Repo Horror Stories

Jul 27, 2023

March 31st, 2023 – Jonathon D. Nelson, General Counsel for Dedicated Financial GBC

When a commercial borrower seeks equipment financing, the lender will require that the borrower pledge collateral to secure the lender’s right to receive payment. Security interests and collateral are generally governed by the Uniform Commercial Code (“UCC”), which has been adopted in various forms by each of the States. See UCC § 9-101 et seq. Generally speaking, the collateral must be identified with specificity (e.g., VIN, serial no., etc.) in a security agreement.

When the borrower signs the security agreement, the borrower is formally pledging its interest in the collateral to the lender, and the lender’s security interest is created and attaches to the collateral. In order to perfect the security interest, the lender needs to determine whether the collateral is covered by a certificate of title. If it is, then the lender must follow the applicable procedure to have its security interest noted on the certificate of title; if it is not, the lender should file a financing statement with the applicable authority in the borrower’s jurisdiction (e.g., Secretary of State’s office).

The financing statement needs to identify the collateral with enough specificity to provide notice that the lender is claiming a security interest in the collateral. The purpose of filing the financing statement is to provide the world with notice that a secured party has a right to collateral. Once the financing statement is filed, or the security interest is noted on the certificate of title, the lender’s security interest is perfected. Perfection is very important because the time of perfection determines priority to the collateral. Priority determines which lender is paid in full first, if there is more than one lender providing financing to a borrower.

Failing to timely perfect a security interest could cause a lender to “lose” their collateral to another lender. Even if a lender perfects its security interest immediately after a borrower signs a security agreement, the collateral could still be “lost.” In the event of a borrower’s default, the lender has the right to take possession of the collateral, which is commonly called repossession. A lender that proceeds with repossession usually has the choice to take collateral pursuant to judicial process (i.e., court order), or without judicial process, if there is no breach of the peace. Most lenders elect to attempt repossession without judicial process because it is almost always quicker and cheaper than a lawsuit.

However, attempting repossession without judicial process can be very risky if a lender does not have a trusted repossession agent, as most States have not defined the phrase “breach of the peace,” leaving it open to interpretation by the courts. If a borrower seeks a determination of whether a “breach of the peace” has occurred, the lender will be forced to choose between spending attorney’s fees and court costs to defend its repossession, or immediately settling with the borrower, absent clear facts that indisputably show that there was no breach of the peace. As you might imagine, such facts rarely exist and most lenders incur fees and costs that exceed the value of the collateral, and then they end up settling with their borrower, thereby “losing” the collateral.

One great example arises from a repossession attempt in Nevada. Droge v. AAAA Two Star Towing, Inc., 2020 Nev. App. LEXIS 3, 468 P.3d 862 (June 18, 2020). Russell Droge entered into a loan agreement with a Bank to allow him to purchase a Dodge Ram truck. Russell was later incarcerated, and his parents agreed to store the Dodge at their home, in their fenced-in backyard. While incarcerated, Russell defaulted on his loan and the Bank retained a Repossession Company to take the Dodge, the Bank’s collateral. The Company went to the parents’ house but was unable to take the Dodge because it was parked in the fenced-in backyard.

Several months after the Bank retained the Company, one of the Company’s agents drove by the parents’ house and saw the Dodge was in the driveway, which was not fenced-in. That Agent called a local towing company to assist with taking the Dodge, and once the Driver of a flatbed truck arrived, he and the Agent discussed the repossession, which was of the “grab-and-go,” “no-contact” variety. The Driver backed his flatbed onto the driveway and started to hook up the Dodge. The parents heard the flatbed and came outside to see what was happening.

Once outside, the parents objected to the taking of the Dodge and the father went into the house to get the keys to the Dodge. Meanwhile, the Driver was under the Dodge, still in the process of hooking it up. The father came outside with the keys, hopped into the Dodge, started it up, and put it in gear. The Driver claimed that the father backed up the Dodge slightly, allegedly striking the Driver in the chest, before the father drove the Dodge into the fenced-in backyard. The sheriff was called, and the Driver told them that he would have been crushed by the Dodge if the father had backed up the Dodge another four inches.

In response to the sheriff’s questioning, the father admitted that he knew the Driver was under the Dodge. As a result, the sheriff arrested the father based on the conclusion that the father had committed battery with a deadly weapon. A deputy district attorney decided to charge the father. When the case proceeded to trial, the Driver testified against the father, but the jury acquitted the father of the charge.

In September of 2015, the parents sued the Company, Agent, and Driver seeking monetary damages. The civil court was asked to determine whether Agent and Driver breached the peace in their attempt to take the Dodge, and if so, the amount of damages that the parents’ incurred as a result of the actions of the Agent and Driver. The civil court examined many different authorities and found three common themes: (1) to benefit creditors in permitting them to realize collateral without having to resort to judicial process; (2) to benefit debtors in general by making credit available at lower costs; and (3) to support a public policy discouraging extrajudicial acts by citizens when those acts are fraught with the likelihood of resulting violence.

The civil court ultimately held that under Nevada law secured parties may carry out self-help repossessions on private property provided that they do so without breaching the peace, and that a breach of the peace occurs when a secured party performs a self-help repossession that is not reasonable in time or manner. They also held that secured parties (i.e., the Bank) will be held liable for actions taken on their behalf by agents or independent contractors (i.e., the Company, Agent, and Driver) because the duty to carry out self-help repossessions cannot be delegated. After nearly 6 years of litigation and an untold amount of attorney’s fees and court costs were incurred, the parties entered into a confidential settlement in July of 2021 and the parents’ lawsuit was dismissed with prejudice.

Another great example of collateral being lost is found in one of the cases cited by that civil court, wherein a Bystander was shot by the Possessor of a Lincoln Continental that was the subject of repossession efforts. Griffith v. Valley of the Sun Recovery & Adjustment Bureau, Inc., 126 Ariz. 227, 613 P.2d 1283, 1284-86 (Ariz. Ct. App. 1980). In the Griffith case, the Repossession Agent attempted to take the Lincoln at 4:00 AM, but the attempt was frustrated by the Lincoln’s burglar alarm, which resulted in the Agent unscrewing a spotlight on the Possessor’s home and then hiding while police investigated what appeared to be a burglary attempt.

The Agent returned later that morning to make another attempt to take the Lincoln, and he set off the car’s burglar alarm again, leading to Possessor coming out of his house and shouting at the Agent. A neighbor also came outside with a shotgun and pointed it at the Agent. As the shotgun was passed from the neighbor to the Possessor, the shotgun accidentally discharged and severely injured the Bystander. In the Bystander’s civil lawsuit against the Agent, the court held that the Agent was not free of blame and set a trial. Since the lawsuit was filed in in the 70’s, the court records are not available. Even so, it is safe to assume that the lawsuit was settled prior to the trial, if the Agent was represented by competent counsel because the cost of a trial would eclipse the value of the Lincoln.

In these repossession horror stories, the lenders were not named defendants. Nevertheless, their names were mentioned in both stories, thereby subjecting them to negative press and harming their reputations and brands. Additionally, the Droge case led to precedential case law that future borrowers could use to hold lenders liable for the actions of their repossession agents. Both of these horror stories underscore the importance of working with trusted agents that will not breach the peace so the collateral is not “lost.”