§ 5.1Caveats Regarding Self-Help Repossession
This discussion and the forms in this chapter should be used only as a starting point for research on each transaction. Laws relating to contracts, waivers, default, acceleration, repossession, and related topics are scattered throughout overlapping state and federal statutes, rules of court, case law, and administrative opinions. The requirements for an action such as giving notice of default, for instance, may vary depending on the nature of the underlying transaction and the applicable law. The attorney should always research each case separately, keeping in mind that the law relating to debtors’ and creditors’ rights changes rapidly.
The applicable contract should be read carefully. Many rights and obligations in a secured transaction can be altered or waived by contract. Notice provisions after default or before disposition of collateral are particularly subject to amendment by contract, although revised chapter 9 of the Texas Business and Commerce Code places substantial limitations on waiver and variance of rights and duties. See Tex. Bus. & Com. Code §§ 9.602, 9.624. On the other hand, the parties may determine by agreement the standards measuring the fulfillment of the rights of a debtor or obligor and the duties of a secured party under any rule stated in section 9.602 if the standards are not “manifestly unreasonable.” Tex. Bus. & Com. Code § 9.603(a). The parties may not agree to determine the standards concerning the duty to refrain from breaching the peace under Tex. Bus. & Com. Code § 9.609. Tex. Bus. & Com. Code § 9.603(b).
Attorneys may be debt collectors under both the federal Fair Debt Collection Practices Act and the Texas Debt Collection Practices Act and therefore should comply with the provisions of both. See sections 2.11 through 2.36 in this manual.
Most self-help repossessions are based on security agreements arising under Uniform Commercial Code article 9. The principal provision in chapter 9 governing repossession is Tex. Bus. & Com. Code § 9.609. Under this section, after default a secured party may take possession of the collateral and, without removal, may render equipment unusable and dispose of collateral on a debtor’s premises under section 9.610. Tex. Bus. & Com. Code § 9.609(a). The secured party may repossess the collateral pursuant to judicial process or may do so without judicial process as long as he proceeds without breaching the peace. Tex. Bus. & Com. Code § 9.609(b). Finally, if so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party that is reasonably convenient to both parties. Tex. Bus. & Com. Code § 9.609(c).
The phrase without breach of the peace is not defined in chapter 9, and its interpretation is left to the courts. However, there is no reason to think that the phrase means anything different under the revisions to chapter 9 than it did before July 1, 2001, and presumably prior judicial interpretations of the phrase are still good law.
It is clear from the official comments to the section that actions of third-party contractors, such as professional repossession firms, are subject to the same requirements concerning breach of the peace. Section 9.609 confirms and codifies the rule of such cases as MBank El Paso, N.A. v. Sanchez, 836 S.W.2d 151 (Tex. 1992). Also, the use of law-enforcement officers who are not acting under the judicial process to repossess property is not authorized by section 9.609 and may involve a breach of the peace, as some cases have held under prior law. For additional discussion of self-help repossession, see sections 5.21 through 5.23 below.
Section 9.609 permits the sale of the collateral on the debtor’s premises, but, unlike prior Code section 9.503, section 9.609 expressly conditions this right on the debtor’s (or obligor’s) default. On the other hand, a debtor and secured party are free to agree that the secured party may require the debtor to assemble collateral and make it available from time to time at a place that the secured party designates, and such agreements are valid whether or not they are conditioned on the debtor’s or obligor’s default. Tex. Bus. & Com. Code § 9.609(c).
Unsecured parties may have rights of self-help repossession. They include—
1.sellers of goods sold to an insolvent buyer, including a buyer who fails to pay for the goods (see section 5.51 below);
2.lessors of goods leased to lessees who default on the lease (see section 5.52 below); and
3.repairers of motor vehicles, motorboats, vessels, or outboard motors (see section 7.2 in this manual).
The issue of due process has frequently been raised in self-help cases. The Fifth Circuit and other circuits have held that repossession under Uniform Commercial Code article 9 is free from federal due-process scrutiny in a civil rights action, for lack of requisite state action. Calderon v. United Furniture Co., 505 F.2d 950 (5th Cir. 1974).
§ 5.4Considerations in Choosing Self-Help Repossession or Judicial Foreclosure
Breach of Peace: Self-help repossession cannot be used if the repossession results in a breach of the peace. Tex. Bus. & Com. Code § 9.609(b). For a discussion of breach of the peace, see section 5.2 above and sections 5.21 and 5.23 below.
Perishable Collateral: If the collateral is rapidly deteriorating or its value is diminishing, it may be quicker or more effective to file suit, obtain a writ of sequestration, and then hold an emergency sale. Care must be taken in sequestering and disposing of collateral. For a discussion of sequestration, see sections 8.16 through 8.19 in this manual.
Disposition of Collateral and Deficiency: The secured creditor is put to an election regarding the repossessed collateral; he may sell it or retain it in complete satisfaction of the debt. Tex. Bus. & Com. Code §§ 9.610, 9.622; Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769, 771 (Tex. 1982); Knight v. General Motors Acceptance Corp., 728 S.W.2d 480, 483 (Tex. App.—Fort Worth 1987, no writ). See sections 5.32 through 5.38 below regarding sale or disposition of the collateral and section 5.39 regarding retention of collateral in satisfaction of the debt.
Expense and Time: Self-help repossession is usually less expensive and faster than a judicial foreclosure proceeding.
[Sections 5.5 through 5.10 are reserved for expansion.]
II. Security Interest and Agreement
Except as described in section 5.2 above, a creditor’s right to repossess depends on whether his security interest has attached to the collateral. Attachment has three elements:
1.A valid security agreement must exist.
2.Value must be given by the creditor.
3.The debtor must have rights in the collateral.
The security agreement must be in writing, must be signed by the debtor, and must describe the collateral. Or, in lieu of a signed writing, the debtor must have “authenticated” the security agreement, a term that would include an electronic signature of an electronic document. Tex. Bus. & Com. Code §§ 9.102(a)(7), 9.203(b)(3)(A). See also section 14.28:1 in this manual.
Under the revised chapter 9, effective July 1, 2001, most security interests are perfected by filing a financing statement with (1) the secretary of state or (2) another designated central filing office of the state in which the debtor is located. Tex. Bus. & Com. Code § 9.301(1). See Tex. Bus. & Com. Code § 9.307 and the discussion in section 3.22 in this manual concerning how to determine the debtor’s location for purposes of chapter 9.
Most security interests are perfected by filing a financing statement with the secretary of state of the state in which the collateral is located. Perfection establishes the priority of competing rights in the collateral. Perfection is not required to establish a valid security interest and is therefore not required to repossess. Gulf Oil Co. v. First National Bank of Hereford, 503 S.W.2d 300, 307 (Tex. Civ. App.—Amarillo 1973, no writ). Failure to perfect, however, may give away valuable rights to others claiming an interest in the collateral. A full discussion of the various means of perfection is beyond the scope of this manual, but note that taking possession or control, or the purchase of certain types of collateral (for example, instruments or investment property), may permit a later secured party or a purchaser to take priority over an earlier secured party who merely filed a financing statement. See Tex. Bus. & Com. Code §§ 9.312 cmt. 2, 9.328(1). Certain types of security interests are automatically perfected on attachment. See Tex. Bus. & Com. Code § 9.309.
§ 5.11:3Priorities between Conflicting Claims in Collateral
Unperfected Creditor vs. Unperfected Creditor: If no secured creditor perfects, the first interest to attach has priority. Tex. Bus. & Com. Code § 9.322(a)(3). In this instance, the creditor should perfect immediately if possible; a junior lienholder can jump ahead by perfection.
Perfected Creditor vs. Unperfected Creditor: The perfected security interest has priority, even if that creditor has actual knowledge of a prior attaching security interest. Tex. Bus. & Com. Code § 9.322(a)(2).
