The Revised Article 9 presents some changes to the way collateral is liquidated upon default by a borrower. This manuscript is designed to explain the changes and to provide a worksheet with forms for you to use in connection with asset disposition. Exhibits A-D should be helpful in your daily work. These exhibits are as follows:

• Exhibit A: Retention of Collateral in Satisfaction of Secured Obligation After Default

• Exhibit B: Disposition of Collateral After Default

• Exhibit C: Form of Notice for Non-Consumer-Goods Dispositions

• Exhibit D: Form of Notice for Consumer-Goods Dispositions

Overview

Changes to the default provisions of Article 9 were designed to resolve ambiguities in enforcement of security interests under old Article 9 (FA9). Like FA9, 25-9 does not define what constitutes "default" – that is still determined by the terms of the security agreement between the debtor and the secured party. (In the case of statutory agricultural liens, a default occurs when the secured party has the right to enforce the lien. Other statutory liens were not brought within RA9.) Instead, RA9 sets forth the secured party’s rights and remedies with respect to the collateral after default and limits those rights and remedies by requiring the secured party to give minimum protections to the debtor and other interested parties. Many of these minimum protections are not waivable under RA9.

As detailed below, the default provisions of RA9 are lender-friendly with respect to commercial transactions, eliminating some hidden pitfalls for lenders. For example, notice by a secured party to the debtor 10 days prior to the secured party’s disposition of collateral is reasonable per se in the commercial context. With respect to consumer transactions, RA9 leaves a fair amount of discretion with the trial court to determine what is commercially reasonable. There is no set notice period that is reasonable, per se, in a consumer transaction. This manuscript will highlight differing treatment of consumer and commercial transactions throughout as appropriate. It focuses on RA9 as enacted in the state of North Carolina, and cites to specific sections are to sections in the North Carolina General Statutes, in which RA9 is found in Chapter 25, Article 9.

Secured Party's Options After Default

As is the case under FA9 and under the common law, after default the secured party may take possession or control of the collateral, but only if it can do so without a breach of the peace. Where the collateral is accounts or instruments, the secured party may collect the payments from account debtors and persons obligated on the instruments. Collateral in the possession or control of the secured party may be sold and the proceeds applied to the secured debt, or the secured party may retain the collateral in satisfaction of the debt.

Collection

RA9 clarifies and expands the collection remedies available to a secured party under § 9-502 of FA9. As under the old law, after default (and prior to default if so agreed by the parties) a secured party has the right to notify account debtors or persons obligated on instruments to pay the secured party directly and to exercise the rights of the debtor to enforce the obligations. § 9-607(a). For transactions in which the sale of accounts or instruments includes recourse to the debtor, collection and enforcement must be conducted in a commercially reasonable manner. § 9-607(c).

Under § 25-9-607(b), a secured party that is the assignee of an obligation secured by a real estate mortgage has the right to become the mortgagee of record upon the debtor’s default in order to foreclose nonjudicially on the mortgage. To accomplish this, the secured party may record in the public registry where the mortgage is recorded (1) a copy of the security agreement that creates or provides for a security interest in the obligation secured by the mortgage; and (2) the secured party’s sworn affidavit in recordable form stating that a default has occurred and that the secured party is entitled to enforce the mortgage nonjudicially.

Under § 25-9-607(a)(4) and (5), a secured party with control over a deposit account may receive and apply to the secured debt the funds contained in the deposit account.

For transactions subject to § 25-9-607(c), a secured party may deduct from the collections reasonable expenses of collection and enforcement, including reasonable attorney’s fees and legal expenses incurred by the secured party. § 25-9-607(d).

Retention of Collateral in Satisfaction of Secured Debt ("Strict Foreclosure")

Former Law:

Under § 501 of FA9, a secured party in possession of the collateral could retain the collateral in full satisfaction of the secured debt if: (1) written notice of its proposal to do so was sent to the debtor and others required to receive notification and (2) the secured party did not receive any objection in writing within 21 days after the notice was sent. The debtor could waive the right to receive notice, but only after default. If the secured party received any written objection to retention of collateral, § FA9-505(2) required the secured party to dispose of the collateral.

