 |
 |
|
|
Problem.Deficiency
A. Mel Town runs both a small candle making business and a website design business in the garage behind his house. When Mel needed more money to buy wax, computers, and software, his sister-in-law Rita advanced Mel $50,000. She insisted that the debt be secured by Mel's van. Mel used the van to pick up supplies for his candle business, to make deliveries of candles to stores in which they were sold, to ferry his daughter to and from school and soccer practice, and for grocery shopping. Mel signed a home grown promissory note calling for repayment, without interest (she was his sister-in-law, and this makes the answer easier to calculate), in five annual installments and signed a written security agreement granting Rita a security interest in the van. Neither the note nor the security agreement contained an acceleration clause, a late payment fee clause, or an attorney's fee clause. Compare the provisions of the sample promissory note.
A year later, a few days after the first installment under the note was due, Mel called Rita to ask for an extension. Rita told Mel that she would think about it and get back to him in a week. Later the same day, Rita’s sister told Rita that she (Rita’s sister) was going to divorce Mel. Upon hearing that news, Rita decided to repossess the van. The next day, she walked to Mel’s house under the pretense of a friendly family visit and offered to take Mel’s daughter to soccer practice. She borrowed his van to do so. Mel thanked his sister-in-law and went back to making candles. Rita drove Mel’s daughter to soccer practice, arranged for the daughter to get a ride home with friends, and parked the van in a friend’s garage.
That night Mel learned both about the divorce and about Rita’s subterfuge. In a phone conversation with Rita he angrily demanded return of the van. She refused and told him that she was going to sell it. Her lawyer sent Mel the notice of disposition required by the Commercial Code. Upon receiving the notice, Mel immediately sent Rita a check for the first installment payment on the $50,000 loan with a demand that she return the van. Rita immediately sent the check back to Mel. A commercially reasonable time after her lawyer sent Mel notice of disposition, without having contacted other potential buyers, Rita sold the van to her church for $15,000.00. In the newspaper classified advertising section, the asking price for the same make and model van with similar mileage, but in somewhat better condition, ranged from $20,000 to $22,000.
Rita has filed an action against Mel seeking a deficiency in the amount of $35,000. Mel has filed an answer and cross-complaint alleging wrongful repossession and conversion. What result on cross motions for summary judgment? Would it matter if there had been an acceleration clause in the note and Rita had declared the entire sum due and payable? Consider U.C.C. 1-103, U.C.C. 9-601(a), U.C.C. 9-609 and Commentary. Self help repossession, U.C.C. 9-610(b), U.C.C. 9-623, U.C.C. 9-625, U.C.C. 9-615, U.C.C. 9-626.
B. Good Night Inn, Inc. owned and operated a chain of hotels located in both Northern and Southern California. A year ago it obtained a multi-million dollar loan from your client, Bank of Death Valley, to refurnish the hotel rooms in all of its hotels. The loan was secured by a security interest in all of the new furnishings purchased. Upon default, the bank hired an agent to repossess and sell all of the furnishings from hotel locations in Northern California. The proceeds of the foreclosure sale were insufficient to satisfy the obligation and the bank has consulted you for advice. After reviewing the details of the sale, you have determined that there may well have been improper notice of the sale or a commercially unreasonable sale of the furnishings from hotel locations in Northern California. What do you recommend? U.C.C. 9-615, U.C.C. 9-625(d), U.C.C. 9-626, Official Comment 6 to U.C.C. 9-626.
C. Recall Part C of Problem.Foreclosure by disposition. In that problem we hypothesized that FF would be entitled to a return of its down payment under the law of Article 2 of the Uniform Commercial Code. Under the assumption made in that problem that FF is justified in rejecting the fertilizer and cancelling the contract, FF might also be entitled to damages from Cowspoils for breach of contract under U.C.C. 2-711 and either U.C.C. 2-712 or 2-713. Assume that FF received $750,000 following a commercially unreasonable sale of the fertilizer and that, in addition to the remaining $250,000 of its downpayment, it could prove $100,000 in damages. Does Cowspoils have any defense to an action for $350,000 under U.C.C. 2-706? Under U.C.C. 9-626? Recall U.C.C. 9-110(3).
1. Suppose that Sears sold
a refrigerator and microwave on secured credit to Ned and Nora Newlywed, retaining a
security interest in the two items purchased to secure payment. Both Ned and Nora signed
the retail installment contract. One year later Ned and Nora divorced. Pursuant to their
marital property settlement agreement, Nora agreed to keep the two appliances and to
assume responsibility for paying the $1,000 balance owing Sears. Nora defaulted with $800
still owing? Can Sears pursue Ned for that amount (plus interest and attorney fees)? If
Sears repossesses the two appliances and sells them for $400 upon proper notice and in a
commercially reasonable sale, may it recover the balance owing from either Ned or Nora? In
addition to U.C.C. 9-615(d), consider U.C.C. 9-201(b), (c) and Cal. Civ. Code 1812.2, 1812.3, 1812 .4, and 1812.5,
part of California's retail installment sales act governing credit sales of consumer goods
other than motor vehicles. If barred from collecting a deficiency, what factors
should influence its choice or remedy?
