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16a-5-103. (UCCC) Restrictions on deficiency judgments. (1) This section applies to a deficiency on a consumer credit sale of goods or services and on a consumer loan in which the lender is subject to defenses arising from sales (K.S.A. 16a-3-405, and amendments thereto); a consumer is not liable for a deficiency unless the creditor has disposed of the goods in good faith and in a commercially reasonable manner.

(2) If the seller repossesses or voluntarily accepts surrender of goods which were the subject of the sale and in which he has a security interest, the buyer is not personally liable to the seller for the unpaid balance of the debt arising from the sale of a commercial unit of goods of which the cash sale price was $1,000 or less, and the seller is not obligated to resell the collateral unless the buyer has paid 60% or more of the cash price and has not signed after default a statement renouncing his rights in the collateral.

(3) If the seller repossesses or voluntarily accepts surrender of goods which were not the subject of the sale but in which the seller has a security interest to secure a debt arising from a sale of goods or services or a combined sale of goods and services and the cash price of the sale was $1,000 or less, the buyer is not personally liable to the seller for the unpaid balance of the debt arising from the sale, and the seller's duty to dispose of the collateral is governed by the provisions on disposition of collateral (K.S.A. 84-9-610, and amendments thereto) of the uniform commercial code.

(4) If the lender takes possession or voluntarily accepts surrender of goods in which he has a security interest to secure a debt arising from a consumer loan in which the lender is subject to defenses arising from sales (K.S.A. 16a-3-405, and amendments thereto) and the net proceeds of the loan paid to or for the benefit of the debtor were $1,000 or less, the debtor is not personally liable to the lender for the unpaid balance of the debt arising from the loan and the lender's duty to dispose of the collateral is governed by the provisions on disposition of collateral (K.S.A. 84-9-610, and amendments thereto) of the uniform commercial code.

(5) For the purpose of determining the unpaid balance of consolidated debts or debts pursuant to open end credit, the allocation of payments to a debt shall be determined in the same manner as provided for determining the amount of debt secured by various security interests (K.S.A. 16a-3-303, and amendments thereto).

(6) The consumer may be liable in damages to the creditor if the consumer has wrongfully damaged the collateral or if, after default and demand, the consumer has wrongfully failed to make the collateral available to the creditor.

(7) If the creditor elects to bring an action against the consumer for a debt arising from a consumer credit sale of goods or services or from a consumer loan in which the lender is subject to defenses arising from sales (K.S.A. 16a-3-405, and amendments thereto), when under this section the creditor would not be entitled to a deficiency judgment if the creditor took possession of the collateral, and obtains judgment:

(a) The creditor may not take possession of the collateral, and

(b) the collateral is not subject to levy or sale on execution or similar proceedings pursuant to the judgment.

History: L. 1973, ch. 85, § 82; L. 2005, ch. 144, § 16; July 1.

KANSAS COMMENT, 2010

1. Where there has been a default with respect to a secured consumer credit transaction, the rights of the creditor and consumer are controlled by part 6 (Default) of UCC article 9 (K.S.A. 84-9-601, et seq.), except to the extent that such rights are changed by the U3C (see K.S.A. 84-9-201). Under the UCC, the creditor has the right to take possession of the collateral on default and may proceed without judicial process. K.S.A. 84-9-609. The creditor may then sell, lease or otherwise dispose of the collateral in public or private proceedings, and may buy at the foreclosure sale. The consumer is entitled to reasonable notification of the time and place of any public sale and reasonable notification of the time after which the collateral will be disposed of privately. K.S.A. 84-9-611. Proceeds are applied first to the expenses of repossession and disposition and then to satisfaction of the indebtedness. Any excess is paid to the consumer and the consumer is liable for any deficiency. K.S.A. 84-9-615. If the consumer has paid 60% of the cash price in the case of a sale or 60% of the principal in the case of a loan and, after default, has not signed a statement renouncing his or her rights, the creditor must dispose of the collateral. If the creditor fails to dispose of the collateral within 90 days after repossession the consumer may recover under K.S.A. 84-9-625. In all other cases the creditor may retain the collateral in satisfaction of the debt, if the consumer does not object after receipt of notification of the creditor's intention to do so. K.S.A. 84-9-620 and K.S.A. 84-9-622. The consumer has a right to redeem the collateral at anytime before disposition of the collateral or satisfaction of the obligation, by tendering fulfillment of all obligations secured by the collateral as well as expenses of the creditor. K.S.A. 84-9-623.

