Tuesday, May 31, 2011

A Car Repossession Gone Awry: A Lender's Good Faith Obligation

In Engram v. Jpmorgan Chase Bank, 2010 Ariz. App. Unpub. LEXIS 885 (Ariz. Ct. App. 2010), the Arizona Court of Appeals considered a summary judgment granted in favor of the lender by the trial court. The Engrams borrowed $10,977 from the lender for the purchase of car. The security agreement provided for events of default including failure to pay and insecurity of the lender. Upon default the lender could repossess the automobile. The Emgrams were often late in paying the lender and eventually were some $908 in arrears and facing repossession. The lender told the Emgrams that they could avoid repossession if they brought the account current. Emgram went to the local branch and paid the amount owing and asked the tellers to confirm with the main office that the account was in order. The lender assured them it was. Nevertheless, the lender repossessed the car that evening. The lender’s collection department did not learn that the account had been brought current until the next day. The lender then called to check whether the insurance was current on the car, only to find the insurer cancelled for nonpayment. The lender did not have a practice of checking insurance unless they repossessed a car and the borrower wanted to redeem it. The lender sold the car and claimed a deficiency judgment, which the lower court granted.

Reversing the decision of the trial court, the court of appeals held that summary judgment was inappropriate as there were genuine issues of material fact as to whether Chase reasonably believed itself insecure. The court noted that the lender could only accelerate and repossess the car based on an insecurity in good faith (citing UCC 1-309) that future payments were impaired. Moreover, the lender did not discover the problems with the insurance until after it repossessed the car. Without deciding the issue, the court noted other jurisdictions are conflicted over whether lenders must exercise good faith after an event of default. Ultimately the court found that there was “evidence on which a jury could conclude that Chase three times assured Ms. Engram that if she and her husband brought the loan current, the bank would not repossess their car.” For those reasons, a jury could find the lender either estopped from repossession or had waived its right to do so for any events other than the failure to pay the outstanding arrears.