RACHEL C. WILLIAMS vs. AMERICAN HONDA FINANCE CORPORATION.
SJC-12367
Supreme Judicial Court of Massachusetts
June 5, 2018
Suffolk. December 7, 2017. Present: Gants, C.J., Gaziano, Lowy, Cypher, & Kafker, JJ.
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Motor Vehicle Instalment Sales, Repossession, Notice. Uniform Commercial Code, Notice. Words, “Fair market value.”
Certification of questions of law to the Supreme Judicial Court by the United States Court of Appeals for the First Circuit.
John J. Roddy (Elizabeth A. Ryan also present) for the plaintiff.
Eric S. Mattson, of Illinois (Tracy McDevitt Waugh also present) for the defendant.
Fredrick S. Levin, John C. Redding, & Ali M. Abugheida, for American Financial Services Association, amicus curiae, submitted a brief.
Stuart T. Rossman, for National Consumer Law Center, amicus curiae, submitted a brief.
KAFKER, J. The primary issue presented in this case is how to establish the fair market value of a repossessed automobile1 pursuant to
We conclude that the Legislature required that deficiency calculations for repossessed vehicles be determined based on the fair market value of the vehicle, but did not dictate the creditor‘s market choice in the first instance and left the ultimate determination of fair market value to the courts in contested cases, taking into account both creditor and debtor interests, and the means, methods, and markets used to sell the vehicle. As will be explained infra, estimated retail value as provided in periodically published trade journals has a very limited role in the statute, essentially establishing a rebuttable evidentiary presumption that allows a debtor to put the fair market value as originally determined by the creditor to the test in contested cases. The approach to determining fair market value and deficiencies that we delineate respects the plain language of the statute, the legislative history, and the practical realities of the automobile repossession market. Had the Legislature intended to impose a fair market retail value standard, it would have simply said so in the statute or the legislative history, and it did not.
Finally, in response to the second and third questions, concerning the notice that is required, we answer that the presale and postsale notices provided to the debtor must expressly describe the deficiency as the difference between the amount owed on the
1. Background. The relevant facts and procedural history are as follows.
Honda resells tens of thousands of used motor vehicles every year -- some after a repossession, but most after they have been returned to Honda at the end of a lease. To sell all of these vehicles, Honda uses a process that the plaintiff has admitted is “designed to obtain the highest possible price.” The first step in this process involves an independent auction company rating the vehicle‘s condition on a scale from zero to five, with zero representing the “very worst” and five the “very best.” With the vehicle‘s grade in mind, a Honda employee consults the Black Book to help establish a baseline value for vehicles it resells. The Black Book is a guidebook used in the collections, customer service, and credit industry. Honda determines a “floor price” -- the minimum it intends to accept when it sells the vehicle -- based in part on the Black Book‘s estimated values for a vehicle of the same make, model, year, mileage, and condition. After a floor price is set, the vehicle is sold, along with vehicles from other manufacturers, at a biweekly auction that is open to licensed dealers.
Honda uses auctions rather than a retail channel to sell these vehicles for a variety of reasons. Honda is not licensed to sell at retail, and selling at retail may interfere with the legal rights of independent Honda dealers. It also would take Honda a longer time to sell these vehicles at retail than selling at the dealer auctions. This is significant because automobiles depreciate rapidly and the longer a creditor retains possession of a vehicle, the less it will be worth when it is eventually sold.
Honda financed the purchase of the plaintiff‘s vehicle in 2007. Four years later, after the plaintiff defaulted on her loan, Honda repossessed the vehicle.2 Honda then provided the plaintiff with the following notice:
“We have [your vehicle] because you broke promises in our agreement, and we will sell it at a private sale sometime after October 11, 2011.
“The money received from the sale (after paying our costs)
will reduce the amount you owe. If the auction proceeds are less than what you owe, you will still owe us the difference. If we receive more money than you owe, you will receive a refund, unless we must pay it to someone else. If you would like a written explanation on how the amount you owe was determined, or need additional information about the sale, please send your request to the address below. “You can get the property back at any time before we sell it by paying the full payoff amount, including our expenses. As of today, the payoff amount is $13,366.78, which is subject to change due to the addition of applicable fees and/or finance charges.”
