Kruse v. Voyager Ins. Cos. - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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OPINIONS OF THE SUPREME COURT OF OHIO
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Kruse, Appellant, v. Voyager Insurance Companies et al.; Fifth
Third Bank of Northwestern Ohio, N.A., Appellee.
[Cite as Kruse v. Voyager Ins. Cos. (1995), Ohio
St.3d .]
Secured transactions -- Disposition of collateral after default
by debtor -- Where collateral is consumer goods, debtor
may recover pursuant to R.C. 1309.50(A), when.
- - -
Regardless of whether a secured party's disposition of
collateral after default by the debtor is commercially
reasonable, where the collateral is consumer goods the debtor
may recover pursuant to R.C. 1309.50(A) if the secured party
fails to provide the debtor with reasonable notice of the sale
of the collateral in accordance with R.C. 1309.47(C).
- - -
(No. 94-827 -- Submitted March 8, 1995 --
Decided May 17, 1995.)
Certified by the Court of Appeals for Lucas County, No.
L-93-169.
Plaintiff-appellant, Marianne K. Kruse, purchased an
automobile in 1990 and financed the purchase with money
borrowed from defendant-appellee, Fifth Third Bank of
Northwestern Ohio, N.A. ("Fifth Third"), with the automobile
serving as collateral for the loan. In late 1991, Fifth Third
notified her that she was in default on her loan payments.
Shortly thereafter, appellant's automobile was repossessed and
sold by Fifth Third.
After the foreclosure and sale, appellant brought suit
against Fifth Third and against Voyager Insurance Companies,
properly called Voyager Life Insurance Company ("Voyager"),
claiming that the automobile had been wrongfully repossessed.
Fifth Third answered and counterclaimed for a deficiency
judgment against appellant in the amount of $2,477.44 plus
interest, alleging that the proceeds of the sale after default
fell short of meeting appellant's debt. During the litigation,
appellant dismissed her claims against Voyager. Appellant and
Fifth Third each filed motions for summary judgment with the
trial court. The trial court granted summary judgment in favor

of Fifth Third on appellant's claim of improper repossession,
finding that the repossession was lawful; denied Fifth Third's
motion for summary judgment on its counterclaim; and granted
appellant's motion for leave to file an amended answer to Fifth
Third's counterclaim.
In her amended answer, appellant claimed that Fifth Third
had failed to give her proper notice of the foreclosure sale,
and that Fifth Third had failed to prove the commercial
reasonableness of the sale. Appellant contended that Fifth
Third's failure to comply with R.C. 1309.47 barred Fifth Third
from collecting a deficiency judgment against her. In
addition, appellant counterclaimed for the recovery allowed by
R.C. 1309.50(A) when a secured party fails to comply with
requirements for disposition of the collateral.
Both parties again moved for summary judgment. The trial
court found that Fifth Third had not given appellant adequate
notice of the sale of the collateral, and that, therefore,
Fifth Third was barred from recovering a deficiency judgment
from appellant. As to appellant's counterclaim for recovery
under R.C. 1309.50(A), the court determined that since
appellant now conceded that the sale of the automobile was
commercially reasonable, Fifth Third was not liable under R.C.
1309.50(A) for the failure to provide appellant with proper
notice of the sale. Appellant appealed from the decision to
deny recovery on her counterclaim, and the court of appeals
affirmed.
The appellate court, finding its judgment to be in
conflict with the judgment of the Court of Appeals for Cuyahoga
County in Soc. Natl. Bank v. Hardmon (Oct. 11, 1990), Cuyahoga
App. Nos. 57098 and 57206, unreported, 1990 WL 151666, and with
the judgment of the Court of Appeals for Franklin County in
Soc. Bank, N.A. v. Cazeault (1993), 83 Ohio App.3d 84, 613
N.E.2d 1103, certified the record of the cause to this court
for review and final determination.

Boyk & McCulley and Steven L. Crossmock, for appellant.
Gregory Sova, for appellee.

