Part VII Enforcing an Article 9 Security Interest
Chapter 35 Disposing of Collateral
A. Generally
As was seen in Chapter 33 (A Secured Party's Options on Default), until the secured party has effectively foreclosed its security interest, the debtor continues to be the owner of the collateral. Under new Article 9, as was true under former Article 9, there are essentially two ways a secured party may foreclose its security interest in the collateral and divest the debtor of the debtor's ownership interest: Dispose of the collateral or attempt to retain (accept) it in complete or partial satisfaction of the debt. Retention of the collateral in complete or partial satisfaction of the debt is the subject of Chapter 36 (Acceptance of Collateral in Full or Partial Satisfaction of the Debt).
As was true under former Article 9, under new Article 9, section 9-610, a secured party may dispose of collateral only in a "commercially reasonable" manner. Moreover, as also was true under former Article 9, under new sections 9-611 and 9-612, most parties who are impacted by the disposition must be sent "reasonable notification." The commercially reasonable and reasonable notification requirements generally necessitate an examination of the circumstances of a particular disposition in the context of the purposes the standards are intended to serve.
As will be seen in subpart B, new Article 9 attempts to provide more guidance than given by former Article 9. However, in the last analysis, the question is whether the disposition was reasonably likely, as judged by commercial standards, to bring the highest return and the smallest deficiency and whether the notification was reasonably calculated to permit persons entitled to such notification to act to protect their interests. The matters of greatest importance are what is available for distribution to whom and whether anyone will be stuck with a deficiency or benefit from a surplus. The rules for applying the proceeds of a disposition and for calculating deficiencies and surpluses are given separate attention in subpart B(3).
Under former section 9-112 the duties discussed in this chapter also were owed to persons who owned the collateral but were not obligors on the secured debt. Under new Article 9, debtor is defined to mean only a person who has an interest in the collateral, new 9-102(a)(28), but certain of the duties owed by secured parties run to obligors as well as debtors. On the other hand, new section 9-605(1) explicitly provides that the duties owed by a secured party do not run to debtors or secondary obligors who are unknown to the secured party. Thus, a secured party has no duties as to a transferee of collateral from the debtor in a transaction as to which the security interest continues in the collateral unless the secured party is aware of the transfer. Moreover, under new section 9-605(2), a secured party has no duties as to persons who become creditors of the new debtor and take security interests in the collateral.
B. Disposition of Collateral
1. Commercially Reasonable
The disposition scheme of new Article 9 echoes that found in former Article 9, section 9-507(3). A range of different sorts of dispositions after a default is available. Both public and private sales are authorized. Generally speaking, a public sale is one that is open to the public and characterized by competitive bidding among those who have the opportunity to buy. See Official Comment 7 to new 9-610. A private sale, by contrast, is one that is limited to buyers selected by the secured party, including other customers, and in which the price is negotiated rather than being driven by competitive bidding. However, as is discussed more fully in subpart B (2) below, distinguishing a public from a private sale is not always easy.
Under new section 9-610(b) every aspect of a disposition must be commercially reasonable. As was true with former Article 9, new Article 9 does not actually define commercially reasonable, but some guidance as to its meaning is offered by new section 9-627(b).
Under new section 9-627(b)(3) dispositions made in conformity with reasonable commercial practices among dealers in the type of collateral involved are deemed to be commercially reasonable. Courts at times have suggested that a disposition in conformity with practices among dealers renders the disposition commercially reasonable. See, e.g., Automotive Finance Corp. v. Smart Auto Center, Inc., 334 F.3d 685 (7th Cir. 2003). However, new section 9-627(b)(3) actually requires that the practices themselves be reasonable. For example, there is a place for wholesaling under new section 9-627(b)(3) because such dispositions may be more economical than retail dispositions, but "dumping collateral" under circumstances where there is no real competition among buyers should not be permitted (even if dealers commonly engage in such dispositions).
Under new sections 9-627(b)(1) and (b)(2), dispositions made in a recognized market or at a price current in a recognized market also are deemed to be commercially reasonable. "Recognized market" is not defined but would seem to be limited to situations where the price that collateral will bring is determined by internal market operations and not by negotiations between buyers and sellers. Thus, securities sold on a securities exchange are sold on a recognized market.