Perfected Creditor vs. Perfected Creditor: Conflicting perfected security interests rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest is first perfected, if there is no period thereafter during which there is neither filing nor perfection. Tex. Bus. & Com. Code § 9.322(a)(1). “Filing” refers to the filing of an effective financing statement. See Tex. Bus. & Com. Code § 9.310. “Perfection” refers to the acquisition of a perfected security interest, that is, one that has attached and as to which any required perfection step has been taken. See Tex. Bus. & Com. Code § 9.308. Certain security interests are automatically perfected on attachment. See Tex. Bus. & Com. Code §§ 9.308, 9.309.
Purchase-Money Security Interest: A purchase-money security interest (PMSI) in collateral other than inventory or livestock has priority over a competing interest in the same collateral or its proceeds if the creditor perfects at the time the debtor receives possession of the collateral or within twenty days thereafter. Tex. Bus. & Com. Code § 9.324(a). See also Tex. Bus. & Com. Code § 9.324(b) regarding inventory. The provisions of revised chapter 9 on purchase-money security interests have expanded the definition of a PMSI somewhat and made the preferred status of a PMSI, in transactions other than consumer transactions at least, easier to maintain than it was before. Tex. Bus. & Com. Code § 9.103. Note that in a transaction other than a consumer-goods transaction, a secured party claiming a PMSI has the burden of establishing the extent to which the security interest is a PMSI. Tex. Bus. & Com. Code § 9.103(g).
A detailed discussion of the new definitions and the new priority rules between competing PMSIs is beyond the scope of this manual; see, however, sections 9.103 and 9.324 and the official comments to the Texas Business and Commerce Code for the rules governing priority of a PMSI.
§ 5.11:4Client’s Financing Statement
To determine whether a financing statement has been filed with the Texas secretary of state, the attorney should call the secretary of state’s office (512-475-2703), give the name of the debtor, and request a search or should inspect the client’s financing statement and determine whether the secretary of state’s filing stamp (indicating the date and place of filing) is shown in the upper right corner of the statement. Alternatively, UCC filings may be examined on the Texas secretary of state’s website, SOS Direct, at http://direct.sos.state.tx.us.
For a form UCC1 financing statement, see form 5-1 in this chapter. See section 3.22 regarding description of the collateral and financing statement searches.
§ 5.11:5Prior Financing Statement
When checking with the secretary of state’s office to see if a client’s financing statement has been filed, the attorney should also determine whether there is any other financing statement covering the same collateral on file under the debtor’s name. Tex. Bus. & Com. Code §§ 9.308–.317, 9.320–.322, 9.324.
Note that if the debtor is a registered organization located outside Texas, a search may have to be done in both the debtor’s domiciliary state and in Texas or possibly other jurisdictions because of the change in filing rules in chapter 9 after the revisions. See section 3.22 in this manual.
§ 5.11:6Filing Financing Statement
A financing statement (form 5-1 in this chapter) should be filed with the Texas secretary of state or the appropriate county clerk, depending on the nature of the collateral. Under the revisions to chapter 9 of the Texas Business and Commerce Code, local filings are required only for as-extracted collateral (such as oil, gas, or other minerals (defined by Tex. Bus. & Com. Code § 9.102(a)(6))), timber to be cut, or fixtures. Tex. Bus. & Com. Code § 9.501. The local filing office is the recording office for the related real property. Additional debtors’ names and nonstandard forms require additional fees; the filing office should be contacted to ascertain current fees.
§ 5.12Agreement Regarding Self-Help Repossession
On default, a secured party has the right to take possession of the collateral unless otherwise agreed. Tex. Bus. & Com. Code § 9.609. It is important, therefore, to determine whether there is any clause in the security agreement prohibiting self-help repossession by the creditor. Most agreements are creditor-oriented and do not contain this prohibition.
§ 5.13Agreement Regarding Assembly of Collateral by Debtor
A security agreement may contain a provision requiring the debtor, on demand, to make the collateral available to the creditor at a place designated by the creditor that is reasonably convenient to both parties. In addition, the creditor may, without removal of equipment, render it unusable and may thereafter dispose of it on the debtor’s premises. Tex. Bus. & Com. Code § 9.609(a)(2).
Rendering equipment unusable and disposing of it on the debtor’s premises allows the creditor to avoid the expense of removal and storage pending resale. Tex. Bus. & Com. Code § 9.609. For a letter requiring the debtor to assemble the collateral for the creditor at a mutually convenient location, see form 5-2 in this chapter. If the debtor refuses to comply with the creditor’s request, the creditor’s remedies include self-help repossession or judicial action. Failure to deliver possession to the secured party may also constitute the criminal offense of hindering a secured creditor. See Tex. Penal Code § 32.33(c), discussed at section 6.27 in this manual. Although ethical considerations are beyond the scope of this manual, note that pursuing criminal activity may implicate serious ethical concerns pursuant to rule 4.04(b) of the Texas Rules of Disciplinary Conduct if not handled properly and kept separate from the civil proceeding.
[Sections 5.14 through 5.20 are reserved for expansion.]
§ 5.21:1Requirement of No Breach of Peace
Unless otherwise agreed, a secured party may repossess collateral without judicial process if repossession can be achieved without a breach of the peace. Tex. Bus. & Com. Code § 9.609. The creditor’s duty not to breach the peace is not delegable, even if the repossession is performed by an independent contractor. MBank El Paso, N.A. v. Sanchez, 836 S.W.2d 151, 153 (Tex. 1992).
§ 5.21:2Contractual Provisions
Texas courts generally uphold the legality of consumer contract clauses authorizing repossession of collateral wherever it may be found with free right of entry. See, e.g., Woolard v. Texas Motors, Inc., 616 S.W.2d 706, 709 (Tex. Civ. App.—Fort Worth 1981, no writ). Most courts have construed this provision as one of limitation on the creditor that encourages peaceful repossession without trespass. The Supreme Court of Texas has not addressed this specific issue, but in dictum it repeated a remark in Woolard that such a provision would be unlawful if it read, “Seller shall have the right to repossess the property wherever the same may be found.” Gonzalez v. Gainan’s Chevrolet City, Inc., 690 S.W.2d 885, 888 (Tex. 1985). A security agreement may not authorize a breach of the peace. Tex. Fin. Code § 348.411.
§ 5.21:3Examples of Breach of Peace
The following acts have been held to be a breach of the peace:
1.Breaking into a garage to repossess an automobile. A.B. Lewis Co. v. Robinson, 339 S.W.2d 731, 735 (Tex. Civ. App.—Houston 1960, no writ).
2.Picking the lock of a building on business premises to obtain possession of equipment stored therein (the premises were owned by the creditor and leased to the debtor; the debtor was in default under the lease but had not been notified that the lease had been terminated). Gulf Oil Corp. v. Smithey, 426 S.W.2d 262 (Tex. Civ. App.—Dallas 1968, writ dism’d).
3.Gaining entry to a home peaceably and refusing to leave after being ordered to do so by the debtors and continuing to search for the collateral, provoking a fight, and causing an assault and a battery. Godwin v. Stanley, 331 S.W.2d 341 (Tex. Civ. App.—Amarillo 1959, writ ref’d n.r.e.).
4.Intimidating the debtor into giving the creditor the keys to the mortgaged automobile and then requiring the debtor to leave the automobile. Watson v. Hernandez, 374 S.W.2d 326, 328 (Tex. Civ. App.—Amarillo 1963, writ dism’d).
5.Towing an automobile at high speed with the owner inside, then parking the car in a padlocked storage yard where a Doberman pinscher guard dog was running loose. MBank El Paso, N.A. v. Sanchez, 836 S.W.2d 151, 152–54 (Tex. 1992).
