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Repossessions: 12.9.8.2 Safety Considerations

Before addressing legal remedies or strategies to avoid repossession or defend a deficiency action filed against a victim of coerced debt, the victim’s legal representative should discuss “safety planning” with the victim and refer the victim to a local domestic violence program or the National Domestic Violence Hotline.

Repossessions: 12.9.8.4 Defending a Deficiency Action

A victim of coerced debt has affirmative legal claims against the abuser. If it is safe to do so, a victim who is sued for a deficiency can add the abuser as a responsible third party or a cross-defendant under the contract. Claims such as duress that the victim may be unable to assert against the lender may be viable against the abuser. The victim may request that the abuser be held partially responsible for paying any deficiency judgment or that the liability be entirely shifted to the abuser.

Repossessions: 12.10 Raising Defenses to FDIC or RTC Deficiency Actions

Consumers whose obligations are owed to a bank that has become insolvent may find themselves sued for deficiencies by a federal agency such as the Federal Deposit Insurance Corp. (FDIC), or a financial institution that has purchased the obligation from the agency. Attorneys should be familiar with three different defenses available both to federal agencies responsible for insuring these financial institutions and to those who purchase loan instruments from those agencies.

Repossessions: 11.1.1 Consumer’s Right to Surplus and Liability for Deficiency

After the creditor’s disposition of repossessed collateral, the sale proceeds must be applied, in order, to the reasonable expenses of repossession and sale, satisfaction of the indebtedness, and satisfaction of any indebtedness secured by any subordinate security interest.1 After these deductions, the secured party must pay the debtor any amount of the sale proceeds remaining, called the surplus.2 If the proceeds are not sufficient to pay these expenses and to satisfy the indebtedness, the obligor is l

Repossessions: 11.1.2.1 Right to Surplus After Sale of Collateral

Once the creditor has sold the repossessed collateral and calculated the expenses, credits, and proceeds, the secured party must pay any surplus to the debtor.5 Revised Article 9 is explicit that the right to surplus proceeds cannot be waived by agreement.6 Nor does voluntary surrender of the collateral waive the right to surplus proceeds.7

Repossessions: 11.3.5.4 Consumer Remedies for Insider Sales

UCC § 9-615(f) compares the sale price actually obtained with an arm’s length disposition for two separate and distinct purposes. The insider rule is only triggered if the sale proceeds are “significantly below the range of proceeds” that would be obtained in an arm’s length sale. If the rule is triggered, then the rule requires that the surplus or deficiency is calculated based on the “amount of proceeds that would have been realized” in an arm’s length sale.

Repossessions: 11.3.5.5.1 The burden of proof generally

Burden of proof rules are important in litigation under UCC § 9-615(f). If the creditor bears the burden of proving that the sale price was not significantly below the range of proceeds that an arm’s length sale would have produced, then it is much more likely that UCC § 9-615(f) will measurably reduce abusive deficiencies.

Burden of proof issues arise with respect to three separate questions under UCC § 9-615(f):

Repossessions: 11.3.6.1 Expenses of Seizing and Storing the Collateral

The UCC allows the creditor to deduct from the sale proceeds the reasonable expenses of retaking and holding the collateral.162 Even if the credit agreement does not so provide, the creditor can deduct from the sale price fees paid to repossession agents, other repossession expenses, towing or transporting charges for the repossessed property, and storage fees.163 The creditor must prove its entitlement to these repossession expenses when seeking a deficiency.

Repossessions: 11.3.6.2.1 When such expenses are valid

Secured parties may sell “collateral in its then condition or following any commercially reasonable preparation or processing.”173 If the sale price of the repossessed collateral will be significantly enhanced, then the secured party may have an affirmative obligation to prepare or restore the collateral.174 The UCC specifically authorizes creditors to deduct from the sale price costs for “preparing for disposition,” but the charge must be reasonable.175

Repossessions: 11.3.6.2.2 Computing creditor expenses

If the secured party contracts with an independent, unrelated party for repairs or preparation of the collateral, the secured party should not charge the debtor more than the amount the third party charges the secured party. But, if the secured party performs the repairs itself, it is not clear how it should compute its charge. Creditors often compute repair expenses not at cost, but using a retail price—the same hourly labor charges and part mark-ups that retail customers are charged.

Repossessions: 11.3.6.3 Selling Expenses

Reasonable expenses for selling the collateral can be deducted from the sale price,185 but make sure these costs are not deducted twice: once to reduce the sale price and again as a debit in computing the deficiency. Sale expenses include actual payments the secured party makes to an auctioneer for fees and expenses, and advertising expenses for advertisements that specifically mention the consumer’s property. When the advertising mentions several goods for sale, the consumer should only pay a reasonable share of the advertising costs.

Repossessions: 11.3.6.4.1 Introduction

The secured party’s attorney fees are often a major contributor to a large deficiency claim. While UCC § 9-615(a) allows the secured party to deduct attorney fees and legal expenses from the sale price, it specifies that the creditor can do so only to the extent provided for in the credit agreement and only to the extent that these deductions are not prohibited by state law.189

Repossessions: 11.2.1 Overview

Revised UCC § 9-616 creates a new requirement for a secured party in a consumer-goods transaction (one in which the person incurs the debt primarily for personal, family, or household use, and consumer goods secure the debt25). The secured party must provide a written explanation of the surplus or deficiency.26 The notice, though, need not be provided if the creditor does not seek a deficiency or provide a surplus.27

Repossessions: 11.2.3 Remedies for Failure to Comply

A secured party is liable for any loss caused by its failure to comply with UCC § 9-61649 and, in addition, is liable for supplemental statutory damages of $500 if the violation is part of a pattern or consistent with a practice of noncompliance.50 It appears that the pattern or practice of noncompliance need not be shown if there is a deficiency and the secured party fails to respond to a consumer’s request for an explanation.51

Repossessions: 11.3.1 Overview

Under the UCC, the creditor determines the deficiency or surplus. Few consumers ever challenge this calculation and federal or state law enforcement officials or regulators rarely monitor these calculations. As a result, creditors may become sloppy, apply suspect procedures, intentionally overstate deficiencies, or “forget” surpluses.

Repossessions: 11.3.2.1 The Remainder Due on the Debt Before Adjustments

The debtor is liable for the outstanding credit balance: the amount due on the note whose acceleration led to the repossession. Do not accept the creditor’s calculation of this amount at face value; the creditor has the burden to prove this amount. Nevertheless, one court allowed a creditor to meet its burden through a conclusory affidavit when the consumer did not provide any specific rebuttal.63