#5 - Article 9 Sale and Deficiency Flashcards
Acceptance of Collateral
After default, debtor can consent to secured creditor retaining collateral in full or partial satisfaction (“partial” meaning debtor receives credit against the debt in some amount but continues to owe the remainder)
UCC 9-620
Acceptance is roughly analogous to Deeds in Lieu of Foreclosure
Right to Consent
9-620c2 implies consent if secured party sends debtor proposal for retention of collateral in full satisfaction and doesn’t get a written objection within 20 days. Oral objection from debtor doesn’t work. Basically if you do nothing, you consented.
Sale Procedure under Art 9
9-610 governs procedure of sales
Most important difference from real estate: the secured creditor conducts the sale, not a public official
Creditor can choose method and timing mostly: can choose auction, fixed price, or negotiating. Still has duty to debtor to choose procedure that is “commercially reasonable” in terms of method, manner, time, place, and terms 9-610(b)
Requirement to Give Debtor Notice
9-611(c)(1) requires creditors doing a foreclosure sale to notify the debtor of the sale
Art 9 Right to Redeem / Equity of Redemption Equivalent
9-623 gives debtors the option to redeem by paying the full debt.
Note: there is NO equivalent of the statutory right to redeem after the foreclosure sale in Art 9.
Setting Aside the Sale
9-617b = Failing to comply with Art 9 is not enough to set aside the sale. Only a lack of good faith will cause a sale to be set aside.
Policy = this encourages 3rd parties to buy property. Because if the sale could be set aside because of some technicality or even a problematic behavior from the creditor surrounding the sale, that would reduce public confidence in buying the property and result in lower prices.
Consequence for Creditor Misbehavior = If a creditor failed to comply with Art 9, the debtor gets an action for actual damages under 9-625(b)
Debtor Liability for Deficiency after Art 9 Sale
9-615(d) general rule: debtor on secured debt is liable for any deficiency remaining after the sale
Two anti-deficiency limits:
1. 9-615(f) applies when the secured party buys collateral at the sale for a price substantially below what would have been paid in a commercially reasonable sale. The amount that would have been realized in a complying sale to a third party is treated as if it were the actual sale price, thus limiting the recoverable deficiency to the creditor.
- 9-626(a)(3) applies when the sale does not comply with requirements of Art 9. In calculating the deficiency, the amount that would have been realized in a complying sale is treated as the actual sale price.
Deficiency litigation is more common than loss of equity but is limited by the fact that “commercially reasonable sale” is vague enough that debtors can fight back.
Problems with the Art 9 Sale Procedure: #1 Failure to Sell the Collateral
9-610(a) = the secured party may sell the collateral after default, but there is no requirement that the secured party MUST sell it (except for a narrow exception for some consumer goods in 9-620(f)). The secured party can keep it and use it.
Issue of Accepting Collateral: if the secured party waits too long or procrastinates, an issue arises: are they just trying to keep it? Were they accepting collateral without complying with UCC 9-620 restrictions on acceptance? If a court concluded the sec creditor was attempting improper acceptance, court could order a sale or award damages under 9-625(a) and (b).
If a secured party was proceeding to sale, the second issue is: whether they were doing it at a “commercially reasonable pace”.
Collateral may decline in value while the secured party has possession. That does nothing for the debtor alone. But if the creditor’s delay is commercially unreasonable, that creditor’s deficiency will be lowered by limiting it to the amount that would have been left owing if the sale had been commercially reasonable. See 9-626(a)
Problems with the Art 9 Sale Procedure: #2 The Notice Requirement
9-611 requires that the secured party send notice to the debtor, guarantors, and some lienors. To identify lienors, the secured party may have to conduct a search of the public records. Failure to give this notice does not invalidate the sale, UCC 9-617, but it’s a defect that can affect the deficiency amount by lowering it or sometimes eliminate the deficiency.
Problems with the Art 9 Sale Procedure: #3 The Requirement of a Commercially Reasonable Sale
9-610(b) requires that “every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” It’s vague on purpose, and its goal is to bring the knowledge and ingenuity of the secured party to bear in determining a reasonable way to dispose of the collateral.
Ordinarily, that will be a method that will be reasonable for owners of the particular type of property to use if their own money were at stake.
Requires close factual inquiry
Creditor Can Accept Collateral for Full or Partial Satisfaction of Debt
For Full Satisfaction = if debtor does not respond to notice, debtor’s silence will be taken as consent to acceptance. This is only the case if the debtor hands the property over and there is no deficiency at all, must be full satisfaction. Anything less, and the debtor’s inaction can’t work as consent. The only way this NO RESPONSE CONSENT works is for full satisfaction.
For Partial Satisfaction = creditor must get the debtor’s consent in writing 9-620(c)(1)
For Consumers = there is no partial satisfaction in consumer transaction. If the creditor takes the collateral back, the creditor gives up their deficiency.
Notice Must be Compliant
In re Downing = notice must be adequate as per 613 and 614. Here, the lender failed to specify in notice if it was a public or private sale, which was required. Because the notice was noncompliant, it was treated as if there was no notice at all and the creditor lost their deficiency.
What makes a sale “commercially reasonable”?
Depends on the facts and circumstances. Largely depends on what the collateral is. In many cases, this involves bringing in expert testimony.
Notice Requirement 9-611
Creditor must send notice to debtor, guarantors, and some lien holders. Use public records for lien holders.
Need at least 10 day notice if the debtor is not a consumer. So how much notice do you need if you are a consumer? Not clear. Reasonable time.
Rebuttable Presumption Rule
If secured party fails to give notice of sale or conduct a commercially reasonable sale, the presumption is in effect that they are being sneaky and the secured creditor can only recover a deficiency by rebutting the presumption.
To rebut, the secured party must prove that the collateral is worth less than the amount of the debt (collateral > debt). If successful, the secured party gets the net difference.
