Case Title: Kruse v. Voyager Ins. Cos.

Citation: 1995-Ohio-120

Docket Number: 19940827

State: ohio

Court: Ohio Supreme Court

Date: 1995-05-17T00:00:00Z

Document:
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Kruse, Appellant, v. Voyager Insurance Companies et al.; Fifth                   
Third Bank of Northwestern Ohio, N.A., Appellee.                                 
[Cite as Kruse v. Voyager Ins. Cos. (1995),       Ohio                           
St.3d      .]                                                                    
Secured transactions -- Disposition of collateral after default                  
     by debtor -- Where collateral is consumer goods, debtor                     
     may recover pursuant to R.C. 1309.50(A), when.                              
                             - - -                                               
Regardless of whether a secured party's disposition of                           
collateral after default by the debtor is commercially                           
reasonable, where the collateral is consumer goods the debtor                    
may recover pursuant to R.C. 1309.50(A) if the secured party                     
fails to provide the debtor with reasonable notice of the sale                   
of the collateral in accordance with R.C. 1309.47(C).                            
                             - - -                                               
     (No. 94-827 -- Submitted March 8, 1995 --                                   
Decided May 17, 1995.)                                                    
     Certified by the Court of Appeals for Lucas County, No.                     
L-93-169.                                                                        
     Plaintiff-appellant, Marianne K. Kruse, purchased an                        
automobile in 1990 and financed the purchase with money                          
borrowed from defendant-appellee, Fifth Third Bank of                            
Northwestern Ohio, N.A. ("Fifth Third"), with the automobile                     
serving as collateral for the loan.  In late 1991, Fifth Third                   
notified her that she was in default on her loan payments.                       
Shortly thereafter, appellant's automobile was repossessed and                   
sold by Fifth Third.                                                             
     After the foreclosure and sale, appellant brought suit                      
against Fifth Third and against Voyager Insurance Companies,                     
properly called Voyager Life Insurance Company ("Voyager"),                      
claiming that the automobile had been wrongfully repossessed.                    
Fifth Third answered and counterclaimed for a deficiency                         
judgment against appellant in the amount of $2,477.44 plus                       
interest, alleging that the proceeds of the sale after default                   
fell short of meeting appellant's debt.  During the litigation,                  
appellant dismissed her claims against Voyager.  Appellant and                   
Fifth Third each filed motions for summary judgment with the                     
trial court.  The trial court granted summary judgment in favor                  
of Fifth Third on appellant's claim of improper repossession,                    
finding that the repossession was lawful; denied Fifth Third's                   
motion for summary judgment on its counterclaim; and granted                     
appellant's motion for leave to file an amended answer to Fifth                  
Third's counterclaim.                                                            
     In her amended answer, appellant claimed that Fifth Third                   
had failed to give her proper notice of the foreclosure sale,                    
and that Fifth Third had failed to prove the commercial                          
reasonableness of the sale.  Appellant contended that Fifth                      
Third's failure to comply with R.C. 1309.47 barred Fifth Third                   
from collecting a deficiency judgment against her.  In                           
addition, appellant counterclaimed for the recovery allowed by                   
R.C. 1309.50(A) when a secured party fails to comply with                        
requirements for disposition of the collateral.                                  
     Both parties again moved for summary judgment.  The trial                   
court found that Fifth Third had not given appellant adequate                    
notice of the sale of the collateral, and that, therefore,                       
Fifth Third was barred from recovering a deficiency judgment                     
from appellant.  As to appellant's counterclaim for recovery                     
under R.C. 1309.50(A), the court determined that since                           
appellant now conceded that the sale of the automobile was                       
commercially reasonable, Fifth Third was not liable under R.C.                   
1309.50(A) for the failure to provide appellant with proper                      
notice of the sale.  Appellant appealed from the decision to                     
deny recovery on her counterclaim, and the court of appeals                      
affirmed.                                                                        
     The appellate court, finding its judgment to be in                          
conflict with the judgment of the Court of Appeals for Cuyahoga                  
County in Soc. Natl. Bank v. Hardmon (Oct. 11, 1990), Cuyahoga                   
App. Nos. 57098 and 57206, unreported, 1990 WL 151666, and with                  
the judgment of the Court of Appeals for Franklin County in                      
Soc. Bank, N.A. v. Cazeault (1993), 83 Ohio App.3d 84, 613                       
N.E.2d 1103, certified the record of the cause to this court                     
for review and final determination.                                              
                                                                                 
     Boyk & McCulley and Steven L. Crossmock, for appellant.                     
     Gregory Sova, for appellee.                                                 
                                                                                 
