Texas Commercial Law Firm

Most are familiar with the services provided by the “repo man”.  Typically, the repo man will take possession and control of a motor vehicle, ideally without the delinquent borrower’s knowledge and consent.  This is usually the fastest and most economical means of recovering collateral.  Other than to advise clients concerning the proper processes to follow we are not involved in the physical repossession of vehicles.  Repossession and it’s many attendant considerations are discussed in detail below.

Sequestration (Replevin)

“Sequestration” (sometimes referred to as “replevin”) refers to a pre-judgment judicial process by which a court order is obtained requiring the immediate turnover of a specific item of personal property, (typically a motor vehicle) to the peace officer who serves the Writ of Sequestration.  Clients who have been unsuccessful in repossessing collateral through “self-help” means must typically resort to sequestration.

We handle a substantial volume of sequestrations of vehicles, RV’s, boats and mobile homes and have done so for many years.  We have an automated process and specially trained staff to handle sequestrations on a volume basis.  A summary of sequestration services we provide follows:

Sequestration Services

Balcom Law Firm provides complete sequestration services throughout Texas (in all 254 counties), including the following:

Prepare and send the initial demand letter.

Prepare and file all pleadings necessary to initiate a lawsuit for recovery of collateral and/or monetary judgment, including Plaintiff's Original Petition, Ex Parte Application for Writ of Sequestration, Order Granting Ex Parte Writ of Sequestration, Affidavit for Sworn Account and for Admission of Business Records and Verification and Application in Support of Plaintiff's Application for Writ of Sequestration.

Obtain judge's signature on Order Granting Ex Parte Writ of Sequestration

Provide you with copies of all court filings.
If your bonding company does not draft its own bonds, we will draft the Sequestration Bond and provide it for execution.

Coordinate with constable's/sheriff's offices throughout Texas to effectuate proper service of process, recovery of collateral and in the case of manufactured home sequestrations, court ordered removal of defendants from the collateral.

Monitor court deadlines to ensure timely prosecution of cases.

Schedule and attend hearings to compel recovery of collateral as needed.

Provide you with prompt notice of completion of service of process upon all parties, recovery of collateral and readiness for move outs.

Prepare and submit Default Judgments for uncontested matters and when necessary, attend hearings regarding same.

Prepare and submit final Abstracts of Judgment for recording in the appropriate county records.

Pursue deficiency judgments once collateral is sold.

Prepare and file of lawsuit dismissals, as needed.

 

 

            Repossession and Foreclosure of Personal Property under UCC Article 9

A.            The Uniform Commercial Code:  History and General Principles

Although Article 9  of the Uniform Commercial Code ("UCC") (generally, Section 9 of the Texas Business and Commerce Code) may seem complex to one unfamiliar with it, in actuality,  the UCC greatly simplifies pre-code personal property security devices.  The UCC was created to simplify various bodies of law in each state relating to creating an enforceable lien against personal property.  Prior to the UCC, each type of personal property (chattel paper, instruments, equipment, etc.) had its own body of law and procedures.  Perhaps the most revolutionary and innovative change brought by Article 9 was to develop a universal security device governed by a uniform set of laws.

Article 9 applies to contractual liens and specifically excludes from its coverage judgment liens or statutory liens.  Such liens arise by operation of law rather than by contract.  Similarly, Article 9 specifically excludes realty (other than fixtures).

To create a security interest in personal property under Article 9 the lien must "attach".  This means the lien has become enforceable against the debtor and against third parties not holding "perfected" liens.  Perfection is generally achieved under the UCC by proper filing of notice. 

B.            Creating, Attaching and Perfecting Security Interests

In order to have an enforceable security interest and the right to repossess and foreclose, the creditor must take the steps set forth in Article 9.  Once a creditor complies with these fairly simple requirements, a security interest is created in his favor and the lien is said to "attach".

Once a "lien attaches", the security interest becomes enforceable against the debtor.  This means that upon default, the creditor may foreclose or take other steps to enforce its interest in the collateral.  While attachment of the security interest is basic to the right of a creditor to enforce its lien against the debtor, it does not put third parties on notice of the lien or establish the creditors' priority vis-a-vis any third party taking a lien against the collateral after the creditor's lien.  In order to win in a lien contest against such third party creditors, a security interest must be "perfected". 

Perfection against personal property (other than items such as stock, money, instruments, etc. which are perfected by possession) is achieved by filing a financing statement with the Secretary of State of the state where the property is located at the time the lien is created or if affixed to real estate, in the county where the real estate is located.  Once a creditor's lien is properly perfected, its lien priority is established for most purposes.

