Legal Dings, Dents and Crashes: Collecting on Auto Deficiency Accounts – Part I

Guest Blog by M. Brent Yarborough, Zarzaur & Schwartz, P.C.

Business Loan Approval ConceptOn October 16, 2015, Michael Joyce, of Shindler and Joyce, and I presented “Legal Dings, Dents and Crashes: Collecting on Auto Deficiency Accounts” at NARCA’s Fall Conference in Washington, DC. This article, consisting of Parts I and II, is based in part upon the materials we put together for that presentation. Although he was unable to join us in Washington, Keith Shindler, of Shindler & Joyce, was instrumental in developing the presentation. I would also like to thank Nikkita Brown, of Shindler & Joyce for her help in keeping us organized and on schedule.


Automobile deficiency accounts are relatively document intensive, compared with other types of consumer collection matters. In addition to a copy of an executed retail installment agreement, the practitioner should also expect to receive documents related to the consumer’s application for the loan, the consumer’s payment history, and the repossession and resale of the vehicle. Other important documents include a copy of the notice of intent to sell and a copy of the explanation of the deficiency balance.


The FDCPA, specifically 15 USC § 1692i, gives the creditor attorney a choice between suing the consumer in the judicial district in which the consumer resides at the commencement of the action or in the judicial district in which the consumer signed the contract sued upon. While most consumer collection suits are brought in the district in which the consumer resides, when bringing an auto deficiency suit, there are good reasons for looking to the place of contract execution. In many cases there are co-signers that can be named as defendants. Those co-signors often do not live in the same judicial district, but in most instances they each signed the contract at the dealership. Also, should it be necessary to call a witness from the dealership, this will be more convenient if suit is brought within that judicial district.


A number of auto financing companies are using electronic signatures for contracts and other documents executed at the time of sale. The practitioner dealing with the consumer who denies signing the contract, or with the judge who wants to see the “real” signature, should become familiar with the Uniform Electronic Transaction Act (UETA). This uniform law has been adopted in forty-seven states, plus the District of Columbia. The other three states have non-uniform laws that recognize electronic signatures. Congress also has enacted the Electronic Signatures in Global and National Commerce Act (ESIGN). Among other things, UETA provides that a “signature may not be denied legal effect or enforceability solely because it is in electronic form.” Please note that it is possible for electronic documents to be executed remotely by the buyer or co-signer. Thus, if you are brining suit in the judicial district in which the dealership is located, you should confirm that the seller’s practice is to have the sale documents executed on-site.


Some auto loans are pledged as collateral to the issuers’ lenders. When a loan has been securitized, the securitization arrangement is often reflected on the instrument itself. The practitioner should determine whether the lender has pledged its legal title or simply the income stream from the loan. The answer to this question will permit the attorney to correctly identify the creditor/plaintiff for reference in letters and pleadings.


Although there are a number of defenses a consumer might raise in response to a complaint seeking to recover a deficiency, most tend to take one of these forms:

  1. the lender took the car, so I should not have to pay,
  2. I returned the car voluntarily, so there is no more debt, or
  3. the lender somehow erred in repossessing or reselling the vehicle or in collecting the deficiency, thus I am off the hook.

While, in certain situations, some states have statutes that affect a creditor’s right to collect a deficiency following repossession and resale, a creditor generally does have the right to recover a deficiency. This is also true when the vehicle is voluntarily surrendered rather than repossessed. But if the consumer alleges that the lender agreed to accept the surrendered vehicle in exchange for extinguishing any deficiency balance, then the court might enforce this bargain, if the consumer can prove up the elements of accord and satisfaction, waiver, or estoppel. Also, in rare cases in which the vehicle was surrendered within a short time following the sale, the consumer might allege a revocation of acceptance.

Resale Not Commercially Reasonable

Often a consumer will defend a deficiency suit by alleging that the resale of the vehicle was not commercially reasonable. The consumer will generally attempt to support this defense by showing that the price obtained at sale or auction was substantially less than some listed value. However, price alone does not determine whether a sale was commercially reasonable. Instead, courts will look to the procedures used by the seller and examine whether those procedures were in conformity with reasonable commercial practices among dealers disposing of the same type of collateral.

Each state applies one of three rules to determine the effect of a commercially unreasonable sale on the creditor’s ability to recover a deficiency balance. In states that have adopted the absolute bar rule, a commercially unreasonable sale will completely bar a deficiency. In most other states, courts apply a rebuttable presumption rule. This rule presumes that the value of the collateral equals the amount of the remaining debt, but allows the creditor an opportunity to rebut this presumption by showing that the actual value of the collateral was less than the remaining loan balance. If the creditor is successful in making this showing, then it may recover the difference. A very small number of states apply a set-off rule. In those states, a creditor may recover a deficiency even when the sale was commercially unreasonable, but the consumer may reduce the deficiency amount by setting off statutory or actual damages caused by the creditor’s noncompliance.

Statute of Limitations

The last defense that should be mentioned here is the statute of limitations. Article 2 of the Uniform Commercial Code (§ 2-725) contains a four-year limitation period applicable to actions involving a sale of goods. Although a consumer’s default in failing to make payments to the lender appears to relate more to the financing of a loan than to the sale of a good, some states have applied Article 2’s four-year SOL to deficiency actions, rather than the state’s longer period for breach of a written contract. The issue of which SOL to apply to auto deficiency actions has yet to be decided by appellate courts in many states. Thus creditor attorneys should be aware of a federal case from Washington in which the court held that the bona fide error applies to a mistake of law with regard to the UCC’s four-year limitation period. Gray v. Suttell & Associates et al., No. 2:09-cv-251, ECF Document 544 (E.D. Wash. Aug. 12, 2015).

In Part II, we will discuss Counterclaims in collecting on auto deficiency accounts.

Brent Yarborough, of Zarzaur & Schwartz, P.C., Birmingham, Alabama

Michael Joyce and Keith Shindler, of Shindler & Joyce, Schaumburg, Illinois

Categories: Auto deficiencies, Debt Collection, Guest Blogs

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