Disposition of Collateral

People generally hope that Secured Transactions doesn't show up on the MEE.  It's not uncommon for it to show up, and so it's a good idea to understand the issues that have appeared on prior exams. One such issue deals with the obligations that a secured party has in the collateral once the debtor has defaulted.

The general rule here is that after default by the debtor, a secured party may dispose of the collateral. A private sale by the secured party of the collateral is permissible if commercially reasonable. The proceeds of that disposition will first be applied to the cost associated with the sale and then the remainder will go to the secured party to satisfy the obligation that the debtor failed to pay.

Before disposition, though, the secured party must send to the debtor a reasonable, authenticated notification of disposition. This is the default rule and should be applied unless an exception applies.

An exception to the default rule applies when the collateral is perishable or if for any reason the value of the collateral threatens to decline speedily in value. In such instances, the need to provide notification is balanced against the need to dispose of the collateral in the quickest possible manner.

Let's assume here that the exception does not apply and that a notification is required. If a notification is required but the notification is not sent to the debtor prior to the secured party disposing of the collateral, the secured party may be liable. This liability might result in damages owed to the debtor. More likely, though, is a deduction in the amount owed to the secured party from the debtor for the damages caused by the debtor's default.