Rights on Default

Question 1

Determining when default has occurred

Answer 1

Article 9 does not define the events that will trigger a default; rather, the security agreement will usually provide that upon certain events, the secured party may exercise default remedies. In the absence of such a provision, default has been restricted to mean the failure to perform or pay.

• Disposition may be by either public (auction) or private sale, and by one or more contracts

Question 2

Self-Help

Answer 2

The secured party may take possession by slef-help without the judicial process if she can do so without a breach of the peace.

Question 3

Breach of the Peace

Answer 3

A repossession made over any protest by the debtor constitutes a “breach of the peace,” even though no violence or significant disturbance occurs.

Question 4

Consequences of a breach of the peace

Answer 4

When a secured party breaches the peace, he loses the Article 9’s authorization to repossess and may be sued for conversion and is liable for actual and sometimes punitive damages

Question 5

Collection rights of secured party

Answer 5

With non-goods collateral, such as accounts and instruments, if the debtor who gave a security interest in the collateral defaults, the secured party can notify the person owing money to the debtor to make payment to the secured party, rather than to the debtor. Upon notification, the account debtor must pay the secured party rather than the debtor.

Question 6

Replevy Action

Answer 6

The secured party may always take possession by replevying the collateral pursuant to judicial process.

Question 7

Rights and Duties of Secured Party in Possession

Answer 7

A secured party with possession of collateral after default has the same rights and duties regarding the collateral that she had before default.

Question 8

Sale

Answer 8

The secured party, after default, may sell, lease, or license collateral either in its condition when taken or after commercially reasonable preparation or processing.

Question 9

Commercial Reasonableness

Answer 9

The general test as to validity of the sale is commercial reasonableness of the method, manner, time, place, and terms.

• the mere fact that a better price could have been obtained from a sale at a different time or in a different manner is not sufficient to establish that the sale was not commercially reasonable
• a sale is made in a commercially reasonable manner if it is done in the usual manner in a recognized market or at the market price in such a market at the time of sale.
• a sale is also commercially reasonable if it conforms to reasonable commercial standards among dealers in the kind of good sold

Question 10

When must reasonable notice be given?

Answer 10

Unless the collateral is perishable or threatens to decline rapidly in value or is of a kind ordinarily sold in a recognized market, reasonable notice must be given, authenticated by the secured party.

Question 11

Can a debtor/surety waive the right to notice of the sale?

Answer 11

Yes, after default, the debtor or surety may, in an authenticated agreement, waive the right to notice of sale

Question 12

What notice must be given to other parties?

Answer 12

Except in the case of consumer goods, the same notice must be given to any other secured parties who have given an authenticated notification to the secured party in possession of their interests, and any secured parties who have perfected by filing a financing statement or making a notation on a certificate of title.

Question 13

When is notice timely?

Answer 13

Notice must be sent within a reasonable time before the sale.

• what constitutes a reasonable time is a question of fact
• notice is deemed to be sent within a reasonable time if it is sent 10 days or more before the time of the sale

Question 14

What must the notice contain?

Answer 14

In a sale of collateral other than consumer goods, the notice should contain:

1. a description of the debtor and the secured party;
2. a description of the collateral;
3. the method of sale (public or private);
4. a statement that the debtor is entitled to an accounting for the unpaid indebtedness and the charge for performing the accounting; and
5. the time and place of public sale or the time after which a private sale will be made

A notice containing this information is per se sufficient; if it lacks any, it will be a question of fact.

Question 15

What must be contained in the notice for the sale of consumer goods?

Answer 15

In a sale of consumer goods, the notice must contain all of the information previously mentioned. In addition, it must contain:

• a description of the recipient’s liability for a deficiency;
• a telephone number from which the recipient can discover the cost of redeeming the collateral; and
• a telephone number or mailing address from which the recipient can get additional information concerning the sale.

Question 16

If the debtor is a consumer, what information must be provided after the sale?

Answer 16

The secured party must send the debtor an explanation of the calculation of any debt still owed or money the debtor will receive.

Question 17

Can the secured party purchase the collateral?

Answer 17

Generally, the secured party may purchase the collateral at a public sale.

• The secured party may purchase at a private sale if the collateral is of a type customarily sold in the recognized market or is of a type on which there are widely distributed price quotations

Question 18

What does the purchaser of the collateral take?

Answer 18

Generally, the purchaser takes all of the debtor’s rights in the collateral.

• the sale also discharges the security interest under which the sale is being made and all subordinate security interests
  
  • The purchaser is still subject to superior security interests

Question 19

What is the order of distribution of proceeds of the sale?

Answer 19

1. expenses of the repossession and sale;
2. satisfaction of the debt;
3. satisfaction of subordinate third-party security interest debts & interests of cosigners in order of priority;
4. surplus then goes to debtor or deficiency is collected.

Question 20

After default, can the foreclosing secured party keep the collateral?

Answer 20

Yes, he may keep the collateral to fully or partially satisfy the debt. This called strict foreclosure…but there are requirements.

Question 21

Requirements for strict foreclosure.

Answer 21

The secured party may pursue strict foreclosure if:

• the debtor consents to the strict foreclosure by either:
  
  • agreeing to the strict foreclosure in an authenticated record after default; or
  • in the case of a full strict foreclosure, failing to make an authenticated objection within 30 days after the secured party sends written notice of the intent to keep
• The secured party sends an authenticated notice of inent to keep the collateral in satisfaction of the debt to:
  
  • any other secured party from whom the foreclosing party has received notice of a claim to the collateral; and
  • any other secured party who has perfected a security interest in the collateral by filing a financing statement or making a notation on a certificate of title; and
• none of the notified secured parties objects within 20 days after the notice is sent.
  
  • if there is an objection, the collateral must be disposed of by sale

Question 22

Strict Foreclosure

Exceptions

No partial strict foreclosure in consumer transactions

Answer 22

In a consumer transaction, a secured party may not keep the collateral in partial satisfaction of the debt and seek a deficiency judgment. Can only keep the collateral in FULL satisfaction of the debt

Question 23

Strict Foreclosure

Exceptions

Consumer Goods Sixty Percent Rule

Answer 23

In consumer goods cases where the debtor has paid at least 60% of the cash price in the case of a PMSI or 60% of the loan in all other cases, the secured party MUST sell the collateral within 90 days after repossession, unless after default, she gets an authenticated agreement from the debtor waiving this right or extending the time in which the collateral may be sold.

Question 24

Strict Foreclosure

Right to Redeem Collateral

Answer 24

Until the secured party has sold the collateral or has discharged the debt by retention of the collateral, a debtor, a surety, or any other secured party or lienholder, unless he has otherwise agreed after default, may redeem the collateral by paying all obligations secured by the collateral plus the reasonable expenses incurred by the secured party in relation to the repossession, including reasonable attorneys’ fees.

Question 25

What is a secured party’s liability for failure to comply with Article 9 requirements?

Answer 25

A secured party is liable for the actual damages caused by failure to follow any of the Article 9 rules.