agreed to by the debtor. That agreement will ordinarily be part of the security agreement itself, but an amendment to the security agreement or other subsequent agreement will also be recognized. 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(6)) or other covenants running with land, may be enforced under this Act. However, subdivision (b)(2) of this section excludes the foreclosure of association liens on cooperative units if they 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 in various states, including the direct taking of possession of the funds by the secured creditor; this Act does not add to or detract from those methods.
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, and they may resort to judicial foreclosure if they wish. In some states other processes, such as strict foreclosure, are authorized by law and may continue to be used after adoption of this Act.
In some states special statutory provisions govern the termination of installment land contracts (contracts for deed). A state adopting this Act may wish to consider whether foreclosure of such contracts should be excluded from its coverage, or alternatively whether the statute providing for termination of installment contracts should be repealed.
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 of a receiver or for collection of rents and proceeds are not inconsistent with foreclosure under this Act, and may be pursued simultaneously with foreclosure against the real property under this Act. The same is true of actions against guarantors, sureties, and accommodation parties.
The Act does not impose a "one-action" rule, prohibiting commencement of an action on the debt when it is secured by real property, as is found in a few states. But it does prohibit simultaneous pursuit of a foreclosure 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, subsection 210(c) may exempt that person from any further liability for a deficiency.
SECTION 104. PERSONAL PROPERTY
If a security agreement covers both real property and personal property, the secured creditor may proceed under this [Act] as to both the real property and personal property.
Comment
Mortgages and other security agreements that chiefly affect real property often contain terms encumbering some items of personal property as well. It is permissible for lenders to employ this Act to foreclose on the real property, and to use other procedures consistent with Article 9 of the Uniform Commercial Code to realize on the security of the personal property. However, a lender may, at its option, sweep the personal property into a real property nonjudicial foreclosure under this Act. Any argument that such a foreclosure fails to satisfy the requirements of Article 9 for disposition of collateral is eliminated by this section.
SECTION 105. VARIATION BY AGREEMENT.
(a) Except as otherwise provided in subsections (b), (c) and (d), the parties to a security agreement may not vary by agreement the effect of any provision of this [Act].
(b) The time within which a person must respond to a notice sent by a secured creditor may be lengthened by agreement.
(c) The parties may vary the effect of a provision that by its terms permits the parties to agree to the contrary, and may by agreement determine the standards by which performance of obligations under this Act is to be measured if those standards are not manifestly unreasonable.
(d) The parties may by agreement modify the time, place and manner of foreclosure by auction under Section 205 if the obligation secured by the security agreement is a debt exceeding five million dollars. Notwithstanding such modification, the foreclosure under Section 205 must be by auction and the time, place, and manner of sale must be commercially reasonable.
(e) If no debtor under the security agreement is a residential debtor, an agreement by a guarantor, surety, or accommodation party waiving the right to receive notices under this [Act] is enforceable to the extent otherwise allowed by applicable law.
[Reporter's Note: The provisions for agreements governing standards of performance (subsection (c)), allowing modification of the time, place, and manner of foreclosure by auction (subsection (d)), and authorizing guarantors in nonresidential transactions to waive notices, have been added.]
Comment
In general, the parties to a real property security agreement have freedom of contract with respect to their rights and remedies. However, judicial policy has provided, almost from time immemorial, certain protections not only of the defaulting debtor but also of other creditors. Hence, the rights and duties associated with foreclosure under this Act may not be modified by agreement of the parties unless the Act specifically so provides. In addition, the parties are permitted to lengthen by agreement the time allowed to respond to a notice sent by a secured creditor, and to establish reasonable standards of performance for obligations under this Act. If foreclosure is by auction (205), the parties may agree to change the time, place, and manner of the auction if the change is commercially reasonable and the secured debt exceeds $5 million.
Guarantors, sureties, and accommodation parties are permitted to waive the right to receive notices in nonresidential transactions. Such waivers are commonly demanded by lenders, and it is reasonable to expect that such parties will be informed of the lender's actions by the borrower.
SECTION 106. SUPPLEMENTAL PRINCIPLES OF LAW AND EQUITY APPLICABLE. The principles of law and equity affecting security interests in real property, including the law relative to acceleration, capacity to contract, principal and agent, marshaling of assets, subrogation, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement this [Act] unless displaced by a particular provision of the [Act].
Comment
An act governing foreclosure cannot anticipate all possible forms of conduct that would cause courts to intervene in the normal foreclosure process. Historically foreclosure has been subject to equitable principles, and this Act does not change that fact. Hence, this section provides that the fundamental principles of the common law, worked out over centuries, continue to apply to foreclosures. For example, a court might "deaccelerate" an installment debt that had been accelerated under inequitable conditions; might enjoin a foreclosure because the granting of the security interest was tainted with fraud, duress, or lack of capacity; might order that multiple parcels be foreclosed in a particular order to avoid unnecessary harm to holders of subordinate interests under the doctrine of marshaling; or might permit an agent to pursue or defend against foreclosure on behalf of the principal.
SECTION 107. NOTICE.
(a) A person has notice of 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.
(b) Except as provided in subsection (c), to send or give a notice, or to notify a person, means in the manner agreed, or otherwise with any costs provided for, and properly addressed to the person's address for notice or if none, directed as reasonable under the circumstances,
(1) to deposit a record in the United States Postal Service or with a commercially reasonable carrier; or
(2) with respect to an electronic record, to initiate operations that in the ordinary course will cause the record to come into existence in an information processing system or at an address within that system in a form capable of being processed by or perceived from a system of that type by the recipient, if the recipient uses, designates by agreement or otherwise has designated or holds out, that system or address as a place for the receipt of communications of the kind sent. An electronic record is not sent if the sender or its information processing system inhibits the ability of the recipient to print or store the record. Receipt within the time in which it would have arrived if properly sent has the effect of a proper sending.
(c) In the case of a notice required to be sent by a secured creditor under Sections 202 through 207, to send or give a notice or to notify a person means
(1) to hand-deliver the written notice to the person; or
(2) to deposit the written notice with the United States Postal Service or with a commercially reasonable carrier, with any costs provided for and properly addressed to the person's address for notice.
(d) A notice to which subsection (c) applies may be transmitted in a manner authorized by subsection (b) if the person to whom it is sent is not a residential debtor, has agreed with the secured creditor that notice may be transmitted in that manner, and that manner of transmittal is reasonably calculated to provide actual notice to the person to whom it is sent.
(e) A notice is sufficient even if the notice includes information not required by law or contains minor errors that are not seriously misleading.
(f) A notice is received when it comes to a person's attention or is delivered to and available at the person's address for notice, or if none, at a location or at an information processing system designated by agreement for that purpose in a form capable of being processed by or perceived from a system of that type by a recipient, or, in the absence of an agreed location or system,
(1) in the case of a notice that is not an electronic record, it is delivered at the person's residence, the person's place of business through which the security agreement was made, or at any other place held out by the person as a place for receipt of communications of the kind; or
(2) in the case of a notice that is an electronic record, it comes into existence in a system or at an address in that system in a form capable of being processed by or perceived from a system of that type by a recipient, if the recipient uses or otherwise has designated or holds out that system or address for receipt of notices of the kind and the sender does not know that the notice cannot be accessed from that place.
(g) If, at the time of sending a required notice, a secured creditor has actual knowledge that the address for notice or other address of a person to whom the notice is directed is invalid or that notices cannot be delivered to that person at that address, the secured creditor shall make a reasonable effort to determine and use a correct address for that person before sending the notice.
[Reporter's Note: This section has been simplified somewhat. The concept of the "address for notice" (a defined term in Section 102(2)) has been included. Consideration was given to deleting subsection (f), defining when a notice is received; however, this subsection was retained, since it is needed to measure certain other time periods in the Act. The former last subsection, requiring that notices be given in minority languages, has been deleted. Former Section 109, on correction of addresses, has been moved to this section as subsection (g).]
Comment
This section is derived from the Uniform Electronic Transactions Act, and is generally consistent with the current draft of UCC Article 2. It combines the provisions specifying when a person "has" notice; when a person "gives" notice; and when a person "receives" notice.
The terms "notifies," "gives," or "sends" are the words used when the essential fact is the proper dispatch of the notice, not its receipt. When the essential fact is the other party's receipt of the notice, that is stated. Subsections (b), (c), and (d) provide that proper dispatch and not its receipt satisfies the obligation "to notify" or "to give notice." Subsection (f) states when a notice is received.
In most cases, the notice requirements of this Act may be satisfied by electronic transmission. However, when a notice required by Sections 202 through 207 is given to a residential debtor, electronic transmission is not permitted. These notices are regarded as so important, and the consequences of failure to receive them so great, that only a paper notice that is hand-delivered, mailed, or sent by a commercially reasonable carrier to the recipient is satisfactory.
If the secured creditor knows that an address is wrong, it has a duty to make a reasonable effort to determine a correct address. Such efforts would ordinarily include use of any forwarding address provided by the U.S. Postal Service, the use of at least one generally-used telephone directory for the area in which the real property collateral is located, and at least one nationwide internet search database. As technology develops, other methods of address search may also become reasonable and hence obligatory on secured creditors.
