Editor’s note: Section 4 of PL 14-34 enacted a new chapter 10 entitled The Secured Transactions Act. The word “The” has been removed as unnecessary and to comport with standard code formatting.
SUBCHAPTER IV
Enforcement of Security Interests
SECTIONS
§ 1047. Rights after default—General provisions.
§ 1048. Procedure if security agreement covers fixtures.
§ 1049. Unknown debtor or secondary obligor.
§ 1050. Collection and enforcement of debt or obligation by secured party.
§ 1051. Application of proceeds of collection or enforcement—Liability for deficiency and right to surplus.
§ 1052. Secured party’s right to take possession after default.
§ 1053. Judicial enforcement of right to possession—Pre-judgment orders.
§ 1054. Disposition of collateral after default.
§ 1055. Notification before disposition of collateral.
§ 1056. Timeliness of notification before disposition of collateral.
§ 1057. Contents of notification before disposition of collateral—General.
§ 1058. Application of proceeds of disposition—Liability for deficiency and right to surplus.
§ 1059. Rights of transferee of collateral.
§ 1060. Rights and duties of certain secondary obligors.
§ 1061. Transfer of record or legal title.
§ 1062. Acceptance of collateral in full or partial satisfaction of obligation—Compulsory disposition of collateral.
§ 1063. Notification of proposal to accept collateral.
§ 1064. Effect of acceptance of collateral.
§ 1065. Right to redeem collateral.
§ 1066. Waiver.
§ 1067. Remedies for secured party’s failure to comply with Act.
§ 1068. Action in which deficiency or surplus is in issue.
§ 1069. Determination of whether conduct was commercially reasonable.
Editor’s note: PL 14-34 § 54 created this subchapter as subchapter 4. This subchapter entitled Enforcement of Security Interests has been redesignated subchapter IV for format consistency.
(1) After default a secured party has the rights provided in this chapter and those provided by agreement of the parties.
(2) After default, a secured party may reduce a claim to judgment, foreclose, or otherwise enforce the claim, or security interest by any available judicial procedure.
(3) After default, if the collateral is documents, the secured party may proceed either as to the documents or as to the goods they cover.
(4) A secured party in possession of collateral or control of collateral has the rights and duties provided in section 1008 of this chapter.
(5) Rights under this section are cumulative and may be exercised simultaneously.
(6) Except as otherwise provided in this chapter with respect to an unknown debtor, after default, a debtor and an obligor have the rights provided in this subchapter and by agreement of the parties.
(7) If a secured party has reduced its claim to judgment, the lien of any levy that may be made upon the collateral by virtue of an execution based upon the judgment relates back to the earliest of:
(a) the date of perfection of the security interest in the collateral; or
(b) the date of filing a notice covering the collateral.
(8) A secured party may purchase at any execution sale or sale pursuant to judicial foreclosure upon collateral and thereafter hold the collateral free of any other requirements of this chapter.
(9) This subchapter imposes no duties upon a secured party that is a consignor or a buyer of accounts, chattel paper, or other intangible property.
(1) Subject to subsection (2) of this section, if a security agreement covers goods that are or become fixtures, a secured party may proceed:
(a) under this subchapter; or
(b) in accordance with the rights with respect to real property.
(2) Subject to the other provisions of this subchapter, if a secured party holding a security interest in fixtures has priority over all owners and encumbrancers of the real property, the secured party, after default, may remove the collateral from the real property.
(3) A secured party that removes collateral shall promptly reimburse any encumbrancer or owner of the real property, other than the debtor, for the cost of repair of any physical injury caused by the removal. The secured party need not reimburse the encumbrancer or owner for any diminution in value of the real property caused by the absence of the goods removed or by any necessity of replacing them. A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse.
