Default Flashcards
Default
Default is not defined by the UCC. Instead, the terms of default are contained in the security agreement.
Self-Help Repossession
After default, a secured creditor is entitled to take the collateral if doing so can be accomplished without “breach of the peace.”
⇒ A secured creditor is also entitled to make equipment unusable.
Breach of the Peace
Breach of the peace is conduct that has the potential to lead to violence. Conduct is more likely to lead to violence when it involves a residence rather than commercial premises.
Strict Foreclosure
Strict foreclosure occurs when, after a debtor defaults, a secured creditor takes possession of collateral and keeps it rather than sells it. In order to do this, the secured creditor must (1) notify any other creditors with a security interest on the collateral and (2) obtain the debtor’s consent. If there either party objects within 20 days, then the secured creditor must sell the collateral.
Requirement for Resale of Collateral
- The secured creditor must give reasonable notice of the sale to the debtor, to perfected secured creditors, and to secured creditors who have notified the the secured creditor of their interest.
- Every aspect of the sale must be commercially reasonable, including the method, manner, time, place, and terms.
Priority of Proceeds from Resale of Collateral
- First to the foreclosing secured creditor;
- Next to secured creditors with a lower priority;
- Surplus to the debtor.
⇒ Note that priority security intersts with a lower priority than the foreclosing interest are removed from the collateral after the sale; higher priority interests remain on the collateral.
Affect of Failure to Follow UCC Rules
- A secured party is liable for any damages that result from failure to follow any UCC rules.
- If a secured party that fails to follow UCC’s default rules, then there is a rebuttable presumption that the resale proceeds are equal to the debt and, thus, there is no right to a defficiency judgment.
Right to Redeem
A debtor may redeem at any time before the secured creditor has resold the collateral by fulfilling all their obligations secured by the collateral.
⇒ Note that because most security agreements contain acceleration clauses, the debtor normally has to pay the entire loan balance to redeem.