CONSEQUENCE OF DEFAULT TO THE DEBTOR

(continued, with footnotes)

There are, however, exceptions to the debtor's right to receive notice prior to the sale or other disposition. The exceptions are as follows:

(1) Sale or other disposition of perishable collateral;⁸⁵

(2) Sale or other disposition of collateral which threatens to rapidly decline in value;⁸⁶ or

(3) Sale of other disposition of collateral which is customarily sold on a recognized market.⁸⁷

The requirement that any sale of the collateral be conducted in a commercially reasonable manner should provide some impetus for litigation. From the debtor's perspective, it is important that this protection be enforced. The debtor's attorney should insist on strict compliance with the "commercial reasonableness" requirement to ensure that the collateral is not sold for a grossly inadequate price and to prevent the creditor from asserting a large deficiency judgment against the debtor. The fact that a better price could have been obtained on a different day or by use of a different method is not alone determinative of commercial reasonableness.⁸⁸ A sale will be considered to have been made in a commercially reasonable manner if the secured party: (a) sells the collateral in the usual manner in any recognized market therefor;⁸⁹ or (b) sells the collateral at the current price in such market at the time of the sale;⁹⁰ or (c) sells the collateral in conformity with reasonable commercial practices among dealers in the type of property sold.⁹¹ A sale will also be deemed commercially reasonable if it has been approved in any judicial proceeding by a bona fide creditors' committee or representatives of creditors.⁹² The courts will otherwise have to provide guidance with respect to what type of sale will be considered commercially reasonable, because Chapter 9 provides little other guidance in this area.

The requirement that notice be reasonable will generate much litigation. Most disputes will probably arise when the creditor has made an attempt to actually notify the debtor but the debtor did not actually receive notice. Reasonable notification is not defined by Chapter 9. The comments to La. R.S. 10:9-504 provides the following insight:

Notice is also considered to have been given if a person takes such steps as may be reasonably required to inform another, in the ordinary course, whether the other actually comes to know of it.⁹⁴ Hence, there is no provision requiring the debtor actually receive the notice that the creditor has sent. It will be interesting to see whether or not Louisiana courts will be sympathetic to debtors and guarantee that debtors actually receive notice prior to the sale or other disposition of the collateral. If the courts are not sympathetic to debtors in this regard, creditors will be required only to send notice. The "sending notice" requirement presumably will be fulfilled if the creditor deposits a properly stamped and addressed letter in the mail.⁹⁵

"Sending notice" will also be fulfilled if the writing or notice is delivered for transmission by another means of communication with the costs of transmission provided for.⁹⁶ In any event, the receipt of any writing or notice within the time at which it would have arrived if properly sent has the effect of a proper sending.⁹⁷

When collateral is disposed of by a secured party after default, the disposition transfers to a purchaser for value all of the debtor's rights therein, discharges the security interest under which it is made, and discharges any subordinate security interests or liens.⁹⁸ The purchaser of collateral at a public sale takes the collateral free of all rights and interests as long as he is not knowledgeable of any defects in the sale and does not buy in collusion with the security party, other bidders, or the person conducting the sale.⁹⁹ The purchaser of collateral at a private sale takes the collateral free of all rights and interests if the purchaser acts in good faith.¹⁰⁰ It is worth noting that the secured party may purchase the collateral sold at a public sale.¹⁰¹ The secured party may also be the purchaser of the collateral sold at a private sale if the collateral is of a type customarily sold in a recognized market or of a type which is the subject of widely distributed price quotations.¹⁰²

In the absence of a contrary agreement, a person who is liable to the secured party under a guarantee, endorsement, repurchase agreement or any other like agreement is discharged from his obligation only to the extent that the debtor is so discharged as a result of a public sale, private sale or any judicial action in execution of the security interest.¹⁰³ If such person receives atransfer of collateral from the secured party or is subrogated to the secured party's rights, that person thereafter acquires the rights and duties of the secured party.¹⁰⁴ Such a transfer of collateral is not considered a sale or disposition under Chapter 9.¹⁰⁵

The public/private sale remedy and procedure provided by Chapter 9 is a radical departure from the procedures and remedies available to enforce security interests in movables prior to its adoption. "Commercial reasonableness" has become the issue to be addressed when the collateral is sold or disposed of via non-judicial public or private sales. Debtors must be cognizant of the fact that the technical requirements applicable to judicial sales are no longer applicable when collateral is sold non-judicially. In asserting the legal position of the debtor who challenges a sale or disposition via a public or private sale, the debtor's attorney must be aware that the focus of the Louisiana courts will be on good faith and fair dealing.

The debtor in many cases may decide that he would be better off without a resale of the collateral. The debtor may enter into an alternative arrangement pursuant to La. R.S. 10:9-505. In lieu of resale or other disposition, the secured party after default by the debtor may propose to retain the collateral in satisfaction of the underlying secured transaction. This process is referred to as strict foreclosure. This remedy is available to a secured party only if the collateral is of a type that the secured party that the secured party is authorized to sell pursuant to La. R.S. 10:9-503.¹⁰⁶ The debtor in this situation may under certain circumstances be discharged from the underlying obligation and is free from incurring a deficiency judgment.

