Volvo Financial Services vs. Williamson (5th Cir.) –Statute of Limitations Governing Secured Creditor’s Deficiency Action Does Not Begin to Run Until All Items Covered by Cross-Collateralization Clause Are Sold

The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:

SUMMARY:

The Fifth Circuit has held that the applicable state statute of limitations governing secured creditors’ deficiency suits did not begin to run until the creditor has sold all of the items covered by a cross-collateralization clause contained in the parties’ agreements. [Volvo Financial Services vs. Williamson, 2018 Westlaw 6333781 (5th Cir.).]

Facts: An individual purchased eight commercial trucks. He executed a separate promissory note for each truck, and each note included a cross-collateralization clause. Following the debtor’s default, the creditor repossessed the trucks and resold them.

The creditor brought suit against the debtor for the deficiency. The debtor argued that part of the deficiency was barred because the creditor’s sale of four of the trucks took place more than a year prior to the commencement of suit. The trial court granted summary judgment in favor of the creditor.

Reasoning: The Fifth Circuit affirmed. The debtor argued that under the applicable Mississippi statute, a secured creditor’s suit to collect the deficiency must be commenced within a year of a foreclosure sale. The court acknowledged that there was no Mississippi state case law on point and that the statute was unclear: “[The statute] is ambiguous with respect to whether the one-year limitations period is triggered by the sale of only some property securing a note, or instead whether all property securing a note must be sold for the limitations period to begin.” The court held that there were policy reasons to construe the statute in favor of the creditor, i.e., that the action seeking a deficiency judgment can be brought within a year of the sale of the last item of collateral:

[W]here there are multiple pieces of property securing a note, as here, foreclosure or sale of all the property could span or surpass the length of the one-year limitations period, requiring the foreclosing party to bring multiple actions. The sale of different property at different times could lead to a surplus in some instances and a deficit in others, potentially obviating the need for the foreclosing party to bring a deficiency action at all . . . . [T]he most reasonable interpretation of [the statute], when applied to the facts of this case, is that the sale of all property securing a note must be complete to trigger the statute of limitations. This interpretation does not conflict with the statute’s purpose of discouraging foreclosures and, in some instances, could even further it.

By avoiding the mire of litigation concerning the partial foreclosure or sale of property securing a note, the defaulting party would have a chance to cure his default as to the rest of the property, thereby preventing a total foreclosure or sale.

As a fallback, the debtor argued that the cross-collateralization clause was a disguised waiver of the statute of limitations, in violation of Mississippi law. But the court held that this argument misstated the issue, since the question was precisely when the statute of limitations was triggered, not whether the statute of limitations applied at all.

Author’s Comment: This has to be the right result; many states require creditors to exhaust all of their security prior to bringing suit against the borrower, for all of the reasons articulated by the court. If the statute were construed in any other fashion, secured creditors would be forced to sell the collateral as fast as possible, which would violate the rule that dispositions of collateral under Article 9 must be commercially reasonable.

In one sense, however, the secured creditor in this case got lucky. The language of the cross-collateralization clause was murky. When there are multiple promissory notes and accompanying security agreements, each agreement should make it clear that all of the debtor’s obligations, no matter when incurred, are secured by all of the debtor’s collateral, no matter when acquired.

For discussions of other cases dealing with the problem of accrual dates under applicable statutes of limitations, see:

• 2018-45 Comm. Fin. News. NL 89, “Accrual Clause” in RMBS Agreement is Not a Condition Precedent to Accrual of Purchaser’s Warranty Claim, and Parties’ Attempt to Delay Commencement of Limitations is Void as Against Public Policy.
• 2018-35 Comm. Fin. News. NL 70, Creditor’s Cause of Action on Credit Card Debt Accrues as Soon as Optional Acceleration is Available, Even If No Acceleration Occurs.
• 2018-26 Comm. Fin. News. NL 51, Acceleration of Note Was Not Self-Executing, and Statute of Limitations for Enforcement of Deed of Trust Was Never Triggered by Notices of Sale.
• 2018-7 Comm. Fin. News. NL 14, Lender’s Deficiency Claim Against Guarantor on Construction Loan is Time-Barred, and Claim on Mezzanine Guarantee May Be Barred Due to Accrual at Time of Default.

These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.