On the other hand, goods that bring an individually negotiated price within some range of prices specified by a "blue book" are not sold on a recognized market. See Official Comment 4 to new 9-627 (providing that the concept of a recognized market in subsections (b)(1) and (b)(2) is quite limited; it applies only to markets in which there are standardized price quotations for property that is essentially fungible, such as stock exchanges). Likewise, sale at a dealer auction does not constitute a sale in a recognized market. Id.
New section 9-610(a) allows a secured party to sell collateral in its then condition. Section 9-615(a)(1), on the other hand, allows a secured party to recover from the proceeds of a disposition the reasonable expenses of collection and enforcement, and these would include the costs of preparing collateral for disposition. The question may arise whether a secured party must expend money to prepare collateral for disposition where doing so will bring a higher price.
Since every aspect of a disposition must be commercially reasonable it may be that there is an affirmative duty to prepare collateral for disposition where the prospects for a higher price that will cover the costs of preparation are such that it is reasonable for a secured party to incur the costs. However, in Automotive Finance Corp. v. Smart Auto Center, Inc., 334 F.3d 685 (7th Cir. 2003), it was held that a sale to a party who has experience with the disposition of vehicles as to which there are odometer or title problems is commercially reasonable without discussing any responsibility on the part of the secured party to remedy the problems with the vehicles.
Consistently with the commercially reasonable standard, new Article 9 does not dictate a time within which a disposition must be made. Moreover, as will be seen below, holding collateral for an unreasonable length of time will not result in a forced acceptance in satisfaction of the debt. On the other hand, delaying for an unreasonable amount of time might result in damages under new section 9-625 or even a loss of a deficiency. As noted in Chapter 33 (A Secured Party's Options on Default), a secured party who complies with the requirements of new Article 9 is entitled to a deficiency but must account for any surplus.
Under new section 9-610(c), a secured party may purchase at any public disposition but may purchase at private disposition only if the collateral is sold on a recognized market or is the subject of widely distributed standard price quotations. The question of what is and what is not a recognized market was discussed above (and the embellishment in new section 9-610(c) would not change the conclusion that sales within a range of blue book prices does not permit a secured party to purchase at a private sale).
A sale to a person related to the secured party, as defined in new section 9-102(a)(63) would not be a sale to the secured party within the meaning of this restriction but as discussed in subpart B (1) below, sales to persons related to the secured party can impact the calculation of a deficiency or surplus. Likewise, a sale to a party with whom the secured party regularly does business would not be within the restriction in new section 9-610(c) or constitute a sale to the secured party unless the party to whom the collateral is sold is controlled by the secured party or the sale is otherwise not viewed as an arms length transaction. See Automotive Finance Corp. v. Smart Auto Center, Inc., 334 F.3d 685 (7th Cir. 2003) (holding a sale to a party who has experience with the disposition of vehicles as to which there are odometer or title problems to be commercially reasonable).
A recurring question under former Article 9 was whether a low price relative to fair market value or what parties might reasonably have expected a sale to bring renders a sale not commercially reasonable. New section 9-627(a) reformulates former section 9-507(2) on this point by providing that the fact that a greater amount could have been obtained by a disposition conducted at a different time or in a different way does not of itself preclude a showing that the disposition was commercially reasonable. The key phrase is "not of itself" and a low price will certainly lead a court to scrutinize all aspects of a disposition to discover if there were defects in the disposition that contributed to the low price. Many of the decisions rendered with regard to former Article 9 dispositions are likely to be informative as to dispositions under new Article 9.
The opinion in Chavers v. Frazier, 93 B.R. 366 (Bkcy M.D. Tenn. 1989),decided under former Article 9, is thoughtful and informative and should be read carefully. You can do so by clicking on the case name above.
As you will have noticed, the court in Chavers gives special attention to defects in the advertising of the resale of the Lear Jet. Advertising of a disposition must be commercially reasonable. But, advertising should be distinguished from the separate requirement that reasonable notification must be sent to parties who are entitled to be sent such notification. The notification requirement is explored in the next subsection. The court in Chavers also concluded that the failure of the secured party to dispose of the collateral in a commercially reasonable manner should result in the loss of a deficiency claim for the secured party. Deficiencies and surpluses are considered more fully in subpart B(1) below and in Chapter 38 (Remedies for a Secured Party's Failure to Comply with Article 9).