6.Unreasonably damaging the collateral. Giese v. NCNB Texas Forney Banking Center, 881 S.W.2d 776, 783 (Tex. App.—Dallas 1994, no writ).
7.Damaging the garage in which the collateral was kept. Meyers v. Ford Motor Credit Co., 619 S.W.2d 572, 574 (Tex. Civ. App.—Houston [14th Dist.] 1981, no writ).
§ 5.21:4Examples of No Breach of Peace
The following acts have been held not to constitute a breach of the peace:
1.Repossessing a car from a public street or other property when the debtor was not present. Ford Motor Credit Co. v. Cole, 503 S.W.2d 853, 855 (Tex. Civ. App.—Fort Worth 1973, writ dism’d).
2.Repossessing a car from a service station where the debtor had taken it for repairs, with the creditor allegedly lying by telling the service station employee he had the debtor’s permission to take it. Thompson v. Ford Motor Credit Co., 550 F.2d 256 (5th Cir. 1977).
Courts routinely sanction self-help repossessions if the creditor has towed the debtor’s mortgaged car off the public streets. If, however, the property is in the debtor’s actual or constructive possession, as when it is inside his home or garage, the creditor should request the debtor to relinquish possession; if the debtor refuses, the creditor should resort to court action.
If the secured party anticipates difficulty or a breach of the peace, he may obtain judicial process to aid in obtaining possession. Unicut, Inc. v. Texas Commerce Bank-Chemical, 704 S.W.2d 442, 445 (Tex. App.—Houston [14th Dist.] 1986, writ ref’d n.r.e.). Without removal, a secured party may render equipment unusable and may dispose of collateral located on the debtor’s premises. Tex. Bus. & Com. Code § 9.609(a)(2). The secured party may take any permitted action or combination of actions. See section 5.21:6 below for caveats about prejudgment remedies. All actions in connection with disposition must be taken in a commercially reasonable manner. Tex. Bus. & Com. Code § 9.610(b). Commercial reasonableness is discussed at section 5.32 below.
§ 5.21:6Using Prejudgment Judicial Remedies as Aid to Self-Help Repossession
The attorney should exercise caution in using prejudgment judicial remedies such as sequestration and attachment as aids to obtaining possession of the collateral. A creditor’s actions in sequestering the collateral, obtaining possession through a plaintiff’s replevy bond, voluntarily dismissing the lawsuit, and then foreclosing on the collateral through power of sale amounted to an abuse of process, leaving the creditor liable for damages for wrongful sequestration. Burnett Trailers, Inc. v. Polson, 387 S.W.2d 692, 694–95 (Tex. Civ. App.—San Antonio 1965, writ ref’d n.r.e.); see also American Lease Plan v. Ben-Kro Corp., 508 S.W.2d 937, 943–44 (Tex. Civ. App.—Houston [1st Dist.] 1974, writ ref’d n.r.e.). Tex. R. Civ. P. 698 requires that a bond for a writ of sequestration must be conditioned on the applicant’s prosecuting the suit to effect completion. Using a writ of sequestration to secure the property and then attempting to nonsuit would be grounds for forfeiture of the bond. See section 8.2 in this manual regarding garnishment, sequestration, attachment, and injunction.
§ 5.22Conversion of Nonsecured Property
During repossession, a creditor may inadvertently take possession of personal property in which the creditor does not have a security interest. For example, he may unknowingly take possession of tools or other items in the trunk of a car being repossessed. In such a case, the creditor must notify the debtor, within fifteen days of discovering the property, of the debtor’s rights to identify and claim the property at a reasonable time before the thirty-first day after the date notice is given. The notice must also tell the debtor where the property can be reclaimed. If the debtor fails to reclaim the property, the creditor may either keep it or dispose of it in a reasonable manner and distribute the proceeds according to applicable law. Tex. Fin. Code § 348.407.
The parties cannot contract to exempt the secured party from liability if the debtor’s unsecured property is converted by the creditor after repossession. Such a contract is unenforceable as against public policy. Ford Motor Credit Co. v. Cole, 503 S.W.2d 853, 856 (Tex. Civ. App.—Fort Worth 1973, writ dism’d).
§ 5.23Practical Considerations in Self-Help Repossession
The secured party has a nondelegable duty to effect self-help repossession without a breach of the peace and may be held liable for the acts committed during self-help repossession by an independent contractor such as a towing company. MBank El Paso, N.A. v. Sanchez, 836 S.W.2d 151, 152–54 (Tex. 1992). The creditor and his attorney should exercise extreme caution in self-help repossession. A creditor may be held liable for his own or his attorney’s conduct in repossessing property. Damages are potentially severe. See Southwestern Bell Telephone Co. v. Wilson, 768 S.W.2d 755, 758–59 (Tex. App.—Corpus Christi 1988, writ denied) (creditor liable for attorney’s tortious conduct in executing on judgment).
The following is a nonexclusive list of “do’s” and “don’t’s” for creditors attempting repossession.
DO
•make sure that there is a valid security interest in the collateral—in other words, that there is a right to repossess.
•make sure that there is no security interest that has priority over the one being enforced.
•review the contract provisions to make certain that they are in compliance with current statutes and case law. If necessary, send notice to correct a violation of the Texas Finance Code.
•ensure that the repossession procedure complies with any specific requirement of the security agreement—for example, a twenty-day notice before sale.
•make sure that the proper notices have been sent to the debtor and that the default permits repossession.
•make sure that no damage is done to other property in the debtor’s possession when the collateral is removed.
•protect property belonging to third parties.
•be sure the correct property is repossessed.
•cease all repossession efforts at the first sign of resistance to the repossession; let the property be recovered through the courts.
•immediately notify the debtor of any items of personal property other than the repossessed collateral that were inadvertently taken during the repossession and return the property immediately on demand.
DON’T
•make any show of force or threat, or do anything that might be interpreted as a threat to the debtor. Even an implied threat can give rise to substantial liability in a suit by the debtor against the repossessor. This is true even if the debt is valid.
•use law enforcement officers, whether on or off duty or in or out of uniform, to assist in the repossession. Don’t even bring them to the repossession.
•try to obtain the collateral if the debtor offers any resistance, including mere verbal resistance.
•enter a building or enclosed area through an entrance that is closed or locked unless the debtor or his authorized agent has granted permission.
•use more than one person in making the actual repossession, speak in a gruff voice, or use harsh language. Intimidating the debtor, even through implication, can incur liability.
•do anything that can be considered a breach of the peace.
•threaten the debtor in any manner, such as telling him his credit rating will be ruined or he will be put in bankruptcy or in jail if he does not allow the repossession.
[Sections 5.24 through 5.30 are reserved for expansion.]
Under most circumstances, reasonable notification of the sale must be given to—
1.the debtor;
2.any secondary obligor;
3.any other person from whom the secured party has received, before the notification date, an authenticated notification of a claim of an interest in the collateral; and,
4.if the collateral is anything other than consumer goods, any secured party that has perfected its security interest under the Texas Business and Commerce Code or under another statute, regulation, or treaty (as described in Code section 9.311).
Tex. Bus. & Com. Code § 9.611(b). Exceptions are set out in section 5.31:3 below. The careful secured party will avail himself of the safe harbor offered by Tex. Bus. & Com. Code § 9.611(e), by requesting in a commercially reasonable manner information concerning financing statements indexed under the debtor’s name in the office indicated in Tex. Bus. & Com. Code § 9.611(c)(3)(B). This must be done not later than twenty days or earlier than thirty days before the notification date. The secured party should then send authenticated notifications of disposition to each secured party or other lienholder named in that response whose financing statement covers the collateral. Tex. Bus. & Com. Code § 9.611(b)–(c). The failure to order the search does not necessarily mean that the notification was not done in a commercially reasonable manner, but, considering the relative ease and low expense of doing so in most cases, there is usually no reason not to. Otherwise, the secured party takes the risk that his information about other claimants of an interest in the collateral may be inaccurate. Any secured party or lienholder of record who (1) is not notified of the disposition but whose name would have been found if the search had been ordered or (2) has sent a prior authenticated notification of a claim of an interest in the collateral and who does not receive an authenticated notification of disposition has the right to recover any loss resulting from the failure to receive notification. See Tex. Bus. & Com. Code § 9.625(b).
