Legal Question in Real Estate Law in Colorado
default on a security agreement
I sold my business(tavern) 4 years ago and I am carrying the buyer with a $75,000 prommisory note, secured buy the furniture,equipment and inventory of the tavern.The buyer has only 7 payments left on the note. Recently I went into the tavern and noticed that the comercial stove and refridgerator were missing from the kitchen along with stainless steel shelving. According to the UCC security agreement, The secured party(me) must be immediatly informed if any of the collateral is moved to a different location or sold. I was never informed of the removal of the stove or fridge and these are the biggest part of the collateral.This is clearly a default of the security agreement. In the security agreement it says that in the event of a default that the debtor shall assemble the collateral and deliver it to the secured party(me). It also says that the remaining debt shall come due and payable all at once including interest.
My question is; In this kind of default,does the debtor only relinquish the collateral if they cannot pay the rest of the debt? Or do they have to relinquish both the collateral and pay off the rest of the debt due to the default?
2 Answers from Attorneys
Re: default on a security agreement
The type of default you describe invokes the "acceleration clause" which provides that the balance of the financing is now due in full. It also deems the security to be in jeopardy, entitling the holder to retake possession.
Typically the remaining inventory is sold, the proceeds applied to the loan balance, and the signer is liable for the difference between the outstanding balance and the sale proceeds.
Re: default on a security agreement
According to the terms of the contract, you can sue to foreclose on the collateral. If you recorded the appropriate forms, then your security interest may prevail over a purchaser's interest. Depending on the terms of your agreement, you can trace the proceeds if there was a sale of the collateral. The debtor may have to pay the balance of the agreement. This all depends on the contract. Also if you foreclose you must use commercially reasonable methods to dispose of the collateral. This movement of collateral, or any payment problems may be signs of financial problems, and the debtor may be preparing to file bankruptcy. In that case, you need to make sure you have perfected your security interest according to the UCC.
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