Where the collateral was consumer goods, the secured party could not retain collateral in satisfaction of the secured debt if the debtor had paid 60% of the cash price (if PMSI) or 60% of a non-purchase-money loan and the debtor had not signed a post-default renunciation of his FA9 default rights. § FA9-505(1).

For consumer-goods collateral, only the debtor was entitled to receive notice of the proposal to retain the collateral. For all other collateral the secured party was required to give notice to any other secured party from whom the secured party received (prior to the secured party’s sending notice to the debtor or before debtor’s renunciation of) written notice of a claim of an interest in the collateral.

A pitfall under FA9 was "constructive retention" of the collateral, whereby a secured party that, after default, failed to timely dispose of collateral in its possession was deemed to have retained it in full satisfaction of the debt. Additionally, a retention of the collateral by a senior secured party did not discharge junior security interests.

New Law:

The revised statute makes retention of collateral more attractive to lenders than it was under FA9. Under § 25-9-620, a secured party in a commercial transaction may retain collateral in partial satisfaction of the secured debt, and the secured party may retain collateral in satisfaction even if the secured party is not in possession of the collateral (as in the case of intangible collateral like accounts.) To retain collateral, the secured party must notify the debtor and other parties obligated on the secured debt of the proposed retention by an "authenticated" notice (vs. written) and may retain the collateral if no objection is received within 20 days (vs. 21). As under FA9, the debtor may waive the right to receive notice and to object to retention only after default.

A new requirement under § 25-9-621 is that a secured party notify other secured parties and lienholders who are of record ten days before the debtor consented to the retention of the collateral, i.e., the secured party contemplating retention has constructive notice of other interests in the collateral, and persons who have recorded their interests need not send any additional notice to senior secured parties. Those with unrecorded interests may, before the debtor consents to the retention of the collateral, provide authenticated notification of their claims to the secured party, and the secured party must provide them with authenticated notice.

For consumer-goods collateral, the debtor cannot consent to retention while he is in possession of the collateral. The secured party can retain collateral only in full satisfaction of the secured debt. Also, disposition of the collateral is mandatory if 60% of the cash price (for PMSI), or 60% of the principal amount of the secured obligation in a non-purchase-money transaction, has been paid.

"Constructive retention" has been eliminated under RA9. A secured party will not be deemed to have taken the collateral in satisfaction of the secured debt unless it takes the steps set forth in the statute (see Exhibit A).

Finally, under § 25-9-622 subordinate interests are discharged when a senior secured party retains collateral (even if the secured party does not comply with the statute), which was not the case under FA9. However, failure to comply may subject the secured party to liability under § 25-9-625.

Disposition of Collateral

Former Law:

Under FA9 the secured party could sell or otherwise dispose of the collateral by public or private sale and apply the proceeds of the sale to the secured debt. Such dispositions were required to be "commercially reasonable" in all respects, and the debtor was unable to waive the reasonableness standard. Except where the collateral was perishable or otherwise vulnerable to a rapid decline in value, or where the collateral was of a type customarily sold in a recognized market (such as commodities or marketable securities), the secured party was required to send "reasonable notification" to the debtor of the time and place of any public sale, or reasonable notification of the time after which a private sale could take place. The notice provisions regarding disposition of collateral mirrored those regarding retention of collateral. In the case of consumer goods collateral, only the debtor was entitled to receive notice. For all other collateral the secured party was required to give notice to any other secured party from whom the secured party received (prior to the secured party’s sending notice to the debtor or before debtor’s renunciation of) written notice of a claim of an interest in the collateral.

FA9 did not allow a secured party to purchase the collateral at a private sale unless the collateral was either (1) of a type customarily sold in a recognized market or (2) the subject of standard price quotations. A secured party sale generally discharged all subordinate interests in the collateral.

New Law:

The "commercial reasonableness" standard has been clarified under RA9, especially with respect to commercial transactions. Favorable changes include:

(1) In a commercial transaction, 10 days prior notice of disposition is per se reasonable. § 25-9-612(e). The notice must be given after default. No safe-harbor period applies to consumer transactions. Whether the notice of disposition is commercially reasonable is a question of fact, and comment 2 to § 9-612 states that a notification that is sent so near to the disposition date that a notified person could not be expected to act on or take account of the notification would be unreasonable.