Alice Robie Resnick, J. The issue certified for our
review is "whether a creditor's failure to provide adequate
notice of the sale of collateral establishes, as a matter of
law, that the sale was commercially unreasonable so as to
permit the debtor to not only defeat a prayer for a deficiency
judgment but also obtain money damages under R.C. 1309.50(A)."
R.C. 1309.50(A) (UCC 9-507[1]) provides:
"If it is established that the secured party is not
proceeding in accordance with the provisions of sections
1309.44 to 1309.50, inclusive, of the Revised Code, disposition
may be ordered or restrained on appropriate terms and
conditions. If the disposition has occurred the debtor or any
person entitled to notification or whose security interest has
been made known to the secured party prior to the disposition
has a right to recover from the secured party any loss caused
by a failure to comply with the provisions of sections 1309.44
to 1309.50, inclusive, of the Revised Code. If the collateral
is consumer goods, the debtor has a right to recover in any
event an amount not less than the credit service charge plus

ten percent of the principal amount of the debt or the time
price differential plus ten percent of the cash price."
(Emphasis added.)
In 2 White & Summers, Uniform Commercial Code (3 Ed.1988)
623, Section 27-18, the authors discuss the rationale behind
the last sentence of UCC 9-507(1):
"It is now all but indisputable that compensatory damages
are an insufficient deterrent to creditor misbehavior in nickel
and dime consumer transactions where such damages will amount
to very little in most cases. It is not surprising, therefore,
that the draftsmen installed a statutory penalty in 9-507 to up
the ante for those who would abuse the consumer * * *.
"The sentence is a penalty -- a 'minimum recovery' the
comment [Comment 1 to UCC 9-507] calls it -- and the consumer
is entitled to it even if he has not suffered a penny's loss."
(Footnotes omitted.)
Although appellant has conceded that Fifth Third's sale of
her automobile after foreclosure was done in a commercially
reasonable manner, appellant claims entitlement to the award of
R.C. 1309.50(A) relating to consumer goods. Fifth Third urges
that the commercial reasonableness of the sale precludes the
award and that a creditor that has been barred from recovering
a deficiency judgment for failure to provide proper notice of
the disposition of collateral to a debtor in default may not
also be subject to liability involving consumer goods under
R.C. 1309.50(A).1 Fifth Third did not appeal from the trial
court's decision that notice of the sale was inadequate, so no
issue regarding the propriety of the notice is before us.
Fifth Third also did not appeal from the trial court's decision
that the failure to provide notice to the debtor barred Fifth
Third from recovering a deficiency judgment from appellant;
that issue also is not before us.
The parties do not dispute that the collateral, the
automobile taken by Fifth Third upon appellant's default, is
"consumer goods" for R.C. 1309.50(A) purposes. R.C. 1309.07(A)
provides that goods are "'consumer goods' if they are used or
bought for use primarily for personal, family, or household
purposes."
The court of appeals, in its phrasing of the certified
issue, appears to presuppose that a creditor's sale of
repossessed collateral must necessarily be commercially
unreasonable before a debtor may recover the statutory award
relative to consumer goods in R.C. 1309.50(A). However, we do
not read R.C. 1309.50(A) to impose such a requirement.
Although it is true that a failure to conduct a commercially
reasonable sale would be a failure to comply with Revised Code
provisions for disposition of the collateral, a commercially
reasonable sale is only one of the requirements imposed by the
Revised Code for the disposition.
Comment 1 to UCC 9-507 states that "[t]he principal
limitation on the secured party's right to dispose of
collateral is the requirement that he proceed in good faith
(Section 1-203 [R.C. 1301.09]) and in a commercially reasonable
manner. See Section 9-504 [R.C. 1309.47]. * * * The section
[UCC 9-507] * * * provides for damages where the unreasonable
disposition has been concluded, and, in the case of consumer
goods, states a minimum recovery."

