In a decision significant to both creditors and debtors in Wisconsin, the Court of Appeals recently ruled that parties to security agreements may not waive certain rights provided by Article 9 of Wisconsin’s version of the Uniform Commercial Code (“UCC”).
On August 5, 2009, the appellate court issued its decision in Kraenzler v. Brace, No. 2008AP1709 (recommended for publication), which establishes that, although parties may opt out of many standard UCC provisions, certain statutory debtor rights relating to secured obligations may not be voluntarily waived in a security agreement.
The Kraenzler case involved a loan made by Robert and Lynn Brace (“Brace”) to Werner Kraenzler and Michael Newville (“Kraenzler”) for the purpose of facilitating Kraenzler’s business of producing parts for 1932 Ford roadsters. To secure the loan, Brace and Kraenzler entered into an agreement whereby Kraenzler gave Brace a security interest in stamping dies that were used to fabricate steel for roadster parts. After Kraenzler failed to make full repayment of the loan, Brace sent Kraenzler a notice of default. When Kraenzler failed to respond to the default notice, Brace located the stamping dies and sold them to a third-party. Kraenzler discovered that Brace sold the dies and sued Brace for violating certain provisions of Article 9 of Wisconsin’s UCC, which governs secured transactions. Brace then counter-sued, claiming breach of contract.
On review, the Court of Appeals was presented with issues of whether Brace violated Kraenzler’s rights as a debtor, including Kraenzler’s statutory right to a commercially reasonable sale of the stamping dies collateral. Specifically, the court addressed whether all or only certain provisions of the Wisconsin’s UCC may be contractually altered. The Court of Appeals ultimately held in favor of Kraenzler, ruling that certain UCC provisions governing debtor rights may not be contracted away in light of clear statutory directive found in Wis. Stat. § 409.602. Of importance, the Court of Appeals indicated that certain statutory debtor rights may not be waived in a security agreement, including the right to:
- require that the secured party may use the collateral only in the manner and extent agreed to by the debtor;
- request an accounting from the secured party regarding the collateral and any surplus from the sale of the collateral;
- require that the secured party proceed in a commercially reasonable manner when enforcing the obligation against the debtor;
- application of the proceeds from the collateral to the debtor’s obligation under the loan;
- receive timely notice upon disposition of the collateral by the secured party;
- a calculation and explanation of the surplus or deficiency on disposition of the collateral;
- redeem the collateral; and
- remedies under Wis. Stat. §§ 409.625 and 409.626 when the secured party fails to comply with Chapter 409.
Importantly, there are certain rights under the UCC that a debtor can waive, but only by authenticated agreement after default:
- the right to notification of the disposition of collateral;
- mandatory disposition of the collateral; and
- redemption of the collateral.
The Kraenzler decision is important to creditors and debtors alike in confirming the prohibitions and limitations on debtors’ legal right to negotiate, limit or contractually eliminate certain protections afforded debtors by the Uniform Commercial Code.
For more information, please contact one of the authors of this alert or your Michael Best attorney.