DRAFT

FOR DISCUSSION ONLY

UNIFORM NONJUDICIAL FORECLOSURE ACT

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NATIONAL CONFERENCE OF COMMISSIONERSON UNIFORM STATE LAWS

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FEBRUARY 2002

With Reporter’s Notes

Copyright © 2002by the

NATIONAL CONFERENCE OF COMMISSIONERSON UNIFORM STATE LAWS

[Note to drafting committee: The Prefatory Note has not been revised for this draft, andtherefore does not mention a few specific modifications that have been made here. It isnonetheless included for your convenience.]

UNIFORM NONJUDICIAL FORECLOSURE ACT

TABLE OF CONTENTS

[ARTICL E] 1

GENERAL PROVISIONS

SECTION 101. SHORT TITLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

SECTION 102. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

SECTION 103. APPLICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

SECTION 104. VARIATION BY AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

SECTION 105. SUPPLEMENTAL PRINCIPLES OF LAW AND EQUITY APPLICABLE. . . . . . . . . . . . . . . . 14

SECTION 106. NOTICE AND KNOWLEDGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

SECT ION 1 07. TR ANSA CTIO N CRE ATIN G SEC URIT Y INT ERES T. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

SECTION 108. TIME OF FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

[ARTICLE ] 2

PROCEDURES BEFORE FORECLOSURE

SECTION 201. RIGHT TO FORECLOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

SECTION 202. NOTICE OF DEFAULT AND RIGHT TO CURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

SECTION 203. NOTICE OF FORECLOSURE: MANNER OF GIVING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

SECTION 204. NOTICE OF FORECLOSURE: CONTENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

SECTION 205. REQUEST FOR NOTICE OF FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

SECTION 206. MEETING TO OBJECT TO FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

SECTION 207. PERIOD OF LIMITATION FOR FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

SECTION 208. JUDICIAL SUPERVISION OF FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

SECTION 209. REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

[ARTICLE ] 3

FORECLOSURE BY AUCTION

SECTION 301. FORECLOSURE BY AUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

SECTION 302. EVIDENCE OF TITLE; OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

SECTION 303. ADVERTISEMENT OF SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

SECTION 304. ACCESS TO COLLATE RAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

SECTION 305. LOCATION AND TIME OF SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

SECTION 306. FORECLOSURE OF T WO OR M ORE PARCELS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

SECTION 307. POSTPONEMENT OF SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

SECTION 308. CONDUCT OF SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

SECTION 309. DEPOSIT BY SUCCESSFUL BIDDER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

[SECTION 310. UPSET BIDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52]

SECTION 310. PAYMENT OF REMAINDER OF BID. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

SECTION 311. FORECLOSURE AM OUNT; DISTRIBUTION OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . 54

SECTION 312. DEED TO SUCCESSFUL BIDDER; AFFIDAVIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

SECTION 313. DISCONTINUANCE OF FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

[ARTICLE ] 4

FORECLOSURE BY NEGOTIATED SALE

SECTION 401. FORECLOSURE BY NEGOTIATED SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

SECTION 402. ADVERTISEMENT AND CONTRACT OF SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

SECTION 403. NOTICE OF PROPOSED NEGOTIATED SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

SECTION 404. COMPLETION OF SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

SECTION 405. RECORDING OF AFFIDAVIT AND DEED; APPLICATION OF FORECLOSURE AMOUNT.62

SECTION 406. NOTICE OF OBJECTION TO SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

[ARTICL E] 5

FORECLOSURE BY APPRAISAL

SECTION 501. FORECLOSURE BY APPRAISAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

SECTION 502. APPRAISAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

SECTION 503. NOTICE OF APPRAISAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

SECTION 504. COMPLETION OF FORECLOSURE BY APPRAISAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

SECTION 505. RECORDING OF AFFIDAVIT; TIME OF FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 69

SECTION 506. NOTICE OF OBJECTION TO FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

[ARTICLE ] 6

RIGHTS AFTER FORECLOSURE

SECTION 601. APPLICATION OF PROCEEDS OF FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

SECTION 602. TITLE TRANSFERRED BY FORECLOSUR E. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

SECTION 603. ACTION FOR DAMAGES OR TO SET ASIDE FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . 74

SECTION 604. POSSESSION AFTER FORECLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

SECTION 605. JUDGMENT FOR DEFICIENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

SECTION 606. DETERMINING AMOUNT OF DEFICIENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

[ARTICLE ] 7

MISCELLANEOUS PROVISIONS

SECTION 701. UNIFORMITY OF APPLICATION AND CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 80

SECTION 702. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE

ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

SECTION 703. EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

SECTION 704. REPEALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

SECTION 705. TRANSITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

UNIFORM NONJUDICIAL FORECLOSURE ACT

Prefatory Note

In 1974 the National Conference of Commissioners on Uniform State Laws adopted theUniform Land Transactions Act (ULTA). ULTA covered numerous aspects of real property law,but a major portion of it was devoted to security interests in land. In 1985, the Conference splitthese 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 twothings: first, a further separation of the foreclosure provisions of ULTA and ULSIA (i.e., ULSIAPart 5) into a distinct foreclosure statute, and second, an extensive revision of those foreclosureprovisions. In addition, the Act introduces two new forms of foreclosure that were not found inULTA or ULSIA, and it eliminates ULSIA’s provision, tracking UCC Article 9, that permittednonresidential mortgages to be foreclosed by “reasonable disposition of the collateral” – aprovision that was widely opposed.

Revision is appropriate because of a number of changes in the field of mortgage foreclosurelaw that have occurred since the drafting of ULTA in the early 1970s. These changes includeconsiderable development by the courts of the constitutional concept of due process of law asapplied to foreclosures; an expansion of the secondary mortgage market to include large numbersof conventional and commercial mortgages; a vast advance in the securitization of bothresidential and commercial mortgages; and the publication of the Restatement (Third) ofProperty: Mortgages in 1997.

A few states have adopted power of sale foreclosure statutes in recent years, but there are stillabout twenty states that have not done so. This act is offered in the belief that non-judicialforeclosure can be both fair to borrowers and efficient from the viewpoint of lenders, and hence asuperior form of foreclosure for all of the affected parties.

The delays and inefficiency associated with foreclosure by judicial action are costly. Theyincrease the risks of vandalism, fire loss, depreciation, damage, and waste. The resulting costsraise the cost of private mortgages and significantly erode the economic value of governmentsubsidy programs involving mortgages. They add to the portfolio of foreclosed properties heldby secondary mortgage market investors and government lenders, insurers, and guarantors ofmortgages. The availability of a uniform, less expensive, and more expeditious foreclosureprocedure will ameliorate these conditions, and will facilitate the sale and resale of secured realestate loans.

The desirability of nonjudicial foreclosure is emphasized by the successful implementation oftwo federal statutes that permit the U.S. Department of Housing and Urban Development toforeclose by power of sale the mortgage loans it holds. See Multifamily Mortgage ForeclosureAct, 12 U.S.C.A. §§ 3701-3717, adopted in 1981; Single Family Mortgage Foreclosure Act, 12U.S.C.A. §§ 3751-3758, adopted in 1994; regulations applicable to both acts at 24 C.F.R. §§ 27.1- 27.123.

Features of the Act

Why nonjudicial foreclosure? The fundamental premise of this Act is that, in the greatmajority of cases, judicial involvement in foreclosure is unnecessary, simply because there is nodispute between the debtor and creditor. The note and security instrument are indeed valid, thepayments 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 littlesense to force all foreclosures into court because a small fraction of them involve disputes of lawor fact. Using the time of judges and the machinery of the courts to conduct foreclosures istherefore often a misallocation of public funds as well as a waste of the secured creditor’sresources.

Foreclosure is intended to accomplish two distinct purposes: (1) to evaluate the collateral and(2) to liquidate it. Evaluation is necessary in order to determine whether the lender has a surplus(to be distributed to junior lienors and the debtor) or a deficiency (to be demanded from thedebtor and others who are personally liable on the debt). Liquidation is necessary because thelender, in nearly all instances, is not in the business of owning real property and does not want toretain the collateral for the long term.

However, there is no overarching principle that requires the evaluation and liquidationfunctions to be accomplished in a single process. Indeed, a persuasive case can be made thatwhen both functions are done at once, as in the case of the traditional auction sale, both are likelyto be done inefficiently. See Debra Pogrund Stark, Facing the Facts: An Empirical Study of theFairness and Efficiency of Foreclosures and a Proposal for Reform, 30 U. Mich. J. L. Reform639, 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 threemethods of foreclosure, and permits the secured creditor to elect the method to be used. The firstis conventional foreclosure by means of an auction sale. Here both evaluation (by means of thehigh bid at the sale) and liquidation (by means of a foreclosure deed to the high bidder) arecombined.

The second method authorized by this draft is foreclosure by negotiated sale. Such a sale willbe consummated in much the same way as other real property sales; the property may be listedwith a real estate broker and advertised extensively. This is usually a very effective way ofliquidating the property, but has not been used in this country in the past as a method ofevaluating the property for purposes of foreclosure because of concern about the potential forcollusive price-setting between the secured creditor and the purchaser. In the procedureauthorized in this Act, however, that concern is eliminated. The creditor notifies the debtor andjunior interest-holders of the “foreclosure amount” that it is willing to allow for the property, andthey can simply disapprove the sale if they are dissatisfied with that amount. Their disapprovalwill force the creditor to abandon the negotiated sale and resort to a different method offoreclosure. In many cases, however, it is believed that the amount will appear adequate to thoseparties and they will permit the sale to proceed.

The third foreclosure method authorized by this draft is foreclosure by appraisal. Thismethod 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 securedcreditor, who will have the burden of liquidating it after the foreclosure is completed.

Foreclosure by appraisal incorporates several safeguards to ensure the integrity of theappraisal’s result. The lender selects the appraiser, but the appraiser must meet reasonableprofessional standards of qualification and cannot be an employee of the lender. As withforeclosure by negotiated sale, the secured creditor notifies the debtor and junior interest holdersof the “foreclosure amount” that it is willing to offer for the property. Any debtor or juniorinterest-holder who is dissatisfied with the amount can simply disapprove it and thereby preventthe foreclosure by appraisal from going forward.

It is believed that with all three of these foreclosure methods, sufficient protections have beenincluded to assure the legitimate interests of debtors and junior interest-holders. Irrespective ofthe method of foreclosure selected by the secured creditor, the foreclosure cannot occur less than90 days after the giving of the original notice of foreclosure. During this period, any personwhose interests will be extinguished by the foreclosure has the right to redeem the collateral fromthe security interest, but must pay the accelerated balance due in order to do so.

The “residential debtor” concept. This draft preserves, with some changes, the “residentialdebtor” concept employed (and termed the “protected party”) in ULTA and ULSIA. Itrecognizes two classes of debtors: residential debtors and everyone else. Residential debtors areassumed to need additional legal protections from foreclosing creditors that are not essential toother persons.

“Residential debtor” includes both a person who has a home on which a security interestexists, and anyone who is personally liable on an obligation that is secured by the home of theobligor. “Home” is used here as a shorthand for “residential real property,” which must beowner-occupied and contain no more than four dwelling units.

Thus, “residential debtor” encompasses not only the usual consumer borrowers on homemortgage loans, but also relatives who guarantee their loans and purchasers who buy homessubject to, or with an assumption of, existing mortgages.

Four specific protections are provided for residential debtors in this Act. The first relates tothe notices of default and foreclosure that must be sent to secured creditors. In general, debtorsmay agree to receive notice by any reasonable means, including electronic mail or facsimile. However, residential debtors are entitled to written notice, either delivered in person ortransmitted by mail or other courier service, and they may not waive their right to such notice. This provision recognizes that other forms of communication are not as reliable as the mails,particularly in residential settings.

Second, the cure period allowed to debtors to reinstate their loans without acceleration isordinarily thirty days after a notice of default is given. This period may be reduced by agreementof the parties to as little as ten days, but only if no debtor is a residential debtor.

Third, the Act limits the right to cure without acceleration to once per year for a non-monetary default of the same type, but this limitation does not apply to residential debtors.

Fourth, the Act precludes the entry of deficiency judgments against residential debtors whohave acted in good faith with respect to the property and the foreclosure. Deficiencies may stillbe asserted against guarantors of residential debtors.

Systems of notice. Power of sale foreclosure statutes presently in effect may be divided intoone-notice and two-notice systems. In a two-notice system, the secured creditor typically isrequired to send a notice of default, and after the passage of some time period, a second notice offoreclosure. Depending on the jurisdiction, the first notice may or may not coincide with anacceleration of the debt. If it does not, the period between the first and second notices (or somepart of that period) may be thought of as a “cure” period, during which only arrearages need bepaid to put the loan back “on stream.”

The present draft provides for a “two-notice” system. Debtors are given a notice of defaultand a 30-day period to cure arrearages before a notice of foreclosure may be given to them. Fornonresidential debtors this time period may be reduced to ten days by agreement, and the right tocure is eliminated if a prior notice of default has been given and cure made within the previoustwelve-month period. No provision is made in this Act for giving the notice of default to juniorlienholders, irrespective of whether the debtor is a residential debtor.

In addition to these two notices, all affected parties will receive further warning that theforeclosure is about to occur. In the case of foreclosure by auction, a copy of the advertisementof the sale must be sent to them (although it may be included with the notice of foreclosure). Ifforeclosure is by negotiated sale, the affected parties must be given a notice informing them ofthe proposed sale. In the case of foreclosure by appraisal, they will receive a copy of theappraisal report.

Due process: notice and hearing. When a governmental entity forecloses a mortgage, it isreasonably well established that it must comply with the demands of the Due Process Clause,including the giving of notice reasonably calculated to inform those whose rights are affected,and the provision of a hearing at which such persons may present defenses to the foreclosure.

Whether these protections are also required when a private creditor forecloses is not settled.However, irrespective of the requirements of Due Process, fundamental fairness would seem todemand that all persons whose rights may be destroyed by a foreclosure should have advancenotice of the proceeding and the opportunity to show why it should not go forward.

This Act therefore provides (in Sections 203 and 204) for notice to all those whose propertyrights are put at risk by a foreclosure. It also provides, in Section 205, an opportunity for anyother person who wishes to receive notice of the foreclosure to file a request for such notice inthe public records.

In addition, this Act provides residential debtors and other affected parties (Section 206) theright to an informal meeting with a responsible representative of the secured creditor at aconvenient location to present reasons why the foreclosure should not go forward. This meeting,which will be held only if it is affirmatively requested, is intended to guard debtors against thefundamental unfairness of a mistakenly-conducted foreclosure that is legally improper.

It might be argued that the informal meeting process created by this draft is unnecessary

because a debtor or junior lienor can always bring an action to enjoin an improper foreclosure. However, this step requires a good deal of affirmative effort by the plaintiff – the retaining ofcounsel, typically at significant cost, and the pursuit of the litigation. It is not clear that thisoption is adequate to protect unsophisticated debtors.

Judicial intervention. In a great majority of cases, foreclosures under this Act are expectedto proceed without judicial involvement. However, there are a number of situations in which aparty may seek and obtain the intervention of a court. For example, a party who believes thatthere has been no default under the security instrument may seek a judicial review of that issue. A court may also be asked to postpone a foreclosure, to determine the priority of competingsecurity interests, to direct foreclosure in bulk or by parcels, to marshal assets by directing theorder in which parcels should be sold, or to direct the order of distribution of the proceeds of aforeclosure. In these situations the court serves as a “safety valve,” guarding against improper oroverreaching actions by the foreclosing creditor.

Omitted parties. Mortgage law uniformly holds that a person who is not made a party to ajudicial foreclosure is not bound by it, and such a person’s interest survives the foreclosure. However, in foreclosures by power of sale, there is little legal authority in most jurisdictions as tothe effect of failure to provide notice to holders of junior interests. This draft explicitly providesthat holders of junior interests are not bound if they are not given notice; hence, their position islike 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 tenantwho has been omitted purposely (because the lender wishes to preserve rather than destroy thetenant’s lease) intervene in the foreclosure for the purpose of getting the lease terminated? Caselaw on this point is about evenly divided. The position of this draft is that the tenant may not doso. In other words, a foreclosing lender under this draft has the choice of whether to destroy orpreserve individual junior leases, a right sometimes referred to as “pick and choose.”

Redemption. In general, mortgaged property may be redeemed in either of two ways: byequitable redemption before foreclosure, and by statutory redemption after foreclosure. All statesrecognize equitable redemption, but only about half of the states have statutes permittingredemption after foreclosure. This draft recognizes the fundamental right to equitableredemption until the date of foreclosure, but does not make any provision for statutoryredemption. 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 foreclosurebid prices that results from the uncertain status of title introduced by statutory redemption.

Title from foreclosures. No matter which method of foreclosure is employed, this Actprovides that completion of the foreclosure process raises a presumption of compliance with thenotice, advertising, and other procedural requirements of the Act. This presumption isconclusive evidence in favor of good faith purchasers for value of the collateral. However, thepresumption does not make foreclosure titles impregnable. The reason is that defects outside thescope of the Act may exist. For example, the debtor may not have had good title to the collateralwhen the security interest was given; the security instrument itself may be a forgery or otherwisevoid; or the debtor may not in fact have been in default on the secured obligation. The extent towhich such defects will cause a court to set aside a sale, even when the property has passed to abona fide purchaser, is left to other law.

Deficiency liability. In general, this draft permits recovery of deficiencies by the foreclosingcreditor and by “sold-out” junior lienholders (assuming, of course, that the obligation is arecourse debt). As noted above, residential debtors who act in good faith are exempt fromdeficiency liability. Otherwise, a deficiency judgment is available to the foreclosing creditor, nomatter which of the three methods of foreclosure is used. However, if the foreclosure is byauction, deficiency liability is limited by the “fair market value” concept. Any person againstwhom a deficiency is sought may seek a court determination of the property’s value as of the dateof foreclosure, and the amount thus determined is substituted for the high bid at the foreclosuresale in calculating the deficiency. This procedure recognizes that auction foreclosure sales oftendo not bring a price that approximates the market value of the property, and it encouragesforeclosing creditors to make efforts to generate interest among potential bidders. No similar fairmarket value determination is available or needed in the case of foreclosure by negotiated sale orby appraisal.

Note on the terminology of foreclosure. The term “foreclosure” is often used in modernpractice in a sense that is inconsistent with its historical origins. In its inception in England, whatwas “foreclosed” was the debtor’s “equity of redemption” – that is, by foreclosure the debtor wasprecluded from redeeming his or her land from the mortgage. Thus, one did not, properlyspeaking, “foreclose a mortgage,” but rather foreclosed the equity of redemption.

Today, however, terms “foreclose a mortgage” or “foreclose a deed of trust” are in commonuse and introduce no apparent confusion. This Act follows the modern pattern, and refers to“foreclosing a security interest” in real property and any accompanying personal property.

