Article 9 Remedies After Default: Repossession and Disposition

Default and the Secured Party's Remedies

Part 6 of Article 9 of the Uniform Commercial Code, adopted in Illinois at 810 ILCS 5/9-601 through 5/9-628, governs what a secured party may do after its debtor defaults. This page addresses commercial transactions: loans and lines of credit to businesses, equipment and asset-based financing, and factoring. Consumer-goods transactions and consumer transactions are subject to additional rules on notification, deficiencies, and damages that are not covered here.

Article 9 does not define default. Default is generally defined by the security agreement and the related loan or factoring documents, which typically list events of default such as nonpayment, breach of a covenant or warranty, insolvency, or a change in control. Whether a default has occurred is therefore first a question of contract. Before acting, the secured party should confirm that an event of default exists, that any required notice has been given and any cure period has run, and that it has not waived the default or created a contrary course of dealing.

Under UCC § 9-601(a), codified at 810 ILCS 5/9-601(a), after default a secured party has the rights provided in Part 6 and, except as limited by § 9-602, those provided by agreement of the parties. It may reduce its claim to judgment, foreclose, or otherwise enforce the claim or the security interest by any available judicial procedure. Under § 9-601(c), those rights are cumulative and may be exercised simultaneously. A lender may sue on the note and the guaranty while it also pursues the collateral. Under § 9-601(e), the lien of a levy on collateral following judgment relates back to the earliest of perfection, filing a financing statement covering the collateral, or the applicable date specified by an agricultural-lien statute.

One scope rule matters to factors. Under § 9-601(g), except as provided in § 9-607(c), Part 6 imposes no duties on a secured party that is a buyer of accounts, chattel paper, payment intangibles, or promissory notes. A factor that purchased receivables outright generally collects them as owner. The analysis changes where the factor also holds a security interest in other collateral to secure the client's repurchase or recourse obligations.

Bankruptcy is the threshold check. Under 11 U.S.C. § 362(a), the filing of a bankruptcy petition generally stays acts to obtain possession of property of the estate and acts to enforce a lien against that property. A repossession, notification, or sale made in violation of the stay may be set aside and may expose the creditor to liability. A bankruptcy search should be run before the first enforcement step and again immediately before any repossession or sale.

Duties the Agreement Cannot Waive

Article 9 leaves wide room for contract, but not unlimited room. Under § 9-602, the debtor or obligor may not waive or vary specified rules to the extent they give rights to the debtor or obligor or impose duties on the secured party. Those rules include the following.

• The duty to proceed in a commercially reasonable manner when collecting from account debtors with recourse against the debtor, § 9-607(c)
• The limit on self-help repossession to conduct without breach of the peace, § 9-609
• The requirement that every aspect of a disposition be commercially reasonable, § 9-610(b)
• The duty to send a notification of disposition with the required contents, § 9-611 and § 9-613
• The rules on application of proceeds, surplus, and deficiency, § 9-615(c), (d), and (f)
• The conditions on acceptance of collateral in satisfaction of the debt, § 9-620 through § 9-622
• The right to redeem, § 9-623, and the remedy and deficiency rules of § 9-625 and § 9-626

Section 9-603(a) softens these rules in one respect. The parties may determine by agreement the standards that measure whether those rights and duties have been fulfilled, if the standards are not manifestly unreasonable. A security agreement may, for example, state the number of days of notice that will be treated as reasonable or describe acceptable methods of sale for particular collateral. Under § 9-603(b), however, that latitude does not extend to the duty to refrain from breach of the peace.

Some of these rights may be given up, but only after default. Under § 9-624(a), a debtor or secondary obligor may waive the right to notification of disposition under § 9-611 only by an agreement entered into and signed after default. Under Illinois § 9-624(c), a debtor or secondary obligor may waive the right to redeem under § 9-623 only by an agreement to that effect entered into and signed after default. A waiver of these rights in the original security agreement or guaranty is generally ineffective. In practice, a forbearance or workout agreement signed after default is the vehicle used for an enforceable waiver.

Collecting Accounts and Notifying Account Debtors

When the collateral includes receivables, direct collection is, in practice, often an efficient remedy. Under § 9-607(a), if so agreed, and in any event after default, a secured party may notify an account debtor or other person obligated on collateral to make payment or otherwise render performance to or for the benefit of the secured party. It may also take any proceeds to which it is entitled under § 9-315.

