Consumer Liability for Deficiencies in Washington

Publication year1980


Consumer Liability for Deficiencies in Washington

Edith R. Warkentine(fn*)

I. Introduction

The Article Nine security interest(fn1) is the Uniform Commercial Code's(fn2) device for securing the repayment of a loan of money or extension of credit.(fn3) The purchase money security interest(fn4) is a special type of security interest commonly used to finance the acquisition of consumer goods.(fn5) A consumer grants a purchase money security interest either to the seller of the goods,(fn6) or to a third party, such as a bank or credit union, that loans money to the consumer who uses the money to purchase the desired goods.(fn7) If a consumer defaults(fn8) under a security agreement, the Uniform Commercial Code (U.C.C.) gives the secured party a variety of rights.(fn9) One of the remedies is to repossess the collateral, and after disposing of the collateral, and making appropriate application of the proceeds of the debt, to sue the debtor for the difference between the secured debt and the proceeds of the disposition (the deficiency).(fn10)

This article focuses on a secured party's right to hold a debtor liable for a deficiency when resale of the goods does not satisfy the remaining obligation. Although the State of Washington adopted the U.C.C. with relatively few changes,(fn11) it did enact a different version of section 9-501 governing consumer liability for deficiencies. Under the Washington statute a consumer debtor is not liable for a deficiency in the event of default under a purchase money security agreement when the secured party is the seller of the collateral and uses self-help to repossess.(fn12) This article examines Washington's version of section 9-501, and its treatment of deficiencies. This examination is particularly timely because recent litigation can result in a clear interpretation by the Washington Supreme Court of the Washington version of U.C.C. Section 9-501.(fn13) Whatever the result of the litigation, however, the Washington legislature must still address the question of consumer liability for deficiencies. To understand the effect of the present Washington statute, this article first reviews the history of a consumer debtor's liability for a deficiency arising out of a secured debt. It next analyzes the rules regarding deficiencies introduced by section 9-501, compares these rules to the Washington version of that section, and examines the background of Washington's unique version of section 9-501. Finally, consumer protection problems in the area of deficiencies are explored, and possible methods of addressing those concerns are discussed.

II. Pre-Code Consumer Debtor Liability For Deficiencies

Prior to the adoption of the U.C.C.(fn14) contracting parties used a number of different legal devices, each with its own form and set of rules, to secure the repayment of debts incurred in connection with the acquisition of goods.(fn15) The two devices most commonly used in consumer transactions were the conditional sales contract and the chattel mortgage.(fn16) When a buyer purchased goods under a conditional sales contract, title passed to the buyer conditioned on his complete payment.(fn17) If the buyer failed to complete payment, the contract was breached and the seller then had two options. The first option, which could be done without judicial intervention, was an election to treat the contract as in default and recover the goods.(fn18) In that case, the contract was terminated when the seller repossessed the goods, and the seller had no surviving contractual rights against the buyer. Thus, the defaulting buyer under a conditional sales contract was not liable to the seller for any deficiency. The second option was election to treat the sale as a sale on general credit, and to sue the buyer for any portion of the unpaid purchase price. Under this theory the seller theoretically passed title to the goods to the buyer, and forfeited any rights to repossess the goods. Courts considered these options mutually inconsistent; election of one remedy prevented later resort to the other.(fn19)

Unlike the conditional seller, the chattel mortgagee did not have to elect remedies.(fn20) If the debtor defaulted, the chattel mortgagee had both a right to the property and a right to hold the debtor liable for any deficiency remaining on the purchase price. However, the chattel mortgagee could retake the mortgaged property only through judicial process. Thus a major difference between conditional sales contracts and chattel mortgages was the remedies available under each respective device. Consequently, under pre-Code law whether or not a consumer debtor would be liable for a deficiency depended on the form of security device used.(fn21) The previous discussion of general pre-Code law reviews the basic state of the law in Washington prior to that state's enactment of the U.C.C.(fn22) The Washington Supreme Court had explicitly recognized the doctrine of election of remedies with regard to conditional sales contracts.(fn23) At the same time Washington statutes provided two alternate methods for foreclosing on a chattel mortgage: one, a foreclosure proceeding which was fairly lengthy; the other, a more summary proceeding, where chattel mortgagee action could result in a sheriff sale of the property by informal notice and sale proceedings.(fn24) The mortgagee was not required to elect remedies, under either method, and could hold a debtor liable for any resulting deficiency. The chattel mortgagee could use neither self-help nor a power of sale clause to obtain possession of the property to avoid the burden of foreclosing.(fn25) Even the summary method of notice and sale involved the use of a court officer to obtain possession of the property and to conduct the sale. Therefore, in Washington, a consumer debtor under either a conditional sale contract or a chattel mortgage had some degree of protection from a deficiency. In the case of a conditional sale, the debtor could either lose the property or retain the property and be liable for the contract price. Under a chattel mortgage, although the debtor would both lose the property and be liable for a deficiency, the involvement of a court officer in the repossession and resale activities provided some assurance of fairness in the computation of the deficiency.(fn26)

III. The Uniform Commercial Code's Treatment Of Deficiencies

A. In General

The Uniform Commercial Code's drafters carefully considered the extent to which pre-Code law should be retained or discarded. In drafting Article Nine, they examined and analyzed the wide variety of pre-Code security devices. Their analysis revealed that these legal devices shared many common characteristics.(fn27) One important common characteristic was that each device was designed to give special rights in identifiable personal property to secure the repayment of a loan of money or extension of credit.(fn28) The drafters' analysis indicated that the differing forms and rules governing the creation of the various security devices confused creditors and that their complexity created problems that required a degree of sophistication that most creditors did not have.(fn29) The drafters found no justification for the differences between the security devices. Consequently, the drafters explicitly abolished distinctions based on different types of transactions.(fn30) They rejected the pre-Code system and, in its place, adopted a single approach emphasizing the similarities of the different devices.(fn31) They created a new, simpler, and more efficient device, known simply as an "Article Nine security interest." Concomitantly, a single scheme of creditors' remedies replaced the previous system of remedies where the form of device used had dictated the available remedy.(fn32)

The U.C.C. Article Nine security interest completely changed pre-Code law regarding conditional sales contracts and chattel mortgages. First, these two different security devices were abolished.(fn33) Although parties may still use pre-Code forms, the Code emphasizes substance over form, and both devices are treated as security agreements.(fn34) Second, the Code abolished the distinction in remedies available under those different devices.(fn35) Specifically, the U.C.C. sets forth a wide range of remedies available to a secured party upon a debtor's default, and provides that those remedies are cumulative.(fn36) Among the available remedies is the right to use self-help to repossess, to resell the goods, and if the proceeds of the sale do not satisfy the remaining obligation, to hold the debtor liable for the deficiency.(fn37) In marked contrast to pre-Code law, a creditor in the position of a chattel mortgagee may proceed through self-help directly against the collateral. Also in contrast to pre-Code law, after retaking the goods, a creditor in the position of a conditional seller may recover a deficiency.

B. In Washington

When the Washington legislature enacted section 9-501, it departed from the uniform text's treatment of creditors' remedies by adding a subparagraph to section 9-501(1) which provides:Notwithstanding any other provision of this Code, in the case of a purchase money security interest in consumer goods taken or retained by the seller of such collateral to secure all or part of its price, the debtor shall not be liable for any deficiency after the secured party has...

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