Part VII Enforcing an Article 9 Security Interest
Chapter 38 Remedies for a Secured Party's Failure to Comply with Article 9
A. Generally
It has been noted that a disposition or acceptance may be effective even if a secured party fails to comply with mandated procedures but that the secured party who fails to comply with Article 9 can be subjected to liability or could lose, in part or in whole, a claim to a deficiency. In this chapter we look more closely at the risks of liability or of losing a deficiency and, more generally, at the remedies that exist for parties aggrieved by a secured party's failure to comply with Article 9.
B. Basic Remedies
Former Article 9 provided for injunctive relief and for damages liability in former section 9-507(1). New Article 9, section 9-625, continues to give a party who is aggrieved by a failure of a secured party to comply with Article 9 the right to seek injunctive relief or actual, and in certain cases, statutory damages. However, new section 9-625 expands upon former section 9-507(1) by making the basic remedies for non-compliance available both as to failures to follow the rules governing "collection, enforcement, disposition or acceptance " in Part 6 of Article 9 and for violations of other obligations imposed by Article 9.
The rules outside Part 6 of new Article 9 for which remedies are provided include those that impose on secured parties the obligations not to file an unauthorized financing statement, to file a timely termination statement when required, to provide information about the collateral and the debt when requested under new section 9-210 and to exercise care as to collateral in the secured party's possession under new section 9-207, as well as to act in good faith as required by Article 1, section 1- 304 (formerly Article 1, section 1-203).
The treatment of unauthorized filings warrants special comment. As discussed in subpart D below, and as was also discussed in Chapter 13 (Overview of Perfection by Filing), New Article 9 provides for civil liability for unauthorized filings, including statutory damages. In so doing new Article 9 tracks laws in many states, including Arizona, strictly regulating recordings affecting real estate. See B & S (cited in Chapter 3), Ch. 13. New Article 9 also adds a provision, new section 9-518, that allows a person who believes a filing is inaccurate or was wrongfully filed to file a correction statement.
However, under new section 9-518(c) a correction statement does not affect the effectiveness of the filing with respect to which the correction statement was filed. See Official Comment 2 to new section 9-518. And, the drafters have taken the position that Article 9 cannot provide a satisfactory or complete solution to problems caused by misuse of the Article 9 filing system. See Official Comment 3 to new section 9-518. Nonetheless, at least one state has enacted a non-uniform version of new section 9-518 that adds specific remedies for fraudulent and unauthorized filings. See Vernon’s Texas Code Annotated, § 9.5185.
Under new section 9-625(a), a party who is aggrieved by a failure of the secured party to comply with Article 9 may seek injunctive relief. Bear in mind that injunctive relief is equitable in nature and a party seeking such relief must show that there is a risk of irreparable injury and no remedy at law. As for damages, under new section 9-625(b) a person may be liable for damages in the amount of any loss caused including loss resulting from the debtor's inability to obtain, or increased costs of, alternative financing.
Recovering actual damages involves causation and measurement issues, both of which can be complicated. The aggrieved party has the burden of proof on both issues. Because causation and damages measurement are largely questions of fact and the scope of review is limited. Recovering consequential damages in the form of lost business opportunities can be especially challenging.
In Automotive Finance Corp. v. Smart Auto Cente, Inc., 334 F.3d 685 (7th Cir. 2003), the appellate court affirmed a trial court bench holding that appeared to give little weight to the debtor's argument that an improper repossession of vehicles constituting the debtor's inventory had prevented a sale of the business to a third party. Although there was no express finding to this effect, it may be that the courts were satisfied that the sale did not go through for reasons other than the actions of the secured party. As to the measure of damages itself, the trial court basically rejected the testimony of the debtor's expert witness.
In affirming the decision the appellate court noted that under F.R.C.P. 52(a) the trial court is required to make specific findings of fact, but concluded that the decision should be upheld because it could be ascertained from the record that the secured party was clearly entitled to the judgment awarded.
