Back | WP 6.1 Version |
ASCII Version | PDF
Version
UNIFORM FORECLOSURE BY POWER OF SALE ACT
CARL H. LISMAN, 84 Pine Street, P.O. Box 728, Burlington, VT 05402, Chair
LANI LIU EWART, Suite 1800, Alii Place, 1099 Alakea Street, Honolulu, HI 96813
REED L. MARTINEAU, P.O. Box 45000, 10 Exchange Place, Salt Lake City, UT 84145
ROBERT L. McCURLEY, JR., P.O. Box 861425, Tuscaloosa, AL 35486
LEWIS BART STONE, 52nd Floor, 200 Park Avenue, New York, NY 10166
DALE WHITMAN, University of Missouri-Columbia, School of Law, Missouri & Conley Avenues, 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
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
Uniform Foreclosure by Power of Sale Act
Prefatory Note
In 1974 the National Conference of Commissioners on Uniform State Laws adopted the Uniform Land Transactions Act (ULTA). ULTA covered numerous aspects of real estate law, but a major portion of it was devoted to security interests in land. In 1985, the Conference split these mortgage-related provisions off into a separate act, the Uniform Land Security Interest Act (ULSIA).
No state has adopted either ULTA or ULSIA. The present draft seeks to accomplish two things: first, a further separation of the foreclosure provisions of ULTA and ULSIA (i.e., USLIA Part 5) into a distinct foreclosure statute, and second, an extensive revision of those foreclosure provisions. Revision is appropriate because of a number of changes in the field of mortgage foreclosure law that have occurred since the drafting of ULTA in the early 1970s. These changes include considerable development by the courts of the constitutional concept of due process of law as applied to foreclosures; a vast advance in the securitization of both residential and commercial mortgages; and the publication of the Restatement (Third) of Property: Mortgages in 1997.
A few states have adopted power of sale foreclosure statutes in recent years, but there are still more than twenty states that permit only judicial foreclosure. This act is drafted in the belief that non-judicial foreclosure can be both fair to borrowers and efficient from the viewpoint of lenders, and hence a superior form of foreclosure for all of the affected parties.
The delays and inefficiency associated with foreclosure by judicial action are costly. They increase the risks of vandalism, fire loss, depreciation, damage, and waste. The resulting costs raise the cost of private mortgages and significantly erode the economic value of government subsidy programs involving mortgages. They add to the portfolio of foreclosed properties held by secondary mortgage market investors and government lenders, insurers, and guarantors of mortgages.
The desirability of nonjudicial foreclosure is emphasized by the successful implementation of two federal statutes that permit the U.S. Department of Housing and Urban Development to foreclose by power of sale the mortgage loans it holds. See Multifamily Mortgage Foreclosure Act, 12 U.S.C.A. §§ 3701-3717, adopted in 1981; Single Family Mortgage Foreclosure Act, 12 U.S.C.A. §§ 3751-3758, adopted in 1994; regulations applicable to both acts at 24 C.F.R. §§ 27.1 - 27.123.
The National Conference believes that the availability of a uniform, less expensive, and more expeditious foreclosure procedure will ameliorate these conditions, and will facilitate the sale and resale of secured real estate loans.
Why nonjudicial foreclosure? The fundamental premise of this Act is that, in the great majority of cases, judicial involvement in foreclosure is unnecessary, simply because there is no dispute between the debtor and creditor. The note and mortgage are indeed valid, the payments are indeed in default, and the debtor typically has no defense to foreclosure. Of course, there are exceptional cases in which a defense exists and deserves to be heard, but it makes no sense to force all foreclosures into court because a tiny fraction of them involve disputes of law or fact. Using the time of judges and the machinery of the courts to conduct foreclosures is therefore often a misallocation of public funds, as well as a waste of the secured creditor's resources.
Foreclosure is intended to accomplish two discrete purposes: (1) to evaluate the collateral and (2) to liquidate it. Evaluation is necessary in order to determine whether the lender has a surplus (to be distributed to the debtor and junior lienors) or a deficiency (to be demanded from the debtor and others who are personally liable on the debt). Liquidation is necessary because the lender, in nearly all instances, is not in the business of owning real estate and does not want to retain the collateral.
However, there is no overarching principle that requires the evaluation and liquidation functions to be accomplished in a single process. Indeed, a persuasive case can be made that when both functions are done at once, as in the case of the traditional auction sale, both are likely to be done inefficiently. See Debra Pogrund Stark, Facing the Facts: An Empirical Study of the Fairness and Efficiency of Foreclosures and a Proposal for Reform, 30 U. Mich. J. L. Reform 639, 677-685 (1997).
Types of foreclosure. In recognition of these facts, this draft gives lenders the opportunity (although not the duty) to bifurcate the evaluation and liquidation functions. It provides for three methods of foreclosure, and requires the secured creditor to elect the method to be used. The first is conventional foreclosure by means of an auction sale. Here both evaluation (by means of the high bid at the sale) and liquidation (by means of a foreclosure deed to the high bidder) are combined.
The second method authorized by this draft is foreclosure by negotiated sale. Such a sale will be consummated in much the same way as other real estate sales; the property may be listed by a real estate broker and advertised extensively. This is a very effective way of liquidating the property, but has not been used in this country in the past as a method of evaluating the property for purposes of foreclosure because of concern about the potential for collusive price-setting between the secured creditor and the purchaser. In the procedure authorized in this draft, however, that concern disappears because the debtor and any junior interest-holders can simply disapprove the sale if they are dissatisfied with the price, and their disapproval will force the creditor to abandon the negotiated sale and resort to a different method of foreclosure. In many cases, however, it is believed that the price will appear adequate to those parties and they will permit the sale to proceed.
The third foreclosure method authorized by this draft is foreclosure by appraisal. This method accomplishes only the first function of foreclosure, namely the evaluation of the collateral. It does not liquidate the property, but rather leaves it in the hands of the secured creditor, who will have the burden of liquidating it after the foreclosure is completed. To offset the lender's approximate costs in holding and marketing the property, the lender is required to distribute as the foreclosure amount only 90% of the first $1 million of the property's appraised value, and 97% of the excess value above $1 million. These percentages are consistent with available empirical data on lender losses from foreclosed property acquired by credit bid at conventional foreclosure sales.
Foreclosure by appraisal incorporates several safeguards to ensure the integrity of the appraisal's result. The lender selects the appraiser, but the appraiser must meet reasonable professional standards of qualification and cannot be related to the lender. In addition, a debtor or junior interest-holder who is dissatisfied with the appraisal's results can seek a judicial determination of value, which will then be applied in substitution of the appraised value.
It is believed that, with all three of these foreclosure methods, sufficient protections have been included to assure the legitimate interests of debtors and junior interest-holders. However, it must be emphasized that the drafting committee has not made any commitment to ultimate adoption of any foreclosure method except the auction sale. The other two methods are presented here in an attempt to demonstrate their functionality and to expose them to comment, but with the recognition that the drafting committee may not see fit to adopt them.
Irrespective of the method of foreclosure selected by the secured creditor, the foreclosure cannot occur less than 90 days after the giving of the original notice of foreclosure. During this period, any person whose interests will be extinguished by the foreclosure has the right to redeem the collateral from the security interest (Section 202(d)), but must pay the accelerated balance due in order to do so.
The "protected party" concept. This draft preserves, with minor changes, the "protected party" concept employed in ULTA and ULSIA. It recognizes two classes of debtors: protected parties and everyone else. Protected parties are assumed to need additional legal protections from foreclosing creditors that are not essential to other persons.
"Protected party" includes both a person who has an owner-occupied home on which a security interest exists, and anyone who is personally liable on an obligation that is secured by the home of the obligor or someone related to the obligor. "Home" is used here as a shorthand for "residential real estate", which must not be larger than ten acres nor contain more than two dwelling units.
Thus, "protected party" encompasses not only the usual consumer borrowers on home mortgage loans, but also relatives who guarantee their loans and purchasers who take homes subject to, or with an assumption of, existing mortgages.
Systems of notice. Power of sale foreclosure statutes presently in effect may be divided into one-notice and two-notice systems. In a two-notice system, the secured creditor typically is required to send a notice of default, and after the passage of some time period, a second notice of foreclosure. Depending on the state, the first notice may or may not include an acceleration of the debt. If it does not, the period between the first and second notices (or some part of that period) may be thought of as a "cure" period, during which only arrearages need be paid to put the loan back "on stream."
The present draft is, for the most part, a single-notice system. For most debtors, only a notice of foreclosure need be given, and that notice also acts automatically to accelerate the debt. It is assumed that, to the extent borrowers wish to receive a separate notice of default, they will bargain for it when negotiating the loan.
However, "protected parties" are entitled to a notice of default and a 30-day period to cure arrearages before a notice of foreclosure may be given to them. [Note: no provision is made for giving the notice of default to junior lienholders, even when the debtor is a protected party. Should junior lienholders be entitled to such a notice, so that they can cure arrearages in order to stave off foreclosure?]
While non-protected parties are not entitled to receive separate notices of default and foreclosure, all affected parties will receive, in effect, a second notice that the foreclosure is about to occur. In the case of foreclosure by auction, a copy of the advertisement of the sale must be sent to them. If foreclosure is by negotiated sale, the affected parties must be given a notice informing them of the date and price of the proposed sale. In the case of foreclosure by appraisal, they will receive notice of the appraisal report. Hence, in all cases the affected parties will be warned a second time that foreclosure is imminent.
Due process: notice and hearing. When a governmental entity forecloses a mortgage, it is well established that it must comply with the demands of the Due Process Clause, including the giving of notice reasonably calculated to inform those whose rights are affected, and a hearing at which such persons may present defenses to the foreclosure. Whether these protections are also required when a private creditor forecloses is not settled.
However, irrespective of the requirements of Due Process, fundamental fairness would seem to demand that all persons whose rights may be destroyed by a foreclosure should have advance notice of the proceeding and the opportunity to show why it should not go forward.
This draft therefore provides (in Sections 203 and 204) for notice to all those whose property rights are put at risk by a foreclosure. It also provides an opportunity for any other person who wishes to receive notice of the foreclosure to file a request for such notice in the public records.
In addition, this draft provides for an informal hearing (Section 208) to determine whether the foreclosure should go forward. This hearing procedure has two objectives. The first is to ensure that foreclosure under this Act is compliant with the Due Process Clause. This is an issue of special importance when a governmental agency forecloses, since it is fairly clear that the demands of Due Process apply to government foreclosures. Whether Due Process must be observed by private lenders, or those who are affiliated with the government but not entirely governmental, is presently uncertain and has never been decided by the U.S. Supreme Court. The second purpose of the hearing process is provide fundamental fairness, whether required by the Due Process Clause or not, by protecting innocent debtors from unscrupulous creditors who might attempt to use the power granted by this Act improperly.
