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Debt Collection and Repossessions Edition
Volume Eighteen
July/August 1999
Overview of the New Article 9 from a Consumer Perspective: Part
1: The Good News(1)
After several years of development, the new Article 9 was approved
by the by the American Law Institute in May 1999 and by the National
Conference of Commissioners on Uniform State Laws in July 1999. The
proposed effective date is July 1, 2001. Therefore consumer advocates
can expect to see the new Article 9 arriving in their state
legislatures shortly.
The purpose of this article is to give an overview of what the new
Article 9 does with regard to consumer transactions.
In general, the new Article 9 makes relatively little change in
how consumer transactions are treated post-default. There are some
modest improvements and some modest reductions in consumer
protection. To the few consumer advocates who were involved in the
drafting process, the result can perhaps best be characterized as
mixed.(2) The end product could have
been much better, but it also could have been much worse. Article 9
is part of the Uniform Commercial Code and is particularly important
for consumers because it applies to secured transactions including
retail and car sales which are financed.
Structure
Generally speaking, the most important aspect of Article 9 for
consumer representatives is its rules for what happens when a
consumer defaults on a secured transaction. Those provisions,
formerly in Part 5, have been moved to Part 6 in the new Article
9.(3) The definitions remain in Part 1.
Other provisions of interest to consumer representatives are
scattered throughout the new Article
9.(4) The most important will be noted
below.
Scope
Perhaps the most noticeable feature of the new Article 9 overall
is its expanded scope. Article 9 now applies to the sale of
"accounts." This term is broadly defined to include a right to
payment of many kinds of monetary obligations, including not only
familiar items such as obligations for property that has been or is
to be sold or for services rendered, but also exotica such as
obligations for lottery winnings or arising from the use of
information contained on a credit card.(5)
The newly expanded scope of Article 9 will greatly
facilitate the securitization of many kinds of commercial
transactions.
Fortunately, the expansion movement generally avoided the consumer
areas. Various proposals to allow security interests in such things
as consumer tort claims and deposit accounts in consumer transactions
were rejected.(6) From the consumer
perspective, the scope of new Article 9 should be similar to the
scope of the old.
· First, the good news . . .
The new Article 9 has some modest improvements for consumers. These include:
· Incorporation of the FTC Holder in Due Course Rule
There has been a lingering debate over whether a commercial
assignee who takes assignment of a consumer contract lacking the FTC
"abrogation of holder in due course" notice(7)
should be held to the notice's requirements anyway. The
New Article 9 answers that question in the affirmative.
If a consumer enters into a contract that should have contained
the notice required by Federal Trade Commission Rule 433 that any
assignee would take the contract subject to the consumer's claims and
defenses against the original holder, but the contract did not
contain it, then the new Article 9 will impose the same liability on
the assignee as would have been imposed if the notice had been
present.(8) The Official Comments
observe that "[New 9-403(d)] effectively renders
waiver-of-defense clauses ineffective in the consumer transactions to
which it applies."(9)
· Limited protection against multiple demands for payment.
The new Article 9 provides that a consumer whose account is
assigned may continue to make payments to the assignor until
receiving a notification, authenticated by the assignor or assignee,
that assignment has been made and that payment should now be made to
the assignee.(10) After such
notification, the consumer must start paying the assignee, and may
not reduce his or her debt by paying the
assignor.(11) Standards are set forth
for effective notice.(12) The debtor
may request reasonable proof of the assignment, and may keep paying
the assignor until proof is
furnished.(13) This provision is made
subject to other law establishing different rules for consumer
debtors.(14)
[3n] Improvement of notice of sale
The new Article 9 requires more detailed information to be given
to a consumer before disposition of collateral. New
[ss]9-614(a)(1) requires the following information to be
given:
(1) A description of the debtor and the secured party;
(2) A description of the collateral that is the subject of the
intended disposition;
(3) The method of intended disposition;
(4) A statement that the debtor is entitled to an accounting of
the unpaid indebtedness, and any charge for such an accounting;
(5) The time and place of any public sale or the time after which
any other disposition is to be made;
(6) A description of any liability for a deficiency of the person
to whom the notice is sent;
(7) A phone number from which the amount needed to redeem the
collateral can be obtained;
(8) A phone number or mailing address from which additional
information about the disposition and the obligation can be
obtained.(15)
Inclusion of the above information is mandatory. The
comments note that "[a] notification that lacks any of the
information in subsection (a)(1) is insufficient as a matter of
law."(16)
A "safe harbor" notice form is given in New
[ss]9-614(a)(3). It is relatively "plain language," and
explains not only the conditions of the sale but also what happens
after the sale.
