CentsAbility: Creditors' Rights Law Update
September 29, 2016
This summer, the South Carolina Court of Appeals decided the appeal of Coastal Federal Credit Union v. Brown. The Court had to determine which statute of limitations applied to the credit union’s action to collect a deficiency.
The borrower purchased a motor vehicle which was financed by Coastal Federal. After the borrower defaulted, Coastal Federal repossessed the vehicle and sold it in 2009. Following sale, Coastal Federal notified the borrower of the sale and the amount of the deficiency. In 2013, more than three years after default, Coastal Federal initiated the action to collect the deficiency. In defense, the borrower asserted the statute of limitations.
The Court of Appeals considered whether the UCC statute of limitations, S.C. Code Ann. § 36-2-725(1) applied, or the more general statute of limitations for contract actions, S.C. Code Ann. § 15-3-530. The borrower argued Coastal Federal exercised its rights to repossess the vehicle under Article 9 of the UCC, and that Article does not have a specific statute of limitations so the general statute of limitations applied. Coastal Federal argued the borrower defaulted under a contract for the sale of goods pursuant to Article 2 of the UCC, which contains the six-year statute.
Recognizing this was an issue of first impression, the Court also noted a split of authority across the nation. Ultimately, the Court of Appeals reversed the trial court’s grant of summary judgment to the borrower. The Court reasoned that Coastal Federal, as an assignee of the seller, stood in the shoes of the seller and could assert a breach of contract under the sales agreement. In fact, the Court found that Coastal Federal could exercise its rights under both Articles 2 and 9 simultaneously, provided the lender “does not obtain double recovery, and repossessing and selling the vehicle [does] not extinguish [the lender’s] rights under the sales contract.”
The Court’s reasoning turns on the fact that Coastal Federal was an assignee of the seller. The Court found the contract gave the seller a security interest in the vehicle. The seller, as seller and secured creditor, then assigned the contract in its entirety to Coastal Federal. Under this case, then, lenders like Coastal Federal can assert the claims the seller could assert, and use the statute of limitations the seller could use.
This makes sense, as lenders are also sometimes subject to the borrower’s claims against the seller. (See American Federal Bank v. White noting “question of fact as to whether … [the lender], as assignee to the seller's contract, breached an implied warranty of fitness” under UCC Article 2). At a minimum, lenders’ claims are subject to the defenses the buyer could assert against the seller. (See Rosemond v. Campbell holding that “as against the assignee, the obligor can only assert a claim defensively when the assignee seeks to enforce the obligation.”).
Finally, while Coastal Federal was exempt from the S.C. Consumer Protection Code, other lenders in consumer credit sales would be subject to the claims and defenses of the consumer against the seller.
Bruce Wallace is litigator in Nexsen Pruet’s Charleston office. He advises banks, insurers, and other corporate clients on various complex issues that impact business practices.