The hearing will be held only if affirmatively requested by a debtor or the holder of a junior interest. Moreover, the hearing is extremely limited in scope. The only issue is whether the foreclosure should be terminated because it is legally improper to proceed. In its prior discussions, the drafting committee plainly believed that notice of the foreclosure to all affected parties was essential, but it did not discuss the need for a hearing. Hence, the hearing provisions of this draft are presented in order to test their feasibility and acceptability.
It might be argued that the hearing procedure created by this draft is unnecessary because a debtor or junior lienor can always bring an action to enjoin an improper foreclosure. However, this step requires a good deal of affirmative effort by the plaintiff - the retaining of counsel, typically at significant cost, and the pursuit of the litigation. It is not at all clear that this option satisfies the demands of Due Process, nor that it is adequate to protect unsophisticated debtors.
A subsidiary question is whether the right to request a hearing should be limited to protected parties. They are probably the individuals most likely to benefit from a hearing, but the requirements of the Due Process clause are obviously not limited to cases involving protected parties.
Judicial intervention. In great majority of cases, foreclosures under this Act are expected to proceed without judicial involvement. However, there are a number of situations in which a party may seek and obtain the intervention of a court. For example, a party who does not believe the officer conducting the informal hearing mentioned above decided the matter correctly may pray for a judicial review. Similarly, a party who objects to the correctness of the appraisal in a foreclosure by appraisal may seek a court determination of fair market value.
A court may also be asked to postpone a foreclosure, to determine the priority of competing security interests, to direct foreclosure in bulk or by parcels, to marshal assets by directing the order in which parcels should be sold, or to direct the order of distribution of the proceeds of a foreclosure. In these situations the court serves as a "safety valve," guarding against improper or overreaching actions by the foreclosing creditor.
Omitted parties. Mortgage law uniformly holds that a person who is not made a party to a judicial foreclosure is not bound by it, and such a person's interest survives the foreclosure. However, in foreclosures by power of sale, there is little authority on the effect of failure to provide notice to holders of junior interests. This draft explicitly provides that holders of junior interests are not bound if they are not given notice; hence, their position is like that of an omitted party in a judicial foreclosure.
With respect to tenants under leases junior to a mortgage, a further issue arises: may a tenant who has been omitted purposely (because the lender wishes to preserve rather than destroy the tenant's lease) intervene in the foreclosure for the purpose of getting the lease destroyed? Case law on this point is about evenly divided. The position of this draft is that the tenant may not do so. In other words, a foreclosing lender under this draft has the choice of whether to destroy or preserve individual junior leases.
Redemption. In general, mortgaged property may be redeemed in either of two ways: by equitable redemption before foreclosure, and by statutory redemption after foreclosure. All states recognize equitable redemption, but only about one-half of the states have statutes permitting redemption after foreclosure. This draft (Section 202(d)) permits equitable redemption until the date of foreclosure, but does not make any provision for statutory redemption. While statutory post-sale redemption occasionally benefits a debtor or junior lienor, it is believed that in the aggregate such parties are disadvantaged by the depression in foreclosure bids that results from the uncertain status of the title introduced by statutory redemption.
Title from foreclosures. No matter which method of foreclosure is employed, this draft provides that the foreclosure deed or affidavit may include a recital of compliance with the procedures of the Act. The recital raises a presumption of actual compliance, and a conclusive presumption in favor of good faith purchasers for value of the collateral. However, this presumption does not make foreclosure titles impregnable. The reason is that defects outside the scope of the act may exist. For example, the debtor may not have had good title to the collateral when the security interest was given; the security agreement itself may be a forgery or otherwise void or voidable; or the debtor may not in fact have been in default on the secured obligation. The extent to which such defects will cause a court to set aside a sale, even when the property has passed to a bona fide purchaser, is left to other law.
Deficiency liability. In general, this draft permits recovery of deficiencies by the foreclosing creditor and by "sold-out" junior lienholders (assuming, of course, that the obligation is a recourse debt). A deficiency claim must be filed judicially within 90 days after the foreclosure. However, this draft prohibits deficiency judgments against "protected parties." This provision is bracketed, and some jurisdictions adopting the Act may wish to preserve the deficiency liability of even protected parties.
A deficiency judgment is available to the foreclosing creditor, no matter which of the three methods of foreclosure is used. However, if the foreclosure is by auction, deficiency liability is limited by the "fair market value" concept. Any person against whom a deficiency is sought may seek a court determination of the property's value as of the date of foreclosure, and the amount thus determined is substituted for the foreclosure sale proceeds in calculating the deficiency. This procedure recognizes that auction foreclosure sales often do not bring a price that approximates the market value of the property, and it encourages foreclosing creditors to make efforts to generate interest among potential bidders. No similar fair market value determination is available or needed in the case of foreclosure by negotiated sale or by appraisal.
Title of the Act. The title of this draft uses the term "power of sale." However, if the decision is made to retain either or both of the two non-auction methods of foreclosure embodied in this draft (namely foreclosure by negotiated sale and foreclosure by auction), consideration should be given to a change in the title of the Act. A possible alternative might be "Uniform Nonjudicial Foreclosure Act."
[Other issues. There are several possible provisions that the drafting committee may wish to consider adding to this draft. The list of such possibilities below is based in part on the very thorough article by Professor Roger Bernhardt, ULSIA's Remedies on Default - Worth the Effort?, 24 Conn. L. Rev. 1001 (1992).
Choice of law. Mortgage foreclosure has traditionally been considered a "real" proceeding, and therefore inevitably governed by the law of the state in which the real estate is located. Should this view be reconsidered?
Multicounty security. The present draft assumes that foreclosures will occur separately for separate parcels of land in different counties. However, that need not necessarily be the case. Should lenders be authorized to foreclosure in a single procedure all of the land in the state that is security for a single obligation?
Preforeclosure remedies. This draft simply leaves to other law such preforeclosure remedies as receiverships, mortgagees in possession, and enforcement of assignments of rents. These remedies have been the subject of recent legislation and litigation in many states. Should a uniform foreclosure act deal with them?
FNMA/FNMLC uniform instruments. This draft make no express reference to the secondary market's uniform instruments. The cure period provisions of Section 202 are compatible with those instruments, but nothing is said about them. Should it be?
Alternative dispute resolution. This draft says nothing about the possibility of a mediated or arbitrated settlement in lieu of foreclosure. Should these possibilities be covered explicitly? Conceivably, there could be an additional form of foreclosure: foreclosure by arbitration. Would additional references to ADR be helpful?
Bankruptcy. The mortgagor who files bankruptcy, often on the eve of foreclosure, is a staple of modern real estate practice. However, this draft make no express reference at all to bankruptcy. Are there references or substantive provisions that should be added on this topic?
Nonmonetary obligations. While most mortgage obligations are monetary, occasionally mortgages are given to secure nonmonetary duties. In such cases, it is necessary to reduce the obligation to a monetary equivalent, and this is likely to require the intervention of a court. Hence, a nonjudicial form of foreclosure such as provided by this Act probably is not practical. Should the draft express exclude nonmonetary obligations from its coverage?]
SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Foreclosure by Power of Sale Act.
SECTION 102. PURPOSES.
(a) This [Act] shall be liberally construed and applied to promote its underlying purposes and policies, which are:
(1) to simplify, clarify, and modernize the law governing foreclosures of security interests in real estate;
(2) to promote the flow of funds for secured real estate transactions.
(3) to provide residential borrowers with special protection against practices that may cause unreasonable risk and loss to them; and
(4) to make uniform the law with respect to the subject of this [Act] among states enacting it.
SECTION 103. SCOPE.
(a) Subject to the provisions of subsection (b), this [Act] applies to, and authorizes the foreclosure by power of sale of, every form of security interest in real estate created by contract or conveyance, including a mortgage, deed of trust, trust deed, security deed, contract for deed, land sales contract, lease intended as security, and any other consensual lien on real estate or contract for retention of title to real estate given or entered into as security for an obligation. Foreclosure may occur under this [Act] whether or not any reference to this [Act] or to foreclosure by power of sale is made in the contract or conveyance creating the security interest.
(b) This [Act] does not apply to the enforcement of:
(1) a nonconsensual lien created by statute or operation of law, such as a construction lien, judgment lien, or tax lien;
(2) a landlord's lien unless the parties agree in writing that this [Act] applies;
(3) a vendor's or vendee's lien unless the lien is specifically created by a writing;
(4) an agreement not to convey or encumber real estate;
(5) a lien to secure an obligation owed by an owner to an association in a common interest community or under covenants running with land, except that the remedies provided in Part 2 apply to such a lien;
(6) a security interest in property in a common interest community if under other law of this State that property is personal property;
(7) an assignment of rents or proceeds, whether absolute or collateral, a security interest in rents or proceeds, or an agreement for appointment of a receiver, except that rents or proceeds of the collateral accruing and becoming due after the foreclosure date shall be the property of the person acquiring title to the collateral by the foreclosure (Section 212).
(c) This [Act] does not preclude foreclosure of security interests in real estate by judicial action or other processes authorized by law in this state, and does not govern such processes. No secured creditor may take any action in pursuance of foreclosure under this [Act] at a time when a judicial proceeding to foreclose the same security interest or to enforce the same secured obligation is pending in the courts of this State. However, foreclosure under this [Act] may proceed notwithstanding that a judicial proceeding for appointment or supervision of a receiver of the collateral, or to collect or sequester rents or other proceeds from the collateral, is pending.
This section extends the reach of this Act to all types of consensual security interests in real estate. The caption of the document is irrelevant, so long as it creates a security interest in real estate. It does not matter whether the document is in the form of a contract or of a conveyance of an interest in land, nor whether the security interest is created by granting or retaining it. It is not necessary that the Act or its procedures be expressly adopted or referred to by the document creating the security interest. 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 whereby which a security interest may be created; those issues are left to other law.
The exclusions from the coverage of the Act stated in Subsection (b) are intended to carve out security interests that are nonconsensual (judgment, tax, and construction liens) or are so far removed from ordinary real estate financing transactions that the parties would probably not expect a mortgage foreclosure statute to apply to them unless the documents warned of its coverage. The latter rationale applies to landlords', vendors', and vendees' liens.
