Secured Transactions July 2005 Flashcards
(4 cards)
Summary
Lender has a security interest in the crane and is entitled to enforce that interest against Builder, even though the interest is unperfected. It can enforce through self-help repossession, as it did here, so long as there is no breach of the peace. However, Lender should have given notice to both Builder and Shareholder before it sold the crane. Because of Lender’s failure to give proper notice of the sale, Article 9 of the Uniform Commercial Code (UCC) creates a rebuttable presumption that a proper sale would have generated enough money to entirely pay off Builder’s debt. Thus, Lender is not entitled to recover any deficiency unless it can prove that even in a proper sale the crane would have sold for less than the amount outstanding on the loan. Moreover, Lender is liable for any damages that can be shown to have resulted from its failure to give notice (though the facts of this problem do not support damages claim).
Lender’s security interest is unperfected, but Lender nonetheless has the right to exercise self-help remedies after the debtor’s default.
Lender can assert rights in the crane as collateral if lender has a security interest that has attached to the crane. On the facts of this problem, the requirements for attachment are satisfied. First, Builder signed an agreement granting Lender a security interest in the crane. Second, Lender gave value to Builder. Finally, Builder apparently had rights in the crane, as the facts indicate that the money was borrowed to purchase the crane and the crane was in Builder’s possession. The security interest accordingly attached to the crane, and Lender has the right to enforce that interest against Builder.
Because Lender failed to file a financing statement, Lender’s security interest is unperfected. See UCC §9-310(a). However, a secured party may use Article 9’s self-help remedies after default, regardless of the secured party’s perfected or unperfected status. See UCC §9-601(a). These self-help remedies include repossession and sale of the collateral and are inherent in a security interest. See UCC §§9-609,9-610. Here, Builder was clearly in default, having missed three payments in a row. Thus, Lender was entitled to repossess and sell the collateral.
A secured party need not give notice or follow any established process in repossessing the collateral, so long as the repossession occurs without a breach of the peace. However, it must give advance notice of a foreclosure sale to the debtor, including any guarantor, and its failure to do so renders the foreclosure sale improper.
Article 9’s self-help remedies include repossessing the collateral. See UCC §9-601(a)(1). No notice is required before repossession. See id. The only substantial restriction on self-help repossession is that no “breach of the peace” can result. See UCC §9-609(b)(2). In this case, the facts indicate that there was no breach of the peace. The crane was repossessed from an unsecured job site and under circumstances where there was no opposition to the repossession and no dispute of any sort. Consequently, the repossession was conducted in a manner that complied with Article 9.
However, Lender’s sale of the collateral did not fully comply with Article 9. Before conducting a foreclosure sale, a secured party must send reasonable notification to certain persons. See UCC § 9-611(b). These persons include not only the debtor, whom Lender did notify here, but also “any secondary obligor.” See UCC §9-611(c)(1), (2). Shareholder, as a guarantor of the secured debt, was a secondary obligor to whom notice should have been given. See UCC §9-102(a)(71) and comment 2.a. Accordingly, Lender’s failure to notify Shareholder of the foreclosure auction was a violation of the notice provisions of Article 9.
Shareholder’s actual knowledge of the auction probably does not alleviate the sending-of-notice violation. Even though Shareholder’s actual knowledge provided Shareholder with the opportunity to make a bid, thus serving the purpose of generating a more competitive auction, the statute plainly requires the sending of a notice, and the statute does not provide for actual knowledge to be a substitute for the sending of notice. In part, this is to avoid disputes over what information the debtor or secondary obligor did or did not have. Indeed, the statute requires that the notification be “authenticated,” precisely to overturn earlier cases holding that oral notifications were sufficient. See UCC §9-611 and comment 5.
In all other ways, Lender properly complied with the notice requirement. First, regarding the timing of the notice to Builder, the notice was sent more than 10 days before the auction, and it therefore falls within the timing safe-harbor provided by UCC §9-612(b). Second, regarding the contents of the notice sent to Builder, the notice specifies that the sale will be by auction on a certain date, and it therefore satisfies the requirements of UCC § 9-613(1)(C) and (E) that the notice state the method and date of disposition.
When the secured party fails to comply with Article 9’s foreclosure rules and the case does not involve a consumer transaction, the debtor’s liability for a deficiency is wholly eliminated, except to the extent that the secured party can prove that a deficiency would have existed even in a complying foreclosure.
Article 9 clarifies the rules on the availability of deficiency judgments in cases other than consumer transactions (that is, cases other than those in which the debt and collateral have personal rather than business purposes, see UCC §9-102(a)(26)). Resolving a split of authority, Article 9 adopts the “rebuttable presumption rule” as its primary approach to evaluating deficiency claims in these situations. Under the rebuttable presumption rule, the court must rebuttably presume that, had the secured party complied with the foreclosure rules, the foreclosure sale would have generated enough money to fully discharge the secured debt. See UCC §9-626(a)(3), (4).
In this case, the court will presume that a complying foreclosure sale would have generated $1.5 million (the amount of the debt), thus eliminating Builder’s liability for the remaining $500,000 owed on the loan. The presumption that a compliant disposition would have generated $1.5 million is rebuttable. If Lender can prove that even a fully complying disposition (that is, one in which proper advance notice had been sent to Shareholder) still would have resulted in a deficiency of some amount, then Builder will be liable for that amount. The burden of proof is on Lender. See UCC §9-626(a)(4).
NOTE: Some applicants will continue the analysis by examining whether Lender is likely to be able to rebut the presumption noted above. The two sides of this debate are fairly subtle and difficult, so applicants should get credit regardless of their conclusions on this point, so long as their conclusions are well-supported.
On the one hand, Shareholder’s actual advance knowledge of the auction, though irrelevant in Point Two, might be important here. Since Shareholder declined to bid despite actual knowledge, Lender can make a strong argument that Shareholder would also have declined to bid even if Lender had sent Shareholder the statutorily required notice. In other words, there is apparently no reason to think that Lender’s full compliance with the notice rules would have led to a smaller deficiency, and so the full $500,000 would be recoverable.
On the other hand, if Lender had sent notice to Shareholder and that notice had arrived earlier than the point at which Shareholder in fact gained actual knowledge, then Shareholder may have been able to react earlier and have arranged to make a substantial bid. If Builder can make a good enough case on this point to defeat Lender’s burden of proof, then the deficiency to which Lender is entitled should be reduced by the amount by which Shareholder’s participation would have increased the sale price of the cranes. Because Shareholder’s bid would have been for up to $1.2 million ($200,000 more than the sale price), Lender’s deficiency entitlement would be reduced by up to $200,000, leaving Builder liable for only the remaining $300,000.
