Part VII Enforcing an Article 9 Security Interest
Chapter 36 Acceptance of Collateral in Full or Partial Satisfaction of the Debt
A. Generally
As we saw in Chapter 33 (A Secured Party's Options on Default), on default a secured party has two Article 9 options for enforcing a security interest. The disposition option was examined in detail in Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt). The other option is retention or, as it is denominated in new Article 9, acceptance in satisfaction of the debt. Acceptance of collateral in complete or partial satisfaction of the debt requires strict compliance with the Article 9 rules as to when a complete or partial acceptance is allowed and how an acceptance is to be effected. See 9-620, 9-621 and 9-622.
Once again it is important to bear in mind that the debtor is the owner of the collateral and until its security interest has been foreclosed by either of the foregoing options the secured party has only a lien on the collateral.
As for acceptance in complete or partial satisfaction of the debt, as will be explained more fully below, although the debtor (and other parties with an interest in the collateral) can be divested of ownership (or some other interest in) the collateral even if the secured party fails to comply with all the requirements for acceptance, there can be no acceptance in complete or partial satisfaction of the debt unless a proposal of an acceptance has been made. See In re Cadiz Properties, Inc., 278 B.R. 105 (ND Tex. 2002).
Acceptance in satisfaction of the debt can eliminate or reduce a secured party's right to a deficiency, but it can also work a "strict foreclosure " in the sense that it has the potential to deny the benefit of a surplus to those who would be entitled to it in a disposition situation. Because of the "strict foreclosure" nature of acceptance affected parties must be given a reasonable opportunity to force a disposition. See new 9-620(a) and 9-621. Moreover, acceptance in partial satisfaction of the debt, as allowed by new Article 9, and which is designed to facilitate settlements and reduce the frequency of costly deficiency litigation, is not permitted in a consumer transaction.
Under former Article 9, section 9-505(1), where the collateral was consumer goods secured parties were required to dispose of the collateral in cases where debtors have built up significant equity. Mandatory disposition as to consumer goods is continued under new sections 9-620(e), (f) and (g). Consequently, acceptance in satisfaction of the debt is not always an option and when it is an option there are rigid procedures that must be followed.
B. Other than consumer goods cases.
Under former section 9-505(2), a secured party who gave proper notification of an intent to retain the collateral to the debtor and certain other parties could effect a strict foreclosure (meaning keep the collateral in satisfaction of the debt and forego any need to account for a surplus or right to a deficiency), but the debtor or other persons entitled to notification could by timely and proper objection prevent retention and force a disposition. Obviously, a secured party would be most likely to seek to retain in satisfaction of the debt when there was a surplus and least likely to do so where there would be a deficiency.
New Article 9 makes a number of changes to the retention scheme provided for in former section 9-505(2). To begin with, new Article 9 refers to retention as "acceptance." In addition, new Article 9 permits partial as well as full acceptance in other than consumer cases. By preserving a surplus or leaving a deficiency owing the partial acceptance option may encourage the parties to negotiate a settlement of a secured debt.
New section 9-620(a) eliminates a possession requirement imposed by former section 9-505(2) and thereby makes clear that acceptance is available as to intangibles. Beyond these formal and substantive changes, new Article 9 seeks to clarify the procedures that must be followed to effect an acceptance.
Acceptance of the collateral in complete or partial satisfaction of the debt is governed by new sections 9-620, 9-621 and 9-622. Consistently with the use of the description "acceptance" and the intent of the scheme to encourage the secured party and debtor to work out the terms of a settlement, new section 9-620(a) refers to the debtor's "consent" and new section 9-620(c)(1) requires that the debtor agree to the terms of an acceptance in partial satisfaction of the debt in a record authenticated by the debtor after default.
However, under new section 9-620(c)(2), a debtor "consents" to an acceptance in complete satisfaction of the debt if the debtor receives an essentially unconditional proposal that the debtor fails to object to within twenty days after the proposal is sent. Under new section 9-620(a)(2), parties other than the debtor consent only in the sense that they do not timely object.
Under new section 9-620(b), acceptance is entirely at the option of the secured party and acceptance cannot be forced upon a secured party (as some courts concluded under former Article 9). However, a secured party who holds collateral for an extended period without good reason may be held to have acted in a commercially unreasonable manner thereby subjecting the secured party to the risks that go with failures to comply with Article 9. See Chapter 38 (Remedies for a Secured Party's Failure to Comply with Article 9).