Subdivision (b)(5) and (b)(6) are intended to permit owners' associations to employ the remedy of power of sale foreclosure, but not to permit this Act to govern other aspects of the relationship between unit owners and residents, which are typically controlled by other statutes and documents. Some adjustment of the language of these sections may be appropriate to make them consistent with existing state statutes on condominiums and other common interest communities. Subdivision (b)(6) excludes the foreclosure of association liens on cooperative units if they are considered personal property, as is true in some states.
Assignments of rents and receiverships are outside the scope of this Act. Secured creditors may employ a variety of methods for enforcement of assignments of rents in various states, but this Act does not add to or detract from those methods.
Subdivision (c) preserves the existing authority of the courts to foreclose mortgages and other real estate security interests. Foreclosure by power of sale is simply an option available to secured parties, 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.
The final sentence of subdivision (c) is intended to prevent secured creditors from harassing debtors with a foreclosure by power of sale when a judicial foreclosure or an action on the debt is pending. However, judicial proceedings for a receiver or for collection of rents and proceeds are not inconsistent with foreclosure under this Act.
This Act does not impose a "one-action" rule, prohibiting commencement of an action on the debt when it is secured by real estate, as is found in several states. But it does prohibit simultaneous pursuit of a foreclosure and an independent action on the debt. In addition, if a foreclosure under this Act is completed against a protected party, that person is not subject to any further liability for a deficiency; see Section 211(c).
SECTION 104. SCOPE
(a) If the security agreement covers both real estate and personal property, the secured creditor may proceed under this Part as to both the real estate and personal property.
(b) If a security interest covers only fixtures subject to Article 9 of the Uniform Commercial Code, the creation, obligation, and foreclosure of the security interest in the fixtures is governed by Article 9 of the Uniform Commercial Code.
Mortgages and other security agreements that chiefly affect real estate often contain language encumbering some items of personal property as well. It is permissible for lenders to employ this Act to foreclose on the real estate, 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 estate power of sale 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.
Subsection (b) is intended to carve out of the coverage of this section the foreclosure and other problems concerning a security interest in fixtures only insofar as the UCC is applicable. Thus, a question arising between a first and second real estate mortgagee as to the right to include fixtures in the sale of the real estate would be subject to this article and not to the UCC.
SECTION 105. VARIATION BY AGREEMENT.
(a) The parties to a transaction may vary by agreement the effect of any provision of this [Act] except as provided in subsections (b) and (c), and unless a section of this [Act] contains the words "notwithstanding agreement to the contrary."
(b) The obligation of good faith prescribed by this [Act] may not be disclaimed by agreement, but the parties by agreement may determine standards by which the performance of that obligation is to be measured if those standards are not manifestly unreasonable.
(c) Rights granted to the debtor and obligations imposed on the secured creditor under this Part may not be waived or modified as between creditor and debtor, except as specifically permitted. However, the parties by agreement may determine the standards by which the fulfillment of those rights and obligations is to be measured if the standards are not manifestly unreasonable.
In general, the parties to a real estate security agreement have freedom of contract with respect to their rights and remedies. However, this Act contains two limitations on freedom of contract. The parties cannot eliminate their obligations of good faith, and they cannot eliminate certain debtor rights and creditor duties as provided in Article I of this Act. Judicial policy has provided, almost from time immemorial, certain protections not only of the defaulting debtor but also of other creditors. Even in these areas, however, the parties can agree on the standards that they must observe, and these standards will be enforced unless manifestly unreasonable. See Section 108, imposing an obligation of good faith with respect to contracts and duties governed by the Act.
SECTION 106. SUPPLEMENTARY GENERAL PRINCIPLES OF LAW AND EQUITY APPLICABLE. The principles of law and equity, including the law relative to 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 particular provisions of it.
An act governing foreclosure cannot anticipate all possible forms of conduct that would cause courts to intervene and vary the normal foreclosure process. 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 enjoin a foreclosure because the granting of the security interest was tainted with fraud, duress, or lack of capacity; it might order that multiple parcels be foreclosed in a particular order in order to avoid unnecessary harm to holders of subordinate interests under the doctrine of marshaling; or it might permit an agent to pursue or defend against foreclosure on behalf of the principal.
SECTION 107. REMEDIES TO BE LIBERALLY ADMINISTERED. The remedies provided by this [Act] shall be liberally administered to the end that the aggrieved party is put in as good a position as though the other party had fully performed. However, consequential, special, or penal damages may not be awarded except as specifically provided in this [Act] or by other rule of law.
The objective of foreclosure is to place the secured party in the same economic position as if the debt or other obligation had been paid or performed in a timely manner. Likewise, if a secured party employs the procedures of this Act, but does so improperly, the debtor and others who are harmed by the secured party's actions are entitled to remedies that will place them in as good a position as if the Act had been properly complied with.
Since most security is granted for the payment of debts, the calculation of the indebtedness and the assessment of damages for failure to comply with this Act will ordinarily be straightforward. In these circumstances, it is not desirable to grant courts broad discretion to impose additional damages beyond those dictated by the direct economic impact of a party's breach or wrongdoing.
SECTION 108. OBLIGATION OF GOOD FAITH. Every contract or duty governed by this [Act] imposes an obligation of good faith in its performance or enforcement.
This section sets forth the basic principle that in foreclosure of real estate security, good faith is required in the performance and enforcement of all agreements or duties. Particular applications of this general principle appear in specific provisions of this Act, such as the duty of secured creditors to accept payments from the debtor and holders of subordinate interests that redeem the property from the security interest (Section 202(d)). The concept, however, applies generally, as stated in this section, to the performance of every contract or duty within this Act.
SECTION 109. DEFINITIONS.
(1) "Aggrieved party" means a party entitled to a remedy.
(2) "Agreement" means the bargain of the parties as found in their language and by implication from other circumstances. Whether an agreement has legal consequences is determined by the provisions of this [Act], if applicable; otherwise by the law of contracts.
(3) "Collateral" means the real estate subject to a security interest. It also includes any personal property covered by the security agreement.
(4) "Common interest community" means real estate described in an instrument with respect to which a person by reason of ownership of a part thereof is obligated to pay for real estate taxes, insurance premiums, maintenance, or improvement of another part thereof. The term includes real estate held in a condominium or cooperative.
(5) "Contract" means the total of legal rights and obligations resulting from the parties' agreement as affected by this [Act] and other applicable rules of law.
(6) "Conveyance" means a transfer of real estate other than by will or operation of law.
(7) "Creditor" includes an unsecured creditor, a secured creditor, and a representative of creditors.
(8) "Debtor" means a person who owes payment or other performance of an obligation secured, whether the person's obligation is absolute or conditional, but if the debtor and the owner of real estate are not the same person, the term means the owner of real estate in any provision of this [Act] dealing with collateral, and the obligor in any provision dealing with an obligation. The term includes both where context requires.
(9) "Deed" means a writing, other than a lease or a security agreement, which by its terms conveys title to real estate.
(10) "Law" includes statutes, case law, administrative rules or regulations, and legislative enactments of local governments.
(11) "Organization" means a corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.
(12) "Party" means a person who engages in a transaction or makes an agreement governed by this [Act].
(13) "Person" includes an individual or an organization.
(14) "Protected party" means:
(A) an individual who owns residential real estate all or a part of which the individual occupies or intends to occupy as a residence, and in which a security interest exists;
(B) a person obligated, primarily or as a surety, on an obligation secured by residential real estate if, at the time the obligation is incurred, that person is related to an individual who occupies or intends to occupy all or a part of the real estate as a residence.
(15) "Real estate" 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 through 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. "Real estate" includes rents, the interest of a landlord or tenant, and interests in a common interest community unless under other law of this State that interest is personal property.
(16) "To record" means to present to the recording officer for the place in which the land is situated a document the recording office accepts and either enters in a daily log, or notes thereon an identifying number, regardless of whether under applicable law the recording officer is directed to file the document or otherwise maintain a record of it. "Recorded" and "recording," have corresponding meanings.
(17) "Representative" means a person empowered to act for another, and includes an agent, a government official, an officer of a corporation or association, a trustee, and a personal representative of a decedent.
(18) "Residential real estate" means, in relation to a protected party, real estate containing not more than [ten] acres, improved or intended by its owner to be improved by not more than two dwelling units, and containing no nonresidential uses for which the protected party is a lessor. If a unit in a common interest community is otherwise "residential real estate," it is so regardless of the size of, or the number of units in, the common interest community.
(19) "Secured creditor" means a lender, seller, or other person who has the right to enforce an obligation secured by a security interest. If the holder of an obligation issued under an indenture of trust or the like is represented by a trustee or other person, the representative is the secured creditor.
(20) "Security agreement" means a writing that creates or provides for a security interest in real estate, whether by acquisition or retention of a lien, a lessor's interest under a lease, or title to the real estate for purposes of security. The security agreement includes the written terms of the secured obligation.
(21) "Security interest" means an interest in real estate which is intended to secure payment or performance of an obligation. If a lease is intended as security to the lessor, the lessor's interest is a security interest. If a seller's retention of legal title to real estate after the buyer enters into possession is intended as security, the seller's interest is a security interest. Whether a transaction is intended as security is to be determined by the facts of each case. However:
(A) the inclusion in a lease of an option to purchase at a reasonable price under the circumstances at the time of contracting does not of itself indicate the lease is intended for security, and
(B) retention of the title to real estate by a seller under a contract right to retain title for not more than one year after the buyer enters into possession of the real estate is not a retention for security.
(22) "Written" or "writing" includes printing, typewriting, storing in electronic or magnetic media, or any other communication intentionally expressed in tangible form.
(23) "Foreclosure expenses" means the actual and reasonable costs incurred by the secured creditor in connection with the foreclosure for mailing, advertising, title insurance binder or report (Section 205(a)), attorney's fees to the extent provided in the security agreement, appraisal fees in the case of a foreclosure by appraisal, and the fee of the person conducting the sale in the case of a foreclosure by auction, which fee shall be one percent of the highest bid at the sale, but not less than [two hundred] dollars nor more than [one thousand] dollars.
(24) "In default" means
(A) a failure to comply with the debtor's duties under the security agreement has occurred;
(B) all conditions that are, by the terms of the security agreement, prerequisites to foreclosure have been satisfied;
(C) all notices to the debtor required by the security agreement as prerequisites to foreclosure have been given; and
(D) all grace periods or cure periods available to the debtor by the terms of the security agreement as prerequisites to foreclosure have elapsed without cure being made.