A secured party does not owe a duty based on its status as secured party:
(1) to a person that is a debtor or obligor, unless the secured party actually or constructively knows:
(a) that the person is a debtor or obligor;
(b) the identity of the person; and
(c) how to communicate with the person; or
(2) to a secured party or lien holder that has filed a notice naming the person as a debtor, unless the secured party actually or constructively knows:
(1) If so agreed by the debtor, and in any event after default, a secured party:
(a) may notify an account debtor or other obligor to make payment or otherwise render performance to or for the benefit of the secured party;
(b) may take any proceeds to which the secured party is entitled;
(c) may enforce the obligations of an account debtor or other obligor and exercise the rights of the debtor with respect to the obligation of the account debtor or other obligor to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor or other obligor.
(2) If so agreed by the debtor, and in any event after default:
(a) if a secured party holds a security interest in a deposit account perfected by control pursuant to section 1027(1)(a) of this chapter the secured party may apply the balance of the deposit account to the obligation secured by the deposit account; or
(b) if a secured party holds a security interest in a deposit account perfected pursuant to section 1027(1)(b) or (c) of this chapter, the secured party may instruct the bank to pay the balance of the deposit account to or for the benefit of the secured party.
(3) A secured party shall proceed in a commercially reasonable manner if the secured party:
(a) undertakes to collect from or enforce an obligation of an account debtor or other person obligated on collateral; and
(b) is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor or a secondary obligor.
(4) A secured party may deduct from the collections made pursuant to subsection (3) of this section reasonable expenses of collection and enforcement, including reasonable attorney’s fees and legal expenses incurred by the secured party.
(1) The following rules apply with respect to proceeds from enforcement or collection under section 1050 of this chapter:
(a) a secured party shall apply or pay over for application the cash proceeds of collection or enforcement in the following order to:
(i) the reasonable expenses of collection and enforcement and, to the extent provided for by agreement and not prohibited by law, reasonable attorney’s fees and legal expenses incurred by the secured party;
(ii) the satisfaction of obligations secured by a superior security interest in or other lien on the collateral subject to the security interest under which the collection or enforcement is made if the secured party receives an authenticated demand for proceeds before distribution of the proceeds is completed;
(iii) the satisfaction of obligations secured by the security interest under which the collection or enforcement is made; and
(iv) the satisfaction of obl igations secured by any subordinate security interest in or other lien on the collateral subject to the security interest under which the collection or enforcement is made if the secured party receives an authenticated demand for proceeds before distribution of the proceeds is completed.
(b) if requested by a secured party, a holder of a subordinate security interest or other lien shall furnish reasonable proof of the interest or lien within a reasonable time. Unless the holder complies, the secured party need not comply with the holder’s demand.
(c) a secured party need not apply or pay over for application noncash proceeds of collection and enforcement unless the failure to do so would be commercially unreasonable. A secured party that applies or pays over for application noncash proceeds shall do so in a commercially reasonable manner.
(d) a secured party shall account to and pay a debtor for any surplus, and the obligor is liable for any deficiency.
(2) If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes, the debtor is not entitled to any surplus, and the obligor is not liable for any deficiency.
(b) without removal, may render equipment unusable and dispose of collateral on a debtor’s premises.
(2) A secured party may proceed under subsection (1) of this section:
(a) pursuant to judicial process; or
(b) without judicial process, if it proceeds without breach of the peace.
(3) If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.
(1) Upon default, a secured party, in connection with any judicial proceeding to enforce rights under section 1052 of this chapter, shall be entitled to an expedited hearing upon application for a pre-judgment order granting the secured party possession of the collateral. Such application shall include a statement by the secured party, under oath, verifying the existence of the security agreement attached to the application and identifying at least one event of default by the debtor under the security agreement.
(2) The secured party shall serve a copy of the application upon the debtor, including a copy of all documents and evidence submitted to the court in support thereof. The court shall schedule the hearing under subsection (1) of this section at the earliest available time, provided that no hearing shall be conducted without service on the debtor of the application and reasonable notice of the hearing unless
(a) the court finds that the secured party has made reasonable efforts to make service on the debtor and that such efforts have not been successful; or
(b) the court finds that the hearing should be conducted without delay to prevent damage to the collateral, substantial loss of the collateral’s value or the secured party’s right to possession.
