LEGAL
Court of Appeals Trows a Curve Ball at Automotive Finance By Keith Thornburg, Vice President and General Counsel
Earlier this year, the Missouri Bankers Association and the Missouri Independent Bankers Association joined in an amicus brief filed in the Missouri Eastern District Court of Appeals urging a ruling that would protect lenders and consumer access to competitive vehicle finance programs. Te court issued its decision in Te Central Trust Bank v. Branch (Case No. ED19020) on July 27. Te decision is surprising and disruptive — it’s a curve ball.
Te brief related to the Uniform Commercial Code pre-sale notice (disposition of repossessed vehicle) about whether a “dealer auction” is a private sale or a public sale.
Dealer auction services present an efficient, low-cost means to secure and dispose of repossessed vehicles. Te sales are not open to the public. Te industry, most states and prior Missouri case law classify a dealer auction as a “private sale.” Te borrowers’ class action attorneys and three law professors filing an amicus brief argued that any “auction” is a bid sale, and all bid sales should be regarded as public.
An erroneous classification of the sale in the UCC pre-sale notice exposes lenders to actual and liquidated damages. If a dealer auction is classed as a public sale, such sales would no longer be a viable means to dispose of collateral because no lender could provide a proper or useful notice to a borrower that would enable the borrower to attend a dealer auction. Te court of appeals declined to rule on this question, and its ducking of the issue is not a good thing because it leaves our industry and our customers at risk of continued, future litigation.
Te court of appeals elected to rule against the lender on another issue. Te lender in this case sent the pre-sale notice and a post-sale deficiency notice via certified mail. As defaulted borrowers are known to do, the borrowers in this case refused to accept delivery or to pick up the certified mail. Te court reasoned that in such circumstances a lender could not prove “service” and thus had not provided due process to the borrowers. Because the lender failed to provide due process, the lender would be denied its claim for recovery of deficiency and costs.
Te court noted that if the lender had sent the notice by first class mail, the lender would have obtained a “presumption” of delivery (absent a return of the letter).
Plaintiff class action attorneys representing defaulted borrowers have been mining the minutiae of UCC Article 9 and the Missouri Consumer Loan Act to find novel bases for lender errors and omissions to create lender liability. Te courts apply business codes under a “strict compliance” standard against lenders and in favor of debtors to resolve any doubt about the construction, application or compliance with a statute.
Ultimately, lending costs and underwriting standards will be raised, and many lenders will exit consumer markets as dictated by high costs and high risk versus low returns. Te whole class of consumer borrowers will suffer burdens to enrich the class action bar.
MBA will continue its involvement with this case as there is likely to be a request for transfer to the Missouri Supreme Court. Our industry also may seek UCC and consumer lending law reforms to reduce the incidence of “curve balls” that undermine our ability to provide competitive services to consumers.
THE MISSOURI BANKER 9
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