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Repossessions: 12.3.4 No Deficiency After Revocation of Acceptance

U.C.C. Article 2 gives a buyer the right to revoke acceptance of nonconforming goods and cancel the sale.71 The nonconformity must substantially impair the value of the goods to the buyer.72 A consumer who properly exercises these rights before a repossession (and possibly even after a repossession73) is no longer obligated on the debt.

Repossessions: 12.4.1 Overview

With the exceptions noted in the prior section, the UCC permits a creditor to seek a deficiency after sale of repossessed collateral.83 But about half the states have enacted statutes that limit deficiencies in at least certain consumer transactions.84 These state statutes trump the usual rules about the creditor’s right to a deficiency (found in U.C.C.

Repossessions: 12.4.2 Dollar Limitations on Anti-Deficiency Statutes

The most common reason a state anti-deficiency statute will not apply in a particular case is the low dollar maximum on the consumer transactions covered by the law, allowing a creditor to seek a deficiency when the consumer transaction exceeds the statutory amount. Particularly when the dollar maximum applies to the initial cash price or amount financed, these statutes have limited applicability to car or manufactured home repossessions.

Repossessions: 12.4.3 Are Consumer Loans or Only Credit Sales Covered?

Another major limitation on the scope of certain state anti-deficiency statutes is that they apply only to credit sales, that is an installment sales contract or other credit offered by the seller at the time of sale (usually assigned to a separate creditor after the sale). They typically apply to assignees of retail installment contracts, and therefore apply to banks, credit unions, and other purely lending institutions when one of those institutions seeks a deficiency arising from a debt assigned to it by a seller.

Repossessions: 12.4.5 The Illinois Statute’s Scope

The Illinois anti-deficiency statute’s scope is atypical and needs separate treatment. The statute has no dollar limitations, and thus potentially applies to almost any repossession. But the Illinois anti-deficiency statute applies only to cases in which, upon the creditor’s request, the goods are voluntarily surrendered in ordinary condition, free from malicious damage, and the buyer has paid sixty percent or more of the deferred payment price at the time of default.119

Repossessions: 12.4.6 Excessive Damage to the Collateral May Give Rise to a Creditor Cause of Action

Anti-deficiency statutes prevent a creditor from repossessing collateral and then seeking a deficiency. But they often allow the creditor to bring an action against the consumer after repossession for excessive damage to the collateral that occurred before repossession. For example, the 1968 and 1974 versions of the UCCC124 and the anti-deficiency judgment statutes of many states125 allow the creditor to bring an action for damages if the consumer wrongfully damages the collateral.

Repossessions: 12.4.7 Effect of Anti-Deficiency Statute on Judicial Sale of Property Pursuant to a Judgment Lien

Anti-deficiency statutes require creditors to elect between repossessing the collateral or bringing an action on the debt. If a secured party brings an action on the debt, the UCC allows it to reduce its claim to judgment or to foreclose its interest by any available procedure provided by state law, including a judicial sale of the collateral following judgment, execution, and levy.127 Such judicial sales are governed by other state law, not by the UCC.128

Repossessions: 12.6.2.2 Violations Triggering the Absolute Bar

The absolute bar approach requires the creditor’s strict compliance with the UCC. When the method, manner, time, place, and other terms of the disposition of the collateral are commercially unreasonable or otherwise violate UCC requirements set forth in Part 6 of Article 9, this violation serves as an absolute defense to the deficiency action. The absolute bar applies whenever the creditor fails to meet its burden of proving that every aspect of the sale is commercially reasonable.254

Repossessions: 12.6.2.3 Operation of the Absolute Bar Rule

When the creditor’s conduct triggers the absolute bar rule, the deficiency being sought is precluded in its entirety, no matter what evidence the creditor later presents to prove its right to the balance due. If the debtor has asserted counterclaims that exceed the creditor’s deficiency claim, the debtor recovers at least the difference. If a proper sale would have produced a surplus, the debtor also has a right under section 9-625 [formerly U.C.C.

Repossessions: 12.6.2.4 Justification for the Absolute Bar Rule

The rationale for the absolute bar rule is well described by the following excerpt:

The most natural and reasonable construction of the statutory language, in the light of the legal background, the realities of the relationships involved between secured creditors and debtors who have defaulted and their respective financial resources for engaging in litigation, all lead to the conclusion that the right to a deficiency judgment depends on compliance with the statutory requirements concerning dispositions and notice.

