Lesson. A Borrower’s UCC damages arising out of a secured lender’s breach of the peace can be reduced by the loan deficiency, assuming the disposition of the collateral was commercially reasonable.
Case cite. Horizon Bank v. Huizar, 2021 Ind. App. LEXIS 317 (Ct. App. Oct. 13, 2021)
Legal issue. Whether Borrower’s damages under Indiana Code § 26-1-9.1-625(c)(2) can be reduced be a deficiency owed under the loan.
Vital facts. Please review my 12/10/21 post, which discusses the liability aspects of the Huizar case and serves as an introduction to today’s post.
Following the repossession, Lender sold the vehicle at an auction house that had been in existence for at least twenty-six years. Lender’s employee testified that he had attended such auctions for that period of time and determined when prices will be accepted. In this case, the vehicle sold for $16,000, which left a deficiency of $7,679.08 on the loan amount.
Based upon the trial court’s reading of the applicable Indiana statute, the trial court calculated Borrower’s damages based upon the underlying facts:
10% of amount financed: $2,276.79 ($22,676.93 x .10)
+ a finance charge: $8,482.32
The court then reduced that amount by $7,679.08 (the deficiency), which the court rules “was part of [Borrower’s] relief.” The final result was an award of UCC damages of $3,080.03.
Procedural history. The trial court found that Lender’s auction of the repossessed vehicle was conducted in a commercially reasonable manner. In turn, the court applied the deficiency amount of $7,679.08. Borrower appealed those aspects of the trial court’s judgment.
UCC Damages Statutes.
I.C. § 26-1-9.1-625(b) states: “a person is liable for damages in the amount of any loss caused by a failure to comply" with the UCC.
"Damages for violation of the requirements of [the UCC] are those reasonably calculated to put an eligible claimant in the position that it would have occupied had no violation occurred." I.C. § 26-1-9.1-625, cmt. 3.
I.C. § 26-1-9.1-625(c)(2) provides that, if the loan collateral is consumer goods, then the debtor may recover "the credit service charge plus ten percent (10%) of the principal amount of the obligation or the time-price differential plus ten percent (10%) of the cash price."
However, secured lenders are not liable under section 625(c)(2) more than once with respect to any one secured obligation. I.C. § 26-1-9.1-628(e).
Disposition (Liquidation) Laws.
Under the UCC, secured creditors have the burden of establishing that the disposition of the collateral was proper. I.C. § 26-1-9.1-626(2).
Under I.C. § 26-1-9.1-627(b), disposition is made in a commercially reasonable manner if made:
- in the usual manner on any recognized market;
- at the price current in any recognized market at the time of the disposition; or
- otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
Subsection (b) states that: “the fact that a greater amount could have been obtained . . . is not of itself sufficient to preclude the secured party from establishing" that the disposition was commercially reasonable.”
Indiana cases provide that collateral sold in the usual manner in a recognized market for such goods is presumed to be proper. Under Indiana law, “a sale or disposal of collateral to a dealer or on a wholesale market or auction” is deemed to be commercially reasonable.
Holding. The Indiana Court of Appeals affirmed the trial court’s UCC damages award.
Policy/rationale. Borrower argued that the UCC’s minimum statutory damages under I.C. § 26-1-9.1-625(c)(2) cannot be reduced. Based upon the UCC and Indiana case law, however, the Court rejected the argument. The Court reasoned that, by not reducing the damages, Lender would be penalized through an automatic forfeiture of the deficiency judgment. In other words, Borrower would receive a kind of windfall.
Borrower next contended that his damages could not be reduced because Lender failed to prove it was entitled to a deficiency. The Court pointed out that that the vehicle was sold at auction, with no evidence that Lender executed the sale in bad faith. Accordingly, the Court determined that the trial court did not abuse its discretion in finding that the deficiency judgment was commercially reasonable.
I represent judgment creditors and lenders, as well as their mortgage loan servicers, entangled in loan-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at email@example.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.