Rights Upon Default

Question 1

What is a default?

Answer 1

Any circumstance that the parties to a security agreement determine will constitute a default. Generally, this is the failure of the obligor to make timely payments to the secured party.

Question 2

Is a secured party required to give notice of default or intent to take possession?

Answer 2

No, unless the security agreement provides otherwise.

Question 3

What are the limitations on means of reposession?

Answer 3

A secured party must use judicial process to obtain possession unless possession can be obtained without breach of the peace.

Note: Breach of peace not defined, but usually any crimes except trespass are a breach of peace; threats or use of force also likely a breach.

Question 4

What is the commercially reasonable standard for disposition?

Answer 4

(1) usual manner on a recognized market;
(2) at price current at time of disposition, or
(3) otherwise in conformity with reasonable commercial practices among dealers in the type of property

Question 5

Is a secured party required to send a notification of disposition?

Answer 5

Yes. It must be sent to the debtor, any secondary obligor, and in the case of consumer goods, any other perfected secured party and any other party from whom secured party has received notice of a claim in the collateral.

Question 6

What must the notice of disposition include?

Answer 6

(1) names of debtor and secured party;
(2) description of collateral;
(3) statement of method of disposition;
(4) statement that debtor is entitled to an accounting; and
(5) statement of the time and place of a public disposition or the time after which a private disposition is to be made

Question 7

When must the notice be sent?

Answer 7

Notification should be sent sufficiently far in advance of the disposition to allow the notified party to act on the notification (reasonableness standard). Typically, 10 days before the disposition is reasonable (in transactions other than consumer transactions).

Question 8

What are the exceptions to notification?

Answer 8

A secured party is not required to send a notice of disposition when:

i) The collateral is perishable or threatens to decline speedily in value;
ii) The collateral is of a type customarily sold on a recognized market; or
iii) The persons entitled to notification waive the right to notification.

Question 9

How are cash proceeds from a disposition applied?

Answer 9

In the following order:

(1) Reasonable expenses for collection and enforcement;
(2) Satisfaction of obligations secured by the SI;
(3) Satisfaction of any subordinate SIs (provided that junior secured party made an authenticated demand for proceeds),
(4) Remainder to debtor

Question 10

How are non-cash proceeds from a disposition applied?

Answer 10

A secured party must apply or pay over for application non-cash proceeds of a disposition only if the failure to do so would be commercially unreasonable. If the secured party does apply or pay over for such proceeds, then he must do so in a commercially reasonable manner.

Question 11

What is the result of a “low price” disposition to a secured party?

Answer 11

If the amount of proceeds in a disposition to the secured party is significantly below the range of proceeds would have brought to someone other than the secured party, the amount of the deficiency may be adjusted to reflect the higher price that would have been realized by the other person.

Question 12

When can a secured party accept collateral in full satisfaction of an obligation?

Answer 12

When (1) the debtor consents, after default, to the acceptance in an authenticated record or (2) the debtor does not object to the secured party’s proposal to accept the collateral within 20 days after the proposal is sent

Question 13

When can a secured party accept collateral in partial satisfaction of an obligation secured by the collateral?

Answer 13

If the debtor consents, after default, to the acceptance in an authenticated record.

Question 14

Who does a secured party who wishes to accept collateral in full or partial satisfaction have to notify?

Answer 14

(1) Debtor
(2) Any secured party or lien holder who held a secured interest that was perfected by filing within 10 days before the debtor consented
(3) any person from whom the secured party received an authenticated notification of a claim of interest in collateral

Question 15

Can a secured party accept collateral in partial satisfaction in a consumer transaction?

Answer 15

No. Only acceptance in full satisfaction is valid.

Question 16

What is the 60% rule?

Answer 16

If the goods are consumer goods in the possession of the secured party, and the debtor has paid at least 60% of the cash price in the case of a PMSI, then the secured party cannot keep the goods in satisfaction. They must be sold.

Question 17

How can a debtor redeem collateral?

Answer 17

Unless the secured party has disposed of the collateral, accepted it in full or partial satisfaction, or collected on it, the redeemer must fulfill all obligations secured by the collateral in addition to reasonable expenses incurred by the secured party.

Question 18

Is a waiver of the right of redemption in a security agreement valid?

Answer 18

No, but after default, the debtor or secondary obligor may waive the right in an authenticated agreement.