1

UNIFORM NONJUDICIAL FORECLOSURE ACT1

[ARTICLE] 12

GENERAL PROVISIONS3

SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Nonjudicial4

Foreclosure Act.5

SECTION 102. DEFINITIONS. In this [Act]:6

[Note: several definitions have been deleted by previous decisions of the drafting committee,7including ACCELERATION, AGGREIVED PARTY, AUTHENTICATE, BUSINESS DAY, DEED,8and PARTY.]9

(1) "Collateral" means property, real or personal, subject to a security interest.10

(2) “Common interest community” means real property for which a person is obligated to11

pay real property taxes, insurance premiums, maintenance, or improvement of other real property12

described in a declaration or other governing documents, however denominated, by virtue of13

ownership or the holding of a leasehold interest of at least [20] years, including renewal options.14

(3) “Day” means calendar day.15

(4) "Debtor" means a person that owes payment or other performance of an obligation,16

whether absolute or conditional, primary or secondary, secured under a security instrument,17

whether or not the security instrument imposes personal liability on the debtor. The term does18

not include a person whose sole interest in the property is a security interest.19

(5) “Evidence of title” means a title insurance policy, a preliminary title report or binder,20

a title insurance commitment, an attorney’s opinion of title based on examination of the public21

records or an abstract, or any other means of reporting the state of title to real estate that is22

2

customary in the locality.1

(6) “Expenses of foreclosure” means the lesser of the reasonable costs incurred by a2

secured creditor or the maximum amounts permitted by other law of this State in connection with3

a foreclosure for transmission of notices, advertising, evidence of title, inspections and4

examinations of the collateral, management and securing of the collateral, liability insurance,5

filing and recording fees, attorneys’ fees and litigation expenses incurred pursuant to Section 2076

and 601 to the extent provided in the security instrument or authorized by law, appraisal fees, the7

fee of the person conducting the sale in the case of a foreclosure by auction, fees of court-8

appointed receivers, and other expenses reasonably necessary to the foreclosure.9

(7) “Foreclosing creditor” means a secured creditor who is engaged in a foreclosure under10

this [Act].11

[This is a new definition.]12

(8) “Guarantor” means a person liable for the debt of another, and includes a surety and13

an accommodation party.14

(9) “Interest holder” means a person who owns a legally-recognized interest in real or15

personal property that is subordinate in priority to a security interest foreclosed under this [Act].16

[This is a new definition. Note that nonpossessory interests, such as easement, covenants, etc.17are included.]18

(10) “Original notice of foreclosure” means the first notice of foreclosure sent pursuant to19

Section 204 instituting a foreclosure under this [Act].20

(11) "Person" means an individual, corporation, business trust, estate, trust, partnership,21

limited liability company, association, joint venture, government; governmental subdivision,22

agency, or instrumentality; public corporation, or any other legal or commercial entity.23

(12) “Purchase-money obligation” means an obligation incurred in order to pay part or all24

3

of the purchase price of residential real property collateral. An obligation is not a “purchase-1

money obligation” if any part of the real property securing it is not residential real property. A2

“purchase-money obligation” includes an obligation:3

(A) incurred to the vendor of the real property;4

(B) owed to a third party lender to pay a loan made to pay part or all of the purchase5

price of the real property;6

(C) incurred to purchase labor and materials for the construction of substantial7

improvements on the real property;8

(D) to pay a loan all of the proceeds of which were used to repay in full an obligation9

of the type described in subsubsections (A) through (C).10

(13) "Real property" means any estate or interest in, over, or under land, including11

minerals, structures, fixtures, and other things that by custom, usage, or law pass with a12

conveyance of land though not described or mentioned in the contract of sale or instrument of13

conveyance. The term includes the interest of a landlord or tenant and, unless under the law of14

the state in which the property is located that interest is personal property, an interest in a15

common interest community.16

(14) "Record," used as a verb, means to take the actions necessary to perfect an interest in17

real property under [the recording act of this State].18

(15) “Record,” used as a noun, means information that is inscribed on a tangible medium19

or that is stored in a electronic or other medium and is retrievable in perceivable form.20

(16) "Residential” means:21

(A) as applied to “interest holder,” an individual who holds a possessory interest,22

other than a leasehold interest with a duration of [one] year or less, in residential real property in23

4

which a security interest exists, and any person that is wholly owned and controlled by such an1

individual or individuals;2

(B) as applied to “debtor,” an individual who is obligated, primarily or secondarily, on3

an obligation secured in whole or in part by residential real property, and any person that is4

wholly owned and controlled by such an individual or individuals.5

[This definition has been revised. In prior drafts, the defined term was “residential debtor.” 6However, since the other definitions now distinguish between “debtor” and “interest holder,” it7is necessary to allow for both of these terms to be modified by “residential.”]8

(17) "Residential real property" means real property that, when a security instrument is9

entered into, is used or is intended by its owner to be used primarily for the personal, family, or10

household purposes of its owner and is improved, or is intended by its owner to be improved, by11

one to [four] dwelling units.12

[The structure of this definition has been changed to provide that the property is identified as13“residential” or not at the time the loan is made.]14

[Vacation homes and other second or third homes are included as “residential real property,15since there is no requirement that the home be the debtor’s principal residence. One comment at16the annual meeting questioned whether this is what we intend. The word “primarily” has been17added. This will eliminate second homes, condos, etc. if they are primarily held for rental and18used only occasionally for the owner’s personal purposes.]19

(18) "Secured creditor" means a creditor that has the right to foreclose a security interest20

in real property under this [Act].21

[The reference to “real property” has been inserted because, to foreclose under th e Act, the22creditor must have a security interest in real property. References to agents, employees, trustees,23etc. have been removed on the ground that it is a truism that what one may do for oneself, one24may do through an agent, and it is unnecessary to so state.]25

(19) "Security instrument" means a mortgage, deed of trust, security deed, contract for26

deed, land sale contract, lease creating a security interest, or other contract or conveyance that27

creates or provides for an interest in real property to secure payment or performance of an28

5

obligation, whether by acquisition or retention of a lien, a lessor’s interest under a lease, or title1

to the real property. A security instrument may also create a security interest in personal2

property. If a security instrument makes a default under any other agreement a default under the3

security instrument, the security instrument includes the other agreement. The term includes any4

modification or amendment of a security instrument, and includes a lien on real property created5

by a record to secure an obligation owed by an owner of the real property to an association in a6

common interest community or under covenants running with the real property.7

[The phrase “A security instrument may also create a security interest in personal property” has8been added. Thus, a security instrument must cover real property, and may cover personal9property as well.]10

(20) "Security interest" means an interest in real or personal property that secures11

payment or performance of an obligation.12

(21) “Sign” means:13

(A) to execute or adopt a tangible symbol with the present intent to authenticate a14

record; or15

(B) to attach or logically associate an electronic symbol, sound, or process to or with a16

record with the present intent to authenticate a record.17

[Note that definition was moved from Section 106 (Notice) at the request of the Style Committee.18The word “sign” does not appear in the Act except in Section 106. Shouldn’t the definition of19“sign” be moved back to 106?]20

(22) “State” means a State of the United States, the District of Columbia, Puerto Rico, the21

United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of22

the United States.23

(23) “Time of foreclosure” means the time that title to real property collateral passes to24

the person acquiring it by virtue of foreclosure under this [Act].25

6

Comment1

Introduction to definitions. American law recognizes that many different interests can be2created in real property, and that many different sorts of documents can be employed to3encumber those interests as security for debts and other obligations. This Act makes nonjudicial4foreclosure available to virtually all consensually secured parties, no matter what interest in land5has been made the collateral for the obligation and no matter what the nature of the instrument6creating the security interest.7

Such conventional terms as “mortgage” and “mortgagor” are not used in this Act, since they8could easily be construed as having a limiting effect on the Act’s coverage of security interests. 9Instead, this Act employs a set of terms that have no common law or statutory roots tying them to10a particular form. In place of terms such as “mortgage,” “contract for deed,” “trust deed,” etc.,11this Act substitutes the general term “security instrument” (see paragraph 17). In place of12“mortgagor” or “installment contract purchaser” this Act substitutes “debtor” (defined in13paragraph 4). In place of “mortgagee,” or “vendor,” this Act substitutes “secured creditor” (see14paragraph 16). Instead of enumerating the various types of real property interests, such as “fee15estate,” “leasehold,” and the like, that can be used as security, this Act substitutes “collateral” as16defined in paragraph (1). The interest in the collateral that is conveyed to or retained by the17creditor is defined as a “security interest” (paragraph 18) and not as a “lien” or as “title.” Hence,18for the purpose of foreclosures under this Act it is unimportant whether a state follows the “lien19theory” or “title theory” of mortgage law.20

1. “Collateral” includes all of the interests in land and all of the items of personal property21that are subject to a security interest. The interests in land are subsumed under the term defined22in paragraph (12) as “real property.” This Act cannot be used to foreclose on a security interest23in personal property alone, but can be used to foreclose on personal property in combination with24real property.25

2. “Common Interest Community.” This definition is taken from the Uniform Common26Interest Ownership Act. It encompasses condominiums, cooperatives, and planned communities27that include common areas supported by the payments of individual owners, but does not include28cooperatives if they are treated as personal property under state law.29

3. “Day.” Days must be counted to determine the expiration of various time periods30prescribed by this Act. All days including Saturdays, Sundays, and holidays are counted. 31However, under Section 106(o), a required act that would fall on a Saturday, Sunday, or holiday32may properly be performed on the next weekday.33

4. “Debtor.” In most cases the person who is personally obligated to pay the secured debt (if34anyone is so obligated) and the owner of the real property securing the debt will be the same35person at the inception of the transaction. However, the owner may later transfer the real36property “subject to” the security interest while remaining liable on the secured obligation. In that37case the definition of “debtor” includes only the transferor, while the transferee is an “interest38holder,” as defined in subsection 9. “Debtor encompasses guarantors, sureties, accommodation39

7

makers, assuming grantees, and other persons who are absolutely or conditionally liable on the1secured debt. Hence, the term “debtor” often describes more than one person in a transaction. A2person who has been released from personal liability on the secured obligation is no longer a3“debtor.”4

5. “Evidence of title” may be denominated in a variety of ways, depending on local custom or5practice. It might be termed, for example, a “foreclosure report,” a “trustee’s sale guaranty,” or6the like. Any form of title evidence customarily employed in foreclosures in the locality is7acceptable.8

6. “Expenses of foreclosure” includes the direct costs related to foreclosure, but does not9include items not directly related to foreclosure, such as payment of property taxes, insurance10premiums, or repairs. Under other applicable law a secured creditor may have the right to11expend money on the latter items and add the expenditure to the balance of the obligation12secured by the security instrument. See Restatement (Third) of Property: Mortgages § 2.213(1997). However, these items are not “expenses of foreclosure.” All expenses of foreclosure are14limited to reasonable amounts, However, the secured party is not required to seek competitive15bids for foreclosure services, or to limit foreclosure expenses to the lowest possible amounts. 16Attorney fees are included as expenses of foreclosure only if they are authorized by the security17instrument or by other applicable law.18

8. “Guarantor” is employed in this Act as a surrogate for all persons who promise to pay the19debt of another.20

9. “Interest holder” is a person with an interest in property that is the subject of a foreclosure21under this Act, provided that the interest is subordinate to the security interest being foreclosed. 22Interest holders are often “debtors” as well, but are not necessarily so. For example, if a debtor23borrows on the security of real estate, and subsequently sells the real estate to a non-assuming24grantee, the grantee is an “interest holder” but not a “debtor.” Holders of other liens on the25property are also “interest holders” but are ordinarily not “debtors.” Other examples of interest26holders include tenants under subordinate leases, the holders of subordinate easements and27covenant rights, and the owner or owners of the fee simple estate on which the security interest28was imposed.29

10. “Original notice of foreclosure” is the notice given at the inception of a foreclosure under30this Act. If that foreclosure cannot be completed, and the secured creditor then pursues another31foreclosure by the same method or a different method under this Act, the notice given in32pursuance of that method is not an “original notice of foreclosure.”33

11. “Person” includes both natural persons (individuals) and all forms of legally-recognized34organizations.35

12. “Purchase-money obligation” is a significant definition for purposes of the protection36against deficiency liability provided to certain residential debtors by Section 605. It includes37both vendor financing and third-party loans, as well as construction loans and refinancings of38purchase-money loans. However, an obligation is not “purchase-money” unless all of the real39

8

property securing it is residential real property.1

13. “Real property.” This term refers to the legal relationship or “interest” a person has2against the world with respect to an object, the physical land. It includes common law estates,3both freehold and nonfreehold, as well as rents, servitudes and other interests that are not estates4because they do not carry with them the right of possession of the land. Leaseholds are regarded5as real property for the purposes of this Act, even though for other purposes of state law (e.g.,6decedents’ estates) they may be regarded as personal property. Interests of cooperative apartment7owners are not considered real property under this definition if they are regarded as personal8property by other state law.9

Even though rents are regarded under this Act as real property, the procedures of this Act10cannot be employed by a creditor to reach or obtain rents prior to the time of foreclosure; see11Section 103(b)(3).12

14. To “record” incorporates the requirements of the state’s existing recording act.13

15. A “record” is defined as in the Uniform Electronic Transactions Act.14

16. “Residential” may modify either “interest holder” or “debtor.” Both “residential interest15holders” and “residential debtors” are regarded as needing protections from the acts of creditors16that other borrowers do not need. The term “residential” applies even if the obligation is secured17by other, nonresidential property in addition to “residential real property” (definition 17). If one18or more “residential debtors” or “residential interest holders” own or control all of another entity,19such as a trust or corporation, it is regarded as “residential” as well.20

A vacation home or other “second home” qualifies as residential real property, since there is no21requirement that a dwelling unit on the premises be the primary residence of the owner. "Owner"22should be regarded broadly. Thus, if a house is owned by a trust and is occupied as a residence23by a principal beneficiary of the trust, the house is considered to be in use for the "personal,24family, or household purposes of its owner." Similarly, if a house is owned by a partnership,25limited liability corporation, or other corporation, and the holder of a majority of shares or26ownership interest in the entity resides in the house, it is considered to be in use for the "personal,27family, or household purposes of its owner."28

17. “Residential real property” is an essential term in defining “residential interest holder”29and “residential debtor” (definition 16). There are two elements in the definition, one relating to30the use of the property and the other to the improvements on it. “Residential real property” must31be used or intended to be used primarily for personal, family, or household purposes of its owner. 32This definition is similar to that of the Uniform Consumer Credit Code, the Federal Trade33Commission’s Holder in Due Course Rule and various other consumer protection statutes. Some34commercial or other nonresidential use is permitted within this definition, so long as the35residential use is primary. The property may not contain more than four dwelling units, thus36excluding larger apartment buildings. (Enacting states may wish to change the number of37dwelling units in included property to comply with local custom.) 38

9

In addition, to be “residential real property,” the real property must either be improved with1one to four dwelling units at the time the security instrument is entered into, or the owner must2intend at that time to so improve it in the future.3

18. “Secured creditor” includes a seller of real property who retains a lien or title to the real4property sold for the purpose of securing the price, as well as a person, such as a mortgage5lender, whose claim arises initially from a cash loan. It further includes anyone to whom the6right to foreclose the secured interest is assigned or transferred.7

“Secured creditor” is defined in terms of the right to foreclose the security interest. 8Ordinarily the security interest will automatically follow the obligation, unless the two rights are9intentionally separated. See Restatement (Third) of Property: Mortgages § 5.4 (1997). Hence, a10transfer of a promissory note will normally transfer the right to foreclose the corresponding11security interest as well. However, an intentional separation may occur. Fannie Mae routinely12holds the promissory notes representing the loans it acquires, but has the corresponding13mortgages held in the names of its servicers for convenience in foreclosing. Since Fannie Mae14has the power to direct its servicers to foreclose, it is a “secured creditor” under this definition.15

19. “Security instrument.” This definition recognizes that the title given to a document by its16parties does not necessarily indicate whether it is a security instrument. The test is whether it17creates a security interest. See comment to “security interest” below. The caption or title and the18precise form of the document are irrelevant. It does not matter whether the document is in the19form of a contract or a conveyance of an interest in land, or whether the security interest is20created by granting or by retaining it. If the security instrument provides, as is ordinarily the21case, that a default on another obligation, such as a promissory note, is a default under the22security instrument, then the term “security instrument” includes the terms of the obligation. 23Hence, whether a particular term of the parties’ agreement (such as an acceleration clause or a24due-on-sale clause) is stated in the note or in the mortgage may be immaterial for purposes of this25Act. All modifications and amendments to the original documents are also part of the security26instrument. Thus, “workout” or loan modification agreements are included. A lien created to27assist in the enforcement of owners’ obligations in common interest communities or under28covenants running with land in a residential subdivision is a security instrument under this Act29and can be foreclosed under its provisions.30

On the other hand, not all instruments that create or transfer interests in real property do so31for the purpose of security. For example, most deeds, space leases, and ground leases are given32for the purpose of granting the possession and economic benefits of the conveyed interest to the33recipient, not for the purpose of securing performance of an obligation of the grantor. If this is34the case, these transactions are not security instruments and this Act does not affect them. See35Section 107.36

20. “Security interest.” As indicated in the preceding comment, security interests can arise37from documents labeled in a variety of ways. Mortgages, leases, deeds, and contracts may all38create security interests. A security interest arises in any case in which a person receives or39retains an interest in property for the purpose of securing an obligation owed to that person. 40Security interests such as judgment liens and mechanics liens may arise by virtue of statute or41

10

operation of law, but except for a lien of an owners’ association on property in a common interest1community, such security interests may not be foreclosed under this Act.2

21. “Sign” is defined as in the Uniform Electronic Transactions Act, and includes both3writing on tangible media and electronic signatures.4

22. “Time of foreclosure” occurs when the foreclosure process is completed. Section 1085states the event that constitutes the “time of foreclosure” for each method of foreclosure.6

SECTION 103. APPLICATION.7

(a) Except as otherwise provided in subsection (b), this [Act] applies to, and authorizes the8

nonjudicial foreclosure of, every form of security interest in real property located in this State,9

whether entered into [before,] on or after the effective date of this [Act], if the original notice of10

foreclosure is given after the effective date of this [Act] and if the debtor has agreed in substance11

in the security instrument that:12

(1) the security interest may be foreclosed pursuant to this [Act]; or13

(2) the security interest may be foreclosed by nonjudicial process.14

(b) This [Act] may not be used to foreclose or enforce:15

(1) a lien created by statute or operation of law, except a lien of an owners’ association on16

property in a common interest community;17

(2) a security interest in property in a common interest community if under the law of this18

State that interest is personal property; or19

(3) a security interest in rents or proceeds of real property.20

(c) This [Act] does not preclude or govern foreclosure or other enforcement of security21

interests in real property by judicial or other action permitted by other law of this State. A22

secured creditor may not take action in pursuance of foreclosure under this [Act] if a judicial23

proceeding is pending in this State to foreclose the security interest or to enforce the secured24

11

obligation against a person primarily liable for the obligation. Foreclosure under this [Act] may1

proceed even if a judicial proceeding is pending or a judicial order has been obtained for2

appointment or supervision of a receiver of the collateral, possession of the collateral,3

enforcement of an assignment of rents or other proceeds of the collateral, or collection or4

sequestration of rents or other proceeds of the collateral or to enforce the secured obligation5

against a guarantor.6

(d) If a security instrument covers both real property and personal property, the secured7

creditor may proceed under this [Act] as to both the real property and personal property to the8

extent permitted by [Article 9 of the Uniform Commercial Code].9

[The references to “in this State” have been added in (a) and in (b)(2).]10

Legislative Note: The bracketed word “before” in subsection (a) should be included only if the11Act is replacing a preexisting nonjudicial foreclosure statute in the enacting jurisdiction. 12Otherwise, the word should be omitted, making the Act applicable only to security instruments13entered into or amended after the Act’s effective date.14

