The University of Toledo Law Review
VOLUME
5
FALL
NUMBER 1
CREDITORS, CONSUMERS AND
ARTICLE 9 OF THE UNIFORM
COMMERCIAL CODE
lohn Krahmer *
I.
INTRODUCTION
It is becoming more and more true that consumer law is where
you find it. Although a number of references to special consumer
problems appear in earlier legal literature,I it was not until the mid60's that the subject was seen as constituting a more-or-Iess connected whole,2 however loose that connection might be. This is
not to say that calling something a matter of "consumer law" automatically means there is a discreet body of substantive or procedural
law uniquely applicable to some consumer problem which may be
at hand. What it does more commonly mean is that, somewhere
in the general-and often the more traditional-legal categories
there are concepts, statutes, or decisions which have important bearing on the legal problems of consumers but which are not exclusively used or useful for consumer questions. As an example, the issue
of whether Or not a contract signed by a consumer is unconscionable
is not simply a consumer issue but one bringing into play the general law on unconscionability, much of which developed in commercial or quasi-commercial dealings having little or nothing to do with
• Professor of Law and Assistant Dean, School of Law, Texas Tech University.
Professor Krahmer gratefully acknowledges the research assistance of Mr. John Hayslip,
third year student at the Texas Tech School of Law, in the preparation of this article.
Support for research assistance was provided by Texas Organized Research Funds.
l. See, e.g., Gilmore & Axelrod, Chattel Security: 1,57 YALE 1.J. 517, Part II:
761 (1948); Kessler, Contracts of Adhesion-Some Thoughts About Freedom of Con·
tract, 43 COLUM. L. REV. 629 (1943); Llewellyn, Through Title to Contract and
a Bit Beyond, 3 LAw: A CENTURY OF PROGRESS 80, 81-2 (1937).
2. For examp!e, "Consumer Protection" was not a separate topic in the Index
to Legal Periodicals until 1965. CCH began publishing its Consumer Credit Guide
in 1969.
1
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consumer problems as such. 3 Although perhaps obvious, this point
is worth stating because it is sometimes forgotten that a great deal
of substantive law, not obviously "consumer" in nature, has overtones and shadings that can take on special meanings in a consumer
context. Thus, a "cross-collateral clause" may be perfectly proper
in a commercial setting, but may be considered illegitimate as a
mechanism of oppression if used against a consumer-buyer. 4 Bearing the foregoing in mind, this article will examine Article 9 of
the Uniform Commercial Code5 to identify and analyze those provisions 'which have particular bearing on creditor/consumer transactions,6 including an analysis of sections not obviously consumer
related, but which have become so by court interpretation. 7 To facilitate an organized discussion of the several sections of Article 9
which bear on the resolution of creditor/consumer disputes, the sections will not be discussed in the same order in which they appear
"in the statute, but will be considered in terms of topical relation
to make the discussion more understandable than would be possible
with a numerically sequential "index" approach.
Before taking a close look at the statute itself,however, one
general remark should be made regarding those provisions of Article
9 which make particular reference to consumers. In the early drafting history of the Article, the draftsmen initially planned to use
separate subdivisions of the statute for separate types of financing
patterns, including one subdivision devoted to comprehensive coverage of consumer problems. s Following this initial plan, the May,
1949 draft contained eight "Parts": 1) Short Title and General Provisions; 2) Pledge; 3) Inventory and Accounts Receivable Financ-
3. E.g., Campbell Soup Co. v. Wentz, 172 F.2d 80 (3d Cir. 1948); Bekkevold
v. Potts, 173 Minn. 87, 216 N. W. 790 (1927); Meyer v. Packard Cleveland Motor
Co., 106 Ohio St. 328, 140 N.E. 118(1922).
4. Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965).
5. Unless otherwise indicated herein, references to the Uniform Commercial Code
are to the 1972 Official Text [hereinafter cited as U.c.c.]. Although this text substantially revises some sections of the 1962 Official Text, the portions affecting consumers
that are discussed in this article, are not greatly changed. Cases interpreting such
portions under the 1962 Code will continue to be effective under the 1972 Text.
6. E.g., U.C.C. §§ 9-201; 9-203; 9-204 and 9-206.
7. See, e.g., §§ 9-503 and 9-504.
8. This history is traced more thoroughly in 1 G. GILMORE, SECURITY INTERESTS
IN PERSONAL PROPERTY 288-94 (1965) [hereinafter cited as GILMORE).
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CONSUMERS AND ARTICLE 9
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ing; 4) Equipment Financing; 5) Agricultural Financing; 6) Consllmer Goods Financing; 7) Bulk Transfers; 8) Vehicle Liens.9
Almost as soon as this draft was completed, it became apparent
that the various Parts included substantial repetition of provisions
in other Parts. This unanticipated occurrence indicated, of course,
that the different types of financing were not really as different as
had originally been supposed and that a much more functional approach was possible. At the same time, considerable debate arose
concerning the wisdom of including comprehensive consumer legislation in a commercial statute. The decision was finally made to
retain the security related aspects of consumer financing within the
Article, but to eliminate the remainder of what had been Part 6.10
By October of 1949, the draftsmen had prepared a new draft
organized along highly functional lines expunging much, but not
all, of Part 6. As Professor Gilmore, the associate reporter, states,
"Most of the consumer protective provisions were eliminated from
the final draft, although a few curious traces remain."ll
This brief excursus into history may help explain why a statute
purportedly dealing only with commercial matters actually contains
a few provisions of a consumer protection nature. It may also explain why a lawyer for either a creditor or a consumer must look
at Article 9 from a somewhat different viewpoint when the transaction in question has a consumer on one side of the "deal" instead
of a businessman. With this general matter out of the way, a closer
examination of Article 9 itself can begin.
II.
FORMATION OF THE CONTRACTUAL RELATIONSHIP
Although Article 9 uses the label "Security Agreement" instead
of "Contract" to identify the voluntary relationship created between
a secured party and a debtor, section 9-102(2) makes it clear that
security agreements are simply a specialized form of contract. 12 As
9. 1 GILMORE, supra nofe 8, at 291 n.3.
10. ItJ. at 293.
11. Id.
12. Section 9-102(2) provides:
This Article applies to security interests created by contract including
pledge, assignment, chartel mortgage, chartel trust, trust deed, factor's lien,
equipment trust, conditional sale, trust receipt, other lien or title retention,
contract and lease or consignment intended as security. This Article does
not apply to statutory liens except as provided in Section 9-310.
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such, the validity of the security agreement depends, not only upon
compliance with particular requirements of Article 9 (e.g., the "Statute of Frauds" provisions in section 9-203), but also upon compliance with general principles of contract law covering such matters
as fraud, misrepresentation and unconscionabilityP
The application of these general principles of contract law to
a secured transaction is perhaps best illustrated by the well-known
case of Williams v. Walker-Thomas Furniture Company.14 Two
consumers had purchased various merchandise from the WalkerThomas Company, agreeing to pay for the items in installments
by signing a printed form contract which "leased" the goods until
full payment had been made, at which time title was to become
vested in the purchasers. 15 The contract also contained a "crosscollateral" clause which the court described as naving the effect of
keep[ing] a balance due on every item purchased until the balance
due on all items, whenever purchased, was liquidated. As a result,
the debt incurred at the time of purchase of each item was secured
by the right to repossess all the items previously purchased by the
same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealings.I 6
Noting such matters as inequality of bargaining power, lack of
opportunity to understand the contract terms, educational background of the purchasers, and reasonableness of the agreement under
the circumstances existing when the contract was made, as permitted
by section 2-302 of the Uniform Commercial Code,17 the court conU.CC § 1-103 makes this clear by stating:
Unless displaced by the particular provisions of this Act, the principles of
law and equity, including the law merchant and the law relative to capacity
to contract, principal and agent, estoppel, fraud, misrepresentation, duress,
coercion, mistake, bankruptcy, or other validating or invalidating cause shall
supplement its provisions.
14. 350 F.2d 445 (D.C Gr. 1965).
15. Anicle 9 includes not only "security" agreements per se but also leases "intended as security." V.CC §§ 1-201 (37) and 9-102(1), (2).
16. 350 F.2d at 447.
17. U.CC § 2-302(1) states:
If the coun as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract
without the unconscionable clause, or it may so limit the application of any
unconscionable clause as to avoid any unconscionable result.
13.
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cluded that a sufficient question of unconscionability was raised to
remand the case to the trial court for findings of fact on this issue. Is
Although the VCC has been adopted in the District of Columbia,
the contracts had been signed prior to its enactment, and it therefore
provided analogous authority onlyY' The court's reference to section 2-302 on the question of unconscionability is of particular interest, however, since it indicates a willingness to find persuasive
authority in other Articles of the Code when dealing with a case
purportedly arising only under Article 9. This same willingness
has been expressed by other courts,20 and clearly indicates that Article 9 is not the only place a court will look when deciding if a given
security agreement is valid.
Another aspect of contract formation under Article 9 which is
of particular relevance in creditor/consumer transactions is the specific language in section 9-203 (4) which renders provisions of Article
9 subject to other legislation regulating such matters as usury, small
loans, and retail installment sales. 21 The explanation for this selfsubordinating provision is given in a note following section 9-203
which says, in part,
This Article is designed to regulate all the "security" aspects
of transactions within its scope. There is, however, much regulatory legislation, particularly in the consumer field, which supplements this Article and should not be repealed by its enactment.22
Perhaps due to the desire to be extremely cautious, there are at
least three other places in Article 9 where it is specified that the
18. 350 F.2d at 450.
19. The effective date of the U.CC in the District of Columbia was January
I, 1965.
20. See, e.g., Urdang v. Muse, 114 N.J. Super. 372, 276 A.2d 397 (1971);
Dean v. Universal C.I.T. Credit Corp., 114 N.J. Super. 132, 275 A.2d 154 (1971);
Jefferson Credit Corp. v. Marcano, 60 Misc.2d 138; 302 N.Y.S.2d 390 (Civ. Ct.
City N.Y., 1971).
21. U.CC § 9·203(4) provides:
A transaction, although subject to this Article, is also subject to . . . . ,
. . . ., and in the case of conflict between the provisions of this Article and
any such statute, the provisions of such statute control. Failure to comply
with any applicable statute has only the effect which is specified therein.
Amended in 1972.
Note: At • in subsection (4) insert reference to any local statute regulating
small loans, retail installment sales and the like.
22. U.CC § 9·203, Note.
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Article is subject to other regulatory legislation. 23 Clearly, although
Part &-Consumer Goods Financing, was eliminated after the May,
1949 draft, the substance may still remain if a state has enacted
special consumer legislation. 24 Such other regulatory legislation
should always be checked in any creditor/consumer transaction
since, in addition to "gap-filling" terms on contract form, rate regulation and the like, there may also be provisions which actually supersede Article 9 rules. One example of this is section 5.103 of
the Uniform Consumer Credit Code which denies a secured seller
the right to a deficiency judgment if he repossesses or voluntarily
accepts surrender of goods which were the subject of the secured
sale and had a cash price of $1000 or less. This position is exactly
opposite to that expressed in section 9-504(2) which provides "unless otherwise agreed, the debtor is liable for any deficiency." Other
examples could be stated, but they are not necessary to make the
point that caution is required when applying Article 9 to consumer
transactions.
III.
VALIDITY OF PARTICULAR CONTRACT PROVISIONS
Beyond general legal principles on the validity of contracts,
there are a number of specific provisions often included in agreements between a secured party and a debtor which have their own
special rules. A number of these common provisions will be considered separately.
A.
