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Damages Under Indiana’s UCC For Breaching The Peace: Treatment Of Deficiency

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
= $19,759.11

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.

Key rules.

    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:

  1. in the usual manner on any recognized market;
  2. at the price current in any recognized market at the time of the disposition; or
  3. 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.

Related posts.

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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 john.waller@dinsmore.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.


Liability Under Indiana’s Uniform Commercial Code For Breaching The Peace

Lesson. A Lender (secured creditor) could be exposed to liability for breaching the peace (“disturbing the public tranquility or order”) if it refuses to halt a repossession after a borrower voices an objection to the seizure.

Case cite. Horizon Bank v. Huizar, 2021 Ind. App. LEXIS 317 (Ct. App. Oct. 13, 2021)

Legal issue. Whether Lender’s agents breached the peace during the repossession of Borrower’s vehicle.

Vital facts. After a payment default, Lender, through agents, repossessed a vehicle owned by Borrower that served as collateral for the loan. The agents went to the home of Borrower and his girlfriend, and found the vehicle backed into the driveway. Here’s what went down:

[Agent] went to [Borrower’s] front door and informed [Borrower] that he was there to repossess the vehicle because [Borrower] was behind on payments. [Agent] then showed [Borrower] the contract as the basis for the repossession. [Agent] testified that he could have just taken the vehicle without going to the door, but he was trying to allow [Borrower] to remove the personal property from the vehicle. While [Agent] was talking to [Borrower], [another Agent] got into the driver's seat of the unlocked vehicle and locked the doors. [Girlfriend] came outside and tried to open the vehicle's doors, but [Agent] kept locking the doors and refused to let her enter. [Borrower] then told [Agent] that the men needed to get off his property and that he was not letting them take the vehicle. [Agent] told [Borrower] that if he did not give up the keys to the vehicle, [Agent] would get the police involved. Eventually, [Borrower] instructed [Girlfriend] to provide the keys to [Agents]. [Girlfriend] then removed the personal property from the vehicle, and [Agents] left with the vehicle.

The vehicle later was sold at auction for $16,000.00, leaving a deficiency of $7,679.08 on the loan amount. (I will discuss the issue of damages in my next post.)

Procedural history. Borrower sued Lender on multiple legal theories, including alleged violations of Indiana’s UCC. (This post does not address all of Borrower’s legal claims.) The trial court found, among other things, that Lender breached the peace in violation of the UCC. Lender appealed.

Key rules.

Ind. Code 26-1-9.1-609 (within Indiana’s UCC) states that, after default, a secured creditor may take possession of collateral "without judicial process, if it proceeds without breach of the peace." Indiana appellate court decisions define “breach of the peace” as:

a violation or disturbance of the public tranquility or order, and the offense includes breaking or disturbing the public peace by any riotous, forceful, or unlawful proceedings. Further, the general rule is that the creditor cannot utilize force or threats, cannot enter the debtor's residence without consent, and cannot seize any property over the debtor's objections.

Indiana cases further state that:

if the repossession is verbally or otherwise contested at the actual time of and in the immediate vicinity of the attempted repossession by the defaulting party or other person in control of the chattel, the secured party must desist and pursue his remedy in court.

Holding. The Indiana Court of Appeals held that the trial court did not abuse its discretion in finding that Lender breached the peace.

Policy/rationale. Lender’s main defense was that Borrower ultimately surrendered the vehicle to Agents. The Court rejected the argument, reasoning:

[Borrower] told [Agents] that [they] needed to get off his property and that he was not letting them take the vehicle…. [Lender] contends that "[a]ny initial objection to the repossession was waived when [Borrower] voluntarily surrendered the keys to the vehicle." [Lender] further argues that "[Agents] did not continue the repossession of the vehicle once the objection was lodged and did not resume until [Borrower] consensually surrendered the keys." [Lender] conveniently omits that, during this apparent period of "suspended repossession," an [Agent] had locked himself inside the vehicle and refused to exit until [Borrower] produced the keys.

In the end, the Court felt that an improper "disturbance of the public tranquility or order" occurred when [Agent 1] refused to desist after [Borrower] objected to the repossession - in the context of [Agent 2] locking himself inside the vehicle until the keys were produced.

(My next post will discuss how Huizar handled the damages aspect of the case.)

Related posts.

__________
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 john.waller@dinsmore.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.