September 12, 2018
Author: Michael R. Bosse, Esq.
Organization: Bernstein, Shur, Sawyer & Nelson, P.A.
Article 9 also sets forth the rights and obligations of secured parties upon default by the debtor, as well as any remaining protections that the debtor might still have between the parties. These rights, obligations are protections are found generally in Article 9 at Part 6, Sections 9-1601 through 9-1624. Importantly, the rights provided in Part 6 do not exclude other rights provided by the agreement of the parties. Additionally, the rights are generally cumulative and the exercise of one right does not preclude the exercise of another. Not only are the rights cumulative, they may in fact be executed simultaneously.
Part 6 does not define what constitutes a default, instead leaving it to the security agreement or other agreements of the parties as well as the events that may lead up to, give rise to, or constitute the default. Obviously one looks to loans, notes, security agreements and other agreements to determine what the parties defined as constituting a default and these events generally are considered to be non-payment, failure to abide by covenants in the security agreement, defaults in other agreements that are cross-collateralized, or the filing of a bankruptcy or receivership. The exception to this is that a default occurs in connection with an agricultural lien, pursuant to Section 9-1606, when the secured party is entitled to enforce the lien in accordance with the statute under which the lien was created. This section, however, still requires one to consult the enabling statute under which the lien was created in order to determine the timing of default.
Similarly, Part 6 also does not indicate what types of post-default conduct may result in a waiver of a default. Part 6 also does not state whether language that certain conduct will not be considered to be a waiver of a default will in fact be respected. Instead, the answers to these questions are left to the parties agreement, as it may be supplemented by other laws or the courts. One of the obvious remedies of the secured party is to take possession of the collateral. The rights of possession are governed by Section 9-1609. Upon default, a secured party can either take possession of the collateral or render collateral such as equipment unusable, or dispute of collateral on a debtor’s premises under Section 9-1610. A secured creditor can proceed either pursuant to judicial process or without judicial process if the secured party can proceed without breaching the peace. Article 9 does not define what would constitute a “breach of the peace,” again leaving that to judicial development. Section 9-1609 also does not authorize the assistance of a law-enforcement officer, and some cases have held that the use of a law-enforcement officer would be a failure to comply with Section 9-1609 previous provision. If there is a breach of the peace, a debtor may recover damages pursuant to Section 9-1625.
A secured party may also collect the collateral by collection whatever may become due on the collateral. Pursuant to Section 9-1607, the secured creditor can notify an account debtor or other person obligated on collateral to make payment or otherwise perform for the benefit of the secured party. Thus, the secured party can require those individuals to pay the secured party directly. The secured creditor also may take proceeds to which the secured party is entitled. The secured party also may apply the balance of a deposit account to which it was perfected by control, may apply the proceeds or instruct the bank to pay the balance of the account for the benefit of the secured party.
If the secured party is an assignee of an obligation secured by a real estate mortgage, Part 9-1607 provides a mechanism where it can become the mortgage of record in order to foreclosure nonjudicially on the real estate. Thus, pursuant to Section 1607(2), the secured party may record in the office where the mortgage was recorded a copy of the security agreement that creates or provides for the secured party’s security interest and the secured party’s sworn affidavit in recordable form stating that 1) a default has occurred; and 2) the secured party is entitled to enforce the mortgage non-judicially. This mechanism was necessary because the assignee may not have become the assignee or record, and after defaulting, the mortgagee may not be willing to sign at recordable assignment at that juncture.
Finally, a secured party may deduct from the collections made reasonable expenses of collection and enforcement, including reasonable attorney fees and legal expenses incurred by the secured party. This right arises automatically under Section 1607(4) instead of having to rely on the security agreement.
Disposition of the Collateral
A secured party can sell or otherwise dispose of collateral in a private or public sale and use the proceeds to pay off the secured debt. A discussion of topics under a secured party disposition includes notification to the debtor, the obligations attendant to the disposition itself, commercial reasonableness and, resulting deficiencies.
Sections 9-1611 and 9-1612 govern notification to the debtor. Notification date means the earlier of the date on which the secured party sends to the debtor and any secondary obligors a notification of disposition, or whenever the debtor and any secondary obligors waive the right to notification. The authenticated notification of disposition must be sent to the debtor and any secondary obligors. If the collateral is other than consumer goods, a notice must be sent to anyone else who has sent an authenticated notice of claim of an interest in the collateral, and certain other secured parties or lienholders that had an interest as of ten days before the notification date.
Subsection 5 of Section 1611 provides a safe harbor that takes into account delays in receiving information from public filing offices. Generally, the secured party will be held to have complied with the notification requirement when it requests a search from the proper office at least 20 days but not more than 30 days prior to the notification to the debtor, and it sends the notification to everyone identified on the report from the public office. The notification duty also is satisfied if the secured party requests the report but does not receive the report before notification is sent to the debtor. The request must be done in a commercially reasonable manner.
