Defaults and Repossessions in Motor
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
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,
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
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
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.