Acceleration Clauses
Under pre-Code law, there was considerable doubt about the
use of acceleration clauses. Many decisions held that an acceleration
clause in a promissory note made the instrument non-negotiable because it was not payable at a definite time. 25 Other decisions, however, found that the inclusion of an acceleration clause did not affect
negotiability.26
23. U.c.c. § 9-101, Comment; § 9-102; Note; § 9-201.
24. Such special legislation is fairly commonplace. See statutes cited in notes 62
and 175, inf,.a.
25. E.g., First National Bank v. McCanan, 206 la. 1036, 220 N.W. 364 (192S);
Wetzel v. CaJe, 175 Cal. 20S, 165 P. 692 (1917); W.W. Kimball Co. v. MeHan,
SO Wis. 133, 48 N.W. 1100 (1891).
26. E.g., DeHass v. Diben, 70 F. 227 (3d Cir. 1S95); Mechanics Be Metals
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Although Article 9 does not specifically deal with this issue,
Article 3 approves of the use of an acceleration clause, and allows
instruments in which it is contained to be negotiable. 27 Because
secured transactions usually include some type of negotiable instrument to evidence the underlying debt, as well as a separate agreement to secure the debt, acceleration clauses have obvious importance in a security context. There are three main points about the
use of acceleration clauses in a creditor/consumer secured transaction
which should be considered whenever such a clause is utilized.
First, if the clause is "subjective" and simply gives the secured
party the right to accelerate payment "at will" or "when he deems
himself insecure," instead of being "objective," and specifying particular events which would cause acceleration, the secured party may
exercise his option to accelerate "only if he in good faith believes
that the prospect of payment or performance is impaired. "28 This
limitation on the right to accelerate affects not only the acceleration
clause itself but also sections 9-201 and 9-501 (1) which give the
parties freedom to determine what constitutes a default under the
security agreement. If a secured party, acting in bad faith, declares
the full amount of the debt due and makes demand therefor, a failure to meet this demand would not constitute an operative default
under Article 9, provided of course, the bad faith could be shown. 29
Second, even if the right to accelerate is appropriately exercised,
the total amount which becomes due and payable must be properly
calculated by excluding any unearned interest on the debt. This
requirement of accurate arithmetic is more onerous under the Truthin-Lending Act and the Uniform Commercial Credit Code, at least
in terms of stated penalties for noncompliance,SQ than under Article
9. But, a failure to make a correct calculation might cause a disposition of collateral and an accounting for the proceeds to be violative
of the "commercially reasonable" standard of section 9-504, and
Nat'l Bank v. Warner, 145 La. 1022, 83 So. 228 (1919); Finley v. Smith, 165
Ky. 445, 177 S.W. 262 (Ct. App. 1915).
27.
28.
29.
30.
(1972);
U.e.e. § H09(1)(c).
U.e.e. § 1·208.
la.
Penalties for Trurh-in Lending violations are set out in 15 U.S.e. § 1640
rhe Uniform Consumer Credit Code penalties are stated in § 5.203.
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thus bring the penalty provisions of section 9-507 into play.S! This
result would, of course, be particularly likely if the incorrect calculation were the result of design instead of inadvertance.
Third, under section 9- 506, the debtor is given a right to redeem
the collateral at any time before sale or other disposition "by tendering fulfillment of all obligations secured by the collateral" plus reasonable expenses resulting from such things as retaking, storing, and
arranging for sale. The quoted language is important because it
raises the question of precisely what must be tendered. The comment to section 9-506 apparently finds no ambiguity about the section because it is there stated, "The debtor must tender fulfillment
of all obligations secured, plus certain expenses: if the agreement
contains a clause accelerating the entire balance due on default in
one installment, the entire balance would have to be tendered."32
After flatly saying the entire balance would have to be tendered after
acceleration, the comment proceeds to bolster this conclusion by adding, " Tendering fulfillment' obviously means more than a new promise to perform the existing promise.... "33
In Street v. Commercial Credit Company,34 the court was faced
with the task of interpreting section 18 of the Uniform Conditional
Sales Act,3o the direct predecessor of section 9-506, in an acceleration clause/redemption case. Though the operative statutory language was different, the court's approach is instructive. Discussing
the interpretation of the Act, the court said:
The penalty provisions of U.c.<::. § 9-507 are discussed later in this article.
following note 179, infra.
u.c.c. § 9-506, Comment.
[d.
35 Ariz. 479, 281 P. 46 (1929).
Uniform Conditional Sales Act § 18 (1922) provided, in relevant part:
If the seller does not give the notice of intention to retake described in
Section 17, he shall retain the goods for ten days after the retaking within the
state in which they were located when retaken, during which period the
buyer, upon payment or tender of the amount due under the contract at the
time of retaking and interest, or upon performance or tender of performance
of such other condition as may be named in the contract as precedent to the
passage of the property in the goods, or upon performance or tender of performance of any other promise for the breach of which the goods were
retaken, and upon payment of the expenses of retaking, keeping and storage,
may redeem the goods and become entitled to take possession of them and
to continue in the performance of the contract as if no default had occurred.
31.
See text
32.
33.
34.
35.
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There is no doubt that sections 18 and 26 [a section invalidating
pre-default waivers of redemption rights; compare section 9-501
(3)( d)] of the act were enacted for the express purpose of giving
to the buyer some equity of redemption and preventing unjust,
though technically legal, extortion by the seller. . .. A proviso
that the buyer could redeem only on payment of the full purchase
price remaining would generally be ineffectual to give any real relief, for the principal reason that conditional sales on the installment plan are made is that the buyer is unable to make full payment at once.
. . . In equity the seller is entitled only to his purchase price
and expenses. He has already agreed to accept that price on the
installment plan. If the buyer is in default, and that for a day,
on one payment only the seller may seize the property, and the
buyer must not only make up the delinquent payment with interest
in ten days, but must also pay all the expenses of retaking, keeping, and storage. A failure to redeem within the statutory time
allows the seller to then pursue any of his remedies on the theory
that the whole purchase price is then due and payable. Surely
he is amply protected so far as his equitable rights are concerned!
And the buyer will be warned against unnecessary defaults by
his liability for expenses, generally amounting to a penalty of from
10 to 50 per cent. of the delinquent installment. He is, however,
given a chance to redeem on terms which, though onerous, are
usually possible, unless his financial situation is hopeless.
On the other hand, the construction contended for by appellees
would frequently give the seller his full, original purchase price,
plus an additional profit of from 10 to 60 per cent, by means of
a resale, while in its practical workings it would make redemption
impossible by a very large proportion of debtors who had already
paid a substantial part of the purchase price and could continue
the installment payments, though finding it utterly impossible to
raise the full amount unpaid in one sum. 36
Despite the difference in the exact statutory language, the attitude expressed by the court about the importance of providing realistic redemption rights for the debtor might be read as a judgment
that interpretation of section 9-506, and the words "tendering fulfillment" may not be as obvious as the comment indicates. An
argument might well be made-and accepted-that the language
means a debtor could redeem by paying the past due amounts, plus
expenses, and reaffirmining the promise to make future installments
in a timely fashion. No court has yet read section 9-506 in this
36.
35 Ariz. 479, - , 281 P. 46, 48-49 (1929).
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way, but Robinson v. Jefferson Credit Corp.,37 a Code case, has gone
even further by holding that it would be unconscionable to prevent
a consumer-debtor from redeeming by paying past due installments
and expenses instead of the total accelerated amount. The court
reached this conclusion on general principles of unconscionability
without needing to cite and construe article 9-506 in the manner
suggested above. 3s
B.
After-acquired Property and Cross-collateral
Clauses
Section 9-204(2) in the 1972 Official Text provides:
No security interest attaches under an after-acquired property
clause to consumer goods other than accessions (Section 9-314)
when given as additional security unless the debtor acquires rights
in them within ten days after the secured party gives value.
This language was taken without change directly from the 1962
Official Text,39 and actually dates back even further in concept.
Professor Gilmore identifies the provision as "one of the vestiges
of the original plan, later abandoned, to include in Article 9 a fullscale treatment of the problems of consumer finance."4o
While the Code provision may seem clear on its face, an argument has been advanced that it only limits the use of an afteracquired property clause by a finance company, but does not so limit
a dealer.41 This conclusion is reached by arguing that a consumer
will normally "acquire rights" in items later ·purchased on credit
within ten days after the sale is made and the dealer gives "value."
Only if the word "value" is limited to the original sale-a strained
construction-is the after-acquired property clause prohibited for
a dealer.42
37. 4 VCC REP. SERvo 15 (N.Y. Sup. Ct. 1967). See also Vrdang V. Muse,
114 N.]. Super. 372, 276 A.2d 397 (1971).
38. 4 VCC REP. SERvo 15, 16 (N.Y. Sup. Ct. 1967).
39. Although the language remained unaltered, the section numbering was
changed from VCC § 9-204(4)(b) in the 1962 Official Text to VCC § 9-204(2) in the
1972 Official Text.
40. 1 GILMORE, supra note 8, at 357.
41. B. CLARK & J. FONSECA, HANDUNG CONSUMER CREDIT CASES § 11 n.15
(1972.)
42.
ld.
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This argument seems unsound in two respects. First, it is difficult to see why a second subsequent loan by a finance company
would not also constitute "value" under the premises of the argument. Second, and more importantly, a lender or dealer can take
a direct purchase-money security interest in the goods which are the
subject of the subsequent sale, and the interest will not only be
automatically perfected by operation of section 9-302 (1)( d) ,43 but
will also be given priority against other interests under section 9312 (4) ;44 allowing attachment of a prior interest under an afteracquired property clause seems to serve no useful purpose except
for permitting a secured party to obtain excess security (a desire
hardly worthy of much protection). On balance, section 9-204(2)
can probably be taken at face value as putting a ten-day limit on
the effectiveness of after-acquired property clauses in consumer transactions.
A cross-collateral clause goes beyond mere attachment of a prior security interest to subsequently acquired property by including
provisions attaching a security interest to property already purchased
by the debtor from the same seller but not yet entirely paid for.
A cross-collateral clause also commonly includes specifications on
the consolidation of amounts due on each item and how payments
are to be prorated among items. This feature was one of the main
reasons for the invalidation of a security agreement on grounds of
unconscionability in the Williams v. Walker-Thomas Furniture
Company45 case discussed above.
Although Article 9 itself contains no provision which focusses
directly on this aspect of a cross-collateral clause, section 2-302 (1),
on unconscionability, gives a court leeway to examine an allegedly
offensive clause, and either exercise it or invalidate the entire agree-
43. Except for motor vehicles required to be registered, § 9-302(l)(d) exempts
purchase money security interests in consumer goods from the general filing requirements of Anicle 9. Perfection is therefore automatic for most consumer goods purchases.
44. U.c.c. § 9-312(4) provides:
A purchase money security interest in collateral other than inventory has
priority over a conflicting security interest in the same collateral or its proceeds
if the purchase money security interest is perfected at the time the debtor
receives possession of the collateral or within ten days thereafter.
45. 350 F.2d 445 (D.C. Cir. 1965), discussed in the text accompanying note
16. SfI/Jt'tJ.
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ment,46 To avoid these possibilities, two eminent commentators
have suggested that the clause provide a first-in, first-out proration
method;47 that is, as payments are made they should be applied first
to the items first purchased so that this collateral will be freed first
and so on. The Uniform Consumer Credit Code adopts the same
method of proration,48 and it seems to be the best approach to avoid
the possible unconscionability of a more stringent clause like the
one weighed and found wanting in Walker-Thomas.
C.
