2.2 The Importance of the Parties’ Agreement in Establishing the Rights and Remedies of the Secured Party and the Debtor

• Library: Enforcement of Liens and Judgments in Virginia (Virginia CLE) (2019 Ed.)

2.2 THE IMPORTANCE OF THE PARTIES' AGREEMENT IN ESTABLISHING THE RIGHTS AND REMEDIES OF THE SECURED PARTY AND THE DEBTOR

Many of the rights and remedies of the secured party are provided by the U.C.C. itself. Others flow directly from the terms and conditions of the security agreement. As a result, many aspects of enforcing a security interest under title 8.9A of the Virginia Code should be dealt with prospectively in the security agreement. The appendices to this chapter contain suggested provisions for use in a security agreement that may enhance the secured party's rights.

2.201 The Importance of Default. For the most part, the secured party's rights to enforce the lien of a security interest are triggered by "default under a security agreement." ⁵ For example, in the case of nonpossessory security interests, the secured party's right to possession of the collateral arises upon "default." ⁶ Additionally, certain rights of the debtor may be waived only after default. ⁷

Title 8.9A of the Virginia Code does not define "default." It may be inferred that "default under a security agreement" occurs when the debtor fails to pay the indebtedness secured when due. However, the careful practitioner will not rely on such an inference and will define events of default in the security agreement. Moreover, quite often the secured party may want to provide for events of default other than nonpayment in order to be in a position to act at the outset of a debtor's financial difficulties. Usually these are defined as instances where the debtor fails to live up to requirements of the security agreement, for example, failure to provide adequate insurance for the collateral, failure to keep the collateral at the agreed-upon location or in an agreed-upon condition, or, to the extent not set forth in the note or other obligation secured, failure to maintain a specified financial condition. ⁸

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2.202 Rights and Remedies Arising Only from the Parties' Agreement. In general, the parties may provide in the security agreement for rights and remedies in addition to those set forth in title 8.9A of the Virginia Code. The major limitations on this freedom to create remedies by contract are provided by (i) section 8.1A-302 of the Virginia Code, which provides that obligations of good faith, diligence, reasonableness, and care may not be disclaimed by agreement; (ii) section 8.1A-304, which imposes an obligation of good faith in the performance and enforcement of contracts that are subject to the U.C.C.; (iii) section 8.9A-602, which specifies matters that may not be waived or varied even after default; ⁹ and (iv) section 8.9A-610(a), which requires each disposition of collateral to be "commercially reasonable."

A. Rights and Remedies of a Secured Party. Certain rights and remedies of the secured party exist only if the parties so agree. Often they must be set forth in the security agreement itself, but in other cases they may be established simply "by agreement." Under title 8.9A of the Virginia Code, "'[a]greement,' means the bargain of the parties in fact as found in their language or inferred from other circumstances," for example, trade usage, course of dealing, or course of performance. ¹⁰

1. Direct Collection. Although the general rule is that a secured party's right to enforce a security interest arises only upon default, the secured party may begin direct collection of accounts or other obligations in the absence of default if there is "agreement" to that effect. ¹¹ Financers of chattel paper, such as retail installment contracts and accounts, are well-advised to retain the right of direct collection because of the highly liquid nature of the collateral, the heightened possibility of double financing in these cases, and the ever-present problem of commingling. On the other hand, many debtors (and lenders) do not wish to have their financing relationship known to the debtor's customers. These interests may be accommodated by use of a "lock box," which is no more than a device whereby payment is mailed to the borrower, care of a post office box controlled by the lender, who deposits the proceeds in a special account controlled as provided in the parties' agreement. Alternatively, a lender...