An error in completing the "safe harbor" notice, if not involving
one of the eight mandatory requirements given above, will not make
the notice insufficient unless the error "is misleading with respect
to rights arising under this
article."(17) The comments characterize
such harmless errors as "non-misleading, minor errors in information
. . . not required under subsection (a)(1)."
(18) If a creditor elects not to use
the "safe harbor" notice, however, then the new Article 9 leaves it
up to "other law" to decide the effect of including information not
required by subsection (a)(1).(19)
Advocates should note that inaccuracies which do not create Article 9
liability could still create liability under other laws (e.g., UDAP
statutes).
[3n] Low price dispositions to insiders
Perhaps the most frustrating aspect of Article 9 from a consumer
perspective has been the inability of the "commercially reasonable"
standard to consistently produce resales at prices high enough to
significantly reduce deficiencies.
No overall solution to this problem will be found in the new
Article 9. The "commercially reasonable" standard remains firmly in
place.(20)
However, the new Article 9 does make an improvement for one subset
of low-price resales --- the ones in which the collateral is bought
by the secured party itself, by a person related to the secured
party,(21) or by a secondary
obligor.(22)
The drafters of the new Article 9 recognized that "when the
foreclosing secured party or a related party is the transferee of the
collateral [at a foreclosure sale or disposition], the
secured party sometimes lacks the incentive to maximize the proceeds
of disposition."(23)
They therefore provided that if the collateral is bought by the
secured party, a person related to the secured party, or a secondary
obligor, and "the amount of proceeds is significantly below
the range of proceeds that a complying disposition to [someone
else] would have brought,"(24) then
the surplus or deficiency should be calculated "based on the amount
of proceeds that would have been realized in a [complying]
disposition to [someone
else]."(25) In other words, the
debtor should be credited with what a true arms-length sale
should have produced, rather than what the low-price insider
sale did in fact produce.
Is this change a benefit for consumer debtors? The answer depends
on the current law of your state. If you live in a state where courts
have already held (or statutes already provide) that price is a term
which must be commercially reasonable in all dispositions, then the
new [ss]9-615(f) is a step backward. As the comments note,
[New 9-615(f)] ". . . rejects the view that the secured
party's receipt of [a significantly lower than normal] price
necessarily constitutes noncompliance with Part
6."(26) But if you live in a state
which does not now require the price to be a commercially reasonable
term in all dispositions (most states fit into this category), then
the new [ss]9-615(f) gives you a new way to attack low-price
resales, at least when the resale was to the secured party, a person
related to the secured party, or a secondary obligor.
· New notice of calculation of deficiency.
New [ss]9-616 will require the secured party to send an
"explanation" to the consumer, post-resale, of how much the surplus
or deficiency is and how it was calculated.