This comment, however, does not limit the application of
R.C. 1309.50(A) to only those cases where the creditor has
failed to dispose of the collateral in a commercially
reasonable manner, in light of the statute's clear provision of
a debtor's right to recover for loss caused by the secured
party's "failure to comply with the provisions of sections
1309.44 to 1309.50, inclusive, of the Revised Code." (Emphasis
added.) See Erdmann v. Rants (N.D.1989), 442 N.W.2d 441, 443,
fn.1 (commercial unreasonableness is not the only violation
that will trigger UCC 9-507). R.C. 1309.47(C) provides that
every aspect of the creditor's disposition of the collateral
after default must be "commercially reasonable." R.C.
1309.47(C) also imposes on the secured party a responsibility
to send to the debtor "reasonable notification of the time and
place of any public sale" as a requirement separate from that
of conducting a commercially reasonable sale.
In Erdmann v. Rants, supra, 442 N.W.2d at 443, the Supreme
Court of North Dakota stated:
"By failing to notify [the debtor] Rants of the intended
disposition, the creditors did not proceed in accordance with
NDCC { 41-09-50(3) [UCC 9-504], even though the sale * * * was
commercially reasonable. Their failure to give notice triggers
the statutory damages provision and because the collateral is a
consumer good, the debtor, Rants, is entitled to recover
damages, 'in any event,' regardless of his actual loss. NDCC {
41-09-53(1) [UCC 9-507] entitles the debtor to a 'minimum
recovery' as a statutory penalty for the creditor's failure to
give notice notwithstanding commercial reasonableness and
notwithstanding no actual loss."
Courts frequently discuss notification to the debtor as an
aspect of the concept of commercial reasonableness, and it is
true that debtor notification can be a part of the total
inquiry into whether a sale of collateral was commercially
reasonable. However, when R.C. 1309.50(A) is specifically at
issue, the requirement that the creditor properly notify the
debtor of the sale is separate from the requirement that the
creditor conduct a commercially reasonable sale. In Huntington
Natl. Bank v. Elkins (1990), 53 Ohio St.3d 79, 559 N.E.2d 456,
and in Ford Motor Credit Co. v. Potts (1989), 47 Ohio St.3d 97,
548 N.E.2d 223, this court discussed what a commercially
reasonable sale of collateral is, and cited R.C. 1309.50(B) for
standards to be applied in determining commercial
reasonableness. However, neither case cited R.C. 1309.50(A),
and neither case stands for the proposition that notice to the
debtor is merely one of several components of commercial
reasonableness.
Since notice to the debtor is a requirement in its own
right under R.C. 1309.47(C), the failure of the creditor to
provide reasonable notice to the debtor of the foreclosure sale
triggers the statutory award. We hold that, regardless of
whether a secured party's disposition of collateral after
default by the debtor is commercially reasonable, where the
collateral is consumer goods the debtor may recover pursuant to
R.C. 1309.50(A) if the secured party fails to provide the
debtor with reasonable notice of the sale of the collateral in
accordance with R.C. 1309.47(C). In this case, the trial court
held that Fifth Third had failed to provide appellant with the

