Wisconsin Consumer Act Trumps Choice-of-Law Contract Provision, Appeals Court Rules

By Joe Forward, Legal Writer, State Bar of Wisconsin

Aug. 22, 2012 – A Wisconsin couple who bought a car in Minnesota – and signed the contract there – is still protected by the Wisconsin Consumer Act, a state appeals court recently ruled.

In February 2008, Chao Kong and Pam Her purchased a vehicle in St. Paul, Minn., with a $1,200 down payment, and Credit Acceptance Corporation agreed to finance the rest of the purchase price. The couple made five consecutive late payments, and failed to make the payment due on August 22.

A month and two days later, on September 24, Credit Acceptance sent the couple a “notice of right to cure default.” Under the purchase contract, a “default” allowed the financer to accelerate payments and repossess the car after providing any notice required by law.

The couple failed to cure, and Credit Acceptance repossessed the vehicle. Credit Acceptance then filed a deficiency action in Wisconsin, seeking the balance of the vehicle’s purchase price. The couple counterclaimed, asserting a violation of the Wisconsin Consumer Act (WCA).

A circuit court dismissed the deficiency action and awarded damages to the couple. Specifically, the court awarded nearly $2,000 for car payments made, $1,200 for the down payment, $5,800 for the vehicle’s value, and $1,000 in statutory damages under the state’s consumer act, plus attorney fees.

In Credit Acceptance Corporation v. Kong, 2011AP476 (August 14, 2012), a three-judge panel for the District III Wisconsin Court of Appeals largely affirmed, upholding both the deficiency dismissal and damages judgments. However, the appeals court ruled that statutory damages were not available.

Defaults in Wisconsin

Under the Wis. Stat. section 425.104(1), merchants can’t commence deficiency actions “unless the merchant believes the customer to be in default … and then only upon the expiration of 15 days after a notice is given.” Under section 425.103(2), according to the appeals court, a “default” occurs “when an amount greater than one full payment remains unpaid for more than 10 days.”

In other words, merchants can’t file deficiency actions unless a merchant believes a consumer is in default. A consumer is not in default unless an amount greater than one full payment is delinquent and more than 10 days have passed. And the merchant, once the consumer is in default, must give the consumer notice and the right to cure, then wait 15 days before filing an action for deficiency.

Merchants can’t repossess goods without following the notice requirements.

Credit Acceptance sent its notice of right to cure default a month and two days after Kong and Her failed to meet the August 22 due date. But it was not until the Sept. 22 deadline that the couple’s balance exceeded one full payment, the appeals court explained. Thus, Credit Acceptance’s notice of right to cure, sent on September 24, was premature because the couple was not yet in default under the WCA.

“Because the notice was invalid, Credit Acceptance was not entitled to engage in self-help repossession of the vehicle,” wrote Judge Mark Mangerson. “Nonjudicial enforcement is sharply circumscribed by the WCA. No merchant may take possession of a motor vehicle unless the merchant provides notice and gives the customer an opportunity to object and proceed in court.”

Credit Acceptance argued that the WCA’s definition of “default” did not apply. Specifically, Credit Acceptance said section 425.103(2) allows a default to be defined “under any law.”

Unlike the 10-day safe harbor that Wisconsin law gives consumers before a default occurs, the purchase contract stated that a default occurred if a payment was not made when due.

The choice-of-law provision demanded that Minnesota law apply, Credit Acceptance argued, and Minnesota law does not require notice to a consumer before a creditor repossesses goods.

The appeals court quickly rejected that argument as frivolous. “As long as some portion of the WCA is applicable, no choice-of law-provisions are effective,” Judge Mangerson wrote.

The court explained that Credit Acceptance subjected itself to the WCA when it brought suit for deficiency in Wisconsin. Specifically, Wis. Stat. section 421.201(5) states that the WCA may apply to actions “brought in this state to enforce rights arising from consumer transactions … wherever made.”

The court upheld the circuit courts damages award, but ruled that the statutory award of $1,000 for prohibited debt collection practices was not warranted.

“[B]eyond imposing the statutory penalty, the circuit court’s written orders do not specify in what prohibited debt collection practice Credit Acceptance engaged,” Mangerson wrote. “Kong and Her, for their part, have not offered any explanation or defense of the court’s $1,000 statutory damages award.”