(2) To accommodate new types of property brought within RA9, a secured party may now dispose of the collateral by license, as well as by sale or lease.

(3) A secured party may disclaim or modify the warranties that apply by operation of law to voluntary dispositions of the type of property being disposed of. § 25-9-610(d). The disclaimer need not be written, but it must be a "record" (per § 9-102(72), defined as "information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form"); an oral communication is not sufficient. Section 25-9-610(f) provides that a disclaimer is sufficient to disclaim warranties if it indicates "There is no warranty relating to title, possession, quiet enjoyment, or the like in this disposition" or uses words of similar import.

Per § 25-9-611, the secured party must provide "reasonable authenticated notification of disposition" to the debtor, to any secondary obligor, and, for collateral other than consumer goods, to any other person from which the secured party received an authenticated notification of a claim of an interest in the collateral, and to all secured parties and lienholders of record 10 days before the notification date before proceeding with a disposition of collateral. The notice requirement does not apply if the collateral is perishable or likely to rapidly decline in value.

Section 9-611(e) sets forth "safe harbor" provisions for complying with the notice requirements: (1) If the secured party requests, no later than 20 days nor earlier than 30 days before the notification date and in a commercially reasonable manner, information from secured parties and other lienholders of record concerning financing statements indexed under the debtor’s name in the appropriate filing office(s), and (2) before the notification date the secured party did not receive a response to the request for information, or received a response to the information request and sent an authenticated notification of disposition to each secured party or other lienholder named in that response whose financing statement covered the collateral.

Section 25-9-613(5) provides a safe-harbor form of notification of disposition of collateral for non-consumer-goods transactions and states that the safe-harbor form for consumer-goods transactions contained in § 25-9-614(3) can also be used for non-consumer-goods transactions. (The reverse, however, is not true.) See Exhibits B and C for forms. For non-consumer-goods transactions, unless the parties agree otherwise the safe-harbor notifications are sufficient as a matter of law. Additionally, notification lacking some of the information set forth in § 25-9-613(1) may nevertheless be found sufficient in a non-consumer-goods transaction. For consumer-goods transactions, a notification omitting any of the information required in § 25-9-614(1) is insufficient as a matter of law. Consequently, it is highly recommended that secured parties use the safe-harbor forms.

Section 25-9-619 is a new provision providing for a title clearing mechanism to effect a transfer of record of titled collateral to a foreclosure purchaser, making it easier for a secured party to dispose of collateral covered by a certificate of title or subject to a registration system (such as a copyright). Unless federal law preempts state law with regard to such a transfer, § 25-9-619 provides that a transferee may present a "transfer statement" (along with any applicable fee and a request form) to the official or office responsible for maintaining any official filing, recording, registration, or certificate-of-title system covering the collateral. A "transfer statement" means a record authenticated by a secured party stating:

1. That the debtor has defaulted in connection with an obligation secured by specified collateral;

2. That the secured party has exercised its post-default remedies with respect to the collateral;

3. That, by reason of the exercise, a transferee has acquired the rights of the debtor in the collateral; and

4. The name and mailing address of the secured party, debtor, and transferee.

The official/office is required to "promptly amend its records" to reflect the transfer of title. The mechanism may be used to transfer title from the debtor to the secured party before the secured party exercises its acceptance or disposition rights, or it may be used following the exercise of those rights to transfer title to a third party. Transfer of record or legal title in this manner does not relieve the duties of a secured party with respect to enforcement of its security interest, nor does it discharge any of the debtor’s rights with respect to such enforcement.

Mandatory Disposition

As noted above, retention of collateral is unavailable in the case of consumer goods collateral for which 60% of the cash price has been paid (in a purchase-money transaction) or 60% of the obligation secured has been paid (in a non-purchase money transaction). § 25-9-620(e). In those cases, the secured party must dispose of the collateral within 90 days after taking possession OR within any longer period to which the debtor and all secondary obligors have agreed in an agreement entered into and authenticated after default. Note that the debtor/secondary obligors cannot waive the disposition requirement, only the timing of disposition.

