Enforcement of Article 9 Security Interests

A secured party is not obligated to pursue any of its remedies upon default. Chemtex, LLC v. Anthony Enterprises, Inc., 490 F.Supp. 2d 536, 63 U.C.C. Rep. Serv. 2d 146 (S.D. N.Y. 2007). A secured party, however, may generally not sit on its rights to the detriment of junior creditors. Frierson v. United Farm Agency, Inc., 868 F.2d 302 (8th Cir. 1989); One CW, LLC v. Cartridge World North America, LLC, 661 F.Supp. 2d 931, 70 U.C.C. Rep. Serv. 2d 440 (N.D. Ill. 2009). Generally, upon default a secured party may accelerate the balance due, assess default interest on the arrears and accelerated balances, repossess the collateral, and seek reimbursement of all reasonable costs incurred in pursuing each of these remedies, including reasonable attorney's fees.

Recovery of the Collateral

Article 9 is very clear that a secured party's remedies upon default are “cumulative and may be exercised simultaneously.” U.C.C. ' 9-601(c). Thus, a secured party may simultaneously pursue a judgment for its balance and repossession or foreclosure of its collateral. In re Kuhn, 408 B.R. 528, 70 U.C.C. Rep. Serv. 2d 1 (Bankr. D. Kan. 2009). Significantly, any judicial lien awarded will relate back to the secured party's filing of its financing statement so that the secured party does not lose its priority because it chose to pursue a judicial remedy. U.C.C. ' 9-601, Official Comment 6.

When the collateral includes accounts, chattel paper or a deposit account, the secured party may foreclose pursuant to ' 9-610 et seq. Alternatively, the secured party may simply notify the underlying account debtors and lessees to pay the secured party rather than the debtor, pursuant to U.C.C. ' 9-607. A perfected secured party with a deposit account as original collateral (perfected through control) may also simply apply the funds to the debt. U.C.C. ” 9-607 (4) and (5). These secured parties are still, however, subject to a commercially reasonableness standard, such as that the secured party with the deposit account must apply the funds in a commercially reasonable manner. U.C.C. ' 9-607(c). Secured parties holding these types of collateral are not required to use these foreclosure alternatives, but may foreclose their liens as provided below through a notice and public or private sale. The secured party with a deposit account as collateral would rarely, if ever, have reason to forego the simple procedure of applying the funds. Generally, if there are few accounts and leases, the accounts/chattel paper secured party is likely to just notify the underlying account debtors and lessees to pay the secured party. When the number of accounts or chattel paper is voluminous, it is probably preferable for the secured party to foreclose the whole portfolio pursuant to ' 9-610 et seq. This procedure will enhance the secured party's ability to sell or pledge all or part of the portfolio.

The secured party does not need to give the debtor advance notice of the issuance of a directive to account debtors and lessees to pay to the secured party directly. Pavrez v. Bigelmen, 58 U.C.C. Rep. Serv. 2d 475 (Mich. App. 2005), 2005 WL 3479824. Indeed, the secured party may notify the account debtors and lessees to pay the secured party directly upon default by the debtor or sooner with consent of debtor. U.C.C. ' 9-607(a)(1). Moreover, once the secured party provides proper notice, to wit, a “deflection notice,” to the account debtors and lessees, the account debtors and lessees must pay the secured party. If they continue to pay the obligor, they do so at their own peril. U.C.C. ' 9-406(a). The deflection notice also limits the account debtor's setoff rights. Once an account debtor receives a deflection notice, it cannot raise setoff claims or defenses subsequently accrued. U.C.C. ' 9-404(a)(2).

The secured party may ask the account debtor to agree to waive defenses against the assignor. U.C.C. ' 9-403(b). Absent a waiver, account debtors have the same setoff and recoupment rights against an assignee as they had against the assignor. U.C.C. ' 9-404(a)(1).