As was true under former Article 9, under new sections 9-620(c)(2) and 9-620(d), it is enough that the secured party "send" a proposal for acceptance to parties entitled to such notification and an objection can prevent acceptance only if it is actually received by the secured party within twenty days after a notification is sent. However, given that under new section 9-620(a)(1) a debtor must consent to an acceptance as defined in new section 9-620(c), notification of a desire to accept collateral in satisfaction of a debt need not be sent to the debtor.
To govern situations where notification is required, new section 9-621 provides a somewhat more streamlined version of the notification scheme devised for dispositions in new section 9-611 and discussed in Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt). The scheme does not use the "notification date" device for fixing a cut off for who must be sent notification employed by new section 9-611 applicable to dispositions.
Under new section 9-621(a)(1), a secured party must send notification to any person from whom the secured party receives an authenticated notification of a claim of interest in the collateral before the debtor consents to an acceptance. Under new sections 9-621(a)(2) and (a)(3), the secured party also must send notification to any other secured party or lien holder who, ten or more days before the debtor consented to the acceptance, perfected a security interest or other lien by properly filing a financing statement or by compliance with a law other than Article 9.
There is no protection for secured parties in acceptance cases against delays in obtaining information from filing offices such as is given to secured parties in disposition situations under new section 9-611(e). On the other hand, under new section 9-621(b), only in the case of a partial disposition must the secured party send notification to a guarantor (secondary obligor).
Under new sections 9-622(a)(1) and (a)(2), an effective acceptance (one that is consented to by the debtor and not timely objected to by a party who is entitled to object) discharges the obligation to the extent consented to by the debtor and transfers all the debtor's rights in the collateral to the secured party. Under new sections 9-622(a)(3) and (a)(4) an effective acceptance also discharges the security interest or agricultural lien that is the subject of the acceptance and any subordinate security interest or lien and terminates any other subordinate interest.
Under new section 9-622(b), subordinate interests are discharged or terminated even if the secured party fails to send notification to a party entitled to notification under new section 9-621. In such a case an aggrieved party's only recourse is for damages under new section 9-625, as discussed in Chapter 38 (Remedies for a Secured Party's Failure to Comply with Article 9). See Official Comment 2 to new 9-620.
On the other hand, where an acceptance is not effective because the debtor has not consented or a party entitled to notification has timely objected, subordinate interests are not discharged or terminated. See Official Comment 2 to 9-622. In the case of In re Cadiz Properties, Inc., 278 B.R. 105 (ND Tex. 2002) it was held that where no proposal for acceptance had ever been made there could be no transfer of ownership of stock to the secured party and as the owner of stock that gave the debtor a controlling interest in the corporation a board of directors elected by the debtor had the authority to put the corporation into bankruptcy.
The attempt to encourage settlement through the device of acceptance in partial satisfaction of the debt means that the secured party and the debtor may negotiate an acceptance that is not directly subject to the commercially reasonable requirement imposed on dispositions. Moreover, under new section 9-622(a)(1), a debt is discharged by a acceptance in partial satisfaction of the debt only as provided for in the agreement and the remaining debt continues as a possible basis for a deficiency action by the secured party.
Because liability for a deficiency continues in the case of an acceptance in partial satisfaction of the debt new section 9-621(b) requires that guarantors (who are liable for deficiencies) be afforded an opportunity to object. As noted above, under new section 9-622(b) subordinate interests are discharged or terminated even if the secured party fails to comply with procedures required for acceptance. Any such failure by the secured party does expose the secured party to the risk of liability under new section 9-625.
You may explore the basics of acceptance in complete or partial satisfaction of a debt in other than consumer cases in the next three problems.
Problem 36.1 (interactive)
Assume the facts of Chavers v. Frazier, considered in Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt). Be sure you understand the interests of the various parties involved in the case (perhaps by sketching them out).
(a) Could Chavers have simply kept the jet in satisfaction of the debt? Would the debtors be likely to have consented to an acceptance in complete satisfaction of the debt given the facts of that case? Would Chavers have been likely to propose an acceptance in complete satisfaction of the debt? What circumstances might lead Chavers nevertheless to propose an acceptance in complete satisfaction of the debt?
(b) Would Chavers have been inclined to propose a partial acceptance? Would the debtors be likely to agree to a partial acceptance? Explain your answers.