The explanation must be sent (1) before or when the secured party
first makes written demand on the consumer obligor for payment of the
deficiency (or accounts for and pays any surplus), and (2) within 14
days after the secured party receives a
request.(27)
The explanation must include:
(1) how much the secured obligations were, as of a given date no
more than 35 days before the secured party repossessed the collateral
(or before the disposition if the secured party did not repossess or
took possession of the collateral before default);
(2) the proceeds of the disposition;
(3) how much of the secured obligations are left after deducting
the proceeds;
(4) what the expenses were;
(5) what the credits were (including interest rebates); and
(6) how much the surplus or deficiency
is.(28)
An explanation that substantially complies with these requirements
is sufficient, even if the explanation contains "minor errors that
are not seriously misleading."(29) The
debtor or consumer obligor is entitled to one free explanation during
any six-month period in which the secured party did not already send
one under [ss]9-616(b)(1); otherwise, the secured party can
charge up to $25.(30)
The consumer's damages under [ss]9-616 are limited. A
secured party that fails to send an explanation within 14 days of the
debtor's request is liable for any loss caused plus $500 per
violation.(31) @ A secured party that
fails to send an explanation before or when first making a written
demand for payment of a deficiency (or accounting for a surplus) is
liable for any loss caused, plus, if the noncompliance was part of a
pattern, or consistent with a pattern of noncompliance,
$500.(32) But the non-complying secured
party will not be liable for statutory minimum damages under new
[ss]9-625(c)(2).(33)
Advocates should note that there may be a claim under the Fair
Debt Collection Practices Act(34) for
collection efforts that include a written demand if the demand does
not contain, or is not preceded by, an explanation. Since New
[ss]9-616(b) requires the notice to be sent before or with
the first written effort to collect, the creditor arguably has no
right to collect the debt before the explanation has been properly
sent.
[3n] Waivers generally prohibited
In general, the provisions of Part 6 which give rights to consumer
debtors and obligors and impose duties on secured parties cannot be
waived or varied.(35)
[3n] States with the absolute-bar rule can keep it for
consumers.
This is not so much an improvement as an avoidance of
deterioration, but as a consumer-positive provision it deserves to be
mentioned.
States have differed in the approach they have taken to the effect
of an Article 9 violation on the creditor's ability to collect a
deficiency. Some states have held that such violations create an
"absolute bar" to collection of the deficiency. Other states have
held that such violations create only a "rebuttable presumption" that
a complying Article 9 disposition would have yielded an amount
sufficient to eliminate the deficiency, leaving it open for creditors
to prove otherwise. Old Article 9 was silent on the issue.
New Article 9 adopts the "rebuttable presumption" rule for
non-consumer transactions.(36) However,
consumer transactions are explicitly excluded from this approach, and
"the proper rule in consumer transactions" is left "to the
court."(37) The statute also instructs
the court not to infer from the exclusion of consumer transactions
"the nature of the proper rule in consumer transactions" and allows
the court to "continue to apply established
approaches."(38)
The effect of this interesting compromise should be to allow
states which now have the absolute-bar rule to keep it in consumer
transactions.(39)
[3n]Expanded definition of "Good Faith"
The new Article 9 adds to the previous definition of good faith.
Formerly Article 9 looked to the Article 1 definition of good faith,
which was honesty in fact in the conduct or transaction
concerned.(40) Now Article 9 has its
own definition: honesty in fact and the observance of reasonable
commercial standards of fair
dealing.(41) This is identical to the
definition of good faith contained in the proposed new Article 2, and
seems to reflect an acknowledgement that to act in good faith
requires not only honesty, but in some degree, fairness as
well.(42) How much the new definition
will be of any practical benefit to consumers remains to be seen.
Debt Collection and Repossessions Edition
Volume Seventeen
Sept/Oct 1999
[1n]Overview of the New Article 9 from a Consumer
Perspective: Part 2: The Bad News (continued from the last issue)
[2n]Now, the bad news...
[3n]Constructive strict foreclosure eliminated?
Under Old Article 9, it had been possible to argue that extensive
delay by a secured party in disposing of collateral constituted a
"constructive" strict foreclosure, in full satisfaction of the
debtor's outstanding obligation. This argument will no longer be
available under new Article 9 if a court follows the new commentary.
