Problem.Deficiency.1 (personal property)
A. Mel Town runs both a small candle making business and a web site design business in the garage behind his house. When Mel ran into financial difficulties, 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, and to ferry his daughter to and from school and to and from 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.
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 (including interest) 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, plus interest. 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, 9-601(a), 9-609 and Commentary. Self help repossession, 9610(b), 9-623, 9-625, 9-626.
B. Good Night Inn, Inc. owns and operates a chain of hotels located in both Northern and Southern California. A year ago it obtained a multi-million dollar loan from 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. What do you recommend? Official Comment 6 to U.C.C. 9-626.
C. Recall Part D 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 (see also Official Comment 2 to U.C.C. 2-706)? Under U.C.C. 9-626?
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.
2. Would it make any
difference if the item purchased were an automobile and we increased all of the numbers by
a multiple of 10? Consider Cal. Civ.
Code 2983.2, part of California's automobile sales finance act governing credit sales
of motor vehicles. Without looking for a statute, do you have a guess as to whether
the debtor can be liable for a deficiency following the repossession sale of a mobilehome?
3. Following default, Ned and Nora's car was repossessed by Profitable State Bank. A few months later the bank sent Ned and Nora a demand for payment of a $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 there were lots of bankruptcy attorneys advertising their services in the community. Another friend recommended that they see an attorney specializing in consumer issues, but they had difficult locating one 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. 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?