The Commercial Law Article is replete with provisions providing special protections for consumers who have purchased goods for cash or on credit. From unenforceable disclaimers of implied warranties to the Consumer Protection Act, Maryland has a rich history of promoting consumer rights.

Unfortunately for consumers, the General Assembly diminished this tradition when it adopted revised Article Nine by deleting many of the consumer protections contained in the proposed uniform draft. Consistent with other UCC Articles, the proposed draft of revised Article Nine distinguished consumer debt and business debts by providing broader protection and resulting remedies for consumers. As a general rule, the proposed provisions relating to consumer protections and remedies are applicable if the loan was incurred primarily for personal, family or household purposes or the collateral involves goods used primarily for that purpose. Proposed Section 9-625, for example, imposed a $500 penalty upon a secured party who fails to terminate control of various intangible property rights, improperly files a financing statement, fails to explain or account for a surplus and/or fails to provide an accounting to a debtor regarding their payment history.

Maryland chose not to adopt any of these consumer protections but did adopt proposed 9-625’s penalty provisions regarding a secured party’s failure to abide by the default provisions of Article Nine. This disobedience typically occurs when the debtor is not actually in default or the secured party breaches the peace when repossessing the collateral, fails to notify the debtor or conducts a commercially unreasonable sale or fails to tender to a debtor a surplus from a disposition sale.

Proposed revised Section 9-625 also would have allowed Maryland consumers to continue to benefit from the absolute bar rule by allowing the courts to determine the effect of a secured party’s failure to comply with Article Nine’s disposition requirements. In 1980, Maryland joined several other jurisdictions when the Court of Appeals adopted the absolute bar rule, which prohibited a secured party form obtaining a deficiency judgment if the secured party had not properly notified a debtor of an intended sale of the collateral. However, the General Assembly repudiated the consumer-oriented absolute bar rule by adopting a version of 9-625 which imposes a rebuttable presumption that the value of the collateral equals the amount of the debt upon a secured party who fails to comply with Article Nine.

The General Assembly did not stop there, however. In addition to repudiating the absolute bar rule for consumer loans governed by Article Nine and not adopting many of the consumer protections contained in the proposed draft of Section 9-625, the consumer protections which were contained in the version of Section 9-625 adopted by the General Assembly frequently cannot be utilized by consumers.

In a typical scenario, when a consumer debtor defaults the secured party will resort to its primary weapon in its enforcement arsenal: the right to repossess. The original draft of Article Nine as well as the revised version recognized that debtors frequently may have little equity in the collateral at the time of default. If so, traditional measures of damages for conversion provide little incentive for attorneys to agree to pursue redress for debtors who have been the victim of an improper repossession and just as importantly provide little deterrence to overreaching secured parties. As the drafters of the revised version expressed in Comment Four to Section 9-625, “[it] is designed to ensure that every non-compliance with the requirements of the default provisions in a consumer-goods transaction results in liability.” This liability is a pure penalty and thus is not dependent upon a debtor proving they were injured. Rather, in Maryland as in other states, the amount of the penalty is measured by two separate formulae.

1. If the debtor has borrowed money from a third party who is not the seller, the debtor is entitled to the amount of the service charge, plus 10 percent of the principal amount of the debt. The service charge is the interest which will accrue over the life of the loan and not just the service charge remaining when the consumer-debtor brings suit. The principal amount of the debt, of course, means the original amount of the debt without any additions for interest or deductions for payment made.

2. If the debtor has borrowed money from the seller, the formula for recovery is the time price differential plus 10 percent of the cash price. The time price differential is the difference between the time (or credit) price which a buyer would pay for an item if he borrowed the money and paid for it over a period of time and the cash price which the same buyer would pay if he borrowed no money and paid the full price immediately for the item.

Regrettably, consumers will not be able to utilize 9-625’s penalty formulae if the secured party has chosen to have the loan governed by Title 12 of the Commercial Law Article. Thus, the initial assessment of a consumer debtor’s rights in relation to enforcement of a security interest must begin with a thorough review of the loan documents to see if the transaction is governed by Subtitles 1, 6, 9 or 10 of Title 12. If so, the General Assembly, when it adopted Section 9-201 (c) (3), chose to preclude a debtor from utilizing 9-625’s penalty provisions, even if the creditor has otherwise violated the default provisions of Article Nine. Furthermore (and perhaps more importantly), Title 12 does not contain a penalty provision similar to Section 9-625; rather, Title 12 only precludes a secured party from obtaining a deficiency judgment if the secured party has violated the enforcement provisions of Subtitles 1, 6, 9 or 10.

While not insignificant, the absolute bar to a deficiency in a typical run-of-the-mill consumer case does not provide a viable economic incentive for an attorney to agree to represent a debtor, which along with deterrence is the primary rationale for the penalty provisions of 9-625. Since creditors have complete autonomy in determining whether a loan is governed by Title 12 (although perhaps inadvertently), Maryland consumers suffered a serious diminishment to the protections they had once enjoyed when the General Assembly adopted revised Article Nine.