Self-Help Without Breaching the Peace- How Does a Secured Creditor Repossess Collateral Without Incurring Liability?

When a person or business loans money to another person or business, it is usually the case that the creditor will require a security interest in the assets of the debtor.  Often times, especially these days given the state of the economy in the past five years, the debtor will default on the loan, usually by failing to repay the funds in accordance with the terms of the agreement.  Since the creditor has a security interest in debtor’s personal property, the creditor can simply walk in one day and take everything to satisfy the loan right?  Not quite…

The ability of a secured creditor to take possession of secured collateral is not as easy as the creditor may hope it to be under Florida law.  Fla. Stat. §679.609. Florida Statutes Chapter 679 addresses the rights a secured party has to take possession of collateral after a default.  This section follows former UCC Section 9-503 and earlier uniform legislation. It provides that the secured party is entitled to take possession of collateral after default. These rights include taking possession through judicial process or without judicial process so long as there is no breach of the peace.  Id.  It is important to note that a debtor cannot waive its right to the breach of peace requirement, so crafty drafters should not bother trying to sneak that into a contractual clause for possession of collateral upon default.  Fla. Stat. § 697.602.

It appears that an important factor to consider when determining whether judicial process is necessary is whether you can take the collateral without breaching the peace.  Like former Section 9-503, Fla. Stat. §679.609 does not define or explain the conduct that will constitute a breach of the peace, leaving that matter for continuing development by the courts and risk management evaluation by the creditor. Thus, in order to discern whether this remedy is truly a viable remedy for creditors, one must first identify what it means to “breach the peace.”

Florida courts have set out a two-part test to determine if a party is breaching the peace under Fla. Stat. § 679.609(2)(b).  “To determine if a breach of the peace has occurred, courts inquire mainly into: (1) whether there was entry by the creditor upon the debtor’s premises; and (2) whether the debtor or one acting on his behalf consented to the entry and repossession.”  Marine Midland Bank-Central v. Cote, 351 So.2d 750, 752 (Fla. 1st DCA 1977). Without consent, self-help is incredibly limited and likely not available.

The first prong of the test requires that the creditor enter onto debtor’s property.  It is probably not very difficult to determine whether entry was accomplished, so we will not belabor that point.  The second prong of the test, consent, may be more difficult to ascertain.  The 1^st DCA took an in-depth look at consent in Quest v. Barnett Bank of Pensacola, 397 So.2d 1020 (Fla. 1st DCA 1981).  The Court first reviewed previous holdings to find that the majority of courts have held an unauthorized entry (one without consent) into a home to be a breach of the peace.  Id at 1023.  Others also found unauthorized entries into a garage, or even a place of business, to be a breach as well.  Id.  But, areas that may be considered public may create more room for discussion, such as a driveway or public street.  Id.  The Court then went on to discuss the scope of consent and determined that consent must be “freely and voluntarily given.”  Id.  Consent may be inferred from custom, usage or conduct, but it is limited to those acts within a fair and reasonable determination of the terms of the grant.  Id at 1024.  It appears from the Court’s discussion that any attempt to delay or stop entry or repossession of items would negate a creditor’s ability to use self-help.  Thus, even a statement requesting the creditor wait to enter is enough to create a breach of the peace even though it is not a straight forward denial of entry.  Id at 1023.

In considering whether a secured party has engaged in a breach of the peace, courts not only hold the secured party responsible for its own actions, but also the actions of others taken on the secured party’s behalf, including independent contractors engaged by the secured party to take possession of collateral. Moreover, Florida Statutes and the Uniform Commercial Code do not authorize a secured party who repossesses without judicial process to utilize the assistance of a law-enforcement officer. A number of cases have held that a repossessing secured party’s use of a law-enforcement officer without benefit of judicial process constituted a failure to comply with legal requirements to refrain from breach of the peace.

A further review of case law shows that threats, the use of abusive language, and breaking and entering to gain possession of the collateral would also constitute breach of the peace. Accordingly, it can be reasonably concluded that a breach of peace in taking possession may occur where the secured party exerts wrongful pressure on the debtor to obtain the secured collateral. See Northside Motors of Florida, Inc. v. Brinkley, 282 So. 2d 617 (Fla. 1973).

The concept of breach of the peace includes use of violence and/or damaging the collateral. Where a particular taking of possession of collateral involves a trespass or assault by the secured party, such repossession is not authorized and constitutes a breach of the peace. See e.g. Seibel v. Society Lease, Inc., 969 F. Supp. 713 (M.D. Fla. 1997) (applying Florida law); Matter of Pal Transport, Inc., 13 B.R. 935 (Bankr. M.D. Fla. 1981) (applying Florida law); Thrasher v. First Nat. Bank of Miami, 288 So. 2d 288 (Fla. 3^rd DCA 1974). Thus, a secured party who insists on taking possession after resistance by the debtor faces the consequences of its use of force.

Although there is nothing in the Florida Statutes or Uniform Commercial Code that requires the secured party to give the debtor notice or make a demand for possession before taking possession as a self-help measure, a prior course of conduct between the parties may, in some circumstances, give rise to an issue of fact as to a secured party’s obligation to give the debtor notice prior to taking possession of the collateral. Ordinarily, whether a secured creditor’s acceptance of late payments from the debtor operates as a waiver of the default or estops the creditor from asserting the self-help right to take possession of the collateral presents a question of fact. Where the secured creditor has consistently accepted late payments from the debtor, who has made a majority of the payments called for, and such conduct has led the debtor to believe that late payments will continue to be accepted, the secured creditor may be regarded as having modified the contract by such conduct, resulting in the need for the secured creditor to notify the debtor of a change in this position before taking possession of the collateral. See Ford Motor Credit Co. v. Waters, 273 So. 2d 96 (Fla. 3^rd DCA 1973). On the other hand, where the contract between the parties expressly provides that a waiver by the secured creditor of any default is not to be deemed a waiver of any other default, the creditor’s acceptance of late payments will ordinarily not be deemed a waiver of the right to declare a subsequent default and repossess the collateral. Id.

What happens if self-help is utilized improperly and/or the peace is breached in utilizing self-help? In an appropriate case, the debtor or other person lawfully in possession of the collateral is entitled to recover for the unlawful or wrongful taking of possession thereof by the secured party. In particular, a secured party who wrongfully takes possession of the collateral or does so through improper means may be held liable to the person aggrieved for conversion and recovery may be had under the theory that the secured party has committed the tort of interfering with the business of the debtor. In cases of egregious breaches of the peace, punitive damage awards beyond traditional compensatory damage awards are common.

It is clear from the Florida statutory and case law that a creditor’s right to self-help is very limited in application.  Any breach of the peace, defined by case law as giving a wide berth to debtors wanting to avoid collection, will halt the self-help process.  As a creditor, you must be cognizant of the debtor’s consent, or lack thereof, to non-judicial means of taking secured collateral before plowing ahead and risking a breach of the peace.  Debtors must also become familiar with what constitutes a breach of the peace and ensure proper consent or opposition is placed. Though the law on the subject is a bit murky, one thing is certain; if you are a secured creditor and you are considering exercising self-help under a valid security agreement, you should consult with counsel knowledgeable about creditor’s rights for assistance in gaining relief without exposure to liability.