Andrew C. Voorhees,
Shareholder,
Weltman, Weinberg & Reis

In equipment finance transactions, the parties involved have the best of intentions. The financier provides the funding for the equipment, while the customer covenants to pay on time, keep the equipment in good working order, carry insurance and so forth. Unfortunately, a defaulting customer is too common an occurrence, requiring repossession and sale of equipment as a common remedy. While a repossession and sale can make the financier at least partially whole, how does the financier preserve their right to a deficiency balance and ultimately collect it?

PRESERVING THE RIGHT TO DEFICIENCY

The Uniform Commercial Code (UCC) allows for the recovery of a deficiency balance in the absence of full recovery from a collateral sale. However, the UCC’s legal formalities must be observed in order to preserve your right to any deficiency.

UCC 9-610 (and state equivalent statutes) allows a creditor to dispose of secured collateral after a default. However, the disposition of the secured collateral must be “commercially reasonable.” The UCC provides: “Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, at any time and place, and on any terms.”

While the UCC allows disposition of the collateral at a public or private sale, it also requires that proper notices be sent to all obligors on the debt (UCC 9-611). Additionally, the UCC requires that the notice be sent in a timely manner. UCC 9-612 requires that “[a] notification of disposition sent after default and ten days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition.”

Even if you provide timely notice of disposition to all obligated parties, you must also provide the proper information promulgated by the UCC. UCC 9-613 outlines the proper form and contents of the notification to obligated parties. That section provides that, in a non-consumer goods transaction, the contents of the notification are sufficient if it:
a. “Describes the debtor and the secured party;
b. Describes the collateral that is the subject of the intended disposition;
c. States the method of intended disposition;
d. States that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting;
e. States the time and place, by identifying the place of business or address or by providing other information that, in each case, reasonably describes the location, of a public disposition or the time after which any other disposition is to be made.”

UCC 9-613 also provides an example of a proper notification for further reference.

Once the collateral has been repossessed and the proper notifications have been sent to all obligors, the collateral must be sold in a “commercially reasonable” manner. UCC 9-627 outlines what makes a disposition of collateral “commercially reasonable” and states:

“A disposition of collateral is made in a commercially reasonable manner if the disposition is made:
• In the usual manner on any recognized market;

• At the price current in any recognized market at the time of the disposition;

• Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.”

It is also important to note that “commercially reasonable” does not necessarily mean the higher sale price was obtained at a sale. UCC 9-627 provides that a greater amount that could have been obtained by a collection, enforcement, disposition or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition or acceptance was made in a commercially reasonable manner.

Once the sale has been conducted, another notification must be sent to the obligors to comply with the UCC. Pursuant to UCC 9-616, the creditor must send the obligors a notice of the deficiency balance or surplus due. While the UCC allows a procedure to pay a surplus to the debtor after a sale, it is much more likely that a deficiency balance will be due the creditor. UCC 9-616 outlines what must be included in the explanation of the deficiency:
a. “States the amount of the surplus or deficiency;
b. Provides an explanation in accordance with division (c) of this section of how the secured party calculated the surplus or deficiency;
c. States, if applicable, that future debits, credits, charges, including additional credit service charges or interest, rebates and expenses may affect the amount of the surplus or deficiency;
d. Provides a telephone number or mailing address from which additional information concerning the transaction is available.”

COLLECTING THE DEFICIENCY

Once you have secured your right to the deficiency balance via compliance with the UCC, the next steps are enforcement and collection. This typically includes a three-step process:
1. Attempted negotiation
2. Litigation
3. Post-judgment collections

The negotiation phase is the path of least resistance and likely the best-case scenario when attempting to collect a deficiency balance. In this phase, attempts to contact and compromise with the customer can lead to lump sum settlements, payment plans and, in rare occurrences, full payoff of the deficiency balance. However, lack of engagement in negotiation, lack of response or downright refusal to pay signal a need to proceed to the litigation phase.