Legislative Note: In some jurisdictions special statutory provisions govern the termination of15installment land contracts (contracts for deed). A jurisdiction adopting this Act may wish to16consider whether foreclosure of such contracts should be excluded from its coverage, or17alternatively whether the statute providing for termination of installment contracts should be18repealed.19

Comment20

This section extends the reach of this Act to all types of consensual security interests in real21property. The caption of the document is irrelevant, so long as it creates a security interest in real22property and contains a reference to nonjudicial foreclosure as required by subsection (a). In23theory even an absolute deed may be foreclosed under this Act if it was given to create a security24interest in land, as determined by applicable law, and contains the necessary reference to25nonjudicial foreclosure. This Act does not specify the circumstances or methods by which a26security interest may be created; those matters are left to other law.27

The foreclosure provisions of this Act are available only if they are agreed to by the debtor. 28That agreement will ordinarily be part of the security instrument itself, but an amendment to the29security instrument or some other subsequent agreement will also be sufficient. The agreement30may either be by reference to the Act itself (e.g., “This mortgage may be foreclosed under the31[State] Nonjudicial Foreclosure Act”) or by reference to the concept of the Act (e.g., “This32

12

mortgage may be foreclosed by a nonjudicial procedure exercised by the mortgagee” or “This1mortgage may be foreclosed by exercise of a power of sale by the mortgagee”). The agreement2need not contain a precise reference to this Act, but need only refer to its fundamental concept,3nonjudicial foreclosure.4

Subsection (b) is intended to remove from the Act’s coverage security interests that are5nonconsensual. For example, the Act does not apply to construction liens, judgment liens, tax6liens, landlords’ liens, vendors’ liens, or vendees’ liens, unless the lien in question arises by7virtue of an express agreement for a lien between the parties.8

In general, liens to assist in enforcement of covenants against owners in common interest9communities (see § 102(2)) may be enforced under this Act. If such liens are regarded as being10created by operation of law (for example, under a condominium statute), they comprise an11exception to the general principle that the Act applies only to consensual security interests. 12Subsection (b)(2) excludes the foreclosure of association liens on cooperative units if such units13are considered personal property, as is the case in some jurisdictions.14

Security interests in rents or other proceeds generated by real property are outside the scope15of this Act. Secured creditors may employ a variety of methods for enforcement of those16interests; this Act does not add to or detract from those methods.17

Subsection (c) preserves the existing authority of the courts to foreclose mortgages and other18real property security interests. Nonjudicial foreclosure under this Act is simply an option19available to secured creditors, to which they may resort if they wish. In some states other20processes, such as strict foreclosure of mortgages, are authorized by law and may continue to be21used after adoption of this Act.22

The final sentence of subsection (c) is intended to prevent secured creditors from harassing23debtors with a foreclosure by nonjudicial process when a judicial foreclosure or an action on the24debt is pending. However, judicial proceedings for appointment or supervision of a receiver, for25enforcement of an assignment of rents, or for collection of rents and proceeds are not inconsistent26with foreclosure under this Act, and may be pursued simultaneously with foreclosure against the27real property under this Act. The same is true of actions against guarantors. Even a foreclosure28against other property provided by a guarantor as security for the guaranty may proceed despite29the pendency of a foreclosure under this Act against the principal security for the debt.30

The Act does not impose a “one-action” or “security first” rule, prohibiting commencement31of an action on the debt prior to foreclosure if the debt is secured by real property, as is found in a32few states. But it does prohibit simultaneous pursuit of a foreclosure under the Act and an33independent action on the debt, except as noted above. In addition, if a foreclosure under this34Act is completed against a residential debtor, Section 602 may exempt that person from any35further liability for a deficiency.36

Mortgages and other security instruments that chiefly affect real property often contain37terms encumbering some items of personal property as well. It is permissible for lenders to38employ this Act to foreclose on the real property, and to use other procedures consistent with39

13

Article 9 of the Uniform Commercial Code to realize on the security of the personal property. 1However, a lender may, at its option, sweep the personal property into a real property nonjudicial2foreclosure under this Act. Under subsection (d) this is permissible so long as the requirements3of Article 9 for disposition of collateral are satisfied.4

SECTION 104. VARIATION BY AGREEMENT.5

(a) Except as otherwise provided in subsections (b) through (d), the parties to a security6

instrument may not by agreement vary the effect of a provision of this [Act].7

(b) The time within which a person must respond to a notice sent by a secured creditor may8

be extended by agreement.9

(c) The parties to a security instrument may vary the effect of a provision that by its terms10

permits the parties to do so.11

(d) The parties by agreement may determine the standards by which performance of12

obligations under this [Act] is to be measured if those standards are not manifestly unreasonable.13

(e) If no debtor under a security instrument is a residential debtor, an agreement by a14

guarantor waiving the right to receive notices under this [Act] with respect to the foreclosure of15

the property of a debtor who is not a guarantor is enforceable unless a waiver is unenforceable16

under other applicable law.17

Comment18

In general, the parties to a real property security instrument have freedom of contract with19respect to their rights and remedies. However, for many centuries judicial policy has provided20certain protections not only for the defaulting debtor but also for subordinate creditors. Hence,21the rights and duties associated with foreclosure under this Act may not be modified by22agreement of the parties unless the Act specifically so provides. In addition, the parties are23permitted to lengthen by agreement the time allowed to respond to a notice sent by a secured24creditor, to establish reasonable amounts of foreclosure expenses, and to establish reasonable25standards of performance for obligations under this Act.26

Lenders frequently demand that guarantors waive the right to receive notices related to27foreclosures. Such a waiver is recognized by this Act in nonresidential transactions, but only28with respect to the foreclosure of the property of the principal debtor. However, to the extent that29

14

other law, such as Article 9 of the Uniform Commercial Code, restricts the enforceability of such1waivers, those restrictions govern in a foreclosure under this Act notwithstanding the waiver. 2See UCC 9-611(c)(2) and UCC 9-602(7) (2000 revision). A waiver is not recognized in a3foreclosure of a security interest in the guarantor’s own property given to secure the guaranty. 4

SECTION 105. SUPPLEMENTAL PRINCIPLES OF LAW AND EQUITY5

APPLICABLE. Unless displaced by a particular provision of this [Act], the principles of law6

and equity affecting security interests in real property supplement this [Act].7

Comment8

An act governing foreclosure cannot anticipate all possible forms of conduct that would cause9courts to intervene in the normal foreclosure process. Historically foreclosure has been subject to10equitable principles, and this Act does not change that fact. Hence, this section provides that the11fundamental principles of the common law, worked out over centuries, continue to apply to12foreclosures. These principles include the law relating to acceleration, bankruptcy, capacity to13contract, coercion, duress, estoppel, fraud, marshaling of assets, misrepresentation, mistake,14principal and agent, redemption, subrogation, unjust enrichment, and other validating or15invalidating cause.16

For example, a court might “deaccelerate” an installment debt that had been accelerated17under inequitable conditions (see, e.g., Federal Home Loan Mortg. Corp. v. Taylor, 318 So.2d18203 (Fla.App. 1975); might enjoin or stay a foreclosure because the granting of the security19interest was tainted with fraud, duress, or lack of capacity (see, e.g., National Management Corp.20v. Adolfi, 277 A.D.2d 553, 715 N.Y.S.2d 526 (2000); or might order that multiple parcels be21foreclosed in a particular order to avoid unnecessary harm to holders of subordinate interests22under the doctrine of marshaling (see, e.g., Indiana Lawrence Bank v. PSB Credit Services, Inc.,23706 N.E.2d 570 (Ind.App.1999).24

The listing of legal and equitable principles in this comment is not exhaustive, but is merely25illustrative of the principles that supplement this Act.26

SECTION 106. NOTICE AND KNOWLEDGE.27

[Note to drafting committee: This section has been extensively revised by the reporter and the28Committee on Style. Please review it with special care.]29

(a) In this Section:30

(1) “Address” means a physical or an electronic address, or both, as the context requires.31

15

(2) “Address for notice” means:1

(A) with respect to a notice given by a secured creditor:2

(i) for a recipient that has given to the secured creditor a security instrument or3

other document in connection with a security instrument, the address, if any, specified in the4

security instrument or document;5

(ii) for a recipient not described in subsubparagraph (i) that is identifiable from6

examination of the public records [in the office of the county recorder], or, if personal property is7

being foreclosed together with real property, the financing statement filings in the office of [the8

Secretary of State], the address, if any, specified in the recorded or filed document;9

(iii) for a recipient not described in subsubparagraph (i) or (ii) that the secured10

creditor knows is a tenant, subtenant, or leasehold assignee of all or part of the real property11

collateral, the most recent address made known to the security creditor by that person or, if none,12

the address of the real property collateral, including the designation of any office, apartment, or13

other unit that the secured creditor knows is possessed by the recipient, with the notice directed14

to the recipient’s name, if known, or otherwise “To Tenant occupying property at” the physical15

address or description of the real property collateral;16

(iv) if the sources described in subsubparagraphs (i) through (iii) do not disclose an17

address, the physical address of the real property collateral, if known to the secured creditor; and18

(B) with respect to notices given by persons other than a secured creditor, the address19

given in a document provided by the recipient to the person giving notice.20

(3) “Electronic” means relating to technology having electrical, digital, magnetic,21

wireless, optical, electromagnetic, or similar capabilities.22

(4) “Electronic notice” means an electronic record signed by the person sending the23

16

notice.1

(5) “Electronic record” means a record created, generated, sent, communicated, received,2

or stored by electronic means.3

(6) “Electronic signature” means an electronic sound, symbol, or process attached to or4

logically associated with a record and executed or adopted by a person with intent to authenticate5

the record.6

(7) “Recipient” means a person to whom a notice is sent.7

[Should the definition of “sign” be reinserted here and removed from Section 102?]8

(8) “Written notice” means a written record signed by the person giving the notice.9

(b) A person knows a fact if:10

(1) the person has actual knowledge of the fact;11

(2) the person has received a notice or notification of the fact; or12

(3) from all the facts and circumstances known to the person at the time in question the13

person has reason to know the fact exists.14

[Should we add: “A foreclosing creditor is not held to know a fact that the creditor would15reasonably discover only by inspection of the real property collateral unless the creditor has16actually made such an inspection.” This would eliminate any question that tenants under17unrecorded leases are cut off without receiving notice of foreclosure.]18

(c) Notice is sent or given, or a recipient is notified, subject to the limitations of subsection19

(d):20

(1) by hand delivering a written notice to the recipient or to an individual found at the21

recipient’s address for notice who is authorized to receive service of civil process under the22

[Rules of Civil Procedure]; or23

(2) by depositing written notice, properly addressed to the recipient’s address for notice,24

with cost of delivery paid,25

17

(A) with the United States Postal Service, registered or certified mail, return receipt1

requested;2

(B) with the United States Postal Service by regular mail; or3

(C) with a commercially reasonable carrier other than the United States Postal4

Service; or5

(3) subject to subsection (g), by initiating operations that in the ordinary course will cause6

the notice to come into existence at the recipient’s address for notice in the recipient’s7

information processing system in a form capable of being processed by the recipient.8

[Note that the foregoing subsection is slightly different from the UETA formulation, which9speaks of the notice coming into existence in the recipient’s information processing system or an10address within that system. The formulation above requires that the notice be sent to the correct11e-mail address, and not merely the correct system.]12

(d) Use of the methods of notice specified in subsection (c) is limited as follows:13

(1) If the recipient is an individual and the security interest covers the recipient’s primary14

residence:15

(A) if the notice is a notice of default pursuant to Section 202 or a notice of16

foreclosure pursuant to Section 203, both of the methods of giving notice specified in subsection17

(c)(2)(B) and subsection (c)(2)(C) must be used;18

(B) if the notice is not a notice of default pursuant to Section 202 or a notice of19

foreclosure pursuant to Section 203, a method of giving notice specified in subsection (c)(1) or20

(c)(2) must be used;21

(e) If a person giving a notice pursuant to this [Act] and the recipient have agreed to limit the22

methods of transmission of the notice otherwise permitted by subsections (c) and (d), that23

limitation is enforceable to the extent that it is consistent with subsection (d) and is otherwise24

permitted by law.25

18

[Is there any other law that would come into play here? What would it be?]1

(f) A person may not give an electronic notice unless the recipient uses, designates by2

agreement, or otherwise has designated or holds out an information processing system or address3

within that system as a place for the receipt of communications of that kind. An electronic notice4

is not sent if the sender or its information processing system inhibits the ability of the recipient to5

print or store the record.6

(g) If, at the time of giving a required notice, a person knows that the recipient’s address for7

notice is incorrect or that notices cannot be delivered to the recipient at that address, the person8

that sent the notice shall make a reasonable effort to determine a correct address for the recipient9

and send the notice to the address so determined.10

(h) If, after giving a notice, a person acquires knowledge that the address of the recipient to11

which the notice was directed is incorrect or that notices cannot be delivered to the recipient at12

that address, the person that sent the notice shall promptly make a reasonable effort to determine13

a correct address for the recipient and send another copy of the notice to the address so14

determined, if any. The first notice, if timely sent and properly directed to the recipient’s address15

for notice, complies with the time requirements of this [Act].16

(i) A person may use methods of giving notice in addition to the methods required by17

subsections (c) and (d).18

(j) A notice is sufficient even if it includes information not required by law or contains minor19

errors that are not seriously misleading.20

(k) Receipt of a notice within the time in which it would have been received if properly sent21

has the effect of a proper giving of notice.22

(l) If the recipient is an individual, a notice is received when it comes to the recipient’s23

19

attention or is delivered to and available at the recipient’s address for notice. If the recipient is1

not an individual, a notice is received when it is brought to the attention of the individual2

conducting the transaction, or in any event when it would have been brought to that individual’s3

attention if the recipient had exercised due diligence. An organization exercises due diligence if4

it maintains reasonable routines for communicating significant information with the person5

conducting the transaction and there is reasonable compliance with the routines. Due diligence6

does not require an individual acting for the organization to communicate information unless7

such communication is part of the individual’s regular duties or unless the individual has reason8

to know of the transaction and that the transaction would be materially affected by the9

information.10

[Is this subsection sufficiently clear in the context of a foreclosure?]11

(m) Subject to subsection (n), a person that has sent a notice may revoke it by a subsequent12

notice unless the recipient has materially changed its position in reliance on the notice before13

receiving the revocation.14

(n) A notice of foreclosure may be revoked by the secured creditor at any time before the time15

of foreclosure. Revocation may be accomplished only by recording a sworn affidavit in [the16

Office of the County Recorder] of each [county] in which the notice of foreclosure was recorded,17

stating that the secured creditor has revoked the notice of foreclosure. If a notice of foreclosure18

is revoked, all proceedings taken under that notice are void.19

[(o) If this [Act] or a notice sent pursuant to this [Act] requires a performance on or by a20

certain day, and that day falls on a Saturday, Sunday, or legal holiday, the performance is21

sufficient if done on the next day that is not a Saturday, Sunday, or legal holiday.]22

Legislative note: Enacting jurisdictions should review their rules of civil procedure to ensure23that they provide appropriate information concerning personal service as provided by subsection24

20

(c)(1). Subsection (o) should be enacted only if the jurisdiction’s statutes do not contain a1similar provision of general applicability.2

Comment3

The terms “gives,” “notifies,” or “sends” are the words used when the essential fact is the4proper dispatch of the notice, not its receipt. When the essential fact is the other recipient’s5receipt of the notice, that is stated. Subsection (c) provides that proper dispatch and not its6receipt satisfies the obligation “to notify” or “to give notice.” For example, if notice is given by7mailing with the U.S. Postal Service, the time of deposit of the notice with the postal system is8the time notice is “given” or “sent.” Subsection (l) states when a notice is received.9

In general, the notices required by the Act may be given by personal service, registered or10certified mail, regular mail, other commercial carriers, or electronically. However, there are11restrictions on the types of notices that may be sent to individuals respecting the foreclosure of12their primary residences. When a notice of default or foreclosure required by Article 2 is given13by a secured creditor to an individual in connection with the foreclosure of that individual’s14primary residence, the notice is regarded as so important, and the consequences of failure to15receive it so great, that only a paper notice is permitted, and dual copies of the notice must be16sent, one by commercial carrier or by registered or certified mail, and one by regular mail.17

Electronic notices are not permitted to individuals whose primary residences are being18foreclosed. However, electronic notices may be sent to individuals with respect to property other19than their primary residences, and to entities other than individuals. In all cases, an electronic20notice may be used only if the recipient uses, has agreed to, or holds out a suitable system to21receive the notice. If a recipient is a “consumer,” an electronic notice may not be sent unless the22recipient has consented to receipt of electronic records, and that consent remains in effect, as23provided in the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C.24section 7001(c). The definition of “consumer” in that statute encompasses some cases, such as25vacation homes, in which the recipient is a person other than an individual whose primary26residence is being foreclosed.27

If a person sending a notice knows or later discovers that an address is incorrect, the sender28has a duty to make a reasonable effort to determine a correct address. An address might be29incorrect because no such address exists, because as a result of error the recipient’s address has30been mis-transcribed, or for other reasons. The reasonable effort to determine a correct address 31would ordinarily include use of any forwarding address provided by the U.S. Postal Service, the32use of at least one generally-used telephone directory for the area in which the recipient is33believed to be located, and at least one nationwide internet search database. As technology34develops, other methods of address search may also become reasonable and hence obligatory on35persons sending notices.36

If a correction notice is sent because the sender discovers that the address used for the37original notice was incorrect, any applicable time periods run from the date of the original38sending.39

21

The provisions of subsection (l) concerning receipt of notice are derived from Uniform1Commercial Code section 1-201(27).2

The provisions of subsection (n) concerning revocation of notices are derived from Uniform3Commercial Code section 2-209(5).4

SECTION 107. TRANSACTION CREATING SECURITY INTEREST. A transaction5

that is intended to create a security interest does so irrespective of the caption of the documents. 6

A seller's retention of legal title to real property after the buyer enters into possession under a7

contract of sale creates a security interest only if the retained title is intended as security and the8

contract permits the seller to retain title for more than one year after the buyer enters into9

possession.10

Comment11

The creation of a security interest depends on the parties’ intent. The intent in question,12however, is that relating to real estate law. For example, a “synthetic lease” transaction that is13intended to be regarded as a security interest for legal purposes but a lease for accounting14purposes is within the scope of this Act.15

The common situation in which a buyer takes possession of real property a short time before16the closing under a contract of purchase is excluded from the coverage of this Act. However, if a17seller may retain the title for longer than one year after the buyer enters into possession, the other18circumstances of the case must be examined in order to determine whether a security interest was19created. In many such cases, it will be clear that a “contract for deed” or “installment sale”20transaction was intended and that title was retained for purposes of security. If so, foreclosure21under this Act is available to the seller if the requirements of subsection 103(a) are satisfied.22

With respect to whether a lease creates a security interest, guidance may be obtained from23UCC § 1-203 (ALI Council Draft 2001).24

SECTION 108. TIME OF FORECLOSURE. The time of foreclosure is:25

(a) the time the affidavit required by Section 312 is recorded in the case of a foreclosure by26

auction;27

(b) the time the affidavit required by Section 405 is recorded in the case of a foreclosure by28