2. Suppose that Ned and Nora
purchased an automobile and that the financial strains accompanying the dissolution of
their marriage led to a default on car payments and subsequent repossession and
foreclosure sale of the automobile. Would the automobile financier be entitled to a
deficiency in the likely event that proceeds of the foreclosure sale were insufficient to
satisfy the debt? Consider Cal. Civ. Code
2983.2, part of California's automobile sales finance act governing credit sales of
motor vehicles. What if the property in question were a mobilehome instead of an
automobile? Should the debtors be liable for a deficiency?
Real life lawyuers Mark Chavez and Jonathan Gertler have filed a class action, Mortera v. Ford Motor Credit Company, CV779239 (Santa Clara Superior Court) that alleges, among other things, the failure of Ford Motor Credit Company to comply with the requirment of Cal. Civ. Code 2983.2(a)(9), and seeks injunctive and declaratory relief, restitution, damages, and attorneys' fees. In March, 2000, the Superior Court entered its order granting the plaintiff's motion for summary adjudication of the cause of action for declaratory relief, declaring "Ford Motor Credit Company's failure to include the disclosure set forth in Civil Code section 2983.2(a)(9) precludes it from recovering a deficiency from Plaintiff Mortera on the sale of the repossessed vehicle at issue here" (Order re: Plaintiff's Motion for Summary Adjudication). On May 19, 2000, the Superior Court entered its order certifying a class "consisting of all borrowers in California who were sent a Notice of Intent by Ford Motor Credit Company any time after January 1, 1997 which did not include the . . . [required disclosure] and who allegedly owed a deficiency balance following disposition of the borrower's vehicle; provided . . . [certain persons excluded from class]" (Order re: Motion for Class Certification and Notice). Big Boutique, an article in the March 26, 2001 issue of the publication California Law Business, reports that Chavez and Gertler, an LLP formed in 1994 with offices are located in Mill Valley, California, are working on 42 California filed cases, mostly class actions, involving lending practices in the automobile industry. Many have settled, including a $68 million settlement in Moultrie v. Nissan Motor Acceptance Corp. 302601 (San Francisco Superior Court) and a $58 million settlement in Clark v. Ford Motor Credit Company, 6745257 (Alameda Superior Court).
3. Ned and Nora reconciled but struggled financially. Following default on their car payments, Profitable State Bank repossessed their car. A few months later the bank sent Ned and Nora a demand for payment of an $8,000 deficiency. Because financial misfortune had caused them to default in the first place, they didn't think that they could afford an attorney. Moreover, they weren't sure what kind of attorney to consult. Some friends recommended that they see a bankruptcy attorney and many consumer bankruptcy attorneys advertised in the community. Another friend recommended that they see an attorney specializing in consumer issues, but they had difficulty locating anyone other than a couple of law firms specializing in consumer class actions. They finally found an attorney specializing in consumer issues who offered an hour long initial consultation for $100. They scrapped together the money and went to see that attorney. Why are such attorneys difficult to find? How many people in Ned and Nora's shoes would decide to see an attorney? Persist until they found one? See an attorney specializing in consumer issues rather than or before seeing a bankruptcy attorney? Scrape together enough money for initial fees?
What questions should the attorney ask? What are the potential responses to the demand for a deficiency and what are the advantages and disadvantages of each if: (a) California's non-uniform amendment to U.C.C. 9-626(b) is the governing law? (b) the uniform version of U.C.C. 9-626(b) is the governing law? See also U.C.C. 9-614 and U.C.C. 9-616. Note that in negotiating California's non-uniform amendment to U.C.C. 9-626(b), the price paid by consumer advocates was elimination of U.C.C. 9-625(c)(2) from the California Commercial Code. Was that a worthwhile trade?
Professor Jean Braucher suggests that the most appropriate rule in a consumer transaction would be to calculate the deficiency by deducting the wholesale value of the repossessed goods from the amount of the secured claim without regard to the amount of proceeds received from a sale. J.Braucher, Deadlock: Consumer Transactions Under Revised Article 9, 73 Amer.Bkry L.J. 83, 85-6 (Winter 1999). How might such a rule be more beneficial to consumers than either of the versions of U.C.C. 9-626 referred to above?