Asset based lenders lend against the value of their collateral – at least they are supposed to. Thus, when making a loan the lender needs to consider what it will cost to recover on its collateral in order to set a reasonable advance rate. Each type of collateral has its own issues in recovering. Account debtors protest in paying someone other than the debtor. Landlords deny access to inventory and equipment until the rent is paid. Even then, equipment has additional issues. For example, we once represented a lender who wanted to take back a huge printing press that required the removal of exterior wall to a building. We succeeded in obtaining a court order authorizing the demolition and replacement of the wall but the cost and time affected the lender’s recovery on its collateral.
Rolling stock has its own types of issues. The 1984 film Repo Man made the repossession of rolling stock entertaining but it is far from fun – even when you have a set of keys.
UCC 9-609 of the UCC provides:
SECURED PARTY’S RIGHT TO TAKE POSSESSION AFTER DEFAULT.
(a) Possession; rendering equipment unusable; disposition on debtor’s premises. After default, a secured party: (1) may take possession of the collateral; and (2) without removal, may render equipment unusable and dispose of collateral on a debtor’s premises under Section 9-610.
(b) Judicial and non-judicial process. A secured party may proceed under subsection (a): (1) pursuant to judicial process; or (2) without judicial process, if it proceeds without breach of the peace. (emphasis added).
(c) Assembly of collateral. If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.
A recent decision from the United States District Court for the District of Maryland highlights how easy it is for a debtor to make out a claim for breach of the peace in a non-judicial repossession of collateral. The plaintiffs (the debtor) purchased a dump truck financed by the lender and a dispute arose concerning payments. When the lender’s “repo man” showed up with a tow truck, the debtor protested loudly and called the police who directed the debtor to allow the repossession. The debtor then brought an action against the lender claiming that the repossession was in violation of UCC § 9-609 because it involved a breach of the peace.
The Court held:
Plaintiff alleges that he “objected loudly” to the repossession and claimed that Defendant “did not have the right” to repossess the truck…. Plaintiff further alleges that this disagreement “intensified” to the point that the police were called. …… Therefore, Plaintiff plausibly alleges that Defendant violated § 9-609(b).
The lender’s motion to dismiss the action was denied and even if the lender will ultimately recover its collateral, the cost to do so has gone through the roof.
The Maryland case addressed complications from recovering collateral without judicial process. A few weeks earlier the United States District Court for the District of New Mexico addressed a judicial process to recover collateral – commonly referred to as replevin. That case was brought ex parte – meaning that the debtor did not appear in the case. Even so, a court will review the facts and determine whether the lender is entitled to repossess its collateral even upon the debtor’s default in responding to the claim.
Replevin was an original common-law remedy, however most states have since authorized a suit for replevin by statute. The New Mexico statute provides:
Any person having a right to the immediate possession of any goods or chattels, wrongfully taken or wrongfully detained, may bring an action of replevin for the recovery thereof and for damages sustained by reason of the unjust caption or detention thereof… A replevin suit has two possible components: physical recovery of the collateral, and pursuit of damages for wrongful taking… . In order to obtain a pre-judgment writ of replevin, an affidavit must be filed [according to the statute] “stating: A. that the plaintiff is lawfully entitled to the possession of the property mentioned in the complaint; B. that the same was wrongfully taken or wrongfully detained by the defendant; C. that the plaintiff has reason to believe that the defendant may conceal, dispose of, or waste the property or the revenues therefrom or remove the property from the jurisdiction, during the pendency of the action; D. that the right of action accrued within one year; and E. specific facts, from which it clearly appears that the above allegations are justified”
The magistrate judge hearing the dispute broke out and applied the facts to each of the required elements that needed to be proven and went on to recommend to the District Court that it:
authorize the issuance of a writ of replevin for recovery of the collateral described in the complaint and supporting documents
But that successful ruling was not the end of the story. Inasmuch as replevin is an equitable remedy, it typically comes with the requirement for the posting of a bond – just in case the debtor ultimately appeals and disproves what the court had granted. In this case, the bond was to be in an amount “double the value of the collateral as described in the complaint and supporting documents”
These costs are often anticipated and even mitigated by obtaining landlord waivers. The loan agreement should include a provision where the borrower grants the lender and its agents a license to enter the debtor’s premises (even to break locks) to repossess the collateral, which entry is specifically agreed not to be a breach of the peace.
The lesson is that it costs – and sometimes dearly – to recover on collateral and that cost needs to be factored into the amount a lender is advancing based upon the value of the collateral. As we say time and time again: plan your divorce before you get married -be sure your loan agreements adequately provide for your recovery in the event things do not go as hoped when you made the loan.
Darren Trucking Company v. PACCAR Financial Corp., USDC Maryland, August 20, 2019, 2019 WL 3945103
Commercial Credit Group Inc. v. Protégé Excavation, Inc. USDC New Mexico, August 5, 2019 2019 WL 3973848.