When Does a Default Occur?
Generally, whenever the debtor fails to tender an obligation when due (when the debtor fails to meet an installment payment)
Secured Party’s Options Upon Default
Include:
- reducing a claim to judgment
- foreclosing
- enforcing the claim
- repossessing tangible collateral (but watch out for breach of the peace)
Breach of the Peace
Courts have held that an act that is likely to lead to violence will be considered to breach the peace. An unauthorized entry into a home to repossess collateral will always be considered a breach of the peace.
Replevin
If the secured party cannot obtain the collateral without a breach of the peace, the secured party will be required to bring an action for replevin.
Notice of Payment
If the collateral consists of accounts receivable, instruments, or chattel paper, the secured party may, upon the debtor’s default, notify the person obligated on the collateral to make a payment to the secured party. The notification must:
- be authenticated by the secured party or the debtor
- reasonably identify the rights assigned
Debtor’s Right to Redeem
The debtor has a right to redeem the collateral by tendering to the secured party the amount of the obligation, including interest, together with reasonable expenses and attorneys’ fees caused by the default.
Timing of Redemption
Redemption must be effected before:
- the collateral has been collected
- the secured party has disposed of the collateral or has entered into a K for its disposition; or
- the secured party has accepted the collateral in full or partial satisfaction of the obligation
Waiver of Right to Redemption
There is no right to waiver of the debtor’s redemption rights under the UCC unless all parties to the security agreement agree to the waiver in writing and do so immediately following the default.
Disposition of Collateral After Default
The secured party can sell the property (public or private). Although all aspects of disposition must be commercially reasonable.
When a Sale Is Considered Commercially Reasonable
If it is made:
- in the usual manner on any recognized market
- at the price current in any recognized market at the time of the sale
- otherwise in conformity with reasonable commercial practices among dealers in the type of property that was sold
- when there is appropriate notice
Notification of Disposition
Before disposal, secured party must send to debtor, any other secured party, and any other interest holder a notification, a reasonable authenticated notice of disposition.
Exceptions to the Notification of Disposition Req.
Include:
- collateral that is perishable
- collateral that may decline quick in value
- collateral that is of a type customarily sold on a recognized market (stock market)
Notice Req. in Non-Consumer Transactions
Notice must include:
- a description of the debtor and secured party
- a description of the collateral
- the method of intended disposition
- a statement that the debtor is entitled to an accounting of all unpaid indebtedness
- the time and place of a public disposition or the time after which the collateral will be sold in a private disposition
Notice Req. in Consumer Goods Transaction
In addition to the req. for non-consumer notice, the notice must include:
- a description of any liability for a deficiency
- a telephone number the debtor can call to obtain the amount required to redeem the collateral; and
- a telephone number or mailing address from which additional info is available
Deficiency
If the collateral does not bring enough at sale or collection to pay all outstanding obligations, the secured party is entitled to a judgment for the deficiency. However, if the sale is commercially unreasonable, the deficiency can be reduced (outstanding amount of debt – the amount the collateral would have sold for in a commercially reasonable sale).
