ST-Default

Question 1

Default

Answer 1

Default is not defined by the UCC. Instead, the terms of default are contained in the security agreement.

= event causing security interest to spring to life—gateway to remedies

Question 2

Self-Help Repossession

Answer 2

After default, a secured creditor is entitled to take the collateral if doing so can be accomplished without “breach of the peace.”

⇒ A secured creditor is also entitled to make equipment unusable.

(without going to court first)

Question 3

Breach of the Peace

Answer 3

Breach of the peace is conduct that has the potential to lead to violence.

Conduct is more likely to lead to violence when it involves a residence rather than commercial premises.

Question 4

Strict Foreclosure

Answer 4

Strict foreclosure occurs when, after a debtor defaults, a secured creditor takes possession of collateral and keeps it rather than sells it.
In order to do this, the secured creditor must
(1) notify any other creditors with a security interest on the collateral and
(2) obtain the debtor’s consent.
If there either party objects within 20 days, then the secured creditor must sell the collateral.

= creditor keeps collateral itself to satisfy debt (instead of selling it)

Question 5

Requirement for Resale of Collateral

Answer 5

1. The secured creditor must give reasonable notice of the sale to the debtor, to perfected secured creditors, and to secured creditors who have notified the the secured creditor of their interest.
2. Every aspect of the sale must be commercially reasonable, including the method, manner, time, place, and terms.

Question 6

Priority of Proceeds from Resale of Collateral

Answer 6

1. Repay costs of repossession sale
2. First to the foreclosing secured creditor;
3. Next to secured creditors with a lower priority;
4. Surplus to the debtor.

⇒ Note that priority security intersts with a lower priority than the foreclosing interest are removed from the collateral after the sale; higher priority interests remain on the collateral.

• Remember: senior lienholders ride though the sale
• Secured party’s right to a deficiency judgment
  o Deficiency judgment = amount creditor can collect from debtor beyond value of collateral
   Ex: owe $20k, sells for $15k, deficiency judgment of $5k

Question 7

Affect of Failure to Follow UCC Rules

Answer 7

[If the sale is not commercially reasonable, seller gets penalized]

• A secured party is liable for any damages that result from failure to follow any UCC rules.
• For consumer goods –statutory minimum recovery
• If a secured party that fails to follow UCC’s default rules, then there is a rebuttable presumption that the resale proceeds are equal to the debt and, thus, there is no right to a defficiency judgment.

Question 8

Right to Redeem

Answer 8

A debtor may redeem at any time before the secured creditor has resold the collateral by fulfilling all their obligations secured by the collateral.

⇒ Note that because most security agreements contain acceleration clauses, the debtor normally has to pay the entire loan balance to redeem.

Must be BEFORE foreclosure sale

= debtor’s ability to recover collateral by paying everything owed to creditor