The plaintiff‘s repossessed vehicle was sold according to the auction process. The independent auction company determined that the plaintiff‘s vehicle was in below average condition. For Honda, this meant that the vehicle was in “rough” condition for purposes of the Black Book. According to the Black Book, the estimated wholesale value for this vehicle in “rough” condition was $7,750 and the estimated retail value was $9,800. With these values in mind, Honda set the floor price for the plaintiff‘s vehicle at $8,700 and ultimately sold the vehicle for $8,900. The plaintiff‘s outstanding balance was $12,858.70, and Honda incurred repossession and auction expenses of $754.62, leaving the plaintiff with a postsale deficiency of $4,713.32. After the auction, Honda notified the plaintiff that her vehicle was sold for $8,900 and provided her with a calculation of the deficiency that she owed. There is no indication that Honda, once it sold the vehicle and calculated the deficiency, intended to file a lawsuit to collect the deficiency. Indeed, Honda has brought only five or fewer such lawsuits in the past few years despite selling thousands of repossessed automobiles.
The plaintiff commenced a putative class action in the Superior Court against Honda, claiming that the notices it sent to her and other debtors violated the Uniform Commercial Code and constituted an unfair and deceptive act or practice in violation of
Honda removed the case to the United States District Court for the District of Massachusetts. Following discovery, both parties
The plaintiff appealed to the United States Court of Appeals for the First Circuit. Having determined that the outcome of the case depended on unsettled questions of Massachusetts law, the First Circuit on its own motion certified three questions to this court. We address each question in turn.
2. Discussion. a. Question one. The first certified question asks:
“1. Whether the ‘fair market value’ of collateral under [
G. L. c. 255B, § 20B ,] is the fair market retail value of that collateral” (emphasis in original)?
For the reasons detailed infra, we answer this question, “No.”
i. Statutory language. “[T]he primary source of insight into the intent of the Legislature is the language of the statute.” International Fid. Ins. Co. v. Wilson, 387 Mass. 841, 853 (1983). “Where the language is clear and unambiguous, it is to be given its ‘ordinary meaning,‘” as long as “this meaning . . . [is] reasonable and supported by the purpose and history of the statute” (citations omitted). Commonwealth v. Mogelinski, 466 Mass. 627, 633 (2013).
By its plain language,
“Fair market value” was not a novel or undefined term when the Legislature used it in enacting
The statute goes one step further to protect debtors in the event that the creditor sues to recover the remaining deficiency. Section 20B (e) (2) provides that, “[i]n a proceeding for a deficiency the fair market value of the collateral shall be a question for the court to determine.” When making this determination, the statute introduces an evidentiary presumption that “[p]eriodically published trade estimates of the retail value of goods shall, to the extent they are recognized in the particular trade or business, be presumed to be the fair market value of the collateral.”
The estimated retail value of the vehicle thus has a very limited role in the statute. When the deficiency or the fair market value is disputed, there is a rebuttable presumption that the estimated retail value is fair market value. This presumption places the burden on the creditor to prove the fair market value of the vehicle. The fair market value of the vehicle, however, is just that: the highest price that a willing buyer would pay Honda in a fair market for the vehicle. See Epstein, 317 Mass. at 299. And fair market value, not fair market retail value, is what the statute provides that the court must determine. The statute does not dictate use of a particular market. If contested, a court must determine the fair market value based on all the facts and circumstances, including the goods to be sold, the relevant markets, the particular creditors and debtors, and the rebuttable presumption. See generally Rapson, Deficient Treatment of Deficiency Claims: Gilmore Would Have Repented, 75 Wash. U. L.Q. 491, 522-523 (1997) (discussing different factors that go into consideration of fair market value). See also In re Roberts, 210 B.R. 325, 330-331 (N.D. Iowa 1997) (exclusive reliance on industry guides alone is disfavored and may contradict court‘s duty to value specific collateral at issue).
Indeed, if the Legislature had intended fair market value to be fair market retail value, it would have simply said so, as other provisions in the General Laws demonstrate that the Legislature is capable of specifying retail or wholesale markets and values in statutes when it intends to do so. See, e.g.,
ii. Legislative history. The limited legislative history available supports the plain language interpretation of fair market value and does not even mention fair market retail value.5
The Legislature enacted the current provisions in
There were at least five different proposals for how to calculate
The current method for calculating deficiencies in
iii. Automobile repossession market. Our interpretation of the statutory language and legislative history is also consistent with the practical realities of the automobile repossession market. As evidenced by an extensive study of the automobile repossession market by the Federal Trade Commission in the 1970s, creditors have an incentive to obtain the highest possible price for collateral
Presiding Officer on Proposed Trade Regulation Rule: Credit Practices, at 238 (1978) (FTC Report). The commercial realities of today‘s market, as described in the record, confirm both of these propositions.