Where the dollar amounts justify the time and expense, a secured party may ask for a court's blessing as to a proposed disposition under new section 9-627(c).
You may explore the requirement that a disposition be commercially reasonable in every respect in the next two problems.
Problem 35.1 (interactive)
The court in Chavers concluded that the disposition of a private Lear Jet was not commercially reasonable under former section 9-504(3).
Would the fact that the jet had sold initially for $850,000 and was sold for $415,000 a year later be enough by itself to render the disposition not commercially reasonable under new Article 9?
What language of new section 9-627 supports your answer?
Problem 35.2 (interactive)
Under new section 9-610(b), every aspect of a disposition must be commercially reasonable and, as noted in the CANINE text, a low resale price is likely to lead to greater scrutiny of a disposition to determine whether it was commercially reasonable in every respect.
Which of the following aspects of the disposition in Chavers would be viewed as supporting a conclusion that the disposition was not commercially reasonable had the case been decided under new Article 9?
(a) The proceeds of the resale.
(b) The hastiness of the resale.
(c) The failure to investigate the specialized market for private jets.
(d) The resale was advertised for a total of 60 days.
(e) Most of the advertising of the resale was in the Wall Street Journal.
(f) The resale was public rather than private.
Rather than explain why each of the factors contributed to the conclusion that the sale in Chavers was not commercially reasonable, how would you advise a secured party such as Chavers to proceed?
What other actions might the secured party be advised to take to better assure that the disposition would be deemed commercially reasonable?
If the Chavers had sold the jet for a price that was within the range of prices for a Lear Jet as listed in a trade publication covering private aircraft, would the sale have been commercially reasonable without regard to other factors?
A possibly useful contrast to the disposition in Chavers in another case involving specialized collateral (units of a limited partnership) is offered by Vornado PS, L.L.C. v. Primestone Investment Partners, L.P., 821 A.2d 296 (Chancery Del. 2002). The secured party took the following steps in the course of disposing of the units at a public sale.
(a) Hired a prominent investment banking firm, to assist it in developing a marketing process and identifying potential purchasers of the Units. At 306
(b) Gave notice to debtor and guarantors that it intended to sell the units at a public auction scheduled for 4 p.m. on November 20, 2001 (the default having occurred in late October?). At 306
(c) Retained a licensed auctioneer. At 306
(d) Advertised foreclosure sale in the New York Times on November 6 and 13, and in the Chicago Tribune on November 7. at 306
(e) Compiled a list of, and contacted, 51 potential purchasers, including public companies, opportunity funds, private investors, pension funds and advisors. At 307
(f) Requested debtor to provide a list of potential purchasers (but no response was ever received). At 307
(g) Opened the bidding at $ 8.35 per unit, which was the closing price of shares on the day of the foreclosure sale of publicly traded stock agreed to be the functional equivalent of a partnership unit. At 310.
(h) Purchased the partnership units for this price.
The secured party was the only bidder at the public auction. There was evidence indicating that potential bidders declined to participate because they had only public information about the limited partnership and were not provided confidential inside information. The debtor argued that there should have been a private rather than a public sale. The court granted the secured party's motion for summary judgment because there was no genuine issue of material fact as to the commercially reasonableness of the sale. As to the evidence that potential bidders were put off by the lack of inside information, the court noted that the secured party also lacked such information. The court rejected the argument that the sale should have been private rather than public because new section 9-610(c), subject to narrow exceptions not applicable to the disposition under review, permits a secured party to purchase only at a public sale and a private sale would have eliminated the one viable buyer of the partnership units.
As was noted earlier and stressed in Chavers, the secured party has the burden of proving that a disposition was commercially reasonable when the matter is put in issue. The outcome of a dispute may depend very much on who is given what burden of proof as to which issues. However, allocating burdens of proof is often a tricky business and the burden of going forward by presenting evidence as to an issue and the ultimate burden of persuasion are not always distinguished.
In Automotive Finance Corp. v. Smart Auto Center, Inc., 334 F.3d 685 (7th Cir. 2003), the debtor unsuccessfully argued that the secured party had prevented the debtor from bidding at the auction at which the collateral was sold. Although the court did not refer specifically to the fact that the burden of commercial reasonableness is on the secured party, the court apparently was satisfied that the secured party had the better of the issue because it has presented evidence that at least one auction house barred the debtor from bidding because of past failures to pay as promised.