Limitations On Secured Party's Disposition of Collateral

Commercial Reasonableness

As set forth in § 25-9-610(b), all aspects of a disposition of collateral must be "commercially reasonable." What constitutes reasonable conduct has been much debated and litigated. As discussed elsewhere in this manuscript, RA9 contains some safe-harbor provisions that, if complied with, constitute commercially reasonable conduct with respect to the requirement addressed. For requirements not covered by safe-harbor provisions, § 25-9-627 sets out criteria for judging whether conduct was commercially reasonable:

(a) The fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition or acceptance was made in a commercially reasonable manner. Where the transferee is a secondary obligor, the secured party conducting the sale, or related to that secured party, there is a special provision for calculating a deficiency or surplus (§ 25-9-615(f)), but that provision only kicks in when a complying disposition to one of those parties results in a sale price that is "significantly below the range of proceeds a complying disposition to a person other than the secured party, person related to the secured party, or a secondary obligor would have brought." "Significantly below" is hardly a bright-line test; this provision appears to apply in those cases in which the amount of the secured obligation is low compared to the value that persons unrelated to the transaction would ascribe to the collateral. In such circumstances the secured party has little incentive to maximize the proceeds of the disposition.

(b) A disposition of collateral is made in a commercially reasonable manner if the disposition is made:

1. in the usual manner on any recognized market;

2. at the price current in any recognized market at the time of the disposition; or

3. otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

(c) A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved:

1. in a judicial proceeding;

2. by a bona fide creditors’ committee;

3. by a representative of creditors; or

4. by an assignee for the benefit of creditors.

Note that the parties can contract in advance regarding the standard by which commercial reasonableness may be judged, but the debtor cannot waive the requirement that disposition be commercially reasonable. Though (b) sets forth methods of disposition that are commercially reasonable as a matter of law, they are not the exclusive means of conducting a commercially reasonable disposition.

Waivers

Section 25-9-602 lists thirteen provisions granting rights to debtors or obligors and/or imposing duties on a secured party and states that a debtor or obligor may not waive or vary them. All but two of these are contained in Part 6 (see Exhibit D). Consequently, secured parties must continue to exercise care with respect to waivers of debtors’ rights.

Section 25-9-624 is a limited exception to § 25-9-602, allowing waivers by an agreement between the parties entered into and authenticated after default: (a) waiver by a debtor or secondary obligor of the right to receive notification of disposition of collateral under § 25-9-611; (b) waiver by a debtor of the right to require disposition of collateral under § 25-9-620(e) (applying to consumer goods); and (c) except in a consumer-goods transaction, waiver by a debtor or secondary obligor of the right to redeem collateral under § 25-9-623.

Redemption of Collateral

Under § 25-9-623, the debtor, any secondary obligor, or any other secured party or lienholder may redeem collateral at any time before a secured party:

a. has collected collateral pursuant to § 25-9-607;

b. has disposed of collateral or entered into a contract for its disposition under § 25-9-610; or

c. has accepted collateral in full or partial satisfaction of the obligation is secures under § 25-9-622.

To redeem collateral, a person must tender:

a. fulfillment of all obligations secured by the collateral; and

b. the reasonable expenses (including, where agreed to and not prohibited by law, reasonable attorney’s fees and legal expenses) incurred by the debtor in retaking, holding, preparing for disposition, processing, and disposing of the collateral.

Surplus or Deficiency

Under § 25-9-626, in an action regarding a surplus or deficiency following disposition of collateral in a non-consumer transaction, the secured party must prove its compliance with RA9 procedures only if the debtor or a secondary obligor places the secured party’s compliance in issue. If the secured party fails to prove that its actions were in compliance, then the liability of the debtor or a secondary obligor for a deficiency is limited to an amount by which the sum of the secured obligation, expenses, and attorney’s fees exceeds the greater of (a) the proceeds of the collection, enforcement, disposition, or acceptance, or (b) the amount of proceeds that would have been realized had the secured party proceeded in accordance with the default provisions of RA9.

