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Defaults and Repossessions in Motor Vehicle Transactions

By Keith E. Whann

When a purchaser has fallen behind on his payments in a retail installment sale, a dealership has several options, including repossession.  There are usually three bodies of law that may govern or impact the repossession process: individual state laws such as the Retail Installment Sales Act (RISA), the Uniform Commercial Code (UCC) and the Fair Debt Collection Practices Act.

Before repossessing a vehicle, Article 9 of the UCC requires that a dealership have a valid security interest in the vehicle, and the purchaser must be in default.  A security interest is obtained by selling the vehicle pursuant to a retail installment agreement and recording any lien on the vehicle’s certificate of title or by filing a UCC-1 financing statement. The sales contract must specifically grant the dealer a security interest in the collateral, and the actual owner of the vehicle (debtor) must sign the contract.  A security interest becomes “perfected” when the debtor has signed a security agreement which contains a description of the collateral, when value has been given, and when the debtor has rights in the collateral.  Although perfection of a security interest is not necessary for collection of collateral upon default, it assures the dealership’s priority in the event that the debtor grants a security in the same collateral to another party.

In addition to having a valid security interest, the dealer must verify that  the consumer is in default before it has the right to repossess the vehicle.  The Uniform Commercial Code states that “unless otherwise agreed a secured party has on default the right to take possession of collateral and after default may sell, lease or otherwise dispose of any or all of the collateral.”  The definition of default is most commonly found in the motor vehicle installment contract itself.  If the contract contains no definition, default means only failure to make payments.  Acceptance of a late payment may operate as a waiver of default on the installment.  The repeated acceptance of late payments may impose a duty on the financier to notify the debtor that strict compliance will be required in the future.

If the dealer has a valid security interest and the debtor is in default on payments, the dealership has the right to repossess the vehicle.  State RISA Statutes govern repossession sales resulting from  “consumer transactions,” those being transactions in which the consumer has purchased the goods primarily for personal, family, or household use.  An important exception to this statute is a transaction between financial institutions and their customers.  In transactions exempt from RISA, the provisions from the UCC govern the repossession and subsequent sale of the vehicle.

There are basically two types of repossession, one being a “self-help” method and the other being through judicial process.  Many states’ statutes, as well as UCC 9-503, authorize repossession of a vehicle without judicial process if it can be done without “breach of the peace.”  Breach of the peace essentially means that during the actual attempt to repossess the vehicle the repossessor may not employ oppressive conduct, threat of force, an implied threat of force or engage in a confrontation to gain possession of the collateral.  One overriding concern is to see that no violence occurs.  Ideally the original security agreement will contain a provision governing repossession and will give the dealership the right to enter on private property or will require the debtor to make the vehicle available to the secured party at a designated place which is reasonably convenient to both parties in the event the purchaser defaults.  In addition, repossession is often accomplished when the debtor or an adult closely related to the debtor voluntarily surrenders the vehicle. However, a secured party does not need the consent of the purchaser to repossess and entry onto private property does not necessarily constitute a breach of the peace.

The right of self-help repossession implies a limited privilege to enter on a debtor’s property.  Vehicles are routinely repossessed from a debtor’s open garage, private driveway, street, parking lot, or a repair shop.  It is all perfectly legal as long as no breach of peace occurs.  No breach of peace occurs provided the taking is not verbally or otherwise contested by the debtor or another person in control of the automobile.  If the repossessor has a debtor’s automobile hooked up to a tow truck and is ready to drive off with it, the debtor can demand that the vehicle be unhooked and the repossessor must comply.  The general rule is that a debtor’s request for the repossessor to leave the car alone must be obeyed.  However, once the repossession is accomplished the debtor’s request is too late and aggravated conduct occurring subsequent to repossession does not constitute a breach of peace.  In addition, the repossessor may not enter buildings or structures on a debtor’s property.  Opening a closed garage or breaking a lock on the garage door defeats the privilege and a breach of the peace results.

A dealership or financier that breaches the peace during repossession is exposed to tort liability for conversion.  A conversion action may also be filed if the buyer can prove he was not in default at the time of repossession or where the repossession was proper but the financier failed to notify the debtor that late payments would no longer be tolerated.  Punitive damages are available where circumstances surrounding the conversion show fraud, actual malice, deliberate violence or oppression, recklessness or gross negligence.  Dealerships and financiers are vicariously liable for acts of repossessors who are employees.  If the repossessors are not employees, but rather are independent contractors, the dealer/financier may not be liable under agency principles.  The damage for conversion is the value of the vehicle at the time of repossession, less the amount left unpaid on the purchase price, with interest.

