Default

Question 1

DEFINITION OF DEFAULT

Answer 1

The right of the secured party to proceed against collateral
is triggered by default. Article 9 does not define the events
that will trigger a default, but the security agreement usually
will define default to include events such as failure to pay or
maintain insurance. If the security agreement lacks such a
provision, “default” is generally construed as a failure to pay
or perform.

Question 2

Tip

Answer 2

To determine if there has been a default, look out
for late or missed payments. However, also look
for a possible waiver by the secured party of late
or missed payments.

Question 3

SELF-HELP REPOSESSION

Answer 3

After default, the secured party is entitled to take possession
of the collateral without judicial process (that is, by
“self-help”) if this can be done without a breach of the
peace. When a secured party breaches the peace, the
secured party loses the authorization to repossess, may
be sued for conversion (and possibly assault, battery,
trespass, etc.), and is liable for actual (and frequently punitive)
damages.

Question 4

Breach of the Peace

Answer 4

Any conduct by the secured party that has the potential to
lead to violence is a breach of the peace. Generally, physical
presence by the debtor (or a representative of the debtor)
plus a verbal objection by the debtor over the repossession
is enough to create a breach of the peace.

Question 5

Breaking and Entering Can Be a Breach of the Peace

Answer 5

Breaking and entering of a residence is probably a breach
of the peace. The breaking and entering of a commercial
property is less likely to be a breach of the peace. Further,
simple trespass is not a breach of the peace. Thus, for
example, a repossessor may hot-wire a car sitting on a
driveway, or perhaps one in a commercial garage, but not
one sitting in someone’s closed garage

Question 6

Using Judicial Process

Answer 6

If self-help is unavailable, the secured party can use judicial
process (for example, a replevin action) to get the goods.

Question 7

Rendering Equipment Unusable

Answer 7

Without removal, the secured party may also make equipment
unusable and dispose of it on the debtor’s property if
the secured party can do so without a breach of the peace.
This right is directed toward the problem of taking possession
of heavy, bulky equipment that is not easily movable

Question 8

Self-Help in Accounts

Answer 8

If the debtor defaults and the collateral is an account, the
secured party can notify the person owing money to the
debtor (that is, the account 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. Payment to the debtor will not discharge the
obligation.

Question 9

STRICT FORECLOSURE
6.3.1 General Rule

Answer 9

After default and repossession, the secured party may retain
the collateral in full or partial satisfaction of the debt (in other
words, the secured party may make a full or partial strict
foreclosure) if the secured party does the following:
* The secured party must send its proposal to retain the
collateral to (1) any other secured party from whom the
foreclosing party has received notice of a claim to the collateral,
and (2) any other secured party who has perfected
a security interest in the collateral by filing a financing
statement or noting its security interest on a certificate
of title. If a notified party objects within 20 days after the
secured party sends the notice, the collateral must be
disposed of by sale.
* The secured party must also obtain the debtor’s consent.
The debtor consents by either: (1) agreeing in an authenticated
record after default, or (2) in the case of a full
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NOTES
53
strict foreclosure, failing to make an authenticated objection
within 20 days after the secured party sends notice
(a debtor can’t consent to a partial strict foreclosure in this
manner).

Question 10

Exceptions

Answer 10

a. No Partial Strict Foreclosure in Consumer
Transactions
In a consumer transaction, a secured party may not keep
the collateral in partial satisfaction of the debt and seek a
deficiency judgment. The secured party may keep the collateral
only in full satisfaction of the debt.
b. Consumer Goods 60% Rule
If the debtor has paid 60% of the cash price on a PMSI
in consumer goods, or 60% of the loan on a non-PMSI in
consumer goods, the secured party must dispose of the
collateral within 90 days after repossession. If the debtor has
paid less than 60%, the general rules, above, apply.

Question 11

RESALE OF COLLATERAL

Answer 11

After default, the secured party may sell, lease, license, or
otherwise dispose of the collateral in its condition when
repossessed or after reasonable preparation. The sale may
be either public (auction) or private, and may be by one or
more contracts.
The sale discharges the security interest under which the
sale is being made and all subordinate security interests. The
purchaser, however, is still subject to superior security interests.

