Default Assignment 20: Default and Repossession

Assignment 20:
Default and Repossession
• Article 9 doesn’t define “default”; it just
provides that secured party can enforce its SI
after default
– Default is defined in the security agreement
• After default, secured party can:
– Get a judgment and have collateral sold in a
sheriff’s sale [§ 9-601(a)], or
– Repossess collateral by self-help and conduct
nonjudicial public or private sale [§ 9-609, 9-610]
• If the obligor’s debt is an installment debt, the
first step in secured party’s enforcement is to
“accelerate” the maturity of the debt
– The note/contract evidencing the debt must have
acceleration clause in it
• Rationale: secured party can only foreclose a SI
once (sale will extinguish the SI)
– Thus, it would make no sense to foreclose just to
collect only one or more late installments
Problem 1
• Bank has SI in Crouch’s car
– Due to lost consulting jobs, Crouch has missed two
monthly payments ($456.33 each)
• Bank sends Crouch a letter, saying:
– Bank has accelerated the balance of your debt
– We will repossess your car and sell it in 30 days, unless
you repay the total debt ($11,498.59) w/in that period
• Crouch then sends Bank a check for the two missed
monthly payments ($912.66)
• Could Bank accelerate without
first giving Crouch notice and
a chance to cure?
• If Bank accepts the payment,
does it have to reinstate the
• Or can it just apply the
payment to the accelerated
balance and go ahead with its
foreclosure sale?
Problem 1: Redemption
• Once debt is accelerated, Crouch can only redeem
by paying the full balance of debt [§ 9-623(b)]
– Crouch can’t reinstate the loan, unless contract
expressly gives him that right or Bank agrees
– If contract did not grant reinstatement right to
Crouch, Bank can reject payments, repossess car
– However, Bank could allow Crouch to reinstate the
loan contract, if it wished to do so
Problem 1: Notice/Grace Period
Prior to Acceleration
• General rule: unless contract requires secured
party to give notice to Debtor prior to acceleration,
secured party has no such mandatory obligation
– Secured party may choose to provide notice and
opportunity to cure (and often does)
– But unless the contract required notice to Crouch
prior to acceleration, Bank’s acceleration is proper
• Problem: Was Crouch’s tender of the 2
monthly payments conditioned upon Bank’s
agreement to reinstate the loan?
– If so, Bank’s acceptance of it would create
obligation upon Bank to reinstate the loan,
return the collateral (if it had been repossessed)
and cease foreclosure efforts
– If not, Bank could apply payments to
accelerated debt and proceed with foreclosure
• After default, secured party
can repossess the collateral,
– By judicial process [§§ 9601(a)(1), 9-609(b)(1)], or
– By self-help, if that can be
achieved w/out “breach of
the peace” [§ 9-609(b)(2)]
• Repossession absent default violates § 9-609(a)
• Henson has two potential causes of action
– Henson could bring a cause of action for
conversion (a tort action), or
– Henson could bring a cause of action for replevin
(recovery of car) and damages for breach of K
(Bank’s noncompliance with its obligation under
Article 9 and the security agreement) [§ 9-625(b)]
• How would court calculate Henson’s damages
under each of these theories?
• Bank repossesses Henson’s
car from Hitt Street Garage,
even though Henson was not
in default to Bank at the time
of the repossession
Problem 2(a)
– Car was mistakenly placed on
Bank’s “repo list” due to a
clerical error
• Legal consequences to Bank,
if any?
• Conversion damages = FMV of car
– Bank can offset the amount that Henson owes on the
debt (common law offset of mutual debts)
– Punitive damages unlikely, if this was just a negligent
mistake (absent gross negligence or recklessness)
• Replevin/§ 9-625(b): possession of the car, plus
– Damages for lost “use value” of the car (e.g., car’s fair
rental value while in possession of Bank), AND
– If Henson is a consumer, Henson can collect at least the
“consumer penalty” [§ 9-625(c)] amount (even if he
didn’t suffer that much in actual damages)
Consumer Penalty [§ 9-625(c)]
• When secured party violates Article 9 in
enforcement of its SI, injured consumer can
recover in any event an amount not less than
– Credit service charge (i.e., all interest paid under
the contract) + 10% of principal, or
– “Time-price differential” + 10% of the cash price
• Also, can recover any actual damages over and
above consumer penalty amount
Problem 2(b)
• Most likely, yes: repo breached the peace even
though no actual violence/confrontation resulted
– Grant of SI ≠ implicit permission to enter Crouch’s home
– If Crouch had been home, this action could’ve produced
violent confrontation
– We don’t want to encourage such behavior by creditors
(potential costs if violence/confrontation results may
outweigh cost-saving benefits)
• Bank repos Crouch’s car
Problem 2(b)
– Crouch is in default
– Car repo’d from Crouch’s
garage in his absence, by
going into the garage (which
was closed but unlocked)
– Bank closed/locked garage
after repo was complete
• Did repo violate Article 9?
• Suppose security agreement
contained a provision in which
Crouch consented that Bank
could enter his home to
repossess car after default
• Does that change your analysis?
Problem 2(b)
– § 9-603(a): parties can agree as to
standards for measuring the
fulfillment of their rights and
duties under the contract, if the
agreed-upon standards are not
“manifestly unreasonable”
– However, this doesn’t apply to
duty not to breach the peace [§ 9603(b)]
• Bank repos car of Reuben
Problem 2(c)
– Reuben is in default
– Car is repo’d from Reuben’s
driveway by bat-wielding
repo agent
– During repo, Reuben appears
and says “Please do not take
my car,” but does not “get
• Weight of authority: repo over unequivocal
protest by debtor is likely to cause confrontation,
breaches the peace
• Some courts hold that secured party can ignore
debtor’s protest as long as neither party threatens
physical harm or violence [Koontz (Ill. App.
– Problem: this encourages a debtor that wants to stop a
repossession to make threats (which may provoke
• Does repo violate Article 9?
• Abrams, in default, sends
letter to Bank: “I object to
any attempt to repossess my
car w/out judicial process,
and I will respond to any
attempt with deadly force.”
• One week later: Bank
repossesses the car from
Turner Garage, while
Abrams is in his office
• Did repo violate Article 9?
Effect of Debtor’s Verbal Objection
Problem 2(d)
Effect of Protest
• If debtor is present and raises verbal objection to
secured party’s self-help efforts, secured party
must stop that particular self-help effort (secured
party can “try again later,” after some reasonable
“cool-down” period)
• Debtor can’t issue “pre-emptive” objection letter
[Problem 2(d)] and cut off any self-help attempts
by secured party
• Bank repos car of Dessem
– Dessem is in default
– Bank tricks Dessem into
turning over the car,
believing that its repo agent
is a Honda-authorized
service technician authorized
to perform recall repairs
Problem 2(e)
• Did Bank’s repo violate
Article 9?
• Problem 2(e): Courts have held repossession
through trickery = breach of the peace
– Secured party has duty of good faith and fair dealing
in enforcing its security agreement [§ 1-304], which
requires “honesty in fact”
– However, it is not clear that Dessem suffers any
actual damages due to Bank’s conduct (Dessem was
in default and Bank was entitled to possession)
– Nevertheless, if Dessem is a consumer, Bank would
be liable for consumer penalty
Vehicle Repos: Contents
• Note: while secured party’s repossession of
a vehicle may be valid (no breach of peace),
secured party must take care w/ debtor’s
personal property inside the vehicle
– SI in car does not extend to debtor’s other
personal property within the car
– If secured party doesn’t return personalty in the
car to debtor upon request = conversion