     Alice Robie Resnick, J.  The issue certified for our                        
review is "whether a creditor's failure to provide adequate                      
notice of the sale of collateral establishes, as a matter of                     
law, that the sale was commercially unreasonable so as to                        
permit the debtor to not only defeat a prayer for a deficiency                   
judgment but also obtain money damages under R.C. 1309.50(A)."                   
     R.C. 1309.50(A) (UCC 9-507[1]) provides:                                    
     "If it is established that the secured party is not                         
proceeding in accordance with the provisions of sections                         
1309.44 to 1309.50, inclusive, of the Revised Code, disposition                  
may be ordered or restrained on appropriate terms and                            
conditions.  If the disposition has occurred the debtor or any                   
person entitled to notification or whose security interest has                   
been made known to the secured party prior to the disposition                    
has a right to recover from the secured party any loss caused                    
by a failure to comply with the provisions of sections 1309.44                   
to 1309.50, inclusive, of the Revised Code.  If the collateral                   
is consumer goods, the debtor has a right to recover in any                      
event an amount not less than the credit service charge plus                     
ten percent of the principal amount of the debt or the time                      
price differential plus ten percent of the cash price."                          
(Emphasis added.)                                                                
     In 2 White & Summers, Uniform Commercial Code (3 Ed.1988)                   
623, Section 27-18, the authors discuss the rationale behind                     
the last sentence of UCC 9-507(1):                                               
     "It is now all but indisputable that compensatory damages                   
are an insufficient deterrent to creditor misbehavior in nickel                  
and dime consumer transactions where such damages will amount                    
to very little in most cases.  It is not surprising, therefore,                  
that the draftsmen installed a statutory penalty in 9-507 to up                  
the ante for those who would abuse the consumer * * *.                           
     "The sentence is a penalty -- a 'minimum recovery' the                      
comment [Comment 1 to UCC 9-507] calls it -- and the consumer                    
is entitled to it even if he has not suffered a penny's loss."                   
(Footnotes omitted.)                                                             
     Although appellant has conceded that Fifth Third's sale of                  
her automobile after foreclosure was done in a commercially                      
reasonable manner, appellant claims entitlement to the award of                  
R.C. 1309.50(A) relating to consumer goods.  Fifth Third urges                   
that the commercial reasonableness of the sale precludes the                     
award and that a creditor that has been barred from recovering                   
a deficiency judgment for failure to provide proper notice of                    
the disposition of collateral to a debtor in default may not                     
also be subject to liability involving consumer goods under                      
R.C. 1309.50(A).1  Fifth Third did not appeal from the trial                     
court's decision that notice of the sale was inadequate, so no                   
issue regarding the propriety of the notice is before us.                        
Fifth Third also did not appeal from the trial court's decision                  
that the failure to provide notice to the debtor barred Fifth                    
Third from recovering a deficiency judgment from appellant;                      
that issue also is not before us.                                                
     The parties do not dispute that the collateral, the                         
automobile taken by Fifth Third upon appellant's default, is                     
"consumer goods" for R.C. 1309.50(A) purposes.  R.C. 1309.07(A)                  
provides that goods are "'consumer goods' if they are used or                    
bought for use primarily for personal, family, or household                      
purposes."                                                                       
     The court of appeals, in its phrasing of the certified                      
issue, appears to presuppose that a creditor's sale of                           
repossessed collateral must necessarily be commercially                          
unreasonable before a debtor may recover the statutory award                     
relative to consumer goods in R.C. 1309.50(A).  However, we do                   
not read R.C. 1309.50(A) to impose such a requirement.                           
Although it is true that a failure to conduct a commercially                     
reasonable sale would be a failure to comply with Revised Code                   
provisions for disposition of the collateral, a commercially                     
reasonable sale is only one of the requirements imposed by the                   
Revised Code for the disposition.                                                
     Comment 1 to UCC 9-507 states that "[t]he principal                         
limitation on the secured party's right to dispose of                            
collateral is the requirement that he proceed in good faith                      
(Section 1-203 [R.C. 1301.09]) and in a commercially reasonable                  
manner.  See Section 9-504 [R.C. 1309.47].  * * * The section                    
[UCC 9-507] * * * provides for damages where the unreasonable                    
disposition has been concluded, and, in the case of consumer                     
goods, states a minimum recovery."                                               
     This comment, however, does not limit the application of                    
R.C. 1309.50(A) to only those cases where the creditor has                       
failed to dispose of the collateral in a commercially                            
reasonable manner, in light of the statute's clear provision of                  
