Your UCC Filing and Repossession: Do Not Breach the Peace or the Pizza

Your UCC Filing Provides You with the Right of Repossession, Just Make Sure You Don’t Breach the Pizza, Er… the Peace

With a properly perfected security interest, your UCC filing provides you with the right of recovery, including repossession of collateral (your inventory or equipment). You can repossess collateral if you can do it without breaching the peace. So, if a landlord has filed its UCC and the tenant defaults, can the landlord change the locks on the building or is that considered a breach of peace? Let’s find out!

The Deliciousness of a UCC Success

A recent Michigan Court of Appeals case, Wells Fargo Bank NA v. Vicky Richter Enterprises,  highlights two of my favorite things: the success of a UCC filing and pizza.

The tenant (a pizza restaurant) was behind in rent. The new landlord had agreed to continue renting to the tenant, as long as the tenant paid the agreed upon rent (which included past due amounts) and signed a security agreement granting the landlord a security interest in “all current and subsequent personal property and trade fixtures located on the leased premises.”

As you’d imagine, the tenant failed to pay timely & when it did remit payment, the checks were returned for insufficient funds. The tenant told the landlord it was in negotiations to sell its business.

The tenant listed its restaurant equipment for sale on Craigslist. The owner of another restaurant inquired about the equipment & agreed to purchase the equipment for $40,000.

Serving Up UCC Win #1: Red Flags

The buyer ended up backing out of the sale. Why? “He did not want to assume the unpaid arrearages still attached to the lease…” The UCC flagged the potential buyer of the additional debts, thus protecting the landlord’s security interest.

The Sauce, I Mean Saga, Continues

With the tenant in default, the landlord made several attempts to contact the tenant, including stopping by the pizza shop multiple times during business hours. But the shop was closed.

The landlord’s attorney recommended it secure the property to prevent the tenant from selling the assets. The landlord had the locks on the building changed, and the landlord prepared to auction the trade fixtures and some equipment, with the intention of using the funds to repay city and state tax liens.

Of course, with the locks changed, the tenants were unable to access the property which certainly got the attention of the tenant. The parties ended up in court. On appeal, the tenant claimed the landlord was unreasonable in changing the locks on the building, because it breached the peace.

The Court of Appeals found the landlord did not breach the peace and relied on Article 9-609: Secured Party’s Right to Take Possession After Default.

Delivering UCC Win #2: No Breach of Peace

In accordance with MCL 440.9609 (Michigan’s Article 9), if the debtor defaults, the secured party may:

(a) Take possession of the collateral.

(b) Without removal, render equipment unusable and dispose of collateral on a debtor’s premises under section 9610.

The court explained, the landlord did not breach the peace by changing the locks, it simply enforced its properly perfected security interest. Further, the landlord didn’t change the locks to prevent the tenant from conducting business (which could have been deemed a breach of peace), it changed the locks to protect the collateral (equipment and fixtures) from being sold.

Too Cheesy?

Come on, I know you were totally waiting for the cheese! In all seriousness, economic conditions are wreaking havoc on the foodservice industry. Can you afford the risk if one of your customers defaults? What if 5 of your customers default? You can, and should, protect yourself. Don’t get burned – get the dough! File a UCC.

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