In a non-consumer transaction where an action is brought under § 25-9-615(f) regarding the calculation of a surplus or deficiency where the collateral was transferred upon disposition to the secured party, a person related to the secured party, or to a guarantor, the burden is placed on the debtor or obligor to provide that the proceeds of the disposition are significantly below the range of prices that a complying disposition to an unrelated party would have brought. § 25-9-626(a)(5).

In a consumer transaction, the court is given discretion to determine whether the secured party proceeded in compliance with the RA9 rules for disposition of collateral. § 25-9-626(b).

Secured Creditor Liability

§ 25-9-625 sets out the possible penalties for a secured party’s failure to comply with any of the provisions of RA9. This is a big change from FA9, which established penalties for failure to comply with the default provisions only.

§§ 25-9-625(a) and (b) provide the basic remedies available to those aggrieved by a secured party’s noncompliance, subject to the provisions of § 25-9-628 limiting liability of secured parties. § 25-9-625(a) provides for injunctive relief to order or restrain collection, enforcement or disposition of collateral on appropriate terms and conditions. § 25-9-625(b) states that the secured party is liable for damages in the amount of any loss caused by a failure to comply with RA9, including loss resulting from the debtor’s inability to obtain financing or the increased costs of alternative financing.

Persons entitled to recover damages include not only the debtor, but also persons who were obligors, persons who had a security interest in or other lien on the collateral at the time the secured party’s failure to comply occurred. § 25-9-625(c)(1). If the collateral is consumer goods, the statute provides minimum statutory damages to a person who was a debtor or a secondary obligor at the time of the secured party’s failure to comply. Those damages are significant: an amount not less than the credit service charge plus ten percent of the principal amount of the obligation or the time-price differential plus ten percent of the cash price. § 25-9-625(c)(2). ("Time-price differential" refers to seller-financing: the price charged for the goods if financed less the cash price.)

Some commentators are worried that, as consumers and plaintiffs’ attorneys become aware of the potential for large damages under this section, they will scrutinize every transaction carefully for an opportunity to score a windfall. Errors in form documents or in collection or disposition procedures could be extremely costly for lenders or sellers who finance purchases of their goods. Consumer lenders and sellers who provide financing for consumer purchases must take extreme care to follow statutory procedures.

In addition to the damages set forth in § 25-9-625(b), subsection (c) makes statutory damages of $500.00 available to a debtor, consumer, obligor, or person named as a debtor in a filed record, in each case of noncompliance, from a person who fails to comply with the following provisions:

1. § 25-9-208, referring to the duties of a secured party with control of deposit account or investment property collateral, applicable only when there is no outstanding secured obligation and the secured party is not committed to make advances or otherwise give value.

2. § 25-9-209, referring to the duties of a secured party with respect to collateral consisting of accounts. Like § 25-9-208, this provision is applicable only when there is no outstanding secured obligation and the secured party is not committed to make advances or otherwise give value.

3. § 25-9-509, filing of an unauthorized financing statement.

4. § 25-9-513(a) and (c), failure to file or send a termination statement.

5. § 25-9-616(b)(1), failure to send an explanation of deficiency or surplus calculation following disposition of the collateral, IF the failure is part of a pattern, or consistent with a practice, of noncompliance.

6. § 25-9-616(b)(2), failure to timely send, upon request by a consumer obligor, a waiver of secured party’s right to a deficiency following a disposition of collateral.

7. § 25-9-625(f) establishes statutory damages of $500.00 per occurrence available to a debtor or consumer obligor from a person that, without reasonable cause, fails to timely comply with a request under § 25-9-210 for an accounting of the secured obligations and/or the collateral securing the obligations. The secured party’s duty under § 25-9-210 is to approve or correct a list sent by the debtor or consumer obligor to the secured party with the request for an accounting. A secured party who has never claimed an interest in the collateral or obligations for which an accounting is requested has a reasonable excuse for failure to respond to the request. If a secured party fails, without a reasonable excuse, to comply with such a request, they may suffer a penalty besides the $500.00 statutory damages: the secured party may claim, as against a person who was reasonably misled by the secured party’s failure to respond, a security interest only as to the list of obligations and/or list of collateral that appeared on the request for an accounting. § 25-9-625(g).

