Making the Best of a Bad SituationMaking the Best of a Bad Situation

Presentation and Podcast by Mazyar M. Hedayat, Esq.

(c) 2009 M. Hedayat & Associates, P.C.

Article 9 Secured Transactions

Disposition of Collateral Following Debtor Default

Overview of Article 9Overview 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.

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Parties to the TransactionParties 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.

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Relationships Between PartiesRelationships Between Parties

Creditor a/k/a Secured Party

CollateralDebtor

a/k/a Obligor

Co-Debtor a/k/a Secondary Obligor

Ownership

Promise to

PayFunds or

Credit

Security Interest

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Relationships Between PartiesRelationships Between Parties

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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.

Typical Steps In RepossessionTypical Steps In Repossession

Debtor gives secured interest and begins making payments

Debtor defaults on payments secured by Debtor’s property

Creditor repossesses the Debtor’s 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

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After the Debtor DefaultsAfter 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.

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Repossession of CollateralRepossession 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.

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Disposition of CollateralDisposition 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 creditor’s expenses for retaking and preparing collateral for disposition and legal expenses, if applicable §9-623

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Determining Commercial ReasonablenessDetermining 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.

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Notice RequirementsNotice 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

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Proceeds of DispositionProceeds 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.

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Repurchase of CollateralRepurchase 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)

(c) 2009 M. Hedayat & Associates, P.C.