Remedies available to the secured party upon default
Upon default the secured party may:
(1) Seek possession of the collateral and, in order to satisfy the obligor’s outstanding obligation, either:
(a) Sell the collateral; or
(b) Retain it in full or partial satisfaction of the obligation;
(2) Initiate a judicial action to obtain a judgment based on that obligation; or
(3) Subject to any statutory limitations, pursue any course of action to which the debtor and obligor have agreed.
Security agreement covering fixtures
When a secured party’s security interest has priority over owners and individuals who encumber real property, that secured party may remove the fixture from real property.
If the owner or encumbrancer is not the debtor, the secured party is liable for:
- the cost of repairing any physical object damaged by the removal
- but not for any reduction in the value of the real property due to the removal.
Repossession of collateral
Upon default, unless the security agreement provides otherwise, a secured party is not required to give notice of default nor of its intent to take possession of the collateral.
The secured party can repossess collateral in one of two ways:
(1) By using judicial process—e.g., by filing a replevin action; or
(2) By using self-help reposession.
Transferee’s rights
If the transferee/buyer at a foreclosure sale acts in good faith, she takes the collateral:
- free of the foreclosed security interest and any subordinate interests
- but subject to any security interests senior to that foreclosed.
Account debtors
Upon default, a secured party may notify an account debtor,
- a person obligated on an account, chattel paper, or general intangible, but
- not a person obligated on a negotiable instrument,
to make payment to the secured party.
In addition, the secured party may exercise any rights of the debtor with respect to the obligation of the account debtor.
In a commercially reasonable manner, the secured party may collect from the account debtor, and, if the account debtor does not pay, the secured party may enforce the obligation of the account debtor.
Account debtors: reasonable proof
When an account debtor receives notification of an assignment, the account debtor may request reasonable proof that the assignment has been made and, until such proof is furnished, may still discharge its obligation by paying the assignor.
Repossession of collateral: self help
When using self-help repossession, the secured party cannot breach the peace.
The repossession agent is allowed to:
- Trespass on land; and
- Repossess if there is no confrontation.
But some courts may find a breach of the peace if:
- The agent takes despite the current possessor’s oral protests,
- Although other courts hold that there is no breach of the peace absent threat of violence.
Repossession of collateral: breach of the peace
A secured party breaches the peace if:
- She brings an officer to the repossession, and the officer is not there pursuant to judicial authorization;
- The repossession agent breaks into the debtor’s home or garage, or commits some other criminal act;
- Self help involves certain physical confrontations; or
- Self help involves certain deception or trickery.
Repossession of collateral: large equipment
For equipment that is hard to repossess, it is acceptable to render it unusable in lieu of repossession—if done so without disruption or violence.