Question 12

Reasonable Notification Required

Answer 12

Reasonable notice that is authenticated by the secured
party (that is, the notice can’t be oral) must be given (1) to
the debtor and any sureties on the debt, and (except in the
case of consumer goods) (2) to any other secured parties
who have notified the secured party of their interests, and
(3) to any secured parties who have perfected by filing a
financing statement or making a notation on a certificate of
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NOTES
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title. This notice isn’t necessary when the collateral is perishable
or threatens to decline rapidly in value or is of a kind
ordinarily sold in a recognized market (for example, stock).
After default, the debtor or the surety may waive the right to
notice in an authenticated agreement

Question 13

Timeliness

Answer 13

The notice must be sent within a reasonable time before the
sale (a question of fact). In nonconsumer transactions, notice
is deemed to be sent within a reasonable time if it’s sent 10
days or more before the sale.

Question 14

Contents of Notice

Answer 14

The content of the notice depends on the type of sale and
type of collateral. For a public sale, notice of the time and
place of sale is required. For a private sale, notice of the
time after which the sale will occur must be given. The notice
must also describe the parties and the collateral. Extra info
is required for consumer goods (see the online Secured
Transactions reference outline for more details).

Question 15

Sale Must Be Commercially Reasonable

Answer 15

Every aspect of the sale (including the method, manner, time,
place, and terms) must be commercially reasonable

Question 16

Tip

Answer 16

If an exam question raises the issue of the reasonableness
of the sale, keep in mind that the secured
party must show that they made an effort to
obtain the best price for the collateral. The courts will consider,
and your answer should discuss, factors such as the
following:
The sufficiency of the advertising,
* If the collateral had a limited market, whether people in
that market were contacted,
* Whether the collateral needed cleaning or repair, and
* If the sale was by public auction, the convenience of the
time and place

Question 17

Tip

Answer 17

Also note that low price alone is not enough to
make the sale not commercially reasonable, but if
the price is very low, courts will give extra scrutiny
to the other circumstances of the sale.

Question 18

Secured Party May Buy Collateral

Answer 18

The secured party may buy the collateral at any public sale
but may buy at a private sale only if the collateral is of a type
customarily sold in a recognized market or is of a type which
is the subject of widely distributed standard price quotations

Question 19

Proceeds of the Sale

Answer 19

The money from a foreclosure sale goes first to repay the
costs of the repossession and sale, then to pay off the debt
of the foreclosing creditor, and then to pay off the debt of
creditors with lower priority than the foreclosing creditor. If
any money is left over, the debtor gets this surplus. Note:
Creditors with higher priority than the foreclosing creditor
receive no money from the sale because they don’t lose their
liens as a result of the foreclosure sale.

Question 20

Secured Party’s Right to Deficiency Judgment

Answer 20

If the collateral when sold doesn’t bring in enough to pay
the expenses of the sale and the secured party’s debt, the
secured party may recover any deficiency from the debtor.

Question 21

Explanation of Deficiency or Surplus

Answer 21

If the debtor is a consumer, then after the sale, the secured
creditor must send the debtor an explanation of the calculation
of any debt still owed (the deficiency) or money the
debtor will receive (the surplus

Question 22

Failure to Comply with Code Rules

Answer 22

a. Liability for Actual Damages
A secured party is liable for the actual damages caused by
failure to follow any of the Code’s rules.
b. Minimum Recovery for Consumer Goods
If the collateral is consumer goods and the secured creditor
violates the Code’s rules on default (for example, the sale
isn’t commercially reasonable), the debtor is entitled to
a minimum of 10% of the cash price of the goods plus an
amount equal to all the interest charges to be paid over the
life of the loan.
c. Possible Loss of Deficiency Judgment
Generally, if the secured party fails to follow the Code’s rules
on default, there is a rebuttable presumption that the sale
proceeds equal the amount of the debt. In other words, the
secured party presumptively loses any deficiency

Question 23

DEBTOR’S RIGHT TO REDEEM

Answer 23

Any time before the secured party has resold the collateral or
has entered into a contract for its disposition, or the obligation
has been discharged by the secured party’s retention of the
collateral, the debtor (as well as any surety or other secured
party or lienholder) may redeem the collateral. To do so, the
debtor must tender fulfillment of all obligations secured by the
collateral, plus additional reasonable expenses.
Note: Because most security agreements contain an acceleration
clause (that is, a clause allowing the creditor to
declare the entire loan balance due upon default), the debtor
typically must tender the entire balance in order to redeem