Repossessions: 12.6.3.1 Generally

Most states that do not adhere to the absolute bar approach adopt the rebuttable presumption theory.273 Under this approach, creditors that violate the UCC have the burden of proving by evidence independent of the collateral’s sale price that the collateral’s value is less than the outstanding debt, and that a deficiency is thus owed.

Repossessions: 12.6.3.3 Operation of the Rebuttable Presumption Approach

At least one state supreme court has ruled that the creditor must introduce clear and convincing evidence to satisfy its burden of showing that the sale price did not equal the deficiency.285 The creditor’s proof must address the fair market value of the collateral, not the price obtained at the repossession sale and the circumstances surrounding that sale.286 A car’s value cannot be established solely by a court’s taking judicial notice of a “redbook” value without evidence of the particular ca

Repossessions: 12.6.4 The Set-Off Theory

The third theory, the set-off approach, takes the questionable approach of limiting the debtor’s remedies to raising counterclaims that are set off against the creditor’s deficiency recovery. Even when the creditor’s sale of the collateral is commercially unreasonable, the creditor recovers the full amount of its claimed deficiency, reduced by the debtor’s actual damages or by statutory damages under U.C.C. § 9-625 [formerly U.C.C. § 9-507(1)].

Repossessions: 12.6.5 State-by-State Survey

The preceding subsections have discussed the three competing doctrines states apply to determine the effect of the creditor’s noncompliance with Article 9 on its right to a deficiency: the absolute bar rule, the rebuttable presumption rule, and the set-off theory. This subsection analyzes each state’s approach to this question.

Repossessions: 12.7 Statute of Limitations for Creditor’s Deficiency Claim

A creditor’s deficiency action must be filed within the applicable state statute of limitations. Creditors may be surprised to discover that for actions relating to the sale of goods, the UCC imposes its own four-year statute of limitations (not the six-year to fifteen-year periods creditors may be used to for written obligations or contracts). Article 2 of the UCC states: “An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued.”452

Repossessions: 12.8.1 Is the Plaintiff the Correct Party?

The party seeking the deficiency has the burden of proving it has a present right to enforce the balance of the credit obligation.466 The party cannot just claim it is the owner of the consumer’s obligation, but must present documentary evidence of that ownership.467 If the plaintiff is not the party named in the original credit agreement, and does not prove that the obligation was negotiated or assigned to it, it does not have standing to seek a deficiency judgment.

Repossessions: 12.8.2 Special Notice Requirements As Precondition to a Deficiency

A number of state consumer credit statutes place certain notice requirements on a creditor, and condition its right to a deficiency judgment on compliance with these requirements. These requirements are in addition to UCC restrictions on a deficiency judgment when the notice of sale is defective.485 Many of these special notice requirements relate to the right granted by some states to reinstate the contract after repossession, a topic discussed in , supra.

Repossessions: 12.8.4 Elements Creditor Must Prove

The consumer’s attorney should keep in mind the elements that the creditor must prove in order to recover a deficiency judgment. If the claim is based on a contract, the creditor must prove the existence and terms of that contract.518 Unless a stipulation or admission establishes those facts, the creditor must introduce the contract into evidence.519 The creditor must also establish the amount of the balance.520

Repossessions: 12.9.1.1 Nature of Cosigner’s Liability

Consumers frequently find themselves facing liability for debts for which they have signed along with another person, expecting the other person to make payment.523 Typically, a friend or relative is asked to “cosign” a note or installment contract because a creditor has required another signature as a condition of extending credit. When the principal obligor defaults, the creditor may sell the collateral and seek the deficiency from both the principal obligor and the surety.

Repossessions: 12.9.1.2 Cosigner’s Right to Assert Defenses the Principal Obligor Could Assert

In general, the cosigner, guarantor, or other surety has the same defenses and counterclaims to the deficiency action as are available to the principal obligor.536 However certain defenses, such as bankruptcy or infancy of the principal debtor, by their nature, cannot be used by the guarantor because they go to the heart of why the guarantee was needed.537 Of course, the guarantor’s own infancy or bankruptcy is still a defense.