2016 Case Notes: Banking & Finance - December 14, 2016

You may have read about South Carolina Court of Appeals’ decision to extend the 6-year statute of limitations to UCC claims involving secured transactions arising out of automobile purchases. In Delaney v. First Financial of Charleston, Inc., Op. No. 5442 (S.C.Ct.App. filed September 28, 2016) (Shearouse Adv.Sh. No. 38 at 59), the Court determined that the six-year statute of limitations did not apply to UCC claims against a lender under S.C. Code Ann. § 36-9-625. 

Plaintiff Otha Delaney purchased a truck from a dealer pursuant to a retail installment contract, and the contract was assigned to Defendant First Financial.  Delaney defaulted under the contract, and First Financial repossessed the vehicle, selling it after issuing a notice of private sale.  More than three years after the notice was issued, Delaney sued First Financial, representing a putative class and requesting relief under S.C. Code Ann. § 36-9-625.  The trial court found “Delaney's sole cause of action was a statutory penalty because it requested … the statutorily-mandated award for a violation of the notice provision pursuant to section 36-9-625(c)(2)”  Id. at 61.  

Section 36-9-625(c)(2) in turn provides a debtor may “recover for [the secured party’s] failure … an amount not less than the credit service charge plus ten percent of the principal amount of the obligation or the time-price differential plus ten percent of the cash price.”  Delaney argued that this provision was not a penalty, but merely allowed recovery of “a substitute for actual damages.”  Id. On appeal, the Court of Appeals found that South Carolina’s statutes of limitations for statutory penalties applied, not the UCC six-year statute. The Court defined a statutory penalty as a “penalty an individual is allowed to recover against a wrongdoer as satisfaction for wrong or injury suffered, without reference to actual damage sustained.” Id. at 65.  Citing three prior South Carolina Supreme Court opinions, the Court of Appeals held that the recovery contemplated by Section 36-9-625(c)(2) was clearly a statutory penalty.  Id. 66-67. 

Importantly, the Court held that the six-year statute of limitations did not apply because Delaney had not alleged a breach of the underlying retail installment contract.  Id. at 65.  Because UCC section 36-2-725(1) applies a six-year period to “action[s] for breach of any contract for sale”, it did not apply here.  Id. 

Finally, the Court did not decide whether Delaney’s claims were barred by the one-year statute of limitations for penalties, or the 3-year statute, because Delaney’s claims fell outside both statutes.  The Court found that the date of accrual for the cause of action under 36-9-625 was the date the defective notice was mailed to Delaney.  Id. at 68.  Because Delaney’s claims arose from an allegedly defective notice, the Court found that “under the discovery rule, the date of the notice of sale would be the date of discovery of the cause of action for a failure to comply with the UCC regarding the notice.”  Id.  The Court explained that the date of sale is not the accrual date because section 36-9-625 remedies (1) include restraining the noticed sale, and (2) impose liability even if a debtor is not “injured” by the sale of the goods.  Id. at 70.  The Court affirmed the trial court’s finding that the allegedly defective notice was mailed in May 2008, and Delaney did not file her lawsuit until October 2011, outside even the 3-year statute of limitations.