Default and Enforcement

Question 1

What is the prerequisite to repossession rights or rights to enforce a security interest?

Answer 1

Attachment

Question 2

What determines what constitutes a default?

Answer 2

• The security agreement
• Applicable contract law

Question 3

What triggers Article 9 enforcement rights?

Answer 3

Default

Question 4

Are Article 9 enforcement rights cumulative?

Answer 4

Yes

Question 5

Can Article 9 enforcement rights be exercised simultaneously?

Answer 5

Yes

Question 6

What are a secured party’s Article 9 enforcement rights?

Answer 6

• Seek possession of tangible collateral and sell/retain in satisfaction of the obligation owed
• Abandon its Article 9 rights and obtain a judgment against the debtor or obligor on the obligation
• Pursue other courses of action that the debtor and secured party have agreed upon

Question 7

What methods can a secured party use to repossess collateral?

Answer 7

• The judicial process
• Self-help repossession

Question 8

When using self-help repossession, what can the secured party NOT do?

Answer 8

Breach the peace

Question 9

What are some examples of breaching the peace?

Answer 9

• Bringing an officer who is not judicially authorized to be there
• Breaking into the debtor’s home or garbage
• Criminal acts
• Some physical confrontations
• Some deception or trickery

Question 10

What are some examples of NOT breaching the peace?

Answer 10

• Trespassing on land
• No confrontation (even at night)

Question 11

Is oral protest (e.g. “Don’t take it!”) a breach of the peace?

Answer 11

Circuit split: some say it is, while others require a threat of violence

Question 12

For equipment that is hard to repossess (e.g. large equipment), what can be done in lieu of repossession?

Answer 12

Render it unusable (and then it can be sold on sight)

Question 13

After repossession, what can the secured party do?

Answer 13

• Article 9 disposition sale
• Accept the collateral in partial or full satisfaction of the obligation

Question 14

Once a secured party takes possession of the collateral after default, it may sell, lease, license, or otherwise dispose of the collateral, so long as everything about the disposition is _______________________.

Answer 14

commercially reasonable

Question 15

When is a disposition commercially reasonable as a matter of law?

Answer 15

When the collateral is:

• Sold in the usual manner in a recognized market;
• Sold at the price current in that market; or
• Otherwise in conformity with the reasonable commercial practices among dealers in that type of collateral

Note: These are like safe harbors for a question of fact

Question 16

Is price alone determinative of whether a sale is commercially reasonable?

Answer 16

No

However, a very low price will trigger increased scrutiny

Question 17

True or false: A disposition sale can be public or private.

Answer 17

True

Question 18

When can a secured party buy collateral at a public sale?

Answer 18

Always

Question 19

When can a secured party buy collateral at a private sale

Answer 19

If the price of the collateral is fixed or subject to widely distributed standard price quotes

Question 20

Every aspect of the timing of a disposition sale must be _______________________ under the circumstances.

Answer 20

commercially reasonable

Question 21

When is notice of a disposition NOT required?

Answer 21

• The collateral is perishable or threatens to decline speedily in value;
• The collateral is sold on a recognized market (e.g. NYSE); or
• Notice is waived after default

Question 22

What’s the general rule regarding notice of a disposition?

Answer 22

A secured party must send authenticated notice of the disposition

Question 23

Who must be given notice of a disposition?

Answer 23

• The debtor
• Secondary obligors (e.g. cosigners, guarantors)
• Other secured parties
• Anyone else who has given the secured party notice of a claim or interest in the collateral

Question 24

When must notice of a disposition be given?

Answer 24

• Timing must be commercially reasonable
• Must give the notified party time to act

“Safe harbor” for noncommercial transactions: Reasonable if sent at least 10 days before the disposition sale

Question 25

What must notice of a disposition include?

Answer 25

* Name of the secured party * Name of the debtor * Description of the collateral * How, when, and where the collateral is to be disposed of * Statement that the debtor is entitled to an accounting for the unpaid indebtness

Question 26

What are the additional requirements for notice of a disposition for a consumer goods transaction?

