Building windows

Foreclosure Notices of Sale Must Be Carefully Drafted – Or Unintended Consequences May Follow

No one pays much attention to preparing a Notice of Trustee’s Sale or a Uniform Commercial Code (“UCC”) Notice of Intended Disposition. Both are regulated by statute, and a Notice of Trustee’s Sale is usually prepared by the foreclosure company here in California (and other states where non-judicial foreclosure of real estate is commonly used). A Notice of Trustee’s Sale is also used in California to conduct a “unified” foreclosure sale of both real and personal property collateral.

The concern here is to double check exactly the description of the collateral that is being sold at foreclosure. Where the notice is prepared by an outside vendor, it is critical to make certain that the vendor has all of the necessary information to prepare the notice properly. Even then, costly mistakes can be made, so it is very important to check carefully.

In a recent bankruptcy of a hotel, the FDIC had taken over the lender to a troubled hotel. A Chapter 11 trustee was appointed and she engaged a hotel management company to operate the hotel. Ultimately, the FDIC obtained stay relief and foreclosed. When the dust cleared, the buyer demanded that all the cash on hand be turned over to it. The buyer’s rationale was that the FDIC, as secured creditor, had a security interest in the accounts receivable and proceeds, and that when the FDIC conducted a unified foreclosure sale of both the real and personal property, its Notice of Trustee’s Sale included a definition of accounts receivable and proceeds as collateral being sold.

If the buyer wins this dispute, it leaves the Chapter 11 trustee with no cash to pay administrative expenses (generally speaking, “administrative expenses” are fees earned by the Chapter 11, the lawyers and the accountants) and unsecured creditors. If the Chapter 11 trustee wins the dispute, the buyer gets no cash to put in the till on its opening day as hotel owner.

If this was an arms-length sale of a business, the issue of who gets the cash is determined by negotiations and the purchase and sale agreement. But in a foreclosure sale, what is sold is determined by what is advertised for sale at auction and what the auctioneer describes is being sold when the auction is conducted.

Because this foreclosure occurred in the context of a Chapter 11 case, there is a twist. The cash was actually sitting in bank accounts in the name of the Chapter 11 trustee at the time of the foreclosure sale. My analysis is that the Chapter 11 trustee gets to keep the cash because the collateral description in the FDIC’s deed of trust and security agreement does not include a description of cash in a deposit account in the name of the Chapter 11 trustee.

A similar circumstance occurred last year with serious consequences in the context of an arms-length sale of an operating business during a Chapter 11 bankruptcy case. The parties did not specifically address the question of who gets the cash in the purchase and sale agreement. The sale closed and the buyer demanded the cash. The Chapter 11 debtor, who was the seller, refused, as it was counting on the cash to pay administrative expenses. The end result: the bankruptcy court awarded the cash to the buyer, leaving an administratively insolvent bankruptcy estate.

I am waiting for a lender to notice up the sale of an income property that is under water, i.e., the property is worth less than the debt. The sale notice will include a description of all the collateral, including the rents. For some reason, the rent proceeds will still be in deposit accounts belonging to the borrower when the foreclosure sale takes place. The lender will be expecting to be the successful credit bidder at the foreclosure sale and figures to get the cash for operating expenses. But another bidder sneaks in at the last minute and overbids the lender – winning the auction and ending up with the cash in the borrower’s accounts as well as the property.

We’ve also run into problems caused by signals crossing between the lender and the foreclosure company. In one matter, the lender only had real property collateral, but the foreclosure company noticed a “unified” sale of real and personal property. The dispute was ultimately resolved, but it at a cost of time and attorneys’ fees that could have been avoided.

The JMBM Special Assets Team™ can help make sure that your foreclosure sale goes as planned. Most commercial lenders want to avoid foreclosure and they go to auction only where there are no other realistic choices. If you find that you must take that final step, make sure that you do it properly and structure your sale for the highest possible return. Most lenders want third party buyers to buy at the foreclosure sale, and carefully setting the stage and making sure the notices are properly drafted are important steps in the process.

The lesson here is clear: look carefully at foreclosure notices before they go out. If you have any doubts, ask questions until you get answers that make sense to you. Ask to see a draft. Compare it to the collateral descriptions in your deed of trust and security agreement. Take extra care where intangible property, such as stock, accounts or other rights, is being sold. Exclude the cash from the property being sold. That way, if you end up bidding less than the full amount of your debt, you will get some cash to help cover the shortfall.

This is Dick Rogan, bank lawyer and author of, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.


Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.