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Default and Enforcement

Default and Enforcement. Enforcement: Cumulative Remedies. Proceed under non-UCC law, and satisfy a judgment out of almost any asset the Debtor owns; Proceed under the UCC, and repossess the collateral (self-help).  [9-601; 9-609]

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Default and Enforcement

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  1. Default and Enforcement

  2. Enforcement: Cumulative Remedies • Proceed under non-UCC law, and satisfy a judgment out of almost any asset the Debtor owns; • Proceed under the UCC, and repossess the collateral (self-help).  [9-601; 9-609] • OR, the SP can do both, but only entitled to one satisfaction.

  3. Repossession: Self-Help • No notice required under the code (but see revised 1-304, or contract modification theories). • No court case or supervision required -- self help.  [9-609] • Repossession must be accomplished without "breach of the peace." [9-609(b)]

  4. Repossession: Breach of Peace • Breach of the peace standard: a personal and unequivocal objection to repossession is usually enough. (but see cases like Williams v. Ford Motor Co.). • A breach of the peace also occurs if an enclosed area is entered (e.g., breaking into a garage). • If Breach of Peace occurs, under 9-625(b), SP may be liable for damages.

  5. Notice of Disposition A secured party must send a "reasonable authenticated notice of disposition” to: • the Debtor; • secondary obligors; • (if non-consumer goods): any other secured party, interest holder, or lien holder, as of 10 days before the notification date.

  6. Contents of Notice: • In commercial (non-consumer) transactions, the notification must include: • The debtor and secured party; • The collateral to be disposed; • The method of disposition; • The debtor's right to an accounting; • Time and place for public disposition; Time after which for private disposition; • In commercial (non-consumer) transactions, the notice may be sufficient if it contains minor errors.  [9-613(3)]

  7. Contents of Notice (Consumer) • A consumer notice must contain all of the above, plus: • A description of any liability for deficiency; • A telephone number for paying the full amount to redeem the property; • A telephone number or address for additional information about the disposition.

  8. Penalties for Failure to Comply • In non-consumer cases, the UCC adopts a rebuttable presumption that at a complying sale, the price would have equaled the remaining debt. • In consumer cases, courts are free to apply non-UCC rules (often "Absolute Bar").

  9. Disposition • Disposition must be at a “commercially reasonable sale”.  [9-610(b)] • Parties may agree by contract (within limits) as to what is commercially reasonable.  [9-603] • Secured Party may purchase the collateral at a public sale.  [9-610(c)]

  10. Commercially Reasonable Disposition • A disposition is commercially reasonable if it is “in conformity with reasonable commercial practices among dealers in the type of property that is the subject of the disposition.” See §9-627(b)(3) • The fact that a higher price could have been obtained at a different time or in a different method from the one the SP selected is not of itself sufficient to preclude the SP from establishing that the disposition was made in a commercially reasonable manner. See §9-627(a)

  11. Liability for Deficiency In nonconsumer actions: • A debtor gets any surplus of sale over amount owed, and the obligor (who is usually the debtor) is liable for any deficiency. 9-615(d) • A debtor's deficiency can be limited to the difference between the outstanding debt and the fair market value when a "commercially reasonable sale" to the SP or related party results in a lower price than a sale to a third party would have yielded.

  12. Liability for Deficiencyin Consumer Transactions • Under §9-616 if after disposition the debtor is either entitled to a surplus liable for a deficiency, the SP may have to give the debtor a detailed explanation of how the surplus or deficiency was calculated. • No surplus or deficiency, no need for explanation. • If SP sends consumer obligor a waiver of SP’s right to deficiency, no explanation required.

  13. Transfer Statements • §9-617 empowers the selling SP to pass “all of the debtor’s rights in the collateral” to the transferee (a person who buys at a foreclosure sale), and warranties of title, possession, quiet enjoyment, and the like, are made unless disclaimed. • §9-619 helps the SP and the transferee, i.e. an automobile that was used as collateral, that is subject to a certificate of title statute and the record owner won’t voluntarily indorse the title and deliver it to the SP. • It allows a transfer of title to the SP if the transfer statement is sought before disposition, or to the transferee if obtained after disposition.

  14. Secondary Obligors • See §9-102(a)(71) • Generally known as a “guarantor.” • Under §9-611(c), secondary obligors, as well as debtors, are entitled to notification of disposition. • No waivers of right to a commercially reasonable disposition or notification of disposition

  15. Acceptance of Collateral in Satisfaction of Debt:Strict Foreclosure • To escape the requirements of commercial reasonableness, and the traps posed by notification, the SP may be willing to give up its right to any deficiency.  • The debtor may be willing to abandon the current payments made for the collateral, and to simply surrender the collateral. • The UCC encourages "Strict Foreclosure," a "walk-away" agreement where the SP takes back the collateral and both parties walk away.

  16. Acceptance of Collateral in Satisfaction of Debt: Full Strict Foreclosure • In non-consumer cases, Full Strict Foreclosure (the entire debt is forgiven, the collateral is repossessed) can be accomplished by: • Consent. §9-620(a)(1) • Silence (20 day rule). §9-620(a)(2)] • In consumer cases, Full Strict Foreclosure can be accomplished only by consent.  If the Debtor has paid for 60% of the price of a consumer good, Disposition is required, and Full Strict Foreclosure is not an option

  17. Acceptance of Collateral in Satisfaction of Debt:Partial Strict Foreclosure • In non-consumer cases, partial strict foreclosure (only part of the debt is written off, and a deficiency remains), can only be accomplished by consent.  9-620(c)(2) • In consumer cases, NO partial strict foreclosure.  9-620(g)

  18. Effect of Collateral or Acceptance on Third Parties • Transferees: §9-617(a)(1) allows SP to make a transfer of all the D’s rights • Junior Security Interests or Liens: foreclosure sales cut off rights of junior lien holders (JLH). • JLH are entitled to any surplus or they become unsecured creditors • SP must give notice to JLH if it received an authenticated notice of claim before sale notification • And if JLH perfected its interest by filing a financing statement. § 9-611(c)(3) • SP must search files. • Junior lien holders must send foreclosing SP “an authenticated demand for proceeds before distribution of the proceeds is completed.” §9-615(a)(3)(A)

  19. Collection of Rights of Payment • With non-goods collateral such as accounts, and instruments, if the debtor who gave a SI in the collateral defaults, the SP can notify the person owing money to the debtor, i.e., the account debtor, to make payment to the SP rather than to the debtor. • Upon notification, the account debtor must pay the SP rather than the debtor. See §9-607.

  20. Redemption • Until the secured party has sold the collateral or has discharged the debt by retention of the collateral, • Debtor • Surety or • Any other SP or lien holder, unless she has otherwise agreed after default • May redeem the collateral by paying all obligations secured by the collateral plus the reasonable expenses incurred by the SP in relation to the repossession, including reasonable attorney’s fees. § 9-623

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