Default. Assignment 20: Default and Repossession. Acceleration. Problem 1

Transcription

1 Assignment 20: Default and Repossession Default Article 9 doesn t define default ; it just provides that secured party can enforce its SI after default Default is defined in the security agreement After default, secured party can: Get a judgment and have collateral sold in a sheriff s sale [ 9-601(a)], or Repossess collateral by self-help and conduct nonjudicial public or private sale [ 9-609, 9-610] Acceleration If the obligor s debt is an installment debt, the first step in secured party s enforcement is to accelerate the maturity of the debt The note/contract evidencing the debt must have acceleration clause in it Rationale: secured party can only foreclose a SI once (sale will extinguish the SI) Thus, it would make no sense to foreclose just to collect only one or more late installments Problem 1 Bank has SI in Crouch s car Due to lost consulting jobs, Crouch has missed two monthly payments ($ each) Bank sends Crouch a letter, saying: Bank has accelerated the balance of your debt We will repossess your car and sell it in 30 days, unless you repay the total debt ($11,498.59) w/in that period Crouch then sends Bank a check for the two missed monthly payments ($912.66) 1

2 Could Bank accelerate without first giving Crouch notice and a chance to cure? If Bank accepts the payment, does it have to reinstate the loan? Or can it just apply the payment to the accelerated balance and go ahead with its foreclosure sale? Questions Problem 1: Notice/Grace Period Prior to Acceleration General rule: unless contract requires secured party to give notice to Debtor prior to acceleration, secured party has no such mandatory obligation Secured party may choose to provide notice and opportunity to cure (and often does) But unless the contract required notice to Crouch prior to acceleration, Bank s acceleration is proper Problem 1: Redemption Once debt is accelerated, Crouch can only redeem by paying the full balance of debt [ 9-623(b)] Crouch can t reinstate the loan, unless contract expressly gives him that right or Bank agrees If contract did not grant reinstatement right to Crouch, Bank can reject payments, repossess car However, Bank could allow Crouch to reinstate the loan contract, if it wished to do so Problem: Was Crouch s tender of the 2 monthly payments conditioned upon Bank s agreement to reinstate the loan? If so, Bank s acceptance of it would create obligation upon Bank to reinstate the loan, return the collateral (if it had been repossessed) and cease foreclosure efforts If not, Bank could apply payments to accelerated debt and proceed with foreclosure sale 2

3 Repossession After default, secured party can repossess the collateral, either By judicial process [ 9-601(a)(1), 9-609(b)(1)], or By self-help, if that can be achieved w/out breach of the peace [ 9-609(b)(2)] Bank repossesses Henson s car from Hitt Street Garage, even though Henson was not in default to Bank at the time of the repossession Car was mistakenly placed on Bank s repo list due to a clerical error Legal consequences to Bank, if any? Problem 2(a) Repossession absent default violates 9-609(a) Henson has two potential causes of action Henson could bring a cause of action for conversion (a tort action), or Henson could bring a cause of action for replevin (recovery of car) and damages for breach of K (Bank s noncompliance with its obligation under Article 9 and the security agreement) [ 9-625(b)] How would court calculate Henson s damages under each of these theories? Conversion damages = FMV of car Bank can offset the amount that Henson owes on the debt (common law offset of mutual debts) Punitive damages unlikely, if this was just a negligent mistake (absent gross negligence or recklessness) Replevin/ 9-625(b): possession of the car, plus Damages for lost use value of the car (e.g., car s fair rental value while in possession of Bank), AND If Henson is a consumer, Henson can collect at least the consumer penalty [ 9-625(c)] amount (even if he didn t suffer that much in actual damages) 3

4 Consumer Penalty [ 9-625(c)] When secured party violates Article 9 in enforcement of its SI, injured consumer can recover in any event an amount not less than Credit service charge (i.e., all interest paid under the contract) + 10% of principal, or Time-price differential + 10% of the cash price Also, can recover any actual damages over and above consumer penalty amount Bank repos Crouch s car Crouch is in default Car repo d from Crouch s garage in his absence, by going into the garage (which was closed but unlocked) Bank closed/locked garage after repo was complete Did repo violate Article 9? Problem 2(b) Problem 2(b) Most likely, yes: repo breached the peace even though no actual violence/confrontation resulted Grant of SI implicit permission to enter Crouch s home If Crouch had been home, this action could ve produced violent confrontation We don t want to encourage such behavior by creditors (potential costs if violence/confrontation results may outweigh cost-saving benefits) Suppose security agreement contained a provision in which Crouch consented that Bank could enter his home to repossess car after default Does that change your analysis? 9-603(a): parties can agree as to standards for measuring the fulfillment of their rights and duties under the contract, if the agreed-upon standards are not manifestly unreasonable However, this doesn t apply to duty not to breach the peace [ 9-603(b)] Problem 2(b) 4

5 Bank repos car of Reuben Reuben is in default Car is repo d from Reuben s driveway by bat-wielding repo agent During repo, Reuben appears and says Please do not take my car, but does not get physical Does repo violate Article 9? Problem 2(c) Effect of Debtor s Verbal Objection Weight of authority: repo over unequivocal protest by debtor is likely to cause confrontation, breaches the peace Some courts hold that secured party can ignore debtor s protest as long as neither party threatens physical harm or violence [Koontz (Ill. App. 1996)] Problem: this encourages a debtor that wants to stop a repossession to make threats (which may provoke confrontations/violence) Abrams, in default, sends letter to Bank: I object to any attempt to repossess my car w/out judicial process, and I will respond to any attempt with deadly force. One week later: Bank repossesses the car from Turner Garage, while Abrams is in his office Did repo violate Article 9? Problem 2(d) Effect of Protest If debtor is present and raises verbal objection to secured party s self-help efforts, secured party must stop that particular self-help effort (secured party can try again later, after some reasonable cool-down period) Debtor can t issue pre-emptive objection letter [Problem 2(d)] and cut off any self-help attempts by secured party 5

6 Bank repos car of Dessem Dessem is in default Bank tricks Dessem into turning over the car, believing that its repo agent is a Honda-authorized service technician authorized to perform recall repairs Did Bank s repo violate Article 9? Problem 2(e) Problem 2(e): Courts have held repossession through trickery = breach of the peace Secured party has duty of good faith and fair dealing in enforcing its security agreement [ 1-304], which requires honesty in fact However, it is not clear that Dessem suffers any actual damages due to Bank s conduct (Dessem was in default and Bank was entitled to possession) Nevertheless, if Dessem is a consumer, Bank would be liable for consumer penalty Vehicle Repos: Contents Note: while secured party s repossession of a vehicle may be valid (no breach of peace), secured party must take care w/ debtor s personal property inside the vehicle SI in car does not extend to debtor s other personal property within the car If secured party doesn t return personalty in the car to debtor upon request = conversion 6