Current City (CC) is a retail seller of television sets. CC sells Dhani a $5,000 large-screen, high-definition, plasma set on a retail installment security agreement in which he pays $100 down and agrees to pay the balance in equal installments. CC retains a security interest in the set, and perfects that interest by filing a financing statement centrally. Two months later, Dhani is in default on the payments to CC and is involuntarily petitioned into bankruptcy by other creditors. Discuss CC's right to repossess the TV set and whether CC has priority over the trustee in bankruptcy to any proceeds from the disposal of the set.

Question

What will be an ideal response?

Answer 1

CC will not be able to repossess the set. The filing of the involuntary petition in bankruptcy operates as an automatic stay of any creditor's action against the debtor or the property of the debtor. If CC knowingly violates the automatic stay, CC could be liable to any injured party for actual damages suffered, all costs, reasonable attorneys' fees, and even possibly punitive damages. Therefore, CC's right of repossession is cut off by the bankruptcy proceeding. Because Dhani is a consumer-debtor, within thirty days of the filing of the petition or before the first creditor's meeting (whichever is first) Dhani must file with the clerk his intent as to the disposition of the TV set¾is, whether he intends to retain the set, surrender the set to CC, claim the set as exempt, or reaffirm the debt. The trustee must carry out this intent within forty-five days of this filing. As a secured party, however, CC may attempt to get relief from the stay by claiming it needs adequate protection to preserve its security interest in the set. If, for example, the set is still in Dhani's possession and is being used by him, the bankruptcy court could require Dhani or the trustee to make periodic cash payments or even a single, one-time payment to protect against depreciation of the value of the set. If adequate protection cannot be provided, the court may vacate the stay and allow CC to repossess the set by pursuing its rights under Article 9 of the UCC. CC does have a right of priority over the trustee. A trustee occupies the same position as a lien creditor, but a lien creditor's priority is secondary to a previously perfected secured party. CC is a perfected secured party, and on sale of the television set it is entitled to the proceeds up to the amount of balance of the debt and any costs incurred because of Dhani's default.