Repossessions: 10.2.5.2 Burden of Proof When Creditor Seeks Deficiency
In states that have adopted the uniform version of revised Article 9, courts will look to pre-revision decisions to allocate the burden of proof for consumer transactions.
In states that have adopted the uniform version of revised Article 9, courts will look to pre-revision decisions to allocate the burden of proof for consumer transactions.
When the debtor filed suit against the creditor for failure to dispose of the collateral in a commercially reasonable fashion, some pre-revision cases placed the burden of proof on the debtor.58 Other decisions placed the burden of proof on the creditor, regardless of which party was the plaintiff.59
Most courts consider whether a sale was commercially reasonable a factual question appropriate for jury determination.61 A minority of jurisdictions regard it as a mixed question of law and fact.62 In either case, the issue may be appropriate for summary judgment, which can be a useful litigation tool when the violation is clear, such as when no notice was sent to the debtor, or the notice was improper on its face.
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
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
Preservation of warranties on the collateral may be critical to maximizing the resale price.
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.
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.
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.
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
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.
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
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
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
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
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.
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.
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
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
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.
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