Introduction to definitions. American law recognizes that many different interests can be created in real estate, and that many different sorts of documents can be employed to make those interests become security for debts and other obligations. This Act makes power of sale 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" or "real estate security agreement" (see subsection (20)). In place of "mortgagor" or "installment purchaser" this Act substitutes "debtor" defined in subsection (8). In place of "mortgagee," or "vendor," this Act substitutes "secured creditor" (see subsection (19)). Instead of enumerating the various types of real estate interest, such as "fee estate," "leasehold," and the like, that can be used as security, this Act substitutes "collateral" as defined in subsection (3). 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. "Aggrieved party" is a definition taken from ULSIA Section 11(1).
2. "Agreement" is taken from ULSIA Section 11(2). It includes full recognition of usages in real estate business, the parties' course of dealing and course of performance, the surrounding circumstances, and any agreement permitted under this Act to displace a state rule of law. "Agreement" refers to the agreement in fact. The word "contract," defined in paragraph (5) refers to the legal obligation resulting from an agreement. Whether an agreement has legal consequences is determined by this Act if applicable and otherwise by the general law of contracts.
3. "Collateral" includes both all of the personal property and all of the interests in land which are subjected to a security interest. All of these interests in land are subsumed under the term defined in subsection (15) as "real estate."
4. "Common Interest Community." This definition, derived from the definition of "planned community" in the Uniform Planned Community Act, is used through the Act to refer collectively to the three particular forms of common interest community: condominiums, cooperatives, and planned communities that include common areas supported by the payments of individual owners.
5. "Contract." See Comment to "agreement" above.
6. "Conveyance." This term is intended to include any method of lifetime transfer of an interest in real estate other than by operation of law. Since a real estate 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 estate 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 (9) 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.
7. "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.
8. "Debtor." In most cases the person who is personally obligated to pay the secured debt and the owner of the real estate securing the debt will be the same person at the inception of the transaction. However, the owner may later transfer the real estate "subject to" the security interest. In that case the definition of "debtor" includes the transferee where the section refers to rights in the real estate and, depending on the context, means either the person personally obligated or the person owning the real estate 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. A person who has given a security interest, but has later transferred all of his or her interest in the real estate and has been released from personal liability on the secured obligation, is no longer a "debtor."
9. "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 the state. Under this Act, however, a deed that does not provide otherwise carries certain specified warranties of title.
10. "Law" is defined to make clear that it includes administrative actions and legislative acts of local governments.
11. "Organization" should be read in connection with the definition of a person. "Organization" is intended to include all legally recognized persons other than individuals. It specifically includes governmental entities, trusts, and associations.
12. "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.
13. "Person." See Comment to "organization."
14. "Protected party." This term is used as a rough synonym for "consumer." A protected party is, in essence, a person acquiring, or giving a security interest in, her or his own home. Such persons are regarded as needing protections from the acts of creditors that other borrowers do not need.
15. "Real estate." 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 the common law estate, both freehold and nonfreehold, as well as rents, servitudes and other interests which are not estates because they do not give 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 estate 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 estate 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 estate, the procedures of this Act cannot be employed by a creditor to reach or obtain rents prior to the foreclosure date; see Section 103(b)(7). However, a foreclosure under the Act will pass title to the rents accruing after the foreclosure date; see Section 212.
16. "To record" is defined to include the situation where a document not entitled to be recorded is nevertheless accepted by the recording officer. Taken from USLTA 1-201.
17. "Representative" is taken from ULSIA and also from Uniform Probate Code, which uses the term "personal representative" to include an executor and an administrator.
18. "Residential real estate" is an essential term in defining "protected party" (subsection 14). Unless it is part of a common interest community, "residential real estate" cannot exceed ten acres in size. It must have a dwelling on it, or must be intended by its owner to be improved with a dwelling in the future. It may not contain more than two dwelling units, and the protected party must occupy or intend to occupy one of them as a residence. The owner of "residential real estate" may rent one of the dwelling units to a tenant who will reside there, but may not rent any part of it to a tenant for a nonresidential purpose.
[Query: should we add that the property must not be held primarily for agricultural or commercial purposes?]
19. "Secured creditor" includes a seller of real estate who retains a lien or title to the real estate 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.
[Note that "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. For example, Fannie Mae routinely holds the promissory notes representing the loans it acquires, but has the corresponding mortgages held in the names of its services for convenience in foreclosing. Under the definition in this Act, Fannie Mae would be the "secured creditor."]
20. "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 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, for example) is stated in the note or in the mortgage is immaterial.
21. "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 estate conveys it to another person to secure an obligation owed to that person.
The statement in subsection (21)(B) that "retention of the title to real estate by a seller under a contract right to retain title for not more than one year after the buyer enters into possession of the real estate is not a retention for security" is intended to exclude from the coverage of this Act the common situation in which a buyer takes possession of real estate a short time before the closing.
On the other hand, where a seller retains the title for longer than one year after the buyer enters into possession, the other circumstances of the case must be examined in order to determine whether a security interest was created. In many such cases, it will be clear that a "contract for deed" or "installment sale" transaction was intended and, if so, the foreclosure provisions of this Act are available to the seller.
22. "Written" or "writing" is taken from ULTA Section 1-201.
23. "Foreclosure expenses" includes the direct costs of foreclosure, but does not include items not directly related to foreclosure, such as payment of property taxes, insurance premiums, or repairs. All foreclosure expenses, including attorney and appraisal fees, are limited to reasonable amounts.
SECTION 110. GIVING NOTICE, RECEIPT OF NOTICE.
(a) A person has "notice" of a fact if:
(1) the person has actual knowledge of it;
(2) the person has received a notice or notification of it; or
(3) from all the facts and circumstances known to the person at the time in question the person has reason to know it exists.
(b) A person "notifies" or "gives" or "sends" notice or notification to another, whether or not the other person actually comes to know of it, by taking steps reasonably required to inform the other in ordinary course, but where this [Act] specifies particular steps to be taken to notify, or give or send notice or notification, those steps must be taken.
(c) A person "receives" a notice or notification at the time it:
(1) comes to the person's attention; or
(2) is delivered at the place of business through which the person conducted the transaction with respect to which the notice or notification is given, or at any other place held out by the person as the place for receipt of the communication.
(d) Notwithstanding agreement to the contrary, all notices required or permitted to be sent to protected parties under this [Act] must contain a warning statement [in [insert predominant minority language used in the state] and in any other language found by the [Commissioner of Banks] to be the principal language spoken by substantial number of persons engaged in transactions covered by this [Act]] as follows: "This is an important notice regarding your rights in real estate. Get it translated immediately."
1. This section is derived from ULTA Section 1-202. It combines the provisions specifying when a person "has" notice; when a person "gives" notice; and when a person "receives" notice.
2. 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. Subsection (b) provides that proper dispatch and not its receipt satisfies the obligation "to notify" or "to give notice." Subsection (c) states when a notice is received.
[Query: do we need to add a subsection dealing with when notice to an organization is "received" by an individual within that organization? ULSIA had such a provision.]
SECTION 111. PERSON RELATED TO. In the phrases "individual related to" or "person related to," a person is related to:
(1) an individual if that person is:
(i) an organization directly or indirectly controlled by the individual, the individual's spouse, or a relative by blood or marriage who shares the same residence with the individual;
(ii) the spouse of the individual;
(iii) a brother, brother-in-law, sister, or sister-in-law of the individual,
(iv) an ancestor or descendant of the individual or of the individual's spouse or;
(v) any other relative by blood or by marriage of the individual or of the individual's spouse if the relative shares the same residence with the individual; and
(2) an organization if that person is:
(i) any other organization controlling, controlled by, or under common control with the organization; or
(ii) a person related to the person controlling the organization.
The definitions of this section are important in determining who is a protected party under Section 109(14). For example, a corporation is related to an individual if it is under the control of the individual (paragraph (1)(i) of this section). Under Section 109(14) a person obligated on a debt secured by residential real estate occupied by an individual related to him or her is a protected party. Therefore, a corporation obligated on a security interest on real estate resided in by an individual controlling the corporation is a protected party.
SECTION 201. RIGHTS AND REMEDIES.
(a) Secured creditors, debtors, and the holders of other interests in the collateral have the rights and remedies provided in this Article, in addition to the rights and remedies provided by other law of this state.
This Act is available to all creditors holding real estate security, whether or not their security agreements make any reference to the Act or to foreclosure by power of sale. However, it is available only if the security agreement in question was entered into after the effective date of this Act (see Section 301). The Act does not repeal or preclude the use of other forms of foreclosure on real estate that are authorized by state law, such as judicial foreclosure and, if otherwise available, strict foreclosure.
SECTION 202. FORECLOSURE, CURE, AND REDEMPTION.
(a) If a security agreement is in default (Section 201), a secured creditor may give notice of foreclosure (Sections 203 and 204), and may foreclose against the collateral by auction (Section 205), negotiated sale (Section 206), or appraisal (Section 207). The secured creditor's election of foreclosure method shall be governed by notice given by the secured creditor under Section 204(8).
(b) If at the time of default a dwelling unit in the real estate is occupied as a residence by a protected party or an individual related to a protected party, the notice of foreclosure (Section 204) may not be given until
(1) a payment of money (other than a fee for late payment) due to the secured creditor has not been made when due and remains unpaid for 30 or more days [after having been given notice by the secured party to cure the default]; or
(2) a protected party, after having been given notice by the secured creditor to cure any default other than the payment of money due to the secured creditor under the security agreement, has failed to
(i) cure the default within 30 days if it can be cured by the payment of money, or
(ii) commence and proceed diligently with performance within 30 days if the default cannot be cured by the payment of money.
The provisions of this [Act] and the right to cure a default provided in this subsection do not derogate any rights to notices or to cure defaults provided to any party by the security agreement. The cure period provided in this subsection and any cure period provided in the security agreement shall run concurrently if the security agreement so permits. The secured creditor shall cooperate with a debtor who is attempting to cure a default under this subsection by seasonably providing information concerning the amount due or other performance required to cure.
(c) A protected party may not exercise the right to cure under subsection (b), and no notice of default need be given under subsection (b), if any protected party has exercised the right under subsection (b) to cure a previous default under the security agreement within twelve months prior to the date of the default.
(d) The debtor, any other person who is personally liable for any part of the secured obligation, and any person holding an interest in the collateral subordinate to the security interest shall have the right to redeem the collateral from the security interest by tendering performance of the secured obligation in full, including foreclosure expenses if the security agreement so provides, after the secured obligation is in default but before the foreclosure date. Upon tender of such performance the security interest shall be extinguished or shall be deemed transferred to the person redeeming, as justice may require, and if the secured creditor has recorded a notice of foreclosure as provided in Section 203(e), the secured creditor shall record a further notice withdrawing the notice of foreclosure. Redemption may not be made after the foreclosure date.
