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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.

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