a debtor's right to recover for loss caused by the secured                       
party's "failure to comply with the provisions of sections                       
1309.44 to 1309.50, inclusive, of the Revised Code."  (Emphasis                  
added.)  See Erdmann v. Rants (N.D.1989), 442 N.W.2d 441, 443,                   
fn.1 (commercial unreasonableness is not the only violation                      
that will trigger UCC 9-507).  R.C. 1309.47(C) provides that                     
every aspect of the creditor's disposition of the collateral                     
after default must be "commercially reasonable."  R.C.                           
1309.47(C) also imposes on the secured party a responsibility                    
to send to the debtor "reasonable notification of the time and                   
place of any public sale" as a requirement separate from that                    
of conducting a commercially reasonable sale.                                    
     In Erdmann v. Rants, supra, 442 N.W.2d at 443, the Supreme                  
Court of North Dakota stated:                                                    
     "By failing to notify [the debtor] Rants of the intended                    
disposition, the creditors did not proceed in accordance with                    
NDCC { 41-09-50(3) [UCC 9-504], even though the sale * * * was                   
commercially reasonable.  Their failure to give notice triggers                  
the statutory damages provision and because the collateral is a                  
consumer good, the debtor, Rants, is entitled to recover                         
damages, 'in any event,' regardless of his actual loss.  NDCC {                  
41-09-53(1) [UCC 9-507] entitles the debtor to a 'minimum                        
recovery' as a statutory penalty for the creditor's failure to                   
give notice notwithstanding commercial reasonableness and                        
notwithstanding no actual loss."                                                 
     Courts frequently discuss notification to the debtor as an                  
aspect of the concept of commercial reasonableness, and it is                    
true that debtor notification can be a part of the total                         
inquiry into whether a sale of collateral was commercially                       
reasonable.  However, when R.C. 1309.50(A) is specifically at                    
issue, the requirement that the creditor properly notify the                     
debtor of the sale is separate from the requirement that the                     
creditor conduct a commercially reasonable sale.  In Huntington                  
Natl. Bank v. Elkins (1990), 53 Ohio St.3d 79, 559 N.E.2d 456,                   
and in Ford Motor Credit Co. v. Potts (1989), 47 Ohio St.3d 97,                  
548 N.E.2d 223, this court discussed what a commercially                         
reasonable sale of collateral is, and cited R.C. 1309.50(B) for                  
standards to be applied in determining commercial                                
reasonableness.  However, neither case cited R.C. 1309.50(A),                    
and neither case stands for the proposition that notice to the                   
debtor is merely one of several components of commercial                         
reasonableness.                                                                  
     Since notice to the debtor is a requirement in its own                      
right under R.C. 1309.47(C), the failure of the creditor to                      
provide reasonable notice to the debtor of the foreclosure sale                  
triggers the statutory award.  We hold that, regardless of                       
whether a secured party's disposition of collateral after                        
default by the debtor is commercially reasonable, where the                      
collateral is consumer goods the debtor may recover pursuant to                  
R.C. 1309.50(A) if the secured party fails to provide the                        
debtor with reasonable notice of the sale of the collateral in                   
accordance with R.C. 1309.47(C).  In this case, the trial court                  
held that Fifth Third had failed to provide appellant with the                   
required notice.  Therefore, since the collateral is consumer                    
goods, appellant is entitled to recover from Fifth Third under                   
the consumer-goods provision of R.C. 1309.50(A).  A debtor in                    
appellant's position need do no more than demonstrate that the                   
statutory circumstances have been met, and appellant has done                    
so.                                                                              
     Having determined that appellant is entitled to recover                     
under the clear terms of R.C. 1309.50(A), we next consider                       
whether appellant may get the statutory recovery in addition to                  
the benefit she received when Fifth Third's deficiency judgment                  
was disallowed, or whether appellant has already been                            
compensated for Fifth Third's failure to provide notice by the                   
denial of the deficiency judgment.                                               
     Initially, we note that the trial court's decision that                     
Fifth Third's failure to provide adequate notice of the sale                     
served as an absolute bar to Fifth Third's right to collect a                    
deficiency judgment was in accord with the prevailing view                       
taken by courts of appeals in Ohio at the time the events                        
underlying this litigation occurred.  See, e.g., Horizon                         
Savings v. Wootton (1991), 73 Ohio App.3d 501, 503, 597 N.E.2d                   
1150, 1151; Toledo Trust Co. v. Aldrich (1989), 65 Ohio App.3d                   
189, 193, 583 N.E.2d 371, 374; Liberty Natl. Bank of Fremont v.                  
Greiner (1978), 62 Ohio App.2d 125, 132-133, 16 O.O.3d 291,                      
296-297, 405 N.E.2d 317, 323-324.                                                
     The "absolute bar" rule applied in the above cases is one                   
of several approaches the courts of the various states have                      
