Question/Answer for Assignment 3 [Updated August 28, 2013 at 1:10PM]

1. Suppose that Bank has a security interest in a car. It tries to repossess the car by self-help, but the debtor objects, and so the Bank files a replevin action. Once Bank files a replevin petition and starts the judicial process to repossess collateral, does that mean that the Bank can't try self-help again (if it finds the car on the street later with the debtor not around)?

No, the Bank can always try again. Even if the secured party files a replevin action, the secured party can still use self-help to repossess the collateral if the secured party can accomplish the repossession without breaching the peace. § 9-609(b)(2). While the structure of § 9-609(b) may suggest that the two options (judicial action or self-help) are mutually exclusive options, they are not. Generally speaking, Article 9 remedies are cumulative. § 9-601(a) makes clear that a secured party can exercise any remedies provided by Article 9, Part 6 or can enforce its rights through any judicial procedure, and § 9-609(c) makes clear that the secured party's remedies may be exercised "cumulatively," or simultaneously. Thus, nothing would prevent the secured party from filing a replevin action and still trying to obtain self-help. Indeed, if the secured party expects that self-help may be difficult in a particular case, but still wants to try it, the secured party might go ahead and file the replevin action first. This would get the judicial clock started immediately, so to speak, so that if the secured party's efforts at self-help ultimately fail, the secured party might still effect a judicial repossession more quickly than if it had waited until after self-help failed in order to file its replevin action.

2. Given the uncertainty of the "breach of the peace" standard, is self-help really a viable option at all?

Self-help is always a viable option where the debtor simply "rolls over" and agrees to turn over the collateral. Even in Louisiana (where there is no express self-help right under Louisiana's version of Article 9), courts allow the secured party to accept the collateral by self-help when the debtor voluntarily turns it over.

Even where the debtor doesn't voluntarily turn over the collateral, it is still a viable option for vehicles, because the debtor will often have the vehicle in a public place (parking lot, street) or an accessible quasi-private place (an open driveway) where the secured party can get access to it quickly and complete the repossession before the debtor has an opportunity to intervene and object. By contrast, for most kinds of consumer goods, they'll be located inside the debtor's home, and the secured creditor couldn't really get access to them (again, unless the debtor consented) without breaking and entering — which would undoubtedly be treated as a breach of the peace.

For goods like inventory or business equipment located on business premises, courts have given secured creditors a little more latitude than with private homes. In other words, the secured creditor could probably walk into the debtor's business premises unannounced to effect a repossession (where the secured creditor could not simply walk into the debtor's home unannounced, without knocking), and the court would not necessarily treat that as a breach of the peace. But if the secured creditor tried to persist in the face of an objection from the business debtor, the secured creditor would be prudent to cease the self-help attempt.

3. Can the Debtor object to repossession in advance? In other words, if the Debtor defaults, can the Debtor write a letter to the Bank saying "I object to any effort you might make to repossess the collateral, and insist that if you attempt to repossess the collateral, that it be done through judicial process?"

The Debtor can write that letter, but it doesn't work. The debtor can't prevent the secured party from attempting self-help repossession by entering a "pre-emptive" objection. The objection would have to come in the face of an attempt by the creditor to repossess.

4. You mentioned that a secured party might be subjected to punitive damages if it commits a breach of the peace, but I thought that generally punitive damages weren't available for breach or violation of a contract. Doesn't the UCC preclude punitive damages?

Generally speaking, punitive damages aren't available for violation of an obligation imposed by the Uniform Commercial Code, see § 1-305(a), unless a specific section of the UCC provides a punitive remedy. [For example, in Assignment 5, we'll talk about the Article 9 "consumer penalty."] But section 1-305(a) recognizes that punitive damages can be awarded where provided "by other rule of law," and a breach of the peace/wrongful repossession has also been considered a tort by courts. As a result, the court would have the latitude under tort law to impose punitive damages if the facts were sufficiently egregious.

Then why would a debtor ever sue under the UCC damages provision [§ 9-625(b)] rather than under tort law?

In some cases, the secured party's conduct might not violate any duty imposed by tort law, but might still violate an obligation imposed by Article 9. Here's a preview example from Assignment 5. Suppose that the secured party properly repossessed X's car, and properly gave X notice prior to sale of the car, but failed to give notice to Y, who had signed an agreement guaranteeing the payment of X's car loan. The secured party's conduct would violate Article 9, and the secured party would be liable to Y for any damages that Y suffers as a result of the secured party's failure to give notice. But there wouldn't be any "conversion" of the collateral. The only basis for the secured party's liability would be under § 9-625(b), not under tort law.

5. I have a question about Problem 3.7 (page 56). This is the one where my spam filter picked up an e-mail instructing me to pay my MasterCard bill to American Financial Corporation at a post office box in Arizona. Suppose I had gotten this two months earlier and had instead paid my credit card bill to the same address I always had. Am I at risk of having to pay the bill again, as we talked about in class with respect to assignments of accounts? Is the obligation to pay a credit card bill an "account" subject to that principle? Wouldn't this make it easy for a scammer to steal money by giving bogus notices?

