Many Florida auto finance companies wrestle with the question of how to properly sell a vehicle once it has been repossessed.  While the law on disposition of secured collateral can sometimes be confounding, a few key concepts can go a long way in giving lenders the foundation they need to help them make their decision an informed one.

Florida law[1] provides that a lender may dispose of a lawfully repossessed vehicle by way of either public sale or private sale, so long as either such method is conducted in a commercially reasonable manner.  So what differentiates a public sale from a private sale?  While courts evaluate many factors in making such a determination, a public sale is generally characterized by some meaningful advertisement and open access to the public.  If a sale doesn’t at least meet these criteria, it will likely be considered a private sale.

Because the greater sales prices typically realized at private sales benefit both the lender and the debtor, Florida law encourages private sales and makes two principal distinctions between the two methods: (1) the notice required to be given to the debtor; and (2) the lender’s ability to purchase its own collateral

DEBTOR NOTIFICATION

A lender selling a repossessed vehicle must provide some form of notice to the debtor, but the type of notice provided is governed by the type of sale which is to be conducted.  Florida law provides for less stringent notification requirements in private sales so as to give lenders more flexibility in conducting the sale.  A lender must notify the debtor of the specific time and place of a public sale, but is only required to give notice of the time after which the private sale is to be made.  While these notice requirements may provide lenders with more flexibility, they can become a trap for the unwary as the failure to provide the appropriate notice may prevent the lender from collecting a deficiency after the sale.

LENDER’S PURCHASE OF ITS COLLATERAL

While private sales provide for more flexibility with respect to notice requirements, more stringent restrictions are imposed on self-dealing in order to curb the potential for abuses inherent in the private sales process.  A lender selling repossessed collateral at a properly conducted public sale is entitled to purchase its collateral.  However, a lender may only purchase its collateral in a private sale if the collateral “is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations.”[2]  The UCC Official Comment to this provision notes that a “recognized market” is “one in which the items sold are fungible and prices are not subject to individual negotiation…[f]or example, the New York Stock Exchange.”[3]  In the context of repossessed vehicles, Florida courts have held that “automobile auctions should not be construed as a ‘recognized market.’”[4]  As such, lenders who wish to purchase their repossessed vehicles are generally well-advised to consider conducting a public sale.

A NOTE ABOUT DEFICIENCIES

Since a number of buy-here-pay-here dealers privately sell their repossessed vehicles to their other customers on credit, it is worthwhile to note that, under certain circumstances, a dealer may elect to either immediately credit its original debtor with the principal amount of the new note or, alternatively, credit the original debtor only as and when payments under the new note are made to the dealer. Dealers should carefully consider their practices related to crediting their original debtors’ accounts after a private sale on credit to determine the tax consequences and what impact the selected method may have on the lender’s ability to recover a deficiency from the original debtor.

[1] Florida’s version of the Uniform Commercial Code governing secured transactions is located at §679.601, et. seq., Florida Statutes.

[2] Fla. Stat. §679.610(3)(b) (2011).

[3] Official Comment 9 to U.C.C. §9-610 (§679.610, Fla. Stat.).

[4] Turk v. St. Petersburg Bank & Trust Co., 281 So.2d 534 (Fla. 2d DCA 1973).