Problem 36.2 (interactive)
If the debtors and Chavers were able to reach an agreement on an acceptance in partial satisfaction of the debt, what would be the effect on the secondary obligor (Mrs. Frazier)?
Must Mrs. Frazier be given an opportunity to object?
If Mrs. Frazier were not sent notification of a proposed acceptance in partial satisfaction of the debt as required by new section 9-621(b) would the acceptance still be effective?
If the acceptance were still effective even though the required notification was not sent, would Mrs. Frazier have any recourse against Chavers?
Problem 36.3 (interactive)
Assume again the facts of Chavers v. Frazier. Suppose, however, the jet also was subject to a perfected security interest held by a party "Lender" to secure a $50,000 loan.
Would an acceptance in complete or partial satisfaction of the debt discharge Lender's security interest? Must Lender be given an opportunity to object to any proposed acceptance in complete or partial satisfaction of the debt?
If Lender were entitled to receive notification of a proposed acceptance but Chavers failed to send it would an acceptance consented to by the debtors and not timely objected to by Mrs. Frazier discharge Lender's security interest?
Would Lender have any recourse based on the failure of the secured party to send the required notification?
C. Consumer goods and consumer transactions
The requirements for acceptance in other than consumer transactions generally apply to consumer goods and consumer transactions cases. However, consumers are thought to be at greater risk regarding the strict foreclosure effect of retention or acceptance and some special limitations are imposed to protect consumers.
Under new sections 9-620(e) and (f), if a debtor has paid 60% of the cash price of a purchase money security interest in consumer goods or 60% of the principal amount of the obligation in non-purchase money in consumer goods, then the secured party must dispose of the goods within 90 days after taking possession or within such longer period of time agreed to by the debtor and all secondary obligors in an authenticated agreement entered into after default.
A secured party who does not dispose of the goods within the 90-day period (or a specially agreed to period) may be liable for damages under new section 9-625. The secured party also could be liable for conversion as a remedy available under supplemental principles of law, as provided for in new Article 1, section 1-103(b) (formerly section 1-103). See Official Comment 12 to new 9-620.
Under new section 9-624(b), a debtor may waive the right to mandatory disposition but only by an agreement to that effect entered into and authenticated after default.
Under new section 9-620(g), acceptance in partial satisfaction of a debt is not available in a consumer transaction. According to Official Comment 12 to new 9-620, an attempted acceptance in partial satisfaction of a debt in a consumer transaction is void.
Bear in mind that a "consumer transaction" is defined separately in new section 9-102(a)(26) as one in which an individual incurs an obligation for personal, family or household purposes secured by an interest collateral held or acquired for personal, family, or household purposes. Thus, mandatory disposition under new section 9-620(e) may be required as to "consumer goods," defined in new section 9-102(a)(23) as goods used or bought for use primarily for personal, family or household purposes, whereas the bar in new section 9-620(g) on acceptance in partial satisfaction of the debt applies only in consumer transactions.
You may explore the acceptance rules of new Article 9 applicable to consumer situations in the next two problems.
Problem 36.4 (interactive)
Assume again the facts of Chavers v. Frazier from Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt) but that on default the debtors had paid $600,000 of the $850,000 price of the jet.
Would acceptance of the jet in satisfaction of the debt be an option available to Chavers?
If the jet had been purchased for personal, family, or household purposes, would acceptance be an option for Chavers?
Problem 36.5 (interactive)
Suppose the facts of Chavers v. Frazier from Chapter 35 were that the debtors bought the jet for personal use and at the time of the default they had paid only $400,000 of the price owed. The Chavers are not likely to be inclined to an acceptance in full satisfaction of the debt because they would lose their right to assert a deficiency. However, they might well favor an acceptance in partial satisfaction of the debt. Is acceptance in partial satisfaction of the debt an option? This question is deceptively complicated. In answering this question you should refer to new section 9-620(g) but you also must examine carefully new section 9-102(a)(26).
CASE COMMENTARY
Knutson v. Walker and Associates, Inc., 2005 WL 1950202 (D. Colo. 2005) (Not reported in F. Supp. 2d)
Ronald V. Odette Family Limited Partnership v. Agco Finance, LLC, 129 P.3d 95 (Kan. App. 2005)
Merchant’s Bank of New York v. Gold Lane Corporation, 814 N.Y.S.2d 99, 2006 WL 945091 (N.Y. 1st App. Div. 2006)
2009-02-01 update