22

negotiated sale; or1

(c) the time the affidavit required by Section 505 is recorded in the case of a foreclosure by2

appraisal.3

23

[ARTICLE] 21

PROCEDURES BEFORE FORECLOSURE2

SECTION 201. RIGHT TO FORECLOSE.3

(a) A secured creditor has a right to foreclose under this [Act] if:4

(1) all conditions that, by law and the terms of the security instrument, are prerequisites to5

foreclosure have been satisfied;6

(2) all notices to the debtor required by the security instrument and by this [Act] as7

prerequisites to foreclosure have been given; and8

(3) all periods for cure available to the debtor by the terms of the security instrument and9

law as prerequisites to foreclosure have elapsed and no cure has been made.10

(b) A foreclosing creditor may pursue foreclosure exclusively by auction, by negotiated sale,11

or by appraisal, or may simultaneously pursue, together with foreclosure by auction, either12

foreclosure by negotiated sale or by appraisal, but not both. If the creditor pursues two methods13

of foreclosure simultaneously, the notice of foreclosure must so state.14

[Note the drafting committee: Is there any reason not to allow a creditor to pursue all three15methods of foreclosure simultaneously? Allowing this would actually simplify this section. Of16course, the creditor would have to notify the debtor of which methods were being used in the17notice of foreclosure.]18

Comment19

The fundamental role of this Act is to permit secured creditors, after giving appropriate20notice, to foreclose without the necessity of judicial process. This section defines when21foreclosure is available. If a secured creditor has a right to foreclose, the secured creditor may22give notice of foreclosure (Sections 203 and 204), and foreclose against the collateral by auction23(Article 3), negotiated sale (Article 4), or appraisal (Article 4). Notice of the secured creditor’s24elected method or methods of foreclosure must be given by the secured creditor as provided in25Section 204(b)(6).26

SECTION 202. NOTICE OF DEFAULT AND RIGHT TO CURE.27

(a) Subject to subsections (b) [and (f)(1) if it is retained], a notice of default must be given to28

24

each debtor and each interest holder whose interest gives right of possession of the real property1

collateral, a and the cure period provided by this section must expire without cure being made,2

before notice of foreclosure is given.3

[Note that only “interest holders” with the right of possession of the real estate are entitled to4

notice of default.]5

(b) Except as provided in the security instrument, notice of default need not be given and no6

cure period is applicable if the default cannot be cured.7

(c) A notice of default must contain:8

(1) the facts establishing that a default has occurred;9

(2) the amount to be paid or other performance required to cure the default, including the10

daily rate of accrual for amounts accruing over time, and the time within which cure must be11

made;12

(3) the name, address, and telephone number of an individual who is or represents the13

secured creditor, and who can be contacted for further information concerning the default; and14

(4) a statement that foreclosure may be initiated if the default is not cured in a timely15

manner.16

(d) Within 30 days after notice of default is given to the last person entitled to such notice,17

any person may:18

(1) cure the default if the default is curable by the payment of money, or 19

(2) commence to cure the default if the default cannot be cured by the payment of money,20

diligently proceed to cure the default, and complete the cure of the default within [90] days after 21

the notice of default was given.22

[Is it necessary to include a reference in the text to the payment of the creditor’s expenses, late23fees, default interest, attorney’s fees, etc. in describing the cure? This is mentioned in the24

25

comment.]1

(e) If no person is proceeding diligently to cure a default that cannot be cured by the payment2

of money after 30 days from the date the notice of default was sent to the last person entitled to3

such notice, the secured creditor may immediately terminate the period allowed for cure by4

accelerating payment of the principal amount owing on the secured obligation or giving an5

original notice of foreclosure.6

(f) If none of the real property to be foreclosed is residential real property:7

(1) if a default cannot be cured by the payment of money and a notice of default was8

given by the secured creditor within one year before the date of the present default on account of9

a default of the same kind, no notice of default is required and no right to cure exists except as10

agreed by the parties; and11

[The drafting committee agreed to discuss removing this provision at its next meeting.]12

(2) the periods specified in subsection (d) to cure a default may be reduced as the parties13

agree in the security instrument, but may not be less than 10 days.14

(g) A notice of default may be given notwithstanding that a notice of default has previously15

been given on account of a different default and is still pending.16

[This provision is new.]17

(g) The right to cure a default provided in this section does not impair or limit any other right18

to notice of default or to cure a default provided to any person by the security instrument. The19

period to cure provided in this section and any period to cure provided in the security instrument20

run concurrently unless the security instrument provides otherwise.21

(h) Unless precluded from doing so by law other than this [Act], a secured creditor shall22

cooperate with any debtor or interest holder that attempts to cure a default by promptly providing23

26

upon request reasonable information concerning the amount or other performance due and1

expenses necessary for cure.2

(i) If a default is cured within a period allowed by this section, or after the expiration of that3

period but before acceleration of the principal amount owing on the secured obligation or the4

giving of an original notice of foreclosure, an acceleration by the secured creditor of the principal5

amount owing on the secured obligation on account of that default is ineffective.6

(j) During a period allowed for cure of a default under this section, a secured creditor may7

enforce any remedy other than foreclosure provided for by the security instrument and8

enforceable under law of this State other than this [Act] if enforcement does not unreasonably9

interfere with the ability of a debtor to cure a default under this section.10

Comment11

In most cases this Act requires two notices prior to foreclosure, the notice of default specified12by this section and the notice of foreclosure itself, specified by Sections 203 and 204. However,13no notice under this section is necessary if the default is incurable. 14

Illustrations of curable defaults include a borrower’s failure to pay money by a specified date,15failure to repair the collateral, failure to comply with local building codes, and failure to carry16casualty insurance if no insurable event has occurred during the period of failure. Illustrations of17non-curable defaults include a borrower’s failure to maintain a specific net worth on a specified18date, failure to carry casualty insurance if an insurable event has occurred during the period of19failure, and transfer of the collateral in violation of an enforceable due-on-sale clause.20

Illustrations of nonmonetary defaults include the commission of waste by the debtor, a21transfer of the property in violation of a covenant in the security instrument, a failure to keep the22real property insured as required by the security instrument, or the like. A lender may convert a23nonmonetary default into a monetary default by paying the money necessary to cure and then24demanding reimbursement from the borrower.25

The notice under this section simply advises the debtor or debtors that a default has occurred,26what must be done to cure it, and that foreclosure may ensue if it is not cured within the allowed27time period. Non-debtor parties, such as subordinate lienholders, are not entitled to receive this28notice, although if they otherwise become aware of the default, they may cure it if they wish.29

27

The notice must advise the debtor of the facts establishing that a default has occurred, and1must state what must be done to cure it. The performance required must be stated on a per diem2basis with respect to items whose amount changes with the passage of time. To be effective3under subsection (d), a cure must include reimbursement to the secured creditor of all legally4recoverable expenses incurred by the secured creditor on account of the default. Examples5might include attorneys’ fees, late fees, and fees for property inspection. See the example notice6at the foot of this comment.7

Upon request, the secured creditor must cooperate by explaining the basis upon which any8such fees are calculated. This Act does not deal with the enforceability of such fees, but leaves9that issue to other law. Since redemption requires payment of the secured obligation in full, the10cure provided by this Section is not a redemption.11

The cure period runs from the date the secured party gives the notice of default. If the default12is monetary, it must actually be cured within 30 days. In the case of a nonmonetary default,13however, acceleration and foreclosure can be avoided if continuing and diligent efforts to cure14are commenced within 30 days, even if a complete cure cannot be accomplished within that time. 15However, if those diligent efforts to cure cease before cure is completed, and in all events after1690 days if the cure is not completed, the secured creditor may then immediately proceed to17accelerate the debt or to give notice of foreclosure without taking any other preliminary action.18

In practical effect, the cure period may last longer than the 30 or 90 days indicated in this19section. For example, suppose a nonmonetary default occurs and the debtor is given notice of the20default under this section. The debtor then commences and continues diligent efforts to cure the21default. At the end of 90 days, if the cure is incomplete the secured creditor is entitled to22accelerate the debt or send an initial notice of foreclosure. However, suppose the creditor does23not do so, and with an additional time period – say, 120 days from the date of the notice – the24debtor completes the cure. This cure is effective and the secured creditor cannot thereafter25accelerate or send a notice of foreclosure on account of that default. Thus the cure period is at26least 30 or 90 days as provided in this section, but may be effectively extended if the secured27creditor takes no action until a longer period passes. If cure is made within the time permitted by28this section, subsection (i) “deaccelerates” any acceleration of the obligation that the secured29creditor has initiated.30

This section generally applies whether any of the debtors are residential debtors or not. 31However, if no debtor is a residential debtor two additional limitations are imposed on the right32to cure. First, the 30-day cure period for may be reduced by the parties’ agreement to as little as3310 days. Second, if the default is non-monetary, the right to cure may be exercised only if no34default of the same kind has occurred within the previous year.35

[Do we need a further explanation of “the same kind?” Alternatively, should we either (1)36change this to all kinds of prior defaults, or (2) drop it entirely?]37

The security instrument may provide debtors with additional protections, such as rights to38notice and grace periods, beyond those provided by this Act. Such protections must be observed39before notice of foreclosure can be given. However, any time period for cure under the security40

28

instrument and the time for cure granted by this section will run concurrently unless the parties1have agreed that they will not do so. For example, if the security instrument provides for a 60-2day grace period for the cure of monetary defaults, and the notice of default is given on3September 1, the default may be cured any time prior to October 31.4

The cure periods provided by this section inhibit acceleration and the instigation of5foreclosure under this Act, but do not necessarily stand in the way of other remedies the secured6creditor may have. Exercise of such other remedies is barred only if they would unreasonably7interfere with the debtor’s ability to cure the default. For example, if the security instrument8gives the creditor a security interest in the rents generated by the real estate collateral, and if that9interest is otherwise enforceable under applicable law on account of the default in question, the10creditor may assert its rights against the rents despite the fact that the cure period has not expired. 11If in doing so the creditor notifies the tenants that they are now to pay their rents directly to the12creditor, this action may result in reduced cash flow to the debtor, but since the creditor must13apply the rent received toward the secured debt, the action does not unreasonably interfere with14the debtor’s ability to cure the default.15

Illustration: Notice of Default16

First Financial Corporation17677 First Avenue18

Ashland, Example 1234419December 1, 200X20

To: Mary and John Jones21455 South Main Street22Ashland, Example 1234523

Dear Ms. and Mr. Jones:24

1. This notice affects real property located at Lot 13, Block B, Ridgefield Addition No. 2, in25the City of Ashland, County of Pembroke, State of Example. The street address of this property26is 455 South Main Street, Ashland, Example 12345.27

2. This property is subject to a first mortgage executed by Mary and John Jones to First28Financial Corp. on 23 June, 1999, and recorded in Book 455, Page 244, Official Records of29Pembroke County, State of Example.30

3. The mortgage and its accompanying promissory note require payments to First Financial31Corp. of $1,455.00 principal and interest on the first day of each calendar month.32

4. Your obligations under this note and mortgage are now in default as follows: (a) The33payments for August 1, September 1, and October 1, 200X have not been made. (b) The premium34on the homeowners insurance policy, due on October 1, 200X, was not paid by you, and was paid35by First Financial Corp. on October 14, 200X in order to keep this insurance in force.36

5. If you do not cure these defaults within 30 days of the date of this notice, by December 31,37

29

200X, First Financial Corp. may initiate foreclosure proceedings against the real estate, which1could result in your loss of ownership of this property.2

6. You can cure these defaults within the time stated by tendering at the office of First3Financial Corp., 677 First Avenue, Ashland, Example 12344 the following sums of money:4

August 1, 200X payment: $1,455.005Late fee for above payment: 72.756September 1, 2000X payment: $1,455.007Late fee for above payment: 72.758October 1, 200X payment: $1,455.009Late fee for above payment: 72.7510Reimbursement of insurance premium paid by11

First Financial 10/15/0X $ 588.0012Interest on insurance premium13

at 7.5% per annum to date of this notice: 5.6614Attorneys’ fees in connection with this notice: $ 200.0015Total due as of 12/01/0X: $5,376.9116

Additional per diem interest after 12/01/0X $ .12/per day17

If First Financial Corp. is required to expend additional money on account of your defaults,18you must also reimburse those expenditures in order to cure your defaults.19

Payment must be made by cash, cashier’s check, certified check, or postal money order.20

7. If you have any questions about the defaults mentioned above or the calculation of the21amounts owed, you may contact Sandra A. Mortgagee, residential loan officer for First Financial22Corp. She can be contacted at 677 First Avenue, Ashland, Example 12344, telephone number23123-654-3210, e-mail address mortgageesa@firstfinancial.com.24

[Signed] First Financial Corporation25Sandra A. Mortgagee, Loan Officer26

SECTION 203. NOTICE OF FORECLOSURE: MANNER OF GIVING.27

(a) If a secured creditor has a right to foreclose under Section 201, the secured creditor may28

commence foreclosure by giving notice of foreclosure. The notice must comply with subsections29

(b) and (c) and section 204, and is a prerequisite to foreclosure.30

(b) A foreclosing creditor shall record a copy of the notice of foreclosure in [the office of the31

county recorder] of each [county] in which the real property collateral is located. A recorded32

30

notice of foreclosure is notice of its existence and contents to any person acquiring an interest in1

the real property collateral after the notice of foreclosure is recorded. In the absence of recording2

of the notice of foreclosure, any purported foreclosure under this [Act] is voidable.3

(c) Except as otherwise provided in subsection (d), a foreclosing creditor shall give a notice4

of foreclosure to the following persons no later than five days after recording the notice of5

foreclosure pursuant to subsection (b) if they can be identified as of the time of recording of the6

notice of foreclosure.7

(1) a person that the foreclosing creditor knows to be a debtor;8

(2) a person specified by the debtor in the security instrument to receive notice on the9

debtor’s behalf;10

(3) a person that is shown by the public records in [the office of the county recorder] of11

the [county] in which any part of the real property collateral is located to be an interest holder in12

the real property collateral;13

(4) if the foreclosing creditor holds and intends to foreclose on a security interest in14

personal property, a person who is entitled to notice with respect to the disposition of the15

personal property collateral under [Article 9 of the Uniform Commercial Code];16

(5) a person who the foreclosing creditor knows is an interest holder in the real property17

collateral; and18

(6) a person that has recorded in the public records in [the office of the county recorder]19

of the[ county] in which any part of the real property collateral is located a request for notice of20

foreclosure satisfying the requirements of Section 205.21

(d) After the time of recording of the notice of foreclosure, if the foreclosing creditor obtains22

actual knowledge that a person holds an interest in the collateral that is subordinate in priority to23

31

the security instrument, the foreclosing creditor must give a notice of foreclosure to that person1

no later than five days after obtaining such knowledge.2

(e) A foreclosing creditor may give a special notice of foreclosure to any person described in3

subsection (c) or (d) to avoid the termination of that person’s interest in the collateral by the4

foreclosure. The special notice shall give the information required by section 204, but state that5

the recipient’s interest in the collateral will not be terminated by the foreclosure.6

[Note that this subsection has been revised. It now places an affirmative duty on the creditor to7tell junior tenants if their leases are being preserved in a foreclosure.]8

(f) A foreclosing creditor, within 10 days before or after recording a notice of foreclosure,9

shall affix a copy of the notice of foreclosure at a conspicuous place on the real property10

collateral.11

(g) An original notice of foreclosure is ineffective if given after the limitation period for12

foreclosure of a security interest in real property by judicial proceeding has expired.13

Comment14

This section is designed to provide a fair opportunity to receive notice of foreclosure for all15persons who may be adversely affected by it. In the case of governmental lenders and others16whose actions fall under the Due Process Clause of the federal constitution, compliance with this17section should ensure that the notice requirements of due process will be met.18

This section does not require foreclosing creditors to resort to factual investigation of the19property in order to determine where notice of foreclosure must be sent. Lenders need consult20only their own records, the usual public land title records, and for personal property collateral,21the office where UCC financing statements are filed. Since notice must be given to persons with22recorded interests under subsection (b)(3), the practical result is that the foreclosing creditor must23perform a title examination down to the date and time that the notice of foreclosure is recorded. 24However, there may be parties, such as grantees of the original borrower and subordinate interest25holders, who have not recorded their conveyances, and the foreclosing creditor may not have26knowledge of their rights. In such situations, they are not entitled to notice of foreclosure, and27their rights will be cut off despite the fact that no notice of foreclosure is given to them. 28

This follows even if such unrecorded parties were in possession of the real property. [Under29the definition of “knows,” (section 106(b)), the foreclosing lender is not regarded as knowing of30the presence of tenants on the premises if it could gain such knowledge only by an inspection and31

32

no inspection has been made.] However, posting of the notice of foreclosure at a conspicuous1place on the real estate is required by subsection (c). Posting is reasonably likely to come to the2attention of persons, such as tenants, subtenants, and leasehold assignees, who have unrecorded3interests, and to give them actual knowledge.4

Recording of the notice of foreclosure is required by subsection (a). Once a notice of5foreclosure is recorded, the foreclosing creditor need no longer be concerned about giving notice6to persons who acquire interests in the collateral after the time of recording but before the7foreclosure sale. The recorded notice is analogous to the doctrine of lis pendens, and provides8automatic notice to such parties. Recording of the notice is an absolute requirement for9foreclosure under this Act, since numerous time periods involved in a foreclosure are measured10from the time of recording. For this reason, a purported foreclosure in the absence of recording11of the notice of foreclosure is voidable unless the collateral has passed into the hands of a good12faith purchaser for value; see Section 208(c).13

No notice of foreclosure is necessary to persons holding interests in the property with priority14superior to the security instrument being foreclosed; such persons are unaffected by the15foreclosure and have no need of notice.16

Notice need not be given to guarantors of the secured obligation who have waived their right17to notice if there are no residential debtors in the transaction and if the waiver is otherwise18enforceable under applicable law. See Section 104(d).19

Under subsection (e) the foreclosing creditor may use a special form of notice of foreclosure20in order to avoid terminating the interest of a person entitled to notice under subsections (c) or21(d) because the creditor believes that it is desirable to preserve that person’s interest. A common22example is a subordinate lease which the creditor believes adds to the property’s value, and hence23which it is undesirable to terminate. If such a special notice is given and the foreclosure is24completed, the foreclosing creditor is permanently barred from foreclosing against the interest of25the person to whom the special notice was given.26

[Should this last statement be placed in the text?]27

The only effect of a foreclosing creditor’s failure to give notice to a person entitled to notice28under subsection (c) is to preserve that person’s interest. The failure does not impair the29foreclosure’s effect on the interests of other persons, and does not impair the foreclosing30creditor’s interest or its priority with respect to the interest of the person who was omitted from31notice. The failure to give notice under this Act is analogous to the effect of omitting a necessary32party to a judicial foreclosure proceeding.33

SECTION 204. NOTICE OF FORECLOSURE: CONTENT.34

(a) The heading of a notice of foreclosure must be conspicuous and must read as follows:35