Under new section 9-602(7), the right to a commercially reasonable disposition, as is true of most requirements governing the disposition of collateral, cannot be waived. See also, new section 9-624 (expressly identifying those rights that can be waived by agreement after default). In Sovereign Bank v. Alverado, 2003 WL 21771751 (Conn. Super. Ct. July 15, 2003), the court rejected an argument that the requirement to dispose of collateral in a commercially reasonable manner was dispensed with where the debtor was credited with the fair market value of the collateral. This decision makes good sense not only for the reason offered by the court, namely, that a disposition might bring more than the fair market value, but because fair market value is an elusive concept.
2. Reasonable Notification
As was true under former section 9-504(3), new section 9-611(b) requires that, unless excused, a secured party must send a reasonable authenticated notification of a disposition. There are several aspects to the reasonable notification requirement.
First, the requirement may be excused. Under new section 9-611(d), reasonable notification is excused if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The perishable goods and speedily declining value excuses are easy enough to understand (but not always easy to apply). The "recognized market" idea was discussed above and that discussion should be consulted here.
Second, the notification must be reasonable as to time. Under new section 9-612, whether a notification is sent within a reasonable time is a question of fact, but except in a consumer transaction, a notification of a disposition sent after default and ten or more days before the earliest time set for a disposition in the notification is sent within a reasonable time. Under new section 9-612 a notification sent earlier than ten days before a disposition could be reasonable, but the burden of showing it to be so would be on the secured party.
Third, the notification must be sent as opposed to being received. New section 9-102(a)(74)(A) provides that a notification is sent when it is deposited in the mail or delivered for transmission or transmitted by any other usual means of communication with the costs of mailing or transmitting paid and it is addressed to any address reasonable under the circumstances.
Under former Article 9 there was an issue as to whether notification could be oral. New section 9-102(a)(74)(B), under which causing notification to be received in the time it would have been received if properly sent under new section 9-102(a)(74)(A), may leave the question unanswered. However, a secured party always should put the notification in such a form as to have a copy of it and also should obtain evidence of when it was sent. Moreover, although "send" is the operative word, a secured party who knows a notification was not received would be wise to make reasonable further efforts to see that the notification gets to the person to whom it is sent. See Official Comment 6 to new 9-611 (discussing the need for a "second try").
Fourth, there is the question of form and content of a notification. Under former section 9-504(3) notification as to a public sale had to indicate the time and place for the sale and notification as to a private sale had to indicate the time after which a sale would be made. New section 9-613(1) more expansively provides that the contents of a notification in an other than a consumer-goods transaction are sufficient if the notification describes the debtor and secured party, describes the collateral, states the method of disposition (public or private), states that the debtor is entitled to an accounting as to any unpaid debt (and the charge for providing such an accounting), and states the time and place of a public disposition or the time after which any other disposition is to be made. According to Official Comment 2 to new section 9-613, "the reference to 'time' of disposition means, as it did under former Section 9-504(3), not only the hour of the day but also the date."
Under new sections 9-613(2), (3) and (4), whether a notification lacking any of the information required by subsection (1) is reasonable is a question of fact and substantial compliance with subsection (1) is enough, meaning that no particular phrasing is required.
A number of questions are raised by these requirements. One is what is intended by the use of the word "sufficient." A reading of new section 9-613 in its entirety, together with the official comments to new section 9-613, suggests that the drafters were attempting to capture the notion that there is some flexibility with respect to the contents of a notification. The final test is whether the notification meets the reasonableness requirement of new section 9-611(b). But, reasonableness must be judged by reference to the purpose of the notification requirement.
It is generally understood that the purpose of the notification requirement is to allow the debtor and obligor and other parties with a stake in the outcome of a disposition to protect their interests by redeeming the collateral under new section 9-623 or seeking to negotiate a purchase through a private sale or appear at a public sale and bid on the collateral or otherwise act to try to assure that the collateral brings a fair price. See, e.g., In re Downing, 286 BR 900 (Bkcy W.D. Mo. 2002).
