Kline v. Central Motors Dodge, Inc.

RODOWSKY, Judge. In this case a motor vehicle securing a retail installment sales agreement was repossessed and resold at a sale that was not a public auction sale. We shall hold that such resales must be conducted in a commercially reasonable manner. In January 1988, appellee, Central Motors Dodge, Inc. (Central), sold a used 1986 Dodge Vista to appellants, Billy E. Kline and Jan E. Kline (the Klines).

When sold, the car’s odometer registered approximately 72,000 miles. The transaction was a retail installment sales agreement, with a cash price of $6,995, and an amount financed of $8,252.15. Central assigned the agreement to Chrysler Credit Corporation (Chrysler). The Klines defaulted, and in April 1990 Chrysler repossessed.

When the Klines were unable to redeem, Chrysler invoked its right of recourse against Central and reassigned the contract to Central. At the time of repossession, the odometer registered approximately 111,000 miles. The vehicle had suffered some body damage during the Klines’ possession. Central placed the car on its wholesale lot for resale, without repairing or reconditioning the vehicle.

The car was never offered for sale to retail purchasers. On May 8, 1990, Central sold the car for $800 to Kyner’s Auto Sales. The resulting deficiency was $5,401.28. Thereafter, Central sued for the deficiency in the District Court of Maryland sitting in Washington County.

On the ⁴⁵⁰ Klines’ demand for a jury trial, the case was removed to the circuit court. Central moved for, and was granted, summary judgment. The Klines appealed but before consideration of the matter by the Court of Special Appeals, this Court issued the writ of certiorari on its own motion. 326 Md. 435 , 605 A.2d 137 . This retail installment sales agreement is governed by the Retail Installment Sales Act (RISA), Md.Code (1975, 1990 Repl.Vol.), §§ 12-601 through 12-636 of the Commercial Law Article (CL).

When Central sued for the deficiency and moved for summary judgment, the Klines, in opposition thereto, injected a defense under RISA. RISA § 12-626(e)(4) provides that if the resale of security results in a deficiency, “the buyer is liable for the deficiency if: (i) The agreement provides for liability for a deficiency; and (ii) The holder has complied with all requirements of this subtitle, including the notice requirement of § 12-624(d).” The Klines essentially argued to the circuit court that Central had not complied with one of the requirements of the RISA subtitle, specifically § 12 — 626(e)(l)(ii). Paragraph (1) reads: “The provisions of this subsection (e) apply to: (i) A public sale held under the provisions of this section; and (ii) Any other bona fide public or private sale of goods which had a cash price in excess of $2,000 at the time of their purchase by the buyer, if the buyer has not paid at least 50 percent of the cash price of the goods or if he has paid that amount but has not requested a public sale under subsection (a) of this section.” It is undisputed that the “public” sale referred to in subsection (e)(l)(i) is the public auction sale referred to in RISA § 12-626(a)-(d). At the hearing on summary judgment the Klines argued that the “bona fide public or private sale” referred to in subsection (e)(l)(ii) was a sale conducted in a ⁴⁵¹ commercially reasonable manner and that Central had failed to demonstrate that the subject resale was conducted in that manner.

The Klines’ legal position is that “bona fide,” as used in § 12-626 to describe sales after repossessions, has substantially the same meaning as the words, “commercially reasonable,” have in § 9-504(3) of the Maryland Uniform Commercial Code (U.C.C.). The latter statute deals with the secured party’s disposition of collateral (“[E]very aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable.”). Central, on the other hand, argued to the circuit court that “bona fide” in RISA § 12-626(e) has its legal dictionary meaning. Central argued that “bona fide” meant “ ‘in or with good faith; honestly, openly, and sincerely; without deceit or fraud.’ ” See Black’s Law Dictionary 160 (5th ed.1979).

Based on discovery that it had furnished, Central argued that it had obtained three bids and had sold the vehicle to the highest bidder, without hint of collusion or fraud. 1 The circuit court, in a brief written opinion, rejected the Klines’ argument that a bona fide sale meant a commercially reasonable sale. That opinion gave no indication that the circuit court was applying some meaning to “bona fide” in RISA § 12-626(e) that lay between the absence of fraud, as Central had argued, and the commercial reasonableness position urged by the Klines. In this Court the parties essentially draw the same line between their positions. Here, Central has clarified its position by advocating that “bona fide” be given the same meaning in RISA § 12-626(e) as the words, “good faith,” ⁴⁵² have in U.C.C. § 1-203 (“Every contract or duty within Titles 1 through 10 of this [Commercial Law Article] imposes an obligation of good faith in its performance or enforcement.”).