The account debtor's side of that notice is governed by § 9-406(a). After receipt of a notification, signed by the assignor or the assignee, that the amount due has been assigned and that payment is to be made to the assignee, the account debtor generally may discharge its obligation only by paying the assignee. Drafting and delivery of that notice, and the claims available against account debtors that paid the wrong party, are addressed on the UCC 9-406 notice of assignment page.

Collection carries its own duties. Under § 9-607(c), a secured party that undertakes to collect from an account debtor, and that is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor or a secondary obligor, must proceed in a commercially reasonable manner. Under § 9-608(a), cash collection proceeds are applied to qualifying collection and enforcement expenses, then the secured obligations, and then subordinate secured obligations or liens for which a timely signed demand is received, subject to the reasonable-proof requirement; the secured party must account to and pay the debtor any surplus. Under § 9-608(b), if the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes, the debtor is not entitled to any surplus and the obligor is not liable for any deficiency.

Taking Possession: Breach of the Peace and Judicial Process

Under § 9-609(a)(1), after default a secured party may take possession of the collateral. Under § 9-609(b), it may do so in one of two ways: pursuant to judicial process, or without judicial process if it proceeds without breach of the peace. Article 9 does not define breach of the peace. Whether repossession breaches the peace depends on the circumstances; actual violence is unnecessary, but an oral objection alone does not automatically establish a breach under Illinois authority, and entry through barriers or into enclosed premises materially changes the analysis. See Chrysler Credit Corp. v. Koontz, 277 Ill. App. 3d 1078, 661 N.E.2d 1171 (5th Dist. 1996).

The risk falls on the secured party. The duty to avoid breach of the peace cannot be waived, and retaining a repossession contractor should not be treated as eliminating the secured party's potential liability. A wrongful repossession can give rise to damages under § 9-625, can support tort claims under other law, and can compromise the later sale and deficiency claim. In commercial matters, collateral is often located inside an operating facility, installed in a production line, or held by a debtor that disputes the default. In those circumstances judicial process is generally the prudent course.

Article 9 provides two alternatives to physical removal.

• Rendering equipment unusable, § 9-609(a)(2). After default, a secured party may, without removal, render equipment unusable and dispose of collateral on the debtor's premises under § 9-610. This option is subject to the same breach-of-the-peace limit in § 9-609(b).
• Assembly of collateral, § 9-609(c). If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available at a place designated by the secured party that is reasonably convenient to both parties. A debtor that refuses may be compelled to comply through judicial process.

The principal Illinois judicial remedy for recovering tangible collateral is replevin under 735 ILCS 5/19-101 et seq. A replevin action seeks possession of personal property that is wrongfully detained. Illinois replevin requires a verified complaint satisfying 735 ILCS 5/19-104; § 19-105 generally requires five days' written notice of a hearing, subject to the exceptions and waiver rules in §§ 19-105 and 19-106; and § 19-112 requires a bond with sufficient security in double the property's value before service of the replevin order. A replevin claim can be combined with a claim on the debt and, where applicable, the guaranty.

Disposition: Every Aspect Must Be Commercially Reasonable

Under § 9-610(a), after default a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing. Under § 9-610(b), every aspect of the disposition, including the method, manner, time, place, and other terms, must be commercially reasonable. If it is, the secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms.

Article 9 does not define public disposition. A disposition that is not public is a private disposition, such as a negotiated sale to a dealer or a sale through a broker. Factors that bear on commercial reasonableness include the following.

• Marketing and advertising suited to the buyers who actually deal in that type of collateral
• Timing that allows adequate exposure without unreasonable delay or loss of value
• Reasonable preparation, storage, and insurance of the collateral before sale
• A sale venue, such as an auction house, dealer network, or online platform, appropriate to the collateral
• A written record of the process, the offers received, and the reasons for the method chosen

Price alone does not decide the question. Under § 9-627(a), the fact that a greater amount could have been obtained by a disposition at a different time or in a different method is not of itself sufficient to preclude the secured party from establishing commercial reasonableness. Under § 9-627(b), a disposition is commercially reasonable if it is made in the usual manner on any recognized market, at the price current in any recognized market at the time of disposition, or otherwise in conformity with reasonable commercial practices among dealers in the type of property. Under § 9-627(c), a collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved in a judicial proceeding or by a bona fide creditors' committee, a representative of creditors, or an assignee for the benefit of creditors. Under § 9-627(d), such approval is not required.