Creditors generally do not sue to collect the deficiency. See FTC Report, supra at 220 (“Testimony and evidence presented by many witnesses at the hearings showed that deficiency judgments were not often sought and that recoveries of deficiencies did not provide creditors with a significant amount of revenue“). See also id. at 221-222 (“Creditor-repossessors on an average filed no more than one suit for every five cars repossessed . . .“); J.J. White & R.S. Summers, Uniform Commercial Code § 25-10, at 919 (4th ed. 1995) (“In many cases in which cars are repossessed and resold -- perhaps in the large majority -- no claim for deficiency is filed“). Indeed, Honda has filed lawsuits to collect the deficiencies fewer than five times over the past few years even though it sells tens of thousands of motor vehicles each year, of which approximately twenty to thirty per cent are repossessed vehicles. It is also unlikely that the creditor will recover much, if any, of the resulting deficiency. See National Consumer Law Center, Repossessions § 12.1.1 (9th ed. 2017) (“Creditors know they are able to collect only a small percentage of deficiency judgments“). The FTC found that creditors only collected between five and fifteen per cent of these deficiencies. See 49 Fed. Reg. at 7783. In this case, the evidence suggests that Honda has collected less than ten per cent of the deficiency judgments that it does obtain.9 These realities all incentivize a creditor to maximize
There are also practical problems with imposing a retail market price. In the motor vehicle industry, retail sales require capital, facilities, and personnel, which creditors often lack. FTC Report, supra at 229-231. Moreover, selling a repossessed motor vehicle at retail entails further costs, such as storage, overhead, and most importantly, reconditioning of the vehicle for sale at retail. Id. at 247 (noting “convincing evidence that many repossessed automobiles, and probably the overwhelming majority, require extensive reconditioning or repair to make them suitable for sale at retail“). As the FTC noted, when the creditors who repossess vehicles are retailers, they will usually sell the vehicle at retail. See 49 Fed. Reg. at 7784. When they are not retailers, however, the retail market may be neither practical nor fair.10 Indeed, Honda is not licensed to sell on the retail market and may interfere
Finally, the fact that industry guides, such as the Black Book used by Honda, provide different estimated prices simply reflects the reality that consumers, wholesalers, and retailers each add varying amounts of value to the vehicle that are built into the different sale prices that each can obtain from consumers. See Lawless & Ferris, Economics and the Rhetoric of Valuation, 5 J. Bankr. L. & Prac. 3, 5 (1995) (“The reasons for the price difference result from the manner in which the retail and wholesale automobile markets operate, not because the same automobile can have two different values“). For example, the difference between the estimated retail value of an automobile and the estimated wholesale value of an automobile is often a result of the costs of retailing. See id. at 18 (“inflated retail price includes value-adding activities by the retailer“). See also FTC Report, supra at 230-231.
Imposing a fair market retail value on sales by all creditors would also appear to have unintended consequences. It
would likely increase the cost of borrowing because many creditors lack the means, and some, like Honda, the legal right, to sell repossessed vehicles at retail. See
In sum, the Legislature did not dictate a particular market and left the determination of fair market value to the courts in contested cases. The plain language of the statute, the legislative history, and the realities of the automobile repossession market all support this approach to the determination of fair market value.
b. Questions two and three. Questions two and three are closely related, as each asks whether the notice required by the Uniform Commercial Code can be sufficient even if it does not describe the debtor‘s deficiency as the difference between the outstanding balance and the fair market value of the collateral. Specifically, these questions ask:
“2. Whether, and in what circumstances, a pre-sale notice is ‘sufficient’ under [the Uniform Commercial Code,
G. L. c. 106, § 9-614 (4) and(5) ], and ‘reasonable’ under [theUniform Commercial Code, G. L. c. 106, § 9-611 (b) ], where the notice does not describe the consumer‘s deficiency liability as the difference between what the consumer owes and the ‘fair market value’ of the collateral, and the transaction is governed by [G. L. c. 255B ]?“3. Whether, and in what circumstances, a post-sale deficiency explanation is ‘sufficient’ under [the Uniform Commercial Code,
G. L. c. 106, § 9-616 ,] where the deficiency is not calculated based on the ‘fair market value’ of the collateral, and the transaction is governed by [G. L. c. 255B ]?”
