Deficiency Clauses in Conditional Sale Contracts

Deficiency Clauses in Conditional Sale ContractsAuthor(s): Leon GoodmanSource: The Virginia Law Register, New Series, Vol. 12, No. 12 (Apr., 1927), pp. 712-715Published by: Virginia Law ReviewStable URL: http://www.jstor.org/stable/1107552 .

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12 VIRGINIA LAW REGISTER, N. S.

DEFICIENCY CLAUSES IN CONDITIONAL SALE CONTRACTS.

The writer recently had occasion to try a case in which the chief issue involved was the right of a seller in a conditional sale contract to re-possess the goods sold. lispose of them at public auction and sue the vendee for the deficiency. This (uestion was dealt with recently by one of the contributors to the January number of the REGISTER. With all due respect to the views of this contributor, the writer reached a conclusion diametrically opposed to the views of the author of the paper and which conclusion was adopted by the court in which the case was pending.

It is undoubtedly true that in somie few jurisdictions the deficiency clause is held to be nugatory. Thus in the states of Minnesota and Arkansas. The vast majority of the courts have, however, held decidedly to the contrary. These courts are United States Supreme Court, and the highest courts of the states of California, Delaware, Georgia, Illinois, Idaho. Indi- ana, Kansas, Massachusetts, Michigan, Montana, New York. Oklahoma, Oregon, Wisconsin, Wyoming and Canada. The styles of these cases and a brief syllabus of each case will be found in notes to 25 A. L. R., p. 1490 and 43 A. L. R., p. 1243.

The case of Orenstein v. Martin, 7 W. Va. 793, 88 S. E. 1064-5, cited and briefly quoted in the article referred to, has no application for the simple reason that in that case, the contract sued on contained no deficiency clause.

The text quotations from 24 R. C. L. sustain the views of Mr. Cooper. but when considered will be found to deal with situations similar to that in Orenstein v. Martin. The writer further quotes from Section 785, Sales, 24 R. C. L. Had he turned the page to Section 786 the following would have been found:

"Sec. 786. Resale on Account of Buyers: Liability for De- ficiency. Frequently contracts of sale provide that on default of the buyer the seller may re-demand possession and sell the property on account of the buyer crediting him with the proceeds of the re-sale, and hold him liable for any deficiency 'in the price. Such a provision does not constitute the transaction on absolute sale with mortgage

712 [ April,



CONDITIONAL SALES-DEFICIENCY CLAUSES

back for the price. As a general rule the validity of such a stipulation is given full effect by tile courts and the seller is held entitled, as a re-sale in accordance with the provi- sions of the contract, to sue and recover any sales remain- ing after crediting on the purchase price the proceeds of sulch sale."

The cases supporting this text were cases wherein the contract proviled for re-sale at the vendee's risk. The cases supporting the text matter to Section 785 were cases wherein the contract did snot provide for a leficiency ju(dgment.

In a note to 37 A. L. R., pp. 91, 94, it will ble found that the same court has awarded deficiency judgment where the contract allowed it and refused such a judgment where the contract was silent. For instance, the Georgia court in Glisson v. Heg- gie Bros.. 31 S. E. 118, refused a judgment, and in Daniel v. Thornton. 111 S. E. 575. sustained a deficiency judgment. In the one case. the contract was silent. In the later case such a

judgment was authorized by the contract. An examination of this note and the note in 25 A. L. R. might indicate that Cali- fornia, Georgia, Indiana. Massachusetts, Michigan, New York.

Oregon, Wisconsin and the Canadian Courts have been on both sides of the question. but a study of the test to the notes and the cases cited discloses that these courts uniformly gave

judgment where the contract called for it and denie(l it where the contract was silent.

The theory of the author and which he claims is supported by authority is this:

(a) If the contract is construed to be an absolute sale, with reservation of lien. then a deficiency judgment nlav be recovered. (b) If the same contract is construed to l)e a conditional sale, then the seller cannot hold the vendee for the balance of the unpaid purchase.

Such a problem-when is a conditional sale an absolute sale and vice versa-should delight a legal casuist and is really worthy of a doctor of the Middle Ages who was wont to dis- cuss the number of angles that could gather on the point of a needle. Apparently. however. only two of our courts. Minne- sota and Arkansas. can qualify as such judicial casuists.

1927.] 713



12 VIRGINIA LAW REGISTER, N. S.

Stripping the question of all legal clothing, what do we find: A purchase and sale of personal property, an agreement for the purchase price, a provision that in the event of default, the purchaser will pay the seller the difference between the value of the goods and the agreed price. Anything wrong about that? Had the seller recovered judgment, without repossession, couldn't he have levied upon the personal property, sold it un- der levy and in the event the sale produced an insufficient sum, given the purchaser credit for the amount realized and looked to him for the remainder?

As the Supreme Court of the United States in Harkness v. Russell, 30 L. Ed. 285, commenting upon such a deficiency provision, said:

"This stipulation was strictly in accordance with the rule of damages in such cases. Upon an agreement to sell, if the purchaser fails to execute his contract, the true measure of damages for its breach is the difference between the price of the goods agreed on and their value at the time of the breach on trial, which may fairly be stipulated to be the price they bring on a resale."

The attitude and the policy of our state in regard to such a

provision is clearly shown in the language of Section 5190 of the Code, providing for personal judgment against the purchaser. This section was adopted at a time when contracts of sale did not uniformly provide for deficiency judgments. It therefore carried into the statute law the rule of damages ad- verted to in Harkness z. Russell and it could hardly now be a matter of adverse criticism that parties seek to put into their contracts that which has been established as the law of the state, whether by statute or by judicial pronouncement.

There is every reason to believe if ever this question reaches our highest court, the court will brush aside the flimsy distinc- tion between a conditional sale and a chattel mortgage, look to the contract of the parties, give life and force to it and compel the contracting parties to abide by their agreement.

The law and the reason thereof, is well stated in McCormick. etc., Co. v. Kock (Okla.). 58 Pac. 626:

"The sale of the machine, the terms and conditions of the notes. and the manner of disposal of the machine on de-

714 [ April,



1927.] CONDITIONAL SALES-DEFICIENCY CLAUSES 715

fault, were all matters concerning which the parties had a right to contract, and these terms and conditions were em- braced in and made part of the notes. On default of payment the machine company had a right to the possession of the harvester, and a right to sell the same and apply the proceeds of sale to the payment of the notes; and the prayers expressly agreed that in consideration of the use of the machine, they should be liable for any balance. We know of no reason why such a contract is not valid and binding on the parties to it, or why it cannot be enforced as between the parties to the contract."

LoON GOODMAN.

Lynchburg, Va.



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Deficiency Clauses in Conditional Sale Contracts