Default Rules (Article 9 UCC)

For sure, three areas to know well for Article 9 UCC on the MEE are attachment, perfection, and priorities. Another area that is tested that is often overlooked is default. Specifically, the rules that determine the responsibility of the secured party as to the collateral after the debtor has defaulted by not paying back the loan.

The secured party (the creditor) has some options. The secured party can sue on the debt itself, take possession of the collateral (importantly, only if doing so will not be a breach of the peace),  or sell the collateral by a public or private commercially reasonable sale and then collect any deficiency after sale.

In the case of a sale, the debtor as well as other secured parties (if any) are generally entitled to notice. The notice must be sent within a reasonable time and must be detailed as to the parties, collateral, time and method of sale, etc.

A detail worth noting is that if the debtor has paid 60% of the cash price on a purchase money security interest ("PMSI") in consumer goods or 60% of the loan on a non-PMSI in consumer goods, the secured party must dispose of the collateral within 90 days after re-possessing it or the debtor will be entitled to recover it in conversion. This rule is very specific to consumer goods (a type of collateral). With respect to any other type of collateral, the secured party may retain the collateral in full satisfaction of the debt but only if the debtor consents to the retention in an authenticated record after default or if the debtor (or any other secured party) does not object to the retention within 20 days after notice is sent by the secured party.

Until the secured party has sold the collateral or has discharged the debt by retention of the collateral, the debtor or other secured party may redeem the collateral by paying all obligations plus additional reasonable expenses.

If a secured party fails to follow the requirements as to how to handle the collateral after the debtor has defaulted, the secured party will be liable for actual damages caused by that failure which could amount to entirely denying the secured party the right to collect a deficiency from the debtor or allowing the secured party to recover a deficiency but subtracting from that amount any actual damages that the debtor can prove has resulted from the secured party's failure to follow the default rules.