If the search is ordered, but the results are not received in time to be included in the notification, the secured party has discharged his duty under section 9.611(c) of the Texas Business and Commerce Code notwithstanding that he did not send a notice to a secured party of record whose name was on the search results when finally obtained. Tex. Bus. & Com. Code § 9.611(e)(2). Note that the failure to receive the search results before the notification date has no effect on the secured party’s duty to notify a person from whom an authenticated notification of a claim of an interest in the collateral has been received before the notification date. See Tex. Bus. & Com. Code § 9.611(c)(3).
Although earlier Texas cases held that oral notice was not necessarily unreasonable and that the medium of notice was only one factor in determining whether notice is reasonable, Tex. Bus. & Com. Code § 9.611(a)(1) requires that an “authenticated notice of disposition” be sent. This means that at the very least, an electronic notification complying with the definition of “authenticate” in Tex. Bus. & Com. Code § 9.102(a)(7) must be sent. See Tex. Bus. & Com. Code § 9.611 UCC cmt. 5.
Note: The following cases permitting oral notice of disposition have been superseded by Tex. Bus. & Com. Code § 9.611(b): Beltran v. Groos Bank, N.A., 755 S.W.2d 944, 945–47 (Tex. App.—San Antonio 1988, no writ), and MBank Dallas N.A. v. Sunbelt Manufacturing, Inc., 710 S.W.2d 633, 635–36 (Tex. App.—Dallas 1986, writ ref’d n.r.e.).
It is important to understand that section 9.611 no longer allows the disposing secured party to remain passive, sending notice only to those parties that have contacted him. To ensure that notice is sent to all required parties, the foreclosing creditor not only must order a UCC search report listing financing statements filed against the debtor but also must be familiar with other means of perfection and order searches from appropriate recording officers. See Tex. Bus. & Com. Code §§ 9.701–.708 for the provisions governing the transition period that took place from July 1, 2001, until July 1, 2006.
§ 5.31:2Consequences of Improper Notice
Proper notice is a prerequisite to any subsequent deficiency suit. Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769, 772 (Tex. 1982); see also Wright v. Interfirst Bank Tyler, N.A., 746 S.W.2d 874, 877–78 (Tex. App.—Tyler 1988, no writ); Knight v. General Motors Acceptance Corp., 728 S.W.2d 480, 483 (Tex. App.—Fort Worth 1987, no writ); Gentry v. Highlands State Bank, 633 S.W.2d 590, 591 (Tex. App.—Houston [14th Dist.] 1982, writ ref’d). The Tanenbaum rule is one of election of remedies, not forfeiture, and has even been applied against the Federal Deposit Insurance Corporation and its successors. See, e.g., FDIC v. Payne, 973 F.2d 403, 410 (5th Cir. 1992); In re Norriss Bros. Lumber Co., 133 B.R. 599 (N.D. Tex. 1991). Under Tex. Bus. & Com. Code § 9.625, the failure to give proper notice can also subject the secured party to injunctive relief, damages, and penalties. See section 17.50 in this manual. For a more complete discussion of deficiency suits, see section 14.29.
§ 5.31:3When Notice Not Required
Notice is not required if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold in a recognized market. Tex. Bus. & Com. Code § 9.611(d). A “recognized market” might be a stock or commodity market, in which sales involve items so similar that differences between individual items are nonexistent or immaterial, competition between buyers is not a primary factor in determining sale price, and prices paid for actual sales of comparable items are currently available by quotation. M.P. Crum Co. v. First Southwest Savings & Loan Ass’n, 704 S.W.2d 925, 927 (Tex. App.—Tyler 1986, no writ). Cars and trucks are not generally considered collateral of a type sold on such a recognized market. O’Neil v. Mack Trucks, Inc., 533 S.W.2d 832, 836 (Tex. Civ. App.—El Paso 1975), rev’d on other grounds, 542 S.W.2d 112 (Tex. 1976).
Notice is also not required if the creditor merely transfers his interest in the collateral and underlying loan and does not sell or dispose of the collateral itself. Hairgrove v. Cramer Financial Group, Inc., 895 S.W.2d 874, 875 (Tex. App.—Fort Worth 1995, writ denied).
In a case decided before the revisions to chapter 9 of the Texas Business and Commerce Code, if the debtor relinquishes the collateral to the creditor for an agreed-on sum to be credited against the debt, he is not entitled to notice of the sale or disposition of the collateral. Acuff v. Lamesa National Bank, 919 S.W.2d 154, 156–57 (Tex. App.—Eastland 1996, no writ). Several additional conditions have been imposed on the secured party’s acceptance of collateral in full or partial satisfaction of the secured debt by the revised chapter 9. See section 5.38 below.
§ 5.31:4Who Is Entitled to Notice
See Tex. Bus. & Com. Code § 9.611(b) and the discussion in section 5.31:1 above concerning notice. Much of the earlier case law on this subject is now codified in Code section 9.611.
§ 5.31:5Contents of Notice—Nonconsumer Transactions
The contents of reasonable notice are prescribed with particularity by Tex. Bus. & Com. Code § 9.613 for all types of transactions other than consumer-goods transactions. Under section 9.613, a notice of disposition is sufficient if it—
1.describes the debtor and the secured party;
2.describes the collateral to be disposed of;
3.states the method of disposition (for example, sale, lease, license, and so forth);
4.states that the debtor is entitled to an accounting of the unpaid debt for a stated fee; and
5.states the time and place of any public sale of the collateral or the time after which the collateral will be disposed of by another manner.
Tex. Bus. & Com. Code § 9.613.
The statute offers a model form; see form 5-3 in this chapter. Note that this notice may be used for either a public or a private sale.
Practice Note: The safest course in describing the collateral is to reproduce exactly the description from the security agreement or financing statement. Incorporating descriptions by references to documents that may be misplaced or unavailable later is risky.
The right to an accounting may carry a fee with it. Section 9.613 does not expressly reference or incorporate section 9.210, which treats the subject of requests for accounting, lists of collateral, or statements of account generally and which provides that a debtor is entitled without charge to one response to a request during any six-month period and allows the secured party to require payment of a charge, not exceeding $25, for each additional response.
A notice that substantially complies with the five requirements of section 9.613 is sufficient. Tex. Bus. & Com. Code § 9.613(3). But a creditor that departs from, negligently completes, or supplements the model form invites challenges to the propriety of his notice. Whether a notice that lacks one or more of the five requirements is nonetheless sufficient is a question of fact. Tex. Bus. & Com. Code § 9.613(2).
Practice Note: When in doubt about whether a transaction is a consumer or nonconsumer transaction, use the consumer notice found in Tex. Bus. & Com. Code § 9.614. See section 5.31:6 below.
§ 5.31:6Contents of Notice—Consumer-Goods Transactions
Unlike Tex. Bus. & Com. Code § 9.613, which provides that a notice is sufficient as long as the required information is provided and may be sufficient even if some information is missing, Tex. Bus. & Com. Code § 9.614 requires that a notice in a consumer-goods transaction contain all of the following:
1.a description of the debtor, the secured party, and the collateral that is being disposed of;
2.a description of the method of disposition;
3.a statement that the debtor is entitled to an accounting of the unpaid debt and the charge, if any, for the accounting;
4.the time and place of public sale or the time after which any other disposition is to be made;
5.a description of the recipient’s liability for any deficiency;
6.a telephone number from which the recipient can obtain the redemption price of the collateral; and
7.a telephone number or mailing ad dress from which the recipient can obtain additional information concerning the disposition and the obligation.