(3) If the court finds, after hearing, that it is probable that a default has occurred under the security agreement and that the secured party has a right to take possession of the collateral, the court shall enter a pre-judgment order granting the secured party possession of the collateral pending final judgment or further order of the court. The order may direct the debtor to take such action as the court deems necessary and appropriate so that the secured party may take possession.
(4) If the court enters an order under subsection (3) of this section granting the secured party pre-judgment possession of the collateral, it shall also, upon application by the secured party, enter an order permitting the prejudgment sale or other disposition of the collateral under section 1054 of this chapter unless the collateral is rare or unique, or otherwise of such a nature that it is unlikely to be replaceable. In the event of a disposition under this subsection, the secured party shall retain possession of the proceeds of the disposition pending final judgment or further order of the court.
(5) A secured party who takes possession of collateral under an order issued pursuant to subsection (3) of this section shall hold such collateral subject to the rights and duties set forth in section 1008 of this chapter, pending disposition under subsection (4) of this section, final judgment or further order of the court.
(6) Nothing contained herein shall affect the right of a secured party to proceed under sections 1405 and 1406 of title 6 of this code at any time with respect to collateral or to bring any civil action for foreclosure in such manner as may be authorized under any other law.
Source: PL 14-34 § 61.
Cross-reference: The statutory provisions on the FSM Supreme Court are found in title 4 of this code. The statutory provisions on Judicial Procedure are found in title 6 of this code.
(1) After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.
(2) Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms.
(3) A secured party may purchase collateral:
(a) at a public disposition; or
(b) at a private disposition only if the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations.
(4) A contract for sale, lease, license, or other disposition includes the warranties relating to title, possession, quiet enjoyment, and the like which by operation of law accompany a voluntary disposition of property of the kind subject to the contract.
(5) A secured party may disclaim or modify warranties under subsection (4) of this section:
(a) in a manner that would be effective to disclaim or modify the warranties in a voluntary disposition of property of the kind subject to the contract of disposition; or
(b) by including in the contract for disposition an express disclaimer or modification of the warranties.
(6) A contract is sufficient to disclaim warranties under subsection (5) of this section if it indicates “There is no warranty relating to title, possession, quiet enjoyment, or the like in this disposition” or uses words of similar import.
(1) In this section, “notification date” means the earlier of the dates on which:
(a) a secured party sends to the debtor and any secondary obligor written notification of disposition; or
(b) the debtor and any secondary obligor waive the right to notification.
(2) Except as otherwise provided in subsection (4) of this section, a secured party that disposes of collateral under section 1054 of this chapter shall send to the persons specified in subsection (3) of this section reasonable notification of disposition. This subsection does not apply if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market.
(3) To comply with subsection (2) of this section, the secured party shall send notification of disposition to:
(a) the debtor;
(b) any secondary obligor; and
(c) if the collateral is other than consumer goods:
(i) any other person from which the secured party has received, before the notification date, notification of a claim of an interest in the collateral; and
(ii) any other secured party or lien holder that, ten days before the notification date, held a security interest in or other lien on the collateral perfected by the filing of a notice that identified the collateral and was indexed under the debtor’s name as of that date.
(4) A secured party complies with the requirement for notification prescribed by subsection (3)(c)(ii) of this section if:
(a) not later than 20 days or earlier than 30 days before the notification date, the secured party requests, in a commercially reasonable manner, information concerning notices indexed under the debtor’s name in the filing office; and
(b) before the notification date, the secured party:
(i) did not receive a response to the request for information; or
(ii) received a response to the request for information and sent notification of disposition to each secured party or other lien holder named in that response whose notice covered the collateral.
(1) Except as otherwise provided in subsection (2) of this section, whether a notification is sent within a reasonable time is a question of fact.