Limitations On Secured Party Liability

Unless a secured party knows that a person is a debtor or obligor, knows the identity of the person, and knows how to communicate with the person, the secured party is not liable to the person, or to a secured party or lienholder that has filed a financing statement against the person, for failure to comply with RA9, and the secured party’s failure to comply with RA9 does not affect the liability of that person for a deficiency. § 25-9-628(b). This section relates to § 25-9-605, which states that a secured party owes no duty based on its status as a secured party to an unknown debtor or secondary obligor or to a secured party or lienholder that has filed a financing statement against a person that the secured party does not know is a debtor. This situation can arise where, for example, the original owner of collateral sells it to a third party without the secured party’s knowledge, and still other parties become secondary obligors or secured parties with respect to the new owners of the collateral. In a search of the financing statement records conducted in anticipation of notifying the proper parties of a planned disposition of collateral, the secured party would not know to search under the names of the new debtor(s) and/or obligor(s), and it would be unjust to hold them liable for failure to comply with RA9 procedures with respect to those persons.

A secured party is not liable to any person, and a person’s liability for a deficiency is not affected, because of any act or omission arising out of the secured party’s reasonable belief that a transaction is not a consumer-goods transaction or a consumer transaction, or that goods are not consumer goods, if the secured party’s belief is based on its reasonable reliance on (1) a debtor’s representation concerning the purpose for which collateral was to be used, acquired or held; or (2) an obligor’s representation concerning the purpose for which a secured obligation was incurred. § 25-9-628(c).

If a secured party fails to comply with § 25-9-616 (regarding explanation of a calculation of surplus or deficiency), with respect to consumer goods collateral, it is not liable for the statutory damages set out in § 25-9-625(c)(2) (i.e., the finance charge plus 10% of the amount financed). § 25-9-628(d).

A secured party is not liable under § 25-9-625(c)(2) more than once with respect to any one secured obligation. §25-9-628(e).

If you have any questions regarding this bulletin, please contact Judy Thompson at 704.342.5299 or jdthompson@poynerspruill.com.

This electronic publication is published by Poyner & Spruill LLP to provide general information about significant legal developments. Because the facts in each situation vary, the legal precedents noted herein may not be applicable to individual circumstances.

Exhibit A

Retention of Collateral in Satisfaction of Secured Obligation After Default

1. If the collateral is consumer goods, check to make sure that less than 60% of the cash price of the collateral (if a purchase-money transaction) or less than 60% of the secured obligation (if not purchase-money) has been paid. Otherwise, the secured party must dispose of the collateral. Also, consumer goods can be retained only in full satisfaction of the secured obligation.

2. Send proposal to retain the collateral to the debtor. The debtor is deemed to have consented to the proposal if:

a. the proposal is unconditional or subject only to a condition that collateral not in the secured party’s possession be preserved or maintained;

b. in the proposal the secured party proposes to accept the collateral in full satisfaction of the obligation it secures; and

c. the secured party does not receive a notification of objection authenticated by the debtor within 20 days after the notice is sent.

If the secured party proposes to accept the collateral in partial satisfaction, the debtor must agree to the terms of retention in a record authenticated after default.

3. Check to see whether anyone has notified the secured party of a claim of interest in the collateral. If so, those persons are entitled to receive notification of the secured party’s intent to retain the collateral, and they have 20 days to notify the secured party of their objection to retention.

4. Check the public records for other secured parties or lienholders:

a. that, 10 days before the debtor consented to the acceptance, held a security interest in or other lien on the collateral perfected by a financing statement that:

(1). identified the collateral;

(2) was indexed under the debtor’s name on that date; and

(3) was filed in the office or offices in which a financing statement was required to be filed on that date;

OR

b. that, 10 days before the debtor consented to the acceptance, held a security interest in the collateral perfected by compliance with other law (e.g., certificate of title)

Those persons are entitled to receive notice of the proposal to retain the collateral, and they have 20 days to object. Third parties not entitled to receive any notice may object within 20 days after the last notification sent pursuant to #3 and/or #4.

5. Acceptance takes place if: (a) the debtor has consented, (b) 20 days have passed since the last required notice was sent, and (c) the secured party has not received notice of any objections.

