The following is an article reprinted with permission from the upcoming Spring 2009 edition of The WWR Letter:
By: David A. Wolfe, Associate
Once a debtor defaults on his/her installment loan payments and collection and workout efforts fail to achieve the desired results, creditors traditionally look to repossess any collateral. While this process is often the most cost-effective approach, it is fraught with traps for the creditor, as any mistakes can bar the creditor from recovering the deficiency and subject the creditor to liability for wrongful repossession.
Secured transactions are governed by Article 9 of the Uniform Commercial Code (“UCC”), which has been adopted in most states. Repossession is a self-help method for creditors to recover their collateral and is permitted by the UCC, but only if it can be done “without breach of the peace.” While the UCC does not define “breach of peace,” some courts have held that even a debtor’s verbal protests are enough to stop the repossession. Additionally, all too often a secured party will attempt to repossess when the debtor is not in default, so it is important to be sure the debtor is truly in default at the time of the repossession. Even when the debtor is in default, the secured party may lose the right to repossess if it has established a course of accepting late payments. During loan workout efforts, debtors will often make partial payments or payments that do not fully cure any arrearages. Acceptance of these late or partial payments may prohibit a creditor from accelerating the debt and declaring the debtor in default. Unfortunately, while the security agreement may contain an “anti-waiver” provision, courts in a number of jurisdictions have diluted these clauses, ruling that the secured party’s acceptance of late or partial payments waived the non-waiver clause, or that the non-waiver clause is void as against public policy. Once it has been determined that repossession was wrongful, punitive damages may be available to the debtor, even where there are no actual damages. In some situations, the Fair Debt Collection Practices Act allows the debtor to recover attorneys’ fees. In addition, the UCC entitles a consumer whose car or other property is wrongfully repossessed to recover a statutory penalty that is often in the thousands of dollars.
The best protection for the creditor begins with its loan documents. The security agreement should have a clear and inclusive default section allowing the creditor to repossess not only upon failure to make payments, but also upon other defaults such as failure to maintain proper insurance and seizure by police or other government authorities. The security agreement should also include unambiguous cross-default and cross-collateralization clauses with other agreements that the debtor may have with the creditor. The most effective way for a creditor to protect itself against the waiver problem discussed above is to include an “anti-waiver” or “non-waiver” clause that provides that the failure of the secured party to exercise its remedies on one default will not waive its right to exercise them on any subsequent default. The file should clearly document any extensions given to the debtor. Finally, the creditor should select its repossession contractor carefully. While the majority of repossessions are now carried out by trained professionals who go out of their way to avoid confrontation, a repossession contractor’s improper actions could be imputed to the creditor, subjecting the creditor to liability.
David A. Wolfe is an Associate in the Bankruptcy and Legal Action Recovery departments of the Detroit office. He can be reached at (248) 362-6142 or firstname.lastname@example.org.