Conversion may also occur during a lawful repossession if the debtor’s personal property is taken along with the automobile.  The repossessor is deemed a constructive bailee of the items and has a duty to keep the items safe.  If the items are returned, the debtor still may have a cause of action for loss of use or damage to the items.  A repossessor may avoid liability by adopting a procedure whereby an inventory is taken of the automobile’s contents immediately after repossession.  The repossessor should then send the debtor a list of items found and tell the debtor whom to contact to make arrangements for their return.

The second type of repossession is by means of the judicial process or a court-ordered repossession.  This type of repossession may take one or more forms according to the legal theory your attorney advises and the state in which the repossession is to take place.  Some of the theories include “claim and delivery,” “replevin,” and “attachment.”  As a general rule, court ordered repossessions are deemed commercially reasonable, but they are often more expensive and time consuming.  For instance, replevin, one of the judicial processes for repossession, requires a writ of replevin.  The writ of replevin, authorized by a court on the basis of an affidavit alleging the debtor’s default, gives the sheriff authority to seize the automobile by force if necessary.  The sheriff turns the vehicle over to the creditor, but it cannot be sold until the creditor has won a judgment on the underlying installment contract.  The debtor may attempt to assert defenses, such as warranty related counterclaims, against the judicial proceedings.  Moreover, there is some legal authority giving courts discretion to set a reasonable period of time in which the debtor may cure any default prior to the collateral being turned over to the secured creditor.  There also is a provision that states the debtor may retain the collateral by posting a bond payable to the secured creditor in the amount of double the then-present value of the collateral.  Finally, dealers may run into claims of competing lien holders after initiating the legal action.

Under some state Retail Installment Sales Acts, a creditor repossessing a vehicle must send a notice of default and right to cure within five business days after taking possession of the collateral.  The notice must specifically state the circumstances constituting the default and must include an itemized amount the debtor is required to pay in order to cure the default.

Note that the debtor has the right under some state laws (UCC 9-506), unless otherwise agreed in writing after default, to redeem the vehicle at any time before the dealership has disposed of it or has entered into a contract for its disposition.  In order to redeem the vehicle, the debtor or any other secured party, must tender fulfillment of all obligations secured by the vehicle as well as the expenses reasonably incurred by the dealership in retaking, holding, and preparing the vehicle for disposition, in arranging for the sale.  For instance, in Ohio the debtor may cure the default within 20 days after the dealer retakes possession of the vehicle, or 15 days after the dealer sends the notice, whichever is later, by delivering to the dealer the following:

  • All installments that are due or past due at the time of delivery;

  • Any unpaid delinquency or deferred charges;

  • The actual and reasonable expenses incurred by the dealer in retaking possession of the vehicle.  Any portion of these expenses that exceeds $25.00 need not be delivered to the dealer, but shall be added to the time balance; and

  • A deposit by cash or bond in the amount of two installments.  The dealer may apply the deposit toward satisfaction of the debt in the event of another default by the debtor.

The dealer must make the vehicle available for inspection by the debtor during reasonable hours during the period between the time the dealer retakes possession and the expiration or exercise of the debtor’s right to cure his default.

Once the debtor cures his default, he may take possession of the vehicle.  The dealership must make the vehicle available to the debtor at a time and place that is reasonably convenient to both parties.  If the debtor requests that the dealership return the collateral to the place from which it was taken, the dealership may charge the debtor the actual and reasonable expenses incurred in returning the vehicle to that place.  Such amount must be added to the time balance.  Note that a debtor’s right to cure his default may not be exercised more than once for any single debt.

Finally, the dealership should be familiar with procedure regarding bankruptcy filings.  As soon as a bankruptcy petition is filed in federal bankruptcy court, an estate is created.  This estate usually consists of all legal and equitable interests of the debtor in the property.  An automatic stay of all legal proceedings against that debtor goes into effect regardless of whether a particular creditor knows about the filing.  Again, the automatic stay immediately stops any efforts of any creditor to collect a claim against the debtor, including any acts to obtain possession of the property of the estate.

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