required notice. Therefore, since the collateral is consumer
goods, appellant is entitled to recover from Fifth Third under
the consumer-goods provision of R.C. 1309.50(A). A debtor in
appellant's position need do no more than demonstrate that the
statutory circumstances have been met, and appellant has done
so.
Having determined that appellant is entitled to recover
under the clear terms of R.C. 1309.50(A), we next consider
whether appellant may get the statutory recovery in addition to
the benefit she received when Fifth Third's deficiency judgment
was disallowed, or whether appellant has already been
compensated for Fifth Third's failure to provide notice by the
denial of the deficiency judgment.
Initially, we note that the trial court's decision that
Fifth Third's failure to provide adequate notice of the sale
served as an absolute bar to Fifth Third's right to collect a
deficiency judgment was in accord with the prevailing view
taken by courts of appeals in Ohio at the time the events
underlying this litigation occurred. See, e.g., Horizon
Savings v. Wootton (1991), 73 Ohio App.3d 501, 503, 597 N.E.2d
1150, 1151; Toledo Trust Co. v. Aldrich (1989), 65 Ohio App.3d
189, 193, 583 N.E.2d 371, 374; Liberty Natl. Bank of Fremont v.
Greiner (1978), 62 Ohio App.2d 125, 132-133, 16 O.O.3d 291,
296-297, 405 N.E.2d 317, 323-324.
The "absolute bar" rule applied in the above cases is one
of several approaches the courts of the various states have
applied when determining whether a debtor who receives
inadequate notice of the disposition of repossessed collateral
is liable for a deficiency judgment. See Annotation, Uniform
Commercial Code: Failure of Secured Creditor to Give Required
Notice of Disposition of Collateral as Bar to Deficiency
Judgment (1974), 59 A.L.R.3d 401.
Former R.C. 1309.47 did not specify the consequences of a
secured party's failure to provide the debtor with reasonable
notice of the sale on the secured party's right to recover a
deficiency judgment. The "absolute bar" rule was adopted by
Ohio courts without explicit support in R.C. 1309.47. However,
effective July 1, 1992, R.C. 1309.47 was amended to apply a
rebuttable presumption against any deficiency when a secured
party in disposing of collateral fails to comply with the
requirements of R.C. 1309.47(C). See R.C. 1309.47(B)(2). A
secured party is no longer barred from recovering a deficiency
judgment for failure to comply with R.C. 1309.47(C). Rather,
the Revised Code now specifies that the secured party may
recover a deficiency judgment based upon proof of the
appropriate value of the collateral, with the appropriate value
of the collateral rebuttably presumed to equal the secured
indebtedness. R.C. 1309.47(B)(2)(d). R.C. 1309.47, as
amended, is not applicable in this case, since the events at
issue occurred prior to the effective date.
The issue the court of appeals certified would have us
decide whether a debtor who benefits from the creditor's being
denied a deficiency judgment for inadequate notice may also
benefit by recovering a statutory award pursuant to the last
sentence of R.C. 1309.50(A). We recognize that there is
authority to support each party's position on this issue.
On the one hand, Fifth Third argues that to both deny it

the right to a deficiency judgment and also make it liable for
the statutory award pursuant to R.C. 1309.50(A) in effect
subjects it to a double penalty for the same behavior. Fifth
Third points out that it was absolutely barred from recovering
a deficiency judgment, even though no provision of former R.C.
1309.47 specifically provided for such a bar. Thus a strong
argument can be made that the deficiency judgment was denied
for equitable reasons. Since the deficiency recovery was
barred without regard to the amount of the deficiency
outstanding, the bar was not really an award of damages, but
functioned to punish Fifth Third for giving inadequate notice.
Fifth Third urges this court not to bar deficiency judgments
but to adopt an equitable setoff approach, which allows the
R.C. 1309.50(A) recovery to be set off against the creditor's
deficiency judgment.
In Bank of Chapmanville v. Workman (1991), 185 W.Va. 161,
168, 406 S.E.2d 58, 65, the Supreme Court of Appeals of West
Virginia noted that UCC 9-507[1] is a "minimum damages
provision," (emphasis sic) and found that a debtor may not take
the full statutory consumer goods award in addition to
benefiting from the denial of the creditor's deficiency
judgment. See, also, Gulf Homes, Inc. v. Goubeaux (1983), 136
Ariz. 33, 36, 664 P.2d 183, 186 (deficiency amount owed by
debtor upon default and sale may be set off against statutory
liability of creditor for noncompliance with provisions for
disposition of collateral); Davenport v. Chrysler Credit Corp.
(Tenn.App.1991), 818 S.W.2d 23, 32 (deficiency judgment and UCC
9-507(1) award may be set off against each other).
Appellant, on the other hand, emphasizes that the purpose
behind R.C. 1309.50(A)'s award when the collateral is consumer
goods is to protect the debtor from abuse by the secured
party. The statutory award cannot really be characterized as
compensatory damages, because the amount of the award is
unrelated to the degree of harm suffered, and is also unrelated
to the actual degree of wrongdoing by the secured party. The
award is more in the nature of a punishment imposed upon the
secured party to ensure that procedures for disposition of the
collateral are strictly complied with when the collateral is a
consumer good. Appellant in effect argues that the statutory
award is independent from questions relating to the deficiency
judgment, so that no setoff should occur in this case.
Appellant's argument finds support in Staley Emp. Credit
Union v. Christie (1982), 111 Ill.App.3d 165, 169, 443 N.E.2d
731, 734, where the court held that a disallowed deficiency
judgment cannot diminish a statutory recovery under UCC
9-507(1) for consumer goods collateral.
Although we see some merit in Fifth Third's argument that
not allowing a setoff subjects it to two punishments for the
same ( relatively minor) failure to give adequate notice, we
are constrained from granting a setoff under the unique
circumstances of this case. That is, Fifth Third failed to
appeal the trial court's decision to deny a deficiency judgment
against appellant. With the case in this posture, we must
accept that Fifth Third was not entitled to a deficiency
judgment. To now allow a setoff, when appellant is entitled to
her full R.C. 1309.50(A) award under the clear authority of
that statute, would in effect allow Fifth Third to prevail on

