Thursday, March 14, 2013

FYI: Maryland Ct of Appeals Rules Repo'd Auto Auctions "Private," Requiring Add'l Disclosures Under MCLEC, Due to Admission Fee

The Maryland Court of Appeals recently concluded that sales of repossessed automobiles requiring all bidders and other interested parties, including debtors whose cars had been repossessed,  to pay a refundable $1,000 admission fee to attend and observe the sales were "private sales" under Maryland's Creditor Grantor Closed End Credit Act ("CLEC"), and therefore subject to CLEC's requirements to make specific disclosures to the debtors about the purchaser, the number of bids received, and distribution of proceeds, among others.   


In answering a question certified by the U.S. Court of Appeals for the Fourth Circuit, the Maryland Appellate Court stressed that the admission fee "obscured transparency" in the sales process, and thereby precluded the sales from being "public auctions" not subject to CLEC's stringent post-sale disclosure requirements. 


A copy of the opinion is available at:


Two car buyers ("Consumers") purchased cars from car dealers under retail installment contracts governed by Maryland's Creditor Grantor Closed End Credit Act ("CLEC").  In each case, the car dealer assigned the installment contract to a finance company ("Finance Company") which had a security interest in Consumers' vehicles. 


Consumers eventually defaulted on their car loans, and Finance Company repossessed their cars.  Finance Company subsequently sent Consumers notices informing them that their cars would be sold at a "public sale" on a particular date, place and time.  One of the notices also indicated that a Consumer "may attend the sale and bring bidders if you want."  The notices supposedly did not mention that members of the public were required to provide a refundable $1,000 cash deposit in order to attend the sales, even as spectators.   However, published classified advertisements announcing the sales indicated that a $1,000 cash deposit was required to attend, but supposedly failed to indicate the make, model years, or condition of the cars to be sold.   When one of the Consumers tried to attend the sale of her car, she allegedly was denied admission because she could not pay the $1,000 deposit. 


Following the sales of Consumers' repossessed cars, Finance Company sent correspondence to Consumers informing them that they each owed a substantial deficiency balance of well over $10,000.   Consumers then filed separate putative class-action lawsuits in federal district court, alleging in part that Finance Company violated CLEC in that the sales of their cars were actually "private sales," subject to CLEC's post-sale disclosure requirements and that Financing Company had failed to provide those disclosures. 


The district court combined the lawsuits, reasoning that they shared the same issue as to whether the sales of Consumers' cars were "public auctions" or "private sales," with private sales being subject to CLEC's more stringent notice and accounting requirements.


Finance Company moved for summary judgment.  The district court granted Finance Company's motion, ruling that the sales were "public auctions" as the sales "were widely advertised and open to the public for competitive bidding."  Consumers appealed to the Fourth Circuit, where they moved to certify the question as to whether the sales of their cars were "private sales" in light of the $1,000 fee required to attend and observe.


Initially denying Consumers' motion, the Fourth Circuit later certified the question to the Maryland Court of Appeals.  The Maryland Court of Appeals in turn concluded that the sales were "private sales" that triggered CLEC's post-sale disclosures requirements, including the requirement to disclose the purchaser's name and address, the condition and value of the cars, and the number of bids sought and received.


As you may recall, CLEC provides in part:

(j)  Sale or auction – Authorized; notice; commercially reasonable manner; accounting. – (1)(i) . . . the credit grantor shall sell the property that was repossessed at:  . . .  (2) . . a private sale; or 2. A public auction.  (ii)  At least 10 days before the sale, the credit grantor shall notify the consumer borrower in writing of the time and place of the sale, by certified mail . . . sent to the consumer borrower's last known address.  (iii)  Any sale of repossessed property must be accomplished in a commercially reasonable manner. (2)  In all cases of a private sale of repossessed goods . . . . a full accounting shall be made to the borrower in writing and the seller shall retain a copy of this accounting for at least 24 months.  This accounting shall contain the following information:  (i) The unpaid balance at the time the goods were repossessed; (ii) The refund credit of unearned finance charges and insurance premiums, if any; (iii) the remaining net balance; (iv) The proceeds of the sale of the goods; (v) The remaining deficiency balance, if any, or the amount due the buyer; (vi) All expenses incurred as a result of the sale; (vii) The purchaser's name, address, and business address; (viii) The number of bids sought and received; and (ix) Any statement as to the condition of the good at the time of repossession which would cause their value to be increased or decreased above or below the market value for good of like kind and quality. . . .