"A purported or apparent acceptance of collateral under [New
section 9-620] is ineffective unless (1) the secured party
consents to the acceptance in an authenticated record or sends a
proposal to the debtor; and (2) [various other conditions are
met]."(43) The comments add:
"[A] mere delay in collection or disposition of collateral
does not constitute a "constructive" strict foreclosure. Instead, a
delay that is unreasonable may be a factor relating to whether the
secured party acted in a commercially reasonable
manner"(44)
· Simultaneous exercise of creditor remedies authorized.
Under Old section 9-501(1), the secured party's remedies were
cumulative, but it was unclear whether they could be exercised
simultaneously. It is no longer unclear. The creditor's remedies now
"are cumulative and may be exercised
simultaneously."(45) The comments note
that the secured party must act in good faith, and that New section
9-601(c) does not override non-UCC law, including tort law and
debt-collection statutes, which could make a creditor liable for
abusive behavior or harassment.(46)
· Fee for second accounting raised to $25
Under Old section 9-208(3), the debtor could obtain a statement of
account or list of collateral once every six months without charge,
but the creditor could charge $10 for each additional statement
provided within that period. Under New section 9-210(f), the fee for
an additional statement has been raised to $25.
· Little protection for business purpose loans secured by consumer purpose collateral
In the new Article 9, the applicability of consumer protection
rules is largely governed by whether a party or transaction falls
within one of several consumer-related
definitions.(47) Two of these
definitions, those of "consumer-goods transaction" and "consumer
transaction," have multiple requirements, all of which must be met. A
transaction is a "consumer-goods transaction" if the obligation is
secured by a security interest in consumer goods bought primarily for
personal, family, or household purposes, and if an individual
incurred the obligation primarily for personal, family, or household
purposes.(48) A transaction is a
"consumer transaction if an individual incurred the obligation
primarily for personal, family, or household purposes, a security
interest secures the obligation, and the collateral is held or
acquired primarily for personal, family, or household
purposes.(49)
The effect of these requirements is that if collateral was
originally purchased for a "consumer" purpose, but is later used by
the consumer to secure a business purpose loan, the collateral loses
its "consumer" status and the limited protections that go with such
status. Consumer advocates are concerned that people who think of
themselves as consumers and make purchases as consumers will, by
later using those purchases to secure business loans, be unwittingly
putting themselves into a different, and less protected,
category.
· Transfer of collateral to one who has a repurchase agreement is no longer clearly not an Article 9 sale
Under Old section 9-504(5), a person who "is liable to a secured
party under a guaranty, endorsement, repurchase agreement or the like
and who receives a transfer of collateral from the secured party or
is subrogated to his rights has thereafter the rights and duties of
the secured party. Such a transfer of collateral is not a sale or
disposition of the collateral under this article." Thus, under old
Article 9, if Joe's Autos repurchases the car it sold to Consumer
after Bob's Finance repossessed it, the repurchase by Joe's would not
be the Article 9 sale. Rather, the subsequent sale of the car by
Joe's would be the Article 9 sale.
Under New section 9-618, this flat rule is eliminated. A more
limited version is substituted which would allow the possibility of a
secured party transferring collateral to a secondary obligor in a
transaction that would be a disposition and would establish a
deficiency or surplus. Only if the secondary obligor agrees to accept
the right and assume the duties of the secured party, as well as take
the transfer of collateral, will the transfer be defined by statute
as clearly not an Article 9
disposition.(50)
· Coming Soon to a Legislature Near You . . .
The new Article 9, generally speaking, does not significantly cut
back on existing consumer protection. Several provisions in Article 9
establish different rules for commercial and consumer transactions.
These differences generally reflect more favorable or "friendly"
treatment for consumers.
Even though the new Article 9 may seem like more or less a "wash"
for consumers, and therefore not of great importance, remember that
your state's final version doesn't have to be that way. Once Article
9 reaches the state legislatures, there are no guarantees that its
limited consumer protection provisions will survive. Although the
drive for uniformity in UCC matters is strong, sometimes state
legislators have different views. Sometimes industries decide to seek
at the state level what they could not get at the national level.
