UCC Article 9 (Cal. Com. §§9101, et seq.) applies to both pledges and sales of
promissory notes (§§9109(a)(1), (3)). Even in a “true sale” situation, the seller is referred to in
Article 9 as the “debtor”, the buyer as the “secured party” and the sold property as the
“collateral” (§9102(12), (28), (72)).
Despite its applicability to both loans and sales of promissory notes, there are certain
provisions within Article 9 that only apply to loans, and not to sales.1 For purposes of this
litigation, these “sale distinguishing” features pertain to Article 9’s collection, enforcement
disposition and acceptance provisions in Article 9, Chapter 6 (§§9601-9629) (“Chapter 6”).
Upon default, Chapter 6 affords a secured party2 (here, Gateway) a number of remedies.
It may (i) non-judicially foreclose (§9610(c)), (ii) strictly foreclose (§9620), and, (iii) where the
collateral is a promissory note, enforce the obligations of the account debtor (i.e., the underlying
borrower) (§9607(a)(3)).3
With these rights come corresponding restrictions and obligations for the benefit of the
debtor (here, Plaintiffs). If the secured party elects non-judicial foreclosure, it must (i) provide
notice to the debtor (§§9611-9614), (ii) afford the debtor the right to redeem the collateral
(§9623), (iii) account to the debtor (§§9615(d)(1), 9616), (iv) apply the proceeds to the secured
debt and the costs of collection (§9615(a)(1)), and (v) to the extent there is a surplus following
the foreclosure, pay the debtor the surplus funds (§9615(d)(1)).
If the secured party elects to enforce the obligations under the note, the secured party
must: (i) proceed in a commercially reasonable manner (§9607(c)), (ii) afford the debtor the right
to redeem the collateral (§9623), (iii) account to the debtor (§§9608(a)(4)), (iv) apply the
proceeds to the secured debt and the costs of collection (§9608(a)(1)), and (v) to the extent there
is a surplus, pay the debtor the surplus funds (§9608(a)(4)).
Finally, if the secured party “strictly forecloses” (i.e., takes the collateral without a
foreclosure in satisfaction of the debt), the secured party must (i) send a written proposal to the
debtor (§9621(a)), and (ii) then obtain the written consent of the debtor to the strict foreclosure
(§9620(a)(1)).
1
Despite these sales distinguishing provisions, the drafters of Article 9 elected not to expressly address whether a
particular transaction is a “sale” or a “loan”, instead choosing to leave it “to the courts” (§9101, cm. 4). This brief
does not address whether the MMLPA is a sale or a loan. For a more detailed analysis of that issue, see Plaintiffs
Trial Brief (at 16:12-25:27) and Plaintiffs Motion in Limine #9.
Even in a “true sale” situation, Article 9 refers to the “buyer” as the “secured party”, the “seller” as the “debtor”,
and the purchased property as the “collateral” (§9102(12), (28), (72)).
2
3
The secured party may also waive the collateral and sue the debtor in the same manner an unsecured creditor could
(§9601(a)(1)). The secured party may also judicially foreclose (id.). These remedies are not relevant to the instant
lawsuit.
If, on the other hand, the transaction is a true sale, there are two possibilities. If the sale
is with recourse, the only statutory requirement of the secured party is to proceed in a
commercially reasonable manner if it seeks to enforce the obligations of the account debtor
(§9607(c)).4 If the sale is without recourse (i.e., a true sale), there are no Chapter 6 rights or
obligations. The buyer is not entitled to a deficiency, and the seller is not entitled to a surplus
(§§9608(b), 9615(e)(1)).
4
From this requirement, it would necessarily follow that the secured party would be required to apply the proceeds
of collections toward the obligation under §9608(a)(1).