With true consignments, no foreclosure is necessary if the goods are returned to the consignor because there will be no remaining debt obligation, that is, no deficiency claim. U.C.C. ' 9-601(9). In all other cases, the secured party will need to determine whether to seek repossession of the collateral and whether to foreclose pursuant to ' 9-610 et seq. Regardless of the type of collateral or the procedure the secured party pursues upon default, the secured party's actions and inactions will be subject to a “commercial reasonableness” standard. U.C.C. ' 9-610(b).

Repossession of Collateral

Upon default, the secured party is generally authorized under the loan documents to repossess its collateral. This right is also authorized by Article 9. U.C.C. ' 9-609(a)(1). Repossession may be exercised through a judicial procedure such as a replevin action or through “self help” so long as it may be achieved without a breach of the peace. U.C.C. ' 9-609(b)(1) and (2). As noted above, if the secured party proceeds by judicial process, any judicial lien will relate back to the earlier of the date of filing or the date of perfection so that the secured party that chooses to enforce a security interest by judicial process does not lose its priority. U.C.C. ' 9-601, Official Comment 6.

Many states have laws that include special notice provisions or that otherwise impact self-help rights in consumer transactions. These statutes must be reviewed on a state by state basis.

Self-help is an extremely efficient and valuable remedy. However, it needs to be exercised with care and caution.

A secured party is generally exempt from environmental liability under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). 42 U.S.C. ' 9601 et seq. See subsections 20(E)-(G). Under CERCLA, the definition of “owner or operator” excludes a lender that “without participating in the management of a facility, holds indicia of ownership primarily to protect the security interest of the person in the vessel or facility.” 42 U.S.C. ' 9601(20)(E)(i). The statute goes on to provide that participation in management excludes, “[r]estricting, renegotiating or otherwise agreeing to alter the terms and conditions of the extension of credit or security interest.” 42 U.S.C. ' 9601(20)(F)(iv)(I), (VII).

Despite this exemption, a secured party must tread carefully when confronted with environmental issues. A secured party can still have exposure when it enters into a use and occupancy or other rental agreement for the premises to remove or sell the collateral, when the collateral is affixed to the real estate and its removal requires special care, and when the collateral is equipment that was actually used in the activity that generated environmental contamination.

Another example of a federal law that can present a problem to a secured party's repossession and sale of its collateral is the Fair Labor Standards Act (“FLSA”). 29 U.S.C. ' 215(a). Under the “hot goods” provision, one may not ship or sell goods if employee wages involved in the production of the goods were not paid. Under this provision the U.S. Supreme Court upheld the injunction of a secured party from selling inventory manufactured by employees whose wages were not paid. Citicorp Industries Credit, Inc. v. Brock, 483 U.S. 27 (1987).

Writs of replevin are generally executed by a marshal or sheriff. The secured party is generally not liable for the marshal's or sheriff's actions. Cla-Mil East Holding Corp. v. Medallion Funding Corp., 6 N.Y.3d 375, 846 N.E.2d 431, 813 N.Y.S.2d 1 (N.Y. 2006). In contrast, Article 9 makes clear the secured party is liable for the actions of its repossession agent. U.C.C. ' 9-609, Comment 3.

Article 9 does not define what constitutes “breach of the peace.” As a result, what constitutes “breach of the peace” varies from state to state and is unclear even within states. Clearly, the use of force or threats of any kind will generally run afoul of the law. However, even the use of trickery may be improper. To avoid potential problems, it is wise to avoid all contact with the debtor or anyone acting on its behalf. If the secured party is trying to exercise its self-help rights to repossess collateral and the debtor or anyone acting on its behalf appears and offers any resistance, verbal or physical, or takes any action other than a consensual surrender of the collateral, the secured party should immediately leave the premises. See, e.g., Hollibush v. Ford Motor Credit Co., 179 Wis. 2d 799, 508 N.W. 2d 449 (Wis. App. 1993).

