Repossession as Satisfaction Without Debtor’s Consent – A Recipe for Trouble

A recent Wisconsin Court of Appeals decision serves as a helpful reminder for secured parties to closely follow the Wisconsin statutes when foreclosing on a debtor’s assets after default.

In 2009, James March sold a restaurant to Thomas Linn for a $50,000 down payment and a $160,000 promissory note secured by a security agreement on all the assets that Linn purchased from March.

The security agreement provided that, in the event of default, March “shall have the right to repossess the tangible assets” and the premises.

When Linn defaulted on the payments due under the promissory note, March sued Linn and received the remedy provided by the security agreement: possession of the restaurant and its assets in partial satisfaction of the debt.

March then used the repossessed collateral to operate the restaurant.

Linn appealed, arguing that he never consented to March’s possession of the collateral as satisfaction of the debt.

Without such consent, Linn argued, March’s repossession of the collateral was invalid under Wisconsin law. The Wisconsin Court of Appeals agreed.

The court held that, despite the language in the security agreement, if a secured party seeks to acquire a debtor’s interest in collateral as full or partial satisfaction of a debt, the debtor must consent to the secured party’s terms.

Such consent is required by Wisconsin law and cannot be waived.

Wisconsin law would have permitted March to repossess the collateral and proceed to sell it under “commercially reasonable” terms, and apply the proceeds to the debtor’s outstanding obligations.

However, because Linn did not consent to March’s repossession, March was forbidden from simply retaining the collateral.

The attorneys at FOS can help businesses and individuals effectively navigate these rules to protect their rights and interests.