When Workouts Fail: Strategic Enforcement to Maximize Recovery
May 06, 2025
Our new insightful and informative series, “Protecting Lenders: Strategic Responses to Borrower Default," is designed to provide comprehensive guidance on managing borrower defaults effectively. This four-part series covers the essential aspects of default management from initial response through various resolution strategies. The third installment provides insights on navigating enforcement mechanisms in Connecticut and New York, including judicial foreclosure options, receiverships, and UCC enforcement for non-real estate collateral.
Navigating the Enforcement Landscape: Judicial and Non-Judicial Options for Lenders
When workout negotiations collapse or borrowers fail to perform under restructured agreements, lenders must pivot decisively to enforcement strategies. Your optimal approach will depend on jurisdiction, scope of collateral, and loan documentation—each pathway offering distinct advantages and procedural requirements.
Connecticut Real Estate Enforcement
Connecticut offers two distinct judicial foreclosure pathways:
Strict Foreclosure
- Title vests directly in the lender without public sale
- Particularly effective when property value is insufficient to adequately secure debt
- Eliminates auction costs and accelerates possession
Foreclosure by Sale
- Court-supervised auction process
- Creates transparent market valuation
- Potential for recovery of surplus value beyond the debt for benefit of borrower and junior lienholders
Both processes require meticulous preparation, including comprehensive title searches, current professional appraisals, precisely calculated payoff statements, and proper notification to all parties holding interests in the property. Both processes provide clear foundation for post-foreclosure deficiency claims on a strict timeline. Strategic decisions regarding whether to name guarantors in the action must be made early in the process, though Connecticut law does not require guarantors to be party to a foreclosure action.
Connecticut’s Uniform Commercial Real Estate Receivership Act (UCRERA)
Connecticut’s recently enacted UCRERA sets forth a streamlined framework for the strategic implementation and use of receiverships in commercial foreclosure. UCRERA governs:
- The type of property for which a receiver may be appointed
- When a receiver can be appointed and who may serve as receiver
- A Court-appointed receiver’s broad powers and duties going beyond rent collection, including sale of real and non-real property collateral through non-distressed sale maximizing recovery
- A bankruptcy-like claims process for junior creditors
New York Real Estate Enforcement
New York's judicial foreclosure process follows a more focused structure:
- Potential Default and Pre- and Post- Foreclosure notice and filing requirements depending on the nature of the real estate collateral
- Availability of receiverships in appropriate circumstances
- Court-appointed reference for calculation of debt and sale processes
- Foreclosure only by judicial sale permitting lender credit bidding, with strict timelines for seeking recovery of surplus monies and deficiency judgments
New York's Single Action Rule limits a lender’s ability to pursue multiple actions to recover a debt secured by real property preventing a lender from simultaneously foreclosing on a mortgage and suing on an underlying debt instrument raising strategic pre-enforcement considerations. New York also has particular timing limitations for mortgage foreclosures. Note that "power of sale" foreclosure is no longer available in New York, making judicial process the only viable pathway.
Non-Real Estate Collateral: UCC Enforcement
For business assets, securities, and other non-real estate collateral, Uniform Commercial Code (UCC) foreclosure provides an effective enforcement mechanism:
- Applies to membership interests, equipment, inventory, accounts receivable, and intellectual property
- Requires precise notice to borrowers and other interest holders in the collateral
- Allows flexible disposition through public or private sales
- Permits lender credit bidding in public sale formats
- Requires "commercial reasonableness" standard for all aspects of the process
- Mandates distribution of proceeds according to security priority
- Preserves deficiency claim rights where sale proceeds fall short of indebtedness
Strategic selection and execution of these enforcement mechanisms directly impacts recovery amounts, timeline to resolution, and exposure to subsequent litigation risk.
Maximize your recovery potential. Schedule a strategic enforcement consultation with our specialized team to develop a tailored approach that optimizes your recovery while minimizing procedural pitfalls and litigation exposure or if you’re interested in scheduling a private and customized presentation on navigating borrower defaults, workouts, and enforcement actions.