When a party finances a purchase, such as the purchase of an automobile or a vessel, the contract, in conjunction with state statutes, will usually outline the process that the secured party must follow in order to ultimately obtain a deficiency judgment against the borrower. A deficiency judgment is a judgment for the amount still due on a loan obligation after the collateral has been repossessed and sold, and the proceeds were not enough to satisfy the outstanding loan balance. The procedure is typically found in the state’s version of the Uniform Commercial Code, which in Virginia is found at VA CODE ANN. §§ 8.9A-601 to 8.9A-628.
The Virginia UCC outlines the procedure that a secured party must follow when repossessing and selling collateral if that party wants to ultimately obtained a deficiency judgment against a borrower.
The procedure is important, because not only will a failure to follow the procedure allow a court to prevent a secured creditor from enforcing the obligation, it could expose the secured creditor to liability. See VA CODE ANN. § 8.9A-625. The provisions of the UCC may be modified by the contract at issue, so the contract must be reviewed while keeping in mind the UCC requirements.
First, a secured party may notify the borrower of the default. VA CODE ANN. § 8.9A-607.
Second, a secured party may take possession of collateral without court intervention, provided that it can do so without a breach of the peace. See VA CODE ANN. § 8.9A-609. The secured party may then sell, lease, license or otherwise dispose of the collateral, provided that it does so in a commercially reasonable manner. See VA CODE ANN. § 8.9A-610.
Before disposition of the collateral, the secured party must notify the borrower and anyone secondarily liable on the note. VA CODE ANN. § 8.9A-611. The notice must be sent after default and at least ten days before the earliest time of disposition. VA CODE ANN. § 8.9A-612. In a consumer goods transaction, the notice must include (1) a description of the debtor; (2) a description of the secured party; (3) the method of the intended disposition; (4) a statement that the debtor is entitled to an accounting of unpaid indebtedness; (5) a statement of the time and place of a public disposition or the time after which any other disposition is to be made; (6) a description of any liability for a deficiency; (7) a telephone number from which the amount that must be paid to redeem the collateral is available; (8) a telephone number or mailing address from which additional information concerning the disposition is available. VA CODE ANN. § 8.9A-614.
A borrower may redeem by fulfilling all obligations secured by the collateral and by paying reasonable expenses and attorneys fees, provided that he does so prior to disposition of the collateral. VA CODE ANN. § 8.9A-623.
After a sale, the proceeds are first applied to the repossession and sale expenses, then the obligation, then any secondary obligations. VA CODE ANN. § 8.9A-615.
In a consumer goods transaction in which there is potential for a surplus or a deficiency, the secured party must send an explanation of any surplus or deficiency to the borrower at or before the payment of any surplus or at or before its first demand for a deficiency. VA CODE ANN. § 8.9A-616. This notice must include: (1) the aggregate amount of the obligation; (2) the proceeds of the disposition; (3) the aggregate amount of the obligation after applying the proceeds; (4) the expenses of repossession; (5) the amount of any credits; and (6) the amount of any surplus or deficiency. VA CODE ANN. § 8.9A-616. Substantial compliance is all that is required.
Prosecuting a case for a deficiency judgment
As a plaintiff, you will have the burden to prove the existence of the contract, your damages, and that the sale was commercially reasonable. Under the Virginia version of the UCC, you need only prove statutory compliance if the defendant puts it at issue. You need only prove a fair price if you are unable to prove statutory compliance, or that the sale otherwise failed to conform to commercially reasonable practices.
- Statutory Compliance
Statutory compliance, often echoed in the contract, requires essentially three notices to the borrower: (1) Notice of Default; (2) Notice of Repossession/intended disposition; and (3) Notice of the Outcome of Disposition. Pursuant to VA CODE ANN. § 8.9A-626, the secured party does NOT have to prove statutory compliance unless the borrower or secondary obligor puts compliance at issue. Id. If compliance is at issue, and the secured party fails to prove compliance, its recovery is limited to the sum by which the secured obligation, expenses and attorney’s fees exceed the greater of (1) the proceeds of disposition; or (2) the amount that would have been realized if the secured party had complied with the statute. Pursuant to VA CODE ANN. § 8.9A-626(4), the amount that would have been realized if the secured party had complied with the procedure is equal to the amount that of the secured obligation, expenses and attorney’s fees unless the secured party proves that the amount was less. If you can’t prove the amount a compliant disposition would have brought, then the statute provides for zero recovery.
Therefore, even if a secured party fails to comply with the statute it can still recover a deficiency judgment if (1) the defendant fails to put compliance at issue; or (2) it can prove that the price it would have obtained was less than the amount of the obligation. Proving the price would, in almost every case, require expert testimony.
While price is almost universally raised by a defendant in a deficiency suit, it is almost irrelevant when the statutory procedures are followed and the disposition is conducted in a commercially reasonable manner. Pursuant to VA CODE ANN. § 8.9A-627(a) “The fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner.” I mention it only because it is always raised by a defendant and one should be prepared to address any claims that a price was unreasonable by pointing to statutory compliance and the method of disposition. If the secured party is unable to prove statutory compliance then it must prove that it obtained a fair price, otherwise it will not recover any damages.
- Commercial Reasonableness
“In a challenge to the reasonableness of a sale of repossessed property, the secured party bears the burden of proof that the sale was commercially reasonable.” L. C. Arthur Trucking, Inc. v. Evans, 20 Va. Cir. 460, 461 (Cir. Ct. 1990)
VA CODE ANN. § 8.9A-627(b) provides guidance on how to determine whether the secured party’s conduct is commercially reasonable. “A disposition of collateral is made in a commercially reasonable manner if the disposition is made: (1) in the usual manner on any recognized market; (2) at the price current in any recognized market at the time o 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.”
- Recognized Markets
The editor’s note to subsection 627 makes clear that “the concept of a ‘recognized market’ in subsections (b)(1) and (2) is quite limited; it applies only to markets in which there are standardized price quotations for property that is essentially fungible, such as stock exchanges.” Therefore, only subsection (b)(3) will apply in virtually all consumer repossession/deficiency actions.
- Reasonable Commercial Practices
Whether a practice is commercially reasonable is a question of fact left to the trier of fact. In order to prove conformity with “reasonable commercial practices among dealers”, you will require someone with knowledge of commercial practices among dealers, i.e. a dealer. In the repossession or sale of a vessel, for example, you must present testimony from the dealer who sold the vessel in order to establish that the method of sale conformed to the normal method of sale for dealers since you will need testimony showing (1) what was done to sell your vessel; and (2) what is normally done to sell similar vessels.
In any suit for a deficiency judgment under the Virginia UCC, a secured party should prove the following:
- The existence of a contract and damages resulting from its breach;
- Compliance with statutory requirements of notice before and after disposition of collateral;
- That the disposition of the collateral was done in conformity with reasonable commercial practices.
As for items (1) & (2), the custodian of records for the secured party is the appropriate witness to prove this element of the case. Item (3) can only be proven by witnesses with knowledge of the actual disposition, and knowledge regarding the normal practice among dealers. In the event that price is at issue due to the secured party’s failure to comply with statutory requirements or due to a failure to conform to reasonable commercial practices, a third witness, most likely an expert witness, will be required to opine as to the value of the collateral at the time of the disposition.
By: John R. Griffin