9.4 Enforcement of Security Interests

• Library: The Virginia Lawyer: A Deskbook for Practitioners (Virginia CLE) (2022 Ed.)

9.4 ENFORCEMENT OF SECURITY INTERESTS

9.401 In General.

The rights and remedies of a creditor with a contractually created lien on personal property are generally governed by part 6 of Article 9 of the U.C.C., no matter what name the parties give to the transaction. ⁶¹⁷⁷

As between the debtor and the creditor, these rights exist whether the security interest is perfected or not. The creditor may:

1. Exercise rights and remedies provided by agreement or title 8.9A of the Virginia Code;

2. Foreclose;

3. Reduce a claim to judgment;

4. Use any available judicial procedure to enforce the security interest;

5. If the collateral is documents of title, proceed against either the documents or the goods thereby covered (or both);

6. If the collateral is accounts, notify the account debtors or obligors to make payment directly to the secured party. ⁶¹⁷⁸ A secured party may also proceed against collateral provided by the account debtor; or

7. If the security agreement covers both real and personal property, proceed under title 8.9A against the personalty alone or against both the real and personal property pursuant to rights and remedies respecting the real property, in which case title 8.9A generally does not apply. ⁶¹⁷⁹

9.402 Importance of the Security Agreement.

A. In General.

Many of the rights and remedies of the secured party are provided by the U.C.C. Others, however, flow directly from the terms and conditions of the security agreement itself. 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.

B. 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." ⁶¹⁸⁰ For example, in the case of nonpossessory security interests, the secured party's right to possession of the collateral arises upon default. ⁶¹⁸¹ Additionally, certain rights of the debtor may be waived only after default. ⁶¹⁸²

Title 8.9A 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. The security agreement may provide for events of default other than nonpayment in order for the secured creditor to be in a position to act at the outset of a debtor's financial difficulties. Usually these are instances where the debtor fails to live up to requirements of the security agreement, for example, by failing to provide adequate insurance for the collateral, failing 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, failing to maintain a specified financial condition. ⁶¹⁸³

C. Rights and Remedies Arising Only from the Parties' Agreement.

1. In General.

Generally, the parties may provide in the security agreement for rights and remedies in addition to those set forth in title 8.9A. The major limitations on this freedom to create remedies by contract are provided by

1. 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;

2. Section 8.1A-304, which imposes an obligation of good faith in the performance and enforcement of contracts that are subject to the Code;

3. Section 8.9A-602, which specifies matters that may not be waived or varied even after default; ⁶¹⁸⁴ and

4. Section 8.9A-610(a), which requires each disposition of collateral to be "commercially reasonable."

2. 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." "'Agreement,' as distinguished from 'contract,' means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in § 8.1A-303." ⁶¹⁸⁵

a. 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. ⁶¹⁸⁶ Before engaging in direct collection, the secured party should take note of Tazewell Oil Co. v. United Virginia Bank, ⁶¹⁸⁷ and the hostility to direct collection remedies evidenced in Justice Lacy's opinion. ⁶¹⁸⁸

b. Assembling the Collateral.

The secured party may require the debtor to assemble the collateral and make it available at a mutually convenient location, but only if the security agreement so provides. ⁶¹⁸⁹

c. Legal Expenses.

The secured party may not apply proceeds of a foreclosure sale to attorney fees and legal expenses unless the security agreement so provides. ⁶¹⁹⁰

d. Deficiency After Sale.

In most instances, the debtor is liable for any deficiency existing after sale of the collateral. ⁶¹⁹¹ If the underlying transaction was a sale of accounts or chattel paper, the debtor is not liable for the deficiency after sale by the secured party unless the security agreement so provides. ⁶¹⁹²

3. Rights of the Debtor.

Certain rights and remedies of the debtor exist only if there is agreement.

a. Surplus After Sale.

