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Repossessions: 4.1.1 Default As Precondition to Repossession

Under the Uniform Commercial Code (UCC), the debtor’s default is necessary before the secured party may either repossess the collateral1 or dispose of collateral already in the secured party’s possession.2 Repossessing collateral when there has been no default is conversion3 and a violation of Article 9.4 The previous chapter analyzed the first precondition to lawful repossession: a valid security agreement whereby t

Repossessions: 4.1.3 Relationship of Default and Acceleration

It is important to understand the concept of acceleration as it relates to the various uses of the term “default.” Although there are legal theories that argue that a creditor can declare the debtor in default on the whole note when the debtor is delinquent for one or two monthly installments, most courts disagree, and rule that only the delinquent payments are in default.

Repossessions: 4.1.4 Agreement to Accelerate Required; Strict Construction of Grounds to Accelerate

A creditor cannot accelerate a debt unless the credit agreement provides the creditor that right.22 This right must be stated clearly and with certainty, and may not be determined by mere inference.23 “When there is reasonable doubt as to the meaning of the terms of a provision for acceleration, preference is given to that construction which will deny the right to accelerate in order to avoid the harshness of such action.”24

Repossessions: 4.1.7.2 Waiver Provisions Strictly Construed

Courts strictly interpret contractual language allowing creditors to repossess without demand or notice. Notice of acceleration must be given even if a credit agreement in one section allows repossession without demand, if another section of the agreement requires payment of the accelerated note upon demand.40 When the contract is ambiguous, the notification requirement will not be deemed waived.41

Repossessions: 4.2.1 Limits on Nonpayment As Grounds for Default

A number of state statutes provide a grace period for at least certain types of secured transactions before a consumer’s nonpayment is a default.51 Even when not required by statute, creditors often include some form of grace period in the credit agreement, and that provision is as enforceable as any other contract term. A grace period provides that the consumer’s late payment is not a default or grounds for acceleration if made within the grace period.

Repossessions: 4.2.2.2 The UCC Limitation

The UCC allows payment or performance to be accelerated “at will” when the creditor “deems itself insecure,” or words of “similar import,” only if the creditor “in good faith believes that the prospect of payment or performance is impaired.”63 This standard is broad and generous to the creditor.64 Although the creditor must in “good faith” believe that the prospect for payment is impaired, the UCC is explicit that the burden of establishing lack of good faith is on the debtor.

Repossessions: 4.2.4 Retaliatory or Discriminatory Acceleration

The federal Equal Credit Opportunity Act (ECOA) prohibits creditors from declaring a note in default or accelerating a loan just because the consumer has exercised rights under the Truth in Lending Act (TILA), the Fair Credit Reporting Act, the Consumer Leasing Act, the Fair Credit Billing Act (FCBA), the Federal Garnishment Act, the Fair Debt Collection Practices Act, the Electronic Fund Transfer Act, or the ECOA itself.98 For example, it would be an ECOA violation to accelerate a note because of a consumer’s TILA rescission notice, FCBA dispu

Repossessions: 4.2.6 Limits When the Consumer Is a Servicemember

For members of the armed forces on active duty, the Servicemembers Civil Relief Act requires creditors to reduce interest rates on pre-active duty obligations to six percent unless the creditor goes to court and proves that active duty does not materially affect the servicemember’s ability to pay.105 The creditor must forgive any interest over six percent that would otherwise have accrued during the period of active duty.106 The creditor should reduce the monthly payment to reflect the lower int

Repossessions: 4.3.1.1 Generally

Acceleration is not favored in the law, and a creditor may not “by acts or omission permit another to assume that the covenant will not be strictly enforced, then ‘crack down’ on the obligor by rigidly insisting on enforcement, without giving some reasonable notice and opportunity to comply.”119 Accordingly, a creditor who has not insisted upon strict compliance with due dates in the past, but who has instead accepted late payments, must give reasonable notice to the debtor that it will insist on strict compliance in the future.

Repossessions: 4.3.1.2 Waiver

The waiver theory holds that by accepting late payments and by other conduct, the creditor has specifically modified the credit agreement and waived the contractual right to accelerate without notice upon late payment.125 Even though the credit contract has not been amended in writing, the modification is binding if evidenced by the creditor’s oral statement126 or merely by the creditor’s conduct or course of dealing.127 A waiver is effective if th

Repossessions: 4.3.1.3 Estoppel

The second theory used to prevent the creditor from suddenly accelerating a note is that the creditor is estopped by its conduct from enforcing its contractual rights.

Repossessions: 4.3.3 Waiver of Right to Accelerate Based Upon Creditor’s Representations

When a consumer justifiably relies on a creditor’s mistaken representation that payments are not owed, the creditor may be equitably estopped from holding the consumer in default.142 The fact that the creditor has no intent to defraud or deceive is irrelevant. Unlike a claim for fraud, equitable estoppel only requires proof of representations intended to induce reliance.

Repossessions: 4.3.4 Effect of Contractual Anti-Waiver Provisions

Creditors often insert a provision in the credit agreement to the effect that “waiver of any breach or default shall not constitute a waiver of any other or subsequent breach or default.” A number of courts, particularly in commercial cases, find that this clause effectively cuts off the debtor’s rights and that the creditor can use the clause to accelerate without notice, even after accepting late payments in the past.147