Under new section 9-625(c)(1), except as otherwise provided in new section 9-628, a person who was a debtor, an obligor, or held a security interest in or other lien on the collateral, at the time of the failure to comply, may recover actual damages under new section 9-625(b).
C. Consumer Cases
A special type of recovery is available under new section 9-625(c)(2) to debtors and secondary obligors when the collateral is consumer goods. Under new section 9-625(c)(2), again subject to new section 9-628, if the collateral is consumer goods, a person that was a debtor or a secondary obligor at the time a secured party failed to comply with Part 6 may recover "in any event" damages (meaning whether or not the debtor or secondary obligor can prove actual damages -- or perhaps, even if actual damages are proved) an amount equal to the credit service charge plus ten percent of the principal amount of the obligation or the time-price differential plus ten percent of the cash price.
Neither "credit service charge" nor "time price differential" is defined in Article 9. In the law outside of Article 9, time price differential or TPD is the difference between the cash price and the time (credit) price for that item. TPD was more important before laws of most states were changed to render the distinction between interest and TPD as a matter of usury limitations relatively insignificant. For all practical purposes, both credit service charge and TPD refer to the finance charge imposed on a credit sale or a loan.
The provision for "in any event" damages in new section 9-625(c)(2) appears to be intended to allow a debtor to recover the amount provided for whether or not the debtor can prove actual damages. However, was been uncertainty under former Article 9 whether the "in any event" damages were in lieu of actual damages and made available because of the difficulty, especially in consumer cases, of proving actual damages resulting from a failure to comply with foreclosure rules or whether "in any event" damages could be recovered as a sort of penalty even where actual damages are established. New Article 9 leaves the question unanswered.
D. Special Remedies for both Consumer and Non-Consumer Debtors and Obligors
New Article 9 provides that certain parties may recover statutory damages in addition to actual damages for failures to comply in specified cases where actual damages may be difficult to prove. Under new section 9-625(e), a debtor, consumer obligor or other person named as a debtor in a filed record is entitled to statutory damages in the amount of $500 where:
a secured party fails to comply with section 9-208;
a secured party fails to comply with section 9-209;
a person files a record that the person is not entitled to file under Section 9-509(a);
a secured party fails to cause the secured party of record to file or send a termination statement as required by section 9-513(a) or (c);
a secured party fails to comply with section 9-616(b)(1) and the failure is part of a pattern, or is consistent with a practice, of noncompliance; or
a secured party fails to comply with section 9-616(b)(2).
Under new section 9-625(f), a debtor or consumer obligor also may recover statutory damages of $500 as well as actual damages where a secured party has, without reasonable cause, failed to provide required information under new section 9-210. According to new section 9-625(f), a recipient of a request who never claimed an interest in the collateral has reasonable cause for a failure to comply with a request.
A more serious sanction for failure to satisfy new section 9-210 is possible. New section 9-625(g) provides for a kind of estoppel in that if a secured party fails to comply with a proper request regarding a list of collateral or a statement of account under new section 9-210, the secured party may claim a security interest only as shown in the list or statement included in the request as against a person who is reasonably misled by the failure.
Again, in a proper case, tort damages, including punitive damages are possible under new Article 1, section 1-103(b) (formerly section 1-103) (supplementary principles of general law). Cf. Official Comment 12 to new 9-620. As we saw in Chapter 33 (A Secured Party's Options on Default), such liability is especially likely where a secured party acts to enforce a security interest in the absence of a default or breaches the peace in exercising self help.
Relief outside Article 9 is especially important as to unauthorized or fraudulent filings. As was seen above, new section 9-625(e) provides for statutory damages against a person who files a record that person is not entitled to file. However, as discussed in Chapter 13 (Overview of Perfection by Filing), new Article 9 provides for the filing of a correction statement but such a statement does not prevent a “bogus” filing from being effective and judicial action to expunge the filing may be needed.
You may explore the remedies available when a secured party fails to comply with Article 9 in the next four problems.
