Mixed collateral

     As illustrated in Lovelady v. Bryson Escrow, Inc., many commercial transactions involve mixed collateral, i.e. the creditor takes a security interest in both real and personal property and sometimes fixtures to secure a single obligation. In Lovelady, the sellers of a restaurant business secured payment of a note for the purchase price of the business with both the personal property of the business being sold (restaurant equipment and fixtures) and with a leasehold interest in the real property at which the restaurant was located.

     The construction or purchase of a hotel offers another illustration. The lender will take a deed of trust on the real property (the building(s) and the land on which the buildings are located) and a security interest in the personal property (the beds, other furniture and fixtures of the hotel). If the debtor defaults, the lender will want to maximize its return in the foreclosure sale.  Depending upon alternatives uses of the real property (including demolition of the hotel to be replaced by other improvements) the lender may be able to obtain more from a foreclosure sale of the real property alone or may be able to obtain more from a unified foreclosure sale of both the real property and the personal property.  

     As you would expect, and as illustrated in Lovelady, the lender must insure that its lien on the real property is enforceable under real property security law and that its lien on the personal property and fixtures is enforceable under Article 9.

     We will explore significant differences between a creditor's real property foreclosure and deficiency rights and its personal property foreclosure and deficiency rights. Because of those differences, foreclosure on mixed collateral poses some difficult and complex issues. We introduce these issues in Commentary. Foreclosure on Mixed Collateral.