The secured party should also be aware that it risks running afoul of the law even when it repossesses the collateral without coming into contact with the debtor, because it may be liable for trespass. For example, entering the property of a third party or breaking a lock on the fence surrounding the debtor's premises to repossess collateral has been held to be improper even when the repossessor did not come into contact with anyone. Rogers v. Allis-Chalmers Credit Corp., 679 F.2d 138 (8th Cir. 1982). But see In re Pal Transport, Inc., 13 B.R. 935 (Bankr. MD Fla. 1981) (entering onto a third party's property to effectuate a repossession was proper). Laurel Coal Co. v. Walter E. Heller & Co., 539 F.Supp. 1006 (W.D. Pa. 1982); Williamson v. Fowler Toyota, Inc., 1998 Ok. 14, 956 P.2d 858 (Okla. 1998). But see Massey-Ferguson Credit Corp. v. Peterson, 102 Idaho 111, 626 P.2d 767 (Idaho 1980) (repossessor and sheriff's cutting a chain or padlock to remove collateral entitled debtor to only nominal damages). Repossessing collateral from an open driveway or hangar is generally permitted. Butler v. Ford Motor Credit Co., 829 F.2d 568 (5th Cir. 1987); Allen v. Fidelity Fin. Servs., 1999 U.S. Dist. LEXIS 21013 (D. Minn. 1999); Ivy v. General Motors Acceptance Corp., 612 So.2d 1108 (Miss. 1992); Pierce v. Leasing International, Inc., 142 Ga. App. 371, 235 S.E.2d 752 (Ga. App. 1977). Opening a closed garage door to repossess a vehicle is generally not permitted. Davenport v. Chrysler Credit Corp., 818 S.W.2d 23 (Tenn.App. 1991).Virtually all efforts to repossess collateral through self-help should be reviewed with counsel.

A North Carolina Court of Appeals case identified a helpful five-factor test in evaluating any self-help repossession. Giles v. First Virginia Credit Services, Inc., 149 N.C. App. 89, 560 S.E. 2d 557, (N.C. App. 2002). The five factors are: 1) where the repossession took place; 2) the debtor's express or constructive consent; 3) the reactions of third parties; 4) the type of premises; and 5) the creditor's use of deception. A secured party using self-help should at the very least consider each of these factors in every proposed self-help repossession.

The secured party should also be aware that a self-help repossession with the presence of a law enforcement officer, without first having gone through the judicial process, may be problematic, as a court may find it to be a violation of due process under the 14th Amendment of the U.S. Constitution. See, e.g., Waisner v. Jones, 107 N.M. 260, 755 P.2d 598 (N.M. 1988). But see, Santa Barbara, Inc. v. Heart of Cedar Lane, Inc., 226 N.J. Super. 509, 545 A.2d 180, (N.J. Super. App. Div. 1988) (mere presence of constable does not violate due process) and Barrett v. Harwood, 189 F.3d 297 (2d Cir. 1999).

A violation of the self-help rules can give rise to an affirmative claim against the secured party, including a claim seeking punitive damages. As noted above, Article 9 clarifies that a secured party cannot shield itself by hiring a repossession agent; a secured party is responsible for the acts of its repossession agents. U.C.C. ' 9-609, Comment 3 (2005). In larger or more acrimonious cases the secured party may wish to have the repossession process videotaped.

Sometimes the obligor will agree to a voluntary surrender of the collateral. Under Article 9, the secured party's acceptance of collateral in satisfaction of the debt cannot be inferred. U.C.C. ' 9-620(b). This provision should eliminate claims by obligors that there was an oral agreement that the secured party would accept surrender of the collateral in full or partial satisfaction of the debt. Nevertheless, in cases of voluntary surrender, the secured party should confirm, in writing, that it is not accepting the collateral in full or partial satisfaction of the debt and that the secured party retains its claim for a deficiency balance. If possible, the secured party should also obtain a waiver by the obligor and all guarantors of the right to receive any notices of sale of the collateral. While these waivers are invalid if included in the original transaction documents, they are generally valid when obtained post-default. U.C.C. ' 9-624(a).

Once the secured party obtains possession of the collateral, whether through “self-help,” a replevin order, or a peaceful surrender, all expenses incurred such as for repair and storage, and any lease, license or sale of the collateral must be “commercially reasonable” pursuant to Article 9. The secured party should also be aware of any laws or regulations relating to the handling of the collateral, such as environmental requirements and privacy laws.