A lender may create an Article 9 security interest simply by entering into a written security agreement with the debtor concerning property in which the debtor has an interest in exchange for value (typically a loan) given by the creditor.  While security agreements are frequently lengthy in order to cover details of payment, default, lien enforcement , etc.,  to be an enforceable security agreement, a writing is only required to have the following:  (1) language by which the debtor grants a security interest; (2) an adequate description of the collateral; and (3) the debtor's signature.

In addition to protecting the parties to the agreement, the security agreement protects third parties.  Because a debtor in default or in bankruptcy may not be concerned about who among his creditors realizes on the collateral, the security agreement has essential evidentiary value in resolving lien priority issues.

While Article 9 applies to the creation and perfection of security interests in many items of personal property, there are notable exceptions.  For example, security interests in ships, railroad equipment, and aircraft, among other items, must be perfected in accordance with federal statute.  Filing a financing statement with the Secretary of State's office will not perfect the creditor's security interest for these items.

Likewise, perfection for certain items such as automobiles is typically governed by a state notice system (such as certificate of title).  However, even in areas where Article 9 does not control proper means of perfection of a security interest, Article 9 will govern other aspects of a secured transaction not governed by the federal or state statute.  This is why we look to Article 9 for guidance concerning how to repossess vehicles and sell them at foreclosure.  Assuming we have a properly attached and perfected security interest against personal property of the debtor in default, then we must next consider what steps may be taken to attempt to recover our debt by realizing on the collateral.

C.            "Self-help" Remedies on Default

            1.            Defining default.  Although Article 9 clearly requires a "default" prior to a secured creditor taking any action the word "default" is not defined in Article 9.  Consequently, we must look both to the terms of the agreement between the parties and Texas law in evaluating whether a default has occurred.  While the most common default is failure to make payments, failing to comply with the security agreement in other respects, (e.g. failing to properly maintain the collateral or keep the collateral insured) may also amount to a condition of “default”.

            2.            Self-help.  Upon default, a creditor may seize the collateral (subject to UCC and state law restrictions against trespass and breach of peace) and either keep the collateral in satisfaction of the debt or resell the collateral and apply the proceeds to the debt.  In the alternative, the creditor may sue on the note and obtain a judgment and proceed by execution and levy.   Many creditors prefer to use self-help and foreclose under the UCC whenever possible because it allows them to realize upon collateral sooner and less expensively than proceeding judicially.

When proceeding non-judicially, the creditor must first obtain possession of the collateral.  A secured party has the following self-help alternatives:  Section 9-503 states:

unless otherwise agreed a secured party has on default the right to take possession of the collateral.  In taking possession a secured party may proceed without judicial process if this can be done without breach of the peace or may proceed by action.  If the security agreement so provides the secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.  Without removal a secured party may render equipment unusable, and may dispose of collateral on the debtor's premises under Section 9-504.

            3.            Breach of the peace.  The most important restriction upon repossession of collateral is that it be done without "breaching the peace".   A breach of the peace may expose a creditor to tort liability, liability under Section 9-507 and deprive the creditor of the right to a deficiency judgment.  Although the most critical element in repossession, the term "breach of the peace" is somewhat vague.

Texas decisions appear to make repossession a riskier alternative.  The Texas Supreme Court has stated that the secured creditor trying to repossess collateral has two choices:  (1) it may repossess if this can be done without breach of the peace; or (2) it may choose to take legal action.  If the secured creditor chooses the first option, it runs the risk that repossession may, in fact, breach the peace and if that happens, the secured creditor may be held liable in tort.  Mbank El Paso, N.A. v. Sanchez, (Tex. 1992) 836 S.W.2d 151 rehearing overruled). 

In Sanchez, the court found that the bank which had hired a towing service to repossess an automobile could not delegate the duty to avoid breach of peace even though the towing service was an independent contractor.  Id.  The court imposed on secured creditors pursuing non-judicial repossession a duty to take precautions for the public safety.  Nevertheless, there are instances when repossession has been determined to be allowable.
 
It is clear that consent to repossession, given freely by the debtor at the time of repossession cannot be a breach of the peace.  The critical element here is that the consent be freely given and not induced by duress, fraud or given by a third party other than the debtor. 

Fraud may be allowable in certain circumstances although the courts frown on the fraudulent or unauthorized use of a law enforcement officer's badge or by one representing that he is a law enforcement officer or affiliated in some way with a state or federal agency.

It is important to note that violence or the threat of violence will constitute a breach of the peace regardless of whether the violence or threats of violence originate with the secured party or from the debtor.  Hubbard v. Lagow, 576 S.W.2d 163 (Tex. Civ. App. - Austin, 1979, writ ref'd n.r.e.).  Consequently, if a secured party encounters hostility, threats of violence or actual violence while attempting to repossess collateral, he should retreat immediately, end all self-help efforts and proceed to file suit for judicial foreclosure.  Id.

