Answering Repossession Questions: Public Sale v. Private Sale
Dealer Question: I'm new to the Buy-Here-Pay-Here business and I've gotten conflicting information about handling repossessions. I have been told by some that I have to send a certain notice prior to repossession and others tell me I don't. Also, I am confused about the so-called “10-day” repossession notice and the “20-day” notice and whether I should dispose of repossessed vehicles at a “public” or a “private” sale. Can you clear up those questions for me?Answering Repossession Questions
By Michael W. Dunagan
Jameson & Dunagan
Answer and Discussion: The questions you raise are a common source of confusion for secured creditors, including BHPH dealers. But a good understanding of repossession procedures and the various types of notice letters is critical to avoiding repossession-related compliance issues. The Uniform Commercial Code or UCC (the Texas version is referred to as the Texas Business and Commerce Code or TBCC) is the main source of statutory authority regulating the repossession and disposition of collateral. There are also statutory references to repossession procedure in the Texas Finance Code.
The TBCC and the Finance Code do not require prior notice of repossession in Texas. Some states have pre-repossession notice requirements with corresponding mandatory wait periods to give the debtor an opportunity to pay up before repossession can take place, but Texas does not. In my Texas Automobile Repossession: A Lien Holder's Legal Guide book, there is a pre-repossession form (referred to as a “cure letter”) that can be sent to offer the debtor an opportunity to bring the account current and to advise the debtor that late or partial payments will not be accepted going forward. This notice is not mandated by law and is offered as an option for the creditor to avoid any appearance of unfairness in exercising the repossession remedy.
Most BHPH dealers use either Strict Foreclosure – Acceptance of Collateral In Satisfaction (we'll refer to it simply as strict foreclosure) or private sale as these methods are more appropriate for the BHPH business model. We'll discuss why public sale may not be appropriate for most dealers later. (Another option – obtaining a signed waiver of notice and relinquishment of ownership rights after repossession – is available and will be discussed in another article.) Let's put strict foreclosure aside for the moment to address the dealer's first question.
Public vs. Private
“Public sale” is defined in an official comment to the Uniform Commercial Code as a sale “at which the price is determined after the public has a meaningful opportunity for competitive bidding.” This implies that the sale is advertised to bring in a large number of people bidding against each other and is open to the public. This type of sale might be more appropriate to the sale of large trucks or heavy equipment. It would be unusual for a BHPH dealer to want to bear the expense of placing advertisements or legal notices in a newspaper, and holding a competitive bid sale for one or two repossessed units.
“Private sale,” on the other hand, is not defined by the UCC, but is generally considered to be anything that is not a public sale. The sale of a repossessed vehicle by the secured party (in this case a BHPH dealer) at the dealer's lot in the normal course of the dealer's business is considered a private sale. The sale could be at retail or wholesale, as long as the sale is “commercially reasonable.” The sale can be for cash or can be financed. The sale of a vehicle at a wholesale auto auction is usually considered to be a private sale because the auction is only open to licensed dealers (as opposed to the public).
Thus, in choosing between a public sale and a private sale it would appear that a private sale would probably be the better method for most BHPH dealers. But as we discussed earlier, there is another option that many BHPH dealers prefer, and that is strict foreclosure.
Prior to the mid-1980s, almost all vehicle repossessions were handled as private sales. In a private sale, the collateral is held for a period of time after notice of private sale is sent to the debtor (usually 10 days; thus the private sale notice is often referred to as the “10-day” letter), then the collateral is resold in a commercially reasonable manner, and the proceeds of sale are applied against the indebtedness. If the proceeds of resale fall short of the amount owed, there is a deficiency, and the creditor can pursue collection of that deficiency.
If, on the other hand, the resale is at a price higher than the amount owed by the debtor, then there is a surplus (or the debtor's equity in the vehicle), and the creditor must remit this amount to the debtor. Another way to describe this latter situation is that the debtor has a positive equity position in the collateral and is entitled by law to receive the surplus amount from the creditor. The creditor in a private sale does not automatically take ownership of the repossessed collateral, but instead has a property right in the collateral that enables the creditor to sell the property and apply the proceeds to the indebtedness owed. The creditor's interest in the collateral in a private sale is thus limited to the indebtedness owed.