an issue which it did not appeal. A setoff would in effect be
awarding a deficiency judgment to Fifth Third, since the setoff
would come from the deficiency award, and that award has
already been conclusively denied. Furthermore, since the
current version of R.C. 1309.47(B) is inapplicable to this
case, Fifth Third was unable to use that statute's provisions
in the trial court to establish appellant's liability for a
deficiency judgment in arguing for a setoff.
As a final matter, we consider the amount appellant is
entitled to recover pursuant to the formulae contained in the
last sentence of R.C. 1309.50(A):
"The Code uses two formulae to cover both situations in
which the debtor may borrow money and secure the debt with
consumer goods. If the debtor has borrowed money from a third
party who is not the seller, the formula for recovery is the
amount of the service charge, plus ten percent of the principal
amount of the debt. The service charge is the interest which
will accrue over the life of the loan and not just the service
charge remaining when the consumer-debtor brings suit. The
principal amount of the debt, of course, means the original
amount of the debt without any additions for interest or
deductions for payment made. * * *
"If the debtor has borrowed money from the seller, the
formula for recovery is the time price differential plus ten
percent of the cash price. The time price differential is the
difference between the time, or credit, price which a buyer
would pay for an item if he borrowed the money and paid for it
over a period of time and the cash price which the same buyer
would pay if he borrowed no money and paid the full price
immediately for the item." (Footnotes omitted.) 9 Hawkland,
Lord & Lewis, Uniform Commercial Code Series (1991) 901-902,
Section 9-507:06.
The parties agree that pursuant to the first formula,
appellant would be entitled to get $2,461.91, which is the
credit service charge ($1,983.93) plus ten percent ($477.98) of
the principal amount of the debt. Appellant, however, claims
more under the second formula. It is apparent that appellant's
attempted calculation under this second formula mistakenly uses
the price paid at the sale after foreclosure by the third party
who bought the collateral, rather than the cash price paid by
the debtor to purchase the automobile, and mistakenly uses the
difference between the original purchase price and the
foreclosure sale price as the time price differential, to
compute the statutory award. For a case which applies the
second ("time price differential") formula, where a debtor
borrowed money from the seller to make the purchase, see Gulf
Homes, Inc. v. Goubeaux, supra, 136 Ariz. at 39, 664 P.2d at
189. We find that appellant's proper recovery pursuant to R.C.
1309.50(A) is $2,461.91. The cause is remanded to the trial
court to enter judgment for appellant in that amount.
Judgment reversed
and cause remanded.
Moyer, C.J., Wright, F.E. Sweeney, Pfeifer and Cook, JJ.,
concur.
Douglas, J., dissents.

FOOTNOTE:

1 Fifth Third also proposes that a debtor may not recover
under R.C. 1309.50(A) when the debtor fails to take advantage
of an opportunity to establish before the disposition of the
collateral that the creditor is not proceeding in accordance
with Revised Code provisions for the disposition. Fifth Third,
apparently advocating imposing an obligation upon a debtor in
default to pursue injunctive relief whenever possible, bases
its argument on the provision in the first sentence of R.C.
1309.50(A) that "disposition may be ordered or restrained on
appropriate terms and conditions." Although we believe that
reading R.C. 1309.50(A) to place an affirmative duty on the
debtor to seek injunctive relief prior to the disposition of
the collateral strains the language of that statute, we do not
decide this issue, as we find that Fifth Third has waived this
argument by not raising it in the trial court.