The intricacies of litigation are vast, dense and much better explained in the myriad of literature that exists on the subject. For the purposes of collecting the deficiency balance, obtaining a judgment from the court is vital in order to avail yourself of the legal tools available to compel payment of the debt. Litigation can be a costly and time-consuming prospect to all parties, which must be taken into account when determining this path to collection. However, litigation is a valuable tool to possibly reach a negotiated settlement and to provide a legal path to post-judgment collection.

Assuming the litigation phase resulted in a judgment from the court without negotiated settlement, the next step in the process are post-judgment collections. While a judgment does not mean that your customer will voluntarily pay, it does provide legal authority to enforce your right to payment. Depending on your state, the law provides for a number of legal mechanisms to collect a judgment against a debtor that refuses to pay voluntarily. Some of the most common of these include:

• Judgment Liens: Judgment liens may be filed, or may be applied automatically depending on the state, against real property owned by the judgment-debtor. The judgment becomes an encumbrance on the property that precludes sale or transfer of the property with clear title unless the lien is paid or otherwise resolved. While homestead exemptions, tax liabilities and prior lienholders may make the cost of foreclosing a judgment lien prohibitive, the encumbrance on the property can lead to resolution of the debt months or years in the future.
• Wage Garnishments: Many states permit garnishment of a judgment-debtor’s wages. Although amounts vary, typically, a judgment-creditor can garnish, via court order, 25% of the judgment-debtor’s take-home pay until the judgment is ultimately paid. It is important to consult your records to see if you already have your customer’s employment information on file in order to file the execution quickly.
• Bank Attachments: Many states permit attaching funds held at a financial institution. By filing the appropriate execution, the court will order the financial institution to freeze funds in an account and order them paid into the court to be disbursed to the creditor pending a hearing. It is important to note that a judgment-debtor can claim exemptions to this attachment. Social security payments, unemployment compensation, pension and other retirement accounts are some of the exemptions that do not allow for attachment. Again, it is important to consult your records for past payment information, as this will give you a direction on which financial institution to serve with the execution.
• Property Levies: State law may permit the filing of a personal property levy. By filing the appropriate writ with the court, a court office (typically a sheriff) will tag a judgment-debtors’ personal property for sale at auction. This can include vehicles, jewelry, furniture, cash, machinery or any other items owned by the judgment-debtor that can be identified with a certain amount of specificity. The method of collection should only be employed if the judgment-debtor owns items of sufficient value and free of prior liens that would lead to recovery of funds. Storage and auction of personal property can be expensive and erode your potential recovery. It is also important that you know the physical address of the items to be attached. VIN numbers, serial numbers and other identifying information is helpful.
• Creditor’s Bills: This is a lesser known but valuable post-judgment collection method for judgment-debtors who do not receive a regular wage that can be garnished or are otherwise owed payment from a third party. Judgment-debtors who work as independent contractors or commissioned salespeople do not receive a normal wage that can be garnished. A creditor’s bill is a separate litigation whereby the judgment-creditor seeks an order from the court directing any funds owed the judgment-debtor from a third party instead be paid to the judgment-creditor as partial satisfaction of the judgment. This method can also be used to divert payment of insurance proceeds or legal settlements to the judgment-creditor.
• Judgment Debtor Exams: Although this method does not directly lead to recovery of funds, it is an invaluable tool to determine the existence and location of a judgment-debtor’s assets in order to employ the other post-judgment remedies available. This process involves summoning the judgment-debtor to court and questioning them under oath as to their assets. Failure to appear after proper service and failure to answer questions truthfully can lead to a judgment-debtor being found in contempt of court. It is a rare occurrence for a piece of equipment or other collateral to fully pay the debt owed to an equipment financier after repo and sale. Most of the time, there is a substantial deficiency balance due. By observing the UCC formalities in disposing of the collateral, you can preserve your right to collecting that deficiency and utilize the myriad legal processes available to help you collect. •

Andrew C. Voorhees works with professionals at all levels, from asset recovery managers to credit managers, all the way up to the CFO. They count on him to be responsive, knowledgeable and resourceful in solving their problems, whether they need to recover money or collateral. Voorhees has a passion for history and writing and a knack for public speaking. He regularly delivers presentations on all aspects of the recovery process and is a frequent contributor to legal publications on a wide variety of legal and collection topics.