SECTION 108. TRANSACTIONS CREATING SECURITY INTERESTS. Whether a transaction creates a security interest depends on the intent of the parties and is determined by the facts of each case. 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. A lease that is intended as security to the lessor creates a security interest.
[Reporter's Note: The detailed description of when a lease creates a security interest has been deleted. The comment suggests reference to UCC 1-203 instead.]
Comment
The common situation in which a buyer takes possession of real property a short time before the closing 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, 22 Nov. 1999).
ARTICLE 2
DEFAULT AND FORECLOSURE
SECTION 201. RIGHTS AND REMEDIES
(a) A secured creditor has a right to foreclose under this [Act] if
(1) a default has occurred;
(2) all conditions that are, by the terms of the security agreement and applicable law, prerequisites to foreclosure have been satisfied;
(3) all notices to the debtor required by the security agreement and by this [Act] as prerequisites to foreclosure have been given; and
(4) all grace periods or cure periods available to the debtor by the terms of the security agreement and by this [Act] as prerequisites to foreclosure have elapsed without cure being made.
(b) 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 (Section 205), negotiated sale (Section 206), or appraisal (Section 207). Notice of the secured creditor's elected method of foreclosure must be given by the secured creditor as provided in subsection 204(8).
Comment
The fundamental role of this Act is to permit secured creditors, after giving appropriate notice, to foreclose without the necessity of judicial process. This section defines when foreclosure is available and serves as an overview of the foreclosure methods open to secured creditors under this Act.
SECTION 202. NOTICE OF DEFAULT AND RIGHT TO CURE BEFORE FORECLOSURE
(a) A notice of foreclosure under Section 204 may not be given until
(1) a default has occurred;
(2) if a cure of the default is possible, and if the obligation secured by the security agreement is a debt of five million dollars or less, each debtor has been given notice by the secured creditor of the nature of the default and of the fact that foreclosure may be initiated if a cure of the default is not effected as provided in paragraph (a)(3); and
(3) if a notice must be given under subsection (2), no person has, within 30 days from the date the notice of default is sent,
(i) cured the default, if the default can be cured by the payment of money, or
(ii) commenced and proceeded diligently with actions to cure the default, if the default is curable but cannot be cured by the payment of money.
(b) This [Act] and the right to cure a default provided in this section do not derogate any right to notice or to cure a default provided to any party by the security agreement. The period to cure provided in this section and any period to cure provided in the security agreement run concurrently unless the security agreement provides otherwise. Unless precluded from doing so by other law, the secured creditor must cooperate with any person who attempts to cure a default by promptly providing information upon request concerning the amount due or other performance required to cure.
(c) A cure, to be effective under subsection (a)(3), must include reimbursement to the secured creditor of all reasonable expenses incurred by the secured creditor in enforcing the security agreement, including, but not limited to, reasonable attorneys' fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting the secured creditor's interest in the collateral and rights under the security agreement.
(d) Unless a debtor is a residential debtor, no notice to cure need be given under subsection (a)(2) and no right to cure shall exist except as agreed by the parties if a notice of default under subsection (a)(2) for a default of the same type has been sent by the secured party within one year prior to the date of the default in question.
(e) Unless a debtor is a residential debtor, the time period specified in subsection (a)(3) to cure a default may be reduced to such shorter period as the parties may agree, but not less than five days.
(f) If cure is made as provided in subsection (a) of this section, any acceleration of the secured obligation by the secured creditor is ineffective and the obligation is owed as if no acceleration had occurred.
(g) The debtor and other persons having the right to redeem the collateral from the security interest under applicable principles of law may not redeem after the time of foreclosure.
(h) An original notice of foreclosure may not be given under Sections 203 and 204 after the limitations period for foreclosure of a mortgage by judicial proceeding has expired.
[Reporter's Note: In a nonresidential debtor case, the agreement of the parties can now limit the debtor's cure period to as little as 5 days. In addition, in such cases, the debtor is entitle to a cure period only once every 12 months. No cure period is required for nonresidential debtor cases in which the debt exceeds $5 million.]
Comment
This Act requires two notices prior to foreclosure, the one specified by this section and the notice of foreclosure itself, specified by Sections 203 and 204. The notice under this section simply advises the debtor or debtors that a default has occurred and that foreclosure may ensue if it is not cured within 30 days. Non-debtor parties, such as subordinate lienholders, are not entitled to receive this notice, although they may cure the default if they wish. No statutory right to cure exists if the secured debt exceeds five million dollars, although the security agreement itself may provide a right to cure in such cases.
The 30-day period runs from the date the secured party gives the debtor notice of the default. If the default is monetary, it must actually be cured within 30 days. In the case of a nonmonetary default, however, acceleration and foreclosure can be avoided if continuing and diligent efforts to cure are made, even if a complete cure cannot be accomplished within 30 days. However, if those diligent efforts to cure cease before cure is completed, the secured creditor may then immediately proceed to give notice of foreclosure (Sections 203 and 204) without taking any other preliminary action. The parties may agree upon a reasonable time limitation, such as 90 days, to cure nonmonetary defaults; such an agreement is enforceable as a standard of performance under Section 105(c).
Illustrations of nonmonetary defaults include the commission of waste by the debtor, a transfer of the property in violation of a covenant in the security agreement, a failure to keep the real property insured as required by the security agreement, or the like.
The 30-day cure period may be reduced by the parties' agreement to as little as five days if no debtor is a residential debtor.
The security agreement may provide debtors with additional protections, such as rights to notice and grace periods, beyond those provided by this Act. Such protections must be observed before notice foreclosure under Sections 203 and 204 can be given. However, any time period for cure under the security agreement and the time for cure granted by subsection (a) will run concurrently unless the parties have agreed that they will not do so.
Unless a residential debtor is involved, the right to cure may be exercised only if no default of the same type has occurred within the previous year.
If cure is made within the time permitted, subsection (d) "deaccelerates" any acceleration of the obligation that the secured creditor has initiated.
The common law equitable concept of redemption is recognized by this Act, but is not spelled out in detail; that is left to other law. See Restatement (Third) of Property: Mortgages § 6.4 (1997). All enforceable fees and charges, such as late fees and prepayment fees, must be tendered to accomplish a redemption. This Act does not deal with the enforceability of such fees, but leaves those issues to other law. Since redemption requires payment of the secured obligation in full, the cure provided by subsection (a) is not a redemption.
Under this Act, no post-foreclosure redemption is permissible, and the title to the collateral emerging from foreclosure is not conditional or subject to revocation on account of any later payment of the obligation.
Subsection (f) makes the statute of limitations for judicial foreclosure of mortgages applicable to foreclosures under this Act. For this purpose, the giving of an initial notice of foreclosure under Sections 203 and 204 is the equivalent of the filing of a judicial foreclosure action.
SECTION 203. NOTICE OF FORECLOSURE: MANNER AND EFFECT OF GIVING.
(a) Except as otherwise provided in subsection (e), notice of foreclosure must be sent by the secured creditor to the following persons if they can be identified as of the time of recording of the notice of foreclosure:
(1) each debtor;
(2) any person specified by the debtor in the security agreement to receive notice on the debtor's behalf;
(3) any person who 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 hold an interest in the collateral which is subordinate in priority to the security agreement;
(4) if the secured creditor holds and will foreclose on security interests in personal property, any person who is entitled to notice with respect to the disposition of the collateral under Article 9 of the Uniform Commercial Code;
(5) any person who 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 meeting the standards of Section 211;
(6) any tenant, subtenant, or assignee who is in possession of any part of the real property collateral under a lease.
(b) If the notice of foreclosure is deposited in the United States Postal Service, it must be sent both by regular mail and by registered mail, return receipt requested.
(c) The secured creditor shall record in the [Office of the Recorder of Deeds of the county or counties in which any of the real property collateral is located] a copy of the notice of foreclosure. Any person acquiring an interest in the real property collateral after the notice of foreclosure is recorded
is deemed to have been given notice of foreclosure.
(d) Within thirty days after the time of foreclosure, a person acquiring rights to the collateral by virtue of foreclosure may give a notice to any tenant, subtenant, or assignee of a tenant whose rights were terminated by the foreclosure, advising such person that the foreclosure is revoked as to such person's interest in the collateral, and that such person's interest continues to subsist. The notice shall have the effect of preserving the interest of such person.
(e) The secured creditor may elect not to give notice of foreclosure to one or more of the persons entitled to notice under this section. An interest in the collateral held by a person described in paragraphs (a)(1) through (6) who is not given notice of foreclosure survives and is unaffected by the foreclosure. The secured creditor is liable for the actual damages, not to exceed five hundred dollars sustained by a person who has recorded a request for notice of foreclosure meeting the standards of Section 211, but who is not given notice of foreclosure.
(f) Except as provided in subsection (e), failure of the secured creditor to send notice of foreclosure to the persons and in the manner specified in this section does not impair the secured creditor's interest or priority in the collateral or the secured obligation.
