Enforcement of Article 9 Security Interests:Foreclosing an Article 9 Lien

Next month, Part Three of this article will discuss the details of a commercially reasonable sale under Article 9, including the terms of sale of collateral, debtor's redemption rights, deficiencies and surpluses, and foreclosures by a junior secured party.

Part Two of a Three-Part Article

This is the second part of a three-part article designed to provide secured parties an overview of their enforcement rights and remedies as set forth in Article 9 of the UCC. Part One covered the recovery and repossession of a secured party's collateral. This installment addresses the acceptance of collateral in full or partial satisfaction of debt, and the notice components of a commercially reasonable sale.

Acceptance of Collateral in Full or Partial Satisfaction of Debt

The secured party may wish to accept the collateral in full satisfaction of the debt, and in non-consumer transactions, the secured party may accept the collateral in partial satisfaction, under the strict foreclosure rules. If the secured party wishes to accept the collateral in full satisfaction of the debt, the secured party must send written notice to those parties identified in U.C.C. ' 9-621(a). The secured party need not be in possession of the collateral to accept the collateral in satisfaction of the debt. U.C.C. ' 9-620, Official Comment 7. If a secured party in a non-consumer transaction wants to accept collateral in partial satisfaction of a debt, the debtor must consent in an authenticated record, after default, and the secured party must send written notice to those parties listed in U.C.C. ' 9-621(a) and (b); in this case notice must also be sent to “secondary obligors.” Objections must be made within 20 days. U.C.C. ' 9-620(d). If any objections are received, the collateral must be sold in a commercially reasonable manner. In consumer transactions, the secured party is prohibited from using strict foreclosure, even in cases of full satisfaction, in the following two cases:

1. 60% of the cash price has been paid in the case of a purchase-money security interest in consumer goods; or
2. 60% of the principal amount of the obligation secured has been paid in the case of a non-purchase-money security interest in consumer goods. U.C.C. ' 9-620(e)(1) and (2).

Persons Entitled to Notice and Waiver of Notice

A secured party that is not accepting the collateral in full or partial satisfaction of the debt generally must foreclose its lien in its collateral through a commercially reasonable sale. U.C.C. ' 9-610 et seq. A commercially reasonable sale has two basic requirements. The first requirement is written advance notice of sale to the obligor, secondary obligors such as guarantors, and in non-consumer cases, all other secured parties with any interest or claimed interest in the collateral. U.C.C. ' 9-611-614. See U.C.C. ' 9-611, Comment 5. Guarantors and secondary obligors include co-signers, general partners of a general partnership, and corporate officers who endorsed the note. A secured party is not required to give notice to secondary obligors that are unknown to the secured party. U.C.C. ' 9-605(1); 9-628(a) and (b). If the collateral is restricted securities, which may include partnerships and LLC interests, the secured party needs to be sure to comply with all applicable laws. Additionally, in the case of a security interest in a closely held corporation, a partnership or an LLC, the consent of other shareholders, partners or members may be required for the sale.

If there are any federal tax liens, the IRS must be provided with special notice. The IRS notice must be in writing and must include all the information required at 26 C.F.R. ' 301.7425-3. The sale may still be public or private. 26 C.F.R. ' 301.7245-2. The sale must be on 25 days' notice. 26 U.S.C. ' 7425(b) and (c) (require 25 days' notice or consent to the sale by the government free of the lien). If the secured party fails to comply with the special IRS notice requirements (including the 25 days' notice provision) the buyer at sale acquires the collateral subject to the IRS lien. Fortunately, unlike with real property, the IRS does not have a right to redeem. 26 C.F.R. ' 301.7425(d). The secured party should always also consider whether there are any state tax liens with special notice or other requirements.

Because sale notices must be sent, in non-consumer cases, to all secured parties that have or claim to have an interest in the collateral, once the secured party obtains possession of the collateral, it must immediately order an updated UCC search to identify all companies and individuals that need to be notified. The UCC search must be ordered “not later than 20 days or earlier than 30 days before the notification date ' ” U.C.C. ' 9-611(e)(1). Secondary obligors, like debtors, may only waive their right to notice, post default and in an authenticated agreement. U.C.C. ' 9-624(a). Singleton v. Stokes Motors, Inc. , 358 S.C. 369, 595 S.E.2d 461, 53 U.C.C. Rep. Serv. 2d 140 (S.C. 2004).