(k) . . . (1) [in case of] a public sale of property which secured a loan in excess of $2,000 at the time the loan was made . . . (2) The proceeds of a sale to which this subsection applies shall be applied, in the following order, to: (i) The actual and reasonable cost of the sale; (ii) The actual and reasonable cost of retaking and storing the property; and (iii) The unpaid balance owing under the agreement at the time the property was repossessed. (3) The credit grantor shall furnish to the consumer borrower a written statement which shows the distribution of the proceeds.  Md. Code Ann., Com. Law § 12-1021(j), (k) ("Section 12-1021").


Limiting its analysis to the question whether the $1,000 admission fee affected the characterization of the sales of the repossessed cars as "public" as opposed to "private," the Court of Appeals noted that under Maryland law both public auctions and private sales must be conducted in a "commercially reasonable manner."   In so doing, however, the Court of Appeals pointed out that if a sale is a "private sale," the debtor must receive detailed information in the form of statutorily required post-sale disclosures than would otherwise be required in the context of a "public auction" and, further, that a debtor's ability to challenge a potential deficiency judgment may hinge on whether the sale, and any related disclosures, complied with CLEC.


Rejecting Finance Company's assertions that: (1) the car sales were "public auctions," and thus did not require Section 12-1021(j)'s post-sale disclosures, because a "private sale" expressly excludes "classes of individuals"; and (2) "public auctions" are simply methods of selling property "in a public forum through open and competitive bidding," the court observed that the sole focus in this case was the effect of the admission fee on the nature of the sales. 


Noting that neither the Maryland Uniform Commercial Code nor CLEC defines the terms "public auctions" or "private sales," the Appellate Court turned to CLEC's legislative history, among other things, to distinguish between private and public sales of repossessed goods. The Court also observed that, although all sales of re-possessed goods must be commercially reasonable, the term "commercially reasonable" remains similarly undefined. 


Accordingly, the Court of Appeals turned to case law interpreting Maryland's Uniform Commercial Code, and, applying a "multi-factor analysis" to CLEC issues, concluded that commercial reasonableness consists, not in the proceeds ultimately "received from the sale, but rather from the procedures employed for the sale."  See National Housing Partnership v. Municipal Capital Appreciation Partners I, L.P., 935 A.2d 300, 315 (D.C. 2007); Harris v. Bower, 266 Md. 579, 590-91, 295 A.2d 870, 875-76 (1972)(ruling that sale of repossessed boat was not commercially reasonable where creditor failed to advertise sale in "customary yachting publications," boat depreciated between time of repossession and resale, and the limited  number of bids were of "dubious nature"); Kline v. Central Motors Dodge, Inc., 328 Md. 448, 614 A.2d 1313 (1992)(requiring a "bona fide public or private sale" to be conducted in a commercially reasonable manner).  


According to the Court, factors in determining the commercial reasonableness of a sale of repossessed goods include:  how soon after repossession the sale occurred; location of sale; adequacy of advertising; opportunity for prospective bidders to inspect the property prior to the sale; maintenance performed by the creditor to increase selling price of goods; and whether the sale occurred as advertised. 


Moving from the issue of commercial reasonableness, the Appellate Court next noted that the hallmark of a "public auction" is that it is "a method of selling [property] in a public forum through open and competitive bidding."   The Court thus reasoned that the signature characteristics of a public auction are openness and competitive bidding, which, in turn, require full transparency to allow bidders and other interested parties to verify that procedures are followed and that the sale does not allow collusive or unfair practices.  See WSG Holdings, LLC v. Bowie, 429 Md. 598, 57 A.3d 463 (2012)(acknowledging in part that openness requires transparency by allowing observation of proceedings).


Reasoning that Section 12-1021(j)'s post-sale disclosure requirements for "private sales" are triggered in sales lacking openness and transparency, the Appellate Court concluded that in this case the admission fee "obscured transparency" because bidders and other interested parties had to pay the fee simply to observe the sale process.    Accordingly, because the admission fees "shielded the process used to sell . . . the cars from observation," the Court held that the sales were "in actuality, 'private sales' subject to" Section 12-1021(j)'s detailed post-sale disclosures rather than the "public auctions" Finance Company purported them to be.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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