(g) A secured creditor may elect to send notice of foreclosure to any person whom the secured creditor knows or believes may have an unrecorded interest in the collateral that is subordinate in priority to the security agreement. The giving of such notice does not enlarge the rights or priority of a person to whom such notice is given.
(h) A foreclosure under this act passes the debtor's title to the collateral to the successful bidder under Section 205, the contract purchaser under Section 206, or the secured creditor under Section 207, subject only to interests in the collateral having priority over the security agreement, the interests of persons as to whom the foreclosure was revoked under subsection (d), and the interests of persons entitled to notice under subsections (a)(1) through (a)(6) who were not given notice of the foreclosure.
[Reporter's Note: This draft takes a different approach than previous drafts to the preservation of junior leases. First, it provides generally that a lessee is entitled to notice only if the lease is of record (subsection (a)(3)) or the lessee is in possesssion (subsection (a)(6)). (The Reporter continues to believe that it is undesirable to require notice to tenants under unrecorded leases, but this draft does so.) Other leases will ordinarily be destroyed by the foreclosure even if the lessees are not given notice. However, subsection (d) allows the foreclosure purchaser to "revoke" the foreclosure as to any person with a junior lease by notice given within 30 days after the foreclosure date. This notice permits the preservation of junior leases that the foreclosure purchaser considers desirable.]
Comment
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.
In general, this section does not require secured creditors to resort to factual investigation in order to determine where notice of foreclosure must be sent. Lenders need consult only their own records and the usual public land title records (e.g., the recorder's office, the court clerk's office, and for personal property collateral, the office where UCC financing statements are files). An exception exists for tenants holding possession under leases. If the creditor wishes to eliminate such leases they must be given notice of foreclosure, even if their leases are not recorded; this can usually be done with a mailing to the property address.
Recording of the notice of foreclosure is required. Once a notice of foreclosure is recorded, the foreclosing creditor need no longer worry about giving notice to persons who acquire interests in the collateral after the time of recording but before the foreclosure sale. The recorded notice is analogous to lis pendens, and provides automatic notice to such parties. Since notice must be given to person with recorded interests under subsection (a)(3), the practical result is that the foreclosing secured creditor must perform a title examination down to the date and time that the notice of foreclosure is recorded.
No notice of foreclosure is necessary to persons holding interests in the property with priority superior to the security agreement being foreclosed; such persons are unaffected by the foreclosure and have no need of notice.
Notice need not be given to sureties, guarantors, or accommodation parties who have waived their right if there are no residential debtors in the transaction and if the waiver is otherwise enforceable under applicable law. See Section 105(e).
There are two situations under which a person with a junior interest in the collateral might not have its interest terminated by foreclosure. One is the case of a person who is entitled to notice under subsection (a), but to whom no notice is given (subsection (e)). The other is the case of a person as to whose interest the foreclosure is revoked by the person acquiring title by virtue of the foreclosure. Such a revocation must be made within 30 days after the date of foreclosure. Hence the secured creditor or foreclosure purchaser has the power to "pick and choose" which interests will be wiped out by foreclosure. This power is most likely to be exercised in the case of leases that are seen as desirable from a landlord's viewpoint, and which the creditor or purchaser therefore wishes to preserve in foreclosure.
SECTION 204. NOTICE OF FORECLOSURE: CONTENT. A notice of foreclosure must be headed as follows: "NOTICE OF FORECLOSURE. THIS IS A NOTICE THAT YOU MAY LOSE YOUR RIGHTS TO CERTAIN PROPERTY. READ IT IMMEDIATELY AND CAREFULLY."
(a) The notice must contain:
(1) the date of the notice, the name of each debtor, the legal description and, at the secured creditor's option, the street address, if any, of the real property collateral or portion thereof to be subjected to foreclosure, and a description of any personal property collateral to be included in the foreclosure;
(2) identification of the security agreement;
(3) the facts establishing that the security agreement is in default and a statement that the secured creditor plans to foreclose;
(4) a statement that the secured creditor has accelerated or, by virtue of the notice, is accelerating the maturity of the secured obligation, unless the secured creditor elects not to accelerate the obligation.
(5) a statement that the collateral may be redeemed from the security interest by payment or performance of the secured obligation in full before foreclosure, and the amount to be paid or other action necessary to redeem;
(6) a statement that the secured creditor elects to foreclose by auction (Section 205), by negotiated sale (Section 206), by appraisal (Section 207), or by a combination of two of those methods, as provided in subsection (b);
(7) a date after which foreclosure will occur if no cure or redemption is made, and the time and place of foreclosure if foreclosure will be by auction;
(8) a statement that the foreclosure will extinguish the rights in the collateral of the person receiving the notice of foreclosure;
(9) a statement as to whether the secured creditor will waive the right to claim a deficiency if the foreclosure does not fully satisfy the secured obligation; and
(10) an explanation of the right of the debtor to request a meeting with a representative of the secured creditor on the propriety of the foreclosure within fifteen days after the date the notice of foreclosure is given (Section 208).
(b) The secured creditor may simultaneously pursue, with foreclosure by auction under Section 205, either foreclosure by negotiated sale under Section 206 or foreclosure by appraisal under Section 207, but not both. If the creditor pursues two methods of foreclosure simultaneously, the notice of foreclosure shall so state, as provided in subsection (a)(6).
[Reporter's Note: Subsection (b) has been added, permitting the secured creditor to pursue either one (but not both) of the other methods of foreclosure simultaneously with foreclosure by auction.]
Comment
The following is an illustrative notice of foreclosure complying with the requirements of this section.
NOTICE OF FORECLOSURE
THIS IS A NOTICE THAT YOU MAY LOSE YOUR RIGHTS
TO CERTAIN REAL PROPERTY.
READ IT IMMEDIATELY AND CAREFULLY
1. This notice is given December 1, 200X, 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 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. The payments for August 1, September 1, and October 1, 200_ have not been made.
4. First Financial Corp. is now accelerating the unpaid balance on this promissory note. This means that the entire balance of $137,455.34 is now due and payable. Interest will continue to accrue on this balance at the rate of 7.5% per annum, and will be added to the principal due until paid in full.
5. The debtor and the holders of property interests subordinate to the mortgage of First Financial Corp. may now prevent a foreclosure of the real property only by paying the full balance of $137,455.34 on December 1, 200X, 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 given in the next paragraph in order to prevent foreclosure from occurring.
6. If payment is not made in this amount, First Financial Corp. elects to foreclose by auction.
7. It is expected that the auction will be held on March 1, 200_ on the west steps of the Pembroke County Court House and the real property will be sold to the highest bidder.
8. If that foreclosure sale is held, it will extinguish the rights to the real property of all persons to whom this notice is directed.
9. If the sum bid at the foreclosure sale is less than the unpaid balance on the mortgage indebtedness and expenses of foreclosure, the borrowers, Mary and John Jones, will not be held personally liable for any remaining unpaid sum.
10. If the borrowers, Mary and John Jones, believe that the proposed foreclosure is legally improper, they may request a meeting with Jane A. Doe, attorney at law, who represents First Financial Corp. in this matter, to discuss their objections with her. She can be contacted at 123 Main Street, City of Ashland, State of Example, or at telephone number 123-654-3210. This meeting must be requested within 15 days after the date of this notice given above. Upon receiving such a request she will schedule a meeting at a mutually convenient time.
----------------------------------------------------------------
Note that the amount that must be paid to redeem can, and 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.
Under subdivision (1), the secured creditor may foreclose against all of the collateral or only part of it. The security interest will continue to exist on the part omitted from the foreclosure until the secured obligation is fully discharged and the expenses of foreclosure are paid. If a portion of the collateral is not covered by the initial foreclosure, the secured creditor may institute a subsequent foreclosure under this Act or otherwise foreclose on the remaining collateral if necessary at a later time. See Section 213 regarding foreclosure on multiple parcels.
The notice of foreclosure automatically accomplishes an acceleration of the obligation by virtue of compliance with subdivision (4). Even in the exceedingly rare cases in which the security agreement contains no acceleration clause, an acceleration will still take place by operation of this Act. This should impose no inconvenience on lenders, since no rational lender wishes to foreclose without acceleration. However, nothing in the Act prevents a lender from voluntarily "deaccelerating" as part of a workout agreement with a borrower, even after the notice of foreclosure has been given. Such a deacceleration is possible, if the lender is willing, up to the time of foreclosure.
SECTION 205. FORECLOSURE BY AUCTION. If a secured creditor elects to foreclose by auction, the requirements of this section must be satisfied.