No notice is required, however, if the collateral is “perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market.” U.C.C. ' 9-611(d). These exceptions are generally intended to apply to perishables like food or securities in a recognized market subject to daily price fluctuations.

The debtor and secondary obligor cannot waive the right to notice prior to default, but may do so after default. U.C.C. ' 9-624(a) and (b).

Form of Notice, Timing and Issuance of Notice, Public vs. Private Sale Notice and Secured Party Bidding

Article 9 includes forms of sale notice for consumer and commercial transactions. U.C.C. ” 9-613 (non-consumer) and 9-614 (consumer). These are safe harbor forms, approved by Article 9. The secured party should rarely deviate from these forms because any addition or deletion will be scrutinized for commercial reasonableness. For example, including the amount to be paid to redeem the collateral will be a problem if the amount is incorrect. Fielder v. Credit Acceptance Corp. , 19 F. Supp. 2d 966 (W.D. Mo. 1998), vacated in part , 188 F.3d 1031. In consumer transactions, failure to include the required information, including incorrect required information, is fatal to the notice. U.C.C. ' 9-614. In non-consumer transactions, omissions or erroneous information will render the notice invalid only if seriously misleading. U.C.C. ' 9-613(3).

Oral notices are invalid. U.C.C. ' 9-612(b). See also, U.C.C. ' 9-611, Comment 5. Whether the secured party uses a public or private sale, the sale notice forms should be issued on 10 days' notice plus three to five days for mailing, since Article 9 provides a 10-day safe harbor for non-consumer transactions, explicitly providing that 10 days' notice is reasonable. U.C.C. ' 9-612(b). As noted above, however, if there are any federal tax liens, the secured party must provide the IRS with 25 days' notice.

In the case of a private sale, the secured party must provide written notice as described above and must provide a reasonable time to object to the sale. U.C.C. ” 9-612 and 9-613(1)(E). If the sale is a public sale, the secured party must provide reasonable advance written notice of the date, time and location of the sale. Id.

Article 9 requires the secured party to “send” the notices. “Send” is defined in Article 9, as follows:

(A) to deposit in the mail, deliver for transmission, or transmit by any other usual means of communication, with postage or cost of transmission provided for, addressed to any address reasonable under the circumstances; or

(B) to cause the record or notification to be received within the time that it would have been received if properly sent under subparagraph (A). U.C.C. ' 9-102(74).

The secured party must send the notices to the last known address. If the last known address is no longer valid, the secured party should take reasonable steps to identify a new address. If a current address cannot be located, the secured party has satisfied its obligation by sending the notice to the last known address. Coy v. Ford Motor Credit Co. , 422 Pa. Super. 76, 618 A.2d 1024 (Pa. Super. 1993). Under Article 9, it is left to the court's discretion to determine whether the secured party should attempt a “second try” if the first mailing is returned. U.C.C. ' 9-611, Official Comment 6.

Under Article 9 the obligor and the debtor may not be one and the same. Debtor: ' 9-102(a)(28); Obligor: ' 9-102(59). Technically, if the obligor and the debtor are not the same, the secured party is not required to send the sale notice to the obligor because only the debtor has the right to redeem. U.C.C. ' 9-611(c); ' 9-623. Nevertheless, it is advisable to send notice to the debtor and obligor out of an abundance of caution.

The secured party may be a bidder at a public sale, but not at a private sale unless “the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations.” U.C.C. ” 9-610(c)(1) and (2) (2005). However, if the secured party or a person related to the secured party or a secondary obligor is the buyer, and the sale price is “significantly below the range” that would have been netted in a commercially reasonable sale to an unrelated party, any deficiency must be calculated based upon what a commercially reasonable sale to a third party would have yielded. U.C.C. ' 9-615(f).

Next month, Part Three of this article will discuss the details of a commercially reasonable sale under Article 9, including the terms of sale of collateral, debtor's redemption rights, deficiencies and surpluses, and foreclosures by a junior secured party.