Mercedes-Benz Credit Corp. v. Morgan
312 Ark. 225, 850 S.W.2d 297 (1993)
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Rule of Law:
A secured creditor who repeatedly accepts late payments from a debtor establishes a course of dealing that waives the right to repossess for a subsequent late payment, unless the creditor first gives the debtor clear notice that strict compliance with the contract's payment terms will be required going forward.
Facts:
- Dr. Jerry Morgan purchased a 1984 Porsche and financed it through an installment contract, which was assigned to Mercedes-Benz Credit Corporation (MBCC).
- The contract required Morgan to make a payment on the first day of each month.
- Over a fourteen-month period, Morgan made only one payment on time; the other thirteen payments were consistently late, ranging from a few days to over thirty days.
- MBCC personnel contacted Morgan regarding his delinquent payments but never informed him that they would begin to strictly enforce the contract's terms or repossess the vehicle for late payments.
- On March 22, 1991, MBCC decided to repossess the car.
- On April 1, 1991, MBCC accepted Morgan's late payment for the month of March.
- On April 8, 1991, while Morgan's April 1st payment was outstanding, MBCC peacefully repossessed the Porsche.
- After the repossession, Morgan brought his account current, and MBCC offered to return the car, but he refused and filed suit.
Procedural Posture:
- Dr. Jerry Morgan sued Mercedes-Benz Credit Corporation (MBCC) in trial court for the tort of conversion.
- MBCC filed a motion for summary judgment, which the trial court denied.
- The case proceeded to a jury trial, and the jury returned a verdict in favor of Morgan for $11,900.00.
- The trial court also awarded $2,500 in attorney's fees to Morgan.
- MBCC filed post-trial motions for a directed verdict and for judgment notwithstanding the verdict, all of which the trial court denied.
- MBCC (appellant) appealed the judgment and the award of attorney's fees to the Arkansas Supreme Court.
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Issue:
Does a secured creditor's consistent acceptance of late payments from a debtor waive its right to repossess collateral for a subsequent late payment without first notifying the debtor that strict compliance will henceforth be required?
Opinions:
Majority - Justice Tom Glaze
Yes. A secured party who has not insisted upon strict compliance with payment deadlines in the past must give the debtor notice that strict compliance will be demanded in the future before it can validly declare a default and repossess the collateral for a late payment. The court reasoned that MBCC's acceptance of thirteen out of fourteen late payments established a course of dealing that effectively waived its right to rely on the contract clause authorizing repossession for delinquency. This pattern led Morgan to believe late payments would be accepted. To reinstate its right to repossess, MBCC was required to first notify Morgan that it would no longer tolerate late payments and would henceforth demand strict compliance. Because MBCC failed to provide such notice, its repossession was wrongful and constituted the tort of conversion.
Analysis:
This decision solidifies the "waiver by course of dealing" doctrine in the context of secured transactions under the Uniform Commercial Code. It places a duty on creditors who have been lenient with debtors to provide clear notice before reverting to strict enforcement of contract terms. The ruling protects debtors from surprise repossessions after being lulled into a false sense of security by a creditor's past conduct. For future cases, creditors must understand that accepting late payments can modify their enforcement rights unless they explicitly and prospectively notify the debtor that strict compliance is required.
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