(a) The secured creditor shall procure evidence of title to the real estate collateral in a form customary in the locality, unless evidence of title is not reasonably available. The evidence of title must be issued no earlier than sixty days prior to the time of recording of the notice of foreclosure (Section 203(c)), and must state the willingness of the issuer to provide evidence of title to the real property collateral to the person who acquires title by virtue of the foreclosure, and the exceptions and exclusions from coverage to which the evidence title issued to such person will be subject. If the evidence of title is an attorney's opinion, the attorney need not be willing to issue an opinion to the person acquiring title by virtue of the foreclosure if doing so would constitute a conflict of interest for the attorney. The secured creditor is not liable to any person for inaccuracy of the evidence of title. The secured creditor shall make a copy of the evidence of title available to any prospective foreclosure purchaser upon request. The secured creditor, at its option, may also make available to prospective foreclosure purchasers other reports and information affecting the collateral which it possesses, but is not liable to any person for any inaccuracy in any report not prepared by the secured creditor.
(b) The secured creditor, after giving notice as required by Sections 203 and 204, shall advertise the foreclosure sale by placing an advertisement in
ALTERNATIVE A
a publication complying with the publication requirements of existing state law affecting judicial lien sales. The advertisement must be published for the frequency and period of time required for publication of notices of foreclosure of judicial liens in this state. [Not less than 21 days nor more than 45 days before to the sale, the advertisement must be submitted on any internet site maintained by the [Secretary of State] of this State for the purpose of disseminating information concerning foreclosures of real property.]
ALTERNATIVE B
a newspaper having general circulation in the county where the real property collateral or some part of it is located. The advertisement must be published at least once per calendar week during a three-week period, with the last publication at least seven days, but not more than 30 days, before the sale. Not less than 21 days nor more than 45 days before to the sale, the advertisement must be submitted on any internet site maintained by the [Secretary of State] of this State for the purpose of disseminating information concerning foreclosures of real property, posted in a prominent place on each parcel of the real property collateral if posting can be accomplished without a breach of the peace, and sent to the persons who were entitled to notice of foreclosure under Section 203. A copy of the advertisement may be included with the notice of foreclosure, and otherwise must be sent in the manner prescribed for notices by Section 107. The secured creditor may, but is not required to, advertise the sale in any additional reasonable manner that it deems desirable.]
(c) The advertisement must state or contain:
(1) the date, time, and location, by street address and by floor and office number, if applicable, of the foreclosure sale.
(2) that the sale will be made to the highest qualified bidder, and the amount of the deposit that will be required of the successful bidder at the completion of the sale if a deposit of other than ten percent of the bid will be required;
(3) the legal description, the [property tax map number] [parcel identifier number] of the real property to be sold, and at the option of the secured creditor, the real property's location by street address, if any;
(4) a brief description of any improvements on the real property and any personal property collateral to be sold;
(5) an address and telephone number for the secured creditor, if an individual, or an employee, agent, or attorney of the secured creditor who can provide information concerning the collateral;
(6) a statement that additional information, a copy of the evidence of title if available, and other information or reports concerning the collateral, which may be listed specifically, are available from the person identified in paragraph (5);
(7) 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
(8) any other information that, in the judgment of the secured creditor, may be of interest to prospective purchasers of the collateral.
(d) If the secured creditor is authorized to grant access to the collateral, the secured creditor shall reasonably accommodate persons who contact the person designated in paragraph (c)(5), express an interest in bidding at the foreclosure sale, and request an opportunity to make inspections of the collateral.
(e) The sale must be conducted during ordinary business days and hours, in a county where some of the real property collateral is located, at a location
ALTERNATIVE A
where sales of property subject to judicial liens may be held in this state.
ALTERNATIVE B
(1) at the main door of the county courthouse, or other location if prominent signs indicate that location; or
(2) at the site of the real property collateral; or
(3) that is readily accessible to the public and bears a standard street address.
(f) The sale must not be held less than 90 days after the giving of an original notice of foreclosure (Sections 203 and 204), and not less than 30 days after a notice of foreclosure given pursuant to a postponed sale (subsection (k)) or a sale resulting from a change in the method of foreclosure. The sale must be conducted by an individual designated by the secured creditor. Beginning at least one-half hour before the time and at the place designated for sale in the advertisement and the notice of foreclosure, the individual conducting the sale shall exhibit or distribute copies of the evidence of title. The sale shall be conducted
ALTERNATIVE A
in the manner prescribed by law in this state for the foreclosure of judicial liens.
ALTERNATIVE B
in the following manner:
(1) Any person, including any debtor and the secured creditor may bid at the sale. The individual conducting the sale may bid on behalf of the secured creditor or any other person by whom he or she is authorized, but may not bid for his or her own account. The secured creditor may bid, without tendering cash, any amount up to the balance owing on the secured obligation including the expenses of foreclosure.
(2) Bids of persons not attending the sale may be submitted by records received by the secured creditor before the opening of the sale, and must be read aloud before the sale is opened to oral bids.
(3) Sale must be made to the person bidding the highest amount unless the individual conducting the sale, in his or her unfettered discretion, determines that the highest bid is inadequate, in which event the sale shall be cancelled and postponed as provided in subsection (k).
(4) The successful bidder shall pay a deposit to the individual conducting the sale. The deposit shall be ten percent of the amount of the bid, unless the notice of foreclosure stated that a different percentage deposit, or no deposit, would be required. The successful bidder shall pay the remainder of the bid to the person conducting the sale within five business days after the day of the sale. If payment is not made, the sale is cancelled, and the secured creditor shall conduct a postponed sale as provided in subsection (k).]
(g) The time that the auction sale is completed by the auctioneer's announcement that the property is "sold" is the time of foreclosure. The highest amount bid at the sale, less the expenses of foreclosure, is the foreclosure amount. The proceeds of the sale must be distributed by the secured creditor in the following order:
(1) to the expenses of foreclosure;
(2) to discharge the secured obligation;
(3) to discharge, in the order of their priority, the indebtedness secured by all liens subordinate to the foreclosed security interest held by persons who were given notice of foreclosure;
(4) to the debtor or the debtor's assigns.
(h) If the secured creditor, in distributing 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 secured creditor shall have no liability for an erroneous distribution. The secured creditor may apply for an order of the [district] court directing the order of distribution of the proceeds of the sale.
(i) Upon payment by the successful bidder of the full balance of the bid, the secured creditor shall issue and deliver a deed, and if applicable a bill of sale, without warranty of title, conveying the collateral to or as directed by the successful bidder. The deed and bill of sale pass title to the collateral, subject only to interests in the collateral superior in priority to the foreclosed security interest and to interests in the collateral subordinate to the foreclosed security interest whose holders were not given notice of foreclosure under Section 203(e).
(j) Delivery of the deed and bill of sale constitutes conclusive compliance with this Section and Sections 203 and 204 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, any person attacking the foreclosure on grounds of noncompliance with this Section and Sections 203 and 204 shall have the burden of persuasion.
(k) The person conducting the sale may, for any cause the person considers appropriate, postpone the sale from time to time until it is completed. Announcement of postponement must be given at the time and place previously scheduled for the sale. If the sale is postponed for more than thirty business days, whether by the person conducting the sale or by order of a court of this state or the United States, the sale must be readvertised with the new time and place of sale in the manner required by this section, and a copy of the advertisement must be sent to the persons and in the manner prescribed by Sections 203 and 204.
(l) Before completion of the sale, the secured creditor may elect to terminate foreclosure by auction. To do so, the secured creditor shall send notice to the persons specified in subsection 203(a), by a method of notification specified in subsection 107, advising them whether the secured creditor will:
(1) attempt another foreclosure by auction under this section;
(2) foreclose by negotiated sale under Section 206;
(3) foreclose by appraisal under Section 207;
(4) foreclose by judicial proceeding;
(5) discontinue the foreclosure.
The secured creditor may pursue foreclosure by auction simultaneously with foreclosure by appraisal or negotiated sale.
(m) If the notice sent by the secured creditor under subsection (l) contains all of the elements required for notice of foreclosure under Sections 203 and 204, no further notice is necessary under those sections to initiate a further foreclosure.
[Reporter's Note: In this draft, the generic term "evidence of title" has been substituted for references to title insurance and the like. If the evidence of title is an attorney's opinion, the attorney need not be willing to provide an opinion to the foreclosure purchaser if doing so would constitute a conflict of interest.
The detailed description of the type of newspaper in which advertisement must be made has been eliminated in favor of a "newspaper of general circulation." The location of the sale has been revised to allow sale at the courthouse, the property, or at any other readily accessible location in the county.
Under this draft, the person conducting the sale may represent and bid on behalf of anyone except himself or herself. The requirement that bidders make a deposit in advance of the bidding has been eliminated. A deposit must be made after the sale is concluded. It will ordinarily be 10%, but may be more or less if so announced in the advertisement and notice of sale.
The secured creditor's distribution of the proceeds of sale is protected against liability for error, provided the secured creditor acts in good faith and without knowledge of the invalidity or lack of priority of a distributee's claim.
The conclusive nature of the foreclosure title, in favor of bona fide purchasers, has been redrafted. If there is no BFP, the sale may be attacked on grounds of noncompliance with the statute, but the attacker has the burden of persuasion.]
