Avoiding Breaches of Peace in "self-help" Repossessions
| Publication year | 1992 |
| Pages | 12 |
| Citation | Vol. 5 No. 7 Pg. 12 |
August, 1992
R. L. Knuth, J.
"When a strong man armed keepeth his palace, his goods are in peace ..." —Luke 11:21
The so-called "self-help" provisions of Article 9 of the Uniform Commercial Code provide a quick and easy solution to the problem faced by a secured creditor in personal property. Upon default, the secured party is permitted to take physical possession of tangible collateral for disposition as prescribed elsewhere in the Code, so long as no breach of the peace occurs.
Like so many short-cuts outside direct judicial supervision, however, the self-help remedy may be quick and cheap for the client, but it is fraught with the potential for abuse. This article is intended to assist in advising clients of what constitutes a breach of the peace, what consequences of a breach of the peace are, and how collateral can be "peacefully" repossessed.
DEFAULT AND REPOSSESSION
Under the Code, once the fact of default can be shown, three options arise: The creditor can 1) waive the security and sue on the obligation; 2) enforce the security interest by disposing of the collateral and seek a deficiency; or, 3) keep the collateral in full satisfaction of the debt, so-called "strict foreclosure". A secured creditor who decides to enforce the security interest against tangible collateral must then obtain actual, physical possession of the collateral.
With tangible collateral, Utah Code Ann. Section 70A-9-503 provides that a secured party has the right to take possession of the collateral upon default, unless it has been otherwise agreed between the parties. The secured party may proceed either with or without judicial process. Obtaining possession of the collateral without judicial process is known as "self-[1] help". As will be seen below self-help is subject to some rather severe limitations.
VOLUNTARY REPOSSESSIONS
Before analyzing the limitations of the self-help remedy, it is worth noting that avoiding self-help entirely may be the wisest course. An alternative overlooked, surprisingly, by many secured creditors, is simply to ask the debtor to surrender the collateral. A voluntary surrender of collateral by the debtor is usually the best method by which to proceed, since it will generally obviate any claim by the debtor that the collateral was illegally repossessed. Often, the debtor realizes he or she is in deep trouble and is willing to surrender the collateral to reduce potential exposure.
The secured creditor, on the other hand, should be prepared to give concessions to the debtor in order to obtain immediate, voluntary surrender of the collateral, such as a liquidated credit being granted for the goods prior to sale, of some discount of the debt. The parties can often agree on what will constitute a commercially reasonable method of sale or sale price in exchange for voluntary surrender. Every voluntary surrender agreement should, however, be reduced to writing, and should specify that the creditor is not waiving any right to a deficiency in exchange for voluntary surrender, unless an agreement for such a waiver has actually been made.
A voluntary surrender of collateral should, first and foremost, be voluntary, that is, the debtor is making a knowing, informed decision in the absence of any fraud or deceit. A creditor who repossesses fraudulently, in bad faith, unreasonably, or without justification may I be liable for compensatory and, where appropriate, punitive damages. For example, in Clayton v. Crossroads Equipment Co., ' the debtor was a contract harvester who had purchased a combine harvester on credit. When the secured party learned that the debtor was preparing to take the collateral out of the state where he claimed to have work, the collateral was repossessed, ostensibly under the "insecurity" provision of the security agreement. The debtor was not in default of payment at the time of repossession. The secured party claimed to have received information indicating that the debtor was a poor credit risk, thus justifying repossession.
The Utah Supreme Court affirmed the trial court's award of compensatory and punitive damages. The Court observed that the case before it did not involve deterioration of the debtor's credit, but...
To continue reading
Request your trial