Section 9.614 also promulgates a model form; see form 5-4 in this chapter.
Practice Note: The model form found at Tex. Bus. & Com. Code § 9.614 must be strictly adhered to, more so than the notice in nonconsumer-goods transactions found at Tex. Bus. & Com. Code § 9.613. The absence of any required information from a notice under section 9.614 makes the notice insufficient as a matter of law. Tex. Bus. & Com. Code § 9.614 UCC cmt. 2.
The Fort Worth court of appeals held in a case decided before July 1, 2001, that if the note, security agreement, or other contract calls for notice of the time and place of a private sale to be given, the creditor must give notice even though the statute does not require it. Knight v. General Motors Acceptance Corp., 728 S.W.2d 480, 483 (Tex. App.—Fort Worth 1987, no writ). Presumably this case is still valid under the current law. The same is likely true of a holding that if the creditor notifies the debtor that a private sale will occur on or after a particular day but sells the collateral before the date stated, such notification is not reasonable. All Valley Acceptance Co. v. Durfey, 800 S.W.2d 672, 675–76 (Tex. App.—Austin 1990, writ denied).
§ 5.31:7When Notice May Be Waived
The debtor or a secondary obligor may waive notice “only by an agreement to that effect entered into and authenticated after default.” Tex. Bus. & Com. Code § 9.624(a). Previous Texas cases holding that oral waivers of notice and waivers by guarantors not in compliance with the statute were ineffective have been codified in the revised provisions. Standard or boilerplate clauses in which the debtor or a guarantor purports to waive notice of disposition of collateral, signed before default, have no validity in Texas. Tex. Bus. & Com. Code § 9.624(a).
§ 5.31:8Acceleration Accompanying Notice
An installment debt in default must be accelerated before the creditor can collect the unpaid principal not yet due. Without acceleration, the creditor can collect only past-due installments plus accumulated interest. Williamson v. Dunlap, 693 S.W.2d 373 (Tex. 1985). A defaulted secured debt should be accelerated before or at the same time as giving the notice of sale. See section 2.111 in this manual for a general discussion of acceleration.
To avoid a contention that the overall standard of commercial reasonableness was not met, a notice of default should be sent even if the security agreement contains a waiver of notice. For a discussion of what constitutes default and the procedure afterward, see section 14.27. See form 5-5 in this chapter for a letter giving notice of default and intent to accelerate and form 5-6 for a letter giving notice of acceleration.
§ 5.32Commercial Reasonableness of Sale
§ 5.32:1Requirement of Commercial Reasonableness
The secured party may dispose of the collateral by either public or private sale. In both instances, the Business and Commerce Code requires that the sale be conducted in a “commercially reasonable” manner. Tex. Bus. & Com. Code § 9.610(b). “Commercially reasonable,” however, is not defined, leaving the court and jury to judge all the circumstances of the sale after the fact. Whether the sale is conducted privately or publicly, the creditor should retain documentation of the details of the sale so that, if the debtor contests the sale’s commercial reasonableness, the creditor can substantiate his efforts.
The commercial reasonableness requirement is an implied covenant in all contracts governed by article 9 of the Uniform Commercial Code. Under prior law, breach of this covenant was treated as a breach of contract, and no punitive damages were recoverable. Texas National Bank v. Karnes, 717 S.W.2d 901, 903 (Tex. 1986). The revised chapter 9 expressly provides for actual damages, liquidated damages, and penalties. Tex. Bus. & Com. Code § 9.625. See the discussion in section 17.50 in this manual.
§ 5.32:2Choice of Kind of Sale
The creditor has broad choices regarding his handling of the collateral. He can dispose of it by public or private sale, in bulk or in lots, at any time or place and on any terms, as long as the sale is commercially reasonable. He may also elect to retain the collateral in satisfaction of the debt. Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769, 771–72 (Tex. 1982).
It is recommended that all public sales to dispose of collateral be advertised at least three times in a newspaper of general circulation in the geographical area in which the sale is to be conducted. See form 5-7.
§ 5.32:3Factors in Determining Commercial Reasonableness
The revised chapter 9 of the Texas Business and Commerce Code, like the prior version, does not define commercial reasonableness, although it does provide some safe harbors and some examples. Section 9.627 states that the fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or by 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. Tex. Bus. & Com. Code § 9.627(a). 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.
Tex. Bus. & Com. Code § 9.627(b). A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved in a judicial proceeding, by a bona fide creditors’ committee, by a representative of creditors, or by an assignee for the benefit of creditors. Tex. Bus. & Com. Code § 9.627(c). These approvals are not mandatory, however, and the failure to obtain them does not mean that the collection, enforcement, disposition, or acceptance is not commercially reasonable. Tex. Bus. & Com. Code § 9.627(d).
Some factors the courts have considered in determining whether a sale was commercially reasonable are—
1.general market demand for the type of goods in question at the time of the sale;
2.whether the creditor tried to obtain the best price for the collateral;
3.what type and how many advertisements or solicitations for bids were used by the creditor to notify the general public of the sale;
4.adequacy of the time provided for responding to the notice or advertisement before the sale occurred;
5.opportunity to inspect the goods;
6.the sale location’s accessibility to prospective purchasers and the demand for goods at that location;
7.the manner in which bids or purchase offers were made and accepted;
8.the cost of the sale;
9.the cost of reconditioning, rebuilding, or repairing the goods;
10.the price obtained at the sale and the later resale price (if resold); and
11.the fact that full market value is seldom obtained at forced sales.
Havins v. First National Bank of Paducah, 919 S.W.2d 177, 181 (Tex. App.—Amarillo 1996, no writ); Pruske v. National Bank of Commerce, 533 S.W.2d 931, 937 (Tex. Civ. App.—San Antonio 1976, no writ). The fact that the fair market value was not received at the sale or that a better price could have been obtained does not necessarily render the sale commercially unreasonable. Tex. Bus. & Com. Code § 9.627; Siboney Corp. v. Chicago Pneumatic Tool Co., 572 S.W.2d 4, 8 (Tex. Civ. App.—Houston [1st Dist.] 1978, writ ref’d n.r.e.).
§ 5.33Right to Redeem Collateral
At any time before the secured party has disposed of the collateral, entered into a contract for its disposition, or discharged the obligation by retaining the collateral in satisfaction of the debt, the debtor or any other secured party may redeem the collateral, unless otherwise agreed in writing after default. Redemption requires fulfilling all obligations secured by the collateral, paying the secured party’s expenses in retaking, holding, and preparing the collateral for disposition and arranging for a sale, and paying reasonable attorney’s fees and legal expenses to the extent provided in the contract and not prohibited by law. Tex. Bus. & Com. Code §§ 9.608(a)(1)(A), 9.615(a)(1), 9.623(b). It is clear that the right of redemption extends to nonpossessory collateral, such as accounts receivable, as well as possessory collateral, such as goods. Except in a consumer-goods transaction, a debtor or secondary obligor may waive the right to redeem collateral under section 9.623 only by an agreement to that effect entered into and authenticated after default. Tex. Bus. & Com. Code § 9.624(c). Otherwise, the right may not be waived at all. Tex. Bus. & Com. Code § 9.602(11).
§ 5.34Application of Proceeds of Sale
The proceeds of the sale are to be applied in the following order to—
1.the reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing, and, to the extent provided for in the agreement and not prohibited by law, the reasonable attorney’s fees and legal expenses incurred by the secured party;
2.the satisfaction of obligations of indebtedness secured by the security interest under which the disposition is made;
3.the satisfaction of obligations secured by any subordinate security interest in or other subordinate lien on the collateral if—
a.the secured party receives from the holder of a subordinate security interest or other lien an authenticated demand for proceeds before distribution of the proceeds is completed; and
b.in a case in which a consignor has an interest in the collateral, the subordinate security interest or other lien is senior to the interest of the consignor; and
4.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.