(2) In a transaction other than a consumer transaction, a notification of disposition sent after default and ten days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition.
Except in a consumer-goods transaction, the following rules apply:
(1) The contents of a notification of disposition are sufficient if the notification:
(a) describes the debtor and the secured party;
(b) describes the collateral that is the subject of the intended disposition;
(c) states the method of intended disposition;
(d) states that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting; and
(e) states the time and place of a public disposition or the time after which any other disposition is to be made.
(2) Whether the contents of a notification that lacks any of the information specified in subsection (1) of this section are nevertheless sufficient is a question of fact.
Source: PL 14-34 § 65.
Case annotation: The general rule is that where a creditor has failed to both procure credit insurance paid for by the debtor and to notify the debtor of his failure to procure the insurance requested, prior to loss, the debtor may plead such failure as a defense or setoff. FSM Dev. Bank v. Bruton, 7 FSM R. 246, 250 (Chk. 1995).
Equity does not dictate that a setoff for the amount of a defendant’s stock subscription be allowed against a contribution claim when the person claiming the setoff received by far the greatest benefit from the failed corporation while it was operating. Senda v. Semes, 8 FSM R. 484, 507 (Pon. 1998).
A statute that requires the creditor to give written notice to the debtor of the creditor’s intention to foreclose prior to foreclosing on the property, is inapplicable to setoffs because foreclosures and setoffs are very different things. Bank of the FSM v. Asugar, 10 FSM R. 340, 342 (Chk. 2001).
(1) A secured party shall apply or pay over for application the cash proceeds of disposition under section 1054 of this chapter in the following order to:
(a) the reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing, and, to the extent provided for by agreement and not prohibited by law, reasonable attorney’s fees and legal expenses incurred by the secured party;
(b) the satisfaction of obligations secured by the security interest under which the disposition is made;
(c) the satisfaction of obligations secured by any subordinate security interest in or other subordinate lien on the collateral if:
(i) the secured party receives from the holder of the subordinate security interest or other lien an authenticated demand for proceeds before distribution of the proceeds is completed; and
(ii) in a case in which a consignor has an interest in the collateral, the subordinate security interest or other lien is senior to the interest of the consignor; and
(d) a secured party that is a consignor of the collateral if the secured party receives from the consignor an authenticated demand for proceeds before distribution of the proceeds is completed.
(2) If requested by a secured party, a holder of a subordinate security interest or other lien shall furnish reasonable proof of the interest or lien within a reasonable time. Unless the holder does so, the secured party need not comply with the holder’s demand under subsection (1), paragraph (c) of this section.
(3) A secured party need not apply or pay over for application noncash proceeds of disposition under section 1054 of this chapter unless the failure to do so would be commercially unreasonable. A secured party that applies or pays over for application noncash proceeds shall do so in a commercially reasonable manner.
(4) If the security interest under which a disposition is made secures payment or performance of an obligation, after making the payments and applications required by subsection (1) of this section and permitted by subsection (3) of this section:
(a) unless subsection (1), paragraph (d) of this section, requires the secured party to apply or pay over cash proceeds to a consignor, the secured party shall account to and pay a debtor for any surplus; and
(b) the obligor is liable for any deficiency.
(5) If the underlying transaction is a sale of accounts, chattel paper, or other intangible property:
(a) the debtor is not entitled to any surplus; and
(b) the obligor is not liable for any deficiency.
(6) The surplus or deficiency following a disposition in conformance with this subchapter shall be calculated based on the amount of proceeds actually received from the disposition, except that if:
(a) the transferee in the disposition is the secured party, a person related to the secured party, or a secondary obligor; and
(b) the amount of proceeds of the disposition is significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought, the surplus or deficiency shall be calculated based upon the proceeds that would have been received through a disposition to a transferee other than the secured party, a person related to the secured party or a secondary obligor.