In most instances, the secured party must account to the debtor or holders of junior security interests for any surplus proceeds after sale. ⁶¹⁹³ However, if the underlying transaction was a sale of accounts or chattel paper, the debtor is not entitled to any surplus remaining after sale by the secured party unless the security agreement so provides. ⁶¹⁹⁴

b. Deficiency After Sale.

In cases involving other types of collateral, the debtor is liable for any deficiency after sale of collateral unless there is "agreement" to the contrary. ⁶¹⁹⁵

c. Possession.

The debtor and the secured party may agree that the secured party will not have the right to possession of collateral after default, but in the absence of that agreement the right automatically arises under title 8.9A. ⁶¹⁹⁶

4. Matters That May Not Be Varied by Agreement.

a. Relevant Statutory Provisions.

In addition to the general limitations of sections 8.1A-302 and 8.1A-304, title 8.9A imposes its own specific limitations on the contractual powers of the parties. To the extent they give rights to the debtor and impose duties on the secured party, certain provisions of title 8.9A may not be waived or varied in the security agreement. ⁶¹⁹⁷ These provisions include the following:

1. Sections 8.9A-608(a) and 8.9A-615(d), insofar as they require accounting for and payment of surplus proceeds of collateral;

2. Sections 8.9A-610, 8.9A-611, 8.9A-613, and 8.9A-614, which deal with disposition of collateral;

3. Sections 8.9A-620, and 8.9A-621, and 8.9A-622, which deal with acceptance of collateral in satisfaction of the obligation;

4. Section 8.9A-623, which deals with redemption of collateral; and

5. Sections 8.9A-625, 8.9A-626, and 8.9A-628, which deal with the secured party's liability (and limitation on damages) for failure to comply with part 6 of Article 9 of the U.C.C.

b. When Variance or Waiver Is Allowed.

The limitations on which sections may be varied or waived in the security agreement are provided in section 8.9A-602(1) through (13). Additionally, "the parties may by agreement determine the standards by which the fulfillment of these rights and duties is to be measured if such standards are not manifestly unreasonable." ⁶¹⁹⁸ However, the parties can never contract around the secured party's duty to refrain from breaching the peace under section 8.9A-609.

5. Rights That May Be Waived Only After Default.

a. Notice of Sale.

The debtor may waive certain rights only after default. ⁶¹⁹⁹ Under section 8.9A-624(a), the debtor can waive notice of disposition of collateral only by an agreement entered into and authenticated after default. Otherwise, the secured party must notify the debtor of:

1. The method of intended disposition;

2. The time and place of a public sale or other disposition;

3. The date after which a private sale or other disposition will be made; and

4. The fact that the debtor is entitled to an accounting of unpaid indebtedness. ⁶²⁰⁰

Section 8.9A-614 provides for the content of notification before disposition in a consumer goods transaction and a "safe harbor" form for this notification. Section 8.9A-613(5) provides a "safe harbor" notification form that affords sufficient notification in nonconsumer goods transactions.

However, neither notification nor its waiver is required if the collateral is perishable or is likely to decline rapidly in value or is a type customarily sold on a recognized market. For a discussion of the very limited concept of "recognized market," see paragraph 9.406(A). ⁶²⁰¹

b. Timely Sale of Consumer Goods.

The debtor may not waive the right under section 8.9A-620(f) to have consumer goods sold within 90 days of repossession unless the debtor signed after default an agreement renouncing or modifying this right. ⁶²⁰²

c. Retention of Collateral.

A debtor must receive notice of, and may object to, the secured party's retention of collateral in full or partial satisfaction of the obligations secured by the collateral. ⁶²⁰³ Partial "strict foreclosure" is not permitted in consumer goods transactions. ⁶²⁰⁴ Also, the debtor's affirmative consent is required to allow the secured creditor to accept the collateral in "partial" satisfaction of a nonconsumer obligation. ⁶²⁰⁵

d. Right of Redemption.

The debtor may not waive the right of redemption under section 8.9A-623 before default. ⁶²⁰⁶

9.403 Possession.

A. In General.

If the secured party has possession of the collateral at the time of default, the secured...