The “Paper Profit” Problem
The use of a private sale by a BHPH dealer to resell a repossessed vehicle can create some problems. For instance, if the vehicle is retailed with dealer financing, the dealer only receives the amount of the down payment (and value of any trade in) at the time of the transaction. However, the entire sale price, including the amount financed, must be applied against the balance that the prior debtor owes. This could result in a surplus that would have to be paid to the prior debtor even though the amount financed on the resale won't be received unless and until all future payments are made by the second debtor.
To avoid having to account to the prior debtor for a “paper” surplus, some car creditors have “booked” the repossessed unit into inventory at the amount owed, then ignored the actual resale transaction. Courts have consistently held that the actual resale is what counts, not an accounting entry make by the creditor.
Strict foreclosure started catching up with private sale as the method of choice in the BHPH industry in the late ‘80s, and by the early ‘90s, had actually overtaken the private sale as the preferred method by BHPH dealers. Currently, strict foreclosure is by far the predominate method.
In a strict foreclosure, a notice of intention to accept the repossessed collateral in satisfaction of the indebtedness is sent to the debtor. If no written objection is received in 20 days (thus, strict foreclosure notice is often referred to as the “20-day letter”), ownership of the collateral reverts back to the creditor. Because the collateral is taken in satisfaction of the indebtedness, there can be no deficiency (and correspondingly, there is no surplus) upon resale. The 20-day holding period is statutory and can't be shortened by the creditor. After the 20-day holding period expires, and absent a written objection by the debtor, ownership of the collateral reverts to the dealer who can dispose of it as he or she sees fit. No accounting has to be made to the debtor. Any balance remaining of the debtor's account is forgiven and thus no deficiency can be reported to a credit bureau.
Car creditors can choose whichever method best meets their purposes, and can switch back and forth, if they want. However, care must be taken to follow the rules for whichever method is chosen and to use the appropriate notice letter. We recommend checking notice letters before they are mailed since the wrong key on the computer keyboard may have been punched producing the wrong form.
The following is a list of the main characteristics and differences between private sale and strict foreclosure. (A much more detailed explanation can be found in Texas Automobile Repossession: A Lien Holder's Legal Guide, available from TIADA.)
• Holding period is at least 10 days.
• Debtor has the right to redeem vehicle at any time before disposition is completed (the redemption right doesn't end at the expiration of the holding period, but rather when the vehicle is sold).
• Disposition must be “commercially reasonable.”
• Disposition can be retail sale, wholesale sale, or sale at wholesale auto auction. Disposition can be for cash or dealer-financed, but credit for entire sales price must be given on a dealer-finance transaction.
• Creditor must apply proceeds of disposition to balance owed and calculate surplus or deficiency. If surplus occurs, payment of surplus amount must be made to repossessed debtor along with a post-disposition accounting that is sent to the debtor.
• Creditor can sue for any deficiency and/or report deficiency to credit bureau, if post-disposition accounting is given.
Strict Foreclosure (also known as “Acceptance of Collateral in Satisfaction”):
• Balance owed is extinguished. Deficiency no longer exists and can't be reported to credit reporting agency.
• Holding period is 20 days from date that notice of intent to accept collateral in satisfaction is sent. A debtor has the right to redeem the collateral upon payment of balance during 20-day holding period.
• No accounting to debtor of disposition is required.
• Ownership of the collateral reverts to the creditor if 20 days expire without written objection to the strict foreclosure from debtor or guarantor.
• If written objection is received in the 20-day holding period, the creditor must send notice of private sale, use the private sale procedure and make a commercially-reasonable resale. Post- disposition accounting rules apply.
• Strict foreclosure can't be used if more than 60 per cent of original cash price has been paid in (“60-per-cent rule”). If the 60-per-cent rule applies, the creditor must send a private sale notice and use the private sale method to dispose of the collateral.
This brief discussion of the differences between public sale, private sale and strict foreclosure isn't intended to cover all the technical legal requirements for post-repossession procedure. Car creditors should familiarize themselves with and strictly follow the rules. Notice forms should be obtained only from trusted sources and care should be taken to ensure that the actual procedure used matches the type of disposition for which notice is given.