We represent many clients who have made secured loans to other businesses thereby creating purchase money security interests or have leased vehicles or equipment. In these cases, it is important to recover the collateral or leased property as quickly as possible to prevent the continuing depreciation of those assets while a lawsuit is pending to foreclose the client’s interest or recover the amounts past due under the terms of the contract or lease. In Texas, this procedure is called a sequestration or replevin action.

After a default occurs on a secured loan, the secured party may repossess its collateral under section 9 of the Uniform Commercial Code or, in certain circumstances, render its collateral unusable and dispose of the collateral on the debtor’s premises. This procedure may be utilized through the court system at anytime after a lawsuit is filed or by means of ‘self help’ so long as it occurs without a breach of the peace. Most security agreements will contain a clause that requires the debtor to assemble the collateral and make it available to the lender after default at a place that is convenient to both parties. However, when attempting to repossess such items as construction equipment kept in a locked yard or tractor trailers that may be stored in an undisclosed location or on the road out of state, it is usually necessary to use judicial process and file an application for writ of sequestration. The writ of sequestration is prepared by the court and may be obtained ex parte, which means holding a hearing without notice to the other party, and must be served by a constable or sheriff who will, if able, take the collateral into their possession and hold it for ten days at which time the debtor may file a replevy bond and motion to dissolve the writ of sequestration in an attempt to maintain the collateral. This is usually not an attractive option to the debtor as it means more money spent on attorneys and payment of the bond, money that probably wasn’t available to make the monthly collateral payments to begin with.

We are often able to keep lawsuits open after judicially foreclosing on collateral and allow the plaintiff to sell the collateral which almost always results in a deficiency. We can then amend our pleadings to include the new deficiency balance. Section 9 of the Uniform Commercial Code provides that a secured party may, after default and repossession, sell, lease, license or otherwise dispose of any or all of the collateral as long as every aspect of the disposition of the collateral is done in a commercially reasonable manner. Proper notification must be given to the debtor 10 days or more prior to the sale of the collateral, as well as any secondary obligor; any other party that the plaintiff has received an authenticated notification of a claim of interest in the collateral and any other party claiming a security interest in the collateral.

It is important to keep in mind that if, during any point of the process, the debtor files for bankruptcy protection, the plaintiff must cease and desist all collection attempts and communications. The plaintiff must then proceed through the bankruptcy court to protect its interests as a creditor and recover its collateral.