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Williams v. American Honda Finance Corp.

Supreme Judicial Court of Massachusetts, Suffolk

June 5, 2018

RACHEL C. WILLIAMS[1]
v.
AMERICAN HONDA FINANCE CORPORATION

          Heard: December 7, 2017.

         Motor Vehicle Instalment Sales, Repossession, Notice. Uniform Commercial Code, Notice. Words, "Fair market value."

         Certification of questions of law to the Supreme Judicial Court by the United States Court of Appeals for the First Circuit.

          John J. Roddy (Elizabeth A. Ryan also present) for the plaintiff.

          Eric S. Mattson, of Illinois (Tracy McDevitt Waugh also present) for the defendant.

          Fredrick S. Levin, John C. Redding, & Ali M. Abugheida, for American Financial Services Association, amicus curiae, submitted a brief.

          Stuart T. Rossman, for National Consumer Law Center, amicus curiae, submitted a brief.

          Present: Gants, C.J., Gaziano, Lowy, Cypher, & Kafker, JJ.

          KAFKER, J.

         The primary issue presented in this case is how to establish the fair market value of a repossessed automobile pursuant to G. L. c. 255B, § 20B. Under § 20B, a creditor who repossesses and sells a vehicle is entitled to recover from the debtor the deficiency, if any, that remains after deducting the "fair market value" of the vehicle from the debtor's unpaid balance. The plaintiff in this case, Rachel Williams, defaulted on her automobile loan, causing the defendant, American Honda Finance Corporation (Honda), to repossess and sell the vehicle that served as collateral for the loan. The price for the repossessed vehicle was determined at an auction open to licensed dealers. Honda then used that amount to establish the fair market value of the repossessed automobile and likewise referenced the auction sale amount in presale and postsale notices to the debtor. Williams then sued Honda, alleging that the fair market value of her repossessed automobile was the fair market retail value of the automobile and Honda's notices to her were insufficient under Massachusetts law because of the manner in which Honda described and calculated her deficiency. The United States District Court for the District of Massachusetts granted summary judgment to Honda, and the plaintiff appealed.

         Unsure of the meaning of the statute, the United States Court of Appeals for the First Circuit certified to this court three questions related to the calculation of "fair market value" under § 20B, and the notices that are required with respect to this calculation. The court first asks whether the fair market value of the collateral under § 20B is the fair market retail value of the collateral. The second and third questions then relate to the contents of the presale and postsale notices that must be sent to the debtors.

         We conclude that the Legislature required that deficiency calculations for repossessed vehicles be determined based on the fair market value of the vehicle, but did not dictate the creditor's market choice in the first instance and left the ultimate determination of fair market value to the courts in contested cases, taking into account both creditor and debtor interests, and the means, methods, and markets used to sell the vehicle. As will be explained infra, estimated retail value as provided in periodically published trade journals has a very limited role in the statute, essentially establishing a rebuttable evidentiary presumption that allows a debtor to put the fair market value as originally determined by the creditor to the test in contested cases. The approach to determining fair market value and deficiencies that we delineate respects the plain language of the statute, the legislative history, and the practical realities of the automobile repossession market. Had the Legislature intended to impose a fair market retail value standard, it would have simply said so in the statute or the legislative history, and it did not.

         Finally, in response to the second and third questions, concerning the notice that is required, we answer that the presale and postsale notices provided to the debtor must expressly describe the deficiency as the difference between the amount owed on the loan and the fair market value of the vehicle, not the difference between the amount owed and the sale proceeds or the amount owed and the fair market retail value of the vehicle.

         1. Background.

         The relevant facts and procedural history are as follows.

         Honda resells tens of thousands of used motor vehicles every year -- some after a repossession, but most after they have been returned to Honda at the end of a lease. To sell all of these vehicles, Honda uses a process that the plaintiff has admitted is "designed to obtain the highest possible price." The first step in this process involves an independent auction company rating the vehicle's condition on a scale from zero to five, with zero representing the "very worst" and five the "very best." With the vehicle's grade in mind, a Honda employee consults the Black Book to help establish a baseline value for vehicles it resells. The Black Book is a guidebook used in the collections, customer service, and credit industry. Honda determines a "floor price" -- the minimum it intends to accept when it sells the vehicle -- based in part on the Black Book's estimated values for a vehicle of the same make, model, year, mileage, and condition. After a floor price is set, the vehicle is sold, along with vehicles from other manufacturers, at a biweekly auction that is open to licensed dealers.

