Parties cannot contract away all debtor rights in security
agreement, court of appeals says
By Alex De
Grand, Legal Writer, State Bar of Wisconsin
Aug. 13, 2009 – Parties may not completely opt out of the
Uniform Commercial Code when drafting contract terms in a security
agreement, specifically those that protect a debtor in default, the
Wisconsin Court of Appeals held on Aug. 5 in Kraenzler v. Brace, 2008AP1709.
The U.C.C. provides the basic framework for commercial transactions
for businesses and individuals. Under Wis. Stat. § 401.102 (3), parties may opt out of many
standard provisions, but that provision also allows for “an
exception to the exception” shielding certain rights from
A business loan
Robert Brace loaned $14,103.78 to Werner Kraenzler for production of
parts for 1932 Ford roadsters. The parties’ security agreement
directed Kraenzler to pay Brace $2,000, deliver three sets of frame
rails and boxing plates, and repay the principal. The stamping dies
Kraenzler used to create the frame rails and boxing plates were the
designated collateral to secure payment.
If Kraenzler made every payment on time over a six-month period, he
would pay Brace $4,460 in interest, amounting to nearly a 32 percent
interest rate, the court noted.
Kraenzler failed to make any of the monthly payments, incurring late
penalties of $17,220. The court observed that this drove up the
repayment total to $35,783.78. “These additional penalties
resulted in Kraenzler having to pay almost 250 percent interest on the
$14,103.78 six-month loan,” the court remarked.
After the parties negotiated an extension of the deadline for
repayment, Kraenzler paid Brace $2,000 and delivered three sets of frame
rails and boxing plates. Kraenzler made no further payments and Brace
sent a notice of default that went unanswered. Brace located the
stamping dies and sold them to a third party for an undisclosed sum.
Kraenzler sued Brace for violating his right as a debtor in default
to require a commercially reasonable sale of collateral and the other
rights provided by § 409.602. Brace counterclaimed for breach of
contract and requested damages totaling $33,783.76.
On Kraenzler’s motion for summary judgment, the circuit court
ruled for Brace, holding that the provisions of Wis. Stat. ch. 409 could
be varied by agreement so that Kraenzler and Brace’s contract was
‘An exception to the exception’
In an opinion authored by Chief Judge Richard Brown, the court
dissected § 401.102 (3), which both parties cited.
The first portion of the statute states that parties can opt out of
all U.C.C. provisions by varying the terms in the contract, the court
noted. But that language is immediately followed by the qualification
“except as otherwise provided in chs. 401 to 411,” the court
“Based on Kraenzler’s reading of § 401.102 (3), the
unwaivable rights listed in Wis. Stat. § 409.602
are an exception to the exception that prohibits parties from waiving
certain rights in a contract,” the court said. Section 409.602
details the creditor’s duties to the defaulting debtor, including
the treatment of collateral.
The court rejected Brace’s argument that the two clauses render
§ 401.102 (3) ambiguous. “Just because Brace refuses to fully
read the statute and address the second clause does not mean the statute
has more than one interpretation,” the court said.
“Wisconsin Stat. § 401.102 (3) is silent as to which
U.C.C. provisions qualify as exceptions to the exceptions,” the
court continued. Accordingly, the court studied § 409.602, which
instructs that “the debtor or obligor may not waive or vary the
rules stated in the following listed sections.”
“Once again, we are faced with an unambiguous rule,” the
court concluded. “Section 409.602 is clearly an exception to the
exception, and provides that Kraenzler cannot waive the rights listed
within the statute.”
The court listed these preserved rights as including:
- 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
- a calculation and explanation of the surplus or deficiency on
disposition of the collateral
- redeem the collateral
- remedies under Wis. Stat. §§ 409.625 and 409.626 when the
secured party fails to comply with ch. 409, subsec. (13)
“While the rights listed above can never be waived, the debtor
is entitled to waive select rights, but only after the default
occurs,” the court said. “This includes the right to consent
to the acceptance of the collateral, in full, after default.”
The court cited National Operating L.P. v. Mutual Life Ins. Co. of
N.Y., 2001 WI 87, in which the creditor’s rights to
enforce security agreement terms were limited by ch. 409.
“Therefore, the debtor could not waive or vary his or her right to
surplus equity on disposition of the collateral, or to contest the
commercial reasonableness of the sale,” the court reported.
“Lastly, the court [in National Operating] held that the
debtor could waive his or her right to redeem the collateral, but only
in writing, after default,” the court added.