D.            When "Self-Help" Doesn't Work:  Judicial Remedies

There is no doubt that from a legal standpoint the safest way for a secured party to proceed to recover collateral is to sue for judicial foreclosure.  Repossession undertaken in this manner insulates the creditor from claims of breach of the peace, improper repossession and a multitude of other claims which have been asserted by disgruntled debtors.  In addition, if a secured creditor plans to seek a deficiency, the deficiency action will be included within the judicial foreclosure.  When proceeding judicially, a creditor is much less likely to face objections from a debtor that the debtor should not have to pay a deficiency as a result of improper repossession, maintenance, notice, or sale of the collateral.

On the other hand, safety has its price.  Suit for judicial foreclosure when compared to self-help repossession and sale is time consuming and expensive.  Judicial foreclosure requires filing suit, serving the debtor, filing motions, responding to motions, attending hearings and, potentially,  trial.  Once judgment is obtained, the creditor must obtain a writ of execution and a sheriff's sale of the property. 

A creditor is not entirely safe from liability by pursuing judicial foreclosure, however, because an improperly conducted sheriff's sale may cause additional problems for the creditor.  The fact that the debtor is responsible for any additional costs associated with a judicial foreclosure and with additional interest which accrues until the collateral is liquidated, is not particularly consoling to most creditors since it is uncommon to collect a deficiency from one so financially distressed they cannot pay their loan and suffer the loss of their property.

E.            Foreclosure Sales of Personal Property

Under the UCC, there are two procedures by which a defaulting debtor may be legally dispossessed of ownership of personal property.  As a preliminary matter, both procedures require the notification of others who have a security interest in the property as reflected by their filing of a UCC financing statement with the Secretary of State or the County Clerk.

            1.            Lien report.  To assist you in identifying and locating the secured parties, private reporting agencies, (such as Capitol Commerce Reporter) will, for a fee, provide you with a report listing all parties who have filed a financing statement against the debtor with the Secretary of State.  The report may also include copies of the financing statements filed by the other creditors, if requested.  For local filings which include fixtures, goods which are to become fixtures, or farm equipment, the UCC division of the County Clerk's office will provide reports similar to those provided by Capitol Commerce Reporter.

            2.            Public or private sale.  Once you have determined the parties who have an interest in property of your debtor, you may proceed to dispose of the defaulting debtor's property through either public or private sale.  The UCC has different notice requirements for each.  For a public sale, a notice letter must be sent to the debtor and all parties having a security interest in the property sought to be sold.  The notice letter must specify the time and place of the sale and afford the debtor and secured parties a reasonable opportunity to attend the sale.  A private sale merely requires that notice be sent to the debtor and all secured parties informing them of the time after which the property will be sold.

            3.            Commercially reasonable sale.  The UCC standard for a properly conducted sale is what is called the "commercially reasonable" standard.  For a public sale, the standard focuses on how the sale is conducted.  For example, whether there was adequate advertisement of the sale and whether the collateral was sold at a reasonable time and in an accessible location would be indicative of the "commercial reasonableness" of the sale.  In a private sale, the "commercially reasonable" standard focuses primarily on the amount received for the goods.  If the goods are sold for approximately their current market value, there is little chance the sale can be successfully attacked.  You, as a secured party, may buy at a public or private sale provided the UCC requirements have been met.

            4.            Valuation of property.  When there is doubt as to the value of property to be sold by private sale, an appraisal is recommended.  An appraisal by a reliable and credible appraiser will help in proving that you conducted a "commercially reasonable" sale by establishing some indication of the market value of the collateral.  If the collateral is sold at, near or above the appraised value, you will have substantially protected yourself against claims that the sale was not "commercially reasonable".  You should always remember as well that proceeds from the sale (public or private) that exceed the amount owed to you are to be turned over to the debtor.

            5.            Retention of collateral in satisfaction of debt.  An alternative to public or private sale is also available.  You can, under the UCC, simply retain the collateral in satisfaction of the obligation.  Written notice of your proposal to do so must be sent to the debtor and any other party secured by the same collateral.  Such notice should be sent certified mail, return receipt requested.  If you receive an objection in writing to your retention of the collateral from the debtor or a secured party within twenty-one (21) days after notice is sent, you must then proceed to sell the collateral by private or public sale using the procedures for those sales outlined above.  If you receive no written objection within twenty-one (21) days, you may simply retain the collateral in satisfaction of the debtor's obligation.

            6.            Notification is essential.  The importance of the UCC notification requirements cannot be over-emphasized.  If one entitled to receive notification is not notified, he has a right to recover from the party conducting the sale any loss they have suffered as a result of the lack of notification, up to the amount of the value of their security interest in the collateral.  To protect yourself against an action for wrongful disposition of property, extra care should be taken to document your satisfaction of the notice requirements and your efforts to conduct a "commercially reasonable" sale of the property.