When the Article 9 lien is in fixtures and the secured party has priority over the real property owner, the secured party's remedy is removal of the collateral, with the secured party liable for any damage due to the
removal. The secured party may pass this liability onto the debtor. U.C.C. ' 9-604(d). Secured parties have been unsuccessful in attempts to leave the equipment in place and instead claim a portion of the proceeds of a foreclosure sale of the real estate. Maplewood Bank & Trust v. Sears Roebuck & Co., 265 N.J. Super. 25, 625 A.2d 537 (N.J. Super. Ct. App. Div.), aff'd, 135 N.J. 97 (N.J. 1993); Nu-Way Distribution Corp. v. Schoikert, 44 A.D.2d 840, 355 N.Y.S. 2d 475 (App. Div. 1974).

Next month, Part Two of this article will discuss the process of foreclosing an Article 9 lien, including: acceptance of collateral in full or partial satisfaction of debt, and the notice components of a commercially reasonable sale, which include the sale notice, form of notice, timing and issuance of notice, public vs. private sale notice, and secured party bidding.

Frank Peretore is a member of this newsletter's Board of Editors and a founding partner of the law firm of Peretore & Peretore, P.C., with offices in New Jersey and New York. He represents national and regional financial institutions and lessors from the transactional and financing stage throughout the litigation stage in the state, federal and bankruptcy courts. He also represents creditors in general commercial litigation and commercial foreclosure matters. Peretore may be reached at 973-729-8991. This article is adapted from the author's book titled Workouts and Enforcement for the Secured Creditor and Equipment Lessor, (2008) by permission of Oxford University Press, Inc.

Part One of a Three-Part Article

The last few years have been witness to a huge uptick in the number of Article 9 debtors attacking the procedural and substantive aspects of the recovery and sale of collateral. This trend has generated some new and significant case law, and serves as a reminder to secured creditors of the importance of having a good working knowledge of the law regarding the enforcement of Article 9 security interests.

Upon default a secured party has the rights and remedies provided in Article 9 as well as any additional remedies enumerated in the loan documents so long as such remedies are not precluded by Article 9 or any other law.

A secured party is not obligated to pursue any of its remedies upon default. Chemtex, LLC v. Anthony Enterprises, Inc. , 490 F.Supp. 2d 536, 63 U.C.C. Rep. Serv. 2d 146 (S.D. N.Y. 2007). A secured party, however, may generally not sit on its rights to the detriment of junior creditors. Frierson v. United Farm Agency, Inc. , 868 F.2d 302 (8th Cir. 1989); One CW, LLC v. Cartridge World North America, LLC , 661 F.Supp. 2d 931, 70 U.C.C. Rep. Serv. 2d 440 (N.D. Ill. 2009). Generally, upon default a secured party may accelerate the balance due, assess default interest on the arrears and accelerated balances, repossess the collateral, and seek reimbursement of all reasonable costs incurred in pursuing each of these remedies, including reasonable attorney's fees.

Recovery of the Collateral

Article 9 is very clear that a secured party's remedies upon default are “cumulative and may be exercised simultaneously.” U.C.C. ' 9-601(c). Thus, a secured party may simultaneously pursue a judgment for its balance and repossession or foreclosure of its collateral. In re Kuhn, 408 B.R. 528, 70 U.C.C. Rep. Serv. 2d 1 (Bankr. D. Kan. 2009). Significantly, any judicial lien awarded will relate back to the secured party's filing of its financing statement so that the secured party does not lose its priority because it chose to pursue a judicial remedy. U.C.C. ' 9-601, Official Comment 6.