Agreements Not to Assert Defenses
Another clause often encountered in security agreements is a
clause waiving the debtor's right to assert defenses against subsequent assigness of the original secured party. The historic ancestor
of such clauses is, of course, the holder in due course doctrine whose
baptismal date can be fixed as 1758 in the case of Miller v. Race,49
though the actual birth date appears to be even earlier. 50 Under
this doctrine, as refined in later cases and statutes, one who qualifies
as a holder in due course can cut off certain defenses which could
otherwise be asserted against those who buy negotiable paper with
a less than spotless history. 51 By application of this doctrine, a consumer who buys an item on time, signing a negotiable instrument
in return, cannot recover against a person who buys the instrument
for value, in good faith and without notice of any defense against
the instrument, 52 when the item turns out to lack a motor, operate
improperly, or has some other defect which might be characterized
as a breach of warranty,53 failure of consideration54 or even fraud
46. U.e.e. § 2-302(1) is set out in note 17, supra.
47. ]. WHITE & R. SUMMERS, UNIFORM COMMERCIAL CODE 802 (1972).
48. UNIFORM CONSUMER CREDIT CODE § 2.409(1).
49. 1 Burr. 452, 97 Eng. Rep. 398 (K.B. 1758).
50. In the opinion deciding Miller v. Race, Lord Mansfield made reference to
earlier cases on similar points which have not come down to us in existing reports.
Id.
51. See U.e.e. § 3-305, which is the current statutory provision. Under the
Uniform Negotiable Instrument Law, it was §§ 15, 16 & 57.
52. This is the present basic statement of requirements in U.e.e. § 3-302 which
must be met to qualify as a holder in due course. The Code requirements are tlie
same as those which appeared in the Uniform Negotiable Instruments Law. See
comment to u.e.e. § 3-302.
53. First Nat'l Bank v. Carey, 183 Minn. 246, 190 N.W. 182 (1922); compare
U.e.e. § 3-305.
54. C/. Rees v. Sessions, 41 Ohio St. 234 (1884); compare U.e.c. § 3-305.
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in the inducement. 55 The underlying justification for the rule cutting off such defenses is to encourage the free flow of commerce
by encouraging the purchase of commercial paper. 56
As the free flow of commerce came to include the substantial
cutpouring of paper generated in consumer installment sales,57 attempts were made to extend the substance of the holder in due
course doctrine to conditional sales contracts by including a clause
waiving defenses against the seller's assignees. Some jurisdictions
held such clauses void as attempts to create negotiable instruments
outside the Uniform Negotiable Instruments Law;58 others upheld
the clauses. 59
To eliminate some of the confusion existing about the validity
of such agreements, the Uniform Commercial Code, in section 9206, broadly validates waivers of defenses in commercial transactions, but leaves the door wide open for the invalidation of waivers
in consumer matters. The section states that such agreements are
enforceable, "[ s]ubject to any statute or decision which establishes
a different rule for buyers or lessees of consumer goods."60 The
section also provides that, "A buyer who as part of one transaction
signs both a negotiable instrument and a security agreement makes
such an agreement. "61
In net effect, section 9-206 means that waiver of defense clauses
will exist by operation of law even if not stated in the agreement
in any transaction where the buyer signs both a negotiable instrument and a security agreement (surely 99.99<}'00f all secured deals).
55. Von Windursch v. Klaus, 46 Conn. 433 (1878); compare U.e.e. § 3-305.
56. As Wilmot, ]., said in an early case, the concept was fashioned "for the
convenience of trade and commerce:' Pillans & Rose v. Van Mierop & Hopkins,
3 Burr. 1663, 1672, 97 Eng. Rep. 1035, 1040 (1765). The history of the general
concept of negotiability is thoroughly traced in Aigler, Commercial Inst,umenls, the
Law Merchant, and Negotiability, 8 MINN. 1. REV. 361 (1924).
57. Consumer installment debt rose from 4 billion dollars in 1939 to 128 billion
dollars in 1972. See Report of the National Commission on Consumer Finance,
Consumer Credit in the United States, 9 (1972).
58. Universal Credit Co. v. National Radio Mfg. Co., 174 Okla. 178, 49 P.2d
743 (1935); American Nat'J Bank v. A.G. Somerville, Inc. 191 Cal. 364, 216 P.
376 (1923)
59. See Abingdon Bank & Trust Co. v. Shipplett-Moloney Co., 316 Ill. App.
79, 43 N .. E2d 857 (1942); Regrigeration Discount Corp. v. Haskew, 194 Ark. 549,
108 S.W.2d 908 (1937).
60. U.e.e. § 9-206(1).
61. Id.
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In consumer transactions, however, any statute or any court decision
can override the Code and establish a different rule. Obviously,
in dealing with consumer waiver of defenses, section 9-206 does
little more than say, "Look elsewhere."
Even looking casually elsewhere, it soon becomes apparent that
numerous states have chosen to establish a different rule for buyers
of consumer goods. 62 The waiver of defense rule in consumer transactions has been severely criticized63 and other jurisdictions may well
choose to override the provisions of section 9-206 m the future.
D.
Default Clauses
Professor Gilmore has written that, "[Default] can best be defined as being whatever the security agreement says it is,"64 and
a close examination of Article 9, particularly section 9-501, makes
it clear that this proposition is completely accurate. Nowhere in
the Article is there an attempt to specify any act which would constitute a default, thereby leaving the entire matter to the agreement
of the parties (or to a form contract of adhesion proposed by one
of them). Clauses specifying acts of default generally run the gamut of events which a risk-conscious lawyer believes might endanger
the repayment of an outstanding obligation. No list could be exhaustive, but typical provisions include: 1) a failure to pay an installment, in whole or in part, when due; 2) a breach of any of the
warranties or covenants made by the debtor in the agreement; 3)
a discovery of the falsity of any representations made by the debtor
in the agreement; 4) insolvency or death of the debtor; 5) the removal of collateral from a specified location or from the jurisdiction;
6) the failure to obtain insurance covering the collateral; 7) any
levy, seizure or attachment of the collateral; 8) a failure to keep
collateral in good repair or safe from loss, destruction or other injury; and, of course, 9) any belief by the secured party that he deems
himself insecure or that the prospect of payment has been im62. See, e.g., CAL. CIv. CODE § 1804.2 (West 1973); CONN. GEN. STAT. ANN.
§ 52-572g (Supp. 1973); GA. CODE ANN. § 96-908 (1972); MICH. STAT. ANN. § 19.416(115) (Supp. 1973); TEX. REV. CIv. STAT. ANN. art. 5069 § 6.07 (1970). States
which have adopted provisions overriding u.c.e. § 9-206 are collected in CCH CONSUMER CREDIT GUIDE 5 4380 under each state law section.
63. See REPORT OF THE NATIONAL COMMISSION ON CONSUMER FINANCE, CONSUMER CREDIT IN THE UNITED STATES 34-38 n972).
64. 2 GILMORE, SUPftJ note 8, at 1193.
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paired. 65 Default clauses like those contained in the foregoing list
are usually linked to remedy provisions which include an acceleration clause and a clause prohibiting waiver of any part of the agreement, unless the waiver is in writing and signed by the secured
party.66 While Article 9 does not specify acts of default, leaving
these matters to agreement, some limits on the use of default provisions have been developing by adjudication.
In Klingbiel v. Commercial Credit Corp.,67 the secured party
"deemed itself insecure," accelerated the balance remaining on an
installment sales contract, and then repossessed the affected collateral, all without giving any type of notice to the debtor. The terms
of the security agreement allowed acceleration without notice, but
then went on to say, "Purchaser agrees in any such case to pay
said [accelerated] amount to Seller, upon demand or at the election
of Seller, to deliver Vehicle to Seller."68 The trial judge and the
appellate court both reached the conclusion that no default had occurred because no demand for payment or demand for delivery was
ever made by the secured party as required by the agreement. The
repossession was, therefore, a wrongful conversion of the collateral.
Although Klingbiel was decided on the basis of a particular security
agreement, the courts' willingness to strictly read and apply the
agreement indicates that a poorly drafted default clause will not
be given a sympathetic ear.69
The second limit on the use of default clauses is typified by
a fact situation like this: A debtor falls behind in making a scheduled installment payment, creating a default within the terms of
the agreement. The secured party, however, accepts the proffered
tender of the payment, although late, and does not treat the agreement as defaulted. Later on, the debtor again falls behind and this
65. Similar lists appear in most form books on Secured Transactions. See, e.g.,
5B F. HART & W. WILLIER, FORMS & PROCEDURES UNDBR UCC, Form n·l" III at
9.210.117·.124 (1973); 2 F. ELLIOTT & M. RUUD, VERNON'S TEXAS CODE FORMS AN·
NOTATED, Form 4000 (1968).
66. In Clovis Nat'l Bank v. Thomas, 77 N.M. 554, 425 P.2d 726 (1967), such
a clause was directly in issue. It read, "Without the prior written consent of Secured
Party, Debtor will no sell, . . . or otherwise dispose of the Collateral.
.. 77
N.M. at - - , 425 P.2d at 738.
67. 439 F.2d 1303 (10th Cir. 1971).
68. la. at 1305 n.2.
69. A similar line of reasoning was followed in Ford Motor Credit Co. v. Waters,
273 So.2d 96 (Fla. Dist. Ct. App. 1973).
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time the secured party says, "Default!" In a series of cases the
courts have held that the prior actions of the secured party amount
to a waiver of the right to later declare a default when the debtor
does nothing more than he had done before. 7o This result has been
reached despite boilerplate in the security agreements which says
"all waivers of any part of this agreement must be in writing" or
words of similar import.71
One other limit on default clauses, which has the potential to
be the most far-reaching of all, is well summarized by the court
in Kosches v. Nichols: 72
The Court recognizes the right of a default when there is nonpayment, the purchaser attempts to sell the goods, or some similar
reason. The Court also recognizes that, in these adhesion agreements where the buyer has no alternative but to purchase on credit,
the parties are not in an equal bargaining position. The era of
the company store where the purchaser had no place else to go may
not be dead. Clauses which limit the right of the defendant
to move, or declare a default if he dies, or if the holder with
reasonable cause determines the goods are in jeopardy, may be
unconscionable. 73
The special problems relating to contracts of adhesion can also
arise in other contexts and are discussed at length later in this article. 74
IV.
RIGHTS AND REMEDIES AFTER CONTRACTING
BUT BEFORE DEFAULT
The post-contract, pre-default period might be metaphorically
described as an economic plain lying between the legal mountains
of contract on the one side, and the mountains of default on the
other. To a lawyer, this plain might seem dull, boring and legally
lifeless. After the hazards of creating a valid contractual relationship have been avoided, and before the relationship has broken
70. See, e.g., Ford Motor Credit Co. v. Waters, 273 So.2d 96 (Fla. Dist. Ct.
App. 1973); Fontaine v. Industrial Nat'! Bank, - - R.I. - - , 298 A.2d 521 (1973);
Clovis Nat'l Bank v. Thomas, 77 N.M. 554, 425 P.2d 726 (1967).
71. 273 So.2d at 98 n.1; 298 A.2d at 521; 425 P.2d at 728.
72. 68 Misc.2d 795, 327 N.Y.S. 2d 968 (Civ. Ct. 1971).
73. Id. at, 327 N.Y.S.2d at 970. Compare Grossman Furniture Co., Ins, v.
Pierre, 119 N.J. Super. 411, 291 A.2d 858 (Dist. Ct. 1972).
74. See text accompanying notes 100 and 125 infra.
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down, all that is really expected is that the collateral will be delivered to the debtor in good order and that required payments will
be made in due course. So long as the payments continue, the
problems of default will always lie in the distance. Clearly, money
arriving regularly 011 schedule, while pleasant to contemplate, hardly
calls for lawyer skills, and characterizing this on-going relationship
as legally lifeless might not be far from the truth. However, despite
the general accuracy of this characterization there are two points
in the consumer financing area under Article 9 where a lawyer
might be needed in this otherwise purely economic matter. Neither
of them are common, or often even critical, but, because problems
can occur, they should be mentioned.
A.