“NOTICE OF FORECLOSURE. YOU ARE HEREBY NOTIFIED THAT YOU MAY LOSE36

33

YOUR RIGHTS TO CERTAIN PROPERTY. READ THIS NOTICE IMMEDIATELY AND1

CAREFULLY.”2

(b) A notice of foreclosure must contain:3

(1) the date of the notice, the name of the owner of the collateral as identified in the4

security instrument, a legally sufficient description and, at the secured creditor’s option, the street5

address, if any, stated in the security instrument of the real property collateral or portion thereof6

being foreclosed, and a description of any personal property collateral to be included in the7

foreclosure;8

(2) information concerning the recording of the security instrument, including recording9

date and [book and page number] [document number];10

(3) that a default exists under the security instrument, and the facts establishing the11

default;12

(4) a statement that the foreclosing creditor is initiating foreclosure;13

(5) a statement that the foreclosing creditor has accelerated or, by virtue of the notice, is14

accelerating the due date of the principal amount owing on the secured obligation, or a statement15

that the foreclosing creditor elects not to accelerate the due date.16

(6) a statement that the collateral may be redeemed from the security interest by payment17

in full or performance of the secured obligation in full before foreclosure and the amount to be18

paid or other action necessary to redeem, including a per diem amount that will allow calculation19

of the total balance owed as of future dates and any further amount the foreclosing creditor20

anticipates expending to protect the collateral;21

(7) a statement of the method or methods of foreclosure the foreclosing creditor elects to22

use, and the earliest date on which foreclosure will occur if no redemption is made;23

34

(8) a statement that the foreclosure will terminate the rights in the collateral of the person1

receiving the notice of foreclosure;2

(9) if applicable, an explanation of a residential debtor’s right to avoid a deficiency claim3

by compliance with Section 604; 4

(10) if the foreclosure is by negotiated sale or by appraisal, an explanation of the right of5

the debtor and holders of subordinate interests to object to the foreclosure under Section 407 or6

507;7

(11) if applicable, a statement that, within 15 days after the date the notice of foreclosure8

is given, a debtor or an interest holder having a possessory interest in the real property collateral9

may request a meeting with a representative of the foreclosing creditor to object to the10

foreclosure as provided by Section 206; and11

(11) the name, address, and telephone number of an individual who is the foreclosing12

creditor or a representative of the foreclosing creditor, and who can be contacted for further13

information concerning the foreclosure.14

Comment15

The amount that must be paid to redeem ordinarily will be stated as the balance owing as of a16fixed date, plus a per diem amount representing the accruing interest on that balance. If a debtor17seeks further information about the amount needed to redeem (for example, the basis of18attorneys’ fees or other expenses), the creditor must cooperate reasonably in providing that19information.20

Under subsection (b)(1), the foreclosing creditor may foreclose against all of the collateral or21only part of it. The security interest will continue to exist on the part omitted from the22foreclosure until the secured obligation is fully discharged and the expenses of foreclosure are23paid. If a portion of the collateral is not covered by the initial foreclosure, the foreclosing24creditor may institute a subsequent foreclosure under this Act or otherwise foreclose on the25remaining collateral if necessary at a later time. See Section 207 regarding foreclosure on26multiple parcels.27

The notice must state the facts establishing a default in reasonable detail. For example, it is28not sufficient to state “borrower has not made payments when due” or “borrower has failed to29

35

comply with the covenants of the mortgage.” In the case of a default in payment, the notice1should specify the dates and amounts of delinquent payments. In the case of a breach of2mortgage covenants, the relevant covenants should be identified, as in “borrower has failed to3keep casualty insurance in force as required by paragraph 12 of the mortgage.”4

The notice of foreclosure automatically accomplishes an acceleration of the obligation by5virtue of compliance with subsection (b)(4). Even in the exceedingly rare cases in which the6security instrument contains no acceleration clause, an acceleration will still take place by7operation of this Act. This should impose no inconvenience on lenders, since ordinarily no8lender wishes to foreclose without acceleration. However, if the lender wishes, it can expressly9disclaim an acceleration in the notice of foreclosure. Nothing in this Act prevents a lender from10voluntarily “deaccelerating” as part of a workout agreement with a borrower, even after the11notice of foreclosure has been given. Such a deacceleration is possible, if the lender is willing,12up to the time of foreclosure.13

The following is an illustrative notice of foreclosure complying with the requirements of this14section.15

NOTICE OF FORECLOSURE16THIS IS A NOTICE THAT YOU MAY LOSE YOUR RIGHTS 17

TO CERTAIN PROPERTY.18READ IT IMMEDIATELY AND CAREFULLY19

1. This notice is given December 1, 200_, and affects real property located at Lot 13, Block20B, Ridgefield Addition No. 2, in the City of Ashland, County of Pembroke, State of Example. 21The street address of this property is 455 South Main Street, Ashland, Example 12345.22

2. This property is subject to a mortgage executed by Mary and John Jones to First Financial23Corp. on 23 June, 200_, and recorded in Book 456, Page 244, Official Records of Pembroke24County, State of Example.25

3. The mortgage and its accompanying promissory note require payments to First Financial26Corp. of $1,455.00 principal and interest on the first day of each calendar month. The payments27for August 1, September 1, and October 1, 200_ have not been made. First Financial Corp. is28now commencing foreclosure of this mortgage.29

4. First Financial Corp. is hereby accelerating the unpaid balance on the promissory note. 30This means that the entire balance of $137,455.34 is now due and payable. Interest will continue31to accrue on this balance at the rate of 7.5% per annum, and will be added to the principal due32until paid in full.33

5. The debtor and the holders of property interests subordinate to the mortgage of First34Financial Corp. may prevent a foreclosure of the real property by paying the full balance of35$137,455.34 on December 1, 200_, plus interest at the rate of $30.13 for each day thereafter to36the date of payment. Payment must be made before the time of foreclosure in order to prevent37foreclosure from occurring.38

36

6. If payment is not made in this amount, First Financial Corp. elects to foreclose by auction1or alternatively by appraisal. The earliest date on which foreclosure can occur is March 3, 200_.2

7. If the foreclosure sale or foreclosure by appraisal proceeds, it will terminate the rights of3the owner of the property, and may terminate the interests of other persons to whom this notice is4directed.5

8. If the sum received by First Financial Corp. from the foreclosure (or the sum credited6against the mortgage indebtedness in the case of a foreclosure by appraisal) is less than the7unpaid balance on the mortgage indebtedness and expenses of foreclosure, the borrowers, Mary8and John Jones, may be held personally liable for any remaining unpaid sum. However, they can9avoid this liability by compliance with [Section 602(c) of the Uniform Nonjudicial Foreclosure10Act] by acting in good faith, which means that they must 11

(1) peaceably vacate the real estate collateral and relinquish any personal property12collateral within 10 days after notice is given to them that foreclosure has been completed; 13

(2) not have committed significant affirmative waste upon the collateral and left such14waste uncured at the time of foreclosure;15

(3) not have significantly contaminated the collateral with hazardous materials and left16such contamination uncured at the time of foreclosure;17

(4) not have committed fraud against the foreclosing creditor;18(5) not have engaged in criminal activity on the secured real estate collateral that19

significantly reduced its value at the time of foreclosure;20(6) not have permitted significant uncured damage to be done to the collateral by other21

persons or natural causes as a result of their failure to take reasonable precautions against22such damage; and23

(7) provide reasonable access to the collateral for inspection by the foreclosing creditor24and prospective purchasers after the initial notice of foreclosure is sent.25

9. If the borrowers, Mary and John Jones, believe that the proposed foreclosure is improper,26they may request a meeting with Jane A. Doe, attorney at law, who represents First Financial27Corp. in this matter, to discuss their objections with her. She can be contacted at 123 Main28Street, City of Ashland, State of Example, at telephone number 123-654-3210, or by e-mail at29doej@doelawfirm.com. Ms. Doe must receive a request for a meeting within 15 days after the30date of this notice given above. Upon receiving such a request she will schedule a meeting, in31person or by telephone, at a mutually convenient time.32

[Signed] First Financial Corp.33Sandra Mortgagee, Loan Officer34

SECTION 205. REQUEST FOR NOTICE OF FORECLOSURE.35

(a) Any person may record in [the office of a county recorder] a request for notice of36

foreclosure of a security instrument that has been recorded in that [office]. The request must37

37

state:1

(1) the [date, book, and page] [document number] of the security instrument’s recording;2

(2) the names of the parties to the security instrument;3

(3) a legally sufficient description of the real property collateral affected by the security4

instrument;5

[Query: Is the description really necessary, or is a reference to the original mortgage6sufficient?]7

(4) the name and address of the person requesting notice of foreclosure; and8

(5) the legal interest, if any, held by the person recording the request for notice.9

(b) A person that records a request under subsection (a) is entitled to be given notice of10

foreclosure under Section 203(a). Recording a request does not affect the title to the real11

property collateral and does not constitute constructive notice to any person of an interest in the12

real property collateral held or claimed by the person requesting notice. A person that records a13

request for notice under this section may subsequently record an amendment supplementing or14

correcting the person’s name, address, or other information in the request, or withdrawing the15

request.16

(c) A foreclosing creditor is liable for a penalty of $500 to a person that is not given timely17

notice of foreclosure if that person has recorded a request for notice of foreclosure meeting the18

standards of this section. If a recorded request for notice states that the person recording the19

request has an interest in the real property collateral and the person is not given timely notice of20

foreclosure, the person’s interest in the collateral, if any, is preserved from termination by the21

foreclosure. No other remedy or sanction may be imposed against the foreclosing creditor on22

behalf of such person.23

Comment24

38

This section permits anyone who wishes to become eligible for receipt of a foreclosure1notice. For example, a tenant under an unrecorded lease could record a request for notice under2this section, and thus could ensure learning that foreclosure had been commenced. Even a person3with no legal interest in the collateral may record a request under this section.4

SECTION 206. MEETING TO OBJECT TO FORECLOSURE.5

(a) A residential debtor may request a meeting to object to a foreclosure. The request must be6

made by a notice received by the foreclosing creditor within 30 days after the notice of7

foreclosure is given to that debtor. If the foreclosing creditor receives a request for a meeting, the8

foreclosing creditor or a responsible representative of the foreclosing creditor shall schedule and9

attend a meeting with the person requesting it at a mutually agreeable time. The representative10

may be an employee, agent, servicer, or attorney of the foreclosing creditor and must have11

authority to terminate the foreclosure if the representative determines that there is no legal basis12

for foreclosure. The meeting may be held in person or by telephone, video conferencing, or13

other reasonable means, at the election of the foreclosing creditor. If the meeting is held in14

person, it must be held at a location reasonably convenient to a parcel of the real property15

collateral unless the person requesting the meeting and the creditor or representative mutually16

agree on a different location. If the foreclosing creditor receives requests from more than one17

person, the creditor or representative may attempt to arrange a consolidated meeting, and the18

persons requesting meetings must cooperate reasonably with the foreclosing creditor’s effort to19

do so.20

(b) A meeting conducted pursuant to this section is informal and the rules of evidence do not21

apply. The parties may be represented by legal counsel. The foreclosing creditor or22

representative must have access to records that provide evidence of the grounds for foreclosure. 23

The creditor or representative shall consider the objections to foreclosure stated by the person24

39

requesting the meeting. Within 10 days after the meeting the creditor or representative attending1

the meeting shall give to each person who requested the meeting a written statement indicating2

whether the foreclosure will be discontinued or will proceed and the reasons for the3

determination. Neither the objections to foreclosure stated by the person requesting the meeting4

nor the reasons stated by the creditor or representative preclude any person from raising those or5

other grounds for objecting to or supporting foreclosure in any subsequent judicial proceeding. 6

A statement or representation made by a person at the meeting may not be introduced as evidence7

in any judicial proceeding. Each party must bear its own expenses in connection with the8

meeting.9

(c) Neither the foreclosing creditor nor the representative incurs liability for making a10

determination that is adverse to the person who requested the meeting.11

Comment12

The objective of the informal meeting process provided by this section is to ensure both13fairness and the appearance of fairness to residential debtors who are at risk of losing their homes14in a foreclosure. The meeting is not automatic, but is scheduled only if a residential debtor15requests it. Foreclosing creditors have no obligation under this Act to conduct similar meetings16at the request of nonresidential debtors, but of course may do so if they wish.17

The responsible representative of the foreclosing creditor is required to determine whether18the person requesting the meeting has a legal basis for stopping the foreclosure. This section19does not list all of the possible bases for taking such action, and they are left to other law. 20Illustrative bases would include the fact that the security instrument is a forgery not executed by21the debtor, that the secured obligation has already been paid in full, and that the debtor is not in22default.23

The law is not entirely clear, but it is believed that the meeting required by this section will24satisfy the hearing demands of the Due Process Clause, at least with respect to an attack by a25residential debtor, if the foreclosing creditor is a governmental entity and hence subject to that26Clause. Existing cases establish that the “hearing” need not be formal and need not be before a27judicial officer. An employee of the same agency that is conducting the foreclosure is28acceptable, at least if that officer is impartial and not in the chain of decision-making that decided29to foreclose in the first instance. See Johnson v. U.S. Department of Agriculture, 734 F.2d 77430(11th Cir. 1984); Lisbon Square v. U.S., 856 F.Supp. 482 (E.D.Wis. 1994). (The latter case31

40

sustained the Federal Multifamily Mortgage Foreclosure Act, 12 U.S.C. § 3701 et seq., despite1its failure to provide a neutral decision-maker.) Since governmental agencies can provide for2such a neutral “responsible representative” by regulation or administrative action, the informal3meeting required by this section should satisfy their Due Process obligations to residential4debtors. However, since there is no requirement of a meeting with non-debtor holders of5subordinate interests in the collateral or with nonresidential debtors, such persons may still be6able to raise Due Process claims unless the foreclosing creditor grants them a meeting or hearing7voluntarily.8

The foreclosing creditor and representative cannot be not held liable for making a9determination adverse to the debtor, even if their determination is shown to be wrong. However,10the foreclosing creditor may still be held liable for actually proceeding with the foreclosure if a11legal basis for foreclosure did not exist or the foreclosure was conducted wrongfully. See12Section 601. In order to encourage free exchange of information at the meeting, statements by13the representative of the creditor or admissions by the debtor at the meeting cannot be used in a14later judicial proceeding.15

SECTION 207. PERIOD OF LIMITATION FOR FORECLOSURE. The time of16

foreclosure may not be less than 90 days nor more than one year after an original notice of17

foreclosure is recorded under Section 203 and not less than 30 days after any subsequent notice18

of foreclosure. The one-year period of limitation may be extended by agreement of the19

foreclosing creditor and all persons whom notice of foreclosure was required to be given, other20

than persons excluded from foreclosure by notice issued under Sections 203(e), 407(b), or21

507(b). The one-year and 30-day periods of limitation are tolled during the period that any court22

order temporarily enjoining or staying the foreclosure is in effect, and during any stay under the23

United States Bankruptcy Code, 11 U.S.C. § 101 et. seq.24

Comment25

This section constrains the time that may elapse between the giving of an original notice of26foreclosure and the foreclosure itself. The minimum time is 90 days, which gives the debtor an27opportunity to redeem the collateral. The maximum time is one year, a period designed to28prevent a foreclosing creditor’s lengthy inaction from leading the debtor to believe that the29foreclosure will not occur. The one-year limitation is applicable to all parcels of real estate30described in the original notice of foreclosure.31

41

SECTION 208. JUDICIAL SUPERVISION OF FORECLOSURE. Before the time of1

foreclosure, an aggrieved person may commence a proceeding in a court of competent2

jurisdiction for any violation of this [Act] or of other law or principle of equity in the conduct of3

the foreclosure. The court may issue any order within the authority of the court in a foreclosure4

of a mortgage by judicial action, including injunction and postponement of the foreclosure.5

Comment6

The objective of this Act is to provide a fair procedure under which foreclosures can take7place without judicial supervision. However, cases will inevitably arise in which a party believes8that judicial involvement or supervision of the foreclosure is necessary. This section provides for9such involvement if requested by the foreclosing creditor, by a person who was entitled to notice10of foreclosure under Section 203, or by any other aggrieved party, such as a prospective or actual11purchaser of the collateral. 12

The court’s powers are analogous to those applicable in judicial foreclosure proceedings. For13example, the court may enjoin the foreclosure; set a new foreclosure date; determine the priority14of interests in the collateral; direct that the foreclosure be in bulk or by parcels; direct the15sequence of foreclosure of parcels in order to marshal assets; and direct the order of distribution16of the proceeds of the foreclosure.17

The procedural aspects of injunctions against foreclosure – temporary restraining orders,18preliminary injunctions, and permanent injunctions, and associated bond requirements – are not19spelled out in this Act, but are left to other state law. 20

SECTION 209. REDEMPTION. A person having the right to redeem collateral from a21

security interest under principles of law and equity may not redeem after the time of foreclosure.22

Unless precluded from doing so by law other than this [Act], a foreclosing creditor shall23

cooperate with any person who attempts to redeem the collateral from the security interest before24

the time of foreclosure by promptly providing upon request reasonable information concerning25

the amount due or performance required to redeem.26

Comment27

Redemption is the right of every debtor and interest holder to avoid foreclosure by paying or28performing the secured obligation prior to foreclosure. This section embodies the fundamental29

42

concept of foreclosure – that its effect is to cut off the right of foreclosed parties to redeem the1collateral from the security interest.2

43

[ARTICLE] 31

FORECLOSURE BY AUCTION2

SECTION 301. FORECLOSURE BY AUCTION.3

A secured creditor that elects to foreclose by auction shall comply with the requirements of4

this [Article] and [Articles] 1, 2 and 6.5

[The Committee on Style considered this and the other two similar introductory sections (in6Articles 4 and 5) to be unnecessary and deleted them. However, in their absence, we really don’t7have anything that says that the whole of the article must be followed by the foreclosing8creditor.]9

Comment10

This section describes the procedures for foreclosure by auction, the traditional method of11foreclosing land security interests in the United States. It contains several features that are12designed to make the auction sale more attractive to purchasers. These features include the13obtaining and exposure to prospective purchasers of evidence of title, the potential for making14other information and reports available, and the authority of the foreclosing creditor to advertise15the sale in other ways in addition to the traditional newspaper advertisement.16

SECTION 302. EVIDENCE OF TITLE; OTHER INFORMATION.17

(a) [If a secured creditor elects to foreclose by auction,] The foreclosing creditor shall obtain18

evidence of title, and make a copy thereof available upon request to any prospective bidder at the19

foreclosure. The evidence of title must have an effective date no earlier than the time of20

recording of the original notice of foreclosure, and must be issued no later than [30] days after21

the time of such recording. Unless the evidence of title is an attorney’s opinion, it must state that22

the issuer is willing to provide evidence of title to the real property collateral to a person who23

acquires title by virtue of the foreclosure, and the exceptions and exclusions from coverage to24

which the evidence of title issued to that person will be subject.25

(b) The foreclosing creditor may, but is not required to, make reports and information26

concerning the collateral other than evidence of title available to prospective bidders at the27

44

foreclosure.1

(c) The foreclosing creditor is not liable to any person because of error in any information2

disclosed to prospective bidders unless the information was prepared by the foreclosing creditor3

and the foreclosing creditor had actual knowledge of the error at the time the information was4

disclosed.5

Comment6

This section’s purpose is to encourage intelligent and knowledgeable bidding at foreclosure7sales. Since no one can bid intelligently without first reviewing the evidence of title, it is8sensible for the foreclosing creditor to pay for that evidence once, rather than expecting multiple9bidders to purchase it individually. (The foreclosing creditor’s expense can be included with10other costs of foreclosure and added to the secured debt.) A potential bidder, after reviewing the11evidence of title, may wish to contact the issuer and obtain a commitment running directly to the12bidder.13

