The Uniform Commercial Code (UCC) provides a number of post-default remedies a secured lender can pursue without commencing litigation or any judicial intervention whatsoever. This alert; Part 1, regarding collection and enforcement rights; and Part 2, regarding sale of collateral, describe some of these remedies.
One commonly overlooked remedy is acceptance of collateral in full or partial satisfaction of the secured obligation, which is often referred to as strict foreclosure.1 While this method can offer certainty, speed, lower cost, and other advantages over, for example, a secured party sale, it cannot be utilized without the borrower’s cooperation.
The Goal
When completed, a strict foreclosure transfers to the secured party all of the debtor’s rights in the collateral. The secured party is then free to hold or dispose of the assets as it sees fit without any duties to the debtor. The debt secured is discharged to the extent consented to by the debtor. In an acceptance in full satisfaction, the debt is paid in full. In an acceptance in partial satisfaction, the debt is reduced by the amount agreed or consented to by the debtor and the secured party (as described below). Finally, strict foreclosure discharges the subject security interest and any subordinate security interest or lien and terminates any other subordinate interest in the collateral.
Written Proposal
Strict foreclosure requires either a written agreement between the lender and the collateral owner (the debtor) or a written proposal from the lender to the debtor.2 The proposal should explicitly state that the lender is proposing to accept the collateral in full satisfaction of the debt, if that is the case, or in partial satisfaction, in which case the proposal should set forth the exact amount of the debt to be satisfied. A lender should be precise in its communications with the debtor and carefully review communications from the debtor to avoid ambiguities that may result in unintentionally accepting collateral and extinguishing the debt.3 In addition to the debtor, the proposal must be sent to other secured parties and lienholders with respect to the collateral and others holding an interest in the collateral.4 In the case of partial satisfaction only, the proposal must also be sent to any secondary obligor (e.g., guarantor) of the debt.
Acceptance and Objection
In the case of partial satisfaction, the debtor must accept the proposal in writing. In the case of full satisfaction, the debtor must either accept the proposal in writing or fail to object to the proposal within 20 days after it is sent. Additionally, acceptance of the collateral cannot proceed if the secured creditor receives timely objection from any other party required to receive notice or that holds a subordinate interest in the collateral.5
The UCC provides a variety of non-judicial and self-help tools that can assist a secured lender in realizing on its collateral after default without the time and expense of litigation. This alert, together with Part 1 – Collection and Enforcement Rights and Part 2 – Sale of Collateral, describes the general procedures and outcomes for these tools. Experienced legal counsel can help the lender select the appropriate remedy, navigate the specific requirements, and avoid potential pitfalls and problems.
The Thought Leadership Committee of Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts and blogs on an ongoing basis to keep clients, colleagues, and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact the author, Robert Wonneberger, Thought Leadership Committee chair, at rwonneberger@barclaydamon.com, or Janice Grubin or Jeff Dove, Restructuring, Bankruptcy & Creditors’ Rights Practice Area co-chairs, at jgrubin@barclaydamon.com and jdove@barclaydamon.com.
1This alert discusses commercial transactions. There are additional requirements for consumer transactions and consumer goods collateral that are beyond the scope of this alert.
2Even if a written agreement is utilized, a proposal may be needed if there are other parties entitled to receive notification.
3For a discussion of a case in which the lender suffered unintended consequences due to imprecise language, see “Strict Foreclosure Under Article 9: The Born Legacy.”
4The UCC contains specific rules for determining which secured parties and others with an interest in collateral are entitled to notice.
5The UCC contains specific rules regarding when objections must be received to be considered timely.