Default

Question 1

Once a default has occurred, the secured party may…

Answer 1

1. Seek possession of the collateral and, in order to satisfy the obligors outstanding obligation, either:
   i. sell the collateral, OR
   ii. retain it in full or partial satisfaction of the obligation
2. Initiate a judicial action to obtain a judgment based on that obligation, OR
3. Subject to statutory limitations, pursue any course of action to which the debtor and obligor have agreed

Question 2

Security Agreement Covering Fixtures

Answer 2

When a secured party’s security interest has priority over owners and individuals who encumbered real property, that secured party may remove the fixture from the real property

With respect to an owner or encumbrancer who is not the debtor, the secured party is liable for the cost of repairing any physical object damaged by the removal but not for any reduction in the value of the real property due to the removal

Question 3

Possession of Collateral

Answer 3

After default, a secured party is entitled to take possession of the collateral

Unless the security agreement provides otherwise, a secured party is not required to give notice of default, nor is he required to give notice of his intent to take possession of the collateral

Question 4

Disposition of Collateral

Answer 4

After default, a secured party may sell, lease, license, or otherwise dispose of all or any of the collateral

Within limits, the secured party may keep the collateral (strict foreclosure) in full or partial satisfaction of the obligation

Question 5

Commercially Reasonable Standard for Disposition

Answer 5

A disposition is commercially reasonable when conducted:
1. In the usual manner on a recognized market, such as a stock exchange, that has standardized price quotations for fungible goods (i.e., auction)
2. At the price current in any recognized market at the time of the disposition, OR
3. Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition

Question 6

Disposition Price

Answer 6

There mere fact that a higher price could have been obtained by disposing of the collateral in a different manner or at a different time does not establish that the disposition was not commercially reasonable

A low price may trigger scrutiny by the court of the disposition and its reasonableness

Question 7

Time of Disposition

Answer 7

There is no specific time in which a disposition must occur

Question 8

Type of Disposition

Answer 8

A secured party may dispose of collateral publicly or privately

A secured party may purchase the collateral at a public sale, but she cannot do so at a private sale unless the collateral is of a kind that is customarily sold on a recognized market (i.e., the NYSE) or the subject of widely distributed standard price quotations

A secured party cannot purchase the collateral at a private sale when the prices are individually negotiated or when items are not fungible in a recognized market

Question 9

Notice of Disposition

Answer 9

A secured party is generally required to send an authenticated notification of disposition, which is required to be reasonable as to its content, the manner in which it’s sent, and its timeliness

Notification must be sent to:
i. the debtor
ii. any secondary obligor
iii. any other secured party or lien holder who held a security interest that was perfected by filing or pursuant to a statute
iv. any other party from whom the secured party has received authenticated notice of a claim or interest in the collateral

Question 10

Timeliness of Notice

Answer 10

Test: Reasonableness

Notification should be sent sufficiently far in advance of the disposition to allow the notified party to act on the notification.

In a transaction other than a consumer transaction, when a secured party sends a notification of disposition after default and at least 10 days before the earliest time for disposition set forth in the notification, the timeliness of the notice is reasonable, provided it’s sent in a commercially reasonable manner

Question 11

Cash Proceeds

Answer 11

A secured party must apply, or pay over for application, cash proceeds of a disposition in the following order:

1. Reasonable expenses for collection and enforcement, including attorney’s fees and other legal expenses (auction expenses too)
2. Satisfaction of obligations secured by the security interest
3. Satisfaction of any subordinate security interests, provided that the junior secured party made an authenticated demand for proceeds before distribution of the proceeds is complete
4. The remainder of the proceeds to the debtor

Question 12

Surplus

Answer 12

The secured party generally must pay the surplus to the debtor

Question 13

Deficiency

Answer 13

The obligor generally is liable for the deficiency

Question 14

Transferee’s Rights

Answer 14

A sale of the collateral gives the buyer at the sale all of the debtor’s rights in the collateral

If the transferee/buyer acts in good faith, then the disposition discharges the security interest being foreclosed and any subordinate security interests and liens.

However, the transferee takes the collateral subject to any security interests that were senior to the security interest foreclosed