Comment
This section describes the procedures for foreclosure by auction, the traditional method of foreclosing land security interests in the United States. However, it imposes several requirements that are designed to make the auction sale more attractive to purchasers. These requirements include the obtaining and exposure to prospective purchasers of evidence of title, the potential for making other information and reports available, and the use of internet site advertising in addition to the usual newspaper advertisement.
With respect to several aspects of the foreclosure sale, the Act provides legislatures with the option to adopt existing state procedures governing judicial lien sales or to adopt the specific provisions contained in the Act. These aspects include the location of the sale, the media employed to advertise it, and the frequency and number of advertisements.
The person conducting the sale may elect to postpone it. This may be deemed expedient, for example, because of inclement weather, the absence of sufficient bidders, or damage occurring to the property.
The balance owing on the secured obligation (subsection (g)) is not necessarily limited to principal and accrued interest on the secured debt. It may include late fees, default interest, prepayment fees, and other fees to the extent permitted by other law of this state; the enforceability of such fees is not governed by this Act. It may also include expenditures made by the secured creditor to protect the collateral, such as property tax payments, insurance premiums, and expenditures to correct waste. See Restatement (Third) of Property: Mortgages § 2.2 (1997).
Any surplus from the sale, after payment of the foreclosure costs and discharging the secured obligation, is distributed to subordinate lien holders who were given notice of the sale, and to the debtor, in the order of their priority. Persons having interests superior in priority to the security agreement being foreclosed are not entitled to receive any of the proceeds of the sale, since it does not affect their interests.
If the secured creditor is uncertain about the priority of junior interests, it may apply for a court determination of priority. Pending such determination the secured creditor may invest the proceeds of sale in a reasonable manner. Any investment earnings must be added to the proceeds.
The title derived from a foreclosure is immune from attack on the ground of noncompliance with the Act's provisions relating to cure period, notice, and conduct of the sale if the title has passed to a bona fide purchaser. If the title has not passed to a bona fide purchaser, it may be attacked on these grounds, but the attacker has the burden of persuasion.
The secured creditor's election to foreclose by auction is not necessarily a final decision. Under paragraph (k)(l), the creditor can change course and foreclose by negotiated sale or by appraisal instead. However, all of the persons who were entitled to notice of the foreclosure must be given new notices if the foreclosure method is changed.
SECTION 206. FORECLOSURE BY NEGOTIATED SALE. If secured creditor elects to foreclose by negotiated sale, the requirements of this section must be satisfied.
(a) The secured creditor may advertise the collateral for sale to prospective purchasers by whatever methods the secured creditor considers appropriate. The secured creditor may list the collateral with brokers.
(b) The secured 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. A condition of the secured creditor's obligation to sell under the contract is that no objection to the cash price is made under subsection (f) and that no redemption be made prior to the date of foreclosure under Section 202(g). The sale must be completed not less than 90 days after an original notice of foreclosure is given (Sections 203 and 204), and not less than 30 days after a notice of foreclosure resulting from a subsequent attempt to foreclose by negotiated sale under paragraph (g), Section 205(l), or Section 207(g) is given.
(c) The contract of sale must provide for a cash sale, and must state the amount, net of all commissions and other selling expenses, for which the collateral is being sold. The cash price thus stated is the foreclosure amount.
(d) The secured creditor shall send notice of the proposed sale at least 30 days before the proposed sale to the persons specified in subsection 203(a), by a method of notification specified in subsection 107. The notice of proposed sale must state or contain:
(1) the date on or after which the secured creditor proposes to sell the collateral;
(2) the cash price stated in the contract of sale;
(3) that if the sale is completed, the stated cash price will be applied to the secured obligation and the balance distributed as provided in subsection 205(g);
(4) that the person receiving the notice may inspect a copy of the contract of sale by contacting an individual whose name, address, and telephone number are given in the notice;
(5) that if the person receiving the notice objects to the sale, that person may notify the secured creditor by sending a record received by the secured creditor at least seven days before the date of proposed sale.
(e) If the secured creditor receives no record objecting to the proposed sale from any person who has been given notice of the proposed sale, by a date seven days before the date of proposed sale, the sale may be completed by the secured creditor in accordance with the contract of sale. Upon completion of the sale, the cash price must be distributed as provided in subsection 205(g), except that no fee may be paid to the person conducting the sale. The secured creditor may deliver to the purchaser such form of deed and bill of sale, if applicable, as the parties agree. The deed must be recorded in the [county recorder's office]. The time of recording of the deed is the time of foreclosure. With the deed, the secured creditor shall record a sworn affidavit, reciting that the deed is delivered pursuant to a foreclosure by negotiated sale under this [Act] and that the requirements of this section and Sections 203 and 204 have been complied with. The deed and bill of sale pass title to the collateral, subject only to interests in the collateral superior to the foreclosed security interest and to interests in the collateral subordinate to the foreclosed security interest whose holders were not given notice of foreclosure. The foreclosure by negotiated sale and the price are not thereafter subject to objection by any person to whom timely notice of the proposed sale was given. Recording of the deed and bill of sale and affidavit of compliance constitutes conclusive compliance with this Section and Sections 203 and 204 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, any person attacking the foreclosure on grounds of noncompliance with this Section or Sections 203 and 204 shall have the burden of persuasion.
(f) If the secured creditor receives notification by record from any person who has been given notice of the proposed sale, objecting to the sale, before the date of proposed sale, the sale must not be completed and the secured creditor shall proceed as provided in subsection (g). If such notification is given by a person who is not a debtor, but who holds an interest in the collateral subordinate to the security interest being foreclosed, the notification shall be accompanied by a bond, issued by a commercial bonding company licensed to do business in this state, in the amount of ten percent of the proposed selling price under the contract of sale. This bond shall be forfeited to the secured creditor to the extent that the actual foreclosure amount is less than the amount stated in the contract of sale.
(g) If the secured creditor is unable to complete the proposed sale, whether because of receipt of notification objecting to the sale as provided in subsection (f) or for any other reason, the secured creditor shall send notice to the persons specified in subsection 203(a), by the methods of notification specified in subsection 107(d), advising them whether the secured creditor will:
(1) attempt another foreclosure by negotiated sale under this section;
(2) foreclose by auction under Section 205;
(3) foreclose by appraisal under Section 207;
(4) foreclose by judicial proceeding;
(5) discontinue the foreclosure.
The secured creditor may pursue foreclosure by auction simultaneously with foreclosure by appraisal or negotiated sale.
(h) If the notice sent by the secured creditor under subsection (g) contains all of the elements required for notice of foreclosure under Sections 203 and 204, no further notice is necessary under those sections to initiate a further foreclosure.
[Reporter's Note: As now drafted, this section requires that the contract of sale provide for a cash sale. The provisions giving conclusive effect to the sale in favor of a BFP have been redrafted. A provision is now made for the recording of an affidavit of compliance by the secured creditor at the completion of the sale. If objection is made by a junior interest holder (as distinguished from a debtor), a bond must be posted. Provisions have been added for further foreclosure procedures if the foreclosure by negotiated sale cannot be completed.]
Comment
This section provides a method of negotiated sale which may in some cases be quicker and more efficient than the traditional auction sale. However, since this method of foreclosure requires no independent test of the property's market value, it may be employed only if there being no objection to it by those whose interests will be wiped out by it. Those persons are entitled to notice of the negotiated sale, and if they make a timely objection to it, the sale cannot proceed. In that event, the secured creditor may either attempt to make a new negotiated sale or resort to one or more of the other methods of foreclosure. If a junior interest holder objects to the sale, she or he must post a bond equal to 10% of the proposed sale price, and must forfeit the bond if the ultimate foreclosure produces an amount less than the proposed contract sale. No such bond is required if a debtor objects to the sale.
If no objection is made to the sale, the sale price is in effect conclusively deemed to be at least equal to the fair market value of the property, and those who received notice of it cannot subsequently make a collateral attack on it.
The secured creditor may use real estate brokers, various forms of advertising, and any other marketing devices it considers desirable. However, the cash price to be credited against the debt must be a price net of commissions and other sale expenses. For example, if the contract of sale provides for a gross price of $100,000, but the secured creditor will be liable for a commission of $6,000, escrow and closing fees of $500, and title insurance expense of $1,000, the cash price is $92,500. This is the figure of which the debtor and junior interest holders must be notified, and the amount which will be credited against the secured obligation if the sale is completed.
SECTION 207. FORECLOSURE BY APPRAISAL. If a secured creditor elects to foreclose by appraisal, the requirements of this section must be satisfied.
(a) The secured creditor shall order an appraisal of the collateral. The appraisal must be made within 60 days before the date of foreclosure stated in the notice of foreclosure (Section 204), and must state the fair market value of the collateral.
(b) The appraisal must be made by an appraiser who is not an employee of the secured creditor (Section 108) and holds the following qualifications:
(1) If the collateral is residential real property, the appraiser shall be:
(A) designated as a certified or licensed residential appraiser by the [Appraisal Certification Board] of this State; and
(B) a member of the National Association of Independent Fee Appraisers or its successor organization with an IFA designation or a member of the Appraisal Institute with an SRA designation.