Under § 9-610(c), the secured party may purchase collateral at a public disposition. It may purchase at a private disposition only if the collateral is of a kind customarily sold on a recognized market or is the subject of widely distributed standard price quotations. Under § 9-610(d), a contract for disposition includes the warranties relating to title, possession, quiet enjoyment, and the like that by operation of law accompany a voluntary disposition of property of that kind. Under § 9-610(e) and (f), the secured party may disclaim or modify those warranties, and a record is sufficient to disclaim them if it states "There is no warranty relating to title, possession, quiet enjoyment, or the like in this disposition" or uses words of similar import.

Notification of Disposition: Recipients, Timing, and Contents

Under § 9-611(b), subject to subsection (d), a secured party disposing of collateral under § 9-610 must send a reasonable signed notification of disposition. Under § 9-611(c), in a transaction involving collateral other than consumer goods, the notification generally must be sent to the following persons.

• The debtor
• Any secondary obligor, such as a guarantor
• Any other person from which the secured party received a signed notification of a claim of an interest in the collateral before the notification date
• Any other secured party or lienholder that, 10 days before the notification date, held a security interest or lien perfected by a financing statement that identified the collateral, was indexed under the debtor's name, and was filed in the proper office
• Any other secured party that, 10 days before the notification date, held a security interest perfected by compliance with a statute, regulation, or treaty described in § 9-311(a), such as a certificate-of-title statute

Under § 9-611(d), notification is not required if the collateral is perishable, threatens to decline speedily in value, or is of a type customarily sold on a recognized market. Under § 9-611(e), the § 9-611(c)(3)(B) duty is satisfied if the secured party requests the specified filing information in a commercially reasonable manner 20 to 30 days before the notification date and, before that date, either receives no response or sends a signed disposition notification to each secured party or other lienholder identified in the response whose financing statement covers the collateral. Secured parties disclosed in a timely search should be notified even when their priority is believed to be junior.

Under § 9-612(a), whether a notification is sent within a reasonable time is generally a question of fact. Under § 9-612(b), in a transaction other than a consumer transaction, a notification sent after default and 10 days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time. In a transaction other than a consumer transaction, satisfying § 9-612(b) establishes reasonable notification timing; the disposition must still satisfy the separate commercial-reasonableness requirements of § 9-610(b).

Section 9-611 requires that the notification be sent, and the secured party should be able to prove that it was. The notice should go to each recipient at the address required by the loan documents and at any other address the secured party has reason to believe is current, by a method that produces a record of delivery or attempted delivery. If the sale is postponed or the method changes, the secured party should consider whether a new or supplemental notification is needed before the new date. A copy of each notice, the mailing or delivery records, and the search results used to build the recipient list should be kept in the enforcement file, because those records are the first evidence a court will ask for if compliance is later placed in issue.

Under § 9-613(a)(1), the notification is sufficient if it describes the debtor and the secured party, describes the collateral, states the method of intended disposition, states that the debtor is entitled to an accounting of the unpaid indebtedness and the charge, if any, for an accounting, and states the time and place of a public disposition or the time after which any other disposition is to be made. Under § 9-613(a)(2), sufficiency when required information is missing is a question of fact; under § 9-613(a)(3), substantially complete contents remain sufficient despite additional information or minor errors that are not seriously misleading. Section 9-613(a)(5) supplies a form that provides sufficient information when completed in accordance with the applicable statutory instructions. Guarantors are entitled to the same notification, and a defective notice to a guarantor can impair the claim against that guarantor; see personal guaranty enforcement for the guaranty side of the file.

Application of Proceeds, Surplus, and Deficiency

Under § 9-615(a), the secured party applies the cash proceeds of a disposition in the following order.

