Secured Creditor vs. Debtor

 When does secured party have possession of the debtor’s property (collateral)?  Creditor perfected by possession.  After repossession.

 Basic duty = reasonable care  Not responsible for changes in market value

 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.

 Risk of loss  Risk of loss is on the debtor if creditor’s insurance is insufficient.

 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.

 Segregation of collateral  Keep collateral identified.  May commingle fungible collateral.

 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.

 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.

 Problems  Problem 374 – p  Problem 375 – p. 1010

 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?

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 _______________.

 Permits creditor to deem entire unpaid amount of debt due upon default.

 Must be exercised in good faith even if security agreement says “at will.”  Honesty in fact, plus  Exercise of reasonable commercial standards.

 Burden of proof on person claiming lack of good faith.

 Problem 376 – p  Problem 377 – p. 1020

 No judicial process needed.  Self-help remedy.

 Creditor does NOT need to give debtor notice before repossessing.

 Limitation = No breach of the peace

 Problem 378 – p  Breach of the peace

 MBank El Paso, N.A. v. Sanchez, 836 S.W.2d 151 (Tex. 1992).

 Problem 379 – p  Property in collateral  Problem 380 – p  Accounts, instruments, chattel paper

 Creditor’s choices after a proper repossession:  1. Sell the collateral, or  2. Strict foreclosure.

 1. Notice of Sale

 a. When requirement waived

 1. Notice of Sale  a. When requirement waived ▪ 1. Perishable collateral

 1. Notice of Sale  a. When requirement waived ▪ 1. Perishable collateral ▪ 2. Collateral rapidly decreasing in value

 1. Notice of Sale  a. When requirement waived ▪ 1. Perishable collateral ▪ 2. Collateral rapidly decreasing in value ▪ 3. Collateral normally sold in recognized market

 1. Notice of Sale  a. When requirement waived  b. Contents of notice

 1. Notice of Sale  a. When requirement waived  b. Contents of notice ▪ 1. Description of debtor and secured creditor

 1. Notice of Sale  a. When requirement waived  b. Contents of notice ▪ 1. Description of debtor and secured creditor ▪ 2. Description of 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)

 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

 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

 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

 1. Notice of Sale  a. When requirement waived  b. Contents of notice  c. When notice given

 1. Notice of Sale  a. When requirement waived  b. Contents of notice  c. When notice given  d. Who gets notice

 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)

 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

 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

 2. Standard of care for sale – commercially reasonable:  Method  Manner  Time  Place  Terms

 3. May creditor purchase collateral?  Yes, if public sale (auction).  No, if private sale (unless no real debate on sale price).

 4. Title of purchaser at resale  Creditor warrants title, possession, and quite enjoyment.  Creditor may disclaim the warranties.

 5. Application of sale proceeds:

 a. Creditor’s reasonable expenses such as: ▪ Repossession fee ▪ Storage ▪ Preparation for sale ▪ Advertising

 5. Application of sale proceeds:  a. Creditor’s reasonable expenses  b. Balance of debt

 5. Application of sale proceeds:  a. Creditor’s reasonable expenses  b. Balance of debt  c. Subordinate secured creditors in the same 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

 6. If deficiency, creditor sues debtor but is unsecured for the deficiency.

 7. Creditor’s liability if not follow rules:

 7. Creditor’s liability if not follow rules  a. Debtor’s actual damages

 7. Creditor’s liability if not follow rules  b. If consumer goods, at least finance charge (interest) plus 10% of principal

 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.2d 769 (Tex. 1982).]

 Problem 381 – p  Problem 382 – p  Problem 383 – p  Problem 384 – p  Problem 385 – p  Problem 386 – p. 1050

 Debtor’s right to cure the default and regain the collateral.

 1. Creditor not yet sell (or have contract to sell) the collateral

 2. Strict foreclosure has not occurred

 3. Debtor has not waived right to redeem after default  Waiver in security agreement would not work.

 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.

 4. Debtor pays all obligations secured by the collateral Shumway v. Horizon Credit Corp., 801 S.W.2d 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.

 5. Debtor pays all creditor’s reasonable expenses such as:  Repossession fee  Storage costs  Advertising  Preparing collateral for sale

 Problem 387 – p. 1060

 Creditor retains collateral:  Total satisfaction of debt = consumer or non- consumer situations  Partial satisfaction of debt = non-consumer situations

 1. Debtor consents  Express, or  Implied by failing to object within 20 days of when creditor sent notice.

 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

 3. No objection by debtor or another creditor within 20 days

 4. Special rule for consumer goods if debtor has paid 60% of price  Creditor must resell within 90 days of repossession  Policy?

 Problem 388 – p  Problem 389 – p. 1061