Default Flashcards
What is the definition of default?
The right of the secured party to proceed against collateral is normally triggered by default. But Article 9 does not define the term “default.” Typically, grounds of default are specified in the security agreement (e.g., failure to make payment when due, selling collateral without the secured party=s permission, failing to keep the collateral insured). In the absence of such a specification, default has been restricted to failure to perform or pay the obligation when it is due.
- Look for late or missed payments
- Also look for a possible waiver by the secured party of late or missed payments
What is self-help repossession?
After default the secured party is entitled to take possession of the collateral without judicial process if this can be done without “breach of the peace.” When a secured party breaches the peace, he 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
What constitutes a “breach of the peace” under self-help repossession?
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 plus verbal objection is enough to create a breach of the peace
-Physical presence + verbal words or physical action
Generally the bank hires a repossession company
Several burly men come to Wanda’s house and inform her that they have come to repossess her dinette set. Wanda tells them to go away, but one of the men tells her: “get your butt out of the way if you don’t want to get hurt.” Wanda takes his advice, and the dinette set is repossessed. Has a breach of the peace occurred?
Yes, physically present, verbal, has a right to sue the bank
While D is off at work, S enters an open window of D’s home to repossess a stereo. S leaves through the same window, doing no damage to the premises. Has a breach of the peace occurred?
Probably, unauthorized entry into a home is likely a breach of the peace (residential more likely) - provokes suspicion and possibility for violence
While D is asleep in his home, S hotwires D’s car and drives it from D’s driveway. Has there been a breach of the peace?
No - This is a perfect self help repossession - Night time is the right time
What if a car was taken from an open garage at D’s home late at night?
Attached garage more likely to be seen as part of the residence, more likely to be a breach of the peace
Courts all over the place, we are looking at a majority rule jurisdiction
While D’s restaurant is closed, S picks a lock to gain entry, and repossess several pieces of equipment. Has there been a breach of the peace?
Commercial premises less likely to be a breach of the peace
There are cases that say if you pick the lock and do not re-lock the premises than there is a breach of the peace, leave the debtors premises open to thieves
*Note: If self-help is unavailable, the secured party can use judicial process (e.g., replevin) to get the goods (you can use the Sheriff and the Sheriff can use force)
What is retention of collateral (strict foreclosure)?
After default and repossession, the secured party may propose retaining the collateral in full or partial satisfaction of the debt, if the debtor does not object and no other creditor with a lien in the item does not object
How does a creditor retain possession of collateral?
- A secured party wishing to do so must send its proposal to any other secured party from whom the foreclosing party has received notice of a claim to the collateral, and 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 sent notice, the collateral must be disposed of by sale.
- A secured party wishing to retain the collateral also must 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 strict foreclosure, failing to make an authenticated objection within 20 days after the secured party sent notice (a debtor cannot consent to a partial disclosure in this manner).
What is the resale of collateral?
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.
What is reasonable notification for the resale of collateral?
Reasonable notice that is authenticated by the secured party (the notice cannot be oral) must be given to the debtor and any sureties on the debt, and (except in the case of consumer goods) to any other secured parties who have notified the secured party of their interests, and any secured parties who have perfected by filing a financing statement or making a notation on a certificate of title. This notice is not necessary when the collateral is perishable or threatens to decline rapidly in value or is of a kind ordinarily sold in a recognized market (e.g., stock). The debtor or the surety may, after default, in an authenticated agreement waive the right to notice.
What is the definition of timeliness within the notification requirement when reselling collateral?
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 is sent 10 days or more before the time of sale
What is the definition of content within the notification requirement when reselling collateral?
The content of the notice depends on the type of sale and type of collateral.
(1) The statute provides “safe harbor” notice forms.
(2) For a public sale, notice of the time and place of sale is required.
(3) For a private sale, notice of the time after which the sale will occur must be given (e.g., the car will be sold at a private sale after January 1, 2006).
(4) Extra information is required for consumer goods.
What is a commercially reasonable sale when reselling collateral?
Every aspect of the sale (including the method, manner, time, place and terms) must be commercially reasonable
**This is important to know and remember, on the bar say “commercially reasonable”
