Default Secured Creditor vs Debtor Duties of Secured
Default Secured Creditor vs. Debtor
Duties of Secured Party in Possession �When does secured party have possession of the debtor’s property (collateral)? Creditor perfected by possession. After repossession.
Duties of Secured Party in Possession �Basic duty = reasonable care Not responsible for changes in market value
Duties of Secured Party in Possession �Expenses of secured party Debtor responsible for reasonable expenses creditor incurs to keep and preserve the collateral. Debtor responsible for insurance and taxes. Expenses are also secured by the collateral.
Duties of Secured Party in Possession �Risk of loss is on the debtor if creditor’s insurance is insufficient.
Duties of Secured Party in Possession �Increases or profits of the collateral Non-monetary increases (e. g. , appreciation, stock dividends) = creditor may hold as additional collateral. Monetary increases (e. g. , rent, cash dividends): ▪ Use to reduce the debt, or ▪ Remit to debtor.
Duties of Secured Party in Possession �Segregation of collateral Keep collateral identified. May commingle fungible collateral.
Duties of Secured Party in Possession �Use debtor’s property as collateral Creditor may use the debtor’s collateral as collateral when the creditor becomes a debtor. But, doing so cannot impair debtor’s ability to regain the collateral upon payment of the debt.
Duties of Secured Party in Possession �Use debtor’s property: To preserve collateral or its value. Pursuant to court order. If non-consumer goods, as authorized in the security agreement. ▪ If consumer goods, debtor cannot agree to allow creditor to use the collateral.
Duties of Secured Party in Possession �Problems Problem 374 – p. 1009 Problem 375 – p. 1010
Default – What does it mean? �Debtor’s “default” triggers creditor’s remedies (e. g. , repossession). �No U. C. C. definition Obviously, means not paying on time. �Security agreement should have extensive definition. What types of things should be considered default?
Default – What does it mean? Debtor shall be in default under this agreement upon the occurrence of any of the following events or conditions, namely: (a) default in the payment or performance of any of the Obligations or of any covenants or liabilities contained or referred to herein or in any of the Obligations; (b) any warranty, representation or statement made or furnished to Secured Party by or on behalf of Debtor proving to have been false in any material respect when made or furnished; (c) loss, theft, substantial damage, destruction, sale or encumbrance to or any of the Collateral, or the making of any levy, seizure or attachment thereof or thereon; (d) dissolution, termination of existence, filing by Debtor or by any third party against Debtor of any petition under any Federal bankruptcy statute, insolvency, business failure, appointment of a receiver of any part of the property of, or assignment for the benefit of creditors by, Debtor; or (e) the occurrence of an event of default in any agreement between Debtor and/or Secured Party and ________.
Acceleration Clauses -- § 1 -309 �Permits creditor to deem entire unpaid amount of debt due upon default.
Acceleration Clauses -- § 1 -309 �Must be exercised in good faith even if security agreement says “at will. ” Honesty in fact, plus Exercise of reasonable commercial standards.
Acceleration Clauses -- § 1 -309 �Burden of proof on person claiming lack of good faith.
Problems �Problem 376 – p. 1015 �Problem 377 – p. 1020
Repossession
Repossession �No judicial process needed. �Self-help remedy.
Repossession �Creditor does NOT need to give debtor notice before repossessing.
Repossession �Limitation = No breach of the peace
Repossession �Problem 378 – p. 1028 Breach of the peace
May creditor delegate duty not to breach the peace? �MBank El Paso, N. A. v. Sanchez, 836 S. W. 2 d 151 (Tex. 1992).
Problems �Problem 379 – p. 1032 Property in collateral �Problem 380 – p. 1033 Accounts, instruments, chattel paper
Creditor’s Choice After Repo �Creditor’s choices after a proper repossession: 1. Sell the collateral, or 2. Strict foreclosure.
Creditor Selling the Collateral � 1. Notice of Sale
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived ▪ 1. Perishable collateral
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived ▪ 1. Perishable collateral ▪ 2. Collateral rapidly decreasing in value
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived ▪ 1. Perishable collateral ▪ 2. Collateral rapidly decreasing in value ▪ 3. Collateral normally sold in recognized market
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice ▪ 1. Description of debtor and secured creditor
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice ▪ 1. Description of debtor and secured creditor ▪ 2. Description of collateral
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice ▪ 1. Description of debtor and secured creditor ▪ 2. Description of collateral ▪ 3. Method of sale (public/auction or private)
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice ▪ 1. Description of debtor and secured creditor ▪ 2. Description of collateral ▪ 3. Method of sale ▪ 4. Inform debtor about right to accounting
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice ▪ 1. Description of debtor and secured creditor ▪ 2. Description of collateral ▪ 3. Method of sale ▪ 4. Inform debtor about right to accounting ▪ 5. Time and place of auction or earliest date of private sale
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice 1. Description of debtor and secured creditor 2. Description of collateral 3. Method of sale 4. Inform debtor about right to accounting 5. Time and place of auction or earliest date of private sale ▪ 6. If consumer goods, explain debtor’s liability for any deficiency and how to get further information ▪ ▪ ▪
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice c. When notice given
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice c. When notice given d. Who gets notice
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice c. When notice given d. Who gets notice ▪ 1. Debtor (unless waived after default)
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice c. When notice given d. Who gets notice ▪ 1. Debtor (unless waived after default) ▪ 2. Sureties
Creditor Selling the Collateral � 1. Notice of Sale a. When requirement waived b. Contents of notice c. When notice given d. Who gets notice ▪ 1. Debtor (unless waived after default) ▪ 2. Sureties ▪ 3. Unless collateral consumer goods, other creditors who filed, noted on certificate of title, or gave notice to creditor selling the collateral
Creditor Selling the Collateral � 2. Standard of care for sale – commercially reasonable: Method Manner Time Place Terms
Creditor Selling the Collateral � 3. May creditor purchase collateral? Yes, if public sale (auction). No, if private sale (unless no real debate on sale price).