2. The provisions of the UCC outlined above are modified to some extent by this section with respect to proceedings to enforce rights arising from consumer credit sales and consumer loans in which the lender is subject to claims and defenses arising from sales and leases, or so-called "all in the family" loans. See K.S.A. 16a-3-405. For both types of transactions, subsection (1) adopts the position of the line of cases under the UCC that directly or indirectly deny the creditor a deficiency if the creditor has not disposed of the collateral in good faith and in a commercially reasonable manner. See, e.g., Beneficial Finance Co. v. Reed, 212 N.W.2d 454 (Iowa 1973).

Several Kansas cases have cited and discussed the rule of subsection (1); most, however, have found that the particular creditor disposed of the goods in a commercially reasonable manner and, therefore, was entitled to recover a deficiency. See, e.g., Kelley v. Commercial National Bank, 235 Kan. 45, 678 P.2d 620 (1984); Medling v. Wecoe Credit Union, 234 Kan. 852, 678 P.2d 1115 (1984). In Topeka Datsun Motor Co. v. Stratton, 12 Kan. App. 2d 95, 736 P.2d 82 (1987), the court held that failure to provide proper notice to the consumer under the UCC rules constituted failure to dispose of the collateral in a commercially reasonable manner and, as a result, the creditor was barred from recovering a deficiency under the rule of this subsection.

3. Under subsection (2), with respect to a consumer credit sale in which the cash price is $1,000 or less, a seller who repossesses or voluntarily accepts surrender of goods sold in which the creditor has a security interest may not obtain a deficiency judgment against the buyer if the proceeds on disposition of the goods are insufficient to pay the indebtedness and the expenses of the seller. The seller need not resell the goods unless the buyer has paid 60% of the cash price and, after default, has not signed a statement renouncing his or her rights in the collateral. In cases of sales of $1,000 or less, this section gives to the seller the option of either suing for the unpaid balance or repossessing, but the creditor may not do both. The UCC concept of "commercial unit" is borrowed, see K.S.A. 84-2-105(6), and is intended to preclude the argument that subsection (2) is inapplicable to a consumer credit sale of a stove, a refrigerator, a washer, a dryer, and a TV set for a total cash price of more than $1,000 when each of these "commercial units" does not separately cost more than $1,000.

4. The seller may have a security interest in collateral other than goods sold in the consumer credit sale. The U3C allows the seller to take a security interest in collateral other than goods sold in certain limited circumstances. See K.S.A. 16a-3-301 and 16a-3-302, and the Kansas comments to those sections. In those cases, if the cash price of the sale is $1,000 or less, the seller who repossesses or voluntarily accepts surrender of collateral may not obtain a deficiency judgment against the buyer. Subsection (3). The rights of the buyer with respect to compulsory disposition of collateral which was not the subject of the sale and recovery of any surplus on disposition are defined in the UCC. See K.S.A. 84-9-610 and 84-9-620.

5. Under subsection (4), if a lender makes a consumer loan in which the net proceeds paid to or for the benefit of the consumer are $1,000 or less to enable the consumer to purchase goods under circumstances where the lender is subject to claims and defenses arising from the sale of goods (K.S.A. 16a-3-405) and, pursuant to a security interest acquired in the goods, repossesses or voluntarily accepts surrender of the goods, the lender may not obtain a deficiency judgment against the consumer if the proceeds on disposition of the goods are insufficient to pay the indebtedness and the expenses of the lender with respect to that loan. Whether the lender is subject to this restriction depends on whether the criteria for "all in the family" loans in K.S.A. 16a-3-405 are satisfied. The importance of these criteria is illustrated by Central Finance Co., Inc. v. Stevens, 221 Kan. 1, 558 P.2d 122 (1976), where a direct loan under $1,000 was used by the consumer to buy a car. The loan was not an "all in the family" loan and, as a result, the lender was not precluded by this section from recovering a deficiency. However, if, for example, a consumer borrowed $700 in a "direct loan" from a lender in corporate control of a dealer from whom the consumer purchased an item with the proceeds of the loan, the lender would be precluded from obtaining a deficiency against the consumer. See the definition of "person related to" in K.S.A. 16a-1-301(31).