Statements
ot Account
U.c.c. section 9-208 (1) provides,
A debtor may sign a statement indicating what he believes to be
the aggregate amount of unpaid indebtedness as of a specified
date and may send it to the secured party with a request that the
statement be approved or corrected and returned to the debtor.
The same rule applies to lists of collateral. The section then goes
on to say that the secured party must comply with such a request
within two weeks after receipt by sending a written correction or
approval. A failure to comply, without reasonable excuse, makes
the secured party
liable for any loss caused to the debtor thereby; and if ,the debtor
has properly included in his request a good faith statement of the
obligation or a list of the collateral or both the secured party may
claim a security interest only as shown in the statement against
persons misled by his failure to comply.75
This section provides the debtor with a method of obtaining
an accurate statement of the amount due under a security agreement.
This can be of considerable value to a consumer in establishing his
credit standing when dealing with other creditors and correcting or
updating credit reports (a matter of some consequence as the Fair
Credit Reporting Ace a at the federal level illustrates). The penalty
provisions of section 9-208 seem stringent enough to insure the ac75.
76.
U.c.c. § 9-208(2).
15 U.S.c. § 1681(a)-(t)(1972).
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curacy of corrections or approvals, and to protect the debtor in dealing with subsequent creditors even if the secured party does not
comply with the debtor's request for information.
B.
Termination Statements
The 1972 revisions to Article 9 have added a new twist to section 9-404 which will be of particular interest to both creditors
and consumers. Prior to the revision, if a financing statement was
filed on consumer goods, but the obligation was ultimately paid off,
the financing statement would simply stay on the record until lapse
or until a termination statement was filed at the behest of the debtor.77
Revised section 9-404, however, imposes a mandatory duty on
the secured party who files a financing statement on consumer goods
to "clear the record" by filing a termination statement within one
month after the obligation is paid. A failure to file a termination
statement results in the liability of the secured party to the debtor
in the amount of $100, plus the amount of any loss caused to the
debtor because of such failure. Lawyers for creditors would be well
advised to make sure that financing statements on consumer goods
are terminated when the transactions have run their course to avoid
the automatic penalty. Likewise, if the record is not cleared as required, the consumer might as well take steps to collect the $100
penalty since section 9-404 now provides for it.
These two points on Statements of Account and Termination
Statements are the only matters which might be of lawyer interest
in the post-contract, pre-default state.
V.
PROCEEDINGS AFTER DEFAULT UNDER ARTICLE
A.
9
Options Open to the Secured Party
After an event occurs which constitutes a default under the security agreement and the limits of the Code, section 9-501 (1) allows
the secured party to immediately seek a judgment on the underlying
debt without resort to the collateral, to enforce the security agreement against the collateral by judicial process, or to exercise his
77. Under the 1962 Code, lapse would occur automatically five years after the
financing statement was filed under V.e.e. § 9·403(2) or could be removed earlier
if the debtor so demanded in writing under V.e.e. § 9-404(1).
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rights of self-help repossession by retaking the collateral under section 9-503 without using judicial process. Of these options, the
direct route of immediately seeking a money judgment is the simplest-and often the least satisfactory. The thrust of the "security"
concept is to provide the creditor with a definable asset (or assets)
which can be seized before going to court and obtaining a money
judgment. The money judgment option is available, however, to
take care of those cases where collateral has deteriorated greatly
in value, been removed from the jurisdiction, or has otherwise become an unattractive alternative (i.e., has lost its value as "security").
Assuming, however, that the collateral still exists and is available, the secured party will probably first attempt to gain possession
of it before seeking a judgment. If he is successful in obtaining
the collateral, he may choose to keep it in full satisfaction of the
debt or, more likely, decide to resell it and credit the proceeds to
the debt, leaving the balance of the obligation to be collected by
legal action. 78 It is in the taking and disposition of collateral that
a secured party is most likely to run into statutory or judicial limitations of a consumer protection nature. Following the same pattern
of a topical discussion, these specific problem areas will be treated
separately below.
B.
Retakings by Judicial Process
The late Henry M. Hart, who taught Legal Process and various
federal jurisdiction courses at Harvard for many years, delighted in
emphasizing the constantly changing nature of the law to his students by relating a story about an author who, after lengthy and
assiduous labor, published a treatise on "The General Federal Common Law" one month before Erie Railroad Co. v. Tompkins 79 was
handed down. Since the Supreme Court's decision in Fuentes v.
Shevin,80 the entire area of prejudgment property seizures has been
undergoing what must seem to be a change of similar magnitude
to lawyers involved in post-default collection procedures. One by
one, various post-default collection procedures were held unconstitu78. U.c.c. § 9-504(2) allows deficiency judgments at present. This is further
discussed in text at note 170 infra.
79. 304 U.S. 64 (1938), probably the most-cited case in american legal historysee the appropriate volume of Shepard's Citator.
80. 407 U.S. 67 (1972)
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tional as violative of the due process clause,81 culminating in the
potentially far-reaching Fuentes decision.
Beginning in 1969, in Sniadach v. Family Finance Corporation,82 prejudgment wage garnishment under a Wisconsin statute
was found unconstitutional because the act did not provide the debtor with notice of the garnishment or an opportunity to be heard
before it took effect. Some language in the Sniadach opinion
has been interpreted by some courts as holding that the rule is limited to wage garnishments, and not to other garnishments and certainly not to other prejudgment property seizures. 8s Lower courts
have split nicely on the broadness of the Sniadach rule. Some limited the case to wage garnishment,84 others applied it to garnishment generally,85 and still others read it as invalidating any prejudgment seizure of property which did not provide for notice and opportunity to be heard. 86
Even the Supreme Court did not seem to be sure of the scope
of Sniadach. Some statements in the decision of Goldberg v. KellyB7
sounded as if only wages or their equivalent in current earning power were affected by the requirements of notice and hearing before
seizure. ss The same opinion, however, also spoke of "necessities"89
and of the basic nature of due process.90 This ambivalence only
81. See cases cited in notes 86-90 infra.
82. 395 U.S. 337 (1969)
83. The precise statement was: "We deal here with wages-a specialized type
of property presenting distinct problems in our economic system." ld. at 340.
84. E.g., Reeves v. Motor Contract Co., 324 F. Supp. 1011 (N.D. Ga. 1971);
American Olean Tile Co. v. Zimmerman, 317 F. Supp. 150 (D. Hawaii 1970)
85. E.g., Aaron v. Clark, 342 F. Supp. 898 (N.D. Ga., 1972); Larson v. Fetherston,
44 Wis.2d 712, 172 N.W. 2d 20 (1969).
86. E.g., Laprease v. Raymours Furniture Co., 315 F. Supp. 716 (N.D.N.Y. 1970);
Blair v. Pitchess, 5 Cal. 3d 258, 96 Cal. Rptr. 42, 486 P.2d 1242 (197l).
87. 397 U.S. 254 (1970).
88. Goldberg involved welfare payments, essentially a wage-like item, and the
Court noted: "[W) e agree with the District Court that when welfare is discontinued,
only a pre· termination evidentiaty hearing provides the recipient with procedural
due process. [citing Sniadach)." ld. at 264.
89. "Welfare, by meeting the basic demands of subsistence, can help bring within
the reach of the poor the same opportunities that are available to others to participate
meaningfully in the life of the co=unity." ld. at 265.
90. We wish to add that we, no less than the dissenters, recognize the importance of not imposing upon the States or the Federal Government in this
developing field of law any procedural requirements beyond those demanded
by rudimentary due process.
397 U.S. 254, 267 (1969).
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deepened the quagmire of figuring out when due process applied
and when it did not.
Finally, the Supreme Court decided Fuentes v. Shevin 91 which
has at least settled the question of the validity of prejudgment property seizures by state officials acting on behalf of private persons.
Such seizures are invalid unless: 1) the defendant has been given
both a notice of the proceeding and an opportunity to be heard
before the seizure takes place,92 or 2) the seizure takes place within
certain narrowly drawn exceptions to the general due process guidelines. The two most important guidelines being: a) that the case
involves an "immediate danger that a debtor will destroy or conceal
disputed goods,"93 or b) that the debtor has effectively waived his
rights to notice and hearing. 94
Acting under the newly-clarified Fuentes standard, a number of
courts have declared various statutory procedures for the summary
recovery of property unconstitutional,95 and almost certainly more
will follow. For the secured party who wishes to retake collateral
after default by judicial process, it can now be said that he cannot
do so without providing the debtor with a notice that a writ authorizing prejudgment seizure of collateral is being sought and giving
the debtor an opprtunity to contest the issuance of the writ by
way of a hearing, unless the case can be fitted into one of the exceptions to the general rule.
The first exception, that of avoiding an "immediate danger" of
destruction or concealment of goods, is obviously quite limited. 96
The secured party must carry the burden of showing that such a
danger actually exists and, if the showing is not persuasive, the requirements of notice and hearing continue to apply.
More precise standards, such as the quantum of proof required,
the type of evidence relevant to showing "immediate danger," etc.,
91.
92.
407 U.S. 67 (1972).
Id. at 96-97.
93. ld. at 93.
94. ld. at 95-96.
95. See, e.g., Michel v. Rex-Noreco, Inc., 12 UCC REP. SERVo 543 (D. Vt. 1973)
(repossession under the ueC); James v. Pinnex, 4 eCH SECURED TRANSACTIONS GUIDE
, 52, 172 (D. Miss. 1973)(repossession under the UCC); Straley V. Gassaway Motor
Co., Inc., 4 eeH SECURED TRANSACIlONS GUIDE' 52, 162 (D. W. Va. 1973) (Mechanic's lien); HaJl v. Garson, 468 F.2d 845 (5th Cir. 1972) (landlord's lien).
96. Fuentes v. Shevin, 407 U.S. 67, 93 (1972).
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cannot be stated at the present time but will have to be left to
a case-by-case determination. It is possible that at least some general guidelines on the scope of this exception will soon be forthcoming
from the Supreme Court when W.T. Grant v. Mitchell 97 is decided.
Mitchell is a Louisiana case questioning the constitutionality of the
sequestration statutes of that state. After those statutes were upheld
by the Louisiana Supreme Court, a writ of certiorari was granted
to review the decision during the coming Supreme Court term.98
Because the statutes in question require, inter alia, that danger of
destruction or concealment be attested before a writ is issued,99 the
Court may take the opportunity presented by Mitchell to discuss
the scope of the "danger" exception even if it does not constitute
the main decisional issue in the case.
The second exception to the general rule is of an intensely practical concern to lawyers who must plan secured transactions in a
way that makes them as routine and trouble-free as possible. The
question can be simply stated: Can a transaction be planned in such
a way that a debtor can effectively waive his rights to notice and
hearing? There seems to be a good chance that this question can
be answered affirmatively provided:
1)
2)
3)
The waiver clause clearly states the rights which are being
waived;
The waiver is brought to the attention of the debtor, perhaps
by being printed on a separate sheet and separately signed,
together with an explanation of the rights being waived if
there is any doubt about the ability of the debtor to understand the effect of the clause; and
The signing of the waiver does not occur under circumstances
which deprive the debtor of an effective choice of whether or
not to sign. 1OO
The first two provisos are probably self-explanatory. The last
point, however, is more difficult, and may, in some instances, simply
present a situation which no amount of planning and drafting skill
97. 269 So.2d 186 (La. 1972), cert. granted sub. nom. Mitchell v. W.T. Grant
Co., - - U.S. --,93 S. Ct. 2276 (1973).
98. ld.
99. LA. CODE CIv. PRO. ANN. arcs. 3501-76 (West 1961).
100. These requirements were briefly discussed in Fuentes v. Shevin, 407 U.S.
67, 95-96 (1972).
