Secured Transactions July 2006 Flashcards
(6 cards)
Summary
Dealer was required to dispose of the collateral in a “commercially reasonable” manner, which involves giving Joe reasonable advance notice of a public sale after adequate publicity preceding the sale. Here, Dealer’s purchase of the boat for Dealer’s own use without such advance notice and in a private sale did not satisfy the requirements for a commercially reasonable sale.
Where there has been a noncomplying disposition of consumer goods (the boat was purchased for Joe’s family use, which makes it a consumer good), the consumer is entitled to recover actual damages and, in any event, a minimum statutory damage recovery. Because Dealer is still in possession of the boat, a court might also order Dealer to dispose of it through a proper public sale or even to permit Joe to redeem it.
Joe may or may not have the obligation to pay the deficiency. In consumer transactions, there is no “Code” rule. Some courts follow the absolute bar rule, under which a noncomplying sale completely bars recovery of a deficiency. Other courts adopt a rebuttable presumption that a complying sale would have produced proceeds sufficient to pay the existing debt, but the creditor is entitled to a deficiency judgment if it can rebut the presumption and prove that a complying sale would have produced less than the amount due.
Dealer’s disposition of the collateral failed to comply with UCC requirements in two respects. First, Dealer purchased the boat in a private sale, which was inappropriate under the circumstances. Second, Dealer failed to give Joe advance notice of the sale.
Under the UCC, every aspect of a disposition must be commercially reasonable. UCC §987 610(b). In addition, the UCC sets out some specific standards governing the disposition of collateral. One of these standards is the rule that a secured party may purchase the collateral only if the secured party buys it
(1)
at a public disposition; or
(2)
at a private disposition only if the collateral is of a kind that is customarily sold ona recognized market or the subject of widely distributed standard price quotations.
UCC § 9-610(c). Neither requirement was met here.
First, Dealer purchased the collateral in a private, not a public, disposition. Public dispositions are those with some form of advertisement or public notice preceding the sale and where the public has access to the sale. Id. at cmt. 7. There is no suggestion that Dealer sought any third-party bids for the boat or made any public offer to sell it. Second, used boats are not sold under circumstances that would make a private sale appropriate. The facts make clear that used boats are not sold on a recognized market or pursuant to standard price quotations. To the contrary, boat prices fluctuate based on many factors and are subject to individual bids and negotiations. Thus, Dealer’s private purchase of the boat was improper.
Dealer’s disposition was also improper because Dealer did not inform Joe of the disposition until after it had occurred. The UCC requires a secured party to provide notice to the debtor before disposing of collateral. UCC § 9-611. A proper notice must describe the intended disposition and must be sent within a reasonable time before the disposition. UCC §9-613. Under the facts, Joe was never informed of the impending disposition. The only notice he received was after the fact. This failure to notify was also a violation of the UCC.
[NOTE: The facts state that Dealer “disposed of the boat by purchasing it,” which is one manner of disposition of collateral under UCC § 9-610. The problem is designed to force applicants to discuss the standards for disposition of collateral and whether Dealer met them. However, some applicants may incorrectly treat Dealer’s actions as an “acceptance of collateral in full or partial satisfaction of the obligation,” rather than as a disposition. See UCC § 9-620. Those applicants could receive some credit if their critique of Dealer’s actions addresses the central problems of lack of notice and the commercial unreasonableness of Dealer’s purchasing this type of collateral from itself in a private sale.]
Joe has a number of potential remedies, including actual damages, statutory damages, and the possibility of a court-ordered alternative disposition of the collateral.
Joe may recover any actual damages.
Dealer is liable for actual damages in the amount of any loss caused by failing to comply with the UCC rules for notice of disposition and a commercially reasonable disposition. UCC §9-625(b). Damages are “those reasonably calculated to put an eligible claimant in the position that it would have occupied had no violation occurred.” Id. at cmt. 3. The most likely measure of Joe’s actual loss is the difference between the amount credited to Joe by Dealer and the amount that would have been obtained in a sale that complied with UCC requirements. Under these facts, however, Joe would probably have trouble proving that a proper sale would have yielded a significantly better price for the boat.
Because this is a consumer transaction, Joe may recover “statutory damages” even if he suffered no actual damages.
Where the collateral is consumer goods, as here, the debtor is guaranteed a minimum recovery of “statutory damages” in an amount not less than the credit service charge (the interest payable on the loan) plus 10 percent ($1,000) of the principal amount of the loan. UCC §9-625(c)(2). The purpose of this remedy is to “ensure that every noncompliance [with UCC requirements relating to the disposition of collateral] in a consumer goods transaction results in liability, regardless of any injury that may have resulted.” Id. at cmt. 4.
Given that Dealer is still in possession of the collateral, a court could order Dealer to dispose of the collateral by a proper sale or even allow Joe to exercise his right of redemption.
Where a secured party is disposing of collateral improperly, a court “may order or restrain . . . disposition on appropriate terms and conditions.” UCC § 9-625(a). Given the absence of any third-party purchaser of the collateral, a court might void Dealer’s improper sale to itself and order Dealer to sell the collateral by a proper public disposition.
In addition, Joe has a right to redeem repossessed collateral by paying all amounts owed along with Dealer’s repossession expenses. This redemption right is usually extinguished by a proper disposition of collateral. See UCC § 9-623. But a court might allow Joe to redeem under these circumstances (if he wishes to do so and can pay the required amounts), given the impropriety of the private sale by Dealer to itself and the fact that the boat is still in Dealer’s possession.
Joe’s liability for a deficiency depends on whether the jurisdiction adopts the absolute bar rule or the rebuttable presumption rule.
Although ordinarily the secured party may recover a deficiency remaining after disposition, UCC §9-615(d), Joe has several arguments to reduce or eliminate the claimed deficiency of $2,500.
Under UCC § 9-626(b), the impact of noncompliance with Article 9 on recovery of a deficiency in a consumer goods transaction is left to the court to determine. Courts tend to follow two approaches in consumer transactions. Under the so-called “absolute bar” rule, the creditor’s noncompliance bars recovery of any deficiency. Under the “rebuttable presumption” rule (adopted in UCC § 9-626 for commercial transactions), the creditor’s noncompliance results in a presumption that a complying disposition would have realized an amount of proceeds sufficient to cover the entire debt and expenses (and hence that there is no deficiency), but the creditor is given the opportunity to rebut this presumption by proving that even a complying sale would have realized less than the full amount due.
If the absolute bar rule is followed, Joe owes nothing to Dealer. If the rebuttable presumption rule is followed, Joe may be liable for a deficiency if Dealer can prove that a proper disposition of the collateral would have yielded less than what Joe owed (plus expenses). The facts state that the price the Dealer credited to Joe was within a range of likely prices, so it is possible that Dealer could show that even a proper sale would have yielded less than the amount owed on the boat.
[NOTE: It is possible that Joe would be permitted both to recover his statutory damages and to have any deficiency eliminated through the application of one of these rules. Although double recovery or over-compensation of this sort is forbidden in a non-consumer context, the Code “is silent as to whether a double recovery or other over-compensation is possible in a consumer transaction.” UCC § 9-625, cmt. 3. Some courts have therefore concluded that denial of deficiency does not preclude a consumer from also recovering statutory damages. See Coxall v. Clover Commercial Corp., 781 N. Y. S. 2d 567 (N.Y. City Civ. Ct. 2004).]
