Don’t Be Deficient in Collecting Your Deficiencies!

By Matthew M. Young, Esq. 

One of the most common problems in collection actions arise when creditors attempt to collect deficiencies resulting after the sale of repossessed collateral.  More specifically, these problems relate to sending proper notices of sale after repossessing the collateral, before a sale occurs.  Failure to send a proper notice of sale can be a complete bar to recovering any resulting deficiency after the sale.  Not only must you send this notice timely, but you must also include certain terms in order for the notice to be considered valid. 

Most states, including Ohio, have adopted provisions of the Uniform Commercial Code (UCC), which specifies how repossessed collateral must be sold and what notices consumers must receive prior to and after the sale of the collateral.  In this article, we focus on the most critical component of these requirements, the notice of sale.  In Ohio and most states, the consumer must be notified of a sale at least ten days prior to the sale of the collateral.  To be safe, a creditor should account for time to mail the notice.  Accordingly, a good rule of thumb is to mail the notice out at least fourteen days prior to the sale of the collateral. 

Under the Ohio Revised Code, a model notice of sale is provided for creditors to use, which I recommend.  (Most states have notice requirements that are the same or similar to this notice.)  The following provisions are in this model notice and must be included in any notice of sale in Ohio:

  • Describe the debtor and the secured party;
  • Describe the collateral that is the subject of the intended disposition;
  • State the method of intended disposition;
  • State that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting;
  • State the time and place, by identifying the place of business or address or by providing other information that, in each case, reasonably describes the location, of a public disposition or the time after which any other disposition is to be made;
  • Describe any liability for a deficiency of the person to whom the notification is sent;
  • Provide a telephone number from which the amount that must be paid to the secured party to redeem the collateral is available; and
  • Provide a telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available.[1]

Among the biggest missteps creditors make when sending notices of sale occur when the collateral is put up for sale multiple times.  Often, collateral does not sell the first time it is put up for sale (typically in an auction setting) and is put up for sale a second, third or even fourth time, usually in an effort to obtain a higher bid price.  In these instances, a new notice of sale is typically required or specific language needs to be included in the notice to reflect the recurring sale date.  All too often, this subsequent notice or tailored initial notice is overlooked. 

In the event such a recurring sale date is likely, you may want to check your state’s laws to see if a recurring notice of sale is allowed (or required).  For example, in Ohio, where a public sale that begins on a specific date and time recurs daily at the same time and place, a notice of sale is considered timely if it reflects this recurrence. In such an instance, Ohio law only requires the notice to be sent ten days or more before the earliest time of sale after a default has occurred.  Therefore, if your notice of sale is properly crafted with appropriate language, you can avoid sending out a new notice of sale before each sale date.

In the event your loan is an indirect loan, “three party paper” wherein the loan is originally entered into between a dealer and a member, and the dealer thereafter assigns its interest in the note to the Credit Union, additional requirements may apply.  In Ohio, this includes an initial right to cure and the requirement that the collateral be sold at a public auction; in these cases a private sale is prohibited.  Indeed, there are many other elements, beyond the notice of sale requirements, which could impact whether a sale is commercially reasonable, and you should consult your legal counsel if you are unsure if your Credit Union is compliant with all elements of the sale process.  After all, you don’t want to risk voiding your ability to collect a deficiency judgment. 

Matt Young is an associate in the Credit Union Practice Group with Weltman, Weinberg & Reis Co., LPA. He can be reached at 216.739.5726 and myoung@weltman.com.

[1] See UCC 9-613;9-614

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