Maximizing Recovery in Connecticut Commercial Foreclosures by Leveraging Underutilized Collection Strategies

Introduction

In Connecticut’s complex judicial foreclosure landscape, where prolonged timelines and judicial discretion can delay resolution, commercial mortgage lenders face increasing challenges in securing timely recoveries. While traditional foreclosure proceedings remain the foundation of commercial recovery in Connecticut, many lenders overlook powerful supplementary collection strategies that can significantly enhance recovery outcomes. This article explores ten underutilized yet highly effective tactics that can be integrated within and alongside foreclosure actions. These include leveraging lender letters to tenants, utilizing court-appointed receivers, pursuing prejudgment attachments, initiating replevin actions, seeking deficiency judgments, exercising setoffs, issuing notices to account debtors, suing guarantors, foreclosing on multiple mortgages simultaneously, and naming tenants in foreclosure actions. By understanding and implementing these complementary tools, lenders can develop comprehensive recovery strategies that maximize returns, minimize delays, and protect collateral value throughout the foreclosure process.

Direct Rent Collection Through Assignment of Rents: Notifying Tenants to Pay Rent to the Lender

Commercial mortgages often include an assignment of rents provision, allowing lenders to collect rent directly from tenants when a borrower defaults. Under Connecticut law, lenders can enforce this provision by formally notifying tenants to redirect rent payments to them, citing the assignment and default. This strategy provides immediate cash flow, reduces losses during foreclosure, and helps maintain revenue to service the debt. Despite its effectiveness, lenders often overlook this right, missing a critical opportunity to stabilize income and mitigate financial risk.

Key Steps:

• Review the Assignment of Rents Clause: Confirm that the mortgage or loan agreement includes a valid assignment of rents provision.
• Notify Tenants: Upon default, send a formal notice to tenants directing rent payments to the lender, ensuring compliance with Connecticut law.
• Enforce Compliance: If tenants fail to comply, legal action may be required to enforce the assignment of rents.

Benefits:

• Immediate Cash Flow: Redirected rent payments provide immediate liquidity to maintain the property or offset debt.
• Enhanced Property Control: Rent collection gives the lender greater oversight, reducing risks of property deterioration or mismanagement.

Appointing a Court Receiver Under the Uniform Commercial Real Estate Receivership Act

A powerful yet often underutilized tool for lenders in foreclosure proceedings is the appointment of a court-appointed receiver under Connecticut’s Uniform Commercial Real Estate Receivership Act (UCRERA), codified in Conn. Gen. Stat. § 52-619 et seq. A receiver can assume control of the property, preserving its value and maximizing income throughout the foreclosure process. This is particularly beneficial when a defaulting borrower mismanages the property, neglects repairs, or fails to maintain its value.

Key Responsibilities of a Receiver Under UCRERA:

• Preserve and protect the property’s value.
• Collect rents and manage tenant relationships.
• Oversee repairs and maintenance.
• Market and lease vacant spaces.
• Provide professional property management and accounting services.

Key Steps:

• File a Motion for Appointment: The lender must petition the court, demonstrating the need for a receiver to protect the property and its interests.
• Obtain Court Approval: If justified, the court will appoint a receiver to assume control of the property.
• Receiver’s Responsibilities: The receiver manages the property, collects rents, and oversees maintenance until the foreclosure is completed.

Benefits:

• Property Preservation: A receiver ensures proper maintenance, preventing deterioration and preserving the property’s value.
• Maximized Income: By collecting rents and other income, the receiver helps offset debt or fund necessary property upkeep, benefiting the lender.

Prejudgment Attachments to Secure Recovery of Post-Foreclosure Deficiency Judgments

When a post-foreclosure deficiency is anticipated (meaning the loan debt exceeds the property’s value) lenders can seek prejudgment attachments on the borrower’s and guarantor’s other assets. This powerful legal remedy enables lenders to secure assets before obtaining a deficiency judgment, preventing asset dissipation and increasing the likelihood of recovering the post foreclosure remaining loan balance.

Key Steps:

• File a Motion for Prejudgment Attachment: The lender must petition the court, demonstrating the likelihood of a deficiency judgment. This involves calculating the anticipated shortfall by comparing the property’s value to the outstanding debt.
• Obtain Court Approval: If the court finds sufficient evidence, it will issue an order allowing the lender to attach the borrower’s and guarantor’s other assets.
• Enforce the Attachment: Once approved, the lender secures the assets to help satisfy any future deficiency judgment.

Benefits:

• Asset Security: Prevents borrowers and guarantors from dissipating assets, ensuring funds remain available to cover the deficiency.
• Increased Recovery Potential: Strengthens the lender’s ability to recover the full debt amount by securing assets early.

