Pub. 5 2017 Issue 2

Issue 2. 2017 13 James H. Jones is a partner at the Salt Lake City office of Snell & Wilmer where he focuses his practice in commercial and real estate finance, workouts and distressed debt. James may be reached at jjones@swlaw.com or 801-257-1921. Jonathan Kotter is an attorney in the Salt Lake City office of Snell & Wilmer where he focuses his practice in commercial finance. Jonathan may be reached at jkotter@swlaw.com or 801-257-1903. the borrower merely insisting that the secured lender, or its agent (secured lenders will typically be responsible for the actions of their third-party collections agencies) stop, is all it takes for a secured lender to breach the peace if the collec- tion efforts are not abandoned. Furthermore, the no-breach- of-the-peace requirement may not be waived. Notably, failure to comply with this requirement is not without con- sequence: seizing the collateral despite a breach of the peace and without a court order may render the secured lender liable for damages to the borrower and provide a basis for a court order prohibiting (at least on a temporary basis) the collection, enforcement or disposition of the collateral. The bottom line is that secured lenders should always proceed with caution when exercising this right. • Court Order. A secured lender may also resort to the judicial process and seek a court order, whether a writ of re- plevin or other order, compelling the borrower to turn over the collateral. This approach typically starts with the filing of a complaint alleging a borrower default and damages to the secured lender. Realizing Value from the Collateral Once the tangible personal property collateral is obtained, secured lenders have two options under the UCC relative to realizing the value of that collateral (subject, of course, to some exceptions and conditions): (i) retaining the collateral in partial or full satisfaction of the underlying obligation, or (ii) a private or public sale of the collateral. Keeping the Collateral While retention is not a permissible remedy in all scenarios (e.g., in a consumer transaction, a secured lender may not accept collateral in partial satisfaction of the obligation it secures), and there are some inherent ownership risks, it can be an attractive remedy vis-à-vis sale of the collateral to reduce enforcement costs and permit more latitude in the timing and method of an eventual sale of the collateral. Note that there are a number of procedural requirements relative to retention, though retention is generally permissible if (i) the borrower executes a written agreement to the proposed retention (secured lender beware– this agreement must be entered into after the default), (ii) the se- cured lender has timely sent out all notices required by the UCC (this includes notice to the borrower and can include additional secured parties), and (iii) the secured lender doesn’t receive a timely notice of objection from a person required to receive no- tice of the retention or another party with a subordinate interest in the collateral. Once the requirements of retention are met, the collateral belongs to the lender and may be transferred without regard to the rules that govern the sale of collateral under the UCC, which are discussed below. Additionally, the borrower would of course remain liable for any deficiency if the collateral is kept in only partial satisfaction of the obligation. Selling the Collateral Secured lenders have two options under the UCC when selling the collateral: (i) a court-supervised sale or (ii) a secured lender sale of the collateral. However, despite the dual options, many secured lenders prefer to sell the collateral themselves since it is typically less costly and time consuming. Secured lender sales may be either public or private, though a secured lender’s right to credit bid and purchase the collateral at a private sale is qualified. While there are a number of detailed requirements relative to the form and timing of the notice of the sale, fortu- nately for secured lenders, there are relatively few specific re- quirements as to how the sale must be carried out. Rather, the touchstone is commercial reasonableness, as the UCC requires that “[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be com- mercially reasonable.” Commercial reasonableness is not fully defined under the UCC, and unsurprisingly, it is often litigated. There are, how- ever, some guidelines and safe harbors. For example, the UCC clarifies that “[t]he fact that a greater amount could have been obtained by a collection, enforcement, disposition, or accep- tance at a different time or in a different method from that selected by the secured party is not of itself sufficient to pre- clude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a com- mercially reasonable manner”—a very helpful secured-lender protection. In short, if the manner in which the secured lender carries out the sale and the price it obtains are consistent with the typical practices and prices for the sale of similar assets in the open market, the sale is more likely to be considered com- mercially reasonable. Once the collateral is ultimately sold, the UCC has a hierarchy of how the proceeds are generally required to be applied: first, to reasonable expenses of the sale (including attorney’s fees if provided for by agreement and not otherwise prohibited by law); second, to the secured obligations; and third, to the obligations secured by the subordinate security interests. Subject to a few exceptions, the borrower will, of course, typically remain liable for any deficiency and have the right to any surplus. However, special calculation requirements apply if the property was sold to certain interested parties, such as the secured lender or a person related to the secured lender. Understanding the broad—if nuanced—secured party personal property rights and remedies under the UCC is critical to underwriting loans and understanding available asset recovery remedies. However, when they are understood and applied, personal property can be significant security in increasingly uncertain times. n