We conclude that the notice that is required by the Uniform Commercial Code is never sufficient where the deficiency is not calculated based on the fair market value of the collateral and the notice fails to accurately describe how the deficiency is calculated.
The Uniform Commercial Code provisions in
“The money that we get from the sale (after paying our costs) will reduce the amount you owe. If we get less money than you owe, you (will or will not, as applicable) still owe us the difference. If we get more money than you owe, you will get the extra money, unless we must pay it to someone else.”
G. L. c. 106, § 9-614 (3) . A notification following the above form “is sufficient, even if additional information appears at the end of the form.”G. L. c. 106, § 9-614 (4) .
Therefore, when creditors are providing notice prior to disposing of the collateral under
“The fair market value of your vehicle will be used to reduce the amount you owe, which is your outstanding balance plus the reasonable costs of repossessing and selling the vehicle. If the fair market value of your vehicle is less than you owe, you (will or will not, as applicable) still owe us the difference. If the fair market value of your vehicle is more than you owe, you will get the extra money, unless we must pay it to someone else.” (Emphasis added.)
Additionally, when providing notice of the deficiency after the sale under
3. Conclusion. In transactions governed by
The Reporter of Decisions is directed to furnish attested copies of this opinion to the clerk of this court. The clerk in turn will
GANTS, C.J. (dissenting). I respectfully dissent.
Most American consumers purchase their motor vehicles on credit, in many cases by entering into a retail instalment contract. See
In Massachusetts, this process of repossession and sale is governed by the Retail Instalment Sales of Motor Vehicles Act (act),
Based on this presumption, and on the commercial realities that underlie this statute, as well as its purpose and legislative history, I would hold that the “fair market value” of a vehicle under
First, the court‘s interpretation of
The Legislature recognized the commercial realities of the motor vehicle market when it established a presumption in
Where the Legislature has established trade estimates of retail value as the presumed fair market value of the collateral in a deficiency proceeding, I believe it must have intended that “fair
The court takes the position that
Second, the court‘s interpretation of
Third, the court‘s interpretation is at odds with the purpose and history of the act. In order to ascertain the meaning of
The predecessor to the current
Sections 20A and 20B were substantially amended in 1973, see St. 1973, c. 629, § 2, at a time when public concern over abusive consumer credit practices was mounting. Consumer instalment credit had swelled nationwide, more than doubling from $42 billion outstanding in 1960 to $102 billion in 1970. Federal Reserve, Financial and Business Statistics, 59 Fed. Res. Bull. A56 (1973). Consumers in 1970 shouldered more than $35 billion of debt in order to finance the purchase of motor vehicles -- more than one-half of the vehicles purchased in the United States were purchased on credit -- and another $31 billion for other consumer goods. See id.; United States Bureau of the Census, Statistical Abstract of the United States 549 (94th ed. 1973). When consumers defaulted on these loans, creditors had a broad range of remedies to choose from, including repossession of the collateral and lawsuits for deficiency, which typically resulted in default judgments against consumers because of their failure to appear. See National Commission on Consumer Finance, Consumer Credit in the United States 23-42 (1972). Some creditors engaged in especially aggressive repossession tactics, seizing collateral in the middle of the night or under false pretenses. See, e.g., Whaley v. United States, 324 F.2d 356, 356-357 (9th Cir. 1963), cert. denied, 376 U.S. 911 (1964) (private repossessor impersonated Federal law enforcement agent); Boland v. Essex County Bank & Trust Co., 361 F. Supp. 917, 921 (D. Mass. 1973) (repossessions involved “stealthful reclamation of motor vehicles during the nighttime“). See also Firmin & Simpson, Business As Usual: An Empirical Study of Automobile Deficiency Judgment Suits in the District of Columbia, 3 Conn. L. Rev. 511, 512 & n.5 (1971) (Firmin & Simpson) (in study of 106 motor vehicle deficiency suits in District of Columbia courts, ninety-five per cent of repossessions were carried out between midnight and 6 A.M.).
