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Repossessions: 12.9.2.1 Generally

If the case involves a negotiable instrument, as will generally be true when the transaction is a secured loan rather than a retail installment contract, Article 3 of the UCC will govern the liability of cosigners. There are three versions of Article 3 in effect at present.550 As of 2021, only New York retains the pre-1990 version of Article 3.

Repossessions: 12.9.3.4.2 Impairment of collateral as defense to deficiency

If the creditor impairs the collateral, for example by failing to take reasonable care of it after repossession, the accommodation party is discharged to the extent of the damage under the pre-1990 version of Article 3.597 Likewise, if the creditor fails to perfect its security interest in the collateral, and the collateral is sold to a third party or returned to the debtor by a trustee in bankruptcy, then the accommodation party will be discharged from the debt to the extent of the value of the collateral.

Repossessions: 12.9.4.1 Relevance of Common Law Rules

The common law of suretyship is relevant in repossession cases in two situations. First, if the cosigner’s obligation is created by a contract (for example, a retail installment contract or a separate surety agreement) rather than a signature on a negotiable instrument, the common law of suretyship rather than the UCC applies.610 Second, even if the UCC applies, common law suretyship defenses are applicable to the extent that they are not displaced by specific provisions of Article 3.611

Repossessions: 12.9.4.2 Discharge of Guarantor Under Common Law Rules

Under common law the guarantor is a favorite of the law and guaranties are to be construed strictly in favor of the guarantor.614 On the other hand, some courts construe guarantees using the ordinary rules of contract law,615 but as one of those principles is to construe a contract against its drafter the result will often be the same—that a guaranty will be strictly construed in favor of the surety.616 However, in at least the two states (Oklahoma

Repossessions: 12.9.5.2 Creditor’s Duty of Good Faith to Surety

The creditor’s broad duty of good faith under the UCC applies to cosigners as well as to primary obligors.669 One court has held that acceleration not in good faith releases the guarantors.670 Another case which considered this argument recognized a duty of good faith to guarantors, but limited this duty severely, finding that it did not include any requirement of commercial reasonableness.671 Because Article 9’s definition of good faith was broade

Repossessions: 12.9.2.3 Definitions Under Pre-1990 Version of Article 3

The pre-1990 version of Article 3 is relevant only in New York, where it continues to apply, and possibly for very old obligations in a few other states. This version of Article 3 defines an accommodation party as “one who signs the instrument in any capacity for the purpose of lending his name to another party to it.”565 This definition focuses on the purpose of the person in signing the instrument.566

Repossessions: 12.9.3.1 Generally

The three versions of Article 3 are significantly different in their treatment of cosigners’ defenses. The subsections that follow first discuss cosigner defenses under the 1990 version, in effect in most states, then defenses under the 2002 version, and finally defenses in New York, which has retained the pre-1990 version.

Defenses Available to Cosigners Under U.C.C. Article 3

Repossessions: 12.9.3.2.1 Extension of due date

If the creditor extends the due date for an instrument, the 1990 version of Article 3 provides that an accommodation party is discharged to the extent that the extension causes loss to that party with respect to the right of recourse against the principal obligor.570 For example, imagine that a creditor gives the principal obligor an extension of time, and during that extension the principal obligor dies, becomes insolvent, or absconds, and the accommodation party is forced to pay the debt.

Repossessions: 12.9.3.2.2 Modification of terms of obligation

A creditor’s modification of an instrument’s terms other than its due date also provides a defense to an accommodation party. Article 3 in its 1990 version provides that a material modification discharges the accommodation party unless the creditor proves that no loss was caused by the modification.572 Significantly, the burden of proof is on the creditor rather than the accommodation party. This defense applies only to an accommodation party who has a right of recourse against the principal obligor.

Repossessions: 12.9.3.2.4 Release of principal obligor

Under the pre-1990 version of Article 3, if the creditor released the principal obligor, the secondary obligor was also released.580 The 1990 version of Article 3 explicitly rejects this defense, at least when the secondary obligor has a right of recourse against the principal obligor.581 The UCC does not give a clear answer to the question of the effect of a release upon a secondary obligor who does not have a right of recourse, however. It is possible to interpret U.C.C.

Repossessions: 12.9.3.2.5 Waiver

In contrast to the pre-1990 version of Article 3, under the 1990 version a creditor cannot accomplish a waiver of these defenses by unilaterally inserting “reservation of rights” language in a document granting the principal obligor a release, extension, modification, or the like.584 Waiver is allowed, but the accommodation party must actually agree to the waiver, either at the outset of the transaction or at the time the extension or deferral is granted.585 Waiver language may be expressed in g

Repossessions: 12.9.3.2.6 Defenses when accommodation party’s status is unknown to creditor

An accommodation party is not discharged by extension, modification, or impairment of collateral unless the creditor knows of the accommodation party’s status or the note was signed in a way that makes the accommodation status clear.590 If the note includes the FTC Holder Notice, however, and the original holder of the note knew that one of the signatories was merely an accommodation party, the accommodation party should be able to assert these defenses against the current holder of the note.591

Repossessions: 12.9.3.3 Defenses Under 2002 Revisions to Article 3

The 2002 revisions to Article 3, so far enacted by Arkansas, District of Columbia, Indiana, Kentucky, Michigan, Minnesota, Mississippi, Nevada, New Mexico, Oklahoma, South Carolina, and Texas, make some changes in accommodation parties’ defenses. These changes bring the Article 3 cosigner rules closer to the common law rules as expressed by the Restatement (Third) of Suretyship and Guaranty.593

Repossessions: 12.9.3.4.1 Payment extensions and other modifications of terms

The pre-1990 version of Article 3, still in effect in New York, sets forth its rules regarding cosigner defenses in U.C.C. § 3-606(1). It provides for a discharge of the debt against an accommodation party if the creditor “agrees to suspend the right to enforce against [the debtor] the instrument or collateral or otherwise discharges such person.” In contrast to the 1990 version of Article 3, under the pre-1990 version these acts by the creditor completely discharge the accommodation party, regardless of the amount of damage actually caused.

Repossessions: 12.9.7 Surety’s Claims Against the Principal Debtor

When the secured party seeks collection from an accommodation party, it is usually because the debtor is bankrupt, judgment proof, or unavailable. Nevertheless, the accommodation party, if forced to pay some or all of the debt, has a right of recourse against the principal debtor.686 The accommodation party should file a claim if there is a bankruptcy and, if not, should establish their accommodation status and obtain a judgment against the debtor on the hope that collection will be possible in the future.

Repossessions: 12.9.8.1 Background

Coerced debt has been defined as non-consensual credit-related transactions that occur in a violent relationship.690 Coerced debt is essentially a type of identity theft; an abusive individual uses the personal identifying information of a victim691 in a credit transaction to get a financial benefit—either through outright fraud or through force or threats.