applied when determining whether a debtor who receives                           
inadequate notice of the disposition of repossessed collateral                   
is liable for a deficiency judgment.  See Annotation, Uniform                    
Commercial Code:  Failure of Secured Creditor to Give Required                   
Notice of Disposition of Collateral as Bar to Deficiency                         
Judgment  (1974), 59 A.L.R.3d 401.                                               
     Former R.C. 1309.47 did not specify the consequences of a                   
secured party's failure to provide the debtor with reasonable                    
notice of the sale on the secured party's right to recover a                     
deficiency judgment.  The "absolute bar" rule was adopted by                     
Ohio courts without explicit support in R.C. 1309.47.  However,                  
effective July 1, 1992, R.C. 1309.47 was amended to apply a                      
rebuttable presumption against any deficiency when a secured                     
party in disposing of collateral fails to comply with the                        
requirements of R.C. 1309.47(C).  See R.C. 1309.47(B)(2).  A                     
secured party is no longer barred from recovering a deficiency                   
judgment for failure to comply with R.C. 1309.47(C).  Rather,                    
the Revised Code now specifies that the secured party may                        
recover a deficiency judgment based upon proof of the                            
appropriate value of the collateral, with the appropriate value                  
of the collateral rebuttably presumed to equal the secured                       
indebtedness.  R.C. 1309.47(B)(2)(d).   R.C. 1309.47, as                         
amended, is not applicable in this case, since the events at                     
issue occurred prior to the effective date.                                      
     The issue the court of appeals certified would have us                      
decide whether a debtor who benefits from the creditor's being                   
denied a deficiency judgment for inadequate notice may also                      
benefit by recovering a statutory award pursuant to the last                     
sentence of R.C. 1309.50(A).  We recognize that there is                         
authority to support each party's position on this issue.                        
     On the one hand, Fifth Third argues that to both deny it                    
the right to a deficiency judgment and also make it liable for                   
the statutory award pursuant to R.C. 1309.50(A) in effect                        
subjects it to a double penalty for the same behavior.  Fifth                    
Third points out that it was absolutely barred from recovering                   
a deficiency judgment, even though no provision of former R.C.                   
1309.47 specifically provided for such a bar.  Thus a strong                     
argument can be made that the deficiency judgment was denied                     
for equitable reasons.  Since the deficiency recovery was                        
barred without regard to the amount of the deficiency                            
outstanding, the bar was not really an award of damages, but                     
functioned to punish Fifth Third for giving inadequate notice.                   
Fifth Third urges this court not to bar deficiency judgments                     
but to adopt an equitable setoff approach, which allows the                      
R.C. 1309.50(A) recovery to be set off against the creditor's                    
deficiency judgment.                                                             
     In Bank of Chapmanville v. Workman (1991), 185 W.Va. 161,                   
168, 406 S.E.2d 58, 65, the Supreme Court of Appeals of West                     
Virginia noted that UCC 9-507[1] is a "minimum damages                           
provision," (emphasis sic) and found that a debtor may not take                  
the full statutory consumer goods award in addition to                           
benefiting from the denial of the creditor's deficiency                          
judgment.  See, also, Gulf Homes, Inc. v. Goubeaux (1983), 136                   
Ariz. 33, 36, 664 P.2d 183, 186 (deficiency amount owed by                       
debtor upon default and sale may be set off against statutory                    
liability of creditor for noncompliance with provisions for                      
disposition of collateral); Davenport v. Chrysler Credit Corp.                   
(Tenn.App.1991), 818 S.W.2d 23, 32 (deficiency judgment and UCC                  
9-507(1) award may be set off against each other).                               
     Appellant, on the other hand, emphasizes that the purpose                   
behind R.C. 1309.50(A)'s award when the collateral is consumer                   
goods is to protect the debtor from abuse by the secured                         
party.  The statutory award cannot really be characterized as                    
compensatory damages, because the amount of the award is                         
unrelated to the degree of harm suffered, and is also unrelated                  
to the actual degree of wrongdoing by the secured party.  The                    
award is more in the nature of a punishment imposed upon the                     
secured party to ensure that procedures for disposition of the                   
collateral are strictly complied with when the collateral is a                   
consumer good.  Appellant in effect argues that the statutory                    
award is independent from questions relating to the deficiency                   
judgment, so that no setoff should occur in this case.                           
     Appellant's argument finds support in Staley Emp. Credit                    
Union v. Christie (1982), 111 Ill.App.3d 165, 169, 443 N.E.2d                    
731, 734, where the court held that a disallowed deficiency                      
judgment cannot diminish a statutory recovery under UCC                          
9-507(1) for consumer goods collateral.                                          
     Although we see some merit in Fifth Third's argument that                   
not allowing a setoff subjects it to two punishments for the                     
same ( relatively minor) failure to give adequate notice, we                     
