11 Things to Consider Before Initiating a Commercial Foreclosure

By Jennifer J. West

Jen West

Before you decide whether foreclosure, workout or forbearance might be the right strategy for handling a troubled loan secured by real and/or personal property, there are a number of factors that need to be considered. Below is a list of eleven issues of which every commercial lender should mindful as they prepare a plan to recover a troubled loan. Because every loan and lending relationship has its own unique issues, this list is not exhaustive, but is intended to provide an initial checklist of items that should be included in any analysis of a lender's best course of action.

•1. Confirm collateral position and status of loan documents. Have an attorney with experience in evaluation of commercial loan transactions review the entire loan file including the perfection of all security interests to confirm that there are no problems with either the loan documents themselves or the lender's collateral position. Now may be the perfect time to fashion a workout to correct any problems with the documents or defects in the lender's collateral position.

•2. Value of collateral. Consider obtaining updated appraisals of all collateral securing the loan to confirm overall equity position.

•3. Update title information. Obtain updated title searches for real estate collateral, and obtain updated UCC searches to confirm lien position for any liens on personal property.

•4. Tax liens? If your updated title searches and UCC searches reveal tax liens, be sure to consider the implications those liens will have on the sale, including any additional notices of sale to which the IRS or the state taxing authority may be entitled.

•5. Insurance. Confirm that the borrower has adequate insurance in place to protect the lender's interest in the collateral. If not, consider force-placing insurance on any underinsured or uninsured collateral.

•6. Environmental Issues? If the collateral is real estate on which there is a business with potential environmental issues, such as a gas station, industrial manufacturing facility, or auto repair facility, consider ordering a Phase I Environmental Analysis. Any parties willing to pay fair market for this type of property are going to insist on reviewing the Phase I results, and any lender who may ultimately end up with the property as other real estate owned ("oreo") needs to know about potential environmental problems prior to placing themselves into the chain of title.

•7. Possible use of an auctioneer to assist with marketing the property. If the collateral is designed for a very specialized purpose, such as a dairy farm, or specialty restaurant equipment, it may be beneficial to consider using an auction company to assist in marketing the collateral to a nationwide, or even worldwide market to maximize the lender's recovery. Use of an auctioneer adds a significant expense to the sale process, but may result in an increased recovery that far exceeds the added cost.

•8. Disposal of personal property collateral. Do not overlook the special notice and sale requirements set forth in the Uniform Commercial Code with regard to disposal of personal property. Notices to inferior lienholders and the borrowers/grantors are required, and the sale must be conducted in a commercially reasonable manner. These notice requirements differ from the notice requirements related to real estate, but must be coordinated in order to be sure that any sale involving both personal property and real estate is valid as to both types of collateral.

•9. Deed in Lieu of Foreclosure? There are several issues that must be evaluated in determining whether or not acceptance of a deed in lieu of foreclosure is appropriate in any given circumstance, including without limitation, the existence of inferior lienholders, the possible effect on guarantees, and the overall status of the lending relationship. An attorney should be consulted to review all of the potential issues prior to making any decisions with regard to acceptance of a deed in lieu.

•10. Possibility for restructuring or resolution? Unless the lending relationship is irretrievably broken, consider the option of working with the borrower to restructure and reorganize the debt. It may result in a salvaged relationship with the borrower, and could result in a better long-term recovery for the lender. As mentioned above in #1, if there are problems with the documents or the collateral, use of a workout or forbearance agreement may be the perfect vehicle to correct those problems and place the lender in a much stronger position if the collateral must be liquidated later.

•11. Bankruptcy implications? A bankruptcy filing by the borrower could have an impact any action taken by the lender in connection with foreclosure, workout, forbearance or restructuring of the lending relationship, particularly if a workout or forbearance includes a document fix or pledging of additional collateral. An attorney experienced in handling these issues from the creditor's perspective should be consulted to determine what impact a bankruptcy filing could have, and to determine the best way to mitigate any potential risk involved.

For more information please contact Spotts Fain attorney, Jennifer J. West (804) 697-2094.

*Disclaimer: This is not intended to be legal advice on which you may rely. This list is not exhaustive. Every lending relationship is unique. It is important to consult with any attorney prior to taking any steps to foreclose, workout or restructure a secured obligation, for legal advice tailored to your specific circumstance, including any issues that may arise due to a bankruptcy filing or other insolvency proceeding. Nothing herein shall be construed to create an attorney-client relationship between the reader and Spotts Fain.