Problem 38.1 (interactive)
Selma Seller supplies David Dealer's inventory of widgets on credit and has a perfected security interest in the widgets. David and Selma have been involved in an ongoing dispute about the quality of the widgets. David withheld the payment due last month but offered to place the payment in escrow pending a resolution of the quality dispute. Selma advised Donald that she deems herself insecure and has demanded that David pay the entire balance due on the contract for the sale of the widgets. In her demand letter, Selma relied explicitly on UCC Article 1, section 1-309 (formerly Article 1, section 1-208). David refused to pay as Selma demanded. Selma sent her employees to David's place of business to recover possession of the widgets. David physically resisted giving up possession of the widgets to Selma's employees. Selma's employees persisted and over David's complaints took possession of the widgets. David has closed his business and come to you for advice.
(a) Which of the following are accurate statements of the remedies? (More than one may be correct.)
(i) There is a possibility of injunctive or other equitable relief to stop any disposition or acceptance action by Selma.
(ii) There is a possibility of tort damages, including punitive damages.
(iii) David is entitled to actual damages for failure to comply with Part 6, including consequential damages resulting from the close of the business (to the extent that David can prove they resulted from the Selma's failure to comply with Part 6).
(iv) David may recover statutory damages.
(b) Suppose David Dealer was indebted to Supplies R Us when Selma took the above-described actions and David has now defaulted to Supplies R Us. Is Supplies R Us a person entitled to seek actual damages against Selma under new Article 9?
Problem 38.2 (interactive)
Central Bank has a perfected security interest in Donna Debtor's inventory and equipment, existing and later-acquired. Lenny Lender, who was contemplating a loan to Donna, discovered Central's security interest. As provided for in new section 9-210, Lenny, through Donna, requested information from Central about the debt owed to it by Donna and the security interest held by Central. Central ignored the request. Lenny decided against making the loan to Donna.
May Donna recover actual damages, including any loss resulting Donna's inability to obtain or the increased cost of alternative financing, from Central Bank?
Could Donna recover statutory damages based on Central’s failure to respond to Lenny's request under new section 9-210?
Suppose that Donna had submitted a list of collateral in the form required by new section 9-210, could Donna now recover statutory damages.
Suppose the list submitted by Donna omitted several items of collateral from the list. If Central failed to respond could Central assert a security interest in the omitted items against Lenny?
Problem 38.3 (interactive)
Sid Seller sells Bonnie Buyer a recreational vehicle (RV) for vacationing. Bonnie signs a security agreement giving Sid an interest in the RV to secure the unpaid price. The cash price is $12,000. The finance charge is $800. Before paying any of her contract obligation of $12,800, Bonnie defaults. Sid repossesses and without notification resells the RV for $9,800. Sid sues Bonnie for $3,000 plus the expenses associated with repossession and resale. Bonnie files an answer denying liability and asserting a counterclaim of $2,000. Bonnie is unable to prove any damages resulting from the failure of notification.
What damages would Bonnie be able to recover under new section 9-625(c)(2) (putting aside any possible adjustments to be made for deficiency liability, a matter that is discussed later)?
Problem 38.4 (interactive)
First National Bank and Delia Debtor, a sole proprietor, have been engaged in an ongoing dispute regarding a debt allegedly owed by Delia to First National. First National has filed a financing statement indicating as collateral all of Delia’s equipment, inventory and accounts receivables, existing and after-acquired. Delia is prepared to prove that First National had no authority to file the financing statement.
What remedies against First National does Delia have under new Article 9?
Do any of these remedies prevent the filing from being effective?
What must Delia do to prevent the filing from being effective?
E. Loss of All or Part of a Claim for a Deficiency
New Article 9, in new sections 9-626(a)(3) and 9-615(f), also address, at least in part, the risk of losing all or part of a deficiency. As explained in Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt), new section 9-626(a)(3) adopts the rebuttable presumption approach for calculating deficiencies and surpluses in other than consumer cases.