Tex. Bus. & Com. Code § 9.615(a).
If requested by a secured party, the holder of a subordinate security interest or other lien must seasonably furnish reasonable proof of his interest, and unless he does so, the secured party need not comply with his demand. Tex. Bus. & Com. Code § 9.615(b).
Practice Note: This hierarchy of application differs slightly from that prescribed in Tex. Bus. & Com. Code § 9.608, which applies to proceeds of collection (such as accounts receivable) or enforcement (such as a promissory note held as collateral), that is, proceeds of nonpossessory collateral.
If a surplus results from the sale of the collateral, the secured party must pay any surplus to the debtor. If the collateral sale leaves a deficiency, the obligor is liable for any deficiency. Tex. Bus. & Com. Code § 9.615(d). If the underlying transaction was a sale of accounts, chattel paper, payment intangibles or promissory notes, however, the debtor is not entitled to any surplus, and the obligor is not liable for any deficiency. Tex. Bus. & Com. Code §§ 9.608(b), 9.615(e). For discussion of the right to pursue a deficiency after applying the proceeds of a sale to the debt, see section 14.29 in this manual. See form 5-8 in this chapter for a letter giving notice of deficiency after sale.
§ 5.35UCC Notice Requirements to Guarantors
The revisions to chapter 9 of the Texas Business and Commerce Code define “obligor” to mean a person who, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral—
1.owes payment or other performance of the obligation;
2.has provided property other than the collateral to secure payment or other performance of the obligation; or
3.is otherwise accountable in whole or in part for payment or other performance of the obligation.
Tex. Bus. & Com. Code § 9.102(a)(60).
The term does not include issuers or nominated persons under a letter of credit. Tex. Bus. & Com. Code § 9.102(a)(60). The term “secondary obligor” is defined to mean an obligor to the extent that the obligor’s obligation is secondary or the obligor has a right of recourse with respect to an obligation secured by collateral against the debtor, another obligor, or property of either. Tex. Bus. & Com. Code § 9.102(a)(72).
Section 9.611 imposes a duty on a secured party who wishes to dispose of collateral under section 9.610 to send a reasonable, authenticated notice of disposition not only to the debtor but also to any secondary obligor. There are exceptions for collateral that is perishable, threatens to decline speedily in value, or is of a type customarily sold on a recognized market. Tex. Bus. & Com. Code § 9.611. Accordingly, guarantors or sureties are entitled to receive notification of an intended disposition of collateral. If the surety or guarantor created the security interest, the surety or guarantor is treated as the debtor. If not, the surety or guarantor is treated as a secondary obligor. See Tex. Bus. & Com. Code § 9.102(a)(28). Note that a debtor or secondary obligor may waive the right to notification of disposition of collateral under section 9.611 only by an agreement to that effect entered into and authenticated after default. Tex. Bus. & Com. Code § 9.602(7); see also Tex. Bus. & Com. Code § 9.624(a).
The secondary obligor is also entitled to a notice of a proposal to accept collateral in partial satisfaction of the obligation it secures. Tex. Bus. & Com. Code § 9.621(b). A secured party need not send notification to a debtor or secondary obligor unknown to the secured party. Tex. Bus. & Com. Code § 9.605. Note also that under Tex. Bus. & Com. Code § 9.611(b), the borrower, who is implicitly under the definitions the principal obligor, is not always entitled to notification of disposition.
Finally, Tex. Bus. & Com. Code § 9.618 governs certain situations in which a secondary obligor, such as a guarantor or surety, acquires the rights and becomes obligated to perform the duties of the secured party in circumstances other than at a foreclosure sale. Although brief, the section is complex and beyond the scope of this manual. If representing a guarantor or surety that is considering a “take-out” of the secured party, the attorney must study this section and the official comment carefully and evaluate whether the client will become responsible for giving notices, for care and custody of the collateral, and the like.
§ 5.36Notice to Taxing Authorities of Sale of Collateral
§ 5.36:1Notice to Internal Revenue Service
If the Internal Revenue Service has properly filed a notice of federal tax lien with the Texas secretary of state or the county clerk against the debtor’s property more than thirty days before sale of the collateral, notice of the sale must be sent to the IRS at least twenty-five days before the sale. 26 U.S.C. § 7425(c)(1). If notice is given, the IRS has a right to redeem the property for 120 days after sale, but after the redemption period the lien will no longer attach. 26 U.S.C. § 7425(d)(1). If no notice is given, the lien remains against the property, even though it may have been subordinate to the creditor’s lien. 26 U.S.C. § 7425(b)(1). For a notice to the IRS, see form 5-9 in this chapter.
A search of the relevant records should be made and should go back at least ten years, as tax liens generally become unenforceable after ten years from the date of assessment. The taxpayer and the IRS can agree to extend the ten-year period. 26 U.S.C. § 6502(a). A variety of occurrences, including a bankruptcy stay, will suspend the running of the ten-year period. 26 U.S.C. § 6503. Note also the refiling rights of the IRS as set out in 26 U.S.C. § 6323(g).
Any notices of possible federal tax liens filed against persons with the same or similar names as the debtor should be examined carefully. The notice will have either a taxpayer identification number or a Social Security number. The possibility that the defaulting taxpayer and defaulting debtor are different people or entities may be established based on information in the client’s file such as a credit application or report. However, if there is any possibility that the two are the same, the attorney should send the notice to the IRS. This action is cheap insurance against the possibility that the IRS could effectively overturn the foreclosure sale by retaining and enforcing its lien after the client’s lien is extinguished by power of sale.
§ 5.36:2Notice to Texas Comptroller
The Texas Comptroller of Public Accounts (the “comptroller”) is required to file a tax lien for all taxes due the state. Tex. Tax Code § 113.002(a). The lien attaches to all of the taxpayer’s property as of the first day of the period in which the lien was filed (Tex. Tax Code §§ 113.001(b), 113.105(b)), and the filing and recording of a tax lien notice is record of the notice (Tex. Tax Code § 113.006(a)). The Texas Supreme Court has stated in dicta that the practical effect of filing the tax lien is to render any property subject to it virtually unsalable. R Communications, Inc. v. Sharp, 875 S.W.2d 314, 317 n.6 (Tex. 1994). The lien is enforceable against any purchaser of the taxpayer’s property and attaches to all after-acquired property of the delinquent taxpayer as well. Tex. Tax Code §§ 111.020, 113.105.
Every county clerk is required to keep a bound state tax lien book in which state tax liens of the comptroller are recorded. Tex. Tax Code § 113.004. A state tax lien is filed with the county clerk, presumably in the county of the taxpayer’s place of business or residence for personal property, and in the county in which the real property is located. Tex. Tax Code § 113.005(a).
There is no state law provision precisely analogous to section 7425(c)(1) of the Internal Revenue Code. Accordingly, a notice to the comptroller would be required only in the case of collateral other than consumer goods and only if an authenticated notice of a claim against the collateral had been received from the comptroller by the secured party before the notification date. Tex. Bus. & Com. Code § 9.611(c)(3)(A). This is because the entry in the state tax lien book is not a “financing statement” (Tex. Bus. & Com. Code § 9.102(a)(39)), and the state’s interest in the property is not required to be perfected by filing a financing statement. Accordingly, the selling secured party does not have an affirmative duty to search out the state’s security interest in the collateral under Tex. Bus. & Com. Code § 9.611(c)(3)(B).
