Strict Foreclosure Under U.C.C. Article 9

In the current troubled economic climate, secured creditors and debtors alike are finding themselves in the unenviable position of having to go through default and foreclosure. When debtors are no longer able to make their monthly installment payments, secured parties are faced with having to repossess collateral and either conduct a foreclosure sale or engage in strict foreclosure.
Professor Livingston writes:  Although historically most secured parties ended up holding a foreclosure sale, the advent of partial strict foreclosure in Revised Article 9 in 2001 has made strict foreclosure a much more attractive option. Any secured party pursuing full or partial strict foreclosure should adhere closely to the required Article 9 procedures or face the voiding of the attempted foreclosure.

Traditionally, Article 9 of the Uniform Commercial Code provided for only one form of strict foreclosure--full strict foreclosure, in which the secured party accepted the collateral in full satisfaction of the remaining debt owed. See former U.C.C. § 9-505 (1998). Basically, the parties called it even between them--the secured party could not pursue the debtor for any deficiency and the debtor was not entitled to any surplus, should the creditor later sell the collateral at a profit. Secured creditors opted for full strict foreclosure in situations where the value of the collateral at default approximated the debt owed at default. By calling it even, the secured party avoided the Article 9 strictures on foreclosure sales if it decided to sell the collateral down the road. Sometimes secured creditors chose full strict foreclosure if they thought the value of the collateral exceeded the amount of the remaining debt. If they could successfully achieve strict foreclosure without the debtors objection, they would be able to pocket any surplus generated at a later disposition of the collateral.

Despite the advantages of strict foreclosure in certain situations, most creditors conducted foreclosure sales of collateral, either because the debtor objected to strict foreclosure and forced a sale or because the collateral was worth less than the debt owed and the creditor wished to preserve its right to a deficiency. In Revised Article 9, adopted by most states effective July 1, 2001, the drafters added the option of partial strict foreclosure to the creditors post-default options. U.C.C. § 9-620 (a), (c) (Official Text 2007). Partial strict foreclosure essentially entails an agreement between the debtor and the secured party as to the post-default value of the collateral. For example, D defaults owing SP $40,000. SP repossesses the collateral (some equipment). SP and D agree that the equipment is worth $25,000 in an authenticated record entered into after default. At that point, D gets a credit of $25,000 against the $40,000 debt owed at default and is liable for a deficiency of $15,000.

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