Reasonableness so understood typically will be a question of fact. But, it can also happen that a judge determines that a particular notification is sufficient with respect to its purposes as a matter of law. Thus, according to Official Comment 2 to new section 9-613, a notification that includes the information set forth in paragraph (1) is sufficient as a matter of law, even if the phrasing is different or there are minor errors that are not seriously misleading. As for whether a notification that does not include the information contained in paragraph (1) of new section 9-613(b) is sufficient, new section 9-613(2) and Official Comment 2 indicate that whether such a notification is sufficient is a question of fact for the trier of fact.
Another question posed by the notification scheme of new Article 9 is when an error is minor and not seriously misleading within the meaning of new section 9-613(3)(B). Such language is used elsewhere in new Article 9, most notably in new section 9-506. As explained in Chapter 14 (The Nitty Gritty of Filing), whether financing statement is seriously misleading must be determined by reference to the notice filing scheme of Article 9 and the purpose to alert searchers whose interests may be adversely impacted by an outstanding security interest that they should make further inquiry. As also explained in Chapter 14, because financing statements are indexed using the debtor's name, errors in the debtors name are deemed to be seriously misleading unless a financing statement containing an error as to the debtor's name would turn up in a search in the particular filing office using the correct name.
New section 9-613 provides no such guidance as to errors in a notification required by new section 9-611(b). It makes sense that any error in a notification should be judged by reference to the purposes of notification discussed above, namely, to allow parties affected by a disposition to protect their interests. Thus, the seriously misleading error language of new section 9-613(3)(B) should be understood to mean that a notification containing an error that prevents affected parties from protecting their interests is not sufficient.
As the foregoing suggests, whatever there may be said for providing secured parties with some degree of forgiveness with respect to the sufficiency of the required notification, the scheme inevitably will necessitate involved inquiries in certain cases. The drafters of new Article 9 were aware that this is so and have set forth in new section 9-613(5) a safe harbor form. Although new section 9-613(5) does not say so in so many words, the clear intent of the section is that a secured party who completes the form will be deemed to have provided sufficient information sufficient to satisfy the reasonable notification requirement of new section 9-611(b). Given the uncertainties discussed above, although new Article 9 does not mandate the use of the form, it is difficult to conceive of any persuasive reasons for not using the form.
Unfortunately, the form in new section 9-613(5) does not remove all the uncertainties. The form provides, consistently with paragraph (1) of new section 9-613, that "[For a public disposition]" the notification should use the following language: "We will sell [or lease or license], as applicable] the [describe collateral] [to the highest qualified bidder] in public" on a specified day and date, at a specified time and at a specified place. The form further provides that "[For a private disposition]" the notification should use the following language: "We will sell [or lease or license, as applicable] the [describe collateral] privately sometime after [day and date]." Apart from the somewhat confusing use of square brackets and italics and the legitimate issue of why "to the highest qualified bidder" is bracketed, suggesting the language is optional, two rather basic questions are posed.
The first is whether the notification literally must indicate that the disposition will be public or private. There was a split of authority on this question under former Article 9. One might reasonably read the form, implicitly if not explicitly, to require that the disposition be designated public or private. See In re Downing, 286 BR 900 (Bkcy W.D. Mo. 2002). Whether or not that designation technically is required, a secured party would be well advised to include such a designation so as to avoid the need to litigate the issue. However, designating the disposition public or private is more easily said then done.
The reason for the difficulty is that Article 9 nowhere defines what is a public and what is a private sale. Courts and commentators under former Article 9 generally were of the belief that a private disposition was one made to a private party, including a customer, at a price negotiated by the secured party and that party (or simply set by the secured party). It likewise was generally agreed that what distinguished a public from a private sale was a provision for competitive bidding such as characterizes an auction. However, there was some disagreement about the extent to which a disposition had to be open to the public to qualify as a public disposition. Thus, for some courts and commentators, an auction open only to dealers was a private disposition and the court in at least one case decided under new Article 9 agreed. See In re Downing, 286 BR 900 (Bkcy W.D. Mo. 2002) (citing with approval B. Clark, Law of Secured Transactions Under the Uniform Commercial Code, § 4,08(2) at 4-98 (1988) and cases decided under former Article 9).
Official Comment 7 to new section 9-610 provides that:
[A] public disposition is one at which the price is determined after the public has had a meaningful opportunity for competitive bidding. Meaningful opportunity is meant to imply that some form of advertisement or public notice must precede the sale (or other disposition) and that the public must have access to the sale (disposition).
