Default

Question 1

Default

Answer 1

When debtor breaches as defined by the security agreement

Question 2

Once default has occurred, how can a creditor repossess collateral under UCC Art. 9?
(two options)

Answer 2

1. Self-Help Repossession: allowed under Art. 9 so long as there is no “BREACH OF THE PEACE” which arises where
   (i) creditor does something likely to cause violence (whether or not there actually is violence); OR
   (ii) causes ANY type of protest from a debtor;
   (iii) OR impersonate a law enforcement officer

RULE: Creditor may not enter a debtor’s home without voluntary and contemporaneous consent

Note: civil and criminal penalties attach to a creditor’s misconduct

2. Judicial Action: creditor obtains a judicial writ (replevin) and a sheriff obtains possession of the collateral

Question 3

What are a creditor’s options for remedy once they have repossessed collateral?
(two options)

Answer 3

1. STRICT FORECLOSURE: occurs when the secured party retains collateral in FULL satisfaction of the debt still owed (i.e. no deficiency judgments)
   (a) CONSUMER GOODS: Secured party must send a written proposal to retain collateral in satisfaction of debt to: (i) the debtor; AND (ii) secondary obligors (co-signers)

THE 60% RULE: if a consumer has paid 60% of the cash price (PMSI); OR loan (non-PMSI), then strict foreclosure is not allowed and instead creditor must instead sell w/in 90 days (or be liable for conversion)

 (b) NON-CONSUMER GOODS: the written proposal is sent to: (i) the debtor; (ii)secured creditors; (iii) secondary obligors; AND (iv) perfected creditors

Note: if any of the notified parties object w/in 20 days after notice is sent, strict foreclosure is not allowed (must be disposed by sale)

2. SALE: secured party may sell the collateral and apply proceeds to the debt. Every aspect of the sale must be “commercially reasonable”
   (a) Notice in a CONSUMER GOODS: must be sent to:
   (i) debtor; AND
   (ii) secondary obligors w/in commercially reasonable time
   (b) Notice in a NON-CONSUMER GOODS: must be sent to:
   (i) debtor;
   (ii) perfected creditors; and
   (iii) secondary obligors w/in 10 days
   (c) CONTENT of the notice depends on type sale:
   (i) Public: time/place of sale
   (ii) Private: must state the time after the sale will be made

Note: Secured party may buy at public sale (market check), but not private sale

Question 4

If a collateral sale is not sufficient to cover balance, what can a creditor do?

Answer 4

Deficiency Judgment: going after debtor personally
NOTE: if a secured creditor sells collateral at a low price to an insider, deficiency is based on fair market appraisal not the price of the sale

Question 5

What is the debtor’s right of redemption on its defaulted secured collateral?

Answer 5

Debtor’s right to redeem the collateral is CUT OFF once the secured party has RESOLD or completed a STRICT FORCLOSURE

To redeem, the debtor must pay: the amount owed, plus interest, expenses & fees

If the security agreement contains an ACCLERATION clause (i.e. permits creditor to declare full balance due if one payment is missed), a debtor must pay off the ENTIRE debt, PLUS interest, expenses & fees