Foreclosing creditors are encouraged, but not required, to disclose other information they14may have concerning the property being foreclosed. Subsection (c) should facilitate this sort of15disclosure by limiting the creditor’s potential liability for errors in the information. Subsection16(c) does not impose liability for erroneous information, but rather states the conditions in which17liability does not exist. A foreclosing creditor may wish to disclaim liability even for errors of18which it has actual knowledge, and nothing in this Act precludes an effective disclaim of this19type.20

SECTION 303. ADVERTISEMENT OF SALE.21

(a) After giving notice as required by Sections 203 and 204, a foreclosing creditor shall22

advertise foreclosure sale under this [Article]23

ALTERNATIVE A24

[in a manner that complies with the publication requirements of the law of this State for judicial25

foreclosure of security interests in real property.] 26

ALTERNATIVE B27

[by placing an advertisement in a newspaper having general circulation in each [county] where28

any part of the real property collateral is located. The advertisement must be published at least29

45

once per week for three consecutive weeks, with the last publication not less than seven nor more1

than 30 days before the advertised date of sale.]2

(b) No later than 21 days before the advertised date of sale, the foreclosing creditor shall give3

a copy of the advertisement required by subsection (a) to the persons to whom notice of4

foreclosure was required to be given pursuant to Section 203. The advertisement may be sent5

with the notice of foreclosure or may be sent separately in the manner prescribed for notices6

under Section 106. The foreclosing creditor may, but is not required to, enter the real property7

collateral and post on it a copy of the advertisement or a sign containing information about the8

sale.9

(c) An advertisement required by subsection (a) must state or contain: 10

(1) the date, time, and location [by street address and, if applicable, by floor and office11

number,] of the foreclosure sale;12

(2) that the sale will be made to the highest qualified bidder;13

(3) the amount or percentage of the bid that will be required of the successful bidder at14

the completion of the sale as a deposit, and the form in which the deposit may be made if15

payment other than by cash or certified check will be accepted;16

(4) a legally sufficient description, the [property tax map number] [parcel identifier17

number] of the real property to be sold, and the street address, if any, or the location if there is no18

street address, of the real property;19

(5) a brief description of any improvements on the real property and any personal20

property collateral to be sold;21

(6) the name, address, and telephone number of an individual who is the foreclosing22

46

creditor or a representative of the foreclosing creditor, who can provide information concerning1

the collateral and the foreclosure if the foreclosing creditor is not an individual;2

(7) that a copy of the evidence of title, any available reports concerning the collateral,3

which may be listed specifically, and additional information are available from the person4

identified pursuant to paragraph (6);5

(8) whether access to the collateral for the purpose of inspection before foreclosure is6

available to prospective bidders and, if so, how to obtain access; and7

(d) An advertisement required by subsection (a) may also state or contain any other8

information concerning the collateral or the foreclosure that the foreclosing creditor elects to9

include.10

Comment11

The advertising requirement stated in this section represent the minimum requirements. The12foreclosing creditor may advertise the property in any other reasonable manner, and the cost of13such advertisements is a proper foreclosure expense. For example, the foreclosing creditor may14post information about the sale on an internet site that provides information about foreclosures,15whether the site is operated by a private party or by an entity of state or local government.16

The provision in subsection (b) concerning the posting of a sign or advertisement on the real17property creates a legal license for the secured creditor or its representative to enter on the18premises for that purpose, even if contrary to the wishes of the owner or persons in possession.19

The following is an example of a sufficient advertisement.20

Foreclosure Sale21

A foreclosure sale will be held on March 27, 200_ at 10:00 am at the offices of Street and22Black, Attorneys at Law, 1250 Main Street, Suite 400, Ashland, Example 12344. Sale will be23made to the highest qualified bidder. The successful bidder must make a deposit of five percent24of the bid immediately upon completion of the sale. The deposit must be in the form of a25cashier’s check or certified check.26

The real property to be sold is Lot 13, Block B, Ridgefield Addition No. 2 (Parcel Number27134552), as shown in Plat Book 33, Page 141, Official Records of Pembroke County, State of28Example, with a street address of 455 South Main Street, Ashland, Example 12345. The real29property consists of a two-story single-family house with a detached garage. No personal30

47

property is being sold with the real property. 1

For additional information concerning the property, contact Ann Adams, Loan Foreclosure2Specialist, First Financial Corp., 677 First Avenue, Ashland, Example 12344, telephone number3123-654-1889. Prospective bidders may obtain copies of a preliminary title insurance report and4an appraisal of the property by contacting Ms. Adams. The property is vacant, and prospective5bidders may obtain access for purposes of inspecting it by contacting Ms. Adams. The property6is located in Special Street Improvement District No. 34, as established by the City of Ashland,7State of Example, and special assessments of $605 per year are assessed against it until the year8200_.9

SECTION 304. ACCESS TO COLLATERAL.10

If a foreclosing creditor has authority to grant access to the real property collateral, the11

creditor shall reasonably accommodate a person who contacts the creditor, expresses an interest12

in bidding at the foreclosure sale, and requests an opportunity to inspect the collateral.13

Comment14

A debtor typically has no legal obligation to allow access to the real property prior to the15foreclosure for the purposes of allowing prospective buyers to inspect. However, the debtor or16the debtor’s tenant may voluntarily grant such access, or the right of access may be granted by the17terms of the security instrument. In the case of a residential debtor, the granting of reasonable18access is an element that is considered in assessing the debtor’s good faith, and hence the19debtor’s freedom from deficiency liability under Section 602.20

SECTION 305. LOCATION AND TIME OF SALE. An auction sale under this [Article]21

must be conducted:22

(a) at a date and time permitted for a sale under judicial foreclosure of a security interest in23

real property in this State; 24

(b)in a [county] where some of the real property collateral is located; and25

ALTERNATIVE A26

[(c) at a location where a sale under judicial foreclosure of a security interest in real property27

may be held in this State.]28

48

ALTERNATIVE B1

[(c) at:2

(1) a main door of the [county] courthouse, or other location in the courthouse if3

prominent signs indicate that location; [or]4

(2) the site of the real property collateral; or5

[(3) a location that is readily accessible to the public and bears a standard street address.]]6

SECTION 306. FORECLOSURE OF TWO OR MORE PARCELS.7

(a) Collateral consisting of two or more parcels of real property may be foreclosed by auction8

separately or in combination as provided in the security instrument. If the security instrument9

does not specify the manner of sale of two mor more parcels, the auction may be conducted:10

(1) by separate sale of each of the parcels; or11

(2) at the time notice of foreclosure is recorded, if two or more parcels are contiguous, are12

being used in a unitary manner, are part of a unitary plan of development, or are operated under13

integrated management:14

(A) by combining the parcels in a single auction; or15

(B) by conditionally offering the parcels both in combination and separately, and16

accepting the higher of the two aggregate bids.17

(b) If the entire real property collateral is not made the subject of a single auction. the18

foreclosing creditor shall discontinue sales of parcels or combinations of parcels when the total19

amount of bids received is sufficient to pay the secured obligation and the expenses of20

foreclosure.21

49

Comment1

This section deals with the question whether multiple parcels should be offered for sale2separately or together. There is no corresponding provision in the Act for foreclosure by3negotiated sale or by appraisal. The Act does not constrain the choice of the foreclosing creditor4in those situations, since debtors and holders of junior interests can send a notice of objection and5prevent the foreclosure from proceeding if they do not agree with the foreclosing creditor’s6choice.7

The security instrument controls the manner of sale of multiple parcels. If it does not speak8to the issue, the foreclosing creditor may in all cases sell the parcels separately. In its discretion,9it may instead sell them in combination, or conditionally offer them separately and in10combination, if they are contiguous, are being used in a unitary manner, are part of a unitary plan11of development, or are operated under a single management. This test is applied as of the date12the notice of foreclosure is given, and is intended to assure that the parcels have a sufficient13relationship to one another that some prospective purchasers will probably be interested in14buying more than one parcel. Note that the term “integrated management” does not necessarily15require that the same business entity is managing the parcels; the test is whether as a practical16matter the same management controls the parcels and operates them in an integrated fashion,17even if it does so through multiple business entities. Likewise, the fact that the same entity18conducts the management of two or more parcels does not necessarily establish that they are19under “integrated management.”20

A court order marshaling assets will supersede the provisions of this section.21

SECTION 307. POSTPONEMENT OF SALE.22

(a) An individual conducting an auction under this [Article] may postpone the auction for any23

cause the foreclosing creditor considers appropriate. Announcement of the postponement, and24

the time and location of the rescheduled sale, must be given orally at the place previously25

scheduled for the sale and within a reasonable time after the scheduled time for commencement26

of the sale. No other advertisement or notice of the postponed time and place of sale is required. 27

No postponement may be for a period of more than 30 days. Subsequent postponements of the28

sale may be made in the same manner.29

(b) If an auction cannot be held at the time stated in the notice of sale by reason of stay under30

the United States Bankruptcy Code, 11 U.S.C. 101 et. seq., or a stay order issued by any court of31

50

competent jurisdiction, the foreclosing creditor may reschedule the auction to occur at a time1

when the stay is no longer in effect. The rescheduled sale must be advertised, and a copy of the2

advertisement must be sent to the persons entitled thereto, as provided by Section 302.3

[Subsection (b) is new and is derived from the Idaho foreclosure statute.]4

Comment5

The foreclosing creditor may elect to postpone the auction for up to 30 days. This may be6deemed expedient, for example, because of inclement weather, the absence of sufficient bidders,7or damage occurring to the property. A judicial stay, or an automatic stay in bankruptcy, acts as a8postponement, but is not subject to the 30-day limitation. Postponements may not result in the9date of the auction extending beyond the period of limitation stated in Section 207.10

SECTION 308. CONDUCT OF SALE.11

(a) An auction sale under this [Article] must be conducted by a person designated by the12

foreclosing creditor.13

(b) The person conducting an auction, before commencing the auction:14

(1) must make available to prospective purchasers copies of the evidence of title; and15

(2) may verify that persons intending to bid have money in an amount and form necessary16

to make the deposit stated in the advertisement, but shall not disclose the amount that any bidder17

is prepared to deposit.18

(d) The auction must be conducted 19

ALTERNATIVE A20

[under the following rules:21

(1) Any person, including a debtor and the foreclosing creditor, may bid at the auction.22

The individual conducting the auction may bid on behalf of the foreclosing creditor or any other23

person by whom he or she is authorized, but may not bid for his or her own account. The24

foreclosing creditor may bid by credit any amount up to the balance owing on the secured25

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obligation, including the expenses of foreclosure.1

(2) A fixed bid of a person not attending the auction may be submitted by a writing2

received at least 24 hours before the scheduled time of the auction by the person designated in3

the advertisement of sale to provide information about the property. The bid must be4

accompanied by a deposit satisfying the requirements of Section 310. The bid must be read5

aloud by the person conducting the auction before the auction is opened to oral bids.6

(3) Sale must be made to the person bidding the highest amount who complies with this7

section.]8

(4) The auction is completed by the announcement of the person conducting the auction9

that the property is “sold.” 10

ALTERNATIVE B11

[in the manner prescribed by law in this State for the judicial foreclosure of a mortgage on real12

property.]13

Comment14

In addition to the evidence of title, which must be made available, the person conducting the15auction may make other reports or information available to prospective bidders as provided in16Section 302(b). The foreclosing creditor is protected against liability for errors in such17information as provided in Section 302(c).18

The foreclosing creditor may make a credit bid up to the amount owing on the secured19obligation, and may make a cash bid to the extent necessary to exceed the amount owing if the20foreclosing creditor wishes to do so.21

Bids sent by record by persons not attending the auction must be fixed – that is, for a specific22amount. Contingent bids (i.e., bids with amounts dependent on the amounts of other bids made23at the auction) are not permitted.24

SECTION 309. DEPOSIT BY SUCCESSFUL BIDDER. Immediately after the sale is25

complete, the successful bidder, if other than the foreclosing creditor, at an auction under this26

52

[Article] must pay a deposit to the person conducting the sale. The deposit must be at least 101

percent of the amount of the bid or such lower amount as the advertisement of sale stated would2

be accepted. The deposit must be paid in cash, by certified check, or in such other form of3

payment as was stated to be acceptable in the advertisement of sale or is acceptable to the person4

conducting the sale. 5

[SECTION 310. UPSET BIDS.6

[At the last meeting of the drafting committee a decision was taken to delete the provision for7upset bids. It has been left in this draft so that Prof. Billings, who originally proposed its use but8who was not present at the last meeting, can comment on it.]9

(a) An upset bid is a bid by which a person offers to purchase the collateral that has10

theretofore been sold at a foreclosure by auction under this [Act]. The amount of an upset bid11

must exceed the highest bid at the auction sale or the last previously received upset bid by a12

minimum of 5 percent or $1,000, whichever is greater.13

(b) An upset bid may be made by any person, including a person who has made a previous14

bid, by notice to the foreclosing creditor. The notice must give the name, address, and telephone15

number of the upset bidder and the amount of the upset bid, identify the property on which the16

bid applies, and be directed to the attention of the person named in the notice of foreclosure17

pursuant to Section 302 (c)(6).18

(c) An upset bid must be received by the foreclosing creditor no later than 10 days after the19

time of foreclosure or 10 days after receipt of the most recent previous upset bid.20

(d) An upset bid must be accompanied by a deposit, in the form of cash or certified check21

payable to the foreclosing creditor, in an amount of the greater of 10 percent of the upset bid22

amount or $1,000.23

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(e) Successive upset bids made be made. Receipt of each such bid must be followed by a1

period of 10 days within which a further upset bid may be received.2

(f) If a foreclosing creditor receives an upset bid in compliance with this section, the last3

previous bidder, whether an upset bidder or a bidder at an auction sale, is released from any4

further obligation on account of that bid, and any deposit made by the bidder must be returned5

immediately, together with a notice from the foreclosing creditor informing the bidder that the6

bid is ineffective because of the receipt of an upset bid. If an upset bid is received and no timely7

further upset bid is received, the upset bidder is obligated to purchase the collateral for the8

amount of the upset bid.9

(g) The person named in the notice of foreclosure pursuant to Section 303(c)(6) shall10

maintain a record of all upset bids received and, upon inquiry from any person, shall advise that11

person of the status of the most recent bid received and the time remaining for receipt of a further12

upset bid.13

(h) If a bid at a foreclosure by auction or an upset bid is made and no further upset bid is14

received by the foreclosing creditor within the time permitted by subsection (b), the foreclosing15

creditor shall immediately notify the last previous bidder that the bid of that bidder is final and16

binding.]17

SECTION 310. PAYMENT OF REMAINDER OF BID.18

(a) The successful bidder at an auction under this [Article] shall pay the remainder of the bid19

to the person conducting the sale within [seven] days after [notice is given under Section 309(h)]20

the date of the auction.21

(b) If payment of the remainder of the bid is not timely made, the foreclosing creditor may22

54

cancel the sale and reschedule the auction as provided in Section 307(b), or may terminate the1

foreclosure under Section 314. In either event the deposit of the successful bidder may be2

forfeited and distributed in the same manner as the proceeds of a sale, but no person has any3

other remedy against the defaulting bidder.4

SECTION 311. FORECLOSURE AMOUNT; DISTRIBUTION OF PROCEEDS. The5

highest amount bid at a sale [if no upset bid is received, or the last upset bid] is the foreclosure6

amount. The foreclosure must be applied by the foreclosing creditor as provided in Section 6017

within 30 days after the time of foreclosure. After receiving but before applying the proceeds of8

sale, the secured creditor may, but is not required to, invest them in a reasonable manner.9

[Note that this section has been redrafted to make the high bid the “foreclosure amount.” 10Section 601 has been modified so that foreclosure expenses are paid out of the “foreclosure11amount” only in the case of foreclosures by auction. Query: is 30 days a sufficient time? What12if litigation is necessary?]13

SECTION 312. DEED TO SUCCESSFUL BIDDER; AFFIDAVIT.14

(a) Upon payment by the successful bidder of the full balance of the bid, the foreclosing15

creditor shall:16

(1) record and deliver a deed, a bill of sale with respect to personal property if applicable, 17

and such other documents as may be necessary to record the deed, all without warranty of title,18

conveying the collateral to or as directed by the successful bidder; and 19

(2) execute and record in [the office of the county recorder] an affidavit containing the20

following:21

(A) identification of the security instrument foreclosed, including the [book and page22

number] [document number] at which it was recorded, if any; 23

55

(B) identification the debtor;1

(C) a sufficient description of the collateral and identification of the [book and page2

number] [document number] at which the notice of foreclosure was recorded;3

(C) identification of persons to whom notice of foreclosure was given and the [book4

and page number] [document number] at which documents reflecting their interests in the5

collateral were recorded, if any;6

(D) a statement as to which, if any, of the persons identified pursuant to7

subsubparagraph (C) were given special notice of foreclosure preserving their interests from8

termination by the foreclosure;9

(E) a statement that the foreclosing creditor has complied with all provisions of this10

[Act] for a foreclosure by auction; and11

(F) identification of the person acquiring title to the collateral by virtue of the12

foreclosure, and a statement that title has passed to that person.13

(b) When recorded, the deed and bill of sale, if any, transfer title to the collateral to or as14

directed by the successful bidder as provided in Section 602.15

Comment16

The following is an illustration of a sufficient affidavit under this section. [AFFIDAVIT TO17

BE ADDED]18

Title to the collateral does not pass to the auction purchaser until the recording of the19affidavit. However, the successful bidder is under an obligation to complete the purchase or risk20the loss of the deposit. If a casualty loss occurs to the collateral after the auction, but before the21recording of the affidavit, there is no legal basis for a discharge of the bidder from the obligation22to purchase. Hence, it is advisable for the successful bidder to obtain casualty insurance on the23property immediately after the auction is concluded.24

SECTION 313. DISCONTINUANCE OF FORECLOSURE.25

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(a) A foreclosing creditor may elect to discontinue foreclosure at any time before:1

(1) the completion of the auction [the expiration of upset bid period] in the case of a2

foreclosure by auction; or3

(2) the time of foreclosure, in the case of a foreclosure by negotiated sale or by appraisal.4

(b) To discontinue foreclosure, the foreclosing creditor shall give notice to the persons to5

whom notice of foreclosure was required to be given under Section 203(b), advising them that6

the foreclosure has been discontinued and whether the foreclosing creditor will:7

(1) pursue another foreclosure by the same method;8

(2) continue to foreclose by another method under this [Act] pursuant to a notice of9

foreclosure previously given;10

(3) commence foreclosure by a different method authorized by this [Act] pursuant to a11

new notice of foreclosure;12

(4) commence foreclose by judicial proceeding; or13

(6) abandon foreclosure.14

(b) If a notice sent by a foreclosing creditor under this section includes all elements required15

for a notice of foreclosure under Sections 203 and 204, no additional notice of foreclosure is16

necessary to pursue a further foreclosure under this Act.17

[Should this section be moved to Article 2 or Article 6, since it contains information relevant to18all 3 methods of foreclosure?]19

Comment20

The foreclosing creditor’s election to foreclose by auction, negotiated sale, or appraisal is not21necessarily a final decision. Under this section the creditor can change course and foreclose by a22different method instead. If the original (or a previous) notice of foreclosure reserved the right to23proceed by more than one method, the creditor who discontinues foreclosure under this section24need not give a new notice of foreclosure. Otherwise, a new notice of the foreclosure must be25given if the foreclosure method is changed.26