Good question. The obligation to pay a credit card bill is an "account." As § 9-102(a)(2)(vii) says, the term account includes "a right to payment of a monetary obligation ... arising out of the use of a credit or charge card." Thus, the amount you owe on your American Express bill is an "account" in the hands of American Express. If American Express has assigned its accounts to American Financial Corporation, then § 9-607(a) allows American Financial Corporation (the assignee) to give notice to account debtors (i.e., you) to pay the account directly to them (the assignee) rather than paying it directly to the assignor (American Express). In that circumstance, if you receive that notification and you pay the assignor instead, you haven't satisfied your obligation on the debt, and you are at risk of having to pay twice, as explained in class.

It is possible for a scammer to try to steal by sending you a bogus notification letter, notifying you of a bogus assignment. Someone who managed to steal credit card numbers and credit card information might easily try to do that, hoping that you would pay without questioning (and they would steal your money). Of course, your payment in that circumstance wouldn't satisfy your debt if the scammer isn't really an "assignee." But how were you supposed to know that?

The UCC gives the account debtor some protection here in § 9-406(c), which allows the account debtor to request that the assignee "seasonably provide reasonable proof" that the assignment has been made. If the assignee is a bona fide assignee, they will provide proof of the assignment document because, if they don't, the account debtor can go ahead and pay the assignor and thus discharge its obligation. [§ 9-406(c)] Theoretically, if the assignment is coming from a scammer, it won't be able to provide proof of the assignment. Of course, nothing prevents the scammer from forging a security agreement that purports to be a bona fide assignment, which might fool the account debtor into making payment to the "assignee"/scammer as instructed. This probably does happen sometimes; the risk of being defrauded is a universal risk that we have to live with.

6. I have a question pertaining to Problem 3.6(b) where Deane bills Wilson's $42,000 but Wilson's claims $19,000 of the goods are defective. Taking Wilson's defective goods claim as true, it is clear that the bank would only be able to recover $23,000 from Wilson's because that is all Wilson's would be liable to Deane for. But from a realistic standpoint, I imagine that more often than not there is going to be a dispute between Deane and Wilson's regarding whether or not the goods were defective. Deane will not just roll over. Rather, a dispute or argument will ensue regarding the defectiveness (or lack thereof) of the goods. When this is the case, would the court permit the bank to recover all $42,000 from Wilson's, leaving Wilson's to duke it out with Deane for a refund of $19,000 or would all 3 parties (bank, Deane, Wilson's) be involved in a suit together to determine the rights of all the parties. To me it seems like letting the bank recover all of it from Wilson's and then making Wilson's sue Deane for the $19,000 in defective goods would be the most straightforward way to go about it but I know courts often take more into account than just simplicity (what is most equitable to the parties, fairness, who should bear the risk, etc.) Perhaps including all 3 parties in the same suit would make the most sense from a res judicata standpoint? Just hoping for a little guidance because, practically speaking, the party in Deane's position (original debtor) seems likely to rebut the account debtor's "defectiveness" claim.

Good question.  The problem in the book is a bit oversimplified, as your question implies. The answer is that exactly how this transpires --- whether it is a two-party dispute or a three-party dispute --- may depend upon the nature of the agreement between the assignor of the account and the assignee of the account.  While we'll talk more about this in later assignments, there are "two types" of accounts financing.  One is called "factoring," which is where a "factor" buys the assignor's accounts outright.  In this situation, the factor pays the assignor cash to obtain the account and then becomes the complete owner of the account.  In the classic "factoring" arrangement, if the account debtor defaults and doesn't pay, the factor bears the loss (and the assignor doesn't have to pay the factor back).  [Factoring arrangements can vary, and by agreement the factor and the assignor may divide the risk of loss however they might agree.]

The other type of assignment is where the assignor retains ownership of the accounts, but uses them as collateral for a loan. 

In a true factoring arrangement, by buying the accounts, the factor effectively would take the assignor out of the picture, and the dispute becomes basically a two-party dispute between the factor (who steps into the shoes of the assignor) and the account debtor.  So in that situation, Factor might demand that Wilson's pay, and because breach of warranty would be a compulsory counterclaim, it would be incumbent on Wilson's to bring and establish that counterclaim (which, if established, would give Wilson's a set-off right --- getting to the result alluded to in class).  There would be no need to bring in Deare as a party — although obviously one or more employees of Deare might be involved as fact witnesses regarding the condition of the goods.

In a collateral assignment arrangement, Wilson's warranty claim is still a compulsory counterclaim, but once it is asserted, Bank (which is trying to collect the account) might well bring Deare (the assignor) as a third party, so that the court could not only resolve the issue of whether the goods breached any warranty (as between Deare and Wilson's), but also the issue of whether the assignor may have violated any representations or warranties it made to the assignee regarding the collectability of the account (or the lack of defenses to payment of the account) at the time of the assignment.

Either way, in this situation, it will be up to Wilson's to establish the breach of warranty claim (which it must do in order to legally claim the setoff).  In the problem in class, that was assumed, but in reality Wilson's would have to carry the burden of proof of establishing that. If it can't carry that burden, it's liable for the whole $42,000.