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can fully handle.
fessor Kessler:
23
The basic problem has been well-stated by Pro-
The weaker party, in need of the goods or services, is frequently
not in a position to shop around for better terms, either because
the author of the standard contract has a monopoly (natural or
artificial) or because all competitors use the same clauses. His
contractUal intention is but a subjection more or less voluntary to
terms dictated by the stronger party, terms whose consequences are
often understood only in a vague way, if at aU.101
Professor Kessler's remarks in 1943 about freedom of contract
identified a factor of particularly difficult predictive magnitude in
1973 about the validity of any contract offered on a take-it-or-Ieaveit basis when all contracts dealing with the same goods or services
are of substantial identity, and are by nature contracts of adhesion.
The Fuentes case itself, in addition to finding the particular contract
language involved to be of doubtful clarity, made reference to the
relative bargaining positions of the parties as a matter to be examined in deciding if a given contract effectively waived the rights
of the weaker party.102 The same approach of looking beyond mere
words and type size has appeared in a number of recent cases,103
and should give pause to any secured party who decides the requirements of notice and hearing are of academic interest only and can
readily be waived by the debtor by obtaining his signature on an
appropriately drafted form.
This question of planning a secured transaction under Article
9 to include an effective waiver of post-default rights to notice and
hearing is not limited to retakings of collateral by judicial process
since it now appears that self-help repossession under section 9-503
may also involve the same due process rights before collateral is
retaken. 104 Because of this overlap with "straight" repossession, a
further consideration of the problem of obtaining an effective waiver
clause will be deferred to the end of that discussion.
101.
tract, 43
102.
103.
Civ. Ct.
(1971);
Sup. Ct.
104.
Kessler, Contracts of Adhesion-Some Thoughts About Freedom of ConL. REv. 629, 632 (1943).
407 U.S. at 94-95.
See, e.g., Kosches v. Nichols, 68 Misc. 2d 795, 327 N.Y.S.2d 968 (N.Y.
1971); Blair v. Pitchess, 5 Cal.3s 258, 486 P.2d 1242, 96, Cal. Rptr. 42
Paragon Homes, Inc. v. Carter, 56 Misc.2d 463, 288 N.Y.S.2d 817 (N.Y.
1968), aff'd 30 A.D.2d 1052, 295 N.Y.S. 2d 606 (1968).
See cases cited in notes 105 and 107 infra.
CoLUM.
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Retakings by Self-Help Repossession
At the heart of the present article 9 provisions on default is
section 9-503, which is entitled "Secured Party's Right to Take Possession After Default," and which provides:
Unless otherwise agreed a secured party has on default the
right to take possession of the collateral. In taking possession
a secured party may proceed without judicial process if this can
be done without breach of the peace or may proceed by action.
If the security agreement so provides the secured party may require
the debtor to assemble the collateral and make it available to the
secured party at a place to be designated by the secured party
which is reasonably convenient to both parties. Without removal
a secured party may render equipment unusable, and may dispose
of collateral on the debtor's premises under Section 9-504.
As most lawyers who deal with commercial problems are no
doubt already aware, this section was held unconstitutional on due
process grounds in the case of Adams v. Egley.1Q5 That decision
generated a nationwide wave of cases on section 9-503, some uphoiding106 and some invaiidating107 the statutory provision. Adams
itself was subsequently reversed by the Ninth Circuit. lOs
Factually, Adams was a straightforward repossession case.
105. 338 F. Supp. 614 (S.D. Cal. 1972), rev'd, Civil No. 72-1484 (9th Cir.,
filed Oct. 1, 1973).
106. See, e.g., Giglio v. Bank of Delaware, 12 VCC REP. SERvo 934 (Del. Ch.
1973); Plante V. Industrial Nat'l Bank of R.I., 12 VCC Rep. Servo 739 (R.I. Super
Ct. 1973); Brown v. United States Nat'l Bank of Oregon, 509 P.2d 442 (Ore. 1973).
107. See, e.g., Michel V. Rex-Noreco, Inc., 12 UCC REP. SERVo 543 (D. Vt.
1972); James V. Pinnex, 4 CCH SECURED TRANSACTIONS GUIDE' 52,172 (D. Miss.
1973); Chrysler Credit Corp. V. Dinitz, 11 VCC REP. SERVo 627 (N.Y. Civ. Ct. 1972).
108. The Ninth Circuit handed down its decision on the appeal of Adams V.
Egley in Adams V. Southern California First National Bank, Civil No. 72-1484 (9th
Cir, filed Oct. 1, 1973). The court held that there was no federal cause of action
under either § 1983 or the fourteenth amendment. The court stated:
We find that the State of California is not significantly involved in the
self-help repossession procedure undertaken by the creditors in these cases
to permit this court to find the state action or conduct taken under color of
state law required to establish a federal cause of action.
The under color of law requirement of § 1983 has been treated as the
equivalent of the state action requirement of the Fourteenth Amendment
(citation omirted).
Id. at 7.
The Ninth Circuit said that the test for state action as under color of state law
was "not state involvement, but rather is significant state involvement." Id. at 9.
The court adopted this test from the Supreme Court decision in Moose Lodge No.
107 v_ Irvis, 407 U.S. 163, 173 (1972).
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25
When the debtor defaulted by missing payments due under a security agreement, the secured party employed an agent to repossess the
collateral (two motor vehicles). After the repossession had been
successfully accomplished, the collateral was sold at private sale.
The plaintiff-debtor (Adams) then brought suit in the federal district
court for the Southern District of California alleging a violation
of his due process rights to notice and hearing. Jurisdiction was
posited on 28 U.S.C § 1331 (general federal question jurisdiction)109 and the Civil Rights Acts (28 V.S.C § 1343 and 42 U.S.C
§ 1983).110
After finding that the repossession had been carried out "under
color of" state law, and that enactment of section 9-503 constituted
"state action" as required by the jurisdictional statutes,lll the court
proceeded to a discussion of the applicability of the due process standards to a retaking of collateral by a secured party. The court concluded that notice and an opportunity to be heard were indeed required in section 9- 503 property takings. 112 The resolution of the
due process issue, although preceding the Fuentes1l3 decision, closely
paralleled the later reasoning of the Supreme Court on the same
109.
28 U.S.c. § 1331 (1970) provides, in pertinent part:
(a) The district courts shall have original jurisdiction of all civil actions
wherein the matter in controversy exceeds the sum or value of $10,000,
exclusive of interest and costS, and arises under the Constitution, laws, or
treaties of the United States.
110. 28 U.S.c. § 1343 (1970) provides:
The district courts shall have original jurisdiction of any civil action au·
thorized by law to be commenced by any person:
(3) To redress the deprivation, under color of any State law, statute,
ordinance, regulation, custom or usage, of any right, privilege or immunity
secured by the Constitution of the United States or by any Ace of Congress
providing for equal rights of citizens or of all persons within the jurisdiceion
of the United States;
(4) To recover damages or to secure equitable or other relief under any
Act of Congress providing for the protection of civil rights, including the
right to vote.
42 U.S.c. § 1983 (1970) provides:
Every person who, under color of any statute, ordinance, regulation custom, or usage, of any State of Territory, subjects, or causes to be subjeceed,
any citizen of the United States or other person within the jurisdiction
thereof to the deprivation of any rights, privileges, or immunities secured
by the Constitution and laws, shall be liable to the party injured in an action
at law, suit in equity, or other proper proceeding for redress.
111. See text of statutes in notes 109 and 11 0 Iu/Wa.
112. 338 F. Supp at 614, 618-22.
113. See note 99 IUp,.a.
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question, and it can now be said that the district court was correct
in its due process interpretation.
The more difficult issue, however, on which the court of appeab
disagreed with the lower court, is whether the enactment of, and a
retaking under, section 9-503 makes repossession by a secured party
an action done "under color of" state law so as to confer jurisdiction on a federal court. The language "under color of" state law,
which appears in both section 1343 and section 1983/ 14 is perhaps
an especially apt phrase since past cases have come to show that asking if something was done "under color of" state law is about like
asking-in the abstract-"What color is a chameleon ?"115 The
"state action" issue is an equivalent question on the Adams facts
except that it is grounded in the language and interpretation of the
fourteenth amendment instead of sections 1343 and 1983. 116 The
"state action" question is also fraught with uncertainty for, as one
commentator has put it:
Taking it as a whole, what we see exhibited is a "doctrine"
without shape or line. The doctrine-in-chief is a slogan from
1883. The sub-doctrines are nothing but discordant suggestions.
The whole thing has the flavor of a torchless search for a way
out of a damp echoing cave. . ., The field is a conceptual disaster area. . . .117
The Supreme Court itself has said, "Only by sifting facts and
weighing circumstances can the non-obvious involvement of the
State in private conduct be attributed its true significance."l1S
There is no need here to track and repeat the extensive judicial
and scholarly discussion of acts which are done "under color of"
114. See text of these statutes in notes 109 and 110 sup-ra.
115. Simply as one example in the area of U.c.c. § 9-503 repossession, compare
Kirksey v. Theilig, 351 F. Supp. 727 (D. Colo. 1972) (holding no actiop "under
color of" state law occurred in § 9-503 repossession) with Michel v. Rex-Noreco,
Inc., 12 UCC REP. SERVo 543 (D. Vt. 1972) (holding § 9-503 repossession was done
"under color of" state law).
116. Although "state action" and "under color of" state law present the same
questions in repossession cases, wme points of distinction, which are only occasionally
important, do exist. The differences are carefully discussed in Klim V. Jones, 315
F. Supp. 109 (N.D. Ca. 1970) See also Note, The Civil Rights Action 0/ 1871:
Continuing Vitality, 40 NOTRE DAME LAW. 70 (1964).
117. Black, Forward: "State Action," Equal Protection, and California's Proposition 14, 81 HARV. L REV. 69,95 (1967).
118. Burton v. Wilmington Parking Auth., 365 U.S. 715, 722 (1961). This
language was cited with approval in Moose Lodge No. 107 V. levis, 407 U.S. 163,
172 (1972).
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state law or which constitute "state action."1l9 For present purposes,
given the facts of an existing case-Adams-an analogy and an
idea might be enough to suggest a line of development in section
9-503 repossession cases to correctly resolve the "color of" state law
and "state action" issues.
At the level of analogy, there· have recently been a number of
federal court cases holding landlord's lien statutes to be invalid under the due process clause. As was stated in one of these cases:
Not only does California Civil Code § 1861 [on landlord's
J
liens outline the conditions applicable to the lien in question
here, but it is only by virtue of Section 1861 that defendant Jones
had the power to impose a lien on the plaintiff's belongings, and
it is only by virtue of Section 1861 that defendant Jones could
impose such lien without subjecting himself to the forms of civil
liability excluded by Section 1861 (Section 1861 as amended provides the California innkeeper with exemptions from liability for
conversion, trespass, and forcible entry under certain conditions.
. . .) (emphasis in original) .120
A comparison of typical landlord's lien statutes with section 9503 reveals some striking parallels: 121 1) Both the landlord and
119. . See cases and articles cited notes 115-118 supra. See also Henkin, Shelley
v. Kramer: Notes for a Revised Opinion, 110 U. PA. 1. REV. 473 (1962); Horowitz
& Karst, The Proposition Fourteen Cases: Justice in Search of a Justification, 14
U.C.1.A. 1. REV. 37 (1966); Frantz, Congressional Power to Enforce the Fourteenth
Amendment Against Private Acts, 73 YALE L.J. 1353 (1964).
120. Klim v. Jones, 315 F. Supp. 109, 114 (1970).
121. For example, the California statute held unconstitutional in Klim v. Jones,
supra note 115, was § 1861 of the California Civil Code which provided, inter alia:
Hotel, motel, inn, boardinghouse and lodginghouse keepers shall have a
lien upon the baggage and o:her property belonging to or legally under
the control of their guests, boarders, tenants, or lodgers which may be in such
hotel, motel, inn, or lodging house for the proper charges due from such
guests, boarders, tenants, or lodgers ... and unless such charges and moneys
shall be paid within 60 days from the time when the same become due, said
hotel, motel, inn, boardinghouse, or lodginghouse keeper may sell said baggage and property at pu blic auction to the highest bidder . . . .
