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Repossessions: 10.3.2 Use of Collateral
The duty to use reasonable care in the custody and preservation of the collateral means that the creditor may not drive the debtor’s car for personal reasons or let someone use the debtor’s manufactured home pending sale.72 Moreover, in the case of consumer goods, Article 9 specifically prohibits the security agreement from granting the creditor the right to use the collateral after the creditor gains possession.73 However, the creditor may always use or operate the collateral in order to preserve i
Repossessions: 10.3.3 Duty to Recondition
Section 9-610(a) specifically states that the creditor may sell the collateral “in its present condition.”86 Nonetheless, under the substantively identical language of the former version of Article 9,87 many courts found that sale of the collateral in its condition at the time of repossession was not commercially reasonable under the circumstances of the particular case.88 If the value of the collateral will be significantly enhanced or if the likelihood
Repossessions: 10.3.4 Preservation of Warranties
Preservation of warranties on the collateral may be critical to maximizing the resale price.
Repossessions: 10.4.1 Importance of Notice
Section 9-611(b) requires reasonable notice of the sale or other disposition of repossessed collateral. The notice of sale is of the utmost importance to the consumer. It tells when to expect loss of the property if actions are not taken to redeem it or otherwise to prevent the sale.
Repossessions: 10.4.2 Who Must Send Notice
The “secured party” must notify the debtor of the sale.121 If the security interest is transferred to an assignee, several courts have held that the assignee and not the assignor is the “secured party” who must send the notice.122 That is, the party actually responsible for selling the collateral must send the notice.
Repossessions: 10.4.3 Written Requirement
Under the former version of Article 9, courts were split on whether oral notice was proper or whether only written notice of the sale would suffice.
Repossessions: 10.4.4.1 UCC Definition of “Send”
Section 9-611(c) requires the secured party to send notification of the sale.144 Article 9 includes its own definition of “send” instead of incorporating the general definition found in Article 1.145 The core of the Article 9 definition is “to deposit in the mail, deliver for transmission, or transmit by any other usual means, with postage or cost of transmission provided for, addressed to any address reasonable under the circumstances.”146
Repossessions: 10.4.4.2 Electronic Notice
Article 9 allows notice to be given by electronic means of transmission,151 but secured parties may not transmit the notice of sale electronically as a way to avoid giving actual notice to the consumer. Section 9-611(b) requires “reasonable” notification of the sale, and official comment 2 specifically states that the manner in which the notice is sent must be reasonable.
Repossessions: 10.4.5.1 Notice Required Regardless of How and When Creditor Acquires Possession
Voluntary surrender does not constitute waiver of notice of sale, so a debtor who voluntarily surrenders the collateral must receive notice of the sale.159 Notice is required regardless of whether the creditor acquires possession of the collateral before or after default, and regardless of whether the creditor makes a formal declaration of default.160 If the default is cured under state law after the notice of sale has been sent and there is a subsequent default, a new notice must be sent, becau
Repossessions: 10.4.5.2 Notice Required Despite Debtor’s Actual Knowledge or Inability to Buy
Under the former version of Article 9, some courts found that a debtor’s actual knowledge of the sale was sufficient to satisfy the notice requirement, even when the creditor failed to send notice.161 Other cases held that when the creditor failed to send notice to the debtor, the debtor’s actual knowledge of the sale did not cure the creditor’s violation and the creditor acted in a commercially unreasonable fashion.162 Because revised Article 9 requires the notice to inform the consumer of much
Repossessions: 10.4.5.3 Narrow Exception When Collateral Is Perishable, Declining in Value, or Sold on “Recognized Market”
Article 9 provides that notice is not required if the collateral is perishable, threatens to decline speedily in value, or is of a type customarily sold on a recognized market.166 The rationale for the exception for collateral that is perishable or likely to decline speedily in value is to prevent a decline in value of the collateral while notice is being sent, and the provision is thus intended to protect the debtor.167 The reason that sale in a recognized market excuses notice of sale is that
Repossessions: 10.4.6.2 Multiple Notices When There Are Multiple Parties; Notice to Party’s Attorney
When there are multiple parties, each of whom is entitled to notice under Article 9, each must receive a notice. For example, applying revised Article 9, a federal district court held that a creditor’s provision of notice to just one of two co-signers freed the second co-signer from liability for a deficiency even though she was married to, and living with, the other obligor.186
Repossessions: 10.4.6.3 Effect of Agreement Transferring the Collateral to a New Buyer
When the debtor, with the creditor’s permission, sells the collateral (such as a manufactured home) to a third party, but the debtor remains obligated to the creditor if the home’s new owner defaults, the question arises whether the original debtor is entitled to notice of the repossession sale.
Repossessions: 10.4.7.2 Guarantor’s Waiver of Notice
Courts were split under the former version of Article 9 as to whether guarantors could, prior to default, waive their right to notice.214 Former UCC § 9-504(3) allowed a “debtor” to waive notice after default, but did not define whether debtor included guarantors. The majority rule was that guarantors could not waive notice prior to default, and most of the cases reaching the contrary conclusion involved commercial transactions, particularly guarantors of Small Business Administration loans.
Repossessions: 10.4.8.2 Requirements Under Other State Statutes
In some states, non-UCC statutes prescribe a minimum time period between the giving of notice and the sale.239 For example, California law requires at least ten days prior notice if repossessed goods are to be sold at public sale and at least fifteen days’ notice before disposing of a motor vehicle.240
Repossessions: 10.4.9 Notice Sent But Not Received; Burden of Proving Notice Was Sent
Both the current and former versions of Article 9 require only that the creditor send notice, not that the debtor receive it.246 The secured party may prevail even if the debtor denies receiving the notice.247 However, the debtor’s denial of receipt makes it a question of fact whether the notice was actually mailed.248
Repossessions: 10.4.10 Each Co-Debtor and Secondary Obligor Must Receive a Separate Notice
Notice may be inadequate if the creditor fails to send a separate envelope and notice to each co-debtor, even married co-debtors.263 For example, notice sent to the debtor’s husband was inadequate as to the debtor, even though she signed for the notice, when there was no evidence that she read or had knowledge of its contents.264 In one case, a creditor mailed its notice in one envelope addressed to both spouses at the address listed on the contract.
Repossessions: 13.6.2.1 Elements of Conversion
The tort of conversion is often available as a remedy for wrongful repossession or disposition of collateral. A conversion occurs when one wrongfully exercises dominion or control over another’s property.397 The elements of the tort are usually listed as: (1) intentionally interfering, controlling or taking property belonging to another; (2) without the owner’s consent; (3) resulting in serious interference with the rights of the owner to possess the property.398
Repossessions: 13.6.2.2 Application of the Tort of Conversion to Repossession
Examples of the application of the tort of conversion in the repossession context include:
Repossessions: 13.6.2.3 Trespass to Chattels
Even if the secured party eventually returns a wrongfully repossessed vehicle, or returns the unsecured personalty seized with a lawfully repossessed vehicle, the consumer still has a cause of action for conversion or trespass to chattels.431 According to the Restatement (Second) of Torts, a person commits trespass to chattels by intentionally dispossessing another of a chattel, depriving the other of its use for a substantial time, or impairing the chattel’s condition, quality, or value.432
Repossessions: 13.6.3 Negligence
Debtors often have negligence claims when repossession violations occur. For example, a negligence action is possible when collateral has been damaged after being taken. Once unsecured personalty has been taken in the course of a repossession, even unknowingly, the secured party is in the position of a constructive bailee, with concomitant duties.437 Breach of those duties amounts to negligence and any damages caused by that breach are recoverable.438