Answer 26

* Description of any liability for the deficiency * Phone number that the debtor can call to obtain additional information, including the amount needed to redeem the collateral

Question 27

In what order are cash proceeds of a disposition distributed?

Answer 27

1. Reasonable expenses for collection and enforcement 1. Debt to the foreclosing secured party 1. Subordinate security interests, provided the subordinated party makes a formal demand prior to distribution 1. The debtor, if there's any surplus

Question 28

What happens to senior (superior) security interests after a disposition sale?

Answer 28

They survive the sale

Question 29

If there is not enough money from a disposition to satisfy the debt, what can the secured party do?

Answer 29

Seek a deficiency judgment against the obligor for the remaining amount

Question 30

How does a debtor accept collateral in full or partial satisfaction of the debt?

Answer 30

By consenting after default to the acceptance in an authenticated record

Question 31

When accepting collateral in full satisfaction of the debt, is acceptance by silence permitted?

Answer 31

Yes, if the debtor does not object to the secured party's proposal to accept within 20 days after the proposal is sent

Question 32

When accepting collateral in full satisfaction of the debt, what are the additional requirements for consumer goods transactions?

Answer 32

* The secured party can only accept the collateral in full satisfaction of the obligation * **60% Rule**: If the debtor has paid back 60% or more of the debt or the value of the collateral, then the goods must be sold – no acceptance (debtor can waive in an authenticated record)

Question 33

When accepting collateral in partial satisfaction of the debt, is acceptance by silence permitted?

Answer 33

No

Question 34

How may a debtor, secondary obligor, or other secured party redeem collateral?

Answer 34

By paying the entire secured obligation and expenses (including attorneys' fees) incurred in repossessing and preparing the collateral for sale

Question 35

When must redemption occur?

Answer 35

Before the secured party has sold the collateral or accepted the collateral in satisfaction of the debt

Question 36

Can a debtor waive the right to redemption before default?

Answer 36

No

Question 37

When may a secured party remove a fixture from the real estate?

Answer 37

When the secured party has priority

Question 38

What cost(s) is a secured party liable for after removing a fixture?

Answer 38

The cost of repairing damage to the real estate NOT the diminution in value resulting from the removal

Question 39

When may a secured party remove an accession from the other goods?

Answer 39

When the secured party has priority

Question 40

What can a secured party do to collect amounts owed to the debtor by third parties (account debtors)?

Answer 40

Step into the debtor's shoes

Question 41

When can an account debtor NOT discharge the debt by paying the debtor directly? (i.e. when must an account debtor pay the secured party?)

Answer 41

Once the account debtor receives proper notice from the secured party

Question 42

If a secured party is collecting payments, may an account debtor raise defenses they had against the debtor against the secured party?

Answer 42

Yes

Question 43

If the underlying transaction is a sale of accounts, chattel paper, promissory notes, or payment intangibles, do the rules regarding surplus and deficiency apply?

Answer 43

No

Question 44

With enforcement, what are the remedies for a secured party's failure to comply?

Answer 44

* Injunctive relief * Actual damages * Statutory damages

Question 45

With enforcement, if a secured party's failure to comply is ongoing, who can seek what injunctive relief?

Answer 45

The debtor or another secured party can ask the court to halt the improper enforcement activity

Question 46

With enforcement, if a secured party fails to comply, what statutory damages are available?

Answer 46

Minimum damages in consumer goods transactions for specific violations of Article 9

Question 47

With enforcement, if a secured party has violated its obligations under Article 9, what may the secured party be prevented from claiming?

Answer 47

A deficiency

Question 48

With enforcement, if a secured party has violated its obligations under Article 9 for a commercial transaction, what is the rebuttable presumption rule?

Answer 48

If the secured party did not sell the goods in a commercially reasonable manner, they are not entitled to a deficiency, unless they can prove a sale that complied with Article 9 would have created a deficiency

Question 49

With enforcement, if a secured party has violated its obligations under Article 9 for a consumer transaction, what rule do some courts follow?

Answer 49

An absolute bar rule: the secured party cannot recover a deficiency

Question 50

What may a secured party that improperly repossesses collateral be liable for?

Answer 50

Conversion