In order to en~orce the lien provided for in this section, a motel, hotel,
inn, boardinghou~e, and lodginghouse keeper shall have the right to enter
peaceably. the premises used by his guest, boarder, lodger, or tenant in such
hotel, motel, inn, boardinghouse, or lodginghouse without liability to such
guest, tenant, boarder, or lodger for conversion, trespass, or forcible entry ....
The Texas landlord's lien statute, TEX. REV. ClY. STAT. ANN. art. 5238a, held unconstitutional in Hall v. Garson, 468 F.2d 845 (1972), provided, inter alia:
Section 1. The operator of any residential house, apartment, duplex or
other single or multi-family dwelling, shall have a lien upon all baggage and
all other property found within the tenant's dwelling for all rents due and
unpaid by the tenant thereof; and said operator shall have the right to take
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the secured party are given an interest in the property of another;
2) Upon default, the landlord and the secured party are authorized
to take all property to which their respective interests have attached;
3) The property may be sold to satisfy the existing debts; 4) The
seIzing parties are given immunity, within limits, from civil liability
which might otherwise arise from the taking.
Clearly, the analogy is a close one, but there is one point of
possible difference. While both the landlord's interest and the secured party's interest are initially grounded in relationships voluntarily entered into with a tenant or a debtor, the landlord's lien
arises automatically by operation of law when a rent payment goes
unpaid. 122 In contrast, the security interest is entirely contractual
in nature (though all critical steps are spelled out in the statute)
and, conceptually, this interest attaches immediately instead of arising at the time a default occurs.123 Perhaps it can be said that
this difference in the time and man~er of attachment-one by operation of law at the time of default and the other by a contract prior
to default which is "merely" enforceable by law-is a critical distinction. For reasons more fully discussed below, it is submitted that
this distinction is important in only one respect-in security agreement cases, the focus of inquiry should be on any private law provisions created by the parties in their contract which are enforceable
by resort to state law instead of on a provision created by state
law and "read into" private contract arrangements.
In the realm of idea, and as illustration that the distinction between "contract" liens and "legal" liens is slight indeed, Professor
Countryman has recently suggested that a debtor's suit for conversion, after repossession, might force the secured party to raise section
9-503 as a defense, thereby establishing the necessary requirement
of "state action" if the defense is upheld. 124
and retain possession of such baggage and other property until the amount of
such unpaid rent is paid ....
Section 2. In any sale to satisfy said lien, said operator shall be subjecr
to the same duties and shall follow the same procedures as set out for proprietors of hotels, boarding houses, inns, tourist courts, and motels, in Anicle
4595, Revised Civil Statutes of Texas, 1925, as amended ....
These statutes can be profitably compared with U.CC § 9-503 set out in text.
122. See text of statutes set out in note 121 supra.
123. See U.CC § 9-203(2).
124. Counttyman, The Bill 0/ Rights and the Bill Collector, 15 ARIz. L. REV.
521,553-54 (1973).
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A consideration of the foregoing analogy and idea suggests a
theory which might prove to be a sound basis for resolving the
state action issue in property seizure cases. The theory is simply
that we have now reached such a stage in the development of concepts of "state action" and "under color of" state law that they have
ceased to have functional meaning in the resolution of private disputes, and that we must begin looking at the actual arrangements
of the parties to decide if the particular "deal" is one which would
be enforced under state law. If it would be so enforced the requisite
state action exists and the due process standard controls. Put another way, a minimum standard of due process should be applicable
to any private arrangement in which one party gains the right to
seize property belonging to another when that right can be backed
up by force of state authority. We may say that in such cases the
state has delegated its power to seize property. It is difficult to see
why the delegee who can exercise such power should not be held to
the same standard as the state itself.
Application of this theory to the Adams facts results, of course,
in imposing the due process requirements of notice and opportunity
to be heard because the "deal" of the parties did not include an
effective waiver of these requirements, but did grant a right to seize
property. It further results in finding that the repossession was carried out "under color of" state law because the "private law" of
the contract would be enforced by the state if it were called upon
to do so. "State action," by the same token, would be found to
exist by the section 9-503 delegation of authority to seize property
and the immunization from civil liability created by the same section.
If this theory is sound, it leads inexorably to the contract, including alleged waivers and surrounding circumstances, as the pri~
cipal matter for inquiry in repossession cases. 125 We thus again
come full circle and arrive at the same point of a need for the
careful drafting of waiver clauses in "straight" repossession as was
encountered in the discussion of retakings by judicial process. As
noted at the end of that discussion, some waiver techniques are com125. This may be equivalent to the statement by the Supreme Court that, "Only
by sifting facts and weighing circumstances can the non-obvious involvement of the
State in private conduct be attributed its true significance." Burton v. Wilmington
Parking Auth., 365 U.S. 715, 722 (1961).
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mon to both types of property retakings and are particularly important if section 9-503 seizures are unconstitutional.
The first technique which might be used is directed principally
at the problem of obtaining a waiver at a time when the bargaining
positions of both parties are approximately equal. Strangely
enough, every security transaction which involves a default has such
a time: after default, but before repossession. If a waiver is sought
at this time, the debtor will be able to decide whether or not to
sign from a position of strength (he has the goods), and the waiver
will be the focus of discussion, not an addendum, so no claim of
"unfair surprise" can later be asserted. In addition, the potentially
adhesive character of a waiver will be absent because the debtor
can readily refuse to agree if he so chooses; an alternative which
may not be a realistic choice if the waiver is obtained when the
original security agreement is signed. Seeking a waiver of rights
after default is not a unique suggestion since the same approach
is taken by Article 9 in at least three other areas. The method
should be an effective one for validating an agreement which might
otherwise be suspect in a creditor/consumer transaction. 126
The second technique is also aimed at equalizing bargaining position by giving the debtor a real choice of signing or not signing
a waiver statement when it is presented as part of the original security agreement "deal." To some degree, the technique will depend on actual experience accumulated in default cases if notice and
opportunity for a hearing are imposed as requirements on repossession. The principle, however, can be easily stated.
Suppose the cost of providing notice and an opportunity for a
hearing, in all default cases which occur for a particular seller or
lender, totals "X" dollars over a representative period of time. Let
us further suppose that spreading this cost over all credit transactions
for the same seller or lender during the same period of time would
increase the interest rate charged by one-half of one percent. Under
these circumstances it would seem that a debtor could be given the
choice of signing a waiver in return for a lower interest rate or
not signing the waiver and paying a somewhat higher rate. This
126. See U.CC § 9-505 (a) (post-default waiver of right to insist on resale); U.CC
§ 9-506 (post-default waiver of redemption rights) and U.CC § 9-504 (3) (post·default
waiver of right to notice of resale). The technique of obtaining a waiver of notice
and hearing rights is currently being used by at least one major finance company
in Southern California.
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type of differential interest charge already takes place in many consumer credit transactions (better risk borrowers get a better rate than
high risk borrowers) and it seems the same approach could be rather
readily adapted to the legal need of obtaining a valid waiver.
One last matter about the retaking of collateral should be mentioned. In addition to raising a number of questions which must
necessarily be of concern to parties engaged in secured transactions
under Article 9, Fuentes has also resulted in the posing of a curious
problem about the theory of precedent. Because Justices Powell
and Rehnquist were not appointed to the Court until after oral argument had been heard· in Fuentes, they did not take part in the consideration or decision of the case. 127 The case was decided by a
4-3 majority. Although four Justices represented a majority of
those sitting on the case, that number does not, of course, represent
an absolute majority of the nine members of the Court (even though
all nine did not, and could not, participate in deciding the case).
In response to this division, the Supreme Court of Airzona has introduced what might be called "The Theory of Arithmetical Jurisprudence" by deciding, in Roofing Wholesale Co., Inc. v. Palmer,128
that the Arizona replevin statues,129 identical to the statutes found
unconstitutional in Fuentes/ 3o were actually valid because a majority
of the whole court had not acted in deciding Fuentes. This rationale
is unique in the interpretation of Supreme Court cases as precedent,
and, with the exception of a single case,131 is paralleled at the state
level only by a handful of cases based on state laws -specifying that
a certain number of judges of a given court shall constitute a majority.132 No similar statute exists at the federal level for the Supreme
Court. 133 The Arizona theory thus raises a major question about
127. Oral argument was heard in Fuentes on November 9, 1971. Justices Powell
and Rehnquist were confirmed to the Court on December 6 and December 10, 1971,
respeCtively.
128. 502 P.2d 1327 (Ariz. 1972).
129. ARIZ. REV. STAT. ANN. §§ 12-1521, -1522 and -1571 (1956).
130. FLA. STAT. ANN. §§ 78.01-.10 (Supp. 1972-73); and PA. STAT. ANN. tit. 12,
§§ 1821-47 (1967); PA. STAT. ANN. tit.12, Rules 1071-86 (1967).
131. Johnson v. State ex.rel. Brannon, 1 Ga. 271 (1846).
132. See, e.g., Mugge v. Tate, Jones & Co., 51 Fla. 255, 41 So. 603 (1906)
(state constitution); Denver & R.G.R. Co. v. Burchard, 35 Colo. 539, 86 P. 749
(1906)(state constitution); Paine v. Foster, 9 Okla. 213, 53 P.109 (1896); 9 Okla.
257,59 P. 252 (1899)(state statute).
133. 28 U.S.c. § 1 (1970) is the only statute even approaching the point and
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the precedental effect of four to three Supreme Court decisions, and
this question is magnified when it is realized that during the October
1971 Term alone, the Supreme Court decided eleven cases by fourthree decisions. 134 This fact was pointed out in a dissenting opinion
in Roofing Wholesale Co., Inc. v. Palmer,I35 which also gives figures
for four-three decisions in other Supreme Court terms. Clearly, the
ramifications of Fuentes do not stop with Article 9.
D.
Retention of Collateral after Retaking
Assuming that a secured party has properly repossessed collateral
under section 9-503, the next question is, simply, what can he done
with it ?136 Historically, one alternative for the creditor has been
to exercise "strict foreclosure" and keep the collateral in satisfaction
of the debt. The other alternative is to resell the collateral and
account to the debtor for any surplus or sue for any deficiency.
When consumer goods are involved, there are two main rules to
be followed under article 9 if the secured party wants to exercise
the present statutory equivalent of strict foreclosure.
The first rule appears in section 9-503(1). "If the debtor has
paid sixty percent of the cash price in the case of a purchase money
security interest in consumer goods or sixty per~ent of the loan in
the case of another security interest in consumer goods" the secured
party must resell the good within ninety days after repossession unless the debtor has signed a statement after default waiving this
right to conpulsory resale. A failure to resell within ninegr days
makes the secured party liable to the debtor for conversion or subjects him to the statutory penalty provisions of Articfe 9. The reason
for this "6070 Rule" has been described as being that,
if the deBtor has paid as much as 60 per cent, there is a good
chance that he has built up an equity which should 'be protected
it simply provides: The Supreme Court of the United States shall consist of a Chief
Justice of the United States and eight associate justices, any six of whom shall constitute
a quorum.
134. See, e.g., Richardson v. Bel!=her, 404 U.S. 78 (1971); Schilb v. Kuebel,
404 U.S. 357 (1971); Lego v. Twomey, 404 U.S. 477 (1972); Lynch v. Household
Finance Corp., 405 U.S. 538 (1972); Fuentes v. Shevin, 407 U.S. 67 (1972).
