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Repossessions: 8.8.2.4 Ignoring the Claimed Purchase-Money Security Interest in Household Goods

One of the best options for a debtor facing a claimed purchase-money security interest in household goods is to ignore the claim of a security interest entirely. If the debtor completes a bankruptcy case without paying or reaffirming, the debtor’s personal liability on the claim will be discharged. Although the creditor will retain whatever rights it has to the collateral under state law, those rights are subject to whatever defenses the debtor has, as discussed above.

Repossessions: 8.9.1 Requirements of Section 521(a)(2)

Section 521(a)(2) requires the debtor in a chapter 7 case to file a statement of intention with respect to debts secured by property of the estate and with respect to personal property leases.424 The debtor need not state all of their plans regarding the property on this statement (for example, lien avoidance, chapter 13 cure, and so forth).

Repossessions: 8.9.2.1 Introduction

Prior to the 2005 amendments there was no sanction provided for failing to carry through on stated intentions, which reflected the view that the statement of intention was designed primarily as a notice provision for secured creditors.

Repossessions: 8.9.2.2 Stay Relief Under Section 362(h)

Section 521(a)(2)(C) adds an exception for relief from the stay as permitted by section 362(h). That subsection terminates the automatic stay with respect to personal property of the estate securing a claim, and renders that property no longer property of the estate, if the debtor fails to timely file a statement of intention, or to state an intention to surrender the property, redeem the property, enter into a reaffirmation agreement with respect to the underlying claim, or assume an unexpired lease on the property.

Repossessions: 8.9.2.3 Stay Relief Under Section 521(a)(6)

Section 521(a)(6) provides that the debtor shall not retain possession of personal property as to which a creditor has an allowed secured claim for the purchase price secured by that personal property, unless the debtor, not later than forty-five days after the meeting of creditors, enters into a reaffirmation agreement or redeems the property. If the debtor fails to “so act,” the stay under section 362(a) is terminated and the property is no longer property of the estate.

Repossessions: 8.11 When the Repo Man Files Bankruptcy

Those representing consumers on various claims increasingly see defendants that file bankruptcy. A repossessor, for example, might file bankruptcy after your client obtains a judgment against it for damages and attorney fees in a case based on wrongful repossession.460 Similarly, a class action defendant may file a corporate bankruptcy while a case against it is pending—sometimes for reasons unrelated to the pending litigation.

Repossessions: 14.1.1 Scope of This Chapter

This chapter analyzes repossession issues relating to consumer leases of personal property, including automobile leases, rent-to-own (RTO) transactions, solar equipment leases, furniture leases, leases of personal emergency response equipment, and other leases of goods for personal or household use. This chapter does not cover leases of real property, residences, or manufactured home park space. The chapter also does not deal with short term rentals, such as a one-week rental of an automobile or a one-month rental of a power tool.

Repossessions: 14.1.2.1 Generally

This subsection sets out general principles as to when Article 9 governs lease transactions. Application of these principles to automobile leases and RTO transactions is detailed in and , infra. This subsection is background for those discussions and is particularly applicable to the analysis of whether other types of leases are governed by Article 9.

Repossessions: 14.1.2.2 History of UCC Definition of Security Interest

The history of the UCC definition of “security interest” is important because the UCC underwent significant changes in 1987. States adopted the revised definition at various times.4 When reading a case, it is critical to determine whether it interprets the original or the revised definition. Decisions interpreting the original definition will have little precedential value for cases in which the revised definition applies.

Repossessions: 14.1.2.3.1 Introduction

Under the UCC, the facts of each case determine whether a transaction creates a security interest or a lease.10 The focus is on the economics of the transaction.11 When the transaction is designated a lease, courts often place the burden of proof on the party who claims it is not a lease.12 However, the label the parties place upon the transaction is not controlling, and the court will look to the true nature of the transaction to determine w

Repossessions: 14.1.2.3.3 When is additional consideration considered nominal?