• 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
• The satisfaction of the obligations secured by the security interest under which the disposition is made
• The satisfaction of subordinate secured obligations or liens upon timely signed demand, subject to § 9-615(a)(3)(B) and (b), followed by payment to a consignor upon timely signed demand under § 9-615(a)(4)

Under § 9-615(d), after the required applications, the secured party must account to and pay the debtor any surplus unless § 9-615(a)(4) requires payment to a consignor, and the obligor is liable for a deficiency subject to the applicable compliance and deficiency rules. Under § 9-615(e), if the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes, the debtor is not entitled to any surplus and the obligor is not liable for any deficiency. Under Illinois § 9-615(f), if the transferee is the secured party, a related person, or a secondary obligor and the proceeds are significantly below the statutory range, surplus or deficiency is calculated using the proceeds a complying forced sale without reserve to a willing buyer outside those categories would have produced.

In a commercial transaction, a deficiency claim depends on compliance. Illinois § 9-626 adopts the rebuttable-presumption rules in an action in which the amount of a deficiency or surplus is in issue; the enacted Illinois section does not contain the model UCC's consumer-transaction exclusion.

• The secured party need not prove compliance with Part 6 unless the debtor or a secondary obligor places it in issue
• If compliance is placed in issue, the secured party has the burden of establishing that its collection, enforcement, disposition, or acceptance complied
• If the secured party fails to prove compliance, the deficiency is limited to the amount by which the secured obligation, expenses, and attorney's fees exceed the greater of the proceeds actually realized or the proceeds that a complying disposition would have realized
• The amount that a complying disposition would have realized is presumed to equal the secured obligation, expenses, and attorney's fees, unless the secured party proves that the amount is less

The presumption can eliminate a deficiency entirely. A secured party that expects to pursue the debtor or a guarantor for the shortfall after a sale should keep a complete record of default, notification, marketing, bids, and application of proceeds. When a deficiency remains after the sale, the collections and recovery practice addresses suit against the debtor and guarantors and enforcement of the resulting judgment.

Acceptance, Redemption, Guarantors, and Liability for Noncompliance

Instead of selling, a secured party may propose to keep the collateral in full or partial satisfaction of the obligation, often called strict foreclosure. Under § 9-620(a) and (c), acceptance in partial satisfaction requires the debtor's agreement to the terms in a record signed after default. For full satisfaction, the debtor must either agree in a record signed after default or receive an after-default proposal for full satisfaction that is unconditional except for permitted preservation or maintenance conditions, with no signed debtor objection received within 20 days after sending; the secured party must also satisfy the other applicable conditions in § 9-620. Under § 9-621, the proposal must go to persons whose signed claims were received before debtor consent, to the qualifying filed and non-UCC-perfected interest holders measured 10 days before debtor consent, and, for partial satisfaction, to every secondary obligor. Under § 9-620(a)(2) and (d), a timely signed objection from a required proposal recipient or another qualifying subordinate interest holder prevents acceptance. Under § 9-622(a), acceptance discharges the obligation to the extent consented to, transfers the debtor's rights in the collateral, discharges the accepting security interest or agricultural lien and subordinate security interests or liens, and terminates other subordinate interests.

Under § 9-623, the debtor, any secondary obligor, or any other secured party or lienholder may redeem the collateral by tendering fulfillment of all obligations it secures, together with the reasonable expenses and attorney's fees described in § 9-615(a)(1). Redemption may occur at any time before the secured party has collected the collateral under § 9-607, disposed of it or entered into a contract for its disposition under § 9-610, or accepted it under § 9-622.

Guarantors and other secondary obligors receive much of the same protection as the debtor. The rules listed in § 9-602 run to obligors as well as debtors, § 9-611(c) requires that secondary obligors receive notification of disposition, and § 9-624 limits their waivers to agreements signed after default. Enforcement against a guarantor therefore depends on the same compliance record as enforcement against the debtor.

Noncompliance carries direct remedies. Under § 9-625(a), if it is established that a secured party is not proceeding in accordance with Article 9, a court may order or restrain collection, enforcement, or disposition on appropriate terms. Under § 9-625(b), a person is liable for damages in the amount of any loss caused by a failure to comply. Under § 9-625(d), a debtor whose deficiency is eliminated or reduced under § 9-626 generally may recover damages under § 9-625(b) only for the loss of any surplus. Each step of enforcement, from the default letter to the final accounting, should be planned with those consequences in view.