With the rapid growth of consumer credit, various efforts were undertaken to protect consumers from overreaching creditors. In a pair of landmark decisions, the United States Supreme Court took substantial steps to limit creditors’ remedies, holding that creditors could not, absent notice or a hearing, enforce debts by
(creditors who engaged in “churning”
Against this background, the Massachusetts Legislature in 1973 undertook to strengthen the rights of consumers in consumer credit transactions. “An Act relative to taking possession of collateral and deficiency judgments,” St. 1973, c. 629, was first recommended for legislative action by the Massachusetts Consumers’ Council (council), an independent agency charged with acting as a public advocate for consumer interests. See St. 1963, c. 773. As the council explained in its recommendation, “[the] proposed legislation” was intended to “clarify and secure a debtor‘s rights.” 1973 House Doc. No. 59. Specifically, the council stated that “[the] proposed bill,” by limiting creditors’ rights to repossess collateral and recover deficiencies from consumers, “will stop the practice of constant sale, repossession, deficiency judgment, resale, etc., now engaged in by some unscrupulous merchants, and will greatly enhance the protection afforded the unsuspecting consumer.” Id.4
As eventually enacted, the 1973 legislation “impose[d] substantially greater restrictions on the rights of secured creditors in consumer credit transactions,” amending not only the laws governing motor vehicle retail instalment sales,
The 1973 legislation amended
Fifth, and of most relevance here, the 1973 legislation significantly narrowed the scope of consumers’ deficiency liability. Although under the UCC a consumer would have been liable for any deficiency following a “commercially reasonable” sale of the collateral, see former
It is evident from the statutory evolution of
It is also evident that, in making these amendments, the Legislature intended to displace the UCC provisions governing deficiency liability. Any doubt on this issue was resolved in 2001, when the Legislature made explicit that it intended to displace the UCC in this respect, adding to
Legislature had intended
Unsurprisingly, the court‘s interpretation of
“Under the Uniform Commercial Code a secured party may claim a deficiency based upon the proceeds of the resale less expenses so long as the resale is ‘commercially reasonable.’ Now as to consumer goods the amount of the deficiency is computed solely with reference to the ‘fair market value of the collateral’ less ‘reasonable repossession and storage costs.’ ... No longer will a secured party be entitled to rely on the wholesale price in computing his deficiency.” (Emphasis added; footnote omitted.)
Queenan, supra at 417.
In support of its interpretation, the court contends that, because creditors do not generally sue for deficiencies, and are unlikely to recover them even if they do, Honda and other creditors already have every incentive to obtain the highest possible price for repossessed vehicles. Ante at . The court also contends that many creditors lack access to the retail market and therefore, as a practical matter, cannot obtain a price approximating retail value. Id. at . As an empirical matter, this may very well be true. But legally, it is irrelevant. To interpret the meaning of
Finally, the court also warns that, if deficiencies are calculated based on fair market retail value, the costs of borrowing would rise and “[i]n the end, these costs would invariably be passed on to all consumers.” Ante at . Even if it were this court‘s task to determine whether this is the case -- and it is not -- I am skeptical that this would be the “invariable” consequence. If, as the court states, “the repossession and disposition of the collateral is almost always the last opportunity” for a creditor to recover a debt after default, and creditors therefore have no real expectation of recovering the deficiency, ante at , then it should not matter much to creditors, when setting their interest rates, how deficiencies are calculated. If deficiencies are rarely paid, then reducing the amount of those deficiencies by the fair market retail value of the vehicle would have little or no impact on the interest rates that a creditor would charge for a motor vehicle loan.
Consistent with the commercial realities underlying
Notes
“(1) If the unpaid balance of the consumer credit transaction at the time of default was [$2,000] or more the creditor shall be entitled to recover from the debtor the deficiency, if any, resulting from deducting the fair market value of the collateral from the unpaid balance due and shall also be entitled to any reasonable repossession and storage costs, provided he has complied with all provisions of this section.
“(2) In a proceeding for a deficiency the fair market value of the collateral shall be a question for the court to determine. Periodically published trade estimates of the retail value of goods shall, to the extent they are recognized in the particular trade or business, be presumed to be the fair market value of the collateral.”
To give an example of how the “churning” process works, suppose a consumer purchases a motor vehicle from a dealer for $30,000, financing the full amount through a retail instalment contract. The dealer then assigns that contract to an affiliated finance company. When the consumer defaults, her unpaid balance is $20,000. The finance company repossesses the vehicle and sells it back to the dealer for $15,000, then sues the consumer, recovering a deficiency of $5,000. Meanwhile, the dealer sells that same vehicle to another consumer for $25,000. As a result, the finance company is made whole, having received the $15,000 in sale proceeds and a $5,000 deficiency judgment, in full satisfaction of the debt, while its affiliated dealer makes a $10,000 profit, having purchased the vehicle at wholesale for $15,000 and sold it at retail for $25,000. This process can be repeated several times with the same vehicle.