The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
The First Circuit has held that under Massachusetts law, the post-sale notice given by a lender to a defaulting car buyer must state that the borrower’s deficiency liability is based on the difference between the balance due and the vehicle’s fair market value, rather than the auction price. [Williams vs. American Honda Finance Corp., 907 F.3d 83 (1st Cir. 2018).]
Facts: After a consumer defaulted on her car loan, the lender repossessed her car and sold it at auction. It then sent her the following notice: “The money received from the sale (after paying our costs) will reduce the amount you owe. If the auction proceeds are less than what you owe, you will still owe us the difference.”
She brought a putative class action in state court against the lender, claiming that this notice violated both Article 9 of the UCC and the Massachusetts consumer protection statute. She argued that the notice erroneously told her that her deficiency liability would be calculated using the auction price, rather than its fair market value.
That suit was removed to federal court, and summary judgment was entered in favor of the lender. The Court of Appeals certified the question to the Massachusetts Supreme Judicial Court, which ruled that the deficiency must be measured by the fair market value of the vehicle, rather than the auction price. However, the Massachusetts court distinguished between “fair market retail value” and “fair market value.”
Reasoning: The First Circuit reversed the grant of summary judgment in favor of the lender, holding that the issue had been decided in favor of the consumer by the Massachusetts court. The lender argued that the auction price was, in fact, the fair market value of the car, but the court disagreed.
Author’s Comment: This ruling will make it much harder for vehicle lenders to collect from defaulting consumers, for two reasons: the use of a higher hypothetical value (“fair market” value vs. wholesale auction price) will artificially reduce the amount of the borrower’s deficiency, and the “fair market” value is inherently murky and harder to prove than the auction price. The burden of proof, of course, is on the creditor seeking the deficiency.
Speaking cynically (but honestly), the good news is that there is little chance of recovering anything from a defaulting car buyer in any case; thus, a decision that makes it more difficult to collect might not have a significant real-world effect on the finance industry.
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.