Whats in Store for the Wayward Lender

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Mar 2003

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Under the prior version
of Article 9, the consequences of a lender's failure to comply with the
UCC depended largely on which state's law applied. Remedies varied
significantly from jurisdiction to jurisdiction. Parties affected by any
misconduct, other than the principal borrower, might not have standing to seek
relief. Procedural differences also existed, particularly as they might relate
to the burden of proof. Revised Article 9 changes much of this. This article
will explore the rights and remedies of the borrower and other obligated
parties in the event of a lender's failure to meet the requirements of
Revised Article 9.

<h3>Section 9-625: Remedies for Secured Party's Failure to Comply with Article 9</h3>

The most
significant change made by Revised Article 9 in this context relates to the scope of its coverage. Under prior law, remedies were available against a
lender that failed to follow the applicable provisions relating to repossession
or foreclosure. Section 9-625 offers injunctive relief or damages for the
failure to comply with any provision of Revised
Article 9. Where affirmative judicial intervention is appropriate,
§9-625(a) specifies that injunctive relief is available from a court of
appropriate jurisdiction. Section 9-625(b) subjects a disobeying lender to
damages "in the amount of any loss caused by a failure to comply."

The
ramifications of this expansion in scope may not have been contemplated by its
authors. This will occur in the context of lender liability claims. After some
of the more shocking lender liability verdicts were handed down in the
mid-to-late 80s, a number of state legislatures enacted special "statute
of frauds" provisions that applied to lending institutions and credit
transactions.<a href="#1" name="1a">1</a> These provisions are designed to limit or exclude claims against
lenders that are not based on written and signed documents.<a href="#2" name="2a">2</a> Literal
enforcement of these statute of frauds laws in credit transactions resulted in
a broad elimination of the more amorphous claims usually associated with lender
liability litigation, such as breach of fiduciary duty, negligent representation
and negligent interference with a contractual relationship or commercial
advantage.<a href="#3" name="3a">3</a> Section 9-625 essentially countermands these statute of frauds
provisions in any case involving noncompliance with any provision of Revised
Article 9. Under the appropriate circumstances, this could revitalize lender
liability claims that might otherwise be barred.

The
remaining portions of §9-625 are not as controversial or potentially
far-reaching, but significant nonetheless. Section 9-625(c) delineates the parties
who have standing to seek damages. This includes the debtor, any obligor or any
party holding a security interest or other lien in the collateral. If the
collateral consists of consumer goods, recovery may be in an amount not less
than the credit service charge plus 10 percent of the principal amount or
"the time-price differential plus 10 percent of the cash price."
This is designed as a minimum statutory recovery patterned on former
§9-507(1).<a href="#4" name="4a">4</a>

Under
§9-625(d), a debtor whose deficiency has been eliminated under §9-626
may still recover damages for loss of any surplus. However, under this
provision, where a deficiency has been eliminated or reduced under §9-626,
the debtor cannot recover additional damages for the failure to comply with the
provisions of Part 6 relating to collection, enforcement, disposition or
acceptance. This provision is designed to eliminate the possibility of double
recovery or other over compensation where reduction or elimination of a
deficiency has occurred.<a href="#5" name="5a">5</a> However, this limitation does not apply to consumer
transactions.

In the context of
consumer transactions, §9-625(e) provides for statutory damages in the
amount of $500, in addition to damages established under §9-625(b), in six
specific situations:

<ul>
<li>Failure to comply with §9-208 [Additional Duties of
Secured Party Having Control of Collateral];

</li><li>Failure to comply with §9-209 [Duties of Secured Party
if Account Debtor Has Been Notified of Assignment];

</li><li>Filing a record that a person is not entitled to file under
§9-509(a) [Persons Entitled to File a Record];

</li><li>Failure to file or send a termination statement under
§9-513(a) or (c) [Termination Statement];

</li><li>Failure to comply with §9-616(b)(1) [Explanation of
Calculation of Surplus or Deficiency], where part of a pattern or consistent
with the practice of noncompliance;

</li><li>Failure to comply with §9-616(b)(2).
</li></ul>

Additional
statutory damages are available for failure to comply with a request under
§9-210 [Request for Accounting; Request Regarding List of Collateral or
Statement of Account] pursuant to §9-625(f). Finally, §9-625(g)
contains an added penalty limiting a lender's security interest to those
items specified in a statement included in a request made under §9-210
"as against a person that is reasonably misled by the failure."

<h3>Section 9-626: Action in Which Deficiency or Surplus Is an Issue</h3>

The remedies
prescribed in §9-626 are limited to the determination of a deficiency in
the context of the "collection, enforcement, disposition or
acceptance" of collateral.<a href="#6" name="6a">6</a> In any other situation involving
noncompliance, the parties must look to §9-625. To a large degree,
§9-626 is designed to clarify and make uniform a number of disparate
rulings made under §9-507 of the prior code.<a href="#7" name="7a">7</a> Thus, under
§9-626(a)(1), a debtor or secondary obligor has the ability to challenge
compliance with respect to the recovery and disposition of collateral. Only
after some aspect of the secured creditor's conduct has been challenged
does there arise some burden to demonstrate compliance. Once its conduct is
challenged, the secured creditor bears the burden of establishing compliance.
This is characterized as the "rebuttable presumption rule."<a href="#8" name="8a">8</a> Where
the secured creditor is unable to meet its burden of proof, the liability of
the debtor or any secondary obligor for a deficiency will be limited according
to a formula specified under §9-626(3). This is the greater of the actual
proceeds from the disposition of the collateral or the amount that would have
been realized had there been compliance.

