Foreclosing on a mixed collateral loan is not as tough as one might think, not with the law on your side.
So in late in 1996, “The Bank of Real Estate” made you a real estate loan to go buy that 100 unit apartment complex. You thought you would spend the rest of your days soaking up the sun and drinking Kona coffee on your very own beach in Maui.
Fast forward. It is 2009, you’re a running 10% higher vacancy, the loan has reset (higher of course), and you, and your dream, are in serious trouble. Try as you might, the lender is not willing to recast your loan.
The next thing you know, the lender has gone ahead and notified you that it intends to sell all the furniture in your furnished units in one commercially reasonable sale. But they do not foreclose on the apartment complex.
You think back quickly to your college days and business law class and realize that perhaps “The Bank of Real Estate” made a major mistake. You recall something about a secured real property lender having but one action within which to foreclose against real estate security or risk losing its lien on the property. You decide to call your real estate lawyer confident in two things, the lender lost its lien on your 100 units and you have been saved from a life of burnt day old coffee and crowded beaches.
In your call, you find out that they don’t call your lender “The Bank of Real Estate” for nothing. Counsel explains that your lender took a secured interest in both the real estate and personal property used with the real estate – i.e. the furniture used in your furnished units. This is the so-called “mixed collateral” situation and lenders face it all the time.
Empathetically, your lawyer explains that when it comes to dealing with mixed collateral loans, sometimes there is confusion about how a lender is to proceed in the event of a borrower’s default. First off, the term “mixed collateral” refers to those situations where the loan is secured by some combination of real and personal property. For example, a trust deed against the building together with a security interest in accounts receivables, fixtures, furniture and equipment.
The confusion stems from the general differences in the way a lender forecloses on a loan secured by real property versus personal property. California, like most jurisdictions, provides a set of rules to reconcile the differences in requirements for foreclosing personal versus real property.
In your case, when you defaulted, “The Bank of Real Estate” had the right to pick and choose which property (real versus personal property) to foreclosure and in which order.
California’s Commercial Code §9401 provides the primary rules for dealing with these mixed collateral situations. It, and the cases interpreting it, hold that the lender gets to pick the order in which the collateral is foreclosed and may sell its security in a series of sales without violating the one action rule that you remembered from your business law class. So, for example, “The Bank of Real Estate” could choose to foreclose against the furniture, as it did, and then the real property ….. or the other way around. That’s the easy part.
As for our friend and his fleeting dreams of Kona coffee on Maui, he should have considered contacting his trusty real estate lawyer before he took the adjustable loan and perhaps he’d be riding the waves to no where instead of the Amtrack to his new no where job….. at least that’s what this lawyer thinks.
This is an unlikely scenario but designed to make an illustrative point.
2 Nothing in this article is intended to nor should it be construed as legal advice. Situations involving mixed collateral can be quite complex and you should consult with your legal professional regarding your particular situation.