Thus, if a secured party fails to prove it acted in compliance with Part 6 of new Article 9, then the liability of a debtor or secondary obligor is limited to an amount by which the sum of the secured obligation, expenses and attorney's fees exceeds the greater of the proceeds of the disposition or the amount of proceeds that would have been realized if the secured party had complied with Part 6.
Under new section 9-626(a)(4), for purposes of the limitation in new section 9-626(a)(3), the amount that would have been realized had the secured party complied with Part 6 is equal to the sum of the secured obligation, expenses and attorney's fees (i.e., the debt owed), unless the secured party can prove a lesser amount would have been realized.
If collateral is disposed of to the secured party, a person related to the secured party or a secondary obligor and the proceeds are significantly below the range of proceeds that a complying disposition to a person other than the secured party, etc. would have brought, then new section 9-625(f) limits a deficiency to the amount that would have been realized in such a disposition. However, under new section 9-626(a)(5), the debtor or obligor has the burden of proving that the proceeds actually realized are significantly less than would have been brought by a complying disposition to someone other than the secured party, person related to the secured party, or a secondary obligor.
You may explore the limitations on collecting deficiencies in new section 9-626(a)(3) in the next problem.
Problem 38.5 (interactive)
Debbie Dealer sells a Mack Tractor and Semi-Trailer to Byron Buyer for $75,000. Byron pays $15,000 down and agrees to pay the balance in 60 equal monthly installments of $1,100. Debbie takes a security interest in the tractor and trailer and properly perfects that interest. Byron defaults after making six payments ($6,600). Debbie accelerates the balance owing ($53,400) pursuant to an acceleration clause in the security agreement. Byron fails to pay the balance. Debbie repossesses the tractor and trailer. Debbie sends Byron a letter informing him that the tractor and trailer will be sold at a public sale three weeks after the date of the letter. One week after sending the letter Debbie sells the tractor and trailer to another customer for $40,000. Debbie sues Byron for $14,000 (an amount that includes $600 in expenses incurred in repossessing the tractor and trailer). Byron answers Debbie's complaint alleging that she has failed to comply with Part 6 of Article 9 in disposing of the tractor and trailer.
Has Debbie Dealer complied with Article 9 in disposing of the tractor and trailer? Explain your answer.
Who has the burden of proving that Debbie did or did not comply with Article 9 in disposing of the tractor and trailer?
What approach to calculating a deficiency applies here?
How much should Debbie recover in her deficiency action against Byron?
Can Byron upset the sale because of the failure of Debbie to comply with Article 9 in disposing of the tractor and trailer?
The limitation on deficiency recovery in new sections 9-626(a)(3) and (a)(4) applies only in other than a consumer transaction. Recall that a consumer transaction as defined in new section 9-102(a)(26) is one in which an individual incurs an obligation for personal, family or household purposes that is secured by an interest in collateral held for a personal, family or household purpose. According to new section 9-626(b) fashioning rules for consumer transactions is left to the courts. Moreover, under new section 9-626(b), courts are not to draw any inferences from the scheme devised for other than consumer transactions.
Under former Article 9, courts took three different approaches to the question of when a secured party could lose a deficiency. See Official Comment 4 to new 9-626. The first was that a secured party who failed to comply with the foreclosure rules in Article 9 could not recover any deficiency -- the deficiency claim was barred by the failure to comply. The rationale was that strict compliance with the foreclosure rules was a condition to recovering a deficiency.
The second approach was that there was a rebuttable presumption that the collateral was worth the amount owed and a secured party could recover a deficiency only to the extent it could show that the failure to comply did not produce the deficiency. In other words, the secured party had the burden to prove that the deficiency would have resulted even if there had been no failure to comply. The court in Chavers, considered in Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt), took this approach. It also is the approach taken in new sections 9-626(a)(3) and (a)(4), as considered above.
