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Repossessions: 12.9.6.2 State Cosigner Statutes
Some state statutes provide special consumer credit cosigner protections.
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
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: 12.9.8.3 Considerations Prior to Vehicle Repossession
If the creditor has not repossessed the vehicle, there are a number of issues a victim of coerced debt needs to consider, especially if the victim and the abuser are both on the loan or lease as cosigners or co-buyers:
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: 11.1.2.3 Consumer Remedies for Creditor’s Failure to Pay Surplus
A creditor’s failure to pay over a surplus violates UCC Article 9, Part 6, so the consumer is entitled to actual damages or statutory minimum damages under UCC § 9-625(c)(2), whichever is greater. Statutory minimum damages are discussed in § 13.2, infra.
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: 11.3.5.5.2 Burden of proof for consumer transactions
As described in § 11.3.5.5.1, supra, the courts are to fashion the burden of proof rules in consumer transactions.