(e) No original notice of foreclosure may be given under Sections 203 and 204 after the limitations period for foreclosure of a mortgage by judicial proceeding has expired.
(f) If the real estate collateral consists of parcels of land located in more than one county of this state, the secured creditor may;
(1) make each parcel the subject of a separate foreclosure under this [Act]; or
(2) combine in a single foreclosure under this [Act] such parcels as are contiguous, are being used in a unitary manner at the time of notice of foreclosure is given, or are part of a unitary plan of development.
If the entire collateral is not made the subject of a single foreclosure, the secured creditor may foreclose parcels or groups of parcels successively under this [Act] until the secured obligation is fully discharged.
The fundamental role of this Act is to permit secured creditors, after giving appropriate notice, to foreclose without the necessity of judicial process. In general, only a single notice need be given by the secured creditor prior to foreclosure. In the case of a debtor who is not a protected party, the notice may be given as soon as a default exists. For protected parties, however, the default must have continued for at least 30 days. This 30-day period is measured from the date of the default if the default is a failure to make a monetary payment due to the secured party. Such monetary payments include not only principal and interest on the secured obligation, but also payments to impound or escrow accounts maintained by the secured party for taxes, insurance premiums, reserves, and the like. [Query: should a notice of default be required in the case of monetary defaults, as it is in the case of nonmonetary defaults? Should the 30 days run only from the date of notice, rather than the date of the default itself? See the bracketed language in subsection (b).]
If the default is non-monetary, or if it is a default in payment of money due to someone other than the secured creditor (e.g., the local taxing authority), the 30-day period runs from the date the secured party gives the debtor notice of the nature of the default and a demand or request that it be cured. This notice would be necessary, for example, if the default were 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 estate insured, or the like.
If the default is monetary, the protected party debtor must actually cure it within 30 days. In the case of a nonmonetary default, however, the protected party debtor can avoid foreclosure by making continuing and diligent efforts to cure, even if a complete cure cannot be accomplished within 30 days. However, if the debtor subsequently ceases diligent efforts to cure, the secured creditor may then immediately proceed to give notice of foreclosure (Sections 203 and 204) without taking any other preliminary action.
[Query: should the act provide even non-protected parties with a notice and cure period? Or should we assume that non-protected parties will negotiate for such rights? Should it provide for notice and right to cure to junior interest-holders?]
The security agreement may provide debtors with additional protections, such as rights to notice and grace periods, beyond those provided by this Act. Under the definition of "in default," 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 (b) can run concurrently unless the security agreement provides otherwise.
Subsection (d) provides for "equitable" redemption prior to the foreclosure. Redemption can be made only by tendering full performance of the obligation. By comparison, a cure of a default under subsection (b) does not require payment of the obligation in full, is not a redemption, and does not extinguish the security interest. Full performance must include payment of any accrued interest, any enforceable fees, and any actual and reasonable foreclosure expenses incurred up to the point at which redemption is made. This Act does not deal with the enforceability of fees, such as late fees and prepayment fees, but leaves those issues to other law. If the secured creditor refuses to accept a proper tender of full performance, it nonetheless effects a redemption.
This Act does not specify the priority of redemption among multiple redemptionors, but leaves that matter to existing mortgage law. In general, mortgage law provides that parties with security interests of lower priority may redeem from those with security interests of higher priority, and that the debtor may redeem from any and all secured creditors. See Restatement (Third) of Property: Mortgages § 6.4 (1977).
Ordinarily a redemption extinguishes the security interest. However, in some circumstances it is advantageous to a junior lienor who redeems to be treated as an assignee of the security interest, in order to have the benefits of subrogation. This Act recognizes the legitimacy of such a subrogation claim if the requirements of subrogation are met. See Restatement (Third) of Property: Mortgages § 6.4.
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 (e) 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 provided in subsection (e), written notice of foreclosure shall be sent by the secured creditor to all persons who become entitled to such notice at any time before the foreclosure sale (Section 205). The following persons, so identified as of the time of recording of the notice of foreclosure as required by subsection (e), are entitled to notice:
(1) each debtor, but if two or more debtors share the same mailing address, a single notice may be sent to all of them;
(2) any person specified by the debtor in the security agreement to receive notice on the debtor's behalf;
(3) all persons who are shown by the public records to hold interests in the collateral that are subordinate in priority to the security agreement;
(4) all persons who have recorded in the public records a request for notice of foreclosure meeting the standards of Section 211;
(5) if the collateral is residential real estate, all tenants, subtenants, and assignees in actual possession thereof under leases having an original term of one year or less.
(b) Notice of foreclosure shall be sent to the persons entitled thereto both by registered or certified mail, return receipt request, and by ordinary first class mail, with postage prepaid, except that notice may be transmitted in some other written manner if the person to whom it is sent is not a protected party, has authorized the secured creditor in writing to send notice in that manner, and that manner of transmittal is reasonably calculated to provide actual notice to the person to whom it is sent. In all cases delivery in person shall satisfy the requirements of this subsection.
(c) The address used for mailing of the notice of foreclosure shall be:
(1) in the case of a person described in subsection (a)(1) or (a)(2), the address specified in the security agreement or other document executed by the person and in the secured creditor's possession or, if the secured creditor has received notice of a more recent address, that address.
(2) in the case of a person described in subsection (a)(3) or (a)(4), the address specified in the recorded document or request for notice or, if the secured creditor has received notice of a more recent address, that address.
(3) in the case of a person described in subsection (a)(5), the mailing address of the residential real estate with an envelope marked "To Tenants Residing at:".
(4) in any case in which the sources described in subsections (c)(1) through (c)(3) do not disclose a mailing address, to the mailing address of the real estate collateral.
(d) The envelopes in which all notices of foreclosure are sent by U.S. Mail shall bear the legend, "Forwarding Address Requested." If the secured creditor receives information from the U.S. Postal Service, or from any other service used by the secured creditor for transmitting a notice of foreclosure, that the person to whom notice was sent has a new address, the secured creditor shall send a notice of foreclosure to the person at that new address within 3 days of receiving such information. If the secured creditor receives information from the U.S. Postal Service, or from any other service used by the secured creditor for transmitting a notice of foreclosure, that the notice could not be delivered because its address was invalid, the secured creditor shall immediately attempt to determine a correct address for that person by using at least one generally-used telephone directory in the area in which the real estate collateral is located and one nationwide internet database, and if such an address is located, shall send a notice of foreclosure to the person at that address within 3 days of receiving such information.
(e) The secured creditor shall record in the [Office of the Recorder of Deeds of the county or counties in which any of the real estate collateral is located] a copy of the notice of foreclosure. Any person acquiring an interest in the real estate collateral after the time that the notice of foreclosure is recorded shall be treated as having been given notice of foreclosure, except that an assignee or subtenant under a lease, whose assignment was made after the time of recording of the notice of foreclosure, shall be treated as not having been given notice of it if the secured creditor notifies the assignee or subtenant, within 30 days after the secured creditor receives actual knowledge of the assignment or sublease, that the lease and any assignments or subleases are not terminated by the foreclosure. Such notification by the secured creditor may occur either before or after foreclosure.
(f) Failure of the secured creditor to record the notice of foreclosure as provided in subsection (e) shall prevent operation the automatic notice provided by that subsection to persons acquiring interests in the collateral. Failure of the secured creditor to send notice of foreclosure to the persons and in the manner specified in this section shall have the following effects:
(1) The interests in the collateral held by persons described in subsections (a)(1) through (a)(4) shall survive and be unaffected by the foreclosure.
(2) The personal liability of debtors who hold no interest in the collateral, but who are personally liable on the secured obligation, shall be discharged.
(3) The leases held by tenants described in subsection (a)(5) shall survive and be unaffected by the foreclosure.
(g) Except as provided in subsection (f), failure of the secured creditor to send notice of foreclosure to the persons and in the manner specified in this section shall have no adverse effect on the secured creditor's position with respect to the collateral or the secured obligation.
(h) The secured creditor may, but is not required to, send notice of foreclosure to any other person whom the secured creditor knows or believes may have an unrecorded interest in the collateral that subordinate in priority to the security agreement.
This section is designed to provide a fair opportunity to receive notice of foreclosure for all persons who may be adversely affected by it. In the case of governmental lenders and others whose actions fall under the Due Process Clause of the federal constitution, compliance with this section is believed to ensure that the notice requirements of due process will be met.
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). One exception exists, for residential tenants holding leases for one year or less. If the creditor wishes to eliminate such leases by foreclosure, they must be given mailed notice; this can usually be done with a mailing to the property address.
Except for tenants under the short-term residential leases just mentioned, only tenants who have recorded evidence of their leasehold interests are entitled to notice of foreclosure. The foreclosing creditor is not held to constructive notice of the existence of other tenants, and is not required to give notice even to other tenants of which it has actual knowledge unless their interests are of record. Foreclosure will destroy such non-recorded interests even though their holders received no notice of the foreclosure sale.
Ordinarily notice must be given by U.S. mail, but the parties can agree on other reasonable methods of notice except with respect to debtors who are protected parties.
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 acts as lis pendens, providing automatic notice to such parties.
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.
Since the result of failing to send notice to persons with subordinate interests in the real estate is to leave their interests unaffected by the foreclosure (subdivision (f)(1)), the secured creditor has the power to "pick and choose" which interests it wishes to wipe out by foreclosure. This power is most likely to be exercised in the case of leases that the creditor views as desirable from a landlord's viewpoint, and which the creditor therefore wishes to preserve in foreclosure.