In order to invoke rights to retain the collateral, the secured party must send the debtor a written notice of the proposal to retain the collateral.¹⁰⁷ Notice may be waived by the debtor only if he signs a statement after the default renouncing or modifying his right to notice.¹⁰⁸

The secured party is also required to send a notice of his intention to retain the collateral to any third parties who may have acquired the collateral from the debtor.¹⁰⁹ In the case of non-consumer goods, notice must be delivered to any other secured party who has a security interest in the same collateral and who has either properly filed a financing statement or delivered a notice of his interest in the collateral prior to the notice sent to the debtor.¹¹⁰

If the debtor, third party or other secured party desires to object to the secured party's proposal to retain the collateral in satisfaction of the obligation, he must do so in writing within twenty-one days after the notice was sent.¹¹¹ In absence of such written objection, the secured party essentially acquires the collateral in complete satisfaction of the debtor's obligation.¹¹² When the secured party receives a written objection, the secured party may not retain the collateral and must proceed in the manner otherwise provided under La. R.S. 10:9-505.¹¹³

When the collateral is consumer goods, special rules are applicable with regard to the secured party's proposal to retain such collateral in satisfaction of the obligation. Where a debtor who has paid at least sixty per cent (60%) of the loan in the case of a non-purchase money security interest in consumer goods or sixty per cent of the cash price in the case of a purchase-money security interest in consumer goods, the secured party is required to dispose of such consumer goods pursuant to La. R.S. 10:9-504.¹¹⁴ The protection afforded to consumer debtors is clearly advantageous to the debtor if there is a reasonable chance that a surplus might result from a resale of the consumer collateral. The attorney representing the consumer debtor must consider protecting the substantial equity position of that debtor in those cases where such equity exists.

The consumer debtor is afforded an opportunity to obtain a "dation" in the case where he voluntarily surrenders consumer goods that are subject to a security agreement.¹¹⁵ The voluntary surrender of such collateral made after or in contemplation of the debtor's default will be deemed an offer in satisfaction of the debt.¹¹⁶ A presumption arises that the secured party has accepted the surrendered goods in satisfaction of the debt unless the secured party within twenty (20) days after taking actual possession of the goods sends written notice to the debtor that he is not accepting the surrendered goods in satisfaction of the debt.¹¹⁷ Hence, a consumer-debtor has an incentive to surrender voluntarily consumer goods so as to reduce or eliminate the chances of incurring a deficiency judgment.

In the case of non-consumer goods, the debtor's voluntary abandonment or surrender of such goods subject to a security interest is deemed a surrender for sale pursuant to La. R.S. 10:9-503.¹¹⁸ Therefore, unlike the case of consumer goods, the surrender of non-consumer goods by the debtor made after or in contemplation of his default is not presumed to be an offer in satisfaction of the debt. The parties, however, may agree that the surrender of such non-consumer goods is an offer in satisfaction of the debt.¹¹⁹ Such an agreement must be written and made substantially contemporaneously with or after such surrender.¹²⁰

The presumptions built in La. R.S. 10:9-505 (3) and (4) apply to the retention of goods only when the debtor has abandoned the goods or voluntarily surrendered the goods to a secured party in contemplation of or after the debtor's default. These presumptions serve a valid purpose in that they assure that there are clear rules established under Chapter 9 for the release of a debtor when goods are surrendered to the secured party.

The secured party with a security interest in accounts and instruments may, in lieu of selling such accounts and instruments, exercise its right to collect upon such accounts or instruments by providing notice to the account debtor or obligor to make payment directly to the secured party.¹²¹ Thus, Chapter 9 affords a secured party with a security interest in accounts and instruments with an alternative method to enforce its right to repayment. This right to collect upon accounts or instruments arises after the debtor's default.¹²² In addition, this right may, upon agreement by the secured party and the debtor, exist prior to the debtor's default.¹²³

If the secured party has a right to charge back uncollected collateral or otherwise to full or limited recourse against the debtor, a notice to make payment must also be sent to other secured parties who have a security interest in the same collateral.¹²⁴ The other secured parties must have properly filed or forwarded notice of their interest to the secured party exercising his right to collect.¹²⁵

After receiving the notice to collect, the account debtor may request that the secured party provide proof that an assignment of the amount due under the account has been made.¹²⁶ When such a request is made by the account debtor, the secured party must seasonably furnish the proof requested.¹²⁷ Until the secured party seasonably furnishes such proof, the account debtor may continue to pay the debtor.¹²⁸

The secured party may also take control of any proceeds to which he is entitled under La. R.S. 10:9-306.¹²⁹ "Proceeds" include whatever is received from the sale, exchange, collection or other disposition of collateral, except for receipts derived from the disposition of collateral by way of public sale, private sale or judicial sale.¹³⁰

