Secured Transactions - Default

Question 1

As to repossession, upon default, the secured party may…

Answer 1

… attempt to take possession of the collateral without judicial process so long as they do not commit a breach of the peace. Article 9 does not define what actions constitute a breach of the peace; however, breaking into locked property will generally suffice. Some case law suggests that ANY opposition to the entry or seizure, however slight, normally results in a breach of the peace.

Question 2

As to the right to dispose of collateral, upon default, a secured party may…

Answer 2

… sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or in any commercially reasonable manner.

Question 3

As to a non-judicial foreclosure sale, Upon default, a secured party may…

Answer 3

… dispose of collateral in its possession by way of a sale so long as it is commercially reasonable as to method, manner, time, place, and terms. Article 9 requires the secured party to send reasonable notification of the time and place of any public sale to the debtor and any secondary obligor in a timely manner such that the debtor and any secondary obligor have sufficient time to take appropriate steps to protect their interests (e.g., by taking part in the sale).

Question 4

As to Strict Foreclosure (Purchase Rules), unless otherwise agreed, a secured party may…

Answer 4

…purchase the collateral at a public or private sale ONLY IF the collateral is of a kind that is customarily sold on a recognized market (e.g., stock market) or the subject of widely distributed standard price quotations.

Question 5

As to the right to collect directly, upon default a secured party has the right…

Answer 5

…to collect directly from the account debtor (the person who owes the debtor on the account). To exercise this right, the secured party must send an authenticated notification to the account debtor informing the account debtor that the amount due has been assigned and that the payment is to be made to the assignee. Upon receipt of proper notification, the account debtor may discharge its payment obligation ONLY by payment to the assignee (the secured party).

Question 6

Once a party has defaulted, does the creditor have an interest in any of the borrower’s other assets other than the collateral?

Answer 6

YES. A secured party that has a security interest in collateral also has a security interest in any
identifiable “proceeds” of the collateral. UCC § 9-315(a)(2). Proceeds include “whatever is
acquired upon the . . . lease of collateral.”

Question 7

How long is a security interest in proceed from collateral perfected?

Answer 7

A security interest in proceeds of collateral is perfected for at least 20 days if the
security interest in the original collateral was perfected.

The
security interest will remain perfected after the 20-day period if the security interest in
the original collateral was perfected by a filing in the same office in which a security interest in
the proceeds could be perfected by filing

So if owed money on accounts where lender already filed for collateral and perfected, the covered for 20 days and beyond.

Question 8

When a creditor makes a non-complying disposition of collateral under Article 9, the debtor can:

Answer 8

1. recover actual damages
2. recover statutory damages;

OR

3. be subject to a judicially mandated disposition of the collateral

Question 9

Actual damages are…

Answer 9

… those reasonably calculated to put an eligible claimant in the position that it would have occupied had no violation occurred.

Question 10

If the collateral involved is consumer goods, the amount of minimum statutory damages must be…

Answer 10

… at least: the credit loan interest amount + 10% of the loan’s principal amount.

$500 in statutory damages is also recoverable for each violation of certain Article 9 provisions.

Question 11

If the creditor is attempting to improperly dispose of collateral, a court may…

Answer 11

… order or restrain collection, enforcement, or disposition of the collateral on appropriate terms and conditions (e.g., the court could order the creditor to allow the debtor to redeem the collateral, conduct a public sale, etc.).

Question 12

What is a debtor’s right of redemption?

Answer 12

Generally, a debtor or any secondary obligor has the right to redeem (i.e., reclaim) collateral until the secured party has disposed of it or entered into a contract for its disposition. To redeem collateral, the debtor must:

1. Fulfill all obligations secured by the collateral;

AND

2. Pay the reasonable expenses and attorney’s fees.

Question 13

When a secured party sells or disposes of collateral, the amount collected varies from the amount of the obligation if the sale brings in MORE than the underlying obligation…

Conversely, when the sale brings in LESS than the underlying obligation…

Answer 13

…the secured party must pay the debtor for any surplus.

…the obligor is liable for any deficiency.

However, neither side is liable for any surplus or deficiency if the underlying transaction involves the sale of accounts, chattel paper, payment intangibles, or promissory notes.

Question 14

Does Art 9 expressly address the right of a creditor to recover any deficiency in a consumer goods transaction after violating Article 9?

How do courts address this issue?

Answer 14

No.

Different jurisdictions have adopted the following two rules to address this issue:

1. Absolute Defense. Some jurisdictions deny the secured creditor ANY deficiency if they violate Article 9.
2. Rebuttable Presumption Rule. In some jurisdictions, if the secured creditor violates Article 9, it is presumed that the proceeds from the disposition (i.e., sale) are equal to the debt owed. In order to rebut, the secured creditor then has the burden to show that even at a complying disposition, the collateral is worth less than the amount owed by the debtor.
   For non-consumer goods transactions, Article 9 expressly applies the rebuttable presumption rule.