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. 1009
 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. 1015

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. 1028
 Breach of the peace

MBank El Paso, N.A. v. Sanchez, 836 S.W.2d
151 (Tex. 1992).

Problem 379 – p. 1032
 Property in collateral

Problem 380 – p. 1033
 Accounts, instruments, chattel paper

Creditor’s choices after a proper
repossession:
 1. Sell the collateral, or
 2. Strict foreclosure.

1. Notice of Sale

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:

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. 1034

Problem 382 – p. 1034

Problem 383 – p. 1049

Problem 384 – p. 1049

Problem 385 – p. 1050

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. 1060

Problem 389 – p. 1061