The third approach (that taken by the Arizona courts) was that a secured party could recover a deficiency except to the extent the debtor was able to prove an offsetting loss caused by the failure to comply with Article 9. The rationale of this view was that former 9-507(1) provided the only remedies for failures to comply with Article 9 and under former 9-507(1) a debtor had to prove a loss.
What the courts actually will do with new sections 9-626(b) remains to be seen. However, it is difficult to believe that courts would fashion rules that are less favorable to consumers than the rules in new section 9-626(a)(3) and (a)(4) for other than consumer transaction cases and they could opt for a complete loss of deficiency approach.
In In re Downing, 286 B.R. 900 (Bkcy W.D. Mo. 2002), which involved a consumer transaction, was decided under new Article 9. The court denied a deficiency entirely where the secured party had failed to provide the reasonable notification required by new section 9-611(b). In doing so, the court looked to decisions in Missouri under former Article 9 that concluded that because deficiencies were not recoverable at common law the right to a deficiency was conditioned on strict compliance with Article 9. However, the court made no reference to new section 9-626.
It is important to note that whatever rules the courts fashion may interact with new section 9-625(c)(2) and A.R.S. § 44-5501 to produce some interesting results. Thus, in a case to which A.R.S. § 44-5501 applies, a secured party could be denied a deficiency and suffer a counter claim for "in any event" damages.
You may consider this possibility in the next problem.
Problem 38.6 (interactive)
Delia Debtor in Arizona purchases a stereo system from Sid Seller for use in her home. The price of the system as posted is $900. Delia purchases on time, "no money down." Delia signs an agreement promising to pay Sid $1200 in equal monthly installments over the next year. The agreement gives Sid an interest in the stereo system to secure the unpaid balance of the price. Delia defaults before making any monthly payments. Sid repossesses the stereo system and without notice to Delia resells the system for $500. Sid then sues Delia for $700 asserted to be owed as a deficiency. Delia counterclaims. Which of the following most accurately states the most likely outcome of this litigation?
(a) Sid Seller can recover $700.
(b) Sid Seller can recover $700 less $390 (10% of the cash price plus the finance charge).
(c) Sid Seller can recover whatever part of $700 that Sid can show would have been the amount of the deficiency if Sid had complied with Article 9.
(d) Sid Seller can recover nothing and Delia Debtor can recover $390.
CASE COMMENTARY
Knutson v. Walker and Associates, Inc., 2005 WL 1950202 (D. Colo. 2005) (Not reported in F. Supp. 2d)
Semmelman v. Mellor, 2006 WL 90094 (D. Minn. 2006)
Citicorp Leasing, Inc. v. United American Funding, Inc., 2005 WL 1847300 (S.D.N.Y. 2005) (Not reported in F. Supp. 2d)
Federal National Mortgage Association v. Okeke, 2006 WL 355241 (S.D. Tex. 2006)
McDonald Mobile Homes, Inc. v. BankAmerica Housing Services, 218 S.W.3d 376 (Ark. App. Nov. 30, 2005)
AKA Management, Inc. v. Branch Banking and Trust Co., 621 S.E.2d 576 (Ga. App. 2005)
Thompson v. First State Bank, 709 N.W.2d 307 (Minn. App. 2006)
Missouri State Credit Union v. Wilson, 176 S.W.3d (Mo. App. 2005)
Merchant’s Bank of New York v. Gold Lane Corporation, 814 N.Y.S.2d 182 (N.Y. 1st App. Div. 2006)
Borley Storage and Transfer Co., Inc. v. Whitted, 271 Neb. 84, 710 N.W.2d 71 (Neb. 2006)
Federal Express Credit Union v. Lanier, 2005 WL 2806638 (Tenn. App. 2005) (slip copy)
Lister v. Lee-Swofford Investments, L.L.P., 195 S.W.3d 746 (Tex. App. 2006)
D.A.N. Joint Venture, III v. Clark, 218 S.W.3d 455 (Mo. App. 2006)
Davenport v. Bates, 2006 WL 3627875 (Tenn. App. 2006)
2011-08-22 update