SECTION 204. NOTICE OF FORECLOSURE: CONTENT. The notice of foreclosure shall be headed in bold type, at least 12 point in size, as follows: "NOTICE OF FORECLOSURE. THIS IS A NOTICE THAT YOU MAY LOSE YOUR RIGHTS TO CERTAIN REAL ESTATE. READ IT IMMEDIATELY AND CAREFULLY." The notice shall clearly and legibly state in the English language:
(1) the date of the notice, the name of the debtor or debtors, the legal description and the street address (if any) of the real estate collateral (or portion thereof to be subjected to foreclosure), and a description of any personal property collateral to be included in the foreclosure;
(2) an identification of the security agreement and the particular security interest to be foreclosed;
(3) the facts establishing that the security agreement is in default and a statement that the secured creditor plans to foreclose;
(4) that the secured creditor has accelerated, or is by virtue of the notice, accelerating the maturity of the secured obligation;
(5) a statement of the right, if any, of the debtor or other person to cure the default by paying an unaccelerated sum, the amount to be paid or other action necessary to cure, and the time within which the cure must occur;
(6) that notice of default has been given under Section 202(b)(1) or (2), if applicable, and that the required time period for cure under that section has expired;
(7) the right of the debtor and other persons to redeem the collateral from the security interest by paying or performing the secured obligation in full before foreclosure, and the amount to be paid or other action necessary to redeem;
(8) whether the secured creditor elects to foreclose by auction (Section 205), by negotiated sale (Section 206), or by appraisal (Section 207);
(9) the date on which foreclosure will be held if no cure or redemption is made;
(10) the fact that the foreclosure will extinguish the rights in the collateral of the persons receiving the notice of foreclosure;
(11) the fact that the holders of subordinate interests and the debtor have a right to any surplus from the foreclosure;
(12) the fact that the debtor and any other persons who are personally liable on the secured obligation will, or will not, be held liable for any deficiency; and
(13) the right of the debtor to request a hearing on the propriety of the foreclosure within fifteen days after the date the notice of foreclosure is given, and a suitable request form on a postal card, postage prepaid or business reply mail, addressed to the secured creditor.
The following is an illustrative notice of foreclosure complying with the requirements of this section.
1. This notice is given December 1, 200_, and affects real estate 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 mortgage authorizes the debtor to pay the delinquent payments, rather than the unpaid balance, for a period of 30 days after written notice. That notice was given to the debtor on October 15, 200_, and more than 30 days has elapsed since that time. For that reason, the debtor has no further right to reinstate the loan by paying only the delinquent payments.
6. The notice given to the debtor on October 15, 200_, also satisfies requirements for notice of default [Section 202(b)], and no cure of the default was made within the time allowed by that section.
7. The debtor and the holders of property interests subordinate to the mortgage of First Financial Corp. may now prevent a foreclosure of the real estate only by paying the full balance of $137,455.34 plus any accrued interest to the date of payment. Payment must be made before the foreclosure date given in the next paragraph in order to prevent foreclosure from occurring.
8. If payment is not made in this amount, First Financial Corp. elects to foreclose by auction.
9. The auction will be held on March 1, 200_, and the real estate will be sold to the highest bidder.
10. If that foreclosure sale is held, it will extinguish the rights to the real estate of all persons to whom this notice is directed.
11. If the sum bid at the foreclosure sale exceeds the unpaid balance on the mortgage indebtedness, including interest, attorneys' fees, and expenses of foreclosure, the remainder will be distributed to the holders of subordinate rights to the real estate in the order of their priority, and any remaining amount will be distributed as a surplus to Mary and John Jones, the borrowers.
12. 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 personally liable for any remaining unpaid sum.
13. If the borrowers, Mary and John Jones, believe that they have a legal basis for objecting to this foreclosure, they may request a hearing on its propriety before the clerk of the Pembroke County District Court. The request must be made on or before December 16, 200_. The hearing will be held within 30 days of the making of the request. The request may be made by completing and mailing the attached postcard. The postcard must be mailed within seven days after the receipt of this notice by the borrowers. The borrowers will be notified of the time and location of the hearing.
To: First Financial Corp
One Financial Square
Ashland, Example 12345
The undersigned are borrowers under a loan from you, secured by real estate at 455 South Main Street, Ashland, Example 12345.
We believe that we have a legal basis for objecting to the foreclosure of the mortgage you hold on this property, and hereby request a hearing to determine if foreclosure should occur. The basis for our legal objection to foreclosure is as follows:
________________________________________________________________
________________________________________________________________
________________________________________________________________
Date:___________________________
Signed__________________________________, Borrower
___________________________________, Borrower
[Query: should this form, or some variant of it, be placed in the text of the statute?]
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. 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.
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 foreclosure date.
SECTION 205. FORECLOSURE BY AUCTION. If the secured creditor elects to foreclose by auction, the requirements of this section shall be met.
(a) The secured creditor shall procure a title insurance binder or preliminary title report on the real estate collateral from a title insurance company doing business in the county or counties where the real estate collateral is located. The binder or report shall be dated after the recording of the notice of foreclosure (Section 203(e)), and shall state the willingness of the company issuing it to insure the title to the real estate collateral, and the exceptions and exclusions from coverage to which such title insurance will be subject. The secured creditor shall make a copy of the binder or report available to any prospective foreclosure purchaser upon request. All references in this [Act] to a title binder or report shall be inapplicable if no such binder or report is reasonably available immediately prior to the foreclosure sale.
(b) The secured creditor, after giving notice as required by Sections 203 and 204, shall advertise the foreclosure sale by placing an advertisement of at least two column-inches in a newspaper circulated in the county where the real estate collateral or some part thereof is located. The newspaper shall have a circulation of at least ten percent of the population of that county, or if no published newspaper has that circulation, the advertisement shall be published in the newspaper having the largest circulation in that county. The advertisement shall appear in the section of the newspaper where the type of real estate being sold is generally advertised for sale.
(c) The advertisement shall state:
(1) the date, time and location (by street address and by floor and office number, if applicable) of the foreclosure sale, which shall be during ordinary business days and hours at a location in a county where some of the real estate collateral being foreclosed is located, is readily accessible to the public, and bears a standard street address;
(2) that the sale shall be made to the highest qualified bidder;
(3) the location (by street address, if any, or otherwise by legal description) and the property tax map parcel identifier number of the real estate to be sold;
(4) a brief description of the real estate and any personal property collateral to be sold;
(5) an address and telephone number for an employee of the secured creditor or its agent or attorney;
(6) a statement that additional information, access to the premises for presale inspection, a copy of the title insurance binder or report (subsection (a)), a full legal description (if one is not included in the advertisement), and other information concerning the collateral are available from the person identified in subsection (a)(5);
(7) an identification of any interests in the real estate collateral held by persons to whom notice of foreclosure was not given, and whose interests will therefore survive the foreclosure under Section 203(f)(1);
(8) such other information as in the judgment of the secured creditor may be of interest to prospective purchasers of the collateral.
(d) The advertisement shall be published in a newspaper meeting the requirements of subsection (a) on at least four days during a two-week period, with the last publication at least seven days, but not more than thirty days, prior to the sale. Not less than 21 days, nor more than 45, days prior to the sale, the advertisement shall be posted on any internet site maintained by the Secretary of State of this State for the purpose of disseminating information concerning real estate foreclosures, shall be posted in a prominent place on each parcel of the real estate collateral if such can be accomplished without a breach of the peace, and shall be sent to the persons and in the manner prescribed by Sections 203 and 204. The secured creditor may, but is not required to, advertise the sale in any other reasonable manner that it deems desirable.
(e) The secured creditor shall reasonably accommodate persons who contact the person designated in subsection (c)(5) and request an opportunity to make presale inspections of the collateral. The debtor shall cooperate reasonably in such inspections.
(f) The sale shall be held not 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 (g)) or a sale resulting from a change in the method of foreclosure (Section 206(g)). The sale shall be conducted by an employee, agent, or attorney of the secured creditor, who may substitute a different person to conduct the sale from time to time. At the time (or within one hour thereafter) and place designated for sale in the advertisement (subsections (b) through (d)) and the notice of foreclosure (Sections 203 and 204), the person conducting the sale shall exhibit or distribute copies of the title insurance binder or report (subsection (a)), and shall conduct the sale in the following manner.
(1) Any person except the individual conducting the sale may bid at the sale, including any debtor and the secured creditor. The secured creditor may credit bid any amount up to the balance owing on the secured obligation and the foreclosure expenses.
(2) Written bids may be submitted prior to the opening of the sale, and the written bids shall be read aloud before the sale is opened to oral bids.
(3) Each person bidding may be required by the person conducting the sale to make a cash deposit, in advance of bidding, of as much as ten percent of the amount to be bid. Such deposits may be made by bank cashier's check or certified check, payable to the secured creditor. If the secured creditor bids, it is required to make a cash deposit only in the applicable percentage of the amount by which its bid exceeds the balance owing on the secured obligation at the time of the sale.
(4) Sale shall be made to the person bidding the highest amount. The collateral may be offered for bid in bulk or by parcels, whichever in the reasonable judgment of the person conducting the sale is likely to bring the best aggregate price. The collateral may be conditionally offered both in bulk and by parcels, and the person conducting the sale shall accept the greater of the two high bids. If the collateral is offered in parcels, no further parcels shall be sold after the aggregate of the high bids received exceeds the balance owing on the secured obligation together with the foreclosure expenses. If the collateral is the only security for the secured obligation, and if the collateral is offered in bulk, no bid shall be accepted that is less than [one-half] [two-thirds] of the balance owing on the secured obligation.
(5) The deposits of unsuccessful bidders shall be returned to them at the conclusion of the sale. The deposit of the successful bidder shall be applied in settlement of the bid, or if the successful bidder fails to complete the sale as required by subsection (f)(6), shall be applied to pay the costs and expenses of a postponed sale as provided in subsection (h), with any balance returned to the successful bidder.
(6) The successful bidder shall pay the remainder of the bid to the person conducting the sale within three business days after the day of the sale. If such payment is not made, the sale shall be cancelled and the secured creditor shall conduct a postponed sale as provided in subsection (g).
(7) The date the auction sale occurs shall be the foreclosure date. The proceeds of the sale, less the foreclosure expenses, shall be the foreclosure amount. The proceeds of the sale shall be distributed by the person conducting the sale in the following order:
(A) to the expenses of foreclosure;
(B) to discharge the secured obligation;
(C) to discharge, in the order of their priority, all liens [and encumbrances] subordinate to the foreclosed security interest held by persons who were given notice of foreclosure (Section 203);
(D) to the debtor or the debtor's assigns.
The person conducting the sale may apply for an order of the [district] court directing the order of distribution of the proceeds (Section 209), and may invest the proceeds in a reasonable manner pending the issuance of the court's order. Any investment earnings shall be added to the foreclosure proceeds.
(8) Upon payment by the successful bidder of the full balance of the bid, the secured creditor shall issue and deliver to the successful bidder a deed, without warranty of title, conveying the collateral to the successful bidder, and shall also deliver a copy of the title insurance binder or preliminary title report (subsection (a)). The deed shall 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 (Section 203(f)(1)).
(9) The deed may contain a recital of compliance by the secured creditor and the person conducting the sale with Sections 203, 204, and 205. A general reference to compliance with these sections by number shall be sufficient. The recital shall create a presumption of actual compliance with those sections of this [Act], and a conclusive presumption of compliance with those sections in favor of good faith purchasers for value of the collateral.