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[ARTICLE] 41

FORECLOSURE BY NEGOTIATED SALE2

SECTION 401. FORECLOSURE BY NEGOTIATED SALE. A secured creditor that3

elects to foreclose by negotiated sale shall comply with the requirements of this [Article] and4

[Articles] 1, 2 and 6.5

Comment6

This section provides for foreclosure by negotiated sale, a method that may in some cases be7quicker and more efficient than the traditional auction sale. However, it may be employed only if8no objection is made to it by those whose interests will be terminated by it. Those persons are9entitled to notice of the negotiated sale, and if they make a timely objection to it, the sale cannot10proceed unless the foreclosing creditor excludes their interests from the effect of the foreclosure. 11If foreclosure by negotiated sale cannot be completed because of such objections, the foreclosing12creditor may either pursue a new foreclosure by negotiated sale or resort to one or more of the13other methods of foreclosure. In all events the foreclosure must be completed within the period14of limitation of Section 207.15

SECTION 402. ADVERTISEMENT AND CONTRACT OF SALE.16

(a) The foreclosing creditor may advertise the collateral for sale to prospective purchasers by17

whatever methods the foreclosing creditor considers appropriate and may list the collateral for18

sale with brokers. The foreclosing creditor may, but is not required to, enter the real property19

collateral and post on it a sign containing information about the sale.20

(b) The foreclosing creditor may enter into a conditional contract of sale with a prospective21

purchaser or, if the collateral is sold in parcels, with more than one purchaser. The contract shall22

state the gross amount, before expenses of sale, that the purchaser will pay for the collateral. The23

foreclosing creditor’s obligation to sell under the contract is subject to the following conditions: 24

(1) that no objection to the foreclosure amount is made under Section 404; and 25

(2) that no redemption of the collateral from the security interest is made before the time26

of foreclosure.27

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Comment1

The foreclosing creditor has wide discretion in advertising of the property. Newspapers,2broadcast media, magazines, the internet, and other reasonable methods may be used.3

The contract of sale negotiated by the foreclosing creditor may provide for a cash sale or may4provide for installment payments or other forms of financing by the foreclosing creditor. 5

SECTION 403. NOTICE OF PROPOSED NEGOTIATED SALE. If a foreclosing6

creditor enters into a conditional contract of sale as provided in Section 402, the foreclosing7

creditor shall give notice of the proposed sale at least 30 days before the date of the proposed sale8

to the persons specified in Section 203. The notice of proposed sale must state:9

(a) the date on or after which the foreclosing creditor proposes to sell the collateral;10

(b) the foreclosure amount, net of all expenses of foreclosure and sale, that the foreclosing11

creditor offers to credit against the secured debt and distribute to other persons entitled thereto,12

which amount may be greater or less than the selling price stated in the contract;13

(c) that if the sale is completed, title to the collateral will be transferred to the purchaser14

under the contract as of the time of foreclosure and the stated foreclosure amount will be applied15

as provided in Section 601.16

(d) that the person receiving the notice may inspect a copy of the contract of sale by17

communicating with an individual who is or represents the foreclosing creditor, and whose name,18

address, and telephone number are given in the notice;19

(e) that if a debtor or [interest holder] [holder of a lien] whose interest in the collateral is20

subordinate in priority to the foreclosing creditor’s security interest objects to the sale, the debtor21

or interest holder may give the foreclosing creditor a notice so stating, and if the notice is22

received by the foreclosing creditor no later than seven days before the date of the proposed sale,23

the foreclosing creditor must discontinue the foreclosure by negotiated sale unless the foreclosing24

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creditor elects to preserve that person’s interest from termination by the foreclosure or discharges1

the person’s interest.2

Comment3

The foreclosure amount must be stated net of foreclosure and sale expenses; in other words,4the foreclosing creditor is left with the responsibility for paying the foreclosure expenses and any5other costs associated with performance of the contract of sale. The foreclosure amount may be6more or less than the actual price the purchaser agrees to pay, and is determined entirely in the7foreclosing creditor’s discretion. The foreclosing creditor might arrive at the foreclosure amount8by taking the actual selling price and reducing it by the various expenses of foreclosure and sale9that the foreclosing creditor expects to pay. In effect, the foreclosing creditor is offering to apply10this foreclosure amount against the secured indebtedness, and the persons who are entitled to11object must decide whether this amount is acceptable to them. The purchase price stated in the12negotiated sale contract provides some basis for the subordinate interest holders to judge whether13the foreclosure amount stated by the foreclosing creditor is acceptable. If one or more of them14believes that a different form of foreclosure will produce a higher amount, there is a logical basis15for the making of an objection to the proposed negotiated sale. However, there is no requirement16that a person objecting give a reason for the objection, nor that the objection be reasonable or17made in good faith. As a matter of self-interest, those with the right to object will not do so if18they consider the proposed foreclosure amount reasonable.19

The debtor and junior interest holders also have the right to protect themselves from the20foreclosure by redeeming any time prior to the time of foreclosure.21

SECTION 404. COMPLETION OF SALE.22

(a) A foreclosing creditor may complete the sale in accordance with the contract of sale,23

subsection (b), and Sections 405 and 406 unless the creditor receives a notice objecting to the24

proposed foreclosure by negotiated sale seven or more days before the proposed date of sale from25

a person who holds an [interest] [lien] in the real property collateral that is subordinate in26

priority to the foreclosing creditor’s security interest.27

(b) Upon compliance by the purchaser with a contract for sale under this [Article], on or after28

the proposed date of sale, the foreclosing creditor shall deliver to the purchaser or a nominee29

designated by the purchaser a deed, a bill of sale if applicable, and other documents necessary to30

consummate the sale or that the parties agreed the foreclosing creditor would supply. The31

60

foreclosing creditor shall also execute an affidavit containing the following:1

(1) identification of the security instrument foreclosed, including the [book and page2

number] [document number] at which it was recorded, if any; 3

(2) identification the debtor;4

(3) a sufficient description of the collateral and identification of the [book and page5

number] [document number] at which the notice of foreclosure was recorded;6

(4) identification of persons to whom notice of foreclosure was given and the [book and7

page number] [document number] at which documents reflecting their interests in the collateral8

are recorded, if any9

(5) a statement as to which, if any, of the persons identified pursuant to subparagraph (4)10

were given notice under Section 204(e) or 406(a)(1) preserving their interests from termination11

by the foreclosure;12

(6) a statement that the foreclosing creditor has complied with all provisions of this [Act]13

for a foreclosure by negotiated sale; and14

(7) identification of the person acquiring title to the collateral by virtue of the foreclosure,15

and a statement that title has passed to that person.16

Comment17

The affidavit that the foreclosing creditor must record along with the deed to consummate the18foreclosure must identify the subordinate interests in the property that are being terminated by the19foreclosure. If the foreclosing creditor exercises the “opt out” right provided by Section 407(b),20the particular subordinate interest that was “opted out” will be listed in the affidavit as not having21been terminated by the foreclosure.22

The negotiated sale may not actually be completed on the proposed date of sale, but in all23events must be completed within the period of limitation provided by Section 207. If the24negotiated sale is not completed until after the proposed date of sale, the right of the debtor and25junior interest holders to object to the sale is not revived.26

In most cases the contract purchaser may wish to accept title to the collateral in its own name. 27

61

However, if the purchaser desires to pass title directly to some other entity as a result of the1foreclosure, the foreclosing creditor may designate such an entity as its nominee in the deed, bill2of sale if any, and affidavit that are recorded to signify the completion of the foreclosure.3

SECTION 405. RECORDING OF AFFIDAVIT AND DEED; APPLICATION OF4

FORECLOSURE AMOUNT. On or after the date of delivery of the deed, the affidavit, deed,5

and bill of sale if any required under Section 404 must be recorded in [the county recorder’s6

office]. When the affidavit, deed, and bill of sale if any are recorded, the deed and bill of sale7

transfer title to the collateral to the contract purchaser or a nominee designated by the contract8

purchaser as provided in Section 602. The foreclosure amount stated in the notice of proposed9

negotiated sale pursuant to Section 403(b) must be applied as provided in Section 601 within 3010

days after the time of foreclosure.11

[Query: is 30 days a sufficient time? What if litigation is necessary?]12

SECTION 406. NOTICE OF OBJECTION TO SALE.13

(a) If, seven or more days before the proposed date of sale under this [Article], a foreclosing14

creditor receives notice of objection to the sale from any person who holds [an interest in] [a lien15

on] the real property collateral subordinate in priority to the foreclosing creditor’s security16

interest, the foreclosing creditor must:17

(1) discontinue the foreclosure pursuant to Section 313, in which case the notice of18

objection has no further effect;19

(2) give notice, before the time of foreclosure, to the person who made the objection that20

the person’s interest in the collateral will be preserved from termination by the foreclosure. If the21

foreclosing creditor gives such notice:22

(A) the objection of the person to whom such notice is given may be disregarded by23

62

the foreclosing creditor;1

(B) the foreclosure by negotiated sale may be completed;2

(C) the affidavit recorded under Section 405 must identify that interest in the3

collateral of the person objecting as not being terminated by the foreclosure; and4

(D) that person is entitled to none of the foreclosure amount; or5

(3) if the interest of the person who made the objection is capable of being discharged for6

a liquidated sum of money, tender that sum to the person and thereby discharge the interest.7

[This last provision is new, and provides a further way of getting rid of an objector.]8

(b) If the foreclosing creditor makes a tender as provided in section (a)(3) and keeps the9

tender in effect, the person to whom the tender is made must provide the foreclosing creditor10

with a suitable document in recordable form evidencing that the person’s interest has been11

discharged.12

(c) After expiration of the time for objection specified in Section 404(a), a person to whom13

notice of foreclosure under Section 203 and notice of proposed sale under Section 403 were sent14

may not assert that the foreclosure amount was inadequate.15

Comment16

Under subsection (a), the foreclosing creditor may neutralize an objection to the sale simply17by notifying the objector that the sale will be subject to, and will not terminate, the objector’s18interest in the collateral. In this way the foreclosing creditor can “opt out” of foreclosing a19particular interest, just as if that person’s interest had been preserved by the giving of a special20notice of foreclosure under Section 203(e). The holder of such an interest cannot reasonably21object to the sale’s consummation, since the foreclosure will not affect that interest. The22affidavit that the foreclosing creditor must record in order to consummate the foreclosure must23identify the subordinate interests in the property that are being terminated by the foreclosure. If24the foreclosing creditor exercises the “opt out” right mentioned above, the particular subordinate25interest that was “opted out” will not be listed in the affidavit as not having been terminated by26the foreclosure.27

An alternative way for the foreclosing creditor to neutralize an objection to the sale, provided28by subsection (a)(3), is to tender the amount owed to the objector. This procedure is permissible29

63

only if the objector’s interest can be discharged for a liquidated sum. Most mortgages and other1liens fit this description. However, if the objector’s interest is a lien securing performance of an2act other than payment of money, or is a lease, easement, covenant, or other interest with no3liquidated amount, the “buy-out” procedure is not available to the foreclosing creditor.4

A debtor or subordinate interest-holder who has been given the appropriate notices of5foreclosure and of the proposed negotiated sale, and who does not prevent consummation of the6sale by making a timely objection to it, is prohibited from attacking the sufficiency of the7foreclosure amount thereafter. In effect, such parties are estopped to question the foreclosure8amount. However, the amount might nonetheless be attacked in a subsequent bankruptcy9proceeding as a preference or a fraudulent conveyance.10

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[ARTICLE] 51

FORECLOSURE BY APPRAISAL2

SECTION 501. FORECLOSURE BY APPRAISAL. A secured creditor that elects to3

foreclose by appraisal shall comply with the requirements of this [Article] and [Articles] 1, 2 and4

6.5

Comment6

This section provides for foreclosure by appraisal as an alternative to foreclosure by auction7or negotiated sale. Unlike the latter two methods, foreclosure by appraisal transfers title to the8collateral directly to the foreclosing creditor or its nominee. In that respect it is similar to strict9foreclosure at common law. An important difference, however, is that the creditor must notify10all subordinate interest-holders of the amount, net of all expenses of foreclosure, that it is willing11to pay for the property, and the foreclosure can proceed only if no objection is made to it by those12whose interests will be terminated by it. If they make a timely objection, the sale cannot proceed13unless the foreclosing creditor excludes those making an objection from the effect of the14foreclosure. If foreclosure by appraisal cannot be completed because of such objections, the15foreclosing creditor may either pursue a new foreclosure by appraisal or resort to one or more of16the other methods of foreclosure. In this way foreclosure by appraisal under this Section is17similar to foreclosure by negotiated sale under Article 4. In all events the foreclosure must be18completed within the period of limitation imposed by Section 207.19

SECTION 502. APPRAISAL.20

(a) The foreclosing creditor shall obtain a written appraisal of the collateral. The debtor and21

other persons in possession of the real property collateral must provide reasonable access to the22

real property to the appraiser. The appraisal report shall state the appraiser’s conclusion as to the23

fair market value of the collateral as of a date not more than 60 days before the date of24

foreclosure stated in the notice of foreclosure.25

[The language has been revised to require that the effective date of the appraisal must be no26more than 60 days prior to the proposed foreclosure date.]27

(b) The appraisal must be made by an independent appraiser who is not an employee or28

affiliate of the foreclosing creditor and who is designated as a certified or licensed appraiser by29

the [Appraisal Certification Board] of this State with respect to the type of property to be30

65

appraised.1

Comment2

In a foreclosure under this Article the foreclosing creditor must obtain an appraisal of the3collateral by a certified appraiser and forward it to the debtor and other holders of subordinate4interests in the collateral. The purpose of the appraisal is to assist the junior interest-holders in5deciding whether or not to object to the amount of the creditor’s offered foreclosure amount. 6However, that amount may be either lower or higher than the appraised value, and is determined7entirely in the foreclosing creditor’s discretion. If one or more of the subordinate interest-holders8believes that a different form of foreclosure will produce a higher amount, they have a logical9basis for making an objection to the proposed foreclosure by appraisal.10

The reference to “the type of property to be appraised” is included in subsection (b) because11appraiser certification systems in some jurisdictions make distinctions between, for example,12residential and commercial appraisers. In such jurisdictions the appraiser employed under this13Article must have the proper credentials for the type of property to be appraised.14

Since persons in possession of the real property collateral have a duty to provide reasonable15access to the appraiser, they may be subjected to a judicial order upon the petition of the16foreclosing creditor if they fail to do so voluntarily.17

SECTION 503. NOTICE OF APPRAISAL. The foreclosing creditor shall give notice of18

the appraisal at least 30 days before the proposed date of the foreclosure to the persons specified19

in Section 203. The notice of appraisal shall be accompanied by a copy of the appraisal report20

and shall state: 21

(a) the date on or after which the foreclosing creditor proposes to foreclose by appraisal;22

(b) the foreclosure amount, net of all expenses of foreclosure, that the foreclosing creditor23

offers to credit against the secured obligation and to distribute to other persons entitled thereto,24

which amount may be greater or less than the appraised value of the collateral;25

(c) that if the foreclosure by appraisal is completed, title to the collateral will vest in the26

foreclosing creditor or its nominee as of the time of foreclosure, and that the stated foreclosure27

amount will be applied as provided in Section 601;28

(d) that the person receiving the notice may obtain further information concerning the29

66

foreclosure and the appraisal by communicating with an individual who is or represents the1

foreclosing creditor, and whose name, address, and telephone number are given in the notice;2

(e) that if a debtor or [interest holder] [holder of a lien] whose interest in the collateral is3

subordinate in priority to the foreclosing creditor’s security interest objects to the foreclosure by4

appraisal, the debtor or interest holder may give the foreclosing creditor a notice so stating, and if5

the notice is received by the foreclosing creditor no later than seven days before the date of the6

proposed sale, the foreclosing creditor must discontinue the foreclosure by appraisal unless the7

foreclosing creditor elects to preserve that person’s interest from termination by the foreclosure8

or discharges the person’s interest.9

Comment10

The foreclosure amount must be stated net of foreclosure expenses; in other words, the11foreclosing creditor is left with the responsibility for paying the foreclosure expenses and any12other costs associated with the appraisal and foreclosure. The foreclosure amount may be more13or less than the appraised value, and is determined entirely in the foreclosing creditor’s14discretion. The foreclosing creditor might arrive at the foreclosure amount by taking the15appraised value and reducing it by the various expenses that the foreclosing creditor expects to16pay for the appraisal and for holding and marketing the property. In effect, the foreclosing17creditor is offering to apply this foreclosure amount against the secured indebtedness, and the18persons who are entitled to object must decide whether this amount is acceptable to them. The19appraisal report provides some basis for the subordinate interest holders to judge whether the20foreclosure amount stated by the foreclosing creditor is acceptable. If one or more of them21believes that a different form of foreclosure will produce a higher amount, there is a logical basis22for the making of an objection to the proposed foreclosure by appraisal. However, there is no23requirement that a person objecting give a reason for the objection, nor that the objection be24reasonable or made in good faith. As a matter of self-interest, those with the right to object will25not do so if they consider the proposed foreclosure amount reasonable.26

The debtor and junior interest holders also have the right to protect themselves from the27foreclosure by redeeming any time prior to the time of foreclosure.28

SECTION 504. COMPLETION OF FORECLOSURE BY APPRAISAL.29

(a) A foreclosing creditor may complete the foreclosure as provided in subsection (b) and30

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Sections 505 and 506 unless the creditor receives a notice objecting to the proposed foreclosure1

by negotiated sale seven or more days before the proposed date of sale from a person who holds2

an [interest] [lien] in the real property collateral that is subordinate in priority to the foreclosing3

creditor’s security interest.4

(b) On or after the proposed date of sale, the foreclosing creditor shall also execute an5

affidavit containing the following:6

(1) identification of the security instrument foreclosed, including the [book and page7

number] [document number] at which it was recorded, if any; 8

(2) identification the debtor;9

(3) a sufficient description of the collateral and identification of the [book and page10

number] [document number] at which the notice of foreclosure was recorded;11

(4) identification of persons to whom notice of foreclosure was given and the [book and12

page number] [document number] at which documents reflecting their interests in the collateral13

are recorded, if any14

(5) a statement as to which, if any, of the persons identified pursuant to subparagraph (4)15

were given notice under Section 204(e) or 506(a)(1) preserving their interests from termination16

by the foreclosure;17

(6) a statement that the foreclosing creditor has complied with all provisions of this [Act]18

for a foreclosure by appraisal; and19

(7) identification of the person acquiring title to the collateral by virtue of the foreclosure,20

and a statement that title has passed to that person.21

[Is it necessary or desirable for the foreclosing creditor to execute and record a deed to itself, in22addition to the affidavit?]23

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Comment1

The affidavit that the foreclosing creditor must record to consummate the foreclosure must2identify the subordinate interests in the property that are being terminated by the foreclosure. If3the foreclosing creditor exercises the “opt out” right provided by Section 507(b), the particular4subordinate interest that was “opted out” will be listed in the affidavit as not having been5terminated by the foreclosure.6

The affidavit need not actually be recorded on the proposed date of foreclosure, but in all7events must be recorded within the period of limitation provided by Section 207. If the affidavit8is not recorded until after the proposed date of foreclosure, the right of the debtor and subordinate9interest holders to object to the sale is not revived.10

In most cases the foreclosing creditor may be willing to accept title to the collateral in its own11name. However, if the creditor wishes title to pass directly to some other entity as a result of the12foreclosure, it may designate such an entity as its nominee in the affidavit that it records to13signify the completion of the foreclosure.14

