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Repossessions: 12.5.7 Delay in Sale of Collateral

If the creditor holds on to the collateral too long before selling it, a number of courts found under former Article 9 that the creditor’s slow disposition amounted to a strict foreclosure.160 These courts treated the collateral as if it had been retained by the creditor, whether or not the property was subsequently sold.

Repossessions: 12.5.8 Absolute Bar As an Alternative Theory

Even if a court holds that constructive strict foreclosure is not available as a remedy, it can reach the same result if it adopts the rule that a creditor is absolutely barred from recovering a deficiency judgment if it violates Article 9. Many courts reached this conclusion under the former version of Article 9, and the uniform version of revised Article 9 leaves them free to continue to do so in consumer transactions.167

Repossessions: 12.5.9.1 Generally

Constructive strict foreclosure issues also arise when a creditor leads the consumer to believe that return of the collateral will satisfy the debt, but then reneges. If the creditor did not go through the Article 9 strict foreclosure procedures, it may argue that strict foreclosure cannot be imposed on it.

Repossessions: 12.5.9.2 Estoppel

The revised version of Article 9 preserves common law and equitable remedies such as estoppel when a secured party holds repossessed collateral for an unreasonably long time.171 These causes of action may provide a remedy similar to constructive strict foreclosure.

The essential elements of equitable estoppel are:

Repossessions: 12.5.9.3 Waiver

The related doctrine of waiver is the intentional relinquishment of a known right, or conduct inconsistent with asserting the right.179 Most courts hold that no consideration is necessary for a waiver to be effective.180 Waiver can be implied from conduct that clearly manifests an intent to waive the right.181 Even conduct that less clearly manifests an intentional waiver can constitute a waiver if it reasonably leads the other party to rely on it

Repossessions: 12.5.9.4 Accord and Satisfaction

Under the common law theory of accord and satisfaction, if a debtor surrenders property to a secured creditor with the understanding, either express or implied, that it is in satisfaction of the creditor’s claim, and the creditor accepts and retains it, accord and satisfaction may result186 and the creditor may be barred from seeking a deficiency.

Repossessions: 12.5.9.5 Rescission and Satisfaction

Another, somewhat obscure, traditional common law theory that may apply in a case in which a purchaser returns secured property, or it is repossessed and retained by the secured party, is rescission and satisfaction.199 At common law, a seller under a conditional sales contract, or the seller’s assignee, who repossessed secured property after a default but failed to sell the property within a reasonable time as required by statute or the contract, and who used the property for its own personal use, was in some cases deemed to have rescinded o

Repossessions: 12.6.1.2 Must the Consumer Place the Secured Party’s Compliance with Article 9 in Issue?

In non-consumer transactions revised Article 9 places the burden of proof on the secured party only if the debtor places the secured party’s compliance in issue.220 About a dozen states have adopted non-uniform amendments that apply this provision to consumer transactions as well.221 Some uniform states also follow this rule.222 In these states consumer attorneys should, whenever appropriate, raise commercial unreasonableness in the answer and forc

Repossessions: 12.6.1.4 Impact of Defective Disposition on Right to Deficiency

Jurisdictions differ as to the debtor’s remedy when the creditor fails to prove a sale commercially reasonable. No matter the jurisdiction, a creditor’s UCC violations will substantially reduce or even eliminate the creditor’s recovery, and may result in a positive award for the debtor, but jurisdictions differ as to the method of adjusting the sought deficiency because of the UCC violations.

Repossessions: 12.6.2.1 States Adopting the Absolute Bar Rule

The absolute bar rule holds that the creditor’s compliance with Code disposition provisions is a condition precedent to the right to bring a deficiency action. A commercially unreasonable sale or defective notice of sale absolutely bars a deficiency.

Repossessions: 12.3.2 Payment to Assignee

Secured obligations are often transferred from one entity to another. For example, in a typical installment sale the seller is the original creditor, and then assigns the contract to a financing entity. If the transaction is securitized, as many consumer transactions are today, the obligation may be transferred to a trust or special purpose vehicle. Sometimes the obligation will be transferred multiple times, from one trust to another.