Finally, the seller is not obligated to give prior notice to the comptroller of its intent to sell the encumbered collateral under section 9.611(c)(3)(C) because tax liens filed under chapter 113 of the Tax Code do not fall within the exception to the perfection-by-filing requirement in Tex. Bus. & Com. Code § 9.311(a)(2). As a result, unless the state provides the selling secured party with an authenticated notice of its interest in the collateral, the seller has no obligation to inform the state of Texas of the sale of collateral securing payment of delinquent taxes owed. See Tex. Bus. & Com. Code § 9.611(c)(3)(A).
However, the practical reality, because of the transferee liability provisions described above and the ad valorem tax priority provisions such as Tex. Tax Code § 32.05, is that a search for state tax liens against the debtor’s property is essential before conducting a foreclosure sale of the collateral. Even if no notice to the comptroller is required, any purchaser at the sale would not take free and clear of the state’s liens, and the provisions of Tex. Bus. & Com. Code § 9.611 at best merely provide a defense to an action for wrongful foreclosure or conversion. See Grand Prairie Independent School District v. Southern Parts Imports, Inc., 803 S.W.2d 762 (Tex. App.—Dallas), rev’d on other grounds, 813 S.W.2d 499 (Tex. 1991). In that case, the city of Grand Prairie alleged that the foreclosing secured party, Heller Financial, wrongfully foreclosed on the debtor’s collateral. The debtor failed to pay personal property taxes on property it used as collateral for a loan from Heller. Heller failed to give the city notice of its intended foreclosure sale under the predecessor to section 9.611(c)(3) (prior section 9.504(c)). The city’s wrongful foreclosure suit was dismissed by summary judgment because Heller was not required to provide notice to the city. Grand Prairie Independent School District, 803 S.W.2d at 767. Heller was not aware of the city’s security interest in the property because the city did not inform Heller of the existence of that interest. Furthermore, Heller was not obligated to provide the city with notice of the intended sale because the city never filed a financing statement to perfect its tax lien. Of course, the city was not required to file a financing statement to obtain an ad valorem tax lien on the personal property that was Heller Financial’s collateral. Tex. Tax Code § 32.05.
§ 5.37Purchase of Property by Creditor
The secured party may buy the collateral at a public sale. He may buy at a private sale only if the collateral is of a type customarily sold in a recognized market or is the subject of widely distributed standard price quotations. Tex. Bus. & Com. Code § 9.610(c). The debtor is not expressly prohibited from waiving this provision by contract in the laundry list of nonwaivable provisions in section 9.602, but any purchase by the secured party, a related party, or a secondary obligor renders the calculation of a surplus or deficiency following the disposition subject to special scrutiny under Tex. Bus. & Com. Code § 9.615(f).
§ 5.38Disposition of Collateral by Methods Other Than Sale
§ 5.38:1What Constitutes Disposition
The secured creditor, after the debtor’s default, 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 by public or private proceedings. Notice must be given of public or private sale or other intended disposition. Tex. Bus. & Com. Code § 9.610(a). Disposition is not synonymous with sale and transfer of title, and a disposition by some other method is also subject to the notice requirement.
§ 5.38:2Destruction of Collateral
Destruction of the collateral by the creditor was held to be a disposition entitling the debtor to notice in Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769, 772 (Tex. 1982). The creditor was said to be put to an election either to sell the repossessed collateral or to retain it in complete satisfaction of the debt. Tanenbaum, 628 S.W.2d at 771. However, the court also held that if the creditor destroys or scraps the collateral, the creditor, de facto, elects retention of the collateral in satisfaction of the secured obligation. Tanenbaum may have been superseded by revised chapter 9 on this aspect of retention in satisfaction.
§ 5.38:3Delivery to Third Party
Delivery of the collateral to a third party with the intention that that party will retain it for a period of time or permanently is a disposition requiring notice, even if no transfer of title is made. See First City Bank v. Guex, 677 S.W.2d 25, 28 (Tex. 1984).
§ 5.38:4Voting of Stock Shares
Exercise of voting rights in stock without notice is not necessarily a retention of collateral, nor would the exercise of voting rights necessarily constitute a disposition of collateral. It is not necessary, however, that there be a transfer for value in order for there to be a disposition of collateral. See Cohen v. Rains, 769 S.W.2d 380 (Tex. App.—Fort Worth 1989, writ denied).
§ 5.39Retention of Collateral in Satisfaction of Debt
§ 5.39:1When Collateral May Be Retained
The creditor may generally elect to retain the collateral in full or partial satisfaction of the secured obligation. Tex. Bus. & Com. Code § 9.620(a). In consumer transactions, no acceptance in partial satisfaction is permitted, and in certain cases involving consumer goods, no acceptance in full satisfaction is permitted as explained in section 5.39:2 below. Retaining the collateral instead of selling it is sometimes referred to as “strict foreclosure.” Code section 9.620 describes the conditions under which strict foreclosure may or may not be done, section 9.621 describes the persons to whom notice of a proposal for strict foreclosure must be sent, and section 9.622 describes the effects of strict foreclosure.
§ 5.39:2Conditions of Retention in Satisfaction
A creditor may accept collateral in full or partial satisfaction of the unpaid secured debt only if the following conditions are satisfied.
Consent of Debtor: The debtor must consent to the creditor’s proposal. If the creditor proposes partial strict foreclosure, the debtor consents by agreeing to the proposal in a record authenticated after default. If the creditor proposes full strict foreclosure, one of two events must occur:
1.the debtor can expressly consent in a record authenticated after default; or
2.the debtor’s consent will be inferred if—
a.the creditor’s proposal is unconditional (or subject only to the condition that collateral not in the creditor’s possession be preserved and maintained);
b.the creditor’s proposal expresses an intent to accept collateral in full satisfaction of the unpaid secured debt;
c.the creditor fails to receive, within twenty days after sending his proposal to the debtor, the debtor’s notification of objection; and
d.the creditor’s proposal is made in good faith.
Tex. Bus. & Com. Code § 9.620(a)(1).
Absence of Objections from Notified Parties: After sending the notice of a proposal for strict foreclosure to the persons entitled to receive it under Tex. Bus. & Com. Code § 9.621, the secured party may retain the collateral only if he has not received a timely authenticated notice of objection from (1) a party to whom the secured party is required to send its proposal or (2) a lienholder or other secured party with a subordinate property interest in the collateral subject to the proposal. Tex. Bus. & Com. Code § 9.620(a). To be timely, an objection must be received by the secured party within twenty days after the date when the secured party sent his proposal. Tex. Bus. & Com. Code § 9.620(d).
Debtor Not in Possession (Applicable to Consumer-Goods Collateral): A strict foreclosure of consumer goods is not effective if the debtor possesses the consumer goods when he consents to the strict foreclosure. Tex. Bus. & Com. Code § 9.620(a)(3). Note that this condition applies only to consumer goods.
No More than 60 Percent of Principal Amount or Cash Price Paid (Applicable to Consumer-Goods Collateral): A creditor cannot exercise the remedy of strict foreclosure if it possesses consumer goods and at least 60 percent of the cash price of the goods has been paid (if the security interest is a purchase-money security interest (PMSI)), or at least 60 percent of the principal amount has been paid (in non-PMSI cases). Tex. Bus. & Com. Code § 9.620(e). Instead, the creditor must timely dispose of the collateral (in compliance with the requirements of Tex. Bus. & Com. Code § 9.610). A timely disposal in this context means selling it within ninety days of taking possession of it or within a longer period of time to which the debtor and all secondary obligors have agreed in an agreement entered into and authenticated after default. Tex. Bus. & Com. Code § 9.620(f). A debtor may waive the right to require disposition (rather than a proposed retention) of collateral under section 9.620(e), but only by an agreement entered into and authenticated after default. Tex. Bus. & Com. Code § 9.624(b). Note that section 9.620(e) applies only to consumer goods.
