CPA Exam — REG (Regulation)Business LawHard
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 creditor's disposition of the collateral?
- AThe creditor must provide reasonable notice to the debtor and other secured parties.
- BThe sale must be public, with competitive bidding.
- CThe creditor must obtain judicial approval before any sale.
- DThe sale price must equal or exceed the fair market value of the equipment.
Show answer & explanationAnswer & explanation
Correct answer: A. The creditor must provide reasonable notice to the debtor and other secured parties.
UCC Article 9 requires that a secured creditor, upon default and repossession, dispose of collateral in a 'commercially reasonable' manner. A key component of commercial reasonableness is providing reasonable authenticated notice of the disposition to the debtor and any secondary obligors, and usually to other secured parties who have filed financing statements or notified the creditor of their interest.
Why the other options are wrong
- B. Disposition can be public or private, as long as it is commercially reasonable; it does not have to be public.
- C. Judicial approval is not generally required for a secured creditor to sell repossessed collateral, though it can be sought for protection.
- D. While the creditor must strive for a good price, the UCC requires commercial reasonableness, not a guarantee of fair market value, especially in a forced sale context.
UCC Article 9 Disposition of Collateral
Rules governing how a secured creditor must sell or otherwise dispose of collateral after a debtor's default and repossession.
- Disposition must be 'commercially reasonable' in all aspects.
- Reasonable notice must be given to the debtor and other interested parties.
- Creditor can sell, lease, license, or otherwise dispose of collateral.
- Debtor is liable for any deficiency; surplus goes to debtor.
Memory trick: R-D-A: Repossess, Dispose, Accept.