Answer ... Several options are available to a lender upon an event of default, including rights and remedies that may be exercised against the collateral. As an initial matter, upon an event of default, a lender may:
- refuse to extend additional loans to the borrower;
- raise the interest rates to a default rate;
- terminate any remaining loan commitments;
- accelerate the maturity of the loans; and
- demand immediate repayment of all outstanding loans and any other amounts owning under the loan documents from the borrower.
A lender can sue the borrower and any guarantors in court to obtain a judgment for the amounts that it is owed. To avoid a possible counterargument by a guarantor that the lender did not pursue the borrower first, a lender should generally first make demand on the borrower prior to bringing an action against a guarantor. As part of its action, a secured lender may also seek judicial foreclosure of the collateral under state law. Alternatively, a secured lender may exercise ‘self-help’ remedies available to it under the Uniform Commercial Code (UCC), but only if it can do so without breaching the peace.
As part of the remedies available to a secured party under Article 9 of the UCC, a secured lender may sell, dispose of, lease or license the collateral in a commercially reasonable manner. Any sale or disposition of the collateral may be through a private or public sale. In addition, subject to limited exceptions, a secured party must notify certain parties (including the borrower, any guarantors and any other secured parties) prior to a proposed sale of collateral; generally, 10 days is considered commercially reasonable notice. After a sale, the secured party may pursue the borrower for any amounts that remain unpaid under the loan documents (ie, in a deficiency action).
Alternatively, a secured lender can retain the collateral in full or partial satisfaction of the debt (also known as strict foreclosure). The borrower, any guarantors and any other secured parties that are entitled to notice may object to strict foreclosure and prevent exercise of this remedy. Another possible remedy is collection: a secured lender can collect payments directly from account debtors and other parties that owe money to the borrower and apply such amounts to the debt. If a secured lender has a perfected security interest in a deposit account or a securities account (pursuant to an account control agreement), the lender may direct the bank at which the account is held to pay the amounts in the account to or for the benefit of the lender.
A secured party’s remedies are mostly cumulative and can be exercised simultaneously. Further, in enforcing its rights under the UCC, a secured party must act in a commercially reasonable manner. While the determination of what is commercially reasonable is not specifically defined in Article 9 of the UCC, generally, using commercially reasonable efforts to maximise the proceeds of a collateral sale will be considered commercially reasonable. A borrower cannot waive the UCC requirement for the lender to be commercially reasonable when disposing of collateral.
The requirements with respect to enforcement of a security interest in real property collateral are governed by state law and can vary significantly. Some states allow a secured lender to take possession of a collateral property following an event of default. Most states, however, require the secured lender to sell a collateral property through judicial foreclosure, where the foreclosure sale is conducted under court supervision; while others permit foreclosure by power of sale, which is a non-judicial sale of collateral property through an auction. The proceeds of any such sale of a collateral property are applied to the outstanding debt of the secured lender; any excess proceeds go to junior lien holders or are returned to the borrower. Certain states, including California, have a ‘one action’ rule, which requires a secured lender to judicially or non-judicially foreclose on real property collateral before commencing a lawsuit against, or taking other action to collect from, a borrower or its assets.