In the Jersey Mikes security agreement, what happens if there is a deficiency after the sale of collateral?
Jersey_Mikes Franchise · 2025 FDDAnswer from 2025 FDD Document
The Secured Party may itself, upon the occurrence of any Event of Default, so notify and direct any such obligor and may take control of any proceeds to which it may be entitled hereunder.
- 3.4 The proceeds of any sale or other disposition of Collateral authorized by this Agreement shall be applied by the Secured Party first upon all expenses authorized by the Uniform Commercial Code and all reasonable attorney fees and lega l expenses incurred by the Secur ed Party; the balance of the proceeds of such sale or other disposition shall be applied in the payment of the Indebtedness, first to interest, then to principal, and the surplus, if any, shall be paid over to the Debtor or to such other person or persons as may be entitled thereto under applicable law.
The Debtor shall remain liable for any deficiency, which it shall pay to the Secured Party immediately upon demand.
Source: Item 22 — CONTRACTS (FDD page 77)
What This Means (2025 FDD)
According to Jersey Mikes' 2025 Franchise Disclosure Document, if the proceeds from the sale or disposition of collateral are insufficient to cover the outstanding debt, the franchisee (Debtor) is liable for the deficiency. After the collateral is sold, the proceeds will be applied to cover expenses authorized by the Uniform Commercial Code, reasonable attorney fees, and legal expenses incurred by the Secured Party. The remaining balance will then be applied to the outstanding debt, first to interest and then to the principal.
If a deficiency remains after these applications, the franchisee is obligated to pay the remaining amount to the Secured Party immediately upon demand. This means that even after Jersey Mikes has seized and sold the collateral, the franchisee is still responsible for any unpaid balance on the debt.
This clause protects Jersey Mikes by ensuring they can recover the full amount of the debt owed, even if the collateral's value is less than the outstanding balance. For a prospective franchisee, this highlights the importance of carefully assessing their financial capacity and understanding the potential risks associated with securing financing for the franchise. It is advisable to consult with a financial advisor to fully understand the implications of this deficiency clause.