Filing a Simultaneous Replevin Action to Recover Personal Property Collateral

Many commercial loans are secured by both real estate and personal property (e.g., machinery, equipment, inventory). When a borrower has pledged personal property as collateral, lenders can file a simultaneous replevin action alongside the foreclosure. This enables the lender to take possession of the collateral and liquidate it through a UCC Article 9 secured party sale, generating funds to offset the outstanding debt.

Key Steps:

• File a Replevin Action: The lender must file a replevin action in court to seek possession of the personal property collateral.
• Obtain a Court Order: If approved, the court will issue an order allowing the lender to take possession of the collateral.
• Liquidate the Collateral: The lender can sell the collateral through a UCC secured party sale and apply the proceeds to the outstanding debt.

Benefits:

• Protection of Collateral Value: Securing control of personal property collateral through a replevin action helps prevent deterioration, loss, depreciation, or borrower-caused dissipation of valuable assets such as equipment or inventory.
• Accelerated Recovery: A replevin action allows the lender to quickly seize and liquidate collateral, generating immediate funds to offset the debt.

Exercising Lender Setoff Against Borrower Funds Held in Lender Bank Accounts

If a borrower holds funds in an account with the lender (e.g., deposit accounts), the lender may exercise a ‘setoff’ upon default, applying those funds to the outstanding debt. By directly deducting amounts from the borrower’s deposit accounts, the right of setoff provides lenders immediate access to liquid assets, making it an efficient and effective collection method.

Key Steps:

• Review the Loan Agreement: Ensure the agreement includes a setoff provision allowing the lender to apply account funds toward the debt.
• Exercise the Setoff: Upon the borrower’s default, apply available funds from their account to the outstanding balance.
• Notify the Borrower: Provide the borrower with formal notice and an accounting of the funds applied.

Benefits:

• Immediate Recovery: Setoffs allow lenders to recover funds directly from the borrower’s account without court involvement.
• Risk Mitigation: This process reduces the likelihood of the borrower withdrawing or depleting their funds held in lender bank accounts.

Issuing Notices to Account Debtors Under UCC Sections 9-406 and 9-607

Under UCC Sections 9-406 and 9-607, lenders can issue notices to borrower account debtors (parties owing money to the borrower), directing them to pay outstanding receivables (owed to the borrower) directly to the lender. This mechanism allows lenders to intercept the borrower’s income streams, ensuring that funds are applied to satisfy the borrower’s debt rather than being diverted elsewhere. For loans secured by accounts receivable, this tool is particularly effective in accelerating collections. Properly drafted and served notices are critical to the success of this strategy, as they legally bypass the borrower and redirect payments to the lender.

Key Steps:

• Identify Account Debtors: The lender should identify which parties owe money to the borrower.
• Send Notices: The lender should issue formal notices to the account debtors, instructing them to make payments directly to the lender.
• Enforce Compliance: If account debtors fail to comply, the lender may need to take legal action to enforce the notices.

Benefits:

• Direct Recovery: Notifying account debtors allows the lender to collect funds directly from those owing money to the borrower, ensuring an immediate source of repayment.
• Increased Control: Redirecting payments to the lender minimizes the risk of the borrower misusing or depleting the funds.

Simultaneous Foreclosure of Multiple Mortgages

When a lender holds multiple related mortgages with the same borrower (e.g., two mortgages securing the same loan or two mortgages on the same property securing different loans), foreclosing on all mortgages simultaneously within a single foreclosure action can significantly improve efficiency. This strategy avoids the costs and delays associated with filing separate lawsuits, reduces legal expenses, and ensures a more comprehensive resolution of the debt.

Key Steps:

• Identify All Mortgages: Identify all related mortgages held by the borrower that are in default.
• File a Single Foreclosure Action: Commence one foreclosure action, including all defaulted mortgages in the complaint.
• Obtain a Single Judgment: The court will issue a single judgment, allowing the lender to foreclose on all mortgages simultaneously.

Benefits:

• Increased Efficiency: Foreclosing multiple mortgages in one action reduces time and legal costs.
• Comprehensive Recovery: This strategy ensures that all mortgages are addressed, maximizing the lender’s recovery.

Including Guarantors in the Foreclosure Action

Lenders can increase efficiency by including guarantors in the foreclosure action, rather than pursuing separate lawsuits against them after the foreclosure. This approach enables lenders to seek a post-foreclosure deficiency judgment against the guarantors alongside the borrower, within the same proceeding, avoiding duplicative litigation. By addressing guarantor liability concurrently with the borrower’s, this strategy streamlines the recovery process, especially when the guaranty is unconditional and covers the full debt.

