9-609(a) says that a secured party has the right to repossess collateral if the debtor goes into default. 9-609(b) describes the means of how repossession may occur. There are ultimately two means of repossession: judicial (replevin) and nonjudicial (self-help).
A secured party has the right to go and repossess without a court process as long as 1) there is no trespass violation and 2) the repossession proceeds without “breach of the peace.”
The challenge here is to determine what constitutes a breach of the peace. The following cases may be useful here.
Russell v. Santander Consumer USA, Inc.
2020 WL 3077944 (E.D. Wis. 2020).
Did the reposer breach the peace?
“If a Creditor repossesses in disregard of the debtor’s unequivocal oral protest, the creditor commits a breach of the peace.”
Here, the repossession resulted in the breach of a peace.
The Russell’s had purchased a vehicle and fell behind in the payments. Santander, the creditor, obtained a judgment of replevin and used AssetsBiz (who then enlisted an individual named Sancinati) to repossess the vehicle. Sancinati went to the home and was under the hood of the vehicle when Mr. Russell approached him. Mr. Russell informed Sancinati that he had a weapon and that he should leave. Sancinati did leave, but called the police. The police came and detained Mr. Russell. During the detention, Sancinati repossessed the car.
Applying the rule to this case, there was a verbal protest (and potentially a threatening protest). Although Sancinati was fine to walk away, he was not fine to come back later while the police were questing the Russells. In other words 30 minutes before a second attempt is not a sufficient amount of time to allow things to cool off.
Additionally, Santander (the creditor) is liable for the poor repossession of their agent, even though they did not directly hire the agent.
Giles v. First Virginia Credit Services, Inc.
560 S.E.2d 557 (N.C. Ct. App. 2002).
Was the repossession a breach of the peace?
There is a balancing test utilized to determine whether there was a breach of the peace:
- Was there violence
- Where did the repossession take place
- Did the debtor provide express or constructive consent
- What was the reaction of third parties
- What was the type of the premises entered
- Did the creditor use deception
Noise and commotion are insufficient to determine a breach of the peace.
There was no breach of the peace in this case
First Virginia Credit Services had a security interest in the Giles vehicle. The Giles failed to make payments so First Virginia hired Professional Auto Recovery to repossess the vehicle. The repossession took place early in the morning (at about 4 am). The process woke a neighbor who called the Giles. By the time the Giles made it to the driveway, the vehicle was gone. As a result, the Giles called the police and ultimately the whole neighborhood was awake because of the commotion.
The court takes the five factors and applies them to the situation here.
First, the repossession took place in the driveway. There was no need to enter a garage or home. As such, the first factor leans in favor of no breach of the peace occurring.
Second, consent for repossession was provided in the security agreement.
Third, even though a third party was awakened by the noise of the repossession, the third party never engaged the repossessor.
Fourth, no premises were entered. Although the exterior was part of the Giles property, there was no interior entered.
Finally, there was no use of deception.
The factors of deception, when, and where are the more important factors to be considered.
A common way for a secured party to obtain value after taking possession of the collateral is to dispose of that collateral. This means that the secured party would either sell, lease, or license the item. Depending on the collateral and the jurisdiction, secured parties may be limited in how the dispose of the collateral (might be required to conduct a public auction instead of a private sale).
Article 9 has rules for how the secured party is supposed to notify the debtor of the pending disposition. See §§ 9-611 through 9-614. The purpose of which is to provide the debtor with enough information to exercise their rights in an attempt to recover the collateral (redeem, bid, etc.).
Proper notice requires several elements to be satisfied. The letter must:
- Determine who needs to be contacted (several parties may be required).
- State the the debtor is free to redeem by paying the balance of the debt.
- Indicate the anticipated date and method of the disposition.
Disposition must be commercially reasonable to be considered effective. Depending on the action taken, several factors may be relevant. For example, courts will need to consider the time and location of the sale or auction; whether the sale should have been public or private; how the sale or auction was advertised; the price of the collateral; etc. See 9-610(b); 9-610 comments 3 and 4; and 9-627(b).
A low price may indicate unreasonableness but is not final. However, when the courts see a low price, the other factors are considered much more carefully.
Managing Proceeds of Disposition
9-615 outlines the rules for how cash proceeds are to be distributed. Below is the order of operations (as to who gets paid first). After disposition is made and cash proceeds are received, :
- Expenses of repossessing and disposition.
- Foreclosing secured party gets paid.
- Junior security interests gets paid.
- Remainder goes to the debtor (not usually anything left over).
Sometimes purchases are made on credit rather than in cash. In this situation, the secured party may either turn the collateral into a new security interest for the new debtor, or wait until they are paid in cash once the obligation is satisfied.
The result of a sale of collateral is that the buyer takes the item free and clear of any security interest the foreclosing party and any junior party (junior creditors must demand to be paid or else they do not get paid). Note that the foreclosing party may not necessarily be the most senior secured party. In that situation, the purchaser takes the collateral subject to a security interest of any secured party who was senior to the foreclosing party.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.