Therefore consumer advocates should keep a close eye on the
progress of the new Article 9 through their state legislatures. If
certain key sections are changed, the results could be much worse for
consumers.
Here are the key sections to watch:
[b] New section 9-109(d)(12) excludes the assignment of
non-commercial tort claims from the coverage of Article 9. This is
important because if personal injury and other personal tort claims
could be assigned through an Article 9 security interest, they would
quickly become part of the boilerplate.
[b] New section 9-109(d)(13) excludes the assignment of a
deposit account in a consumer transaction from the
coverage of Article 9. This is important for the same reason as the
previous provision.
[b] New section 9-201(b) provides that any applicable rule
of law which establishes a different rule for consumers also applies
to any transaction which is subject to Article 9, and New section
9-201(c) adds that in case of a conflict between Article 9 and the
separate consumer rule, the separate consumer rule controls. This
ensures that states which take a more aggressive approach to consumer
protection will not be inhibited by Article 9.
[b] New sections 9-403 and 9-404 hold assignees liable for
claims and defenses the consumer would have against the original
holder, even if the FTC Holder in Due Course notice is
omitted.(51)
[b] New section 9-406 protects consumers to some extent
against multiple demands for payment by assignors and assignees, and
also against demands for split payments.
[b] New section 9-614 improves the content and form of
notice to consumers before disposition of collateral.
[b] New section 9-615(f) provides that if a disposition is
made to an affiliated party (the secured party itself, a person
related to the secured party, or a secondary obligor), and if the
proceeds are significantly below those which a disposition to a
non-affiliated party would have brought, the consumer should be
credited with the amount the disposition to a non-affiliated party
would have brought.
[b] New section 9-616 requires explanation of the
calculation of deficiency.
[b] New section 9-620(g) allows partial strict
foreclosure, but makes an exception for consumer transactions. This
exception protects consumers with valuable collateral against being
pressured or led into turning over the collateral in exchange for
only partial satisfaction of the debt.
[b] New section 9-625 generally preserves the availability
of statutory damages to consumers.
[b] New section 9-626(a) provides that in non-consumer
transactions, the rebuttable presumption rule is adopted, but in
consumer transactions, New section 9-626(b) leaves it to the courts
to determine the proper rule. Advocates should watch for attempts in
their states to expand section 9-626(a) to cover consumer
transactions.
[b] Many sections of new Article 9 mention "consumer
obligors" as well as consumer debtors. If any cross- reference to
consumer obligors is removed, consumer guarantors or co-signers could
lose some of the protection they have under current law.
Conclusion
The new Article 9, if adopted as written, should have relatively
little impact either way on defaulting consumers. But changes at the
state level could easily turn it into a disaster.
So those who wish to protect the interests of consumers should
keep a close eye on the new Article 9 as it moves through their state
legislatures, to make sure no effort is made to weaken its
consumer-protection provisions. If such changes are proposed,
remember: there are all kinds of interesting ways Article 9 could be
improved from a consumer perspective, too.
Notes:
________
(1) Thanks to Michael Ferry with Gateway Legal
Services in Saint Louis, Mo. for this article. Mike thanks Gail
Hillebrand of Consumers Union and David McMahon of Mountain View
Legal Services for providing information for this article. All
opinions expressed and errors contained herein are Mike's and the
editor's.
(2) Consumer advocates active in the Article 9
process included Gail Hillebrand of Consumers Union (whose efforts to
gain ground for consumers and prevent them from losing ground deserve
far more recognition than they will ever receive), David McMahon of
Mountain View Legal Services, private attorney Yvonne Rosmarin
(formerly with the National Consumer Law Center), and myself. In
addition, law professors who were active in the process as observers
and who frequently advocated for increased consumer protection
included Michael Greenfield of Washington University in St. Louis and
Norm Silber of Hofstra University. "Mixed" is my characterization,
not theirs.