(7) A secured party that receives cash proceeds of a disposition in good faith and without actual or constructive knowledge that the receipt violates the rights of the holder of another security interest or lien:
(a) takes the cash proceeds free of the security interest or other lien;
(b) is not obligated to apply the proceeds of the disposition to the satisfaction of obligations secured by the security interest or other lien; and
(c) is not obligated to account to or pay the holder of the security interest or other lien for any surplus.
(1) A secured party’s disposition of collateral after default:
(a) transfers to a transferee for value all of the debtor’s rights in the collateral;
(b) discharges the security interest under which the disposition is made; and
(c) discharges any subordinate security interest or other subordinate lien.
(2) A transferee that acts in good faith takes free of the rights and interests described in subsection (1) of this section, even if the secured party fails to comply with this chapter or the requirements of any judicial proceeding.
(3) If a transferee does not take free of the rights and interests described in subsection (1) of this section, the transferee takes the collateral subject to:
(a) the debtor’s rights in the collateral;
(b) the security interest under which the disposition is made; and
(1) In this section, “transfer statement” means a writing signed by a secured party stating:
(a) that the debtor has defaulted in connection with an obligation secured by specified collateral;
(b) that the secured party has exercised its post-default remedies with respect to the collateral;
(c) that, by reason of the exercise, a transferee has acquired the rights of the debtor in the collateral; and
(d) the name and mailing address of the secured party, debtor, and transferee.
(2) A transfer statement entitles the transferee to the transfer of record of all rights of the debtor in the collateral specified in the statement in any official filing, recording, registration, or certificate-of-title system covering the collateral. If a transfer statement is presented with the applicable fee and request form to the official or office responsible for maintaining the system, the official or office shall:
(a) accept the transfer statement;
(b) promptly amend its records to reflect the transfer; and
(c) if applicable, issue a new appropriate certificate of title in the name of the transferee.
(3) A transfer of the record or legal title to collateral to a secured party under subsection (2) of this section or otherwise is not of itself a disposition of collateral under this chapter and does not of itself relieve the secured party of its duties under this chapter.
(1) After default, a secured party may propose to accept collateral in full or partial satisfaction of the obligation secured, provided that the secured party shall dispose of the collateral under section 1054 of this chapter if more than 60 percent of the debt secured by the collateral has been paid at the time of default. Notice of the proposal to accept the collateral shall be provided to the debtor and each person described in section 1063 of this chapter. The notice shall set forth the terms of the proposal, advise the recipient of the right to object as set forth in subsection (2) of this section, and designate an address where notice of objection may be provided during regular business hours.
(2) If any person entitled to notice of the proposal under subsection (1) of this section provides to the secured party notice of objection to the proposal within 20 days after being given notice under subsection (1) of this section, the security party shall dispose of the collateral under section 1054 of this title.
(3) If the secured party receives no notice within the period provided in subsection (2) of this section, the secured party shall be deemed, at the end of such period, to have accepted the collateral according to the terms of the proposal.
(4) Any party with an interest in the collateral may agree in writing to a proposal for a secured party’s acceptance of the collateral and such agreement shall be deemed a waiver of the rights to notice and to object provided in subsections (1) and (2) of this section except as may be expressly stated in the agreement.
(1) A secured party that desires to accept collateral in full or partial satisfaction of the obligation it secures shall send its proposal to:
(a) any person from which the secured party has received, before notice of the proposal under section 1062(1) of this chapter has been given to the debtor, written notification of a claim of an interest in the collateral;
(b) any other secured party or lien holder that, ten days before notice of the proposal under section 1062(1) of this chapter has been given to the debtor, held a security interest in or other lien on the collateral perfected by the filing of a notice that:
(i) identified the collateral;
(ii) was indexed under the debtor’s name as of that date.
(c) any other secured party that, ten days before notice of the proposal under section 1062(1) of this chapter has been given to the debtor, held a security interest in the collateral perfected by compliance with a statute or treaty.