(2) If the collateral is not residential real property, the appraiser shall be:
(A) designated as a certified or licensed general appraiser by the [Appraisal Certification Board] of this State; and
(B) a member of the National Association of Independent Fee Appraisers or its successor organization with an IFAS designation or a member of the Appraisal Institute with an MAI or SRPA designation.
(c) The secured creditor shall send notice of the appraisal report to the persons specified in subsection 203(a) by a method of notification specified in subsection 107, at least 30 days before the date of foreclosure. The notice of the appraisal report must be accompanied by a copy of the appraisal report and state:
(1) the proposed date of foreclosure, which must be not less than 90 days after an original notice of foreclosure is given under Sections 203 and 204, and not less than 30 days after a notice of foreclosure resulting from a subsequent attempt to foreclose by appraisal under paragraph (g), Section 205(l), or Section 206(g) is given;
(2) the appraised value, as stated in the appraisal report;
(3) that title to the collateral will vest in the secured creditor on the date of foreclosure; and
(4) the foreclosure amount, which shall be the sum reached by subtracting, from the appraised value as stated in the appraisal report, the following:
(i) the amount owing on all liens, if any, that are superior in priority to the security interest being foreclosed; and
(ii) [10] percent of the first [$1 million] of the appraised value; and
(iii) [3] percent of the amount of the appraised value that exceeds [$1 million]; and
(iv) the expenses of foreclosure, which may be estimated in good faith by the secured creditor for purposes of the notice if their exact amount is not known.
(5) that the foreclosure amount will be applied to the secured obligation and the balance distributed in the order provided in subsection 205(g).
(6) that if the person receiving the notice objects to the foreclosure by appraisal, that person may notify the secured creditor by sending a record that is received by the secured creditor at least seven days before the date of proposed foreclosure.
(d) If the secured creditor receives no record objecting to the proposed foreclosure from any person who has been given notice of the proposed sale, by a date seven days before the date of proposed sale, the foreclosure may be completed by the secured creditor. On or after the proposed date of foreclosure the secured creditor shall record an affidavit in the [county recorder's office] containing the following:
(1) identification of the security interest;
(2) identification of the debtor and of persons who hold subordinate interests in the collateral to whom notice of foreclosure was given under Section 203 and their interests;
(4) a statement that the secured creditor has complied with all provisions of this [Act] for a foreclosure by appraisal; and
(3) a statement that title to the collateral has passed to the secured creditor.
(e) Recording of the affidavit passes title to the collateral to the secured creditor, subject only to interests in the collateral superior to the foreclosed security interest and to interests in the collateral subordinate to the foreclosed security interest whose holders were not given notice of foreclosure. The appraised value of the collateral is not thereafter subject to review. The time of foreclosure is the time of recording of the affidavit. Recording of the affidavit constitutes conclusive compliance with this Section and Sections 203 and 204 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, any person attacking the foreclosure on grounds of noncompliance with this Section or Sections 203 and 204 shall have the burden of persuasion.
(f) If the secured creditor receives notification by record from any person who has been given notice of the proposed foreclosure, objecting to the foreclosure, at least 7 days before the date of proposed foreclosure, the foreclosure must not be completed and the secured creditor shall proceed as provided in subsection (g). If such notification is given by a person who is not a debtor, but who holds an interest in the collateral subordinate to the security interest being foreclosed, the notification shall be accompanied by a bond, issued by a commercial bonding company licensed to do business in this state, in the amount of ten percent of the proposed selling price under the contract of sale. This bond shall be forfeited to the secured creditor to the extent that the actual foreclosure amount is less than the amount stated in the contract of sale.
(g) If the secured creditor is unable to complete the proposed foreclosure, whether because of receipt of notification objecting to the sale as provided in subsection (f) or for any other reason, the secured creditor shall send notice to the persons specified in subsection 203(a), by a method of notification specified in subsection 107, advising them whether the secured creditor will:
(1) attempt another foreclosure by appraisal under this section;
(2) foreclose by auction under Section 205;
(3) foreclose by negotiated sale under Section 206;
(4) foreclose by judicial proceeding;
(5) discontinue the foreclosure.
The secured creditor may pursue foreclosure by auction simultaneously with foreclosure by appraisal or negotiated sale.
(h) If the notice sent by the secured creditor under subsection (g) contains all of the elements required for notice of foreclosure under Sections 203 and 204, no further notice is necessary under those sections to initiate a further foreclosure.
[Reporter's Note: The provisions for objecting to a foreclosure by appraisal have been made parallel to those for objecting to a negotiated sale. If objection is made by a junior interest holder (as distinguished from a debtor), a bond must be posted. The provisions giving conclusive effect to the sale in favor of a BFP have been redrafted. Provisions have been added for further foreclosure procedures if the foreclosure by appraisal cannot be completed.]
Comment
This section provides a method of foreclosure that does not involve any sale to a third party. Instead, title to the collateral passes directly to the secured creditor. The foreclosure amount is determined by reference to a fair market value appraisal by an appraiser who is not an employee of the secured creditor.
The operation of this section is in many ways similar to strict foreclosure, a process that is often employed to foreclose mortgages in Connecticut and Vermont. However, under this section no judicial involvement is necessary unless an aggrieved party seeks a review of the appraisal. In addition, this section (unlike strict foreclosure) requires that any surplus be distributed to junior interest holders and debtors.
The foreclosure amount is reduced by 10% of the first one million dollars of the appraised value, and 3% of any excess of value over and above one million dollars. This reduction from the appraised value is made to reflect the fact that lenders usually have significant costs in holding and disposing of real property that they acquire in foreclosure. The largest category of such costs usually consists of a brokerage commission and other marketing expenses in connection with a resale of the property. Other costs include property taxes, insurance, maintenance, and management services during the lender's holding period. The percentage reduction provided in the Act is a reasonable approximation of these costs. While in a given case the lender's costs might be greater or smaller than the percentage reduction provided in the Act, it has the great advantage of certainty and simplicity.
The operation of this section may be illustrated as follows. Assume that the appraised value of the collateral is $600,000 and that expenses of foreclosure total $20,000. The foreclosure amount is therefore $600,000, less 10% of the appraised amount or $60,000, less the expenses of foreclosure of $20,000. Hence the foreclosure amount is $520,000.
The Department of Veterans' Affairs employs a similar approach in determining what bid it will authorize lenders to make on its behalf in the foreclosure of a VA-guaranteed mortgage loan. See the definition of "net loss" in 38 CFR § 36.4301, as amended 65 FR 46882 (Aug. 1, 2000). The VA publishes annually in the Federal Register its estimate of the average costs (based on its experience during the previous fiscal year) for acquisition and disposition of properties, including property taxes, assessments, liens, property maintenance, property improvement, administration, and resale expenses. The following are the percentages announced by the VA for recent fiscal years:
1989: 10.63%
1990: 11.45%
1991: 10.19%
1992: 10.91%
1993: 14.16%
1994: 11.19%
1995: 11.18%
1996: 15.11%
1997: 13.54%
1998: 13.97%
SECTION 208. MEETING ON PROPRIETY OF FORECLOSURE.
(a) Any debtor who is a residential debtor may request a meeting to challenge the propriety of the foreclosure. The request must be made by notice received by the secured creditor no later than 30 days after the notice of foreclosure is given. If the secured creditor receives a request for a meeting, the secured creditor shall cause a responsible representative to schedule a meeting with the person requesting it at a mutually agreeable time. The representative may be an employee, agent, servicer, or attorney of the secured creditor. The meeting must be held at a location reasonably convenient to a parcel of the real property collateral unless the person requesting the meeting and the representative mutually agree on a different location. If more than one request for a meeting is received, the secured creditor may, at its option, attempt to arrange a consolidated meeting, and the persons requesting meetings shall cooperate reasonably with the secured creditor's effort to do so.
(b) A meeting under subsection (a) is informal, and the rules of evidence do not apply. The parties may, but need not, be represented by attorneys. The representative shall have access to the secured creditor's records that provide evidence of the grounds for foreclosure and shall consider the objections to foreclosure of the person or persons requesting the hearing. If the representative determines that the foreclosure is legally improper, the representative must order a discontinuation of the foreclosure. If the representative determines that the foreclosure is legally proper, the representative may, in his or her unfettered discretion, order a discontinuation of the foreclosure or may permit the foreclosure to proceed. Within ten days after the meeting the representative shall prepare and mail to the person or persons who requested the meeting a written statement of the determination and the reasons therefor. The objections to foreclosure stated by the person requesting the meeting, and the reasons stated by the representative do not preclude any person's raising of those grounds or other grounds for or objections to foreclosure in any subsequent judicial proceeding. Each party shall bear its own expenses in connection with the meeting.
(c) The secured creditor and the representative shall bear no liability for a determination that is adverse to the debtor who requested the meeting.
[Reporter's Note: The former language allowing judicial review of the representative's determination has been deleted. Subsection (c), exclupating the secured creditor and the representative from liability for their determinations as a result of the meeting, has been added.]
