What is Default in Secured Transactions?
The right of the secured party to proceed against collateral is triggered by default. Article 9 does not define the events that will trigger a default, but the security agreement usually will define default to include events such as failure to pay or maintain insurance.
- If the security agreement lacks such a provision, “default” is generally construed as a failure to pay or perform.
Is a party allowed to use Self-Help to Reposess Collateral?
YES! After default, the secured party is entitled to take possession of the collateral without judicial process (by “self-help”) if this can be done WITHOUT a breach of the peace. When a secured party breaches the peace, the secured party loses the authorization to repossess, may be sued for conversion (and possibly assault, battery, trespass, etc.), and is liable for actual (and frequently punitive) damages.
Breach of the Peace: Any conduct by the secured party that has the potential to lead to violence is a breach of the peace. Generally, physical presence by the debtor (or a representative of the debtor) plus a verbal objection by the debtor over the repossession is enough to create a breach of the peace.
Is Breaking and Entering a Breach of the Peace?
Depends on Residential vs. Commercial
- Residential — Breaking and entering of a residence is probably a breach of the peace.
- Commercial —The breaking and entering of a commercial property is less likely to be a breach of the peace.
TRUE or FALSE: Simple trespass is NOT a Breach of the Peace.
TRUE! Simple trespass is NOT a breach of the peace. Thus, for example, a repossessor may hot-wire a car sitting on a driveway, or perhaps one in a commercial garage, but not one sitting in someone’s closed garage.
What are the Other Main Alternatives to Removing Collateral Using Self-Help?
- Judicial Process: If self-help is unavailable, the secured party can use judicial process to get the goods.
- Render Equipment Unusable: If self-help is available, a party may chose to make equipment unusable and dispose of it on the debtor’s property if the secured party can do so without a breach of the peace.
How can a Secured Party Use Self-Help When Dealing with Accounts?
If the debtor defaults and the collateral is an account, the secured party can notify the person owing money to the debtor (the account debtor) to make payment to the secured party, rather than to the debtor. Upon notification, the account debtor must pay the secured party, rather than the debtor. Payment to the debtor will not discharge the obligation.
What is Strict Foreclosure and the General Rule to Strict Foreclosure?
After default and repossession, the secured party may retain the collateral in full or partial satisfaction of the debt (in other words, the secured party may make a full or partial strict foreclosure) if the secured party does the following:
1) Secured party must send its proposal to retain the collateral to:
- Any other secured party from whom the foreclosing party has received notice of a claim to the collateral,
- Any other secured party who has perfected a security interest in the collateral by filing a financing statement or noting its security interest on a certificate of title
If a notified party objects within 20 days after the secured party sends the notice, the collateral must be disposed of by sale.
2) The secured party must also obtain the debtor’s consent. The debtor consents by either:
- Agreeing in an authenticated record after default,
- In the case of a full strict foreclosure, failing to make an authenticated objection within 20 days after the secured party sends notice (a debtor can’t consent to a partial strict foreclosure in this manner)
What are the Main Exceptions to the Strict Foreclosure Rule?
- No Partial Strict Foreclosure in Consumer Transactions: In a consumer transaction, a secured party may NOT keep the collateral in partial satisfaction of the debt and seek a deficiency judgment. The secured party may keep the collateral only in full satisfaction of the debt.
- Consumer Goods 60% Rule: If the debtor has paid 60% of the cash price on a PMSI in consumer goods, or 60% of the loan on a non-PMSI in consumer goods, the secured party must dispose of the collateral within 90 days after repossession. If the debtor has paid less than 60%, the general rules apply.
What may a Secured Party do with Collateral After Default?
After default, the secured party may sell, lease, license, or otherwise dispose of the collateral in its condition when repossessed or after reasonable preparation. The sale may be either public (auction) or private, and may be by one or more contracts.
What is the Effect of a Sale of Collateral After Default?
The sale discharges the security interest under which the sale is being made and all subordinate security interests.
The purchaser, HOWEVER, is still subject to superior security interests.
Who Must Receive Notification of the Resale of Collateral?
Reasonable notice that is authenticated by the secured party ( the notice can’t be oral) must be given:
- To the debtor and any sureties on the debt (except in the case of consumer goods)
- To any other secured parties who have notified the secured party of their interests
- To any secured parties who have perfected by filing a financing statement or making a notation on a certificate of title.
What is the Exception to the Notification Requirement for Resale of Collateral?
Reasonable notice isn’t necessary when the collateral is perishable or threatens to decline rapidly in value or is of a kind ordinarily sold in a recognized market (for example, stock)
When Must Notice of the Resale of Collateral Be Sent?
The notice must be sent within a reasonable time before the sale. In nonconsumer transactions, notice is deemed to be sent within a reasonable time if it’s sent 10 days or more before the sale.
What Must the Notification of the Resale of Collateral Contain?
The content of the notice depends on the type of sale and type of collateral.
- Public Sale: Notice of the time and place of sale is required.
- Private Sale: Notice of the time after which the sale will occur must be given. The notice must also describe the parties and the collateral.
Can the Secured Party Buy the Collateral at the Resale?
- Public Sale: The secured party may buy the collateral at any public sale
- Private Sale The secured party may buy at a private sale only if the collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations.
What Happens With the Proceeds of the Resale of the Collateral?
The money from a foreclosure sale is distributed in the following order:
- Repay the costs of the repossession and sale,
- Pay off the debt of the foreclosing creditor
- Pay off the debt of creditors with lower priority than the foreclosing creditor
- If any money is left over, the debtor gets this surplus.
TRUE or FALSE: Creditors with Higher Priority Than the Foreclosing Creditor DO NOT receive any money from a Resale of Collateral.
TRUE! Creditors with higher priority than the foreclosing creditor receive no money from the sale because they don’t lose their liens as a result of the foreclosure sale.
What Happens When the Sale Does Not Bring in Enough Money To Satisfy the Expenses of the Sale and the Secured Party’s Debt?
If the collateral when sold doesn’t bring in enough to pay the expenses of the sale and the secured party’s debt, the secured party may recover any deficiency from the debtor.
Is a Secured Party Required to Explain a Deficiency or Surplus After the Resale of Collateral?
If the debtor is a consumer, then after the sale, the secured creditor must send the debtor an explanation of the calculation of any debt still owed (the deficiency) or money the debtor will receive (the surplus).
Is the Secured Party Liable for Actual Damages if it Does NOT Follow the Code’s Rules?
YES! A secured party is liable for the actual damages caused by failure to follow any of the Code’s rules.
What Happens when Dealing With a Secured Party That Violated the Rules and The Collateral is Consumer Goods?
If the collateral is consumer goods and the secured creditor violates the Code’s rules on default (for example, the sale isn’t commercially reasonable), the debtor is entitled to a minimum of 10% of the cash price of the goods plus an amount equal to all the interest charges to be paid over the life of the loan.
What is the Debtor’s Right to Redeem?
Any time before the secured party has resold the collateral or has entered into a contract for its disposition, or the obligation has been discharged by the secured party’s retention of the collateral, the debtor (as well as any surety or other secured party or lienholder) may redeem the collateral. To do so, the debtor must tender fulfillment of all obligations secured by the collateral, plus additional reasonable expenses.
- NOTE: Because most security agreements contain an acceleration clause (that is, a clause allowing the creditor to declare the entire loan balance due upon default), the debtor typically must tender the entire balance in order to redeem.
