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7th Cir. Holds State Law Determines ‘Present Right to Repossession’ Under FDCPA

auto financeThe U.S. Court of Appeals for the Seventh Circuit recently held that in the absence of an FDCPA-specific rule regarding “present right to possession,” the Court must look to state law to determine whether a repossessor has a present right to possess the property at the time it was seized.

Here, the Court held that under Indiana law, a repossessor has a present right to take possession of collateral without judicial process only if he proceeds without a breach of the peace.

A copy of the opinion in Richards v. Par, Inc. is available at:  Link to Opinion.

A consumer obtained a loan from a bank to finance the purchase of a sport utility vehicle. The loan agreement provided the bank with a security interest in the SUV and the right to possession if the consumer defaulted. The loan also provided any repossession would proceed without a beach of the peace.

The consumer defaulted, and the bank hired a repossession firm who subcontracted a towing company to repossess the SUV.

The towing company arrived to repossess the SUV and was met by the consumer who protested, saying she would not voluntarily surrender it, and ordered them to leave the property. The towing company then called the police who handcuffed the consumer while the vehicle was towed away, releasing her once the SUV was gone.

The consumer sued the repossession firm and towing company for violations of the federal Fair Debt Collection Practices Act (FDCPA).  Section 1692f(6)(A) of the FDCPA prohibits debt collectors from “[t]aking … any nonjudicial action to effect dispossession or disablement of property if there is no present right to possession of the property claimed as collateral through an enforceable security interest.”

The trial court entered summary judgment for the repossession firm and towing company, construing the claim as an impermissible attempt to use the FDCPA to enforce a violation of state law. The consumer appealed to the Seventh Circuit.

On appeal, the consumer admitted she defaulted on the loan and that the bank had a valid and enforceable security interest, but argued that the towing company lacked a present right to possess the SUV because Indiana law provides that a secured party may take possession of collateral without judicial process only “if it proceeds without breach of the peace.” If a breach of the peace occurs, the repossessor “must desist and pursue his remedy in court.” Allen v. First Nat’l Bank of Monterey, 845 N.E.2d 1082, 1086 (Ind. Ct. App. 2006).

The repossession firm and towing company countered that the requirement for “present right to possession” means only that the repossessor must have an enforceable security interest in the property claimed as collateral.

The Seventh Circuit noted the FDCPA does not define the phrase “present right to possession.” Repossession rights are governed by the relevant state’s property and contract law, and in the absence of an FDCPA-specific rule, the court must look to state law to determine whether a repossessor had a present right to possess the property at the time it was seized.

In Indiana, a repossessor has a present right to take possession of collateral without judicial process only if he proceeds without a breach of the peace.

In making its ruling, the Seventh Circuit relied on two prior rulings. First, in Seeger v. AFNI, Inc., 548 F.3d 1107, 1111 (7th Cir. 2008), the Court could not determine whether the methods used by a cell-phone company to collect debts were “permitted by law” under the FDCPA without reference to Wisconsin law. Second, in Suesz v. Med-1 Sols., Inc., 757 F.3d 636 (7th Cir. 2014) (en banc), the Court looked to Indiana law to identify the “judicial district or similar legal entity” under the FDCPA for venue purposes.

The Seventh Circuit distinguished Seeger and Suesz from cases attempting to use state law to define “unfair or unconscionable” debt collection methods under the FDCPA, noting that “vague” language prohibiting unfair or unconscionable debt-collection practices could not be read to “transform the FDCPA into an enforcement mechanism for matters governed by state law.”

The Court held the towing company was pursuing a self-help remedy by seizing the SUV, further, a reasonable jury could conclude that a breach of the peace occurred during the repossession attempt. At that point, the towing company no longer had a present right to possession pursuant to Indiana code, but its employees took the consumer’s SUV anyway.

Accordingly, the Seventh Circuit reversed the ruling of the trial court and remanded.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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