Comment
The objective of the informal meeting process provided by this section is to ensure both fairness and the appearance of fairness to debtors and others who are at risk of losing their interests in a foreclosure. The meeting is not automatic, but is scheduled only if someone to whom notice of foreclosure is required to be given requests it.
The responsible representative of the secured creditor is required to determine whether the person requesting the meeting has a legal basis for stopping the foreclosure. This section does not list all of the possible bases for taking such action, and they are left to other law. Illustrative bases would include the fact that the security agreement is a forgery not executed by the debtor, that the secured obligation has already been paid in full, and that the debtor is not in default. A failure by the secured party to comply with the requirements of this Act would also be a basis for terminating the foreclosure, at least until the violations of the Act had been rectified.
The law is not entirely clear, but it is believed that the meeting required by this section will satisfy the hearing demands of the Due Process Clause if the secured creditor is a governmental entity and hence subject to that Clause. Existing cases establish that the "hearing" need not be formal and need not be before a judicial officer. An employee of the same agency that is conducting the foreclosure is acceptable, at least if that officer is impartial and not in the chain of decision-making that decided to foreclose in the first instance. See Johnson v. U.S. Department of Agriculture, 734 F.2d 774 (11th Cir. 1984); Lisbon Square v. U.S., 856 F.Supp. 482 (E.D.Wis. 1994). (The latter case sustained the Federal Multifamily Mortgage Foreclosure Act, 12 U.S.C. § 3701 et seq., despite its failure to provide a neutral decision-maker.) Since governmental agencies can provide for such a neutral "responsible representative" by regulation or administrative action, the informal meeting required by this section should satisfy their Due Process obligations.
The secured 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 secured creditor may still be held liable for actually proceeding with the foreclosure if a legal ground for foreclosure does not exist.
SECTION 209. JUDICIAL SUPERVISION OF FORECLOSURE.
(a) At any time before the time of foreclosure, any person entitled to notice of foreclosure under subsection 203(a) or any other aggrieved party may commence a judicial proceeding in [district] court to enjoin or direct the conduct of the foreclosure under this [Act]. The court may make any order within the scope of authority of the court in a foreclosure by judicial action, including injunction and postponement of the foreclosure.
(b) After the time of foreclosure, any aggrieved party may commence a judicial proceeding in [district] court seeking the following relief:
(1) damages against the secured creditor as compensation for any violation of this [Act] or other principles of law or equity in the conduct of the foreclosure;
(2) that the foreclosure be set aside to correct a violation of this [Act] or to satisfy principles of law and equity, but the foreclosure may not be set aside on account of a violation of this [Act] to the extent that the collateral has been acquired by a good faith purchaser for value and compliance with the [Act] is conclusive as provided in subsections 205(j), 206(e), or 207(e).
(d) No action may be brought for damages for violations of this [Act] or to set aside a foreclosure under this [Act] more than [five] years after the time of foreclosure.
[Reporter's Note: The former references to the court's reviewing the determination made after the meeting with the secured creditor, and to the court's determination of fair market value in a foreclosure by appraisal, have been deleted.]
Comment
The objective of this Act is to provide a fair procedure under which foreclosures can take place without judicial supervision. However, cases will inevitably arise in which a party believes that judicial involvement or supervision of the foreclosure is necessary. This section provides for such involvement if requested by a person who was entitled to notice of foreclosure (Section 203), or any other aggrieved party, such as a prospective or actual purchaser of the collateral.
The court's powers are analogous to those applicable in judicial foreclosure proceedings. For example, the court may enjoin the foreclosure; set a new foreclosure date; determine the priority of interests in the collateral; direct that the foreclosure be in bulk or by parcels; direct the sequence of foreclosure of parcels in order to marshal assets for the benefit of the holders of interests in the collateral subordinate to the security interest; and direct the order of distribution of the proceeds of the foreclosure.
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.
After the foreclosure has occurred, the powers of a court to change the result are more limited. Damages may be assessed against the secured creditor if it has failed to comply with this Act or other relevant legal duties in carrying out the foreclosure. For example, if there was proof that notices were not properly given as required by Section 203, the court might award damages against the secured creditor to the debtor or third parties whose interests were extinguished by the foreclosure. However, the court must recognize that compliance with certain provisions of the Act is conclusive, as provided in Sections 205, 206, and 207. 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.
Not all violations of this Act are covered by the provisions for conclusive compliance. For example, if the secured creditor engaged in activities intended to chill the bidding, the court might set the sale aside. The same result might follow if it were proved that the security agreement was void, that the secured debt had already been paid in full, or that there was no default at the time of the foreclosure.
Courts should employ their powers to grant damage awards or to set aside sales only in cases in which the violation of this Act or the principles of law and equity are sufficiently serious that it is likely that they had a substantial detrimental impact on the foreclosure amount. No remedies should be awarded for minor violations that had no significant effect on the outcome of the foreclosure.
SECTION 210. DEFICIENCY.
(a) After the date of foreclosure, the secured creditor and any other person whose security interest in the collateral was extinguished by the foreclosure may commence an action for a money judgment for a deficiency against any person liable therefor. The foreclosing secured creditor may not obtain a deficiency judgment if it waived the right to a deficiency in the notice of foreclosure. If more than one party commences an action for a deficiency, the court may consolidate the actions.
(1) The deficiency owed to the secured creditor is the positive number, if any, determined by subtracting the foreclosure amount from the balance owing on the secured obligation, including all principal, interest, and legally enforceable loan fees, but not including expenses of foreclosure.
(2) The deficiency owed to any person other than the secured creditor whose security interest in the collateral was destroyed by the foreclosure is the positive number, if any, determined by subtracting the proceeds of the foreclosure distributed or distributable to such person from the balance owing on that person's secured obligation, including all principal, interest, and legally enforceable loan fees, but not including expenses of foreclosure.
(b) In an action for a deficiency following a foreclosure by auction, any person liable for the deficiency may petition the court for a determination of the fair market value of the collateral at the time of foreclosure. The court shall hold a hearing at which all interested parties may present evidence of fair market value. The court without a jury shall determine fair market value. If the court determines that the fair market value of the collateral was greater than the proceeds of the sale, the fair market value must be substituted for the foreclosure sale proceeds in making the calculations required by subsections (a) and (b) with respect to all parties against whom a judgment for a deficiency is entered. A determination of fair market value under this section may not be made by the court if the foreclosure was by negotiated sale (Section 206) or by appraisal (Section 207).
(c) No judgment for a deficiency or for the remaining balance owing on the secured obligation may be entered on behalf of the secured creditor against a residential debtor after a foreclosure conducted under this [Act] if the residential debtor is found by the court to have acted in good faith in connection with the foreclosure, as provided in subsection (d). This subsection does not bar deficiency judgments in favor of persons other than the secured creditor whose interests have been extinguished by the foreclosure, and does not bar deficiency judgments against sureties or guarantors of the secured obligation, whether or not they are related to residential debtors, but such sureties and guarantors shall have no personal right of recourse against a residential debtor who has acted in good faith.
(d) "Good faith" exists if the residential debtor:
(1) peaceably vacated the real estate collateral reasonably expeditiously after the time of foreclosure; and
(2) did not commit significant affirmative waste on the collateral; and
(3) defaulted in performance of the secured obligation because of circumstances beyond the residential debtor's control; and
(4) did not contaminate the collateral with hazardous waste materials; and
(5) did not commit fraud against the secured creditor; and
(6) did not engage in significant criminal activity on the real estate collateral; and
(7) took reasonable precautions to prevent damage to the collateral by other persons; and
(8) did not transfer the collateral without the secured creditor's consent in a transaction that required such consent under a due-on-sale clause in the security agreement.
(e) The burden of persuasion as to the nonexistence of good faith on the part of a debtor shall be on the person seeking a deficiency judgment against that debtor. The absence of good faith by a particular debtor shall not make any other debtor liable for a deficiency.
[Reporter's Note: This draft protects residential debtors from deficiency judgments, but only if they acted in good faith. Good faith is defined in a manner similar to the non-recourse carve-outs often found in mortgage loans on income properties. The burden of persuasion as to good faith is imposed on the secured creditor.]
Comment
A judgment for a deficiency is intended to assist the secured creditor in collecting any portion of the obligation that is not discharged by the foreclosure. Since only persons who are "liable therefor" can be subjected to a deficiency judgment, it is necessary for the secured creditor to establish the personal liability of the person who is sued. A deficiency may be recovered against a debtor or against anyone else, such as a surety or guarantor, who is liable on the secured obligation. Both the foreclosing creditor and subordinate secured creditors whose security interests have been destroyed by a foreclosure can bring actions for deficiencies.
A deficiency action by the foreclosing creditor is governed by paragraph (a)(1). The formula stated there does not deduct for expenses of foreclosure, since these expenses are already deducted in arriving at the foreclosure amount. Deficiency actions by "sold-out" junior lienors are governed by paragraph (a)(2). Under that subsection, the amount distributed to the junior lienor, rather than the full foreclosure amount, is considered as offsetting the obligation owed to the lienor.