SECTION 505. RECORDING OF AFFIDAVIT; TIME OF FORECLOSURE. On or15

after the proposed date of foreclosure, the affidavit required by Section 504 must be recorded in16

[the county recorder’s office]. When recorded, the affidavit transfers title to the collateral to the17

foreclosing creditor or its nominee as provided in Section 602. The foreclosure amount stated in18

the notice of appraisal pursuant to Section 503(b) must be applied as provided in Section 60119

within 30 days after the time of foreclosure.20

[Query: is 30 days a sufficient time? What if litigation is necessary?]21

SECTION 506. NOTICE OF OBJECTION TO FORECLOSURE.22

(a) If, seven or more days before the proposed date of foreclosure under this [Article], a23

foreclosing creditor receives notice of objection to the foreclosure from any person who holds [an24

interest in] [a lien on] the real property collateral subordinate in priority to the foreclosing25

creditor’s security interest, the foreclosing creditor must:26

(1) discontinue the foreclosure pursuant to Section 313, in which case the notice of27

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objection has no further effect;1

(2) give notice, before the time of foreclosure, to the person who made the objection that2

the person’s interest in the collateral will be preserved from termination by the foreclosure. If the3

foreclosing creditor gives such notice:4

(A) the objection of the person to whom such notice is given may be disregarded by5

the foreclosing creditor;6

(B) the foreclosure by appraisal may be completed;7

(C) the affidavit recorded under Section 505 must identify that interest in the8

collateral of the person objecting as not being terminated by the foreclosure; and9

(D) that person is entitled to none of the foreclosure amount; or10

(3) if the interest of the person who made the objection is capable of being discharged for11

a liquidated sum of money, tender that sum to the person and thereby discharge the interest.12

[This last provision is new, and provides a further way of getting rid of an objector.]13

(b) If the foreclosing creditor makes a tender as provided in section (a)(3) and keeps the14

tender in effect, the person to whom the tender is made must provide the foreclosing creditor15

with a suitable document in recordable form evidencing that the person’s interest has been16

discharged.17

(c) After expiration of the time for objection specified in Section 504(a), a person to whom18

notice of foreclosure under Section 203 and notice of appraisal under Section 503 were sent may19

not assert that the foreclosure amount was inadequate.20

Comment21

Under subsection (a), the foreclosing creditor may neutralize an objection to the foreclosure22simply by notifying the objector that the sale will be subject to, and will not terminate, the23objector’s interest in the collateral. In this way the foreclosing creditor can “opt out” of24

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foreclosing a particular interest, just as if that person’s interest had been preserved by the giving1of a special notice of foreclosure under Section 203(e). The holder of such an interest cannot2reasonably object to the sale’s consummation, since the foreclosure will not affect that interest. 3The affidavit that the foreclosing creditor must record in order to consummate the foreclosure4must identify the subordinate interests in the property that are being terminated by the5foreclosure. If the foreclosing creditor exercises the “opt out” right mentioned above, the6particular subordinate interest that was “opted out” will not be listed in the affidavit as not having7been terminated by the foreclosure.8

An alternative way for the foreclosing creditor to neutralize an objection to the sale, provided9by subsection (a)(3), is to tender the amount owed to the objector. This procedure is permissible10only if the objector’s interest can be discharged for a liquidated sum. Most mortgages and other11liens fit this description. However, if the objector’s interest is a lien securing performance of an12act other than payment of money, or is a lease, easement, covenant, or other interest with no13liquidated amount, the “buy-out” procedure is not available to the foreclosing creditor.14

A subordinate interest-holder who has been given the appropriate notices of foreclosure and15notice of appraisal, and who does not prevent consummation of the foreclosure by appraisal by16making a timely objection to it, is prohibited from attacking the sufficiency of the foreclosure17amount thereafter. In effect, such parties are estopped to question the foreclosure amount. 18However, the amount might nonetheless be attacked in a subsequent bankruptcy proceeding as a19preference or a fraudulent conveyance.20

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[ARTICLE] 61

RIGHTS AFTER FORECLOSURE2

SECTION 601. APPLICATION OF PROCEEDS OF FORECLOSURE.3

(a) The foreclosing creditor shall apply the proceeds of foreclosure and any investment4

earnings thereon in the following order:5

(1) to pay or reimburse the expenses of foreclosure in the case of a foreclosure by auction;6

(2) to pay the obligation secured by the foreclosed security instrument;7

(3) to pay, in the order of their priority, [the value of all interests terminated] [the amounts8

of all liens terminated] by the foreclosure; and9

(4) to the interest holder who owned the collateral at the time of foreclosure.10

(b) If the foreclosing creditor, in applying the proceeds of the sale, acts in good faith and11

without actual knowledge of the invalidity or lack of priority of the claim of a person to whom12

distribution is made, the foreclosing creditor is not liable for an erroneous distribution. The13

foreclosing creditor may maintain an action in the nature of interpleader, in a court of competent14

jurisdiction sitting in a [county] in which some part of the real estate collateral is located, for an15

order directing the order of distribution of the proceeds of the sale.16

Comment17

The balance owing on the secured obligation is not limited to principal and accrued interest on18the secured debt. It may include late fees, default interest, prepayment fees, and other fees to the19extent permitted by other law of the state; the enforceability of such fees is not governed by this20Act. It may also include expenditures made by the foreclosing creditor to protect the collateral,21such as property tax payments, insurance premiums, and expenditures to correct waste. See22Restatement (Third) of Property: Mortgages § 2.2 (1997).23

Any surplus from the sale, after payment of the foreclosure costs and discharging the secured24obligation, is distributed to the holders of subordinate interest who were given notice of the sale,25and to the debtor, in the order of their priority. Distribution is not limited to persons who hold26liens, but rather is made to the holders of all interests that have a positive value, such as tenants27under leases that have “bonus value.” If agreement cannot be reached about the value of such28

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interests, a judicial determination of their value may be necessary. Persons having interests1superior in priority to the security instrument being foreclosed are not entitled to receive any of2the proceeds of the sale, since it does not affect their interests.3

If the foreclosing creditor is uncertain about the priority of junior interests, it may apply for a4court determination of priority. Pending such determination the foreclosing creditor may invest5the proceeds of sale in a reasonable manner. Any investment earnings must be added to the6proceeds.7

SECTION 602. TITLE TRANSFERRED BY FORECLOSURE. A foreclosure under this8

[Act] transfers the debtor’s title to the collateral to the successful bidder under [Article] 3, the9

contract purchaser under [Article] 4, or the foreclosing creditor under [Article] 5, subject only to10

interests in the collateral having priority over the security interest foreclosed and the interests of11

persons entitled to notice under subsection 202(c) who were not given notice of the foreclosure or12

whose interests were preserved from foreclosure by notice issued under Sections 203(e), 407(b),13

or 507(b). The interests of all of other persons in the collateral are terminated.14

Comment15

This section fulfills the fundamental purpose of foreclosure: to transfer title to the collateral to16the foreclosing creditor or other person who prevails in the foreclosure process, and to eliminate17all of the interests subordinate to the security interest being foreclosed that were held by persons18who were made parties to the foreclosure. Interests superior in priority to the security interest will19survive the foreclosure, as will subordinate interests if their holders are not properly given notice20of the foreclosure or if the foreclosing creditor gives them an appropriate notice to preserve their21interests from the effect of foreclosure.22

Ordinarily a foreclosure will terminate all subordinate interests except those that have been23intentionally or inadvertently omitted from notice, as stated in subsection (a). However, one24equitable exception to this principle exists. If an owner of the equity of redemption in the real25estate purchases at the foreclosure sale, the interests subordinate to the foreclosed mortgage are26preserved. If this were not the result, a debtor could collude with the holder of a first mortgage27and unjustly cleanse the title to the land of the junior liens. See Restatement (Third) of Property28(Mortgages) § 4.9 (1997).29

SECTION 603. ACTION FOR DAMAGES OR TO SET ASIDE FORECLOSURE.30

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(a) Subject to subsection (c), after the time of foreclosure an aggrieved person may commence1

a proceeding in a court of competent jurisdiction seeking the following relief:2

(1) damages against a foreclosing creditor for any violation of this [Act] or an applicable3

law or principle of equity in the conduct of the foreclosure; or4

(2) that the foreclosure be set aside to correct a violation of this [Act] or to satisfy an5

applicable law or principle of equity.6

(b) Recording of the deed and affidavit pursuant to Section 312, the deed and affidavit7

pursuant to Section 405, or the affidavit pursuant to 505 conclusively establishes compliance with8

all applicable notice and procedural requirements of this [Act] in favor of good faith purchasers9

for value of the collateral. If the title derived from foreclosure is not held by a good faith10

purchaser for value, a person attacking the foreclosure on grounds of noncompliance with the11

notice or procedural requirements of this [Act] has the burden of production and persuasion.12

[Is the phrase “procedural requirements” sufficiently clear? Are there some violations of the Act13that should be assertable even against a BFP?]14

(c) An action may not be commenced:15

(1) for damages for violation of this [Act] more than three years after the time of16

foreclosure; or 17

(2) for an order to set aside a foreclosure conducted under this [Act] more than one year18

after the time of foreclosure.19

Comment20

After the foreclosure has occurred, the powers of a court to change the result are limited. 21Damages may be assessed against the foreclosing creditor if it has failed to comply with this Act22or other legal duties in carrying out the foreclosure. For example, if there is proof that notices23were not properly given as required by Section 203, the court might award damages against the24foreclosing creditor to the debtor or to third parties whose interests were terminated by the25foreclosure without notice. However, the court must recognize that compliance with procedural26provisions of the Act, such as the giving and publication of required notices, is conclusive, as27

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provided in subsection (b). For example, if the collateral had passed into the hands of a bona fide1purchaser (BFP), the court would not be authorized to issue an order taking the collateral out of2the BFP’s hands in order to order a reforeclosure on account of failure to give proper notices, but3could nonetheless grant an award of damages.4

Courts should employ their powers to grant damage awards or to set aside foreclosures only in5cases in which the violation of this Act or the principles of law and equity are sufficiently serious6that it is likely that they had a substantial detrimental impact on the foreclosure amount. No7remedy should be awarded for minor violations that had no significant effect on the outcome of8the foreclosure.9

SECTION 604. POSSESSION AFTER FORECLOSURE. A person that acquires an10

interest in real property by foreclosure under this [Act] may commence an action under [the11

forcible entry and detainer statute of this State] to gain possession of the real property against any12

person whose interest in the real property was terminated by the foreclosure.13

Comment14

This Act does not address the question whether a foreclosing creditor may demand possession15of the collateral prior to the time of foreclosure; that question is left to other law. However, one16who acquires real property in a foreclosure proceeding under this Act is entitled to possession17against persons, such as former tenants, whose leases have been terminated by the foreclosure. If18part of the real property is possessed by tenants whose leases were terminated and part by tenants19whose leases were preserved in the foreclosure, the person acquiring the property in foreclosure20may dispossess the former tenants only. The process ordinarily available to landlords to remove21tenants from possession may be employed. In the absence of such a provision, there is doubt in a22number of states whether the landlord-tenant procedure is available to foreclosure purchasers.23

SECTION 605. JUDGMENT FOR DEFICIENCY.24

(a) Except as provided in subsection (b), after the time of foreclosure the foreclosing creditor25

and any other person whose security interest in the collateral was terminated by a foreclosure26

under this [Act] is entitled to a money judgment against any person liable for a deficiency.27

(b) A debtor is not liable to a foreclosing creditor for a deficiency after a foreclosure under this28

[Act] if:29

(1) the foreclosing creditor waived the right to a deficiency; or30

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(2) the debtor is a residential debtor and the secured obligation was a purchase-money1

debt, unless the debtor is found by the court not to have acted in good faith.2

(c) For purposes of this section, a residential debtor acted in good faith if the debtor:3

(1) peaceably vacated the real estate collateral and relinquished any personal property4

collateral within 10 days after the time of foreclosure and the giving of a notice demanding5

possession by the person entitled to possession by virtue of the foreclosure;6

(2) did not commit significant affirmative waste upon the collateral and leave such waste7

uncured at the time possession was relinquished to the person entitled to possession by virtue8

of the foreclosure;9

(3) did not significantly contaminate the collateral with hazardous materials and leave the10

contamination uncured at the time possession was relinquished to the person entitled to11

possession by virtue of the foreclosure;12

(4) did not commit fraud against the foreclosing creditor;13

(5) did not engage in criminal activity on the secured real estate collateral that significantly14

reduced its value at the time possession was relinquished to the person entitled to possession15

by virtue of the foreclosure;16

(6) did not permit significant uncured damage to be done to the collateral by other persons17

or natural causes as a result of the debtor’s failure to take reasonable precautions against the18

damage; and19

(7) provided reasonable access to the collateral for inspection by the foreclosing creditor20

and prospective purchasers after the initial notice of foreclosure was sent.21

(d) The burden of proof as to the absence of good faith on the part of a residential debtor is on22

the person seeking a deficiency judgment against the debtor. The absence of good faith by one23

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residential debtor does not make any other residential debtor liable for a deficiency.1

(e) If liability of a residential debtor for a deficiency is barred by subsection (b)(2), liability of2

a guarantor of the residential debtor’s obligation is also barred.3

(f) This section does not prohibit recovery of a deficiency by a person other than the4

foreclosing creditor.5

Comment6

A judgment for a deficiency is intended to assist the foreclosing creditor in collecting any7portion of the obligation that is not discharged by the foreclosure. Since only persons who are8“liable therefor” can be subjected to a deficiency judgment, it is necessary for a creditor seeking a9deficiency to establish the personal liability of the person against whom the deficiency is claimed.10A deficiency may be recovered against a debtor or against anyone else, such as a guarantor, who is11liable on the secured obligation. Both the foreclosing creditor and subordinate creditors whose12security interests have been terminated by a foreclosure can bring actions for deficiencies.13

This section prohibits deficiency judgments against residential debtors (and their guarantors)14on purchase-money obligations if they have acted in good faith, as defined in subsection (c). 15Lenders often assert that the threat of a deficiency judgment, even if it will rarely be enforceable16as a practical matter, provides a useful inducement to borrowers to behave responsibly. This Act17adopts that principle; under the “good faith” concept here, the threat of a deficiency may dissuade18the debtor from committing waste or fraud, or engaging in other acts detrimental to the19foreclosing creditor’s interests. “Good faith” is an individualized determination, and in a20particular case some debtors may have acted in good faith although others did not.21

Even if a deficiency judgment cannot be obtained by the foreclosing creditor, the holders of22“sold-out” junior liens may still obtain and collect deficiency judgments under subsection (d). .23

A foreclosing creditor may waive the right to a deficiency, and if so, will not be permitted to24recover the deficiency. The waiver might be found in the security instrument, in the notice of25foreclosure, or in some other agreement or communication between the parties.26

SECTION 606. DETERMINING AMOUNT OF DEFICIENCY.27

(a) Subject to subsection (c), the deficiency to which a foreclosing creditor is entitled after a28

foreclosure under this [Act] is the balance remaining, if any, after subtracting the foreclosure29

amount as determined under Section 311, 405, or 503, as applicable, from the balance owing on30

the secured obligation, including principal, interest, legally recoverable fees and charges, and in31

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the case of a foreclosure by auction, the expenses of foreclosure.1

[Note that in the case of foreclosure by negotiated sale or appraisal, the secured creditor is not2allowed to consider the expenses of foreclosure in calculating the deficiency. This is because the3creditor will already have deducted its estimate of those expenses in setting the foreclosure4amount.]5

(b) In an action for a deficiency brought by the foreclosing creditor following a foreclosure by6

auction, a person against whom the action is filed may petition a court of competent jurisdiction7

for a determination of the fair market value of the collateral at the time of foreclosure. After a8

hearing at which all interested parties may present evidence of fair market value, the Court shall9

determine the fair market value of the collateral as of the time of foreclosure. The determination10

must be made by [the court without a jury] [by a jury unless the right to trial by jury is waived by11

all parties to the proceeding]. If the Court determines that 90 percent of the fair market value of12

the collateral was greater than the bid accepted at the foreclosure sale [or the last upset bid], 9013

percent of the fair market value must be substituted for the foreclosure amount in making the14

calculations required by subsection (a) with respect to all parties against whom a judgment for a15

deficiency is entered. 16

[ One comment at the annual meeting suggested that the “fair value” limitation on deficiencies be17confined to residential real property. Under the present draft, all types of real property get the18benefit of the “fair value” determination.]19

Comment20

A deficiency action by the foreclosing creditor is governed by subsection (a). The formula21stated there does not deduct for expenses of foreclosure in the case of foreclosures by negotiated22sale or auction, since the creditor’s estimate of those expenses will already have been deducted by23the creditor in arriving at the foreclosure amount. Deficiency actions by “sold-out” junior lienors24are governed by subsection (b). Under that subsection, the amount distributed to the junior lienor,25rather than the full foreclosure amount, is considered as offsetting the obligation owed to the26lienor.27

If the foreclosure was by auction, subsection (c) provides that the defendant in the deficiency28action is entitled to have the fair market value of the property determined by the court. If this29procedure is used and 90 percent the fair market value is found to be greater than the highest bid30

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(including any upset bid), 90 percent of the fair market value must be used in computing the1deficiency. This subsection recognizes that foreclosures by auction often do not bring fair market2prices, and in effect limits the amount of the deficiency as if 90 percent of fair market value had3been bid. The 90 percent level is adopted in order to approximate the cost to the foreclosure4purchaser of holding and liquidating the collateral.5

This limitation applies only to a deficiency sought by the foreclosing creditor. It does not6apply to deficiencies sought by sold-out junior lienors, since they have no control over the method7of foreclosure employed. No fair market value determination is available or necessary if the8foreclosure was by negotiated sale or by appraisal, since under those procedures, any subordinate9interest holder may force a discontinuation of the foreclosure simply by objecting to it.10

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[ARTICLE] 71

MISCELLANEOUS PROVISIONS2

SECTION 701. UNIFORMITY OF APPLICATION AND CONSTRUCTION. In3

applying and construing this Uniform Act, consideration must be given to the need to promote4

uniformity of the law with respect to its subject matter among States that enact it.5

SECTION 702. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND6

NATIONAL COMMERCE ACT. This [Act] modifies, limits, and supersedes the federal7

Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001 et seq.,8

except that nothing in this [Act] modifies, limits, or supersedes Section 7001(c) of that Act or9

authorizes electronic delivery of any of the notices described in Section 7003(b) of that Act.10

SECTION 703. EFFECTIVE DATE. This [Act] takes effect on ___________________. 11

[Legislative Note: It is recommended that the effective date be delayed after the date of12enactment, in order to allow time for members of the bar and the affected industries to become13familiar with the Act and to modify existing forms and procedures.]14

SECTION 704. REPEALS. The following acts and all other acts and parts of acts15

inconsistent with this [Act] are repealed: [Here should follow the statutes to be specifically16

repealed. Statutes governing judicial foreclosure should not be repealed.]17

SECTION 705. TRANSITIONS. Security interests created before the effective date of this18

[Act] may be foreclosed under any statute or other law repealed or amended by this [Act] as if the19

repeal or amendment had not occurred.20

[Legislative note: Adopting jurisdictions may find it necessary to amend their recording acts in21

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order to permit the recording of notices of foreclosure, requests for notice of foreclosure, and1affidavits of foreclosure that are required by this Act .]2