Key Steps:

• Include Guarantors in the Foreclosure Action: Name the guarantors as defendants in the foreclosure action.
• Seek a Deficiency Judgment Against Guarantors: Request a deficiency judgment against the guarantors, in addition to the borrower, within the same foreclosure action.
• Enforce the Judgment: Once the court issues a deficiency judgment, the lender can enforce it against the guarantors’ and borrower’s assets.

Benefits:

• Efficiency: Including guarantors in the foreclosure action eliminates the need for a separate lawsuit, saving both time and legal costs.
• Enhanced Recovery: Pursuing guarantors within the same action increases the likelihood of recovering the full debt amount.

Including Tenants in the Foreclosure Action

Lenders can include tenants as defendants in the foreclosure action to avoid the need for a separate post-foreclosure eviction proceeding against holdover tenants. This strategy ensures that tenant rights and issues are resolved during the foreclosure process, speeding up and streamlining the transition of property possession after the foreclosure is complete.

Key Steps:

• Identify Tenants: The lender should identify all tenants occupying the property.
• Name Tenants in the Foreclosure Action: The lender should name tenants as defendants in the foreclosure action.
• Obtain Possession: After the foreclosure is complete, the lender can take possession of the property without needing a separate eviction action.

Benefits:

• Including tenants in the foreclosure action eliminates the need for a separate eviction proceeding against holdover tenants, saving both time and legal expenses.
• Immediate Possession: This approach enables the lender to secure possession of the property more quickly, minimizing the risk of deterioration or mismanagement.

Seeking Post-Foreclosure Deficiency Judgments

If the value of a foreclosed property is insufficient to cover the outstanding debt, Connecticut law allows lenders to seek a post-foreclosure deficiency judgment against the borrower and guarantors. This judgment enables lenders to recover the difference between the outstanding debt and the property’s fair market value from the borrower’s and guarantors’ other assets, such as real estate, bank accounts, or personal property. Lenders must follow Connecticut’s legal process, including notice requirements and fair market value determination, to properly pursue a deficiency judgment.

Key Steps:

• File a Motion for Deficiency Judgment: After the foreclosure, the lender must file a motion with the court to seek a deficiency judgment for the remaining loan balance.
• Court Approval: The court will review the motion and evidence, and if granted, will issue a deficiency judgment.
• Enforce the Judgment: Once a deficiency judgment is issued, the lender can pursue various collection methods, including wage garnishment, bank levies, and filing and foreclosing on judgment liens.

Benefits:

• Full Recovery: A deficiency judgment allows the lender to recover the entire debt amount, even if the foreclosure proceeds are insufficient.
• Legal Recourse: The lender gains legal recourse to pursue the borrower’s and guarantors’ other assets, ensuring the debt is fully satisfied.

Conclusion

Commercial foreclosures in Connecticut present complex and time-consuming challenges for lenders. While the traditional foreclosure process is often the primary focus, several underutilized yet powerful collection strategies can enhance efficiency, streamline legal proceedings, and maximize recovery. These include leveraging lender letters to tenants, utilizing court-appointed receivers, pursuing prejudgment attachments, initiating replevin actions, seeking deficiency judgments, exercising setoffs, issuing notices to account debtors, suing guarantors, foreclosing on multiple mortgages simultaneously, and naming tenants in foreclosure actions. By strategically combining these approaches, lenders can improve their chances of successful debt recovery in the challenging landscape of commercial foreclosures.

Neubert, Pepe & Monteith, P.C.

Neubert, Pepe & Monteith, P.C. has extensive experience representing creditors in recovery litigation matters, offering effective and strategic legal counsel. For more information or to schedule a consultation, please contact Attorney Lucas Rocklin at (203) 781-2835 or via email at lrocklin@npmlaw.com.

Lucas B. Rocklin

Lucas B. Rocklin is a creditor rights attorney. He has extensive experience in representing financial institutions and creditors in workout and litigation matters (commercial and consumer) including collections, foreclosures, bankruptcy and landlord-tenant litigation. Attorney Rocklin also practices labor law including collective bargaining agreement negotiations and arbitrations.

Joseph R. Dunaj

Joseph R. Dunaj is a member of the firm’s commercial litigation, and bankruptcy and creditor rights groups. His extensive experience includes representation of financial institutions and creditors in various collection cases and foreclosure cases, inclusive of settlement negotiations, title matters, and both appellate and bankruptcy work.

John T. Szalan II

John T. Szalan is a member of the firm’s commercial litigation and creditor rights groups. His experience includes representation of financial institutions, creditors, and institutional real estate clients, inclusive of settlement negotiations, title issues, and real estate transactions.