The contents and form of the notification, if outside of a consumer goods transaction, must include the following:
The contents must include:
(i) a description of the debtor and the secured party;
(ii) a description of the collateral that is the subject of the intended disposition;
(iii) a statement of the method of intended disposition;
(iv) a statement that the debtor is entitled to an accounting of the unpaid indebtedness
and a statement of the charge, if any, for that accounting; and
(v) a statement of the time and place of the public disposition or the time after which any other disposition is to be made. This includes both the date and the hour of the day.
Section 1613 helpfully provides a form to utilize, and although there is a substantial performance exception, it is best to meet all of the terms that are required with clarity, and without additional information that might cause confusion. The timing of the notification also must be reasonable, and Section 1612 states that the reasonableness of the timing of the notification is a question of fact. However, in non-consumer transactions, a notification sent after default and 10 days or more the earliest time of disposition is deemed to be sent within a reasonable time before the disposition.
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Consumer goods transactions have different notification rules that must be observed and followed. In a consumer goods transaction, the notification must provide the following information:
(i) all of the information listed above;
(ii) a description of any liability for a deficiency of the person to which the notification is sent;
(iii) a telephone number from which the amount that must be paid to the secured party to redeem the collateral is available pursuant to Section 9-1623; and
(iv) a telephone number or mailing address from which additional information concerning the disposition of the collateral and the obligation secured is available.
Section 1614 again helpfully provides a form of notice that can be used in consumer good situations. Section 1614 also includes a safe harbor provision.
The actual disposition of the collaterals is governed by Section 1610. A secured party may sell, lease, license or otherwise dispose of any or all of its collateral. Every aspect of the disposition, including the method, manner, time, and place must be commercially reasonable. A secured party may also purchase collateral at a public sale, or at a private sale if the collateral is of a kind that is customarily sold on the recognized market (like the New York Stock Exchange), or the subject of widely distributed standard price quotations. A disposition generally vests rights in the transferee free from the security interest and the rights of all subordinate security interests and liens.
Although Section 1610(4) provides that contracts for the sale, lease, license or other disposition of property include warranties relating to title, possession, quiet enjoyment and the like, these warranties can be easily disclaimed. The secured party can disclaim the warranties if in any manner that would be effective to disclaim or modify the warranties if the disposition of property had been voluntary or by communicating to the purchaser a record an express disclaimer or modification of the warranties in the contract for disposition of the property.
Application of proceeds is governed by Section 1615. A secured party shall apply the proceeds in the following order:
(i) reasonable expenses of retaking, holding, preparing for disposition, processing and disposition, as well as reasonable legal fees and expenses;
(ii) satisfaction of the obligations secured by the security interest for which the disposition is being made (who have, if requested, provided reasonable proof of their interest); and
(iii) satisfaction of obligations secured by any subordinate security interest or subordinate lien.
A secured party generally needs to apply or pay over for application non-cash proceeds unless it would be commercially unreasonable not to do so. If the transaction is one for accounts, chattel paper, payment intangibles or promissory notes, the debtor is not entitled to any surplus and the obligor is not entitled to a deficiency.
There likely will be a deficiency remaining. If the disposition is to an insider of the secured creditor or the secured creditor, than the calculation for purposes of a deficiency have to be adjusted to reflect a creditor for the higher amount that would have been received by a noninsider purchaser.
Acceptance of Collateral in Satisfaction of Secured Debt
The secured party may desire to retain the collateral in total or partial satisfaction of the debt that is secured. Collateral in consumer goods can only be the subject on a retention remedy if the secured party already is in possession of the consumer goods. Moreover, in the consumer goods arena, the satisfaction can only be total; it may not be partial.
Pursuant to Section 1621, a secured party that wants to accept collateral in full or partial satisfaction of the obligation must send a proposal to the debtor, but also to anyone who has given the secured party a authenticated notification of a claim against the collateral pursuant to Section 1621 as well as to secured parties or lienholders who are holders of a security interest perfected by the filing of a financing statement that identifies the collateral, was indexed under the debtor’s name, and was filed in the office covering that collateral. Secondary obligors also must receive the proposal. The retention remedy can only be utilized if there is no objection from any of the entities. The objection must be provided within 20 days after the notice was sent.
Article 9 also provides that the secured party may be liable to the debtor for any lost cause when the secured party has failed to comply with any of the enforcement provisions of Part 6 of Article 9. Section 9-625 contains a rebuttable presumption rule for commercial transactions if there is an improper foreclosure or other enforcement that results in a deficiency claim. Thus, if the transaction is a commercial one, the value of the collateral is presumed to have equaled the entire secured debt thereby wiping out the deficiency claim unless the secured party can demonstrate that it is not extinguished. There is also a specific penalty that can be imposed on a secured party that does not comply with the enforcement provisions if one is dealing in consumer goods.
Finally, there can be statutory damages in either commercial or consumer transaction in some circumstances under Section 9-625(e)(5)(6).