This comment seems quite clearly to make an auction open only to dealers a private disposition. It may, more generally, be understood to mean that any disposition that is not open to the public and as to which the public has not had a meaningful opportunity to engage in competitive bidding is a private sale. However, the matter is not completely free from doubt and a secured party may have little choice but to look for decided cases offering guidance on the question of when a disposition is public and when it is private in the jurisdiction in which the disposition is made.
In Sovereign Bank v Alverado, 2003 WL 21771751 (Conn. Super. Ct. July 15, 2003) the secured party appeared to have sought to finesse the question of what is public and what is private by sending a notification that "the vehicle will be resold at Southern Auto Auction by private or public sale at anytime after 4:00 p.m. on June 24, 1998." The court held that this compound notification satisfied the requirement of reasonable notification in new Article 9. That holding seems clearly at odds with the mandate that the notification as to a public disposition must state the time and place at which the collateral will be disposed of.
New section 9-614 dictates the contents of the notification required in consumer goods transactions. In contrast to new section 9-613(1) for other than consumer goods cases, which uses the phrasing that a notification is sufficient if, new section 9-614(1) states that "in a consumer-goods transaction, . . . a notification of disposition must provide [specified information]." New section 9-614(1)(A) mandates that the notification provide the information required by new section 9-613(1) for other than consumer goods cases. New sections 9-614(1)(B), (1)(C) and (1)(D) require additional information thought to be proper for consumers, for example, a description of any liability for a deficiency, as required by new section 9-614(1)(B).
Also, there seems to be nothing in new section 9-614 that parallels new section 9-613(2), under which a notification may be sufficient even if it lacks information required by new section 9-613(1). Consequently, the failure to include information required by new section 9-614 and, by incorporation, new section 9-613, would seem to be fatal to the notification. Thus, in In re Downing, 286 BR 900 (Bkcy W.D. Mo. 2002), it was held that a notification that did not inform the debtor whether the disposition would be public or private or the description of any liability for a deficiency required by new section 9-614(1)(B) or the right to an accounting as to the unpaid indebtedness provided for in new section 9-613(1)(D), failed to satisfy new section 9-611(b)'s requirement of reasonable notification.
New section 9-614(5) reinforces the conclusion that the omission of information renders a notification insufficient insofar as it speaks only to the addition of information not required by new section 9-614(1). On the other hand, as is the case with non-consumer goods transactions, no particular phrasing of a notification is required.
New section 9-614(3) contains a safe harbor form that when completed is deemed to provide sufficient information for consumer goods transactions. The consumer goods form is designed for persons as to whom the legalities are not familiar and hence it uses language that is more likely to be understood by a layperson. Because new section 9-614 is less forgiving as to omission and errors, not using the form in new section 9-614(3) is inviting problems. New sections 9-614(4), (5) and (6), all assume the use of the form and address only information added to that specified in the form.
As is true of new section 9-613 for non-consumer goods transactions, there is at least a question whether the notification must in so many words indicate whether a disposition will be public or private. The court in Downing, supra, concluded that there is such a requirement and other courts may reasonably be expected to follow suit. In any event, the wiser course of action for a secured party is to do so.
As discussed above, indicating whether a disposition is public or private requires a secured party to decide whether the disposition it intends is public or private. As is further discussed above, that decision is more difficult than one would expect or hope. The court in Downing, supra, appeared to agree with those courts and commentators concluding that a dealer only auction is a private sale and intimated that the secured party should disclose the terms of a contemplated private sale because to do so would aid the debtor in efforts to redeem the collateral, which is one of the purposes of the requirement of reasonable notification.
It remains to be seen the extent to which other courts will agree with the conclusions of the court in Downing on the questions of whether the notification must expressly indicate that the disposition will be public or private, whether a dealer only auction is a private disposition and whether the secured party must disclose the terms of a contemplated private sale.
There remains the important question of the persons who are entitled to be sent reasonable notification. Former section 9-504(3) was unsatisfactory on this point and some states, including Arizona, adopted special provisions seeking to clarify the answer to the question of to whom notification had to be sent. New section 9-611(c) addresses the question in rather more elaborate, but complicated, fashion.