135. 503 P.2d at 1327, 1332.
136. U.c.c. § 9·501 in an "index" section of the several alternatives open to
the secured parry. Each of these alternatives will be discussed in the text.
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by requiring a compulsory disposition which will, hopefully, produce a surplus to be returned to him.137
The second rule about strict foreclosure (really the other half
of the "60ro Rule") is in section 9-503(2).
In any other case involving consumer goods or any other collateral
a secured party in possession may, after default, propose to retain
the collateral in satisfaction of the obligation. Written notice of
such proposal shall be sent to the debtor if he has not signed after
default a statement renouncing or modifying his rights under this
subsection. In the case of consumer goods no other notice need
be given.
Prior to the 1972 revisions to Article 9, the debtor had 30 days
to object to the proposed retention of collateral. 138 The 1972
amendments have shortened this period to 21 days,139 which might
make strict foreclosure a slightly more attractive alternative by eliminating some of the delay between the time when the secured party
decides to try this alternative and the time when the option can actually be exercised.
E.
Resale of Collateral After Retaking
Although strict foreclosure of consumer goods is possible under
the Code, the most common method of disposition is resale under
section 9-504. The general scheme of this section is uncomplicated.
The first step is to sell the goods. 140 The proceeds of the sale are
then to be applied to the expenses of retaking, resale, etc., and the
satisfaction of the underlying debt (in that order).141 If a surplus
remains, it goes to the debtor.14 2 If a deficiency results, the debtor
is liable for it. 143
However, as we have been told, such well-laid plans "go oft
awry" and the scheme of section 9-504 has proved no exception,
especially in consumer_ cases. Subsection (3) of section 9-503,
which governs the conduct of the sale itself, creates three main
13 7.
138.
139.
140.
141.
142.
2 GILMORE, Jupra note 8, at 1222.
U.c.c. § 9-505(2)(1962 Official Text).
U.c.c. § 9-505(2)(1972 Official Text).
U.C.C. § 9-504(3).
U.c.c. § 9-504(1).
U.c.c. § 9-504(2).
143. la.
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rules:144 1) notice of the proposed sale must be sent to the debtor;
2) every aspect of the sale must be "commercially reasonable"; and
3) the secured party may buy only within the limits of the statute.
The type of notice which must be sent will vary depending on
whether the sale is to be public or private.145 If public, the notice
must state the time and place for the sale.146 If private, the time
after which a sale will take place must be specified. 147 In both
cases, "reasonable notification" is required, and this includes giving
the debtor enough time to lodge an objection if he has one. 14S Notification can be dispensed with if the debtor has waived his right
to notice by signing a post-default statement to that effect. 141! If
the secured party fails to send an appropriate notice, and has not
obtained a waiver, the right to obtain a deficiency judgment may
be lost. 15o It should be noted that the statutory requirement that
notice be "sent" might require more than mere "sending." If the
secured party has reason to know that his efforts to notify have
144.
The full text of U.c.c. § 9-504(3) is as follows:
Disposition of the collateral may be by public or private proceedings
and may be made by way of one or more contracts. Sale or other disposition
may be as a unit or in parcels and at any time and place and on any terms
but every aspect of the disposition including the method, manner, time, place
and terms must be commercially reasonable. Unless collateral is perishable
or threatens to decline speedily in value or is of a type customarily sold on
a recognized market, reasonable notification of the time and place of any
public sale or reasonable notification of the time after which any private sale
or other intended disposition is to be made shall be sent by the secured
party to the debtor, if he has not signed after default a statement renouncing
or modifying his right to notification of sale. In the case of consumer goods
no other notification need be sent. In other cases notification shall be sent
to any other secured party from whom the secured party has received (before
sending his notification to the debtor or before the debtor's renunciation
of his rights) written notice of a claim of an interest in the collateral. The
secured party may buy at any public sale and if the collateral is of a type
customarily sold in a recognized market or is of a type which is the subject
of widely distributed standard price quotations he may buy at private sale.
145. See text of U.C.C. § 9-504(3), supra note 144.
146. ld.
147. ld.
148. ld.
149. Id.
150. See, e.g., Twin Bridges Truck City v. Halling, 205 N.W.2d 736 (la. 1973);
Commercial Credit Corp. v. Lloyd, 12 UCC Rep. Servo 15 (D.C. Super Ct. 1973);
Mallicoat V. Volunteer Finance & Loan Corp., 57 Tenn. App. 106, 415 S.W.2d 347
(1966).
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failed, he may have a duty to make further attempts to give effective
notification. 151
The rule that sales must be conducted in a commercially reasonable manner can also cause problems. The term "commercially reasonable" is not defined in the Code but has been left to a caseby-case determination. Many factors can enter into deciding if a
sale was appropriately conducted. The method of advertising the
sale may be inadequate. 152 The time and manner of conducting
the sale may be suspect. 153 The place of sale may be poorly chosen. 154 An actual "sale" may not occur.155
One important factor which has been turning up in recent cases
is whether, under the facts and circumstances of each case, the sale
resulted in a "fair price" being obtained for the collateraP56 Although section 9-507 (2) provides, inter alia:
The fact that a better price could have been obtained by a sale
at a different time or in a different method from that selected by
the secured party is not of itself sufficient to establish that the
sale was not made in a commercially reasonable manner,
this has not stopped the courts from carefully scrutinizing the price
and analyzing its "reasonableness."157 This is not to say that price
alone will decide the question, but it can go a long way in making
up for rather weak or disputed evidence on other factors in trying
to establish "commercial unreasonableness." Closely tied into this
issue is the question of who has the burden of proving or disproving
that a sale was conducted in a commercially reasonable manner.
At present, the cases are divided on the allocation of the burden
151. See Commercial Credit Corp. v. Lloyd and Mallicoat v. Volunteer Finance
Loan Corp., supra note 150.
152 In re Bishop, 11 UCC REP. SERVo 107l (W.O. Va. 1972), alfd, 4 CCH
SECURED TRANSACTIONS GUIDE 5 52,163 (4th Cir. 1973).
153. Mercantile Financial Corp. V. Miller, 292 F. Supp. 797 (E.O. Pa. 1968).
154. In re Bishop, 11 UCC REP. SERVo 107l (W.O. Va. 1972), aff'd 4 CCH
SECURED TRANSACTIONS GUIDE' 52,163 (4th Cir. 1973).
155. ]efferwn Credit Corp. v. Marcano, 60 Mise. 2d 138, 302 N.Y.S. 2d 390
(N.Y. Civ. Ct. 1969)(Creditor trapped by "no sale" rule of U.c.c. § 9-504(5) which
says a transfer of collateral to .. [a] person who is liable to a secured party under
a guaranty, indorsement, repurchase agreement or the like ... is not a sale or disposition
of the collateral under this Article.").
156. See, e.g., In ,.e Thomas, 12 UCC REP. SERVo 578 (W.O. Va. 1973); Vic
Hansen & Sons, Inc. V. Crowley, 57 Wis.2d 106, 203 N.W.2d 728 (1973); Atlas
Thrift Co. v. Horan, 27 Cal. App. 3d 728 (1973).
157. See cases cited note 156 supra.
&
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of proof. Some have put the purden on the secured party;158 'others
have said this is the debtor's burden. 159 In the consumer cases, a
slight majority may favor the former view, thus making the consumer-debtor's task a little easier in defending deficiency claims. Like
the failure to send appropriate notice, the failure to conduct a commercially reasonable resale can cut off the right to a deficiency judgment. 160
The last of the primary rules created by section 9-504(3),
limiting the secured party's right to buy at the resale, is, of course,
designed to prevent an illusory or fraudulent disposition. There
are two exceptions to this general prohibition. 161 If the sale is a
public sale (i.e., competitive bidding) the secured party may buy
since he would have to meet competition and could not dictate his
own price. Of similar thrust is the second exception which allows
the secured party to buy at either public or private sale if the collateral "is of a type customarily sold in a recognized market or is of
a type which is the subject of widely distributed price quotations."
Again, competition-not the creditor-is the price-determining
mechanism. Although this exception looks like it might be faidy
broad, it may actually include only items like stocks or commodities.1G2 Several cases have held that quotations in trade publications, such as "Blue Book" or "Red Book" valuations in the auto
industry, are not the equivalent of "widely distributed price quotations."163 Hence, it seems that if a car cannot be sold to a secured
party by private sale at a "Blue Book" price, no other repossessed
158. See, e.g., Vic Hansen & Sons, Inc. v. Crowley, 57 Wis. 2d 106,203 N.W.2d
728 (1973); First Nafl Bank v. Rose, 188 Neb. 362, 196 N.W.2d 507 (1972);
Universal C.I.T. Credit Co. v. Rone, 248 Ark. 665, 453 S.W.2d 37 (1970).
159. See, e.g., Fryer & Willis Drilling Co. v. Oilwell Div. of U.S. Steel Corp.,
472 S.W. 2d 857 (Tex. Civ. App., Waco 1971); Ekman v. Mountain Motors, Inc.,
364 P.2d 998 (Wyo. 1961).
160. See, e.g., In re Bishop, 11 UCC REP. SERVo 1071 (W.D. Va. 1972);, aU'd
4 CCH SECURED TRANSACTIONS GUIDE 9 52,163 (4th Cir. 1973); Braswell V. American
Nat'l Bank, 117 Ga. App. 699, 161 S.E. 2d 420 (1968).
161. Both of these exceptions are set out in the statute. See text of U.e.e.
§ 9-504(3), supra note 144.
162. See Turk v. St. Petersburg Bank & Trust Co., 4 CCH SECURED TRANSACTIONS
GUIDE ~ 52,180 (Fla. Dist. Ct. App. '1973). See also Nelson V. Monarch Investment
Plan, 452 S.W.2d 375 (Ky Ct. App. 1970).
163. See, e.g., Carter V. Ryburn Ford Sales, 248 Ark. 236, 451 S.W.2d 199
(1970); Abbott Motors, Inc. v. Ralston, 28 Mass. App. Dec. 35, 5 UCC REP. SERVo
788 (App. Div. 1964); Alliance Discount Corp. V. Shaw, 195 Pa. Super; 601, 171
A. 2d 548 (1961).
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consumer goods would be able to fit the exception since trade valuations for used furniture, appliances, and so on, are even less exact
than used car valuations.
Rather interestingly, however, the exclusion of industry book
valuations from the "recognized market" exception does not mean
that such valuations cannot be used in another context. Trade quotations have been accepted as evidence that a sale was not conducted
in a "commercially reasonable" manner because the price received
was less than the quotation shown in an industry publication. l64 By
the same token (and striking a promising note for consumers) the
mere fact that a resale price equals a quote book price does not
mean a sale was commercially reasonable. l65
Not quite so promising is the second step in the section 9-504
disposition process. After the proceeds have been received they are
to be applied to
the reasonable expenses of retaking, holding, preparing for sale
or lease, selling, leasing and the like, and to the extent provided
for in the agreement and not prohibited by law, the reasonable
attorneys' fees and legal expenses incurred by the secured party.l66
If anything remains after these expenses are paid for, the proceeds
are applied to "the satisfacfiOn of indebtedness secured by the security interest under which the disposition is made."l67 Generally, this
step will wipe out the proceeds and still leave a deficiency. If this
happens, the debtor is liable for the amount of the deficiency.l6s
If a surplus does exist, and no other secured party has an interest
in the proceeds (a rare occurrence in consumer cases), the debtor
gets the excess. l6D
F.
Right to a Deficiency Judgment After Resale
The allowance of a deficiency judgment after resale is a very
critical problem for consumers. There are really two parts to the
problem, one legal and one real.
164. Atlas Construction Co. v. Dravo-Doyle Co., 3 UCC REP. SERVo 124 (Pa.
c.P. 1965).
