In most respects the Uniform Commercial Code adheres to one of its stated purposes which is the facilitation of commercial transactions. Revised Article 9 departs from that goal in some respects concerning the provisions regarding exercise of remedies for default by a consumer debtor. Davenport Evans lawyer Robert E. Hayes explains.
The provisions of which lenders should be aware are found at Section 9-625 of the Uniform Commercial Code (SDCL 57A-9-625). This section provides remedies to a borrower when the lender does not comply with the provisions of the Uniform Commercial Code regarding foreclosure of the lender’s security interest. Those duties include the following:
- Provision of a notice of the lender’s intention to sell its collateral;
- The requirement that the notification be given “within a reasonable time”. In the case of consumer transactions, ten days is not automatically sufficient as is the case in non-consumer transactions.
- The requirement that the notification in a “consumer goods transaction” be in a different format than that required for non-consumer goods transactions;
- Application of proceeds of sale as required by the UCC Section 9-615; and
- The requirement that the lender provide the borrower an explanation that states the amount of any surplus or deficiency, provides an explanation of how the secured party calculates surplus or deficiency, if applicable what future “debits, credits, charges, including additional credit service charges or interest, rebates, and expenses” could affect the amount of the surplus or deficiency; and provides a telephone number or mailing address from which additional information concerning a transaction is available.
In addition, and underlying all dispositions of collateral, the sale must be “commercially reasonable”.
The failure to comply with any of these requirements triggers Section 9-625 which has the ominous title “Sanctions for Failure to Proceed in Accordance with Chapter-Liability for Damages”.
The First Whammy
Essentially, without being limited to consumer transactions, 9-625 provides that if a secured party is not proceeding in accordance with applicable provisions a debtor can obtain a restraining order to prevent disposition.
Also, and in the same manner, any borrower who can prove that damages were suffered as the result of non-compliance with these provisions is entitled to obtain damages which could include the inability to obtain further credit, or increased costs of future credit.
In some states the consequence of non-compliance is the loss of a deficiency. South Dakota does not have the statutory provision which might permit a court to impose loss of deficiency claims for non-compliance, but other states in which a lender does business may have the statutory provision or case law which permits such a remedy.
All of these possible sanctions are what might be perceived as the first “whammy”.
The Second Whammy
The second whammy is what we believe to be of the greatest consequence. Under Section 9-625(c)(2) if the collateral is consumer goods and non-compliance with the requirements noted above occurs, without regard to actual damages the borrower is entitled to recover the entire finance charge plus ten percent of the principal amount of the loan. If the loan transaction is sufficiently large, or the interest rate is sufficiently high, this obviously could result in a substantial award in favor of the borrower which likely cannot be offset by a deficiency claim (although this is not clear).
The Third Whammy
The third and final whammy is the possibility of being exposed to a class action claim. Obviously for a class action claim to be worthwhile, the lender must do a fair volume of loans secured by consumer goods, and as a consequence, engage in a fair number of repossessions with a repetitively occurring lack of compliance with the Code requirements. A recent Supreme Court case may lessen the risk of a class action and thus we do not believe this whammy poses the potential risk that the first two could.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.