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Repossessions: 11.3.2.4 Force-Placed Insurance Premiums Hidden in a Revised Payment Schedule

When a creditor claims a balance due far in excess of what the consumer expected, the explanation is often that the creditor has purchased expensive physical damage insurance covering the collateral and added the premium to the principal after the original credit terms were established. Credit agreements will specify that if the consumer’s physical damage insurance lapses, the creditor can purchase coverage and assess the premium to the consumer. This coverage is called force-placed insurance because the consumer does not voluntarily purchase it.

Repossessions: 11.3.3 Insurance Rebates

The typical secured transaction involves the consumer paying for various types of insurance. Credit life, credit accident and health, and credit unemployment insurance protect the consumer’s ability to repay the debt against risks of the debtor’s death, disability, or lost employment.90 Credit property insurance, automobile physical damage insurance, GAP insurance, and manufactured home policies protect the collateral against damage, theft, or fire. Service contracts and breakdown insurance insure against the need to repair the collateral.

Repossessions: 11.3.4.1 Generally

A key component in a deficiency or surplus calculation is the collateral’s value. A number of motor vehicle installment sales statutes and other state laws specify the exact manner of determining the collateral’s value.92 These more specific statutes override the UCC’s provisions in this area.93

Repossessions: 11.3.4.3 When Sale Involves Additional Property or Charges

The repossessed collateral’s sale price is not a valid value when one price has been obtained for a lot of items including the collateral, and the price the creditor allocates to the other items in the package is artificially high.104 Similarly, a vehicle’s sale price at a private retail sale often includes a finance charge, insurance, service contracts, trade-in allowances, and components other than the price for the basic repossessed property.

Repossessions: 11.3.4.4 When Collateral Purchased in Part with a Trade-In or Other Non-Cash Proceeds

If the secured party receives non-cash proceeds from a commercially reasonable sale of the collateral, the secured party can hold off applying the sale proceeds to the balance of the debt until the proceeds have been converted to cash.105 The official comments clarify, however, that it would not be commercially reasonable for a secured party that is in the business of selling or financing vehicles to resell a vehicle on credit and treat the credit contract as non-cash proceeds.106 The secured pa

Repossessions: 11.3.5.1 Special Rule for Determining Value

A secured party cannot sell to itself at a private sale.113 In addition, whether the Article 9 disposition is public or private, special “insider” rules apply to sales to the secured party, a person related to the secured party,114 or a secondary obligor, such as a dealer subject to a recourse agreement.115 If such a sale involves a price “significantly below the range of proceeds that a complying disposition to a [non-insider] would have brought,”

Repossessions: 11.3.5.2 Who Is an Insider?

Section 9-615(f) focuses on a group of parties who lack the incentive to maximize the collateral’s resale price.125 It applies when the collateral is sold to the secured party itself, to a secondary obligor, or to a person related to the secured party.

Repossessions: 13.2.4.4 Who May Seek Statutory Damages?

Statutory damages under UCC § 9-625(c)(2) are available only to a person who is a debtor (defined as the person who owns the collateral)54 or a secondary obligor at the time the secured party failed to comply with Part 6 of Article 9. Therefore, a person who is the primary obligor but does not have an interest in the collateral is entitled only to actual damages, not statutory damages. The explicit inclusion of secondary obligors resolves a split among the courts under the former version of Article 9.

Repossessions: 13.2.4.6 Calculation of Statutory Damages

When a creditor violates Article 9, Part 6, and the collateral is consumer goods, the consumer is entitled to the greater of the consumer’s actual damages or the minimum damages set out in UCC § 9-625(c)(2).62 Statutory minimum damages are computed by adding the “credit service charge” or “time price differential” (that is, the finance charge) and ten percent of the “principal amount of the debt” (that is, the amount financed) or “cash price.”63 The “time price differential,” a term used when th

Repossessions: 13.2.6.2 Multiple Statutory Damages

Under former Article 9, most courts awarded only one set of statutory damages for each repossession, even if the repossession involved multiple violations of Article 9 Part 5.109 Revised Article 9 explicitly adopts this view.

Repossessions: 13.2.6.3 Can the Consumer Recover Both UCC Statutory Damages and Actual, Statutory, or Punitive Damages Under Non-UCC Law?

A consumer cannot receive UCC § 9-625(c)(2) statutory damages (the finance charge plus ten percent of the principal) and actual damages for the same violation.111 The consumer receives one or the other, whichever is greater. But can the consumer recover in the same transaction both section 9-625(c)(2) statutory damages and statutory damages under some other consumer statute? Strong arguments favor allowing such a recovery.

Repossessions: 13.2.7.1 Generally

Revised Article 9 sets out rules for non-consumer transactions about the relationship between defeat of a deficiency judgment claim and the right to an affirmative recovery of actual damages. The uniform version is silent, however, as to the rule in consumer transactions. It is also silent on the question whether a consumer who has defeated a deficiency judgment can recover statutory damages.

Repossessions: 13.2.7.2 Effect on Actual and Statutory Damages When Debtor Has Defeated Deficiency Claim in Non-Consumer Transaction or in Non-Uniform State

Under UCC § 9-625(d), if a debtor’s “deficiency is eliminated under Section 9-626,” then the debtor may recover damages for loss of a surplus. However, if the deficiency has been defeated or reduced under section 9-626, neither the debtor nor any secondary obligor may otherwise recover actual damages for the creditor’s noncompliance with the provisions of Part 6 relating to “collection, enforcement, disposition, or acceptance.”

Repossessions: 13.2.7.4 When Non-UCC State Law Specifically Bars Deficiency

UCC statutory damages are also appropriate when state law other than Article 9 prohibits the creditor’s deficiency. For example, state consumer credit statutes may bar any deficiency action or a deficiency action if the creditor does not comply with certain disposition requirements beyond those specified in the UCC.

Repossessions: 13.2.7.5 Practical Considerations

Consumer attorneys must be careful to structure their pleadings and requests for relief so that the court can both dismiss the deficiency claim and award statutory damages. If the debtor does not request such relief, the court is unlikely to do so on its own.134 To counter any perception that this relief is a windfall,135 it is important to stress the policy behind UCC § 9-625 statutory damages: the damage award is not just to compensate the consumer, but to deter creditor misconduct.

Repossessions: 13.2.8.1 What Limitations Period Applies

One issue that will vary significantly from state to state is what statute of limitations to use for claims for relief under UCC § 9-625. Even after the limitations period has expired, section 9-625 statutory damages will be available by way of recoupment to offset a deficiency. But the statutory damage award can only offset the deficiency, and not result in a positive recovery for the consumer. For the consumer to obtain a positive recovery, the claim or counterclaim must be brought within the limitations period applicable to UCC § 9-625.