§ 5.39:3Persons to Whom Notice of Proposal to Retain Must Be Sent
The creditor should send a notice of intent to retain the collateral in satisfaction of the debt to—
1.any secondary obligor (only if the proposal is to retain the collateral in partial satisfaction of the debt);
2.any person from whom the secured party has received, before the debtor consented to the acceptance, an authenticated notification of a claim of an interest in the collateral;
3.any other secured party or lienholder that, ten days before the debtor consented to the acceptance, held a security interest in or other lien on the collateral perfected by the filing of a financing statement that—
a.identified the collateral;
b.was indexed under the debtor’s name as of that date; and
c.was filed in the office or offices in which to file a financing statement against the debtor covering the collateral as of that date; and
4.any other secured party or lienholder that, ten days before the debtor consented to the acceptance, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in section 9.311(a).
Tex. Bus. & Com. Code § 9.621.
See form 5-10 in this chapter for a letter to the debtor giving notice of intent to retain collateral.
§ 5.40Penalties for Failure to Comply with Chapter 9
If the creditor fails to comply with the provisions of chapter 9 of the Texas Business and Commerce Code, including those relating to collection, enforcement, disposition, and acceptance, certain aggrieved persons may be entitled to injunctive relief and to recover damages incurred as a result, including liquidated damages and statutory penalties. Tex. Bus. & Com. Code § 9.625.
[Sections 5.41 through 5.50 are reserved for expansion.]
V. Other Repossession Statutes
§ 5.51Reclamation (UCC Article 2)
If a credit seller discovers that his buyer has received goods on credit while insolvent, he may reclaim the goods on demand made within ten days after the receipt. If the buyer misrepresented his solvency to the seller within three months before delivery of the goods, the ten-day limitation does not apply. Tex. Bus. & Com. Code § 2.702(b). The seller has no other right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay. The seller’s right to reclaim is subject to the rights of a buyer in the ordinary course, another good-faith purchaser, or a lien creditor. Successful reclamation of goods excludes all other remedies with respect to those goods. Tex. Bus. & Com. Code § 2.702(c); see also Tex. Bus. & Com. Code § 2.403 (defines “power to transfer” and “good faith purchase”).
§ 5.51:2Cash Sale—Buyer Refuses to Pay for Goods Received or Issues Bad Check in Payment
Although no statute explicitly provides a cash seller with the right or power to recover goods already delivered to a buyer in breach, courts have recognized such a right of reclamation based on the language of section 2.507(b) and comment 3 to section 2.507(b) of the Texas Business and Commerce Code. The comment states:
This subsection [section 2.507(b)] codifies the cash seller’s right of reclamation which is in the nature of a lien. There is no specific time limit for a cash seller to exercise the right of reclamation. However, the right will be defeated by delay causing prejudice to the buyer, waiver, estoppel, or ratification of the buyer’s right to retain possession. Common law rules and precedents governing such principles are applicable [section 1.103]. If third parties are involved, [section 2.403] protects good faith purchasers.
Tex. Bus. & Com. Code § 2.507(b) cmt. 3.
See Chapman Parts Warehouse v. Guderian, 609 S.W.2d 317, 319 (Tex. Civ. App.—Austin 1980, no writ); Peerless Equipment Co. v. Azle State Bank, 559 S.W.2d 114 (Tex. Civ. App.—Fort Worth 1977, no writ); Ranchers & Farmers Livestock Auction Co. v. First State Bank, 531 S.W.2d 167 (Tex. Civ. App.—Amarillo 1975, writ ref’d n.r.e.).
Acceptance of a check is considered a cash transaction, not a credit transaction. Ranchers & Farmers Livestock Auction Co., 531 S.W.2d at 169.
§ 5.51:3Limitations and Waiver
The seller’s right of reclamation under either Tex. Bus. & Com. Code § 2.507 or § 2.702 is not a security interest within the scope of UCC Article 9 secured transactions. However, the seller may acquire a security interest by complying with the provisions of Chapter 9. See Tex. Bus. & Com. Code § 1.201(b)(35). The right to reclaim under Tex. Bus. & Com. Code § 2.702 is limited to a ten-day period from delivery of the goods, and, therefore, if the right is not exercised within that period, it is waived. If there has been a misrepresentation of solvency in writing by the buyer to the particular seller within the three-month period before delivery, the ten-day limitation does not apply. After this right is waived, the seller’s remedies are then on the instrument and for breach of contract. Ranchers & Farmers Livestock Auction Co. v. First State Bank, 531 S.W.2d 167, 169 (Tex. Civ. App.—Amarillo 1975, writ ref’d n.r.e.).
The seller may afford himself greater protection by having the debtor sign a security agreement describing the collateral, then taking the applicable steps required for perfection of a purchase-money security interest. Peerless Equipment Co. v. Azle State Bank, 559 S.W.2d 114, 115 (Tex. Civ. App.—Fort Worth 1977, no writ); see also Tex. Bus. & Com. Code § 1.201(b)(35).
Transactions involving the lease of goods are governed by chapter 2A of the Texas Business and Commerce Code chapter 2A. See Tex. Bus. & Com. Code §§ 2A.101–.532. Chapter 2A is an amalgam of chapters 2 and 9 of the Code, borrowing from each as the drafters deemed appropriate.
§ 5.52:2Lessor’s Right to Repossess
If the lessee defaults by failing to make a lease payment or by committing another default as defined in the lease contract, the lessor has a right—
1.to repossess the goods without judicial process;
2.to require the lessee to make the goods available to the lessor at a mutually convenient place designated by the lessor, if the lease contract so provides;
3.without removing goods employed in trade or business, to render them unusable if the lease contract so provides; or
4.to dispose of goods on the lessee’s premises.
Tex. Bus. & Com. Code § 2A.525(b).
The lessor may employ any of these remedies without judicial process if that can be done without committing a breach of the peace. Tex. Bus. & Com. Code § 2A.525(c).
§ 5.52:3Lessor’s Right to Dispose of Goods
After default and repossession, the lessor has the right to dispose of the goods by lease, sale, or otherwise. Tex. Bus. & Com. Code § 2A.527(a).
§ 5.52:4Deficiency Owed by Lessee after Disposition
Unless there is a liquidated damages clause in the lease agreement or damages are otherwise determined by agreement of the parties, if the lessor has re-leased the goods by a lease agreement substantially similar to the original agreement and has re-leased in good faith and in a commercially reasonable manner, he may recover the following damages from the lessee:
1.accrued and unpaid rent as of the date of the commencement of the new lease agreement;
2.the present value, as of the same date, of the total rent for the then-remaining term of the original lease agreement minus the present value, as of the same date, of the rent under the new lease agreement applicable to that period of the new lease term that is comparable to the then-remaining term of the original lease agreement; and
3.incidental damages allowed under section 2A.530 of the Business and Commerce Code.
Tex. Bus. & Com. Code § 2A.527(b).
If the lessor disposes of the goods by a lease agreement not qualifying under section 2A.527(b) or disposes of the goods by sale or otherwise, the lessor may recover from the lessee as if the lessor had elected not to dispose of the goods. Tex. Bus. & Com. Code § 2A.527(c). See Tex. Bus. & Com. Code § 2A.528 regarding damages the lessor may recover.
For a thorough discussion of the various theories of the measure of damages for the breach of a lease and their application in the personal property leasing context, applying the Wyoming versions of 2A.527 and 2A.528, see The Corner v. Pinnacle, Inc., 907 P.2d 1281 (Wyo. 1995).
§ 5.52:5Criminal Penalties for Wrongfully Holding Rental Property
A person having control of personal property under a written rental agreement who intentionally holds the property beyond the expiration of the rental period may be charged with the offense of theft of service. Tex. Penal Code § 31.04(a)(3).