When the collateral includes accounts, chattel paper or a deposit account, the secured party may foreclose pursuant to ' 9-610 et seq. Alternatively, the secured party may simply notify the underlying account debtors and lessees to pay the secured party rather than the debtor, pursuant to U.C.C. ' 9-607. A perfected secured party with a deposit account as original collateral (perfected through control) may also simply apply the funds to the debt. U.C.C. ” 9-607 (4) and (5). These secured parties are still, however, subject to a commercially reasonableness standard, such as that the secured party with the deposit account must apply the funds in a commercially reasonable manner. U.C.C. ' 9-607(c). Secured parties holding these types of collateral are not required to use these foreclosure alternatives, but may foreclose their liens as provided below through a notice and public or private sale. The secured party with a deposit account as collateral would rarely, if ever, have reason to forego the simple procedure of applying the funds. Generally, if there are few accounts and leases, the accounts/chattel paper secured party is likely to just notify the underlying account debtors and lessees to pay the secured party. When the number of accounts or chattel paper is voluminous, it is probably preferable for the secured party to foreclose the whole portfolio pursuant to ' 9-610 et seq. This procedure will enhance the secured party's ability to sell or pledge all or part of the portfolio.

The secured party does not need to give the debtor advance notice of the issuance of a directive to account debtors and lessees to pay to the secured party directly. Pavrez v. Bigelmen, 58 U.C.C. Rep. Serv. 2d 475 (Mich. App. 2005), 2005 WL 3479824. Indeed, the secured party may notify the account debtors and lessees to pay the secured party directly upon default by the debtor or sooner with consent of debtor. U.C.C. ' 9-607(a)(1). Moreover, once the secured party provides proper notice, to wit, a “deflection notice,” to the account debtors and lessees, the account debtors and lessees must pay the secured party. If they continue to pay the obligor, they do so at their own peril. U.C.C. ' 9-406(a). The deflection notice also limits the account debtor's setoff rights. Once an account debtor receives a deflection notice, it cannot raise setoff claims or defenses subsequently accrued. U.C.C. ' 9-404(a)(2).

The secured party may ask the account debtor to agree to waive defenses against the assignor. U.C.C. ' 9-403(b). Absent a waiver, account debtors have the same setoff and recoupment rights against an assignee as they had against the assignor. U.C.C. ' 9-404(a)(1).

With true consignments, no foreclosure is necessary if the goods are returned to the consignor because there will be no remaining debt obligation, that is, no deficiency claim. U.C.C. ' 9-601(9). In all other cases, the secured party will need to determine whether to seek repossession of the collateral and whether to foreclose pursuant to ' 9-610 et seq. Regardless of the type of collateral or the procedure the secured party pursues upon default, the secured party's actions and inactions will be subject to a “commercial reasonableness” standard. U.C.C. ' 9-610(b).

Repossession of Collateral

Upon default, the secured party is generally authorized under the loan documents to repossess its collateral. This right is also authorized by Article 9. U.C.C. ' 9-609(a)(1). Repossession may be exercised through a judicial procedure such as a replevin action or through “self help” so long as it may be achieved without a breach of the peace. U.C.C. ' 9-609(b)(1) and (2). As noted above, if the secured party proceeds by judicial process, any judicial lien will relate back to the earlier of the date of filing or the date of perfection so that the secured party that chooses to enforce a security interest by judicial process does not lose its priority. U.C.C. ' 9-601, Official Comment 6.

Many states have laws that include special notice provisions or that otherwise impact self-help rights in consumer transactions. These statutes must be reviewed on a state by state basis.

Self-help is an extremely efficient and valuable remedy. However, it needs to be exercised with care and caution.

A secured party is generally exempt from environmental liability under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). 42 U.S.C. ' 9601 et seq. See subsections 20(E)-(G). Under CERCLA, the definition of “owner or operator” excludes a lender that “without participating in the management of a facility, holds indicia of ownership primarily to protect the security interest of the person in the vessel or facility.” 42 U.S.C. ' 9601(20)(E)(i). The statute goes on to provide that participation in management excludes, “[r]estricting, renegotiating or otherwise agreeing to alter the terms and conditions of the extension of credit or security interest.” 42 U.S.C. ' 9601(20)(F)(iv)(I), (VII).