If the foreclosure was by auction, subsection (b) provides that the defendant in the deficiency action is entitled to have the fair market value of the property determined by the court. If this procedure is used and the fair market value is found to be greater than the sale proceeds, the fair market value must be used in computing the deficiency. This subsection recognizes that foreclosures by auction often do not bring fair market prices, and in effect limits the amount of the deficiency as if a fair market price had been bid. This limitation applies both to deficiencies sought by both the foreclosing creditor and sold-out junior lienors. No fair market value determination is necessary if the foreclosure was by negotiated sale or by appraisal, since in those procedures, any aggrieved party may stop the foreclosure simply by objecting to it.
Subsection (c) prohibits deficiency judgments against protected parties if they have acted in good faith, as defined in subsection (d). Lenders often assert that the threat of a deficiency judgment, even if it will rarely be enforced, provides a useful inducement to borrowers to engage in meaningful "workout" efforts. Under the "good faith" concept here, the threat of a deficiency may also dissuade the debtor from committing waste or fraud, or engaging in other acts detrimental to the secured 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 under subsection (c), the holders of "sold-out" junior liens may still obtain and collect deficiency judgments. Likewise, deficiencies can still be collected from sureties and guarantors. However, sureties and guarantors may not obtain reimbursement or exoneration against a residential debtor who has acted in good faith, since permitting recourse would effectively defeat the protection against deficiencies that the Act grants to such persons.
SECTION 211. REQUEST FOR NOTICE OF FORECLOSURE.
(a) Any person may record in the [county recorder's office] of any county in which part of the real property collateral is located a request for notice of foreclosure of a security agreement that has been recorded. The request must state:
(1) the date, book and page of the security agreement's recording;
(2) the names of the parties to the security agreement;
(3) a legal description of the real property collateral affected by the security agreement; and
(4) the name and address of the person requesting notice of foreclosure.
(b) The recording of a request under subsection (a) entitles the person requesting notice to be given notice of foreclosure under subsection 203(a), but does not affect the title to the real property collateral and does not constitute constructive notice to any person of any interest in the real property collateral held or claimed by the person requesting notice. A person recording a request for notice under this section may subsequently record an amendment correcting the person's name or address or withdrawing the request.
Comment
This section permits anyone who wishes to become eligible for receipt of a foreclosure notice. For example, a non-possessing tenant under an unrecorded lease could record a request for notice under this section, and thus could ensure learning of a pending foreclosure.
SECTION 212. POSSESSION AFTER FORECLOSURE. A person who acquires a possessory interest in collateral by foreclosure under this [Act] shall give notice to any person in possession of the collateral. The notice shall state that foreclosure has occurred and that the person giving notice is entitled to possession of the collateral ten days after the date such notice is given. A person who acquires a possessory interest in real property collateral 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, and no notice to any person in possession is necessary to the commencement of such an action except the notice required by this section. No order of possession shall issue until at least ten days after the notice required by this section is given. A person acquiring a possessory interest by foreclosure under this [Act] is also entitled to all rents or proceeds of the collateral accruing and becoming due after the time of foreclosure.
[Reporter's Note: This section has been revised to require that the person obtaining title by foreclosure must give notice to parties in possession that the foreclosure has occurred, and must allow them ten days after giving that notice to vacate the property. With reference to the use of the landlord-tenant eviction procedure, the section now makes it clear that such other pre-filing notices as are ordinarily required need not be given in the context of foreclosure.]
Comment
This Act is silent on whether a secured creditor may demand possession of the collateral prior to the time of foreclosure; that question is left to other law. However, one who acquires property in a foreclosure proceeding under this Act is entitled to possession ten days after giving the parties in possession notice that the foreclosure has occurred. This principle applies only if the interest acquired is a possessory one. For example, a foreclosure of a reversion in land that is subject to a lease would not entitle the person obtaining the reversion through foreclosure to possession until the reversion became possessory. If the holder of the reversion is also entitled to rents from the real property, all rents accruing after the time of foreclosure belong to the person acquiring title through the foreclosure.
This section permits one who obtains title in a foreclosure conducted under this Act to obtain possession by use of the same process as is available to landlords to take possession from tenants. The section is significant because in its absence, there is doubt in a number of states whether the landlord-tenant procedure is available to foreclosure purchasers. If that procedure requires various notices as a prerequisite to the commencement of the action, they do not apply to persons acquiring interests through foreclosure.
SECTION 213. FORECLOSURE OF MULTIPLE PARCELS.
(a) Collateral consisting of more than one parcel of real property may be foreclosed by auction separately or in combination as provided in the security agreement. If no provision is made in the security agreement, the secured creditor, when foreclosing by auction, must foreclose separately on each of the parcels, except that in its discretion the secured creditor may combine two or more parcels in a foreclosure if the parcels so combined are contiguous, are being used in a unitary manner at the time of notice of foreclosure is given, are part of a unitary plan of development, or are operated under a single management.
(b) When two or more parcels of real property collateral are included in a single foreclosure by auction, the parcels shall be offered as provided in the security agreement. If no provision is made in the security agreement, each parcel must be offered separately at the sale, except that two or more parcels may, in the secured creditor's discretion, be offered in combination if the parcels so offered are contiguous, are being used in a unitary manner at the time of notice of foreclosure is given, are part of a unitary plan of development, or are operated under a single management. If the foregoing test is met, the collateral may be conditionally offered both in combination and separately, and the person conducting the sale shall accept the higher of the two aggregate bids. If sale is made by separate parcels or separate combinations of parcels, the auction must be discontinued when the aggregate bids received are sufficient to pay the expenses of foreclosure and the secured obligation.
(c) If the entire real property collateral is not made the subject of a single foreclosure, a secured creditor may foreclose parcels or combinations of parcels, as authorized under this Section, successively until the expenses of foreclosure and the secured obligation are fully paid.
(d) This section does not preclude a court from specifying the order in which parcels are to be foreclosed under the equitable principle of marshaling of assets.
(e) If no debtor is a residential debtor, if the security agreement so provides, and if it covers real property collateral located in more than one state or territory of the United States, the foreclosure law of another state in which some of the real property collateral is located may be employed to foreclose on the real property collateral located in this state, and the law of this state, including this [Act], may be employed to foreclose on the real property collateral located in another state or territory if permitted by the law of that state or territory.
[Reporter's Note: This section has been completely revised.]
Comment
This section deals with two distinct but related questions in the context foreclosure by auction of multiple real estate parcels as collateral: First, must a separate foreclosure proceeding be used for each parcel? Second, if two or more parcels are combined in a single foreclosure by auction, how must the parcels be offered? 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 secured creditor in those situations, since the debtor and holders of junior interests can send a notice of objection and prevent the foreclosure from proceeding if they do not agree with the secured creditor's choice.
As to both of these questions, the security agreement controls, and the section is relevant only if the security agreement contains no relevant provision.
With respect to the first question, the parcels must be foreclosed by separate proceedings unless they contiguous, are being used in a unitary manner at the time of notice of foreclosure is given, are part of a unitary plan of development, or are operated under a single management. This test is intended to assure that the parcels have a sufficient relationship to one another that at least some prospective purchasers
Similarly, when two or more parcels are offered at the same foreclosure sale, they must be offered separately unless the test above is met. As soon as sufficient parcels have been sold to pay the secured debt and foreclosure expenses in full, further sales must be discontinued.
A court order marshaling assets will supersede the provisions of this section.
Ordinarily, a foreclosure on real property must be conducted under the law of the state in which the property is located. However, subsection (e) permits extraterritorial use of another United States jurisdiction to foreclose in this state if there are no residential debtors involved and the security agreement so provides. It also authorizes extraterritorial use of this Act in another jurisdiction under the same conditions, provided that the other jurisdiction's law permits. This provision may make foreclosures of multistate collateral simpler in some cases.
ARTICLE 3
EFFECTIVE DATE AND REPEALER
SECTION 301. 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 302. EFFECTIVE DATE. This [Act] takes effect on ___________________. It applies to foreclosures as to which an initial notice of foreclosure is given on or after that date.
Comment
In theory this Act can be used to foreclose preexisting security agreements. However, it is unlikely that many such agreements will contain the necessary language to make the Act available under Section 103(a).
SECTION 303. SPECIFIC REPEALER, PROVISIONS FOR TRANSITION.
(a) The following acts and all other acts and parts of acts inconsistent herewith are hereby repealed: [Here should follow the statutes to be specifically repealed. Statutes governing judicial foreclosure should not be repealed.]
(b) Security agreements validly entered into before the effective date specified in Section 302, and the rights, duties, and interests flowing from them remain valid thereafter. Security interests created before the effective date specified in Section 302 may be foreclosed under any statute or other law amended or repealed by this [Act] as if the repeal or amendment had not occurred.
Comment
If a preexisting security agreement (either as originally executed or as amended) contains language satisfying Section 103(a), it may be foreclosed either under preexisting state law that is repealed by Section 303(a), or foreclosed under this Act.