Debtor DEFAULTS --> Article 9 Creditor REMEDIES

Question 1

Def: Default

Answer 1

• debtor breaches the contract/record/security agreement

- breach is not defined in Article 9, rather it is defined by the parties in their security agreement

Question 2

Article 9 Creditor Options: (4)

Answer 2

1- Self-Help Repossession
2- Repossession by Judicial Action
3- Strict Foreclosure
4- Sale

Question 3

Self-Help Repossession

Answer 3

• permissible so long as you do not breach the peace
• a breach of the peace occurs when the secured party’s actions are likely to cause violence
• the relevant question is not whether or not an actual fight broke out, but whether the secured party did something provocative or likely to cause violence
• A repossession made over ANY PROTEST by the debtor, however mild the protest, constitutes a BREACH OF THE PEACE.
• if the repossessor misuses the color of law, by for example impersonating a law enforcement officer, he or she has used CONSTRUCTIVE FORCE and therefore has breached the peace
• civil and criminal penalties attach to creditor’s misconduct

Question 4

Self-Help Repossession when the collateral is in debtor’s home:

Answer 4

• secured party MAY NOT enter the debtor’s home w/o VOLUNTARY and CONTEMPORANEOUS consent

Question 5

Self-Help Repo when the collateral is NOT in the debtor’s home:

Answer 5

• Secured party may take the collateral so long as there is no debtor objection

Question 6

Repossession by Judicial Action

Answer 6

Secured Party can get a JUDICIAL WRIT ordering the sheriff to obtain possession of the collateral and deliver it to the secured party.

In NEW YORK the appropriate writ is called a WRIT OF REPLEVIN

Question 7

Def: Strict Foreclosure

Answer 7

Occurs when the secured party retains the collateral IN FULL SATISFACTION of the debt still owed. In other words, the creditor lawfully retains the collateral and the debt in turn is canceled.

Works best when the value of the collateral approximates the value of the outstanding debt

Question 8

How to strictly foreclose

Answer 8

The secured party must send a written proposal to retain the collateral in satisfaction of the debt to:

• collateral = consumer goods –> notice to debtor & guarantors
• collateral NOT consumer goods –> notice to debtor, other secured parties who have told the creditor of their interest in the collateral, any perfected creditors (record), and guarantors of the debt

Question 9

What if notified parties object to strict foreclosure?

Answer 9

If any of the notified parties objects within 20 days after the notice is sent, strict foreclosure will not be allowed. Instead, the collateral must be disposed of by sale.

Question 10

Consumer goods and the 60% Rule

Answer 10

If the collateral is consumer goods and the debtor has paid 60% of the loan in the event of a non-PMSI or 60% of the cash price in the event of a PMSI, strict foreclosure is not allowed. Instead, the secured party must sell the collateral within 90 days or be liable in conversion

Reasoning- avoids giving creditors windfalls at consumer’s expense

Question 11

Sale

• generally
• 2 rules

Answer 11

• The secured party may sell the collateral and apply the sale proceeds to the debt. The secured party chooses whether the sale will be public (i.e., a public auction) or private
• every aspect of the sale must be COMMERCIALLY REASONABLE
• prior to the sale, reasonable notice must be sent

Question 12

Who gets pre-sale notice?

Answer 12

• if collateral = consumer goods –> notice to debtors and guarantors
• if collateral NOT consumer goods –> notice to debtor, and those secured parties who have advised the foreclosing creditor of their security interest, as well as perfected creditors and guarantors

Question 13

What must pre-sale notice contain?

Answer 13

DEPENDS ON THE TYPE OF SALE

• article 9 provides standard notice forms which are presumptively commercially reasonable
• public sale –> notice must state time and place of sale
• private sale –> notice must state the time after which the sale will be made (ex- “Please be advised that after Feb. 1, 2011, Secured Party will sell the following collateral”)
• consumer goods –> additional consumer-protective provisions are mandatory, including how to calculate any deficiency and how debtor can redeem

Question 14

How much advance notice is required pre-sale?

Answer 14

• no bright line
• standard of COMMERCIAL REASONABLENESS
• in a non-consumer transaction, notice is deemed sent w/in a reasonable time if it is sent 10 days or more before the time of sale

Question 15

May the secured party buy at sale?

Answer 15

• public sale –> yes

- private sale –> absent external checks, NO (too much chance for self-dealing)

Question 16

Actions for A Deficiency Judgment

Answer 16

• If sale of collateral nets less that the debt, secured party can proceed against debtor for a deficiency judgment
• If a secured party sells collateral at a low price to an inside buyer, the price that an INDEPENDENT THIRD PARTY WOULD HAVE PAID, rather than the actual amount paid, is the price that will be used in calculating the deficiency.

Question 17

Debtor’s Limited Right of Redemption

Answer 17

• The debtor’s right to redeem the collateral is cut off once the secured party has (1) SOLD; or (2) COMPLETED STRICT FORECLOSURE
• to redeem, the debtor must pay the amount owed from missed payments + interest + creditor’s reasonable expenses (incl. attorney’s fees)
• if the security agreement contains an acceleration clause (which permits the creditor to declare the full balance due in the even of default), to redeem the debtor must pay off the ENTIRE debt + interest + creditor’s reasonable expenses