6. Subsection (6) is designed to protect creditors against consumers who wrongfully damage collateral or who wrongfully refuse to surrender collateral. In addition to the right of the creditor to repossess the collateral, this subsection gives the creditor a right of action for damages for the loss of value of the collateral resulting from wrongful injury to the goods or, in the case of wrongful refusal to surrender the collateral, for any loss suffered by the creditor because of an inability to repossess.

7. Subsection (7) prohibits a creditor not entitled to a deficiency judgment under this section from achieving substantially the same result by first obtaining judgment for the debt and then levying on the collateral on execution.

8. It has been held that elimination of a deficiency judgment under this section is not an unconstitutional impairment of contract rights. See Sanco Enterprises, Inc. v. Christian, 495 P.2d 404 (Okla. Sup. Ct. 1972).

Law Review and Bar Journal References:

"The New Kansas Consumer Legislation," Barkley Clark, 42 J.B.A.K. 147, 197 (1973).

Deficiency judgments, 22 K.L.R. 297, 308, 309 (1974).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 179 (1975).

"Summary Repossession, Replevin, and Foreclosure of Security Interests," Thomas V. Murray, 46 J.B.A.K. 93, 96, 97 (1977).

"Survey of Kansas Law: Consumer Law," John C. Maloney, 27 K.L.R. 197, 200 (1979).

"Uniform Commercial Code: Deficiency Judgments in a Commercially Unreasonable Setting," Michael L. Happe, 22 W.L.J. 160, 166 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 367 (1984).

"Debtor's Remedies When Debitor Seeks Deficiency Judgment on a Consumer Installment Contract," John F. Cowles, XIV J.K.T.L.A. No. 4, 18, 19 (1991).

"Creditor Beware: From Default Through Deficiency Judgment," Wanda M. Temm, 60 J.K.B.A. No. 8, 17, 19, 22 (1991).

"A Primer on Purchase Money Security Interests Under Revised Article 9 of the Uniform Commercial Code," Keith G. Meyer, 50 K.L.R. 143 (2001).

CASE ANNOTATIONS

1. Lender not subject to defenses under K.S.A. 16a-3-405; not precluded from obtaining deficiency judgment. Central Finance Co., Inc. v. Stevens, 221 Kan. 1, 2, 4, 6, 558 P.2d 122 (1976).

2. Cited; UCC secured creditor sale of collateral not in "commercially reasonable manner"; effect. Westgate State Bank v. Clark, 231 Kan. 81, 84, 85, 90, 642 P.2d 961 (1982).

3. Creditor's disposal of goods must be done in good faith and commercially reasonable manner; failure to do so is absolute bar to deficiency judgment; distinction between UCC and UCCC discussed. Medling v. Wecoe Credit Union, 234 Kan. 852, 861, 678 P.2d 1115 (1984).

4. Consumer is not liable for deficiency judgment as matter of law unless repossessed creditor has disposed of goods in good faith and commercially reasonable manner; burden on creditor to prove. Kelley v. Commercial National Bank, 235 Kan. 45, 50, 678 P.2d 620 (1984).

5. Cited; creditor seeking deficiency judgment must prove collateral sold in "commercially reasonable manner" or judgment absolutely barred. Garden Nat'l Bank v. Cada, 11 Kan. App. 2d 562, 566, 729 P.2d 1252 (1986).

6. Secured party failed to act in commercially reasonable fashion as matter of law; deficiency judgment reversed. Topeka Datsun Motor Co. v. Stratton, 12 Kan. App. 2d 95, 100, 104, 107, 109, 736 P.2d 82 (1987).

7. Restraint on deficiency judgments of lender who is subject to defenses arising from sales. Halloran v. North Plaza State Bank, 17 Kan. App. 2d 840, 843, 844, 844 P.2d 764 (1993).

8. Disposal of collateral at well-known regularly scheduled, dealer-only auction may be commercially reasonable. Union Nat'l Bank of Wichita v. Schmitz, 18 Kan. App. 2d 403, 406, 408, 853 P.2d 1180 (1993).


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