One of the circumstances under which the bright-line rule treats a non-terminable lease as a security agreement is when the consumer has the option to acquire the goods at the conclusion of the lease for nominal or no additional consideration.19 Section 1-203(d)(2) states that an option price is not nominal if it is stated as the fair market value of the goods, determined at the time the option is to be performed.20

Repossessions: 14.1.3.1 UCC Article 2A

In 1987 the Uniform Law Commission (formerly the National Conference of Commissioners on Uniform State Laws) and the American Law Institute approved Article 2A of the Uniform Commercial Code covering leases. Article 2A was then extensively amended in 1990. Forty-eight states and the District of Columbia have adopted the 1990 version,39 South Dakota has adopted an amalgam of the original 1987 version and the 1990 version,40 and Louisiana has not adopted any version of Article 2A.

Repossessions: 14.1.3.2 The Federal Consumer Leasing Act

An important supplementary law to Article 2A is the federal Consumer Leasing Act (CLA).45 In the repossessions context, this statute has implications for the disclosure and calculation of charges after default or early termination of a lease. While these CLA standards have particular application to automobile leases, they also apply to solar equipment,46 furniture, alarm systems, and other personal property leases that are not terminable at will.

Repossessions: 14.1.3.4 State Deceptive Practices and Debt Collection Statutes

State deceptive practices (UDAP) statutes have special utility in dealing with lease transactions.70 UDAP statutes apply to RTO transactions, automobile leases (even those with lease payments in excess of the CLA’s dollar limitation or otherwise outside the CLA’s scope), and other forms of consumer leases. UDAP statutes also, at least arguably, apply to almost every type of abusive lease practice, and offer effective consumer remedies.

Repossessions: 14.2.1.1 Generally

The first step in analyzing the repossession rights and responsibilities of automobile lessors and lessees is to determine whether UCC Article 9 or 2A applies to the lease. If Article 9 applies, lessors must comply with the standards set out in , supra. If Article 2A applies, then the lessor has a separate set of obligations, set out in this section.

Repossessions: 14.2.1.2 Closed-End Automobile Leases

The typical automobile lease is a closed-end lease, meaning that at the end of the lease term (absent unusual wear or use) the consumer can return the vehicle without any additional liability. Courts generally find that closed-end automobile leases are not governed by Article 9, but by Article 2A.77

Repossessions: 14.2.1.3 Open-End Automobile Leases

Open-end leases assess the consumer for the difference between the car’s expected value at the end of the lease and the car’s actual value at scheduled termination. In part because of the federal Consumer Leasing Act restrictions on the consumer’s maximum end-of-lease obligation in an open-end lease, few automobile leases today are open-end.

Repossessions: 14.2.1.4 Rent-to-Own Automobile Transactions

Rent-to-own (RTO) automobile transactions are generally structured as a month-to-month or week-to-week rental, terminable at any time without penalty, with an option to purchase the vehicle at the end of the rental term for minimal consideration. As such, the analysis as to whether Article 9 applies is the same as for other RTO transactions.87

Repossessions: 14.2.2.1 Lease Agreement Defines What Conduct Results in Default

Article 2A provides that the lease agreement defines what consumer conduct is a default.95 Consequently, a lessor can only declare a default if its grounds for doing so are specifically and clearly stated in the lease agreement. When a consumer defaults, Article 2A has no requirement that the lessor notify the consumer as to the lease default or to the fact that the lessor will enforce default remedies.96 Any such requirement must be found in other law or in the lease agreement.

Repossessions: 14.2.2.2 Not All Defaults Justify Repossession

While the lessor can define in the lease agreement what conduct amounts to default, Article 2A provides that only certain defaults authorize the lessor to seize the leased vehicle. The lessor can seize the leased vehicle only if the consumer:

Repossessions: 14.2.2.3 Limits on Lessor’s Ability to Accelerate Lease Payments

Article 2A states that the terms accelerate “at will” and accelerate “when the lessor deems itself insecure” shall be construed to allow acceleration of payments only if the lessor in good faith believes the prospect of payment or performance is impaired.102 The lessor has the burden of proving its good faith.103 This provision parallels UCC § 1-309 [formerly UCC § 1-208] relating to security interests, which is analyzed in , supra.