Repossessions: 12.3.4 No Deficiency After Revocation of Acceptance

U.C.C. Article 2 gives a buyer the right to revoke acceptance of nonconforming goods and cancel the sale.71 The nonconformity must substantially impair the value of the goods to the buyer.72 A consumer who properly exercises these rights before a repossession (and possibly even after a repossession73) is no longer obligated on the debt.

Repossessions: 12.4.1 Overview

With the exceptions noted in the prior section, the UCC permits a creditor to seek a deficiency after sale of repossessed collateral.83 But about half the states have enacted statutes that limit deficiencies in at least certain consumer transactions.84 These state statutes trump the usual rules about the creditor’s right to a deficiency (found in U.C.C.

Repossessions: 12.4.2 Dollar Limitations on Anti-Deficiency Statutes

The most common reason a state anti-deficiency statute will not apply in a particular case is the low dollar maximum on the consumer transactions covered by the law, allowing a creditor to seek a deficiency when the consumer transaction exceeds the statutory amount. Particularly when the dollar maximum applies to the initial cash price or amount financed, these statutes have limited applicability to car or manufactured home repossessions.

Repossessions: 12.4.3 Are Consumer Loans or Only Credit Sales Covered?

Another major limitation on the scope of certain state anti-deficiency statutes is that they apply only to credit sales, that is an installment sales contract or other credit offered by the seller at the time of sale (usually assigned to a separate creditor after the sale). They typically apply to assignees of retail installment contracts, and therefore apply to banks, credit unions, and other purely lending institutions when one of those institutions seeks a deficiency arising from a debt assigned to it by a seller.

Repossessions: 12.4.5 The Illinois Statute’s Scope

The Illinois anti-deficiency statute’s scope is atypical and needs separate treatment. The statute has no dollar limitations, and thus potentially applies to almost any repossession. But the Illinois anti-deficiency statute applies only to cases in which, upon the creditor’s request, the goods are voluntarily surrendered in ordinary condition, free from malicious damage, and the buyer has paid sixty percent or more of the deferred payment price at the time of default.119

Repossessions: 12.4.6 Excessive Damage to the Collateral May Give Rise to a Creditor Cause of Action

Anti-deficiency statutes prevent a creditor from repossessing collateral and then seeking a deficiency. But they often allow the creditor to bring an action against the consumer after repossession for excessive damage to the collateral that occurred before repossession. For example, the 1968 and 1974 versions of the UCCC124 and the anti-deficiency judgment statutes of many states125 allow the creditor to bring an action for damages if the consumer wrongfully damages the collateral.

Repossessions: 12.4.7 Effect of Anti-Deficiency Statute on Judicial Sale of Property Pursuant to a Judgment Lien

Anti-deficiency statutes require creditors to elect between repossessing the collateral or bringing an action on the debt. If a secured party brings an action on the debt, the UCC allows it to reduce its claim to judgment or to foreclose its interest by any available procedure provided by state law, including a judicial sale of the collateral following judgment, execution, and levy.127 Such judicial sales are governed by other state law, not by the UCC.128

Repossessions: 12.6.2.2 Violations Triggering the Absolute Bar

The absolute bar approach requires the creditor’s strict compliance with the UCC. When the method, manner, time, place, and other terms of the disposition of the collateral are commercially unreasonable or otherwise violate UCC requirements set forth in Part 6 of Article 9, this violation serves as an absolute defense to the deficiency action. The absolute bar applies whenever the creditor fails to meet its burden of proving that every aspect of the sale is commercially reasonable.254

Repossessions: 12.6.2.3 Operation of the Absolute Bar Rule

When the creditor’s conduct triggers the absolute bar rule, the deficiency being sought is precluded in its entirety, no matter what evidence the creditor later presents to prove its right to the balance due. If the debtor has asserted counterclaims that exceed the creditor’s deficiency claim, the debtor recovers at least the difference. If a proper sale would have produced a surplus, the debtor also has a right under section 9-625 [formerly U.C.C.

Repossessions: 12.6.2.4 Justification for the Absolute Bar Rule

The rationale for the absolute bar rule is well described by the following excerpt:

The most natural and reasonable construction of the statutory language, in the light of the legal background, the realities of the relationships involved between secured creditors and debtors who have defaulted and their respective financial resources for engaging in litigation, all lead to the conclusion that the right to a deficiency judgment depends on compliance with the statutory requirements concerning dispositions and notice.