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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.

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.