Debtor Defaults

Question 1

What is default?

Answer 1

Default is not defined in Art. 9

Default terms are specified in the contract

Question 2

If a Debtor defaults, what can an Art. 9 secured creditor do? (5 options)

Answer 2

1. Self-help repossession
2. Repossession by judicial action
3. Strict foreclosure
4. Sale
5. Action for a deficiency judgment

Question 3

IF DEBTOR DEFAULTS, CREDITOR OPTION #1: Self-help repossession.

What is self-help repossession?

Answer 3

Creditor can take action on his own behalf to repossession the collateral.

Self-help repossession is permissible, as long as Creditor does not breach the peace.

Question 4

What is a “breach of the peace” in the context of Creditor’s attempt at self-help repossession?

(3 types)

Answer 4

A breach of the peace occurs IF:

1. the Secured Party’s actions are likely to cause violence;
2. repossession is made over ANY protest by the Debtor; OR
3. repossessor misuses the color of law (e.g., impersonates a cop) (i.e., uses “constructive force”).

Question 5

What is the rule when Secured Party enters a Debtor’s home to repossess collateral?

Answer 5

It depends.

The Home has a “zone of privacy;” SP may NOT enter D’s home without D’s VOLUNTARY AND CONTEMPORANEOUS CONSENT

Question 6

What is the rule when Secured Party repossesses collateral OUTSIDE a Debtor’s home?

Answer 6

Collateral outside the home gives more latitude to the Creditor. SP may take the collateral as long as there is no Debtor objection.

Question 7

IF DEBTOR DEFAULTS, CREDITOR OPTION #2: Repossession by judicial action.

What is repossession by judicial action?

Answer 7

Secured Party may get a judicial writ (NY: “WRIT OF REPLEVIN”), ordering the sheriff to obtain possession of the collateral and deliver it to SP.

Question 8

IF DEBTOR DEFAULTS, CREDITOR OPTION #3: Strict foreclosure.

What is strict foreclosure?

Answer 8

Strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the debt still owed.

i.e., The creditor keeps the collateral and the debt is cancelled.

Question 9

Why might a Creditor propose strict foreclosure? (2 reasons)

Answer 9

1. Creditor has a use for the collateral

2. (Best when) the value of the collateral approximates the value of the debt still owed

Question 10

How does a Creditor strictly foreclose?

Answer 10

Secured party must send a WRITTEN proposal to retain the collateral in satisfaction of the debt

Question 11

To whom does a Secured Party send a written proposal to retain the collateral in the event of strict foreclosure?

(When collateral is consumer goods?)

(When collateral is NOT consumer goods?)

Answer 11

When the collateral is consumer goods: Notice is sent to

(1) Debtor AND
(2) Secondary obligors (co-signers/guarantors)

[N.B. See 60% Rule exception!]

When collateral is NOT consumer goods: Notice is sent to

(1) Debtor AND
(2) Other secured parties who have told the foreclosing creditor of their interest AND
(3) Perfected creditors and secondary obligors

Question 12

What happens if any notified party in a strict foreclosure objects to the foreclosure?

Answer 12

In the event of a strict foreclosure, IF any notified party objects within 20 days of the notice being SENT, the strict foreclosure will not be allowed. The collateral must be sold.

Question 13

What is the “Consumer goods and 60% rule”?

Answer 13

IF the collateral is consumer goods AND
[(1) Debtor has paid 60% of the loan in the event of a non-PMSI OR
(2) Debtor has paid 60% of the cash price in the event of a PMSI],
Strict foreclosure is not allowed.
Instead, Secured Party MUST sell the collateral within 90 days or be liable for conversion.

Question 14

What is an example of the 60% Rule w/r/t consumer goods in a strict foreclosure?

Answer 14

If Gretchen buys a $20k BMW on credit, Kia retains a PMSI in the car. If Gretchen defaults after only making $12k in payments, Kia may NOT strictly foreclose, because G has paid off 60% of the cash value and Creditor cannot keep both the cash and the collateral.

(Policy: No Creditor windfalls)
(Policy: Special protections for consumer goods)

Question 15

IF DEBTOR DEFAULTS, CREDITOR OPTION #4: Sale.

What is a sale in this context?

Answer 15

The Secured Party may sell the collateral and apply the proceeds to the debt.

The SP chooses whether the sale will be public (auction) or private.

Question 16

What are the two requirements for a Creditor’s sale of collateral in the case of a defaulting Debtor?

Answer 16

1. Every aspect of the sale must be commercially reasonable AND
2. Prior to the sale, notice must be sent
   (See details)

(N.B. Art. 9 provides standard notice forms that are presumptively commercially reasonable)

Question 17

In a sale of collateral, to whom must notice be sent?
(If consumer goods)
(If NOT consumer goods)

Answer 17

IF CONSUMER GOODS:
Notice must be sent to (1) Debtor and (2) Secondary Obligors

IF ANY OTHER KIND OF COLLATERAL:
Notice must be sent to (1) Debtor, (2) Secured Parties who have notified Foreclosing Creditor of their security interests, and (3) Perfected Creditors and Secondary Obligors

Question 18

In a sale of collateral, what information must be included in the notice to be sent?

Answer 18

Content of the notice depends on the type of sale:

IF PUBLIC SALE:
Notice must state the time and place AT WHICH which the sale will be made

IF PRIVATE SALE:
Notice must state the time AFTER WHICH the sale will be made

(N.B. For CONSUMER GOODS, additional consumer protection provisions are mandatory, including (1) how to calculate any deficiency, and (2) what Debtor must to to collect collateral)

Question 19

In a sale of collateral, how much advance notice is required?

Answer 19

No bright line rule. The standard is one of commercial reasonableness.

BUT, in a NON-consumer transaction, notice is sent within a reasonable time if sent 10 days or more in advance of the sale

Question 20

In a sale of collateral, can the Secured Party buy the collateral at sale?

Answer 20

IF public sale, YES

IF private sale, NO, absent external market checks

Question 21

IF DEBTOR DEFAULTS, CREDITOR OPTION #5: Action for deficiency judgment.

What is a deficiency judgment?

Answer 21

If Creditor sells the collateral but the proceeds are less than the debt he is owed, he can seek a deficiency judgment against Debtor to make him whole

Question 22

If a Secured Party sells collateral at a low price to an insider buyer, how does that affect the deficiency calculation?

Answer 22

The value determined to be the price that an independent 3rd party WOULD HAVE PAID is used for the calculation, rather than the price paid by the insider.

Question 23

When is a Debtor’s right to redeem the collateral cut off?

Answer 23

Once the Secured Party has resold or completed a strict foreclosure on the collateral

Question 24

What must a Debtor pay to redeem the collateral? (3)

Answer 24

1. Missed payments to the Creditor, PLUS
2. Accrued interest on the payments, PLUS
3. Creditor’s reasonable expenses (including atty fees)

Question 25

What is an acceleration clause?

Answer 25

Clause in the security agreement that permits the Creditor to declare the full balance of the loan due in the event of default

Question 26

What must a Debtor pay to redeem the collateral in the event that an acceleration clause is triggered by default? (3)

Answer 26

Debtor must pay off:

1. Entire remaining debt, PLUS
2. Interest, PLUS
3. Expenses