Normally, the
burden of proof rests with the party that is either asserting a claim or
pleading an affirmative defense. This is clearly not the approach adopted in
§9-626. It has been suggested that this reflects a desire to create an
incentive on the part of the creditor to comply with the law or an assumption
that evidence of compliance is more assessable to the secured party.<a href="#9" name="9a">9</a> The
Official Comments shed no light on this subject. Nevertheless, the provision
adds certainty to an area of the law that had been the subject of numerous
judicial interpretations throughout the country.

Whatever
clarity §9-626 brings to commercial transactions, it denies to consumer
transactions. Under §9-626(b), it is the court, not the Code, that will
determine what rules apply. As indicated by Official Comment 4, courts in many
jurisdictions have taken three general approaches in dealing with
noncompliance. These include the creation of an offset of damages against a
deficiency, an absolute bar to recovery of a deficiency, or a rebuttable
presumption that bars recovery of a deficiency unless the secured party
establishes that compliance would have yielded an amount to satisfy the debt.
Presumably, practitioners will look to whatever law was applied in the relevant
state prior to enactment of Revised Article 9 to determine what rules will
apply in consumer transactions.

<h3>Section 9-627: Determination of Whether Conduct Was Commercially Reasonable</h3>

Once a
default has occurred in a transaction governed by Revised Article 9, the
general requirements are that a secured party proceed with the disposition of
its collateral in good faith, in a commercially reasonable manner and with
reasonable notification.<a href="#10" name="10a">10</a> However, "commercially reasonable" is
not a defined term. Section 9-627 provides some guidance in this regard.
Section 9-627(a) embraces the rule contained in prior §9-507(2) to the
effect that evidence that a better price could have been obtained is not itself
indicative that the "collection, enforcement, disposition or acceptance"
was not commercially reasonable.<a href="#11" name="11a">11</a> Section 9-627(b) establishes a series of
safe harbors that offer a creditor conclusive proof of compliance. These
include the availability of a recognized market, conformity with reasonable
commercial practices established among dealers of like property, and approval
in a judicial proceeding or by a recognized representative of creditors, such
as a creditors' committee appointed pursuant to the Bankruptcy Code.

<h3>Section 9-628: Non-liability and Limitation of Liability of a Secured Party; Liability of Secondary Obligor</h3>

Section
9-628 is designed to limit liability in specific situations. Under
§§9-628(a) and (b), where a secured party cannot identify or
communicate with a debtor or obligor, liability cannot be established.
Similarly, a secured party is relieved from liability associated with a
consumer transaction where it reasonably believed that the transaction did not
involve a consumer or consumer goods, where such belief is based on a
representation made by a debtor or obligor. Sections 9-628(d) and (e) relate to
the imposition of penalties for noncompliance in consumer transactions under
§9-625(c)(2). Section 9-628(d) excludes liability for a violation of
§9-616, which covers the duty to explain the calculation of any surplus or
deficiency. Finally, §9-628(e) specifies that a secured party can be
liable only once for a particular secured transaction.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See "Limiting
Lender Liability: The Trend Toward Written Credit Agreement Statutes," <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
Minn. L. Rev. 295 (1991)</a>; "Stemming the Tide of Lender
Liability: Judicial and Legislative Reactions," Den. U. L. Rev. 453
(1990). <a href="#1a">Return to article</a>

<a name="2">2</a> See, e.g., Ala. Codes §9-9-2(7); alaska stat. §09.25.010(a)(13); <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=A….
Rev. Stat. Ann. §44-101</a>;

<a name="3">3</a> See, e.g., <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… v. Pine S. Capital, 177 F. Supp. 2d 591 (W.D.
Ky. 2001)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7… Resource Corp. V. Hurst Trust, 76 F. Supp. 2d
723 (N.D. Tex. 1999)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… Services Inc. v. KeyBank Nat'l. Ass'n., 29 F. Supp. 2d 942 (N.D. Ind. 1998)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=9…
Int'l. Inc. v. Orix Credit Alliance Inc.,

902 P.2d 877 (Colo. App. 1995)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
Bank Lakewood v. GCC Partnership, 886 P.2d 299
(Colo. App. 1994)</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> Revised §9-625, Official Comment 4. <a href="#4a">Return to article</a>

<a name="5">5</a> Revised §9-625, Official Comment 3. <a href="#5a">Return to article</a>

<a name="6">6</a> Section 9-626, Official Comment 2. <a href="#6a">Return to article</a>

<a name="7">7</a> Hawkland & Cohen, UCC Series,
§9-626:4 (Rev. Art. 9), West. <a href="#7a">Return to article</a>

<a name="8">8</a> Section 9-626, Official Comment 3. <a href="#8a">Return to article</a>

<a name="9">9</a> See Zinnecker, "The Default Provisions of Revised Article 9," ABA
(1999). <a href="#9a">Return to article</a>

<a name="10">10</a> Section 9-607(c); §9-625, Official Comment
2. <a href="#10a">Return to article</a>

<a name="11">11</a> Section 9-627, Official Comment 1. <a href="#11a">Return to article</a>

Journal Authors

Brent R. Cohen

Journal Date

Saturday, March 1, 2003 - 12:00

Bankruptcy Rule

2003