165. Carter v. Ryburn Ford Sales, Inc., 248 Ark. 236, 451 S.W.2d 199 (1970).
166. U.c.c. § 9-504(1)(a).
167. U.c.c. § 9-504(I)(b).
168. U.c.c. § 9-504(2).
169. U.
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On the legal side, although section 9-504(2) says deficiency
judgments are allowed, the courts have denied them under the circumstances discussed above. 110 In addition to an outright denial
of a deficiency claim for creditor misbehavior, the courts have also
designed other, lesser "punishments." The court may "presume"
the value of the collateral was equal to the amount of the debt
and let the secured creditor try to explain why the price received
on resale did not measure up and why a deficiency judgment calculated on the basis of the lesser amount received is more appropriate
than one based on the "presumed" value of the collateral. l71 Placing
this burden of proof on the secured party may almost be equivalent
to an outright denial of a deficiency claim. If a court wants to
follow still another path, it may choose to allow a claim for deficiency, but permit the debtor to offset any loss suffered because the
creditor did not conduct a proper resale.172 This loss would seem
to be the difference between whatever fair market value the debtor
could establish for the collateral and the actual price received on
resale.173
So far as the "real" considerations are concerned, there seems
to be a growing belief that the rule allowing deficiency judgments
in consumer cases should be completely overturned.174 A number
of state legislatures have already come to this conclusion and have
changed Article 9's deficiency rules as applied to the resale of consumer goods. 175 The most comprehensive study on the question of
170. See text at notes 150 and 160 supra and cases there cited.
171. In re Thomas, 12 UCC REP. SERVo 578 (W.D. Va. 1973); Norton V. Nat'l
Bank of Commerce, 240 Ark. 143, 398 S.W.2d 538 (1966).
172. Farmers State Bank v. Orten, - - S.D. - - , 204 N.W. 2d 178, 12 UCC
REP. SERVo 7 (1973); Atlas Thrift Co. v. Horan, 27 Cal. App.3d 999, 104 Cal. Rptr.
315 (1972).
173. This measure of the loss is, of course, the same as the rule often stated
in the opinions in calculating such damages, vis. "value of the security less the debt."
See, e.g., Farmers State Bank V. Otten, - - S.D. - - , 204 N.W.2d 178, 12 UCC
REP. SERVo 7 (1973); Home Finance Co. v. Ratliff, 374 S.W. 2d 494 (Ky. 1964);
Mallicoat v. Volunteer Finance & Loan Corp., 57 Tenn. App. 106, 415 S.W.2d 347
(1966).
174. See generally Shuchman, Profit on De/ault: An Archival Study 0/ Automobile
Repossession and Resale, 22 STAN. L. REV. 20 (1969).
175. See, e.g., ARIZ REV. CIV. STAT. § 44-5501 (Supp. 1972)(No deficiency allowed if goods had a sales price of $1000 or less); CAL. CIY. CODE § 1812.5 (West
1973) (No deficiency allowed after repossession of consumer goods); ILL ANN. STAT.
ch. 121 1/2, § 526 (Smith-Hurd Supp. 1973}(If buyer has paid 60% or more of price,
seller must elect repossession or suit for balance, cannot repossess then sue for de-
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CONSUMERS AND ARTICLE 9
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eliminating deficiency judgments is the one completed in December
of 1972 by the National Commission on Consumer Finance. The
commission was established by Congress to survey practices in the
consumer credit industry and make recommendations for any needed
changes. 176 On the problem of "low-price" resales and resulting
deficiencies, the commission focused on the most expensive durable
consumer good, the automobile, and derived information which
could be applied to other, less expensive, consumer purchases. The
conclusions by the commission and the statement of underlying reasons is described in the commission's report as follows:
Where default occurs on a secured credit sale in which the
original sales price of $1,765 or less, or on a loan in which the
original amount financed was $1,765 or less and the creditor took
a security interest in goods purchased with the proceeds of such
loan or in other collateral to secure the loan, the creditor should be
required to elect remedies; either to repossess collateral in full
satisfaction of the debt without the right to seek a deficiency judgment or to sue for a personal judgment on the obligation without
recourse to the collateral, but not both ....
The recommendation to prohibit deficiency judgments for
default on a secured credit sale in which the original price was
$1,765 or less or on a loan in which the original amount financed
was $1,765 or less is made despite the probability of increased
rates of charge on such transactions and reduced availability. But
the Commission believes implementation of that recommendation
would afford consumers protection in areas particularly susceptible
of abuse by exempting most household goods purchases from
deficiency judgments and putting an end to deficiency judgment
abuses found in some used car markets.
The Commission position on this recommendation and the
$1,765 figure designated are derived from the Commission hearings on collection practices and findings of a Commission Study on
Repossession of Cars in the District of Columbia. Both highlighted deficiency judgment mechanism problems peculiar to the
ficiency); WIS. STAT. ANN. § 425.209 (Spec. Pamphlet 1973)(If debt owing at time of
default is $1000 or less, no right to deficiency). The states limiting the right to a
deficiency judgment are collected in CCH CONSUMER CREDIT GUIDE , 4310 under
each state section.
176. The Commission was established by Public Law 90-431, the original enactment of the Truth-in·Lending Act, now 15 U.S.C §§ 1601·1681(t) (1972). The
sections establishing the Commission (§§ 401-407) were not carried over into the
United States Code itself because the Commission was not a permanent one and ceased
to exist on December 31, 1972 after its final report was filed.
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used car market. To isolate this market, the Commission determined the point in 1972 at which new and used car markets were
no longer in competition. Aware that the average automobile
loan approaches 100 percent of dealer cost, the Commission ascertained dealer cost of the lowest priced passenger cars made by
each U.S. automobile manufacturer and computed an average of
$1,765. Automobile credit higher than that figure would more
likely be extended to buy a new rather than a used car. So it was
at the figure of $1,765 or less that the Commission determined
the 1972 new car market was not in substantial competition with
the used car market. The figure should be recomputed annually
using average prices of the least expensive American-made passenger cars.
Since most major household goods such as stoves, refrigerators,
washers, dryers, and furniture do not separately cost more than
$1,765, the prohibition against deficiencies provides the consumer
some protection in major household purchases. The Commission
believes that if the debtor defaults after purchasing major household goods, the credtor should have the option of repossession or
suing on the debt, but not both. To allow otherwise would cause
too great a personal hardship.1 77
With a rule against deficiency judgments already law in several
states,178 and a strong endorsement of such a rule by a national
commission of the federal government, the Article 9 approach may
eventually be a dead letter in consumer cases. It is unfortunate
that, in the 1972 revision, the Review Committee for Article 9 did
not take this particular bull by the horns and propose at least an
alternative section eliminating deficiency judgments after the repossession of consumer goods. 179
G.
Penalties for Wrongful Retaking or Disposition
Besides the possible court-imposed sanction of denying a claim
for deficiency, Article 9 has its own penalty provisions in section
177. REPORT OF THE NATIONAL COMMISSION ON CONSUMER FINANcE, CONSUMER CREDIT IN THE UNITED STATES 29-31 (December 1972).
178. See note 175 supra.
179. Such an alternative could be written into the Code very easily as the following draft indicates (proposed addition is in italics):
(§ 9-504(2)] If the security interest secures an indebtedness, the secured
party must account to the debtor for any surplus, and, unless otherwise
agreed, and except in the case 0/ consumer goods with a cash price 0/ ..... .
dollars 01' less, the debtor is liable for any deficiency.
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CONSUMERS AND ARTICLE 9
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9- 507 (1) for wrongful retaking or disposition. There are essentially
three possible remedies spelled out in that section.
The first is a preventive remedy. If the secured party does not
proceed in accordance with the Article 9 provisions on default, disposition may be ordered or restrained, and the court may require compliance with additional terms or conditions designed to protect the
debtor and insure proper conduct by the secured party.
The second remedy is compensatory in nature. If the disposition
has occurred, the secured party is liable to the debtor for any loss
sustained because of a failure to adhere to the Article 9 default provisions. Recovery of actual damage is the basic rule for this remedy.
The third remedy is of special importance for consumers. Because
actual damages, even if provable, will typically be small in consumer
cases, an actual damage rule is no real deterrent to creditor misbehavior. To cover such cases, section 9-507 therefore includes a provision for minimum recovery (i.e., a penalty regardless of any actual
loss). This provision reads:
If the collateral is consumer goods, the debtor has a right
to recover in any event, an amount not less than the credit service
charge plus ten per cent of the principal amount of the debt or the
time price differential plus ten per cent of the cash price.
This statement is, perhaps, deceptively simple and an example
may be helpful in explaining a hidden problem in the rule.
Suppose a loan of $1000 was made to finance the purchase of
consumer goods. The financing was at the rate of $6 per hundred
and the loan was repayable over the period of one year. The penalty calculation in this case would be $60 (the credit service charge
of $6 per hundred times 10 hundreds times one year) plus $100
(ten percent of the principal amount), totaling $160. If the same
basic figures are used, but we hypothesize an installment sale instead
of a loan, and have a downpayment thrown in, the application of
the rule is more difficult. Supposing a $100 downpayment, the
penalty would be $ 54 (the time price differential of $6 per hundred
but note this lower amount results because the $100 down payment
has reduced the amount financed to $900 instead of $1000) plus
$100 (ten percent of the cash price) totaling $154. However,
when the statute says "cash price" does it mean "original cash price
less any downpayment," the Truth-in-Lending meaning of "Amount
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Financed" ?181 If the latter is meant, the above calculation is $10
too high and should be only $90 (ten per cent of $1000-$100 or
$900).
The better view should probably be to read "cash price" as "original cash price" with no deduction allowed for downpayment. This
will prevent having two different penalties for what are essentially
identical transactions, except for the classification of the creditor as
a lender of a seller. In addition, if the reason for imposing a penalty is to dissuade creditors from violating the default provisions of
Article 9, the slightly harsher rule of disallowing deduction of a
downpayment would seem to be a more effective deterrent than the
opposite approach.
Beyond the actual rules of section 9-507 itself, one other important matter about this section could arise in consumer cases. A
secured party might argue that the inclusion of remedy and penalty
provisions in Article 9 means that those provisions are the exclusive
sanctions for violations of the article and that a debtor cannot claim
any relief not provided therein. It is easy to demonstrate that this
argument is unsound. As was noted earlier, the courts have not
been reluctant to deny deficiency claims when a secured party has
acted improperly.l81 The case law does not, therefore, support the
argument of the exclusivity of section 9-507 remedies.182 Also section 9-50 5 (1), after setting out the limits on a secured party's conduct, states, "the debtor at his option may recover in conversion
or under Section 9- 507 (1)." The Code itself thus recognizes the
possibility of alternative remedies for the debtor and does not support the theory of exclusive statutory remedies. The conclusion that
section 9-507 is, therefore, not an exclusive statement of remedies
is easily reached.
VI.
CONCLUSION
At the beginning of this article, the statement was made that
"consumer law is where you find it." Hopefully, the foregoing ex180. See Regulation Z, 12 C.F.R. § 226.2(d)(1969). "Amount Financed" can
include additional items but these have not been "changed" in the simple example
given in the text.
181. See cases cited in notes 150, 160, and 171 supra.
182. The exclusivity argument was raised and extensively discussed in Farmers
State Bank v. Otten, 12 UCC REP. SERVo 7 (S.D. 1973). The argument was rejected.
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amination of Article 9 has illustrated that even a primarily commercial statute may have rules and interpretations which can be used
advantageously in consumer cases. Perhaps the next revision of Article 9 should reinstitute something akin to the Part 6 Consumer
Goods Financing section which appeared in the May, 1949 draft
and also incorporate many of the new developments and ideas which
have at least in part destroyed the uniformity of Article 9 of the
D.C.C.
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