QUESTION:

Dave Deadbeat had purchased an automobile for his own personal use from Leo Lemon's Used Cars for $5,000. The dealer financed it for him charging him $1,500 credit service charge over three years. After the first year, Dave defaulted. Leo peaceably repossessed the car and thereafter sold it without notice for $2,000; which was the fair market value. Leo then sued for a $1,000 deficiency, since Dave had a balance of $3,000 left on the note. In Missouri, who would recover what?

NOTES:

As we saw in Article 2 of the UCC, when a seller sells goods on credit, normally title passes at the time of contacting or when the goods are delivered to a carrier or at destination. Thus, if the buyer does not pay for the goods after the credit period expires, the seller cannot get the goods back. They must sue for the purchase price. The one exception to that rule was under 2-702. However, most sellers would like to have the right to take their goods back upon failure of the buyer to pay, rather than having to file a lawsuit. In addition, under Article 3, we saw that the maker of a note who defaults can be sued as a primary party. But most lenders would rather go against collateral on a note than having to file a lawsuit. In both of these instances, the creditors objectives can be accomplished by becoming a secured creditor under Article 9 of the UCC. Article 9 allows creditors to take a contingent interest in goods sold (purchase money security interest) or other collateral, so that if the underlying debt is not paid, the creditor can take possession of the collateral and sell it to satisfy the debt without having to resort to a lawsuit. There are 3 steps that we need to look at that are important to becoming a secured creditor: when does the security interest attach, how is the security interest perfected and what are the creditors rights upon default. In 2004, Missouri adopted the revised Article 9. It has mostly technical changes, which do not change the 3 steps we are going to discuss. The sections I will reference are the ones under the 2004 amendments.

How does a security interest attach? 9-203 lists 3 requirements for the attachment. The most important of which is that the debtor must sign a security agreement. The pre-code terminology for this was a chattel mortgage. This instrument must describe the collateral and must grant the creditor a contingent interest in the collateral that is owned by the debtor. The agreement should also define default. Other, items which may be included are: uses of the collateral, promises to maintain or provide additional collateral and future advances. As between just the debtor and creditor, the execution of the security agreement is sufficient and the security interest is said to have attached.

However, most creditors would like to maximize their protection. They would like to not only prevail over the debtor but they would also like to prevail over any third parties who might come into the picture. These third parties could include purchasers of the collateral, trustees in bankruptcy and other creditors. In order to maximize their protection, the secured creditors must take a second step called perfection. 9-310(a) is the basic section on perfection. The general rule is that a creditor must file a financing statement in order to perfect their security interest. There are two major exceptions to that rule. First, if the transaction involves a purchase money security interest in consumer goods, there is automatic perfection without the creditor doing anything except getting the security agreement signed. However, if the creditor relies on this automatic perfection, they will lose against a subsequent purchaser of the collateral if they are consumers. Therefore, this exception should be ignored, and a financing statement should always be filed in order to maximize the creditors protection. The second exception is for motor vehicles; perfection comes by following the certificate of title statute instead of using a financing statement. The old Article 9 required the debtor to sign the financing statement and for consumer goods, it would be filed in the county of the debtors residence. The revised article 9 has eliminated the signature requirement and provides that most filings will be with the Secretary of States office. Once the creditor has filed a financing statement or put their interest on a certificate of title, they have done everything that they can to protect themselves from third parties. The theory is that they have given public (constructive) notice to everyone that they have a contingent interest in this collateral, so they should prevail in any disputes about the collateral. The converse of 9-317 allows them to prevail over any lien creditors, which includes trustees in bankruptcy. Therefore if a debtor files bankruptcy, a secured creditor is entitled to their collateral rather than having to file a claim for payment (which usually only nets 1 or 2 cent on the dollar). If the debtor takes the collateral to another lender and they lend him money based on the same collateral, the first creditor will prevail in a dispute with the second creditor if they were the first to perfect. Lastly, if the debtor sells the collateral, the secured party who has filed a financing statement will prevail in all but one situation. 9-315 provides that if the collateral is sold the creditor can, upon default, follow the collateral and take it from the purchaser or follow the proceeds that the debtor received. The only situation where this is not allowed involves a purchase in the ordinary course of business. If a person purchases goods from someone who normally sells those types of goods (usually a retailer), that person takes free from a security interest created by his seller. This is to facilitate trade so that a buyer can assume he is getting a free and clear title when he buys from a retailer. The creditors protection should be in the inventory itself. They can require the retailer to maintain a certain level of inventory and do floor plan checks to see that it is being met.

The third important step involves what the secured creditor can do upon default by the debtor. 9-609 provides that upon default the secured party can take possession of the collateral or file a replevin suit. Creditors prefer to use the former course of action, which is known as self-help, because it is easier and quicker if you do not have to go into court. However, those creditors who use the self-help remedy, must do so without breaching the peace. The best way to accomplish self-help is with the debtors permission. Lacking that, the next best way is to take the collateral by stealth on public property such as a street or parking lot. Never go into a debtors house without permission and never get in a face-to face argument with the debtor. The article in the supplemental materials goes into much more depth concerning breach of peace cases. Once the creditor has possession of the collateral, they may sell it and use the proceeds to pay off the debt. If there is surplus, they must give it to the debtor and if there is a deficiency, the debtor is normally liable for it. However, there are 3 pre-requisites to the sale. First, all aspects of the sale must be commercially reasonable. The creditor cannot sell the collateral to their brother-in-law for 2 cents on the dollar. Second, the creditor must give the debtor notice of the impending sale. Thirdly, the creditor should not buy the collateral if it is sold at a private sale (as opposed to a public sale (auction)). These 3 items are covered in 9-610 and 9-611. If the creditor violates any of these 3 items, they are liable for any loss caused the debtor (loss is presumed for consumers) and they may also lose their right to a deficiency judgment. The old Article 9 did not speak to the last issue. Missouri case law held that a noncompliant secured creditor always lost their deficiency judgment if they failed to give notice but that they could rebut a presumption that there should be no deficiency and still recover it, if what they had done wrong was buy the collateral at a private sale (Wirth vs. Heavey). The Revised Article 9 (9-626) adopts the rebuttable presumption rule for non-consumers but leaves the consumer rule open for the courts to decide. I suspect that the courts will apply the absolute bar rule for consumers and we will still have 2 rules in Missouri but they will be based on who the debtor is rather than what the creditor did wrong.