Creditor Beware: from Default Through Deficiency Judgment
| Jurisdiction | Kansas,United States |
| Citation | Vol. 60 No. 10 Pg. 17 |
| Pages | 17 |
| Publication year | 1991 |
60 J. Kan. Bar Assn. October, 17 (1991). CREDITOR BEWARE: FROM DEFAULT THROUGH DEFICIENCY JUDGMENT
Vol. 60, October, 1991
Copyright 1991 by the Kansas Bar Association; Wanda M. Temm
Introduction
The drafters of the Uniform Commercial Code (UCC) placed the secured creditor in an enviable position. Not only is it entitled to priority over the lowly unsecured creditor, [FN1] but it may take possession of the collateral upon default without the cost of litigation. [FN2] Moreover, if the secured creditor sells the collateral and does not recover the full amount of the debt, it can seek a judgment against the debtor for any deficiency. [FN3] Thus, the secured creditor has the opportunity to be made whole much more so than its unsecured counterpart.
This favored position and resultant power does not go unchecked. Recognizing the potential for overreaching, the UCC drafters set limits on the availability of a deficiency judgment. [FN4] Furthermore, the Uniform Consumer Credit Code (UCCC) places additional restrictions on the secured creditor in consumer [FN5] transactions. [FN6] Failure to comply with these restrictions is harsh-forfeiture of any deficiency, liability for damages, and attorney fees. [FN7]
This article will focus on steps the secured creditor must take to protect its right to seek a deficiency judgment and avoid liability. Through an examination of the relevant statutes and cases, I will discuss both consumer and commercial credit transactions and highlight differences.
Steps to Protect Deficiency Judgment
1. Verifying Default
The UCC does not define default. [FN8] As a result, the secured creditor is given considerable freedom in drafting a broad definition in the security agreement. Besides the failure to pay an installment, the definition of default typically includes failure to insure the collateral, failure to allow inspection of the collateral upon demand, failure to pay taxes, failure to make payments to other creditors, removal of the collateral from the state, sale of the collateral without permission, and death or insolvency of the debtor. [FN9] Creditors may include a catch-all provision such as whenever the secured party "deems himself insecure." [FN10]
The UCCC affords the consumer debtor certain safeguards by limiting the definition of default. [FN11] Default is expressly defined in K.S.A. § 16a-5-109 to include only two situations: when the consumer fails to make a required payment and when the prospect of payment or realization of collateral is significantly impaired. [FN12] While significant impairment may well include factors typically spelled out in the commercial security agreement, such as insolvency or removal of the collateral, [FN13] insecurity clauses are prohibited. [FN14] The consumer debtor, therefore, is not at as much risk to lose the collateral should the secured creditor start to feel insecure.
At this time, if not already done, the creditor should take the time to verify the documents in the transaction. In addition to confirming its own status, the creditor should determine the existence of any other creditors and their priority. Any potential problems can then be addressed before the creditor proceeds with repossession or a foreclosure action.
2. Notice of Right to Cure
Perhaps the most striking difference between consumer and commercial credit transactions is the statutorily required notice for the consumer debtor. Notice of a right
to cure is not required in commercial transactions. [FN15] Situations arise, however, when the prudent creditor would send a notice to the commercial debtor. For instance, if the security agreement appears to require notice prior to repossession [FN16] or if the creditor has established a pattern of accepting late payments, [FN17] notice should be sent.
