UCC Article 9 Security Interests and Voidable Sales Contracts

UCC Article 9 Security Interests and Voidable Sales Contracts

Credit sellers of large-ticket items reserve security interests in the items sold to secure the buyer's payment of the purchase price. These creditors sometimes get off track by assuming that Article 9 does not apply to the transaction. In a recent Virginia Supreme Court decision, an automobile dealer erroneously assumed that it need not comply with Article 9 and suffered a significant damages judgment. The case is discussed in this article.

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Commonly, credit sellers of large-ticket items reserve security interests in the items sold to secure the buyer's payment of the purchase price. Article 9 of the Uniform Commercial Code provides for relatively straightforward methods for achieving attachment and perfection of such security interests, and the rules for foreclosing on the security interests are explicit as well. See generally UCC §§ 9-203, 9-308, 9-310, 9-601-9-628 (Official Text 2009). Nonetheless, creditors sometimes get off track by assuming that Article 9 does not apply to their transaction. In a recent Virginia Supreme Court decision, the creditor made the erroneous assumption that it need not comply with Article 9 and suffered a significant damages judgment as a result. Cappo Management, Inc. v. Britt, 711 S.E.2d 209 (Va. 2011) [hereafter Cappo] [an enhanced version of this opinion is available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law].

In Cappo, the plaintiff Britt entered into a contract to purchase an automobile from the defendant Cappo, d.b.a Victory Nissan. Cappo, 711 S.E.2d at 210. She signed a number of documents, including a "Buyer's Order" and a "Retail Installment Sales Contract," traded in her old car, and provided a down payment of $1,500. Victory Nissan sought to obtain financing on Britt's behalf from a third party lender. The third party lender withdrew its offer of financing, however, and Victory Nissan repossessed the vehicle from her although she was technically not in default under her payment obligations. 711 S.E. 2d at 210. The car dealer ultimately disposed of the vehicle without providing notice of the disposition to Britt. 711 S.E.2d at 210.

Britt then sued the defendant dealer for violations of Article 9, including the defendant's failure to give notice, and ultimately received a damages award of $15,000 plus interest from the trial court. Cappo, 711 S.E.2d at 210. The dealer appealed to the Virginia Supreme Court and argued that Article 9 did not apply to it because the sales contract did not create a security interest in favor of the dealer. The Virginia Supreme Court affirmed the lower court judgment, finding that the contract did provide for an Article 9 security interest and that, therefore, the dealer was bound to observe Article 9 procedures in repossessing and disposing of the collateral. 711 S.E.2d at 212.

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