(g) The person conducting the sale may, for any cause he or she deems expedient, postpone the sale from time to time until it is completed. Notice of postponement shall be given by oral announcement at the time and place previously scheduled for the sale. If the sale is postponed for more than five business days, whether by the person conducting the sale or by order of any court of this state or the United States, the sale shall be readvertised with the new time and place of sale in the manner required by subsections (b), (c) and (d) of this section, and a copy of the advertisement shall be sent to the persons and in the manner prescribed by Sections 203 and 204.
(h) At any time before completion of the sale, the secured creditor may elect to terminate foreclosure by auction and to foreclose by negotiated sale (Section 206) or by appraisal (Section 207). This election shall be implemented by giving notice in the manner described in Sections 203 and 204, which notice shall state that foreclosure by auction is being terminated and the method of foreclosure being elected.
This section describes the procedures for foreclosure by auction, the traditional method of foreclosing land security interests in the United States. However, it imposes several requirements that are designed to make the auction sale more attractive to purchasers. These requirements include the obtaining and exposure to prospective purchasers of a title insurance report or binder, the use of internet site advertising in addition to the usual newspaper advertisement, and the opportunity for prospective purchasers to make inspections of the collateral prior to the foreclosure sale.
The sale process includes the opportunity for written as well as oral bids. The person conducting the sale is given discretion to sell the collateral in bulk or in parcels, whichever in his or her reasonable judgment is likely to produce the highest total price.
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 (f)(7)B)) 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 parties in the order of their priority. Subsection (f)(7)(B) speaks of distribution to holders of "liens and encumbrances." Should distribution be limited to liens, which typically are expressed as a liquidated sum of money? What of liens for obligations that are not liquidated or are conditional, such as a mortgage securing a guaranty? What of non-lien junior interests, such as easements, covenants, and leases? It would be necessary to have a judicial determination of the equivalent dollar value of such encumbrances. Should this be done?]
The secured creditor's election to foreclose by auction is not necessarily a final decision. Under subsection (h), 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 the secured creditor elects to foreclose by negotiated sale, the requirements of this section shall be met.
(a) The secured creditor may advertise the collateral for sale to prospective purchasers by whatever methods the secured creditor deems appropriate.
(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 multiple purchasers). A condition of the secured creditor's obligation to sell under the contract shall be that no objection to the cash price is made under subsection (f). The sale shall be completed not less than 90 days after the giving of an original notice of foreclosure (Sections 203 and 204), and not less than 30 days after the giving of a notice of foreclosure resulting from a subsequent attempt to foreclose by negotiated sale under subsection (g)(1).
(c) The contract of sale shall state the equivalent cash price, net of all commissions and other foreclosure expenses, for which the collateral is being sold, but the price may be paid in installments or otherwise financed by the secured creditor if the secured creditor and the purchaser so agree. The cash price as thus stated shall be the foreclosure amount.
(d) The secured creditor shall send notice of the proposed sale to the persons specified in Section 203(a), by the methods of notification specified in Section 203(b) through (d). The notice of proposed sale shall state:
(1) the date on which the secured creditor proposes to sell the collateral, which shall be at least 30 days after the giving of the notice of proposed sale under this subsection;
(2) the cash price agreed to in the contract of sale;
(3) that if the sale is completed the stated cash price will be applied to the secured obligation, with the balance distributed as provided in Section 205(f)(7);
(4) that the contract of sale is available for inspection or copying by the person receiving the notice, and the name, address, and telephone number of the individual who can be contacted in order to do so;
(5) that persons receiving the notice of proposed sale should notify the secured creditor in writing prior to the date of proposed sale if they believe that the cash price does not reflect the fair market value of the collateral.
(e) If the secured creditor receives no notification from any person who has been given notice of the proposed sale, objecting to the cash price, prior to the date of proposed sale, the sale may be completed by the secured party in accordance with the contract of sale. Upon completion of the sale, the cash price shall be distributed as provided in Section 205(f)(7), except that no fee shall be paid to the person conducting the sale. If the secured creditor does not actually receive the selling price from the purchaser in cash, it shall nonetheless be the duty of the secured creditor to distribute cash funds to those entitled thereto, other than itself, under Section 205(f)(7). The secured creditor may deliver to the purchaser such form of deed, contract for deed, or other conveyance as the parties agree upon. The date of delivery of such instrument shall be the foreclosure date. The deed or other conveyance shall 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 (Section 203(f)(1)). The conveyance and the cash price shall not thereafter be subject to attack by any person to whom timely notice of the proposed sale was given. The deed may contain a recital of compliance by the secured creditor and the person conducting the sale with Sections 203, 204, and 206. A general reference to compliance with these sections by number shall be a sufficient recital. The recital shall create a presumption of actual compliance with those sections of this [Act], and a conclusive presumption of compliance with those sections in favor of good faith purchasers for value of the collateral.
(f) If the secured creditor receives written notification from any persons who have been given notice of the proposed sale, objecting to the cash price, prior to the date of proposed sale, the sale shall not be completed in accordance with the contract of sale, and the secured creditor shall proceed as provided in subsection (g).
(g) If the secured creditor is unable to complete the proposed sale, whether because of receipt of a notice objecting to the cash price as provided in subsection (f) or for any other reason, the secured creditor shall then shall send notice to the persons specified in Section 203(a), by the methods of notification specified in Section 203(b) through (d), advising them whether the secured creditor will:
(1) attempt another foreclosure by negotiated sale under this Section; or
(2) foreclose by auction under Section 205; or
(3) foreclose by appraisal under Section 207.
This section provides a method of negotiated sale which may in some cases be much quicker and more efficient than the traditional auction sale. However, since this method of foreclosure involves no external test of the property's market value, it is dependent on there being no objection to the price by those whose interests will be wiped out by it. Those persons are entitled to notice of the negotiated sale, and if they make a timely objection to the proposed price, the sale cannot proceed. In that event, the secured creditor may either attempt to make a new negotiated sale or resort to foreclosure by auction (Section 205) or appraisal (Section 207).
If no objection is made to the price, it is in effect conclusively deemed to be at least equal to the fair market value of the property, and those who received notice of it cannot subsequently make a collateral attack on it.
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 figure of which the debtor and junior interest holders must be notified, and which they must judge to be unobjectionable.
SECTION 207. FORECLOSURE BY APPRAISAL. If the secured creditor elects to foreclose by appraisal, the requirements of this section shall be met.
(a) The secured creditor shall order an appraisal of the collateral. The appraisal shall be made not more than 60 days prior to the date of foreclosure stated in the notice of foreclosure (Section 204), and shall reflect the fair market value of the collateral, with deduction for any liens or encumbrances superior to the security interest being foreclosed.
(b) The appraisal shall be made by an appraiser who is not related to the secured creditor (Section 111) and who holds the following qualifications:
(1) if the collateral is residential real estate, the appraiser shall be:
(A) designated as a certified residential appraiser by the [Appraisal Certification Board] of this state and
(B) a member of the National Association of Independent Fee Appraisers with an IFA designation or a member of the Appraisal Institute with an SRA designation.
(2) if the collateral is not residential real estate, the appraiser shall be:
(A) designated as a certified general appraiser by the [Appraisal Certification Board] of this state and
(B) a member of the National Association of Independent Fee Appraisers 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 Section 203(a), by the methods of notification specified in Section 203(b) through (d), not less than thirty days prior to the foreclosure date. The notice of the appraisal report shall have appended to it a copy of the appraisal report, and shall state:
(1) the proposed date of foreclosure;
(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;
(4) the foreclosure amount (subdivision (g)), and a statement that the foreclosure amount will be applied to the secured obligation, with the balance distributed as provided in Section 205(f)(7).
(d) Any person to whom notice of the appraisal report is sent under subsection (c), and who believes that the appraisal report does not properly reflect the fair market value of the collateral, may commence an action under Section 209 for a determination of the fair market value of the collateral. Such an action must be commenced prior to the recording of the affidavit as provided in subsection (e). The court's determination of fair market value shall be substituted for the appraised value shown in the appraisal report.
(e) The foreclosure date shall be not less than 90 days after the giving of an original notice of foreclosure (Sections 203 and 204). On the foreclosure date, the secured creditor shall record an affidavit in the [county recorder's office] containing the following information:
(1) identification of the security interest;
(2) identification of the debtor and of subordinate interests in the collateral to whom notice of foreclosure was given under Section 203 and their holders; and
(3) a recital that the requirements of Sections 203, 204, and 207 of this [Act] have been complied with, and that title to the collateral has passed to the secured creditor. A general reference to compliance with these sections by number shall be a sufficient recital.
(f) The recording of the affidavit shall pass 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 (Section 203(f)(1)). The appraised value of the collateral shall not thereafter be subject to review. The affidavit's recital of compliance with the requirements of Sections 203, 204, and 207 shall create a presumption of actual compliance with those sections of this [Act], and a conclusive presumption of compliance with those sections in favor of subsequent good faith purchasers for value of the collateral.
(g) The foreclosure amount shall be a sum equal to the [90] percent of the first [$1 million] of appraised value and [97] percent of the amount of the appraised value exceeding [$1 million], minus the foreclosure expenses. The foreclosure amount shall be distributed by the secured creditor as provided in Section 205(f)(7).
This section provides a method of foreclosure that does not involve any sale to a third party. Instead, title to the collateral passes directly to the secured creditor. The foreclosure amount is determined by reference to a fair market value appraisal by an appraiser unrelated to the secured creditor. However, anyone affected by the foreclosure may elect to seek and obtain a judicial determination of value instead.
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.
The foreclosure amount is 90% of the first one million dollars of the appraised value, and 97% of any excess of value over and above one million dollars. This reduction from the appraised value is made to reflect the fact that lenders usually have significant costs in holding and disposing of real estate 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 advantages 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 foreclosure expenses total $20,000. The foreclosure amount is therefore 90% of $600,000, or $540,000, less the foreclosure expenses of $20,000. Hence the foreclosure amount is $520,000.
SECTION 208. HEARING ON PROPRIETY OF FORECLOSURE.
(a) The debtor and other persons to whom notice of foreclosure is required to be given (Section 203(a)) [and who are protected parties] may request a hearing to determine the legal propriety of the foreclosure. The request must be made by notice to the secured creditor no later than fifteen days after the notice of foreclosure is given. If the secured creditor receives a request for hearing, the secured creditor shall immediately schedule a hearing with the [clerk of the district court] in the county where part or all of the real estate collateral is located, who shall act as hearing officer. The hearing shall be scheduled no later than thirty days after the secured creditor receives the request for hearing. The person requesting the hearing shall be given immediate notice of the date and place of the hearing.
