CPA Exam — REG (Regulation)Business LawMedium
A creditor holds a perfected security interest in a debtor's equipment. The debtor defaults on the loan. The creditor repossesses the equipment and decides to sell it to satisfy the debt. Under UCC Article 9, which of the following is generally required for the disposition of the collateral?
- AThe creditor must retain the collateral for a minimum of 90 days before disposition.
- BThe creditor must obtain the debtor's written consent for the method of disposition.
- CThe creditor must dispose of the collateral in a commercially reasonable manner.
- DThe creditor must sell the collateral through a public auction.
Show answer & explanationAnswer & explanation
Correct answer: C. The creditor must dispose of the collateral in a commercially reasonable manner.
UCC Article 9 requires that a secured party dispose of collateral in a 'commercially reasonable manner' after default. This includes aspects like the method, manner, time, place, and terms of the disposition, aiming to maximize the proceeds for the benefit of both the creditor and debtor.
Why the other options are wrong
- A. There is no general requirement to retain the collateral for a minimum of 90 days. The disposition should occur within a reasonable time, and in some cases, it must occur within 90 days if the debtor has paid 60% of the cash price in a consumer goods transaction and not waived rights.
- B. The debtor's consent is not generally required for the method of disposition, though the debtor must typically receive notice of the disposition.
- D. While a public auction can be commercially reasonable, it is not the only permissible method. A private sale can also be commercially reasonable.
UCC Article 9 Disposition of Collateral
Rules governing how a secured party must sell or otherwise dispose of collateral after a debtor's default to satisfy the outstanding debt.
- Must be conducted in a 'commercially reasonable manner'.
- Debtor must generally receive notice of the disposition.
- Proceeds are applied to expenses, then the debt, with any surplus to the debtor.
Memory trick: Default leads to Dispose Reasonably, Notice to Debtor.