6. If the collateral is consumer goods not eligible for retention, the secured party must (a) dispose of the collateral within 90 days after taking possession or (b) obtain the authenticated agreement of the debtor and all secondary obligors to a longer period.

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Exhibit B

Disposition of Collateral After Default

For perishable collateral, collateral likely to rapidly decline in value, or collateral of a type customarily sold on a recognized market, no notice of disposition is required. § 25-9-611(d).

1. Establish a commercially reasonable time, place and manner for the disposition of the collateral.

2. Notify the debtor and all secondary obligors unless the secured party has obtained from the debtor and all secondary obligors a post-default waiver of the right to notice of disposition of collateral.

(a) For a non-consumer transaction, sending the notice shown in Exhibit C at least 10 days before the proposed disposition constitutes reasonable notice as a matter of law.

(b) For a consumer transaction, the form of notice shown in Exhibit D is sufficient as a matter of law. However, no safe-harbor notice period is provided. The secured party must provide notice sufficient for the recipients of the notice to take account of the notice and respond to it.

3. Check the public records and notify others entitled to receive notice:

(a) For a consumer goods transaction, only the debtor and any secondary obligors are entitled to receive notice.

(b) For a non-consumer transaction, the secured party must also notify:

1) any other person from which the secured party has received (before the notification date) an authenticated notification of a claim of an interest in the collateral;

2) any other secured party or lienholder that, 10 days before the notification date, held a security interest in or other lien on the collateral perfected by the filing of a financing statement that (i) identified the collateral; (ii) was indexed under the debtor’s name as of that date; and (iii) was filed in the office in which to file a financing statement against the debtor covering the collateral as of that date; and

3) any other secured party that, 10 days before the notification date, held a security interest in the collateral perfected by a statute, regulation, or treaty described in § 25-9-311(a) (for example, by recording the lien on a certificate of title for a car or filing a preferred ship’s mortgage with the Coast Guard).

The "notification date" is the earlier of the date on which (a) a secured party sends to the debtor and any secondary obligor an authenticated notification of disposition or (b) the debtor and any secondary obligor waive the right to notification.

With respect to secured parties perfected via a financing statement, the notification requirement is satisfied if: (a) no less than 20 days and no more than 30 days before the notification date, the secured party requests in a commercially reasonable manner information concerning financing statements indexed under the debtor’s name in the appropriate filing office; and (b) before the notification date the secured party (i) did not receive a response to the request for information, or (ii) received a response and sent an authenticated notification of disposition to each secured party or other lienholder named in that response whose financing statement covered the collateral.

4. Publicize the sale in a commercially reasonable manner.

5. Conduct the sale in a commercially reasonable manner.

6. Apply the proceeds of disposition in the following order to:

a. 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;

b. the satisfaction of obligations secured by the security interest (or agricultural lien) under which the disposition is made.

c. the satisfaction of obligations secured by any subordinate security interest in or other subordinate lien on the collateral if (i) the secured party receives from the holder of such subordinate interest an authenticated demand for proceeds before the distribution of the proceeds is completed; and (ii) the subordinate interest is senior to the interest of a consignor with an interest in the collateral, if any; and

d. 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.

7. Calculate surplus or deficiency. (Non-cash proceeds: see discussion in Exhibit E.)

8. Pay over any surplus to the debtor. (Non-cash proceeds: see discussion in Exhibit E.)

9. In a consumer-goods transaction in which the debtor is entitled to a surplus or a consumer obligor is liable for a deficiency, send an explanation in writing to the debtor or consumer obligor, as applicable, containing at least the following information (§ 25-9-616):

a. the aggregate amount of obligations secured by the collateral disposed of and, if that amount reflects a rebate of unearned interest or credit service charge, an indication of that fact, calculated as of a specified date;

b. the amount of proceeds of the disposition;

c. the aggregate amount of the obligation after deducting the amount of proceeds;

d. the amount, in the aggregate or by type, and types of expenses, including expenses of retaking, holding, preparing for disposition, processing and disposing of the collateral, and attorney’s fees secured by the collateral which are known to the secured party and relate to the current disposition; and

e. the amount of the surplus or deficiency.