(2) A secured party that desires to accept collateral in partial satisfaction of the obligation it secures shall send its proposal to any secondary obligor in addition to the persons described in subsection (1) of this section.
(1) A secured party’s acceptance of collateral in full or partial satisfaction of the obligation it secures:
(a) discharges the obligation to the extent specified in the proposal;
(b) transfers to the secured party all of a debtor’s rights in the collateral;
(c) discharges the security interest that is the subject of the debtor’s consent and any subordinate security interest or other subordinate lien; and
(d) terminates any other subordinate interest.
(2) A subordinate interest is discharged or terminated under subsection (1) of this section, even if the secured party fails to comply with this chapter.
(1) A debtor or secondary obligor may waive the right to notification of disposition of collateral under section 1055 of this chapter only by an agreement to that effect entered into and executed after default.
(2) A debtor may waive the right to require disposition of collateral under section 1062, subsection (1) of this chapter, only by an agreement to that effect entered into and executed after default.
(3) A debtor or secondary obligor may waive the right to redeem collateral under section 1065 of this chapter only by an agreement to that effect entered into and executed after default.
(1) If it is established that a secured party is not proceeding in accordance with this chapter, a court may order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions.
(2) Subject to subsection (3) of this section, a person is liable for damages in the amount of any loss caused by a failure to comply with this chapter. Loss caused by a failure to comply may include loss resulting from the debtor’s inability to obtain, or increased costs of, alternative financing.
(3) A debtor whose deficiency is eliminated under section 1068 of this chapter may recover damages for the loss of any surplus. However, a debtor or secondary obligor whose deficiency is eliminated or reduced under section 1068 of this chapter may not otherwise recover under subsection (2) of this section for noncompliance with the provisions of this part relating to collection, enforcement, disposition, or acceptance.
(4) In addition to damages recoverable under subsection (2) of this section, a person named as a debtor in a filed record may recover $500 in each case from a person that files a record that the person is not entitled to file under subchapter III of this chapter, and an additional $500 in each case where failure is part of a pattern, or consistent with a practice, of noncompliance.
In an action arising from a transaction, other than a consumer transaction, in which the amount of a deficiency or surplus is in issue, the following rules apply:
(1) a secured party need not prove compliance with the provisions of this part relating to collection, enforcement, disposition, or acceptance unless the debtor or a secondary obligor places the secured party’s compliance in issue.
(2) if the secured party’s compliance is placed in issue, the secured party has the burden of establishing that the collection, enforcement, disposition, or acceptance was conducted in accordance with this part.
(3) If a secured party fails to prove that the collection, enforcement, disposition, or acceptance was conducted in accordance with the provisions of this part relating to collection, enforcement, disposition, or acceptance, the liability of a debtor or a secondary obligor for a deficiency is limited to an amount by which the sum of the secured obligation, expenses, and attorney’s fees exceeds the greater of:
(a) the proceeds of the collection, enforcement, disposition, or acceptance; or
(b) the amount of proceeds that would have been realized had the noncomplying secured party proceeded in accordance with the provisions of this part relating to collection, enforcement, disposition, or acceptance.
(4) for purposes of subsection (3), paragraph (b) of this section, the amount of proceeds that would have been realized is equal to the sum of the secured obligation, expenses, and attorney’s fees unless the secured party proves that the amount is less than that sum.
(5) if a deficiency or surplus is calculated under section 1058, subsection (6) of this chapter, the debtor or obligor has the burden of establishing that the amount of proceeds of the disposition is significantly below the range of prices that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.
(1) The fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner.
(2) A disposition of collateral is made in a commercially reasonable manner if the disposition is made:
(a) in the usual manner on any recognized market;
(b) at the price current in any recognized market at the time of the disposition; or
(c) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
(3) A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved:
(a) in a judicial proceeding or
(b) by an assignee for the benefit of creditors.
(4) Approval under subsection (3) of this section need not be obtained, and lack of approval does not mean that the collection, enforcement, disposition, or acceptance is not commercially reasonable.