The Auto Finance Agreement: Loan Masquerading as a Sale? What Statute of Limitations Applies?

Next to the purchase of a home, the purchase of an automobile is the most expensive transaction most consumers in this country make. And like the purchase of a home, most car buyers finance this purchase with a bank loan, where the lender as security for the loan gets a lien on the car so as to allow the bank to repossess the car in the event the car buyer defaults on the loan.

When there is a default on a car loan, most lenders do not immediately repossess the vehicle. Instead, there is a long process of notices, demand letters, calls, and attempts to work out a payment plan. If none of these efforts work, in all likelihood, the lender takes steps to repossess the car and sell it in a commercially reasonable manner in order to recoup as much of the default loan amount as possible from the sale proceeds. After that, collection efforts may continue until it is clear that the borrower will not pay anymore. Upon reaching that point, the lender may send the claim to its attorneys for collection, assign the claim to a collection agency or perhaps sell the claim to a debt buyer. Thereafter, these subsequent entities in the chain of collection may pursue further collection efforts and then ultimately sue the borrower.

The prudent lender, collection agency or debt buyer keeps close watch of the time which transpires from default until suit is commenced to prevent the claim from being time barred, but sometimes years can go by before a suit is commenced and the holder of the claim may well be presented with a defense that the claim is time barred by the applicable Statute of Limitations. The question then becomes what is the applicable Statute of Limitations, which, in turn, is a function of what kind of transaction is at issue.

Is the transaction in question a true loan and therefore governed by New York’s six year Statute of Limitations for contract actions (Section 213 of NY’s CPLR), or is it really a sale of goods governed by the four year Statute of Limitations found in Article 2 of New York’s Uniform Commercial Code (UCC Section 2-725)?

A recent decision out of New York City’s Civil Court held, without much analysis, that a breach of an automobile finance agreement was governed by the four year limitation period found in Article 2, the sale of goods section of the UCC. Autovest, L.L.C. v. Nathan, 24033/2012, NYLJ 1202723535649, at *1 (Civ., KI, Decided March 23, 2015) (“Nathan”). The case involved a typical automobile purchase with a finance agreement, simultaneously assigned to Wells Fargo Bank and an subsequent assignment of the agreement to the plaintiff, Autovest, LLC. Because the case was brought four years after the breach of the finance agreement, the court granted the defendant-borrower’s motion to dismiss on limitation grounds.

However, in 2001, well before Nathan, the Second Department of New York’s Appellate Court reached a different conclusion in Santamaria v. Kelly, 280 A.D.2d 536 ( 2nd Dep’t. 2001) (“Santamaria”). Santamaria clearly involved a claim under a vehicle finance agreement and the court (also without any analysis) held that the claim was a breach of contract, governed by New York’s six year Statute of Limitations. A similar result was reached in Erdman v. HSBC Auto Finance, 2011 WL 3420849 (W.D.N.Y.).

The issue of whether in the context of a sale of goods a financing agreement used to fund the purchase of the goods is a sale, governed by the UCC , or a loan contract was analyzed in depth by the Court in Orix Financial Services, Inc. v. Barnes, 64 UCC Rep.Serv.2d 80 (S.D.N.Y. 2007) (“Orix”). Orix involved a case where a buyer entered into a conditional sales contract with plaintiff, a credit finance company, to purchase certain equipment. Recognizing that the particular financing agreement had aspects of both a sale of goods and a financing agreement or loan, the Court in Orix stated that where the financing agreement is separate from the sale of goods, the six-year limitations period should be applied, particularly where the purchase money for goods is advanced by a third party. In addition, the Court in Orix noted that the six-year limitations period also applies to contracts that have the form of a sale of goods, but are only intended to operate as security transactions, citing to Section 2-102 of the UCC, which provides that Article 2 does not apply “to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction.” But, where some of the provisions of the subject agreement are for the sale of goods and some are not, the Orix Court held that a court applying New York law must look “to the ‘primary purpose’ test to determine which statute of limitations applies to the entire contract”; that is, whether the agreement is “predominantly” one for the sale of goods or for the providing of services.

Ultimately, the conditional sales contract in Orix was found to be more in the nature of a contract for the sale of goods and therefore the Court applied UCC Article 2’s four year Statute of Limitation on the basis that the primary purpose behind the contract was to enforce the sale price for the goods and that the financing was secondary.

The same cannot be said for the typical automobile financing agreement. The finance company pays the purchase price for the vehicle directly to the dealer and then the buyer enters into a finance/loan agreement with the finance company which creates a security interest in the automobile. These types of transactions are more in the nature of contractual loan agreements and therefore should be governed New York’s six year Statute of Limitations. We will, nonetheless, admit that in those situations where the agreement in question is characterized as a Retail Installment Contract (though the Court in Orix specifically states that the name given a particular agreement is not controlling) and where the sale and the financing are combined in one agreement, the analysis set forth in Orix should be considered. Although much will depend on the facts of the particular transaction (that is, determining the primary purpose of the agreement), given what might become a “gray” area, collectors and their attorneys looking to enforce Retail Installment Contracts are well advised to err on the side of caution in New York and consider such contracts governed by the four year Statute of Limitations of UCC Article 2.