Despite this exemption, a secured party must tread carefully when confronted with environmental issues. A secured party can still have exposure when it enters into a use and occupancy or other rental agreement for the premises to remove or sell the collateral, when the collateral is affixed to the real estate and its removal requires special care, and when the collateral is equipment that was actually used in the activity that generated environmental contamination.

Another example of a federal law that can present a problem to a secured party's repossession and sale of its collateral is the Fair Labor Standards Act (“FLSA”). 29 U.S.C. ' 215(a). Under the “hot goods” provision, one may not ship or sell goods if employee wages involved in the production of the goods were not paid. Under this provision the U.S. Supreme Court upheld the injunction of a secured party from selling inventory manufactured by employees whose wages were not paid. Citicorp Industries Credit, Inc. v. Brock , 483 U.S. 27 (1987).

Writs of replevin are generally executed by a marshal or sheriff. The secured party is generally not liable for the marshal's or sheriff's actions. Cla-Mil East Holding Corp. v. Medallion Funding Corp. , 6 N.Y.3d 375, 846 N.E.2d 431, 813 N.Y.S.2d 1 (N.Y. 2006). In contrast, Article 9 makes clear the secured party is liable for the actions of its repossession agent. U.C.C. ' 9-609, Comment 3.

Article 9 does not define what constitutes “breach of the peace.” As a result, what constitutes “breach of the peace” varies from state to state and is unclear even within states. Clearly, the use of force or threats of any kind will generally run afoul of the law. However, even the use of trickery may be improper. To avoid potential problems, it is wise to avoid all contact with the debtor or anyone acting on its behalf. If the secured party is trying to exercise its self-help rights to repossess collateral and the debtor or anyone acting on its behalf appears and offers any resistance, verbal or physical, or takes any action other than a consensual surrender of the collateral, the secured party should immediately leave the premises. See, e.g., Hollibush v. Ford Motor Credit Co. , 179 Wis. 2d 799, 508 N.W. 2d 449 (Wis. App. 1993).

The secured party should also be aware that it risks running afoul of the law even when it repossesses the collateral without coming into contact with the debtor, because it may be liable for trespass. For example, entering the property of a third party or breaking a lock on the fence surrounding the debtor's premises to repossess collateral has been held to be improper even when the repossessor did not come into contact with anyone. Rogers v. Allis-Chalmers Credit Corp. , 679 F.2d 138 (8th Cir. 1982). But see In re Pal Transport, Inc., 13 B.R. 935 (Bankr. MD Fla. 1981) (entering onto a third party's property to effectuate a repossession was proper). Laurel Coal Co. v. Walter E. Heller & Co. , 539 F.Supp. 1006 (W.D. Pa. 1982); Williamson v. Fowler Toyota, Inc. , 1998 Ok. 14, 956 P.2d 858 (Okla. 1998). But see Massey-Ferguson Credit Corp. v. Peterson , 102 Idaho 111, 626 P.2d 767 (Idaho 1980) (repossessor and sheriff's cutting a chain or padlock to remove collateral entitled debtor to only nominal damages). Repossessing collateral from an open driveway or hangar is generally permitted. Butler v. Ford Motor Credit Co. , 829 F.2d 568 (5th Cir. 1987); Allen v. Fidelity Fin. Servs., 1999 U.S. Dist. LEXIS 21013 (D. Minn. 1999); Ivy v. General Motors Acceptance Corp. , 612 So.2d 1108 (Miss. 1992); Pierce v. Leasing International, Inc. , 142 Ga. App. 371, 235 S.E.2d 752 (Ga. App. 1977). Opening a closed garage door to repossess a vehicle is generally not permitted. Davenport v. Chrysler Credit Corp. , 818 S.W.2d 23 (Tenn.App. 1991).Virtually all efforts to repossess collateral through self-help should be reviewed with counsel.