(b) The hearing shall be informal, and the rules of evidence shall not apply. The parties may, but need not, be represented by attorneys. The hearing officer shall consider the grounds asserted by the secured creditor for the foreclosure and the objections to foreclosure of the person requesting the hearing. If the hearing officer determines that the foreclosure is legally improper, he or she shall order a discontinuation of the foreclosure, and otherwise shall order that the foreclosure may continue. The hearing officer shall prepare and mail to the parties, within ten days after the hearing, a written statement of the order and the reasons therefor. Each party shall bear his or her own expenses in connection with the hearing, and all parties represented at the hearing shall bear equally the fee of the hearing officer.
(c) Any party to the hearing who desires judicial review of the hearing officer's order may commence an action seeking review under Section 209(a), but such action shall be commenced before the date of foreclosure.
The objective of the informal hearing process described in this section is to ensure both fairness and the appearance of fairness to debtors and others who are at risk of losing their collateral in a foreclosure. When secured parties that are governmental in nature foreclose, they are probably required to provide a pre-foreclosure hearing to meet the demands of the Due Process clause. This requirement is less certain for lenders whose governmental connections are more attenuated.
The hearing is not automatic, but is scheduled only if someone to whom notice of foreclosure is required to be given requests it. However, the request is simple to make and should not be burdensome. The hearing officer is required to determine whether the person requesting the hearing 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 facts 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. An egregious 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 hearing officer's authority is limited to a determination of whether foreclosure should go forward or not. He or she is not authorized to supervise the foreclosure process or to provide remedies for alleged violations of the Act by the secured creditor. Determinations of priority of security interests, orders to marshal assets, decisions to sell the collateral in bulk or in parcels, and the like are outside the hearing officer's authority.
[Query: should this section be limited to hearings for protected parties? Clearly the requirements of Due Process are not limited to such parties.]
SECTION 209. JUDICIAL ACTION TO ENJOIN OR DIRECT CONDUCT OF FORECLOSURE.
(a) At any time prior to the foreclosure date, any aggrieved party may commence a judicial action in [district] court to enjoin or direct the conduct of the foreclosure. The court, for legal cause, may:
(1) review and modify the order of the hearing officer under Section 208, if any;
(2) determine the fair market value of the collateral if the foreclosure is by appraisal under Section 207;
(3) order that the foreclosure shall or shall not take place;
(4) order a postponement of the foreclosure;
(5) determine the priority of interests in the collateral;
(6) direct that the foreclosure be in bulk or by parcels;
(7) 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;
(8) direct the order of distribution of the proceeds of the foreclosure;
(9) order such other procedures or conditions as are necessary to satisfy the principles of law and equity (Section 106);
(10) fix a new foreclosure date, if the court's other orders have caused a delay in the original foreclosure date.
(b) After the foreclosure date, any aggrieved party may commence a judicial action in [district] court seeking damages or setting aside the foreclosure. The court may adjudge damages against the secured creditor as compensation for any violation of this [Act] or other principles of law in the conduct of the foreclosure. [An aggrieved party who is also a protected party may recover $500 upon proof of a violation of this [Act] by the secured creditor without proof of actual damages.] The court may also set aside the foreclosure if necessary to correct a violation of this [Act] or to satisfy the principles of law and equity (Section 106), except that the foreclosure shall not be set aside for a violation of this [Act] to the extent that the collateral has been acquired by a good faith purchaser for value and the recitations of compliance provided for in Section 205(f)(9), 206(e), or 207(e)(3) have been made.
[(c) In a judicial proceeding under this section, an aggrieved party who proves that the secured creditor violated this [Act] may, in the discretion of the court, recover the reasonable expenses of litigation, including attorneys' fees.]
[(d) No action shall be brought for damages for violations of this [Act] or to set aside a foreclosure under this [Act] more than five years after the foreclosure date.]
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 an aggrieved party. Aggrieved parties may include a debtor, the secured creditor, a holder of some other interest in the collateral, and even a prospective purchaser of the collateral. The court has broad powers to prevent the foreclosure from occurring, or to direct its conduct.
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 courts 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 principles 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, if the collateral had passed into the hands of a bona fide purchaser (BFP), and if the foreclosure deed contained appropriate recitals of compliance with this Act, 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.
The conclusive presumption of compliance applies only to the notice and foreclosure provisions of this Act, and not to other legal faults in the foreclosure. For example, if the secured creditor engaged in activities intended to chill the bidding, the court might find a violation of the duty of good faith (Section 108), and could conceivably 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 were 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. Within 90 days after the date of foreclosure, the secured creditor and any other persons whose security interests in the collateral were extinguished by the foreclosure may commence actions for money judgments for deficiencies against any person or persons liable therefor. The foreclosing secured creditor may not obtain a deficiency judgment if it disclaimed a deficiency in the notice of foreclosure (Section 204(12)). If more than one party commences an action for a deficiency, the court may consolidate the actions. The deficiency shall be determined as follows:
(a) The deficiency owed to the secured creditor shall be the positive number, if any, measured by subtracting the foreclosure amount (Section 205(f)(7) and subsection (c) of this section, Section 206(c), or Section 207(g)) from the balance owing on the secured obligation, including all principal, interest, and legally enforceable loan fees, but not including foreclosure expenses.
(b) The deficiency owed to any other person whose security interest in the collateral was destroyed by the foreclosure shall be the positive number, if any, measured 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 foreclosure expenses).
(c) In an action for a deficiency following a foreclosure by auction (Section 205), any person liable therefor may petition the court for a determination of the fair market value of the collateral at the date of the foreclosure sale. 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 foreclosure sale proceeds, the fair market value shall 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. No determination of fair market value under this section shall be made by the court if the foreclosure was by negotiated sale (Section 206) or by appraisal (Section 207).
[For optional enactment]
(d) No judgment for a deficiency, or for the remaining balance owing on the secured obligation shall be entered on behalf of the secured creditor against a protected party after a foreclosure conducted under this [Act]. This subsection does not bar deficiency judgments on behalf of persons other than the secured creditor whose interests were extinguished by the foreclosure.
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. However, all deficiency actions must be brought within 90 days after the date of foreclosure.
A deficiency action by the foreclosing creditor is governed by subsection (a). The formula stated there does not deduct for foreclosure expenses, since these expenses are already deducted in arriving at the foreclosure amount. Deficiency actions by "sold-out" junior lienors are governed by subsection (b). Under that subsection, the amount distributed to the junior lienor, rather than the full foreclosure amount, is considered as offsetting the obligation owed to the lienor.
If the foreclosure was by auction, subsection (c) provides that the defendant in the deficiency action is entitled to have the fair market value of the property determined by the court. If this procedure is used, the fair market value is used instead of the foreclosure sale proceeds 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 applicable if the foreclosure was by negotiated sale or by appraisal.
Subsection (d) is provided for optional enactment. It prohibits deficiency judgments against protected parties. In reality, such judgments are rarely obtained in any event, and are often uncollectible. From a consumer's viewpoint, a deficiency judgment, which may burden the debtor for many years, seems to "add insult to the injury" of loss of one's home. On the other hand, lenders may argue that the threat of a deficiency judgment, even if it will never be enforced, provides a useful inducement to borrowers to engage in meaningful "workout" efforts.
Even if a deficiency judgment cannot be obtained by the foreclosing creditor, the holders of "sold-out" junior liens may still obtain and collect deficiency judgments.
SECTION 211. REQUEST FOR NOTICE OF FORECLOSURE. Any person may record in the [office of the county recorder] of any county in which part of the real estate collateral is located a request for notice of foreclosure of a security agreement which has been recorded. The request shall state:
(a) the date, book and page of the security agreement's recording;
(b) the names of the parties to the security agreement;
(c) a legal description of the real estate collateral affected by the security agreement; and
(d) the name and address of the person requesting notice of foreclosure.
The recording of the request shall entitle the person requesting notice to be given notice of foreclosure (Section 203(a)(4)), but shall not affect the title to the real estate collateral and shall not constitute constructive notice to any person of any interest in the real estate 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.
This section permits anyone who wishes to become eligible for receipt of a foreclosure notice. For example, a tenant under an unrecorded lease could record a request for notice under this section, and thus could ensure learning of a pending foreclosure.
SECTION 212. POSSESSION AFTER FORECLOSURE. A person who acquires a possessory interest in the collateral by foreclosure under this [Act] is entitled to possession of the collateral on the day after the foreclosure date, and is entitled to any rents or proceeds of the collateral accruing and becoming due after the foreclosure date. A person who acquires a possessory interest in real estate collateral by foreclosure under this [Act] may immediately commence an action under [the forcible entry and detainer statute of this State] in order to gain possession of the real estate.
This Act is silent on whether a secured creditor may demand possession of the collateral prior to the foreclosure date; that question is left to other state law. However, one who acquires property in a foreclosure proceeding under this Act is entitled to possession on the following day, provided that the interest acquired is a possessory one. For example, a foreclosure of a reversion in land that is subject to a lease would not entitle the person obtaining the reversion through foreclosure to possession until the reversion became possessory. By the same token, if the holder of the reversion is also entitled to rents from the real estate, all rents accruing after the foreclosure date 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 processes as landlords use 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.
SECTION 301. EFFECTIVE DATE.
This [Act] takes effect on ____________________following its enactment. It applies to [security agreements entered into] [foreclosures as to which an initial notice of foreclosure (Sections 203 and 204) is given] on or after that date.
[Query: should the Act apply to existing security agreements, or only to those entered into after the effective date? Since it deals entirely with remedies, there would be no constitutional objection in most states to applying it to existing security agreements.]
SECTION 302. 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 acts to be specifically repealed].
(b) [Security agreements validly entered into] [Foreclosures commenced] before the effective date specified in Section 301, and the rights, duties, and interests flowing from them remain valid thereafter. [Security interests created before the effective date specified in Section 301 may be foreclosed under any statute or other law amended or repealed by the [Act] as if the repeal or amendment had not occurred.]
If the effective date of the Act is expressed in terms of commencement of new foreclosures, rather than entering into new security agreements, it will probably be necessary to augment the bracketed language in subsection (b) by defining what is meant by "commencement" of a foreclosure under preexisting law.
SECTION 303. GENERAL REPEALER. Except as provided in the foregoing section, all acts and parts of acts inconsistent with this [Act] are hereby repealed.
SECTION 304. LAWS NOT REPEALED. This [Act] does not repeal
_______________________________________________.