In § 1-203 “good faith” means “honesty in fact in the conduct or transaction concerned.” U.C.C. § 1-201(19). We agree with the construction advocated by the Klines. It is consistent with the legislative history, to the extent that the history can be determined. More convincing is the fact that the administrative interpretation of “bona fide” has equated those words with commercial reasonableness and that the General Assembly has clearly indicated its agreement with that administrative interpretation.

The concept of a bona fide public or private sale was not part of RISA as it was originally enacted by Chapter 851 of the Acts of 1941. The concept came into RISA by Chapter 806 of the Acts of 1965. Prior to 1965 there were no deficiency judgments permitted on RISA repossessions, unless the buyer had paid at least fifty percent of the cash price and had satisfied other conditions of the buyer’s right to require a public auction sale. Only in the event that the public auction sale resulted in a deficiency was the holder of the retail installment sales agreement permitted to seek a deficiency judgment.

The 1965 amendment expanded the holder’s right to seek a deficiency. See Union Trust Co. v. Tyndall, 290 Md. 102, 108-10 , 428 A.2d 428, 431-32 (1981). Prior to the 1965 amendment RISA was codified in Md. Code (1957), Art. 83, §§ 128-153. Chapter 806 of the Acts of 1965 amended, inter alia, Art. 83, § 143(b) as follows (italics indicate new matter added to the existing law): “The proceeds of such sale, plus the deposit required in subsection (a) above, or the proceeds of any other bona fide public or private sale, as to goods having a cash price at the time of the purchase by the buyer in excess of two thousand dollars ($2,000.00), where the buyer has not paid at least 50% of the cash sale price of the goods or where the buyer has paid 50% of the cash sale price but has not requested a public sale pursuant to subsection (a) of this section, shall be applied: (1) To the actual ⁴⁵³ and reasonable cost of the sale; (2) to the actual and reasonable cost of retaking and of storage; (3) to the unpaid balance owing under the contract at the time such goods were repossessed; (4) any balance remaining shall be paid to the buyer and if a deficiency arises the buyer shall be liable for said deficiency if the contract provides for such deficiency liability and if compliance has been made with the other provisions of this subtitle including the notice required by Section 141(c) of this subtitle.

A written statement showing the disposition of such proceeds and deposit, shall be furnished to the buyer by the seller.” Central points out that the Uniform Commercial Code had been adopted in Maryland by Chapter 538 of the Acts of 1963. See Md.Code (1957, 1964 Repl.Vol.), Art. 95B. Central notes that Article 95B, § 9-504(3), imposed the commercial reasonableness standard for public or private dispositions of the collateral in secured transactions under the U.C.C., but when RISA was amended two years later, the General Assembly used “bona fide” to describe the sale of the collateral in RISA transactions. Central submits that the General Assembly must have intended “bona fide” in RISA to have a meaning different from commercial reasonableness.

It is far from clear that the conclusion urged by Central is correct, particularly when additional historical facts are considered. In the 1963 session of the General Assembly, House Bill 1110, utilizing “bona fide” to describe the public or private sale following a RISA repossession, was introduced to expand deficiency judgments, but it was not enacted. The same bill was introduced by the same sponsor in the 1964 session of the General Assembly as House Bill 192, but it was not enacted. The 1963 and 1964 proposals would have permitted deficiency judgments arising out of any RISA transaction.

In those years only sales of goods having a cash price of $2,000 or less were within the protection of RISA. The same sponsor introduced in the 1965 session House Bill 597, which modified the proposal ⁴⁵⁴ from its prior form. House Bill 597 enlarged the basic coverage of RISA to include transactions involving goods having a cash price of $5,000 or less, but it allowed a deficiency judgment only if the cash price of the goods was in excess of $2,000. The bona fide sale provisions were unchanged.

It was in that form that House Bill 597 was enacted as Chapter 806 of the Acts of 1965. Two aspects of this history are relevant to the issue before us. First, use of “bona fide” to describe sales following repossessions in RISA transactions had its origins before the Uniform Commercial Code was enacted. This minimizes any significance of the difference in terminology between RISA and the U.C.C. Second, the 1965 amendment to RISA expanded consumer rights by making RISA applicable to a larger class of installment sales while permitting deficiency judgments against buyers who had not complied with RISA § 12-626(aHb) only in the range between the former $2,000 cash price ceiling of goods and the new $5,000 cash price ceiling.

See 63 Op.Att’y Gen. 92 (1978). The compelling inference is that the 1965 legislation was a compromise which expanded deficiency judgments only in exchange for enlarging consumer protection. Consequently, it seems unlikely that the General Assembly intended “bona fide” to mean only the absence of fraud. Honesty in fact as the meaning of good faith has been described by Professor Hawkland as a “ ‘subjective’ (‘white heart and empty head’) standard.” 1