         Honda uses auctions rather than a retail channel to sell these vehicles for a variety of reasons. Honda is not licensed to sell at retail, and selling at retail may interfere with the legal rights of independent Honda dealers. It also would take Honda a longer time to sell these vehicles at retail than selling at the dealer auctions. This is significant because automobiles depreciate rapidly and the longer a creditor retains possession of a vehicle, the less it will be worth when it is eventually sold.

         Honda financed the purchase of the plaintiff's vehicle in 2007. Four years later, after the plaintiff defaulted on her loan, Honda repossessed the vehicle.[2] Honda then provided the plaintiff with the following notice:

"We have [your vehicle] because you broke promises in our agreement, and we will sell it at a private sale sometime after October 11, 2011.
"The money received from the sale (after paying our costs) will reduce the amount you owe. If the auction proceeds are less than what you owe, you will still owe us the difference. If we receive more money than you owe, you will receive a refund, unless we must pay it to someone else. If you would like a written explanation on how the amount you owe was determined, or need additional information about the sale, please send your request to the address below.
"You can get the property back at any time before we sell it by paying the full payoff amount, including our expenses. As of today, the payoff amount is $13, 366.78, which is subject to change due to the addition of applicable fees and/or finance charges."

         The plaintiff's repossessed vehicle was sold according to the auction process. The independent auction company determined that the plaintiff's vehicle was in below average condition. For Honda, this meant that the vehicle was in "rough" condition for purposes of the Black Book. According to the Black Book, the estimated wholesale value for this vehicle in "rough" condition was $7, 750 and the estimated retail value was $9, 800. With these values in mind, Honda set the floor price for the plaintiff's vehicle at $8, 700 and ultimately sold the vehicle for $8, 900. The plaintiff's outstanding balance was $12, 858.70, and Honda incurred repossession and auction expenses of $754.62, leaving the plaintiff with a postsale deficiency of $4, 713.32. After the auction, Honda notified the plaintiff that her vehicle was sold for $8, 900 and provided her with a calculation of the deficiency that she owed. There is no indication that Honda, once it sold the vehicle and calculated the deficiency, intended to file a lawsuit to collect the deficiency. Indeed, Honda has brought only five or fewer such lawsuits in the past few years despite selling thousands of repossessed automobiles.

         The plaintiff commenced a putative class action in the Superior Court against Honda, claiming that the notices it sent to her and other debtors violated the Uniform Commercial Code and constituted an unfair and deceptive act or practice in violation of G. L. c. 93A. The plaintiff challenges Honda's presale notice because it did not use the term "fair market value" in describing her deficiency. The plaintiff also challenges the postsale notice, arguing that it is insufficient because it calculated her deficiency as the difference between her unpaid balance and the auction proceeds.

         Honda removed the case to the United States District Court for the District of Massachusetts. Following discovery, both parties moved for summary judgment. A magistrate judge recommended granting summary judgment in favor of Honda, concluding that under G. L. c. 255B, § 20B, the plaintiff's deficiency must be calculated using the fair market value of the collateral and that Honda's notices complied with the Uniform Commercial Code because there was no evidence that Honda sold the vehicle for less than its fair market value. The district court judge adopted this recommendation and entered judgment in favor of Honda.

         The plaintiff appealed to the United States Court of Appeals for the First Circuit. Having determined that the outcome of the case depended on unsettled questions of Massachusetts law, the First Circuit on its own motion certified three questions to this court. We address each question in turn.

         2. Discussion.

         a. Question one.

         The first certified question asks:

"1. Whether the 'fair market value' of collateral under [G. L. c. 255B, § 20B, ] is the fair market retail value of that collateral" (emphasis in original)?

         For the reasons detailed infra, we answer this question, "No."

         i. Statutory language.

         "[T]he primary source of insight into the intent of the Legislature is the language of the statute." International Fid. Ins. Co. v. Wilson, 387 Mass. 841, 853 (1983). "Where the language is clear and unambiguous, it is to be given its 'ordinary meaning, '" as long as "this meaning . . . [is] reasonable and supported by the purpose and history of the statute" (citations omitted). Commonwealth v. Mogelinski, 466 Mass. 627, 633 (2013).

         By its plain language, G. L. c. 255B, § 20B, calculates the deficiency that the creditor can obtain from a defaulting debtor based on the fair market value of the collateral.[3] Once the creditor repossesses and sells the collateral, the creditor "shall be entitled to recover from the debtor the deficiency, if any, resulting from deducting the fair market value of the collateral from the unpaid balance due" in ...


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