Under new section 9-611(c)(1) and (c)(2), in both consumer and other than consumer goods cases, notification must be sent to the debtor and any secondary obligor (unless the right to such notification is properly waived after default as provided for in new section 9-624(a)). Recall that a "debtor" under new section 9-102(a)(28)(A) is a person having an interest in the collateral, whether or not the person is an obligor. A "secondary obligor" is defined in new section 9-102(a)(71) to mean an obligor whose obligation is secondary or the obligor has a right of recourse against the debtor, another obligor or the property of either. Thus, a secondary obligor is someone who guarantees that a secured debt will be paid and if the debt is not paid the secondary obligor is liable.
It makes sense that a secondary obligor be sent notification of a disposition because the disposition determines how much of a secured debt will be satisfied out of the collateral and how much continues to be owed (as a deficiency). The requirement that notification be sent to a secondary obligor resolves a question left open under former Article 9 as to whether a guarantor was entitled to be sent notification.
In consumer goods cases notification need be sent only to debtors and secondary obligors. In other than consumer goods cases notification may have to be sent to persons other than the debtor and any secondary obligors. Determining who these other persons are requires knowing the "notification date." The "notification date" is a cut off date provided for in new section 9-611(a), under which the notification date is the earlier of the date on which the secured party sends notification to the debtor and any secondary obligor or the date the debtor and any secondary obligor waive the right to notification.
New section 9-611(c)(3)(A) requires that the secured party send notification to any person from whom the secured has received an authenticated notification of a claim before the notification date. Under new section 9-611(c)(3)(B), again in other than consumer goods cases, reasonable notification must be sent to any secured party or lienholder who, ten days before the notification date, held a security interest or lien on the collateral that was perfected by filing a properly filed financing statement. Under new section 9-611(c)(3)(C), reasonable notification must be sent to any secured party not dealt with in (A) or (B), who ten days before the notification date held a security interest perfected by compliance with a state or federal law as required by new section 9-311(a).
All the subsections of new section 9-611(c) together, oversimplifying somewhat, mean that in consumer goods cases a secured party must send reasonable notification only to the debtor and any secondary obligor who has not waived the right to notification after default and, in other than consumer goods cases, a secured party must send notification to the debtor and secondary obligors and also must send reasonable notification to any other person from whom the secured party receives an authenticated notice of a claim ten days before the notification date and to any secured party or lienholder who has filed a financing statement or noted a security interest on a certificate of title or recorded in a federal office where such recording is required ten days before the notification date.
Under new section 9-611(e), a secured party complies with new section 9-611(c)(3)(B) (requiring notification to be sent to a person who ten days before the notification date held a security interest perfected by a proper filing), (1) if between twenty and thirty days before the notification date, the secured party requests information about a filed financing statement in a commercially reasonable manner and the secured party receives no response to its request before the notification date; or (2) if the secured party receives a response to the request and sends an authenticated notification to each secured party or lienholder named in the response.
You may explore the requirement that reasonable notification be sent in the next problem.
Problem 35.3 (interactive)
(a) Assume a dispute involving the facts of Chavers v. Frazier, discussed in subpart B(1) above, but arising under new Article 9.
To which persons in that case must reasonable notification of the disposition of the jet be sent if notification has not been waived or excused?
If in Chavers v. Frazier, a party "Lender" had lent to the debtors and recorded a security interest in the jet with the FAA two days before Chavers (the secured party) sent notification to the debtors and secondary obligors, would Chavers be required to send notification to Lender? In answering the question, be sure to examine all of new section 9-611(c).
Would your answer to the previous question be different if Lender had recorded its security interest twenty days before notification was sent to the debtors and secondary obligor?
Would your answers to the foregoing questions be the same if the jet were used primarily for personal, family or household purposes?
If Chavers sent the required notification to the persons entitled to it after default and 10 days before the time set for the disposition in the notification, would the notification have been sent within a reasonable time before the disposition?
Is the next statement true or false? To be sufficient Chavers' notification should state the time and place for the disposition.
Are the next statements true or false? If the jet in Chavers v. Frazier were bought for use primarily for personal purposes, the notification would not have to state the time and place for the disposition but would have to describe the liability for a deficiency. A debtor cannot waive the right to reasonable notification until after default and must do so in an authenticated agreement, but a secondary obligor may waive the right to reasonable notification in the security agreement.