K.S.A. § 16a-5-110(1) requires a creditor to give notice to the consumer debtor of a right to cure when the debtor is in default for failure to make an installment payment. No notice requirement exists if default is a result of significant impairment of collateral. [FN18] Similarly, because the statute refers only to "a consumer credit transaction payable in installments," [FN19] notice is not required for default on single payment notes. [FN20]
Notice may be given after the consumer has been in default for 10 days. [FN21] This time limitation, together with the right to cure, prevents the unprincipled creditor from repossessing collateral when a payment is only a day or two late. [FN22]
Subsection (2) of K.S.A. § 16a-5-110 governs the content of the notice. Strict compliance with subsection (2) is required, [FN23] and failure to comply results in any repossession declared wrongful. [FN24] The notice must be written and the following information conspicuously stated:
(1) name, address, and telephone number of the creditor; (2) brief description of the credit transaction; (3) consumer's right to cure the default; (4) amount of payment; and (5) date by which payment must be made to cure the default. [FN25] The statute itself contains an acceptable form. [FN26] While the form of the notice is not mandatory and a notice in substantially the same form will suffice, [FN27] the information must be accurate. [FN28]
The creditor effectuates notice when it delivers the notice to the consumer or mails the notice to the address of the consumer's residence. [FN29] The residence is the address given by the consumer as its residence in any writing signed by the consumer in connection with the credit transaction. [FN30] Unless the consumer notifies the creditor, this address is presumed unchanged. [FN31]
Generally, unlike the debtor in commercial transactions, [FN32] a consumer may not waive provisions of the UCCC. [FN33] However, the Eighth Circuit, in In re Schwarting, [FN34] held that filing a petition for voluntary bankruptcy constitutes a waiver of the right to notice of a right to cure. The court reasoned that filing for bankruptcy protection amounted to a concession of the inability to cure the default. As a result, a notice of right to cure would be of no value. [FN35]
3. Right to Cure
Following notice, a consumer [FN36] has twenty days to cure the default. [FN37] Cure consists of tendering all unpaid sums due without acceleration plus any unpaid delinquency or deferral charges. [FN38] Upon cure, the consumer's rights are restored as if no default had occurred. [FN39]
A creditor may not accelerate the unpaid balance until the cure period has expired. In other words, a creditor must wait twenty days after sending notice of right to cure default before demanding payment of the balance of the note. [FN40] Before the expiration of the twenty-day period, the creditor may only seek late payments.
If, after cure, the consumer fails to make another required installment payment, the consumer is not entitled to a second chance to cure. As a result, no limitations are placed on the creditor's right to proceed, and it may do so without notice. [FN41]
4. Effecting Self-Help Repossession and/or Filing Suit
Once notice has been sent and the twenty-day cure period has expired without payment, a creditor is faced with a choice [FN42] of either seeking self-help repossession [FN43] or filing a petition to foreclose the security interest pursuant to K.S.A. § 60-1006. [FN44] In all likelihood, its decision will be based on the particular debtor's circumstances and the costs associated with each remedy. One factor is the degree to which the collateral will satisfy the debt. If the creditor is significantly under collateralized, it should proceed with filing suit and avoid a two-stage process. In contrast, if the sale of collateral will virtually satisfy the debt and the likelihood of breaching the peace is small, self-help repossession would be a significant cost-saver. Moreover, because the UCC provides for cumulative remedies, [FN45] nothing precludes the creditor from attempting self-help repossession while simultaneously foreclosing the security interest. [FN46]
a) Self-help repossession
A creditor's right to peaceful repossession has a long history in the common law and is codified in both the UCC and UCCC. [FN47] The underlying policy rationale is that because the creditor can avoid the costs in time and money required by litigation, the debtor can obtain loans at a lower rate and commercial transactions are encouraged and expanded. [FN48]
Under the UCC, the creditor may take possession only if it can do so without "breach of the peace." [FN49] The UCC drafters did not define "breach of the peace"-purposefully leaving that task to the courts. Not surprisingly, this task has led to a flood of litigation. While no ironclad definition has been formed, commentators note that courts focus on two areas: (1) whether an entry was made upon the debtor's premises, and (2) whether the debtor or someone acting on the debtor's behalf consented or objected to the entry. [FN50]
The initial focus is on the location of the collateral. With little question, forced entry into the debtor's premises would constitute breach of peace. [FN51] An unauthorized entry without force into a closed dwelling has also been held to result in breach of peace. [FN52] Courts have not limited premises or dwelling to the house itself. Repossession of a car from a closed garage has led to a finding of breach of peace. [FN53] A closer question arises when the car is in an open garage. While several courts have held repossession from an open garage to be lawful, [FN54] the secured creditor may be better off to wait considering the potential penalties should a breach of peace be found. Once the car is no longer in an enclosure, repossession is virtually universally upheld. Thus, the creditor...
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