First American - EAGLE 9 Policy

Under RA9, after a default, a lender has the right to seize its collateral without judicial process, provided that engaging in self-help will not be a breach of the peace. As a practical matter, the lender will not be able to foreclose on collateral in the borrower's possession without the borrower's consent or a court order.

Following an event of default, a lender under Article 9 could sell, lease or otherwise dispose of any collateral in which it had a security interest. In addition, under RA9, a lender may now license the collateral. The lender may at its option dispose of the collateral in its present condition or following any commercially reasonable preparation or processing. The lender should evaluate the potential benefits that would result from the preparation or processing of the collateral prior to disposing of it. RA9 continues to allow the lender great leeway in disposing of the collateral, so long as every aspect of the sale is conducted in a commercially reasonable manner. This duty of the lender cannot be waived or varied, though the parties may define commercially reasonable by contract (so long as the standards agreed upon are not manifestly unreasonable). What constitutes commercially reasonable is fact sensitive and requires analysis and experience. The lender may still purchase collateral at a public disposition or a private disposition if the collateral is of the kind that is customarily sold on a recognized market or has widely distributed standard price quotations.

However, lenders and borrowers should be aware of one substantial change involving the disposition of collateral. Unless expressly disclaimed, lenders who voluntarily dispose of collateral provide the purchaser with warranties relating to title, possession and quiet enjoyment, as a matter of law. For example, if the collateral the lender is disposing of consists of goods, the lender provides the purchaser with warranties of title, merchantability and possibly also of fitness for a particular purpose.

If the collateral to be sold is not consumer goods, before proceeding with a foreclosure sale, the lender is required to give notice to: (1) any person that the lender has received an authenticated notice from claiming an interest in the collateral; (2) any other secured party or lien holder who ten days before the notification date had properly perfected its interest via a financing statement; and (3) any other secured party who ten days prior to the notification date held a security interest perfected by compliance with any statute, regulation or treaty described in RA9.

The lender's notification of a foreclosure sale must be a reasonable, authenticated record, transmitted either in writing or electronically or by any other medium that is retrievable in perceivable form. However, notice is not required if the collateral is perishable, threatens to decline quickly in value, or is customarily sold on a recognized market. In addition, RA9 provides the foreclosing lender with a safe harbor in non-consumer transactions if the notice is sent at least ten (10) days prior to the sale. The parties may provide by agreement the standards by which the lender's fulfillment of its duties is to be measured, so long as the standards selected are not manifestly unreasonable. After default, the borrower, under RA9, may waive its right to notice of a foreclosure sale by an authenticated agreement.

For non-consumer goods transactions, a lender's notice will be deemed sufficient under RA9 if it: (1) describes the borrower and the lender; (2) describes the collateral that is the subject of the intended disposition; (3) states the method of the intended disposition; (4) states that the borrower is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for such an accounting; and (5) states the time and place of the public sale or the time after which the lender may sell the collateral at a private sale. For convenience, RA9 provides a sample form of notice that, if complied with, would satisfy the reasonable notification requirement.

Although foreclosure under RA9 is very similar to foreclosure under Article 9, the procedures set forth in RA9 must be strictly adhered to in order to minimize risk to the lender liquidating the collateral.

Karen DeSalvo, a Partner in the Financial Services, Banking & Bankruptcy Department of Ruskin Moscou Faltischek, P.C., can be reached at 516-663-6585 or kdesalvo@rmfpc.com. Karen represents corporations, banks and other commercial lending institutions in connection with asset-based loans, lines of credit, term loans, participation and syndicated loans. She also has extensive experience in debtor-in-possession financing, equipment leasing, factoring, acquisition financings and loan workouts encompassing the preparation and negotiation of loan documents including loan and security, inventory, machinery and equipment, intercreditor, subordination, participation and forbearance agreements. Ruskin Moscou Faltischek, P.C. is one of Long Island's premier law firms and represents clients in connection with corporate compliance, mergers and acquisitions, securities offerings, technology, Internet, intellectual property, trademarks and copyrights, trial and appellate litigation, health law, seniors' housing, municipal and regulatory affairs, energy matters, commercial lending, real estate, employment, distressed asset management, loan workouts and bankruptcy, banking regulations, construction, litigation, corporate counseling and white collar crime and investigations, environmental matters, Surrogate Court litigation, wills, trusts and estate planning, business succession planning and international business transactions. For more information on Revised Article 9 or other current legal issues, please visit Ruskin Moscou on the web at www.rmfpc.com.