A debtor or consumer obligor is entitled without charge to one response to a request under this section during any six-month period in which the secured party did not send to the debtor or consumer obligor an explanation pursuant to this item 8. The secured party may charge up to $25.00 for each additional response.

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Exhibit E

To the extent that the following give rights to a debtor or obligor and impose duties on a secured party, the debtor or obligor may not waive or vary the rules stated in the following listed sections:

1. 25-9-207(b)(4) c: A secured party may use or operate collateral in its possession (or under its control) in the manner and to the extent agreed by the debtor except in the case of consumer goods.

2. 25-9-210: A secured party (other than a buyer of accounts, chattel paper, payment intangibles, or promissory notes or a consignor) must comply with certain requests, authenticated by a debtor, for information about the secured debt, including an accounting of unpaid secured obligations, confirmation of a list of collateral prepared by the debtor, and a statement of account.

3. 25-9-607(c): A secured party shall proceed in a commercially reasonable manner if (1) the secured party undertakes to collect from or enforce an obligation of an account debtor or other person obligated on collateral (such as the obligor under a promissory note) and (2) the secured party has full or limited recourse against the debtor or a secondary obligor for uncollected collateral.

4. 25-9-608(a) and 25-9-615(c): A secured party need not apply or pay over for application noncash proceeds of collection and enforcement under § 25-9-607 unless the failure to do so would be commercially unreasonable. A secured party that does apply or pay over for application such noncash proceeds must do so in a commercially reasonable manner.

(What would not be "commercially reasonable?" Comment 3 to § 25-9-615 gives the example of a secured party in the business of selling cars on credit. The secured party repossesses a vehicle and sells it at a private sale in compliance with RA9 requirements. Instead of selling for cash, he accepts a promissory note from the purchaser in accordance with his usual method of extending credit and retains a security interest in the vehicle. Since the non-cash proceeds are of the type that the secured party generates in the ordinary course of his business, a court may find it commercially unreasonable for the secured party to cause the original debtor delay and uncertainty regarding whether and to what extent his secured obligation has been satisfied.)

5. 25-9-608(a) and 25-9-615(d): A secured party must provide an accounting of and pay over to the debtor any surplus proceeds of collection or enforcement.

6. 25-9-609: A secured party may take possession of collateral (or, without removal, render equipment unusable and dispose of collateral on a debtor’s premises) without judicial process only if it does so without breach of the peace.

7. 9-610(b): Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.

25-9-611: Secured parties must provide timely notification to the debtor, secondary obligors, if any, and (for non-consumer-goods transactions) to other parties with an interest in the collateral before disposition of collateral.

25-9-613 and 25-9-614: The notification required by 9-611 must be adequate in form and content, as set forth in these sections.

8. 25-9-615(f): The surplus or deficiency following a disposition of collateral is calculated based on the amount of proceeds that would have been realized in a disposition complying with Part 6 to a transferee other than the secured party, a person related to the secured party, or a secondary obligor if (1) the transferee in the disposition is the secured party, a person related to the secured party, or a secondary obligor and (2) the amount of proceeds of the disposition is significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.

9. 25-9-616: In a consumer-goods transaction in which the debtor is entitled to a surplus or a consumer obligor is liable for a deficiency under § 9-615, the secured party must provide an explanation of the calculation of surplus or deficiency. See Exhibit F.

10. 25-9-620, 621, and 622 regarding the retention of collateral in satisfaction of obligation. See body of memo for full discussion of these provisions.

11. 25-9-623: A debtor, any secondary obligor or any other secured party or lienholder may redeem collateral by tendering (a) the fulfillment of all obligations secured by the collateral; and (b) the reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing of the collateral, and, to the extent provided for by agreement and not prohibited by law, reasonable attorneys fees and legal expenses incurred by the secured party. Redemption may occur at any time before a secured party has collected collateral under 9-607, has disposed of collateral or entered into a contract for its disposition, or has accepted collateral in full or partial satisfaction of the obligation it secures.

12. 25-9-624: Waivers: see body of memo for discussion.

13. 25-9-625 (Remedies for secured party’s failure to comply with RA9) and 25-9-626 (Action in which deficiency or surplus is in issue).

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