Creditor Selling the Collateral � 4. Title of purchaser at resale Creditor warrants title, possession, and quite enjoyment. Creditor may disclaim the warranties.
Creditor Selling the Collateral � 5. Application of sale proceeds:
Creditor Selling the Collateral � 5. Application of sale proceeds: a. Creditor’s reasonable expenses such as: ▪ Repossession fee ▪ Storage ▪ Preparation for sale ▪ Advertising
Creditor Selling the Collateral � 5. Application of sale proceeds: a. Creditor’s reasonable expenses b. Balance of debt
Creditor Selling the Collateral � 5. Application of sale proceeds: a. Creditor’s reasonable expenses b. Balance of debt c. Subordinate secured creditors in the same collateral
Creditor Selling the Collateral � 5. Application of sale proceeds: a. Creditor’s reasonable expenses b. Balance of debt c. Subordinate secured creditors in the same collateral d. Surplus (if any) to debtor
Creditor Selling the Collateral � 6. If deficiency, creditor sues debtor but is unsecured for the deficiency.
Creditor Selling the Collateral � 7. Creditor’s liability if not follow rules:
Creditor Selling the Collateral � 7. Creditor’s liability if not follow rules a. Debtor’s actual damages
Creditor Selling the Collateral � 7. Creditor’s liability if not follow rules b. If consumer goods, at least finance charge (interest) plus 10% of principal
Creditor Selling the Collateral � 7. Creditor’s liability if not follow rules c. Possible restriction on creditor’s ability to recovery deficiency ▪ Non-consumer – rebuttable presumption collateral equals debt ▪ Consumer transaction – absolute bar to deficiency [Tanenbaum v. Economics Laboratory, Inc. , 628 S. W. 2 d 769 (Tex. 1982). ]
Problems �Problem 381 – p. 1034 �Problem 382 – p. 1034 �Problem 383 – p. 1049 �Problem 384 – p. 1049 �Problem 385 – p. 1050 �Problem 386 – p. 1050
Redemption �Debtor’s right to cure the default and regain the collateral.
Redemption � 1. Creditor not yet sell (or have contract to sell) the collateral
Redemption � 2. Strict foreclosure has not occurred
Redemption � 3. Debtor has not waived right to redeem after default Waiver in security agreement would not work.
Redemption � 4. Debtor pays all obligations secured by the collateral Because acceleration clauses are common, redemption requires payment of all amounts due, not just the late payments.
Redemption � 4. Debtor pays all obligations secured by the collateral Shumway v. Horizon Credit Corp. , 801 S. W. 2 d 890 (Tex. 1991). Before acceleration, a secured party must: ▪ Present note to maker, ▪ Notify maker of secured party’s intent to accelerate, and ▪ Notify maker of the acceleration itself. Exception = The maker has waived right to presentment, notice of intent to accelerate, and notice of acceleration in a clear and unequivocal manner.
Redemption � 5. Debtor pays all creditor’s reasonable expenses such as: Repossession fee Storage costs Advertising Preparing collateral for sale
Redemption �Problem 387 – p. 1060
Strict Foreclosure �Creditor retains collateral: Total satisfaction of debt = consumer or non- consumer situations Partial satisfaction of debt = non-consumer situations
Strict Foreclosure � 1. Debtor consents Express, or Implied by failing to object within 20 days of when creditor sent notice.
Strict Foreclosure � 2. Creditor gives notice to: Debtor, and If not consumer goods: ▪ Creditors who perfected by filing ▪ Creditors who have noted their interests on certificate of title ▪ Creditors who have given notice to creditor
Strict Foreclosure � 3. No objection by debtor or another creditor within 20 days
Strict Foreclosure � 4. Special rule for consumer goods if debtor has paid 60% of price Creditor must resell within 90 days of repossession Policy?
Strict Foreclosure �Problem 388 – p. 1060 �Problem 389 – p. 1061
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