3. Application of the Proceeds of a Disposition
The bottom line concerns as to dispositions are who gets what from the proceeds of a disposition and whether and to what extent anyone will be stuck with a deficiency or benefit from a surplus. Deficiencies and surpluses are treated separately in subpart B(4) below but they depend heavily on the application of the rules determining how the proceeds of a disposition are to be distributed.
New sections 9-615(a) provides:
(a) A secured party shall apply or pay over for application the cash proceeds of disposition under Section 9-610 in the following order to:(1) the reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing, and, to the extent provided for by agreement and not prohibited by law, reasonable attorney's fees and legal expenses incurred by the secured party;
(2) the satisfaction of obligations secured by the security interest or agricultural lien under which the disposition is made;
(3) the satisfaction of obligations secured by any subordinate security interest in or other lien on the collateral if:
(A) the secured party receives from the holder of the subordinate security interest an authenticated demand for proceeds before distribution of the proceeds is completed; and
(B) if a consignor has an interest in the collateral, the subordinate security interest or lien is senior to the interest of the consignor; and
(4) a secured party that is a consignor of the collateral if the secured party receives from the consignor an authenticated demand for proceeds before distribution of the proceeds is completed.
New section 9-615(b) adds:
(b) If requested by a secured party, a holder of a subordinate security interest or other lien shall furnish reasonable proof of the interest or lien within a reasonable time. Unless the holder does so, the secured party need not comply with the holder's demand under subsection (a)(3).
You may explore the rules governing distribution of the proceeds of a disposition under new Article 9 in the next problem.
Problem 35.4 (interactive)
Southern Bank recently repossessed and sold Donna Debtor's inventory and equipment to enforce a timely perfected security interest in the inventory and equipment. The balance owing on the loan at the time Donna defaulted by missing two monthly payments was $60,000. Interest on the loan was 10% a year. The Article 9 disposition took place two months after Donna defaulted. You represented Southern in the provisional remedy action that was necessary to get possession of the collateral from Donna and your reasonable fees in connection with this action amounted to $3,000. You charged Southern another $850 for arranging the public sale of the collateral including the required notifications and advertising of the sale. The expenses of the sale itself were reasonable and totaled $1,000. The sale brought $75,000.
(a) Is the following statement true or false? The $1,000 for the expenses of the sale must be satisfied first out of the proceeds of the sale ahead of Southern Banks secured obligations.
(b) Are your attorney's fees for recovering the collateral and for arranging the sale recoverable and must they be satisfied out the proceeds along with the expenses of the sale?
(c) What is the amount of Southern Bank's secured obligations?
(d) Suppose that at the time of the sale Southern Bank had received an authenticated claim in the amount of $20,000 interest in the collateral from Lender who filed after Southern. Is the following statement true or false? Lender's claim must be satisfied out of the proceeds after the reasonable expenses of the sale are paid but before Southern's obligation is paid.
(e) If Lender's claim must be satisfied out of the proceeds of the disposition, how much does Lender get? (For purposes of answering this question, assume all of your attorney's fees are recoverable from the proceeds.)
(f) Suppose Southern Bank also received a demand for $1,500 from Supplies R Us, one of several unsecured creditors of Donna Debtor. Must the $1,500 be satisfied out of the proceeds of the sale?
(g) What happens to Southern Bank's security interest when its disposition is completed? See new section 9-617(a) as explained below.
New section 9-615(a) interacts with new section 9-617. New section 9-617(a) provides that a disposition discharges the security interest under which a disposition is made and also discharges any subordinate security interests or liens. Under new section 9-617(b), a good faith transferee at a disposition gets title free of security interests and other liens that are subordinate to the security interest under which a disposition is made even if the disposition is defective in some respect. The effect of new section 9-617 is to increase the proceeds received at a disposition and the amount a claimant under new section 9-615(a) is likely to receive.
Note that new section 9-617(a) speaks only to the security interest under which a disposition is conducted and any subordinate security interests. The question arises as to what happens to a senior security interest if a junior secured party conducts a disposition. In the ideal, the holder of a senior security interest will intervene and take control of the disposition. In this regard, recall the desirability of defining a default to include all events that threaten to undermine a security interest. But, it could happen that a senior party fails to intervene and that a disposition is conducted by the junior secured party.