(3) See generally, New sectionsection 9-601
through 9-628. All citations herein prefaced with the word "New" are
to the provisions of the Revision of Uniform Commercial Code Article
9 - Secured Transactions, with Prefatory Note and Reporter's Notes,
as approved by the National Conference of Commissioners on Uniform
State Laws in July 1998, Copyright 1998 by the American Law Institute
and the National Conference of Commissioners on Uniform State Laws.
All citations herein prefaced with the word "Old" are to the previous
version of Article 9, commonly known as the 1972 version.
(4) New section 9-109(a)(3).
(5) New section 9-102(a)(2).
(6) See generally New section 9-109(d).
(7) 16 C.F.R. section 433. See National Consumer
Law Center, Unfair and Deceptive Acts and Practices section 6.6 (4th
ed. 1997 and Supp.).
(8) New section 9-403(d); New section
9-404(d).
(9) New section 9-403, Comment 5.
(10) New section 9-406(a).
(11) Id.
(12) New section 9-406(b).
(13) New section 9-406(c).
(14) New section 9-406(g).
(15) New section 9-614(a)(1); see also New section
9-613(a)(1).
(16) New section 9-614, Comment 2. This varies
from the rule in commercial transactions, in which the trier of fact
may find a notice sufficient even if it lacks some of the required
information. See New section 9-613(2).
(17) New section 9-614(a)(4).
(18) New section 9-614, Comment 3 (emphasis in
original).
(19) New section 9-614(b); see also New section
9-614, Comment 3.
(20) New section 9-610(b).
(21) New sections 9-102(a)(62) and (63).
(22) See New section 9-102, Comment 2(a).
(23) New section 9-615, Comment 6.
(24) New 9-615(f)(2).
(25) New section 9-615(f).
(26) New section 9-615, Comment 6. The Reporters
add that "such a price may suggest the need for greater judicial
scrutiny." See also New section 9-610, Comment 9: "A low price may
suggest that a court should scrutinize carefully all aspects of a
disposition, including the method manner, time, place, and other
terms, to ensure that each aspect was commercially reasonable."
(27) New section 9-616(b).
(28) New section 9-616(c).
(29) New section 9-616(d).
(30) New section 9-616(e).
(31) New section 9-625(b), (c), and (e)(7). See
also New section 9-616, Comment 3.
(32) New section 9-625(b), (c), and (e)(6). See
also New section 9-616, Comment 3.
(33) New section 9-628(d). The statutory minimum
damages referred to are the familiar time price differential plus 10%
of the cash price or the credit service charge plus 10% of the
principal amount of the obligation from Old section 9-507.
(34) E.g., 15 U.S.C. section 1692e(2)(A).
(35) New section 9-602.
(36) New section 9-626(a).
(37) New section 9-626(b).
(38) Id.
(39) Query: Does New section 626(b) also invite
courts in "rebuttable presumption" states to reconsider the "nature
of the proper rule" in consumer transactions?
(40) Old section 1-201(19).
(41) New section 9-102(43).
(42) See New section 2-102(a)(23), 1999 Annual
Meeting Draft, Proposed Revisions of Uniform Commercial Code Article
2 B Sales.
(43) New section 9-620(b).
(44) New section 9-620, Comment 5.
(45) New section 9-601(c).
(46) New section 9-601, Comment 4.
(47) See generally New section 9-102(a)(22)
(consumer debtor), (23) (consumer goods), (24) (consumer-goods
transaction), (25) (consumer obligor), and (26) (consumer
transaction).
(48) New section 9-102(a)(24). The comments
clarify that even if some of the collateral was acquired for a
business purpose, the transaction is still a consumer-goods
transaction. See New section 9-102, Comment 7.
(49) New section 9-102(a)(26).
(50) New section 9-618(a)(2), (b)(1). An
assignment or subrogation will also not constitute a disposition of
collateral under Article 9. See New section 9-618(a)(1), (a)(3),
(b)(1).
(51) See Section 3.A., supra.