are constrained from granting a setoff under the unique                          
circumstances of this case.  That is, Fifth Third failed to                      
appeal the trial court's decision to deny a deficiency judgment                  
against appellant.  With the case in this posture, we must                       
accept  that Fifth Third was not entitled to a deficiency                        
judgment.  To now allow a setoff, when appellant is entitled to                  
her full R.C. 1309.50(A) award under the clear authority of                      
that statute, would in effect allow Fifth Third to prevail on                    
an issue which it did not appeal.  A setoff would in effect be                   
awarding a deficiency judgment to Fifth Third, since the setoff                  
would come from the deficiency award, and that award has                         
already been conclusively denied.  Furthermore, since the                        
current version of R.C. 1309.47(B) is inapplicable to this                       
case, Fifth Third was unable to use that statute's provisions                    
in the trial court to establish appellant's liability for a                      
deficiency judgment in arguing for a setoff.                                     
     As a final matter, we consider the amount appellant is                      
entitled to recover pursuant to the formulae contained in the                    
last sentence of R.C. 1309.50(A):                                                
     "The Code uses two formulae to cover both situations in                     
which the debtor may borrow money and secure the debt with                       
consumer goods.  If the debtor has borrowed money from a third                   
party who is not the seller, the formula for recovery is the                     
amount of the service charge, plus ten percent of the principal                  
amount of the debt.  The service charge is the interest which                    
will accrue over the life of the loan and not just the service                   
charge remaining when the consumer-debtor brings suit.  The                      
principal amount of the debt, of course, means the original                      
amount of the debt without any additions for interest or                         
deductions for payment made.  * * *                                              
     "If the debtor has borrowed money from the seller, the                      
formula for recovery is the time price differential plus ten                     
percent of the cash price.  The time price differential is the                   
difference between the time, or credit, price which a buyer                      
would pay for an item if he borrowed the money and paid for it                   
over a period of time and the cash price which the same buyer                    
would pay if he borrowed no money and paid the full price                        
immediately for the item."  (Footnotes omitted.)  9 Hawkland,                    
Lord & Lewis, Uniform Commercial Code Series (1991) 901-902,                     
Section 9-507:06.                                                                
     The parties agree that pursuant to the first formula,                       
appellant would be entitled to get $2,461.91, which is the                       
credit service charge ($1,983.93) plus ten percent ($477.98) of                  
the principal amount of the debt.  Appellant, however, claims                    
more under the second formula.  It is apparent that appellant's                  
attempted calculation under this second formula mistakenly uses                  
the price paid at the sale after foreclosure by the third party                  
who bought the collateral, rather than the cash price paid by                    
the debtor to purchase the automobile, and mistakenly uses the                   
difference between the original purchase price and the                           
foreclosure sale price as the time price differential, to                        
compute the statutory award.  For a case which applies the                       
second ("time price differential") formula, where a debtor                       
borrowed money from the seller to make the purchase, see Gulf                    
Homes, Inc. v. Goubeaux, supra, 136 Ariz. at 39, 664 P.2d at                     
189.  We find that appellant's proper recovery pursuant to R.C.                  
1309.50(A) is $2,461.91.  The cause is remanded to the trial                     
court to enter judgment for appellant in that amount.                            
                                     Judgment reversed                           
                                     and cause remanded.                         
     Moyer, C.J., Wright, F.E. Sweeney, Pfeifer and Cook, JJ.,                   
concur.                                                                          
     Douglas, J., dissents.                                                      
                                                                                 
FOOTNOTE:                                                                        
1    Fifth Third also proposes that a debtor may not recover                     
under R.C. 1309.50(A) when the debtor fails to take advantage                    
of an opportunity to establish before the disposition of the                     
collateral that the creditor is not proceeding in accordance                     
with Revised Code provisions for the disposition.  Fifth Third,                  
apparently advocating imposing an obligation upon a debtor in                    
default to pursue injunctive relief whenever possible, bases                     
its argument on the provision in the first sentence of R.C.                      
1309.50(A) that "disposition may be ordered or restrained on                     
appropriate terms and conditions."  Although we believe that                     
reading R.C. 1309.50(A) to place an affirmative duty on the                      
debtor to seek injunctive relief prior to the disposition of                     
the collateral strains the language of that statute, we do not                   
decide this issue, as we find that Fifth Third has waived this                   
argument by not raising it in the trial court.