Making the Best of a Bad Situation

1
Making the Best of a Bad Situation
Article 9 Secured Transactions Disposition of
Collateral Following Debtor Default

• Presentation and Podcast by
• Mazyar M. Hedayat, Esq.

2
Overview of Article 9

• UCC Article 9 deals with secured transactions in
  personal property such as
• chattels
• rolling stock
• machinery
• equipment
• And sets forth procedures by which to
• establish
• perfect
• maintain
• enforce
• A secured interest.

3
Parties to the Transaction

• 102(a)(28) The Debtor has an ownership interest
  in the Collateral at issue
• 102(a)(59) And is the Obligor to whom the
  Obligee or Creditor extends value
• Secured Collateral is taken to assure faithful
  performance
• Unsecured No Collateral taken to assure faithful
  performance
• 102(a)(71),(72) A Co-Debtor or Secondary Obligor
  as well as additional Co-Debtors and Co-Obligors
  may be needed. Each Co-Debtor and Co-Obligor may
  pursue the primary Debtor or any other Co-Obligor
  in the event the Creditor takes action due to a
  default. This is known as the right of Recourse
  or Contribution among Co-Debtors.

4
Relationships Between Parties
Collateral
Debtor a/k/a Obligor
Ownership
Promise to Pay
Security Interest
Funds or Credit
Co-Debtor a/k/a Secondary Obligor

• Creditor
• a/k/a Secured Party

5
Relationships Between Parties

• Distinction between debtor/obligor and
  co-debtor/secondary obligor
• The party that stands to get the upside from the
  sale of the collateral may be different from the
  party that has to worry about the deficiency.
• 9-615 (d)(1) says the surplus goes to the
  debtor.
• 9-615 (d)(2) says deficiency must be paid by the
  obligor.

6
Typical Steps In Repossession

• Debtor gives secured interest and begins making
  payments
• Debtor defaults on payments secured by Debtors
  property
• Creditor repossesses the Debtors property
  (collateral)
• Creditor sends notice of commercially reasonable
  sale 9-614
• Public or private sale must take place pursuant
  to notice
• Creditor sends explanation of debt to Debtor
  9-616(b)
• Creditor may sue to collect deficiency from sale
  (if any)

Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
7
After the Debtor Defaults

• If the Debtor is unable to faithfully perform its
  obligation, then the Secured Party may repossess
  Collateral in which it has a properly perfected
  security interest, but only if it does so in
  accordance with UCC 9-601 through 9-607
• In other words, once the Debtor defaults on its
  obligation the Creditor may repossess and may
  dispose of the collateral following notice and a
  hearing as long as the Creditor previously
• established its security interest properly, and
• gave notice of its interest in reasonable time.

8
Repossession of Collateral

• Under 9-609, after the debtor defaults the
  secured creditor may repossess the collateral.
  The actual repossession can be done by the
  secured creditor or by an authorized agent acting
  on behalf of the secured creditor.
• The secured creditor has a right to self-help,
  meaning he or she is not required to give notice
  of possession of the collateral.
• There is an exception to this rule If the
  repossession were to involve a breach of the
  peace, under 9-609(b), the secured creditor
  would not be able to repossess the collateral
  without judicial process.
• For example, a secured party may repossess the
  car on the driveway, but may not break into the
  garage and the repossess the car.

9
Disposition of Collateral

• As long as a notice of given and the disposition
  is commercially reasonable
• Creditor can sell the collateral
• In a public auction
• Private sale
• Creditor can strictly foreclose 9-620
• The secured creditor retains the collateral in
  satisfaction of the debt.
• Creditor can partially foreclose 9-620
• The collateral is traded in for a reduction in
  the debt
• Debtor can redeem the collateral
• If the debtor can pay the creditor back before
  the time of the sale.
• After fulfilling obligations of creditors
  expenses for retaking and preparing collateral
  for disposition and legal expenses, if applicable
  9-623

10
Determining Commercial Reasonableness

• A disposition is commercially reasonable under
  9-627(b) if the disposition is made
• In the usual manner in the recognized market
• At the current price in the recognized market at
  the time of disposition or
• Otherwise in conformity with reasonable
  commercial practices among dealers in the type of
  property that is subject of the disposition.
• The disposition is still commercially reasonable
  under 9-627(a) even if the amount actually
  obtained differs from what could have been
  obtained at a different time or through a
  different method.

11
Notice Requirements

• Under 9-611, Creditor must send a notice to the
  following before disposition
• Debtor
• Secondary obligors (guarantors)
• Secondary secured parties (if an authenticated
  claim is given to the creditor)
• The notice must be sent in a timely manner.
  9-612 says that a reasonable time is ten or more
  days before the earliest time of the disposition.
• 9-613 governs the content of the notice of
  disposition. The notice must include
• Description of debtor and secured party as well
  as a description of the collateral
• The method of intended disposition
• A statement that the debtor is entitled to an
  explanation if there are any unpaid debts or
  charges
• The time and place of a public sale or date after
  for other dispositions
• Description of liability for deficiency

12
Proceeds of Disposition

• 9-615(a) governs post-disposition. If the
  collateral was sold, any proceeds must be given
  to the following in the following order
• To the cost of the sale and repossession, as well
  as other administrative costs
• To the principle and interest of the secured debt
• If there is any surplus remaining, to the
  secondary secured parties (if any)
• If there is still surplus remaining, the debtor
  will receive the remaining .
• If there is any deficiency, the obligor liable.
• If there is any deficiency remaining and debtor
  does not pay, the Creditor may sue to recover
  amounts still due after giving the Debtor credit
  for sums received upon sale of the Collateral.

13
Repurchase of Collateral

• A secured party may chose to purchase the
  collateral at the sale
• The secured party can purchase the collateral
  without restriction in a public sale.
• If the secured purchases the collateral in a
  private sale, then the collateral must be of a
  kind that is customarily sold on a recognized
  market or the subject of widely distributed
  standard price quotations according to 9-610(c)