Default Flashcards
Default defined
debtor has breached. Default is what the security agreement says it is. Usually when debtor misses payment.
a. Default can also mean moving collateral without prior written approval, or failing to get insurance on collateral.
Once debtor has defaulted, what can our Art 9 secured creditor do?
either self-help possession, repo by judicial action, strict foreclosure,sale, action for a deficiency judgment
Self-help repossession
i. Allowed so long as creditor doesn’t breach the peace. A breach of the peace occurs when the secured party’s actions are likely to cause violence.
ii. A repo made over any protest by the debtor, however mild the protest, constitutes a breach of the peace. For that matter, if the repossessor misuses the color of law, by for example impersonating a law enforcement, he or she has used constructive force and therefore has breached the peace
iv. Civil and criminal penalties attach to creditor’s misconduct.
- Repo when the collateral is in debtor’s home:
a. Home enjoys zone of privacy.
b. SP may not enter debtor’s home without voluntary and contemporaneous consent - Repo when the collateral is outside the home:
a. More latitude for creditor
b. Secured party may take the collateral so long as there is no debtor objection
Repossession by judicial action
i. If the secured party chooses not to resort to self-help, he or she may get a judicial writ, ordering the sheriff to obtain possession of the collateral and deliver it to the secured party.
Review:
ii. Now the secured party has possession (either through self-help or judicial action), now what? It can propse to strictly foreclose
Strict foreclosure
i. Defined: strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the debt still owed. In other words, the creditor lawfully retains collateral and the debt in turn is canceled.
1. For example if yacht is worth 50k, but outstanding loan is 44k. bank retains yacht and debt is discharged.
2. Strict foreclosure means the creditor just keeps the collateral!! Doesn’t have to resell it
3. Works when
a. Creditor has need or use for collateral and
b. Collateral’s value approximates the amount of debt still owed. To be fair to the debtor
How to strictly foreclose
To accomplish strict foreclosure, the secured party must send a written proposal to retain the collateral in satisfaction of the debt. To whom is the proposal sent?
- When the collateral is consumer goods, the notice is sent to debtor AND secondary obligors . A secondary obligor is a guarantor of debt, AKA company-signor.
- When the collateral is not consumer goods, the notice is sent to debtor and other secured parties who have told foreclosing party of their interest in the collateral, as well as perfected creditors and secondary obligors.
a. World of interested parties is broader - If any of the notified objects within 20 days after the notice is sent, strict foreclosure will not be allowed. Instead the collateral must be disposed of by sale.
a. AKA pissant rule.
Strict foreclosure: consumer goods and the 60% rule
- Another consumer-debtor protection
- If the collateral is consumer goods and the debtor has paid 60% of the loan in the event of a non-PMSI or 60% of the cash price in the event of a PMSI, strict foreclosure is not allowed. Instead, the secured party must sell the collateral within 90 days or be liable in conversion.
- Reason :to avoid giving creditors windfalls at the consumer-debtor’s expense.
- Basically, consumer-debtor has built a lot of equity, cannot let creditor strictly foreclose the collateral and let them keep BOTH the collateral and the equity the debtor has poured in.
iv. But if creditor doesn’t have need for collateral, or value of debt doesn’t approximate value of collateral, or a party objects
→ have to look to selling the collateral because strict foreclosure is not available
Sale
i. The secured party may sell the collateral and apply the sale proceeds to the debt. Secured party chooses whether the sale will be public (i.e. a public auction) or private.
ii. Two governing guidepost
1. Every aspect of the sale must be commercially reasoanble
2. Prior to the sale, reasonable notice must be sent
Reqs for notice
a. Art 9 provides standard notice forms wich, if used, are presumptively commercially reasonable
b. If the collateral is consumer goods, notice must be sent to debtor and secondary obligors
c. With all other types of collateral, notice must be sent to debtor and those secured parties who have adives the foreclosing creditor of their security interest, as well as perfected creditors and secondary obligors
d. Content of notice depends on type of sale
i. Public sale→ notice must state the time and place of sale
ii. Private sale→ notie must state the time after which the sale will be made
e. For consumer goods, additional consumer-protective provisions are mandatory including how to calculate any deficiency and how debtor can redeem.
i. Special protection for consumer-debtors.
f. No bright line on how much notice is required. Standard is one of COMMERCIAL REASAONBLENESS. However, in a nonconsumer transaction, notice is deemed sent within a reasonable time if it is sent 10 days or more before the time of sale.
g. May the secured party buy at sale?
i. Public sale: yes. Transparency presumed
ii. Private sale: absent external market checks, NO
iii. Why not→ too much potential for self-dealing
Action for a deficiency judgment
Creditor can proceed against debtor personally if the sale nets less than the outstanding debt for deficiency judgment
ii. Note if a secured party sells collateral at a low price to an insider buyer, the price that an independent 3rd party would have paid, rather than the actual amount paid, is the price that will be used in calculating the deficiency.
iii. Debtor’s limited right of redemption
1. Debtor’s right to redeem the collateral is cut off once secured party has resold or completed a strict foreclosure.
2. To redeem, debtor must pay the missed payment(s) plus: accrued interest and creditor’s reasonable expenses including attorney fees.
3. If the security agreement contains an acceleration clause (which allows the creditor to declare the full balance due in the event of default), to redeem the debtor must: pay off the entire debt plus interest plus expenses.
Strict party remedies are cumulative
- Secured party’s remedies (sale, strict foreclosure, and judgment) are cumulative. However, secured party is entitled to only one satisfaction.