The secured party in exercising his right to collect upon accounts or instruments must proceed in a commercially reasonable manner.¹³¹ The obligation to proceed in a commercially reasonable manner applies to transactions wherein the secured party does not assume the full credit risk of collection. The secured party who has a right of chargeback against the debtor is thus discouraged from increasing the deficiency on the debtor because of its selective collection on difficult accounts.¹³²

Proceeds received on the collection of accounts from the account debtor or obligor on an instrument are applied in the following manner:

(1) To reasonable expenses or realization from the collections incurred by the secured party;¹³³ and

(2) to security interests in the order of their priority.¹³⁴

Thereafter, if the security agreement secures an indebtedness, the secured party must account to the debtor for any surplus.¹³⁵ Unless otherwise agreed, the debtor is conversely liable for any deficiency.¹³⁶ If, however, the transaction was a sale of accounts or chattel paper, the debtor is entitled to any surplus or liable for any deficiency only if the security agreement so provides.¹³⁷

The debtor or any other secured party may redeem the collateral as long as the right of redemption has not been waived in writing after default.¹³⁸

The debtor's attorney should alert his client to his right to redeem the collateral. This right can be exercised at any time before:

(1) The secured party has sold the collateral pursuant to La. R.S. 10:9-504;¹³⁹

(2) The secured party has entered into a contract for disposition of the collateral pursuant to La. R.S. 10:9-504;¹⁴⁰

(3) The collateral has been sold or disposed of pursuant to judicial process;¹⁴¹

(4) The debtor and secured party have agreed to the transfer of the collateral in satisfaction of the secured obligations pursuant to La. R.S. 10:9-505.¹⁴²

Because the debtor is very vulnerable after repossession, the debtor's attorney should caution his client against waiving his right of redemption. The attorney's active participation during the post-repossession period can prevent the debtor from unknowingly waiving his right to redemption. In order to redeem the collateral, the debtor must tender fulfillment of all obligations secured by the collateral as well as the following:

(1) Expenses reasonably incurred by the secured party in retaking holding, and preparing the collateral for disposition;¹⁴³

(2) Expenses reasonably incurred by the secured party in arranging for the sale of the collateral;¹⁴⁴ and,

(3) Reasonable attorneys' fees and legal expenses provided for in the agreement and not prohibited by law.¹⁴⁵

The comment to La. R.S. 10:9-506 is helpful in defining the term "tendering fulfillment."¹⁴⁶ "Tendering fulfillment" requires payment in full of all monetary obligations then due and performance in full of all other obligations that have matured.¹⁴⁷

La. R.S. 10:9-507 establishes the debtor's remedies when the secured party does not comply with the Chapter 9 procedures relating to the sale or other disposition of collateral. If the debtor establishes that the secured party is not complying with the procedures for sale or disposition of the collateral, the secured party may be restrained from proceeding with the sale or disposition.¹⁴⁸ In addition, the court in the appropriate case may order that the collateral be sold only by judicial process or in any other commercially reasonable manner.¹⁴⁹ If the sale of the collateral has already taken place, the debtor or any person entitled to notification and any other secured party may pursue the secured party for any loss or damage actually caused by the secured party's non-compliance with Chapter 9.¹⁵⁰

It would appear logical that where a commercially unreasonable sale has been conducted, the loss suffered would be the difference between the amount actually realized on resale and the amount that would have been realized had there been a commercially reasonable sale. From the debtor's perspective, the problem with this remedy is that the recovery is probably an insufficient deterrent to creditor misbehavior in cases where a deficiency judgment will be incurred. The secured party's noncompliance will not result in the extinguishment or forfeiture of a security interest.¹⁵¹ In addition, sureties, guarantors and other third parties secondarily liable, or liable under an accessory contract for the obligation or the security interest, will not be released from their obligations.¹⁵² Debtors undoubtedly would be relieved if La. R.S. 10:9-507 did provide for a penalty that would be sufficient enough to at least eliminate a potential deficiency judgment. Perhaps the most significant remedy the debtor could hope for is the loss of the secured party's right to a deficiency judgment due to his misbehavior. Such a penalty would probably have a significant impact on creditor misbehavior.

Unfortunately from the debtor's perspective, denial of a deficiency judgment due to the secured party's misbehavior is not a permissible remedy under the Chapter 9.¹⁵³ When the legislature considered the issues concerning deficiency judgments, it made the Deficiency Judgment Act inapplicable to public or private sales under Chapter 9.¹⁵⁴ Creditors have reason to rejoice because: (1) except where ordinary or executory process is used to enforce a secured party's interest, La. R.S. 10:9-507 is a comprehensive codification of a debtor's remedies; (2) the Deficiency Judgment Act was specifically amended by the Louisiana Legislature and made inapplicable to public or private sales; and (3) La. R.S. 10:9-507 is silent as to the denial of a deficiency judgment when there has been creditor misbehavior in such sales.

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