Default

Question 1

Default - Definition

Answer 1

• not actually defined in Article 9
• BUT security agreement usually defines default to include certain events, such as failure to pay or maintain insurance
  -> if the security agreement lacks such a provision, “default” is generally construed as failure to pay or perform

Question 2

Default - Exam Tip

Answer 2

• look for late or missed payments to determine if there’s been a default
• BUT, also look for possible waiver by secured party of late or missed payments

Question 3

Self-Help Repossession

Answer 3

• after default, secured party is entitled to take possession of collateral w/o judicial process IF this can be done w/o 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.) + 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
• generally, physical presence by debtor (or rep of the debtor) plus verbal objection by debtor over repossession is enough to create a breach of the peace

Question 5

Breach of Peace - Breaking + Entering

Answer 5

• probably a breach of the peace
  -> less likely though if it’s of commercial property
  -> simple trespass not a breach of the peace
• ex: repossessor may hotwire car sitting on a driveway, or in a commercial garage, but not one sitting in someone’s closed garage

Question 6

Judicial Process + Repossession

Answer 6

if self-help is unavailable, secured party can use judicial process to get the goods

Question 7

Rendering Equipment Unusable

Answer 7

• after default, w/o removal, secured party can make equipment unusable + dispose of it on the debtor’s property if the secured party can do so w/o breach of the peace
• right directed toward problem of taking possession of heavy, bulk equipment that is not easily movable

Question 8

Self-Help in Accounts

Answer 8

• if debtor defaults + collateral is an account, secured party can notify the person owing money to debtor to make payment to the secured party, rather than to the debtor
• upon notification, account debtor MUST pay the secured party, rather than the debtor
  -> payment to the debtor won’t discharge the obligation

Question 9

Strict Foreclosure - Debtor’s Consent

Answer 9

Debtor consents by either:
1) agreeing in an authenticated record after default OR
2) in the case of a FULL strict foreclosure, failing to make an authenticated objection w/in 20 days after the secured party sends notice
-> can’t consent to partial foreclosure in this second manner

Question 10

Strict Foreclosure - General Rule

Answer 10

After default + repossession, secured party may retain the collateral in full or partial satisfaction of the debt, IF secured party does the following:
- 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 objects w/in 20 days after the secured party sends the notice, the collateral must be disposed of by sale
- secured party must also obtain debtor’s consent

Question 11

Exceptions to Strict Foreclosure Rule

Answer 11

• no partial strict foreclosure in consumer transactions
  -> can’t keep the collateral in partial satisfaction of the debt AND seek a deficiency judgment (can only keep it in full satisfaction of the debt)
• consumer goods 60% rule

Question 12

Consumer Goods 60% Rule

Answer 12

• if debtor has paid 60% of the cash price on a PMSI in consumer goods, or 60% of the loan on a non-PMSI consumer good, the secured party must dispose of the collateral w/in 90 days after repossession
  -> if debtor has paid less than 60%, the general rules apply

Question 13

Resale of Collateral

Answer 13

• 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, + may be by one or more contracts
• sale discharges the security interest under which the sale is being made + all subordinate security interests
• the purchaser, however, is still subject to superior security interests

Question 14

Resale of Collateral - Reasonable Notification

Answer 14

• required
• need reasonable notice that is authenticated by the secured party (can’t be oral)
• must be given to:
  1) the debtor + any sureties on the debt AND (except in case of consumer goods)
  2) any other secured parties who have notified the secured party of their interests AND
  3) any secured parties who have perfected by filing a financing statement or making a notation on a certificate of title
• 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
• after default, the debtor or surety may waive the right to notice in an authenticated agreement

Question 15

Timeliness of Notice for Resale

Answer 15

• notice must be sent w/in reasonable time before the sale (question of fact)
• in nonconsumer transactions, notice is deemed to be sent w/in a reasonable time if it’s sent 10 days or more before the sale

Question 16

Contents of Notice - Resale

Answer 16

• content of notice depends on type of sale + type of collateral
  -> for public sale, notice of time + place of sale is required
  -> for private sale, notice of time after which sale will occur must be given
• notice must also describe the parties and the collateral

Question 17

Resale - Reasonableness

Answer 17

• sales must be commercially reasonable
  -> covers every aspect (method, manner, time, place, terms, etc.)

Question 18

Factors to Consider for Reasonableness of Resale

Answer 18

• 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
• make sure to consider all of these if exam q raises issue of reasonableness of sale -> secured party must show they made an effort to obtain the best price for the collateral

Question 20

Reasonableness of Resale - Price

Answer 20

• 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 21

Resale - When Can Secured Party Buy Collateral

Answer 21

• can buy the collateral at any public sale
• 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 21

Proceeds for Resale

Answer 21

• money from a foreclose sale goes first to repay costs of repossession + sale, then to pay off debt of the foreclosing creditor, then to pay off debt of the lower priority creditors
• if any $ leftover, debtor gets the surplus
• creditors w/ higher priority get no $ b/c don’t lose their liens as a result of the foreclosure sale

Question 22

Secured Party’s Right to Deficiency Judgment

Answer 22

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

Question 24

Resale- Explanation of Deficiency or Surplus

Answer 24

• if debtor is a consumer, then after sale, secured creditor must send debtor explanation of calculation of any debt still owed or money debtor will receive

Question 25

Resale - Failure to Comply with Code Rules

Answer 25

• secured party is liable for actual damages caused by failure to follow any of the Code’s rules
• minimum recovery for consumer goods
• possible loss of deficiency judgment

Question 26

Minimum Recovery for Consumer Goods

Answer 26

• if the collateral is consumer goods + the secured creditor violates the Code’s rules on default (ex: the sale isn’t commercially reasonable), the debtor is entitled to 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

Question 27

Possible Loss of Deficiency Judgment

Answer 27

• if 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 28

Debtor’s Right to Redeem

Answer 28

• any time before the secured party has resold the collateral or has entered into a K for its disposition, or the obligation has been discharged by secured party’s retention of collateral, debtor may redeem the collateral
• must tender fulfillment of all obs secured by the collateral, plus additional reasonable expenses
• keep in mind most security agreements include acceleration clauses