Article 9 Secured Transactions
Disposition of Collateral
Following Debtor Default
Making the Best of a Bad Situation
Presentation and Podcast by
Mazyar M. Hedayat, Esq.
(c) 2009 M. Hedayat & Associates, P.C.
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.
(c) 2009 M. Hedayat & Associates, P.C.
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.
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Relationships Between Parties
Debtor
a/k/a Obligor
Collateral
Ownership
Security Interest
Co-Debtor a/k/a
Secondary Obligor
Creditor
a/k/a Secured Party
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P.C.
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.
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P.C.
Typical Steps In Repossession
Step 1
Debtor gives secured interest and begins making payments
Step 2
Debtor defaults on payments secured by Debtor’s property
Step 3
Creditor repossesses the Debtor’s property (collateral)
Step 4
Creditor sends notice of commercially reasonable sale §9-614
Step 5
Public or private sale must take place pursuant to notice
Step 6
Creditor sends explanation of debt to Debtor §9-616(b)
Step 7
Creditor may sue to collect deficiency from sale (if any)
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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.
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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.
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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 creditor’s expenses for retaking and preparing
collateral for disposition and legal expenses, if applicable §9-623
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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.
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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
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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.
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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)
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