A North Carolina Court of Appeals case identified a helpful five-factor test in evaluating any self-help repossession. Giles v. First Virginia Credit Services, Inc. , 149 N.C. App. 89, 560 S.E. 2d 557, (N.C. App. 2002). The five factors are: 1) where the repossession took place; 2) the debtor's express or constructive consent; 3) the reactions of third parties; 4) the type of premises; and 5) the creditor's use of deception. A secured party using self-help should at the very least consider each of these factors in every proposed self-help repossession.

The secured party should also be aware that a self-help repossession with the presence of a law enforcement officer, without first having gone through the judicial process, may be problematic, as a court may find it to be a violation of due process under the 14th Amendment of the U.S. Constitution. See, e.g., Waisner v. Jones , 107 N.M. 260, 755 P.2d 598 (N.M. 1988). But see, Santa Barbara, Inc. v. Heart of Cedar Lane, Inc. , 226 N.J. Super. 509, 545 A.2d 180, (N.J. Super. App. Div. 1988) (mere presence of constable does not violate due process) and Barrett v. Harwood , 189 F.3d 297 (2d Cir. 1999).

A violation of the self-help rules can give rise to an affirmative claim against the secured party, including a claim seeking punitive damages. As noted above, Article 9 clarifies that a secured party cannot shield itself by hiring a repossession agent; a secured party is responsible for the acts of its repossession agents. U.C.C. ' 9-609, Comment 3 (2005). In larger or more acrimonious cases the secured party may wish to have the repossession process videotaped.

Sometimes the obligor will agree to a voluntary surrender of the collateral. Under Article 9, the secured party's acceptance of collateral in satisfaction of the debt cannot be inferred. U.C.C. ' 9-620(b). This provision should eliminate claims by obligors that there was an oral agreement that the secured party would accept surrender of the collateral in full or partial satisfaction of the debt. Nevertheless, in cases of voluntary surrender, the secured party should confirm, in writing, that it is not accepting the collateral in full or partial satisfaction of the debt and that the secured party retains its claim for a deficiency balance. If possible, the secured party should also obtain a waiver by the obligor and all guarantors of the right to receive any notices of sale of the collateral. While these waivers are invalid if included in the original transaction documents, they are generally valid when obtained post-default. U.C.C. ' 9-624(a).

Once the secured party obtains possession of the collateral, whether through “self-help,” a replevin order, or a peaceful surrender, all expenses incurred such as for repair and storage, and any lease, license or sale of the collateral must be “commercially reasonable” pursuant to Article 9. The secured party should also be aware of any laws or regulations relating to the handling of the collateral, such as environmental requirements and privacy laws.

When the Article 9 lien is in fixtures and the secured party has priority over the real property owner, the secured party's remedy is removal of the collateral, with the secured party liable for any damage due to the
removal. The secured party may pass this liability onto the debtor. U.C.C. ' 9-604(d). Secured parties have been unsuccessful in attempts to leave the equipment in place and instead claim a portion of the proceeds of a foreclosure sale of the real estate. Maplewood Bank & Trust v. Sears Roebuck & Co. , 265 N.J. Super. 25, 625 A.2d 537 (N.J. Super. Ct. App. Div.), aff'd, 135 N.J. 97 (N.J. 1993); Nu-Way Distribution Corp. v. Schoikert , 44 A.D.2d 840, 355 N.Y.S. 2d 475 (App. Div. 1974).

Next month, Part Two of this article will discuss the process of foreclosing an Article 9 lien, including: acceptance of collateral in full or partial satisfaction of debt, and the notice components of a commercially reasonable sale, which include the sale notice, form of notice, timing and issuance of notice, public vs. private sale notice, and secured party bidding.

Frank Peretore is a member of this newsletter's Board of Editors and a founding partner of the law firm of Peretore & Peretore, P.C., with offices in New Jersey and New York. He represents national and regional financial institutions and lessors from the transactional and financing stage throughout the litigation stage in the state, federal and bankruptcy courts. He also represents creditors in general commercial litigation and commercial foreclosure matters. Peretore may be reached at 973-729-8991. This article is adapted from the author's book titled Workouts and Enforcement for the Secured Creditor and Equipment Lessor, (2008) by permission of Oxford University Press, Inc.