## Facts

- Automotive Finance Corporation (AFC) provided floor-plan financing to Smart Auto Center, Inc. and its owner, Carl Schwibinger, to purchase used vehicles at auction.
- The financing required payment on each vehicle within 45 days or a partial “curtailment” to extend the due date; proceeds from any sold vehicle had to be remitted within 48 hours, or the vehicle was “out of trust.”
- By late 1999, Smart Auto was behind on payments and had out-of-trust vehicles.
- In December 1999, AFC and Schwibinger arranged a “swap out”: AFC took title to 11 vehicles Schwibinger owned free and clear in exchange for a new loan used to cure out-of-trust exposure and place a second curtailment on past-due vehicles; other payment terms remained in place.
- By the end of December 1999, Schwibinger again fell into default; AFC attempted to collect but received delays and unkept assurances, including a bounced check later made good.
- AFC conducted self-help repossession, taking 16 vehicles before Schwibinger arrived; after he objected and an altercation occurred, AFC removed four additional vehicles and also attempted to take vehicles Schwibinger claimed were personally owned.
- AFC sold nine repossessed vehicles at auction and sold 11 vehicles with unknown mileage (due to odometer issues) in a bulk transaction to a specialized dealer for $160,000.
- AFC claimed an outstanding indebtedness of about $117,000 and sued for a deficiency plus collection-related costs; Schwibinger asserted defenses and counterclaims, including wrongful repossession activity.

## Issues

1. Whether the December 1999 “swap out” modified the parties’ agreement so that Schwibinger was not in default under the original payment terms.
2. Whether AFC’s disposition of the repossessed vehicles, including the bulk sale of unknown-mileage vehicles to a specialty dealer, was commercially reasonable under UCC Article 9 so as to permit a deficiency judgment.
3. Whether AFC was required to accept Schwibinger’s proposed redemption/settlement tied to a planned dealership sale, or otherwise failed to mitigate damages by declining it.
4. Whether the district court’s limited damages award on Schwibinger’s counterclaims should be disturbed on appeal.

## Decision

- The Seventh Circuit affirmed the district court’s judgment after a bench trial.
- The court held Schwibinger was in default; the “swap out” substituted collateral and extended certain due dates but did not replace the governing payment obligations.
- The court upheld the finding that AFC’s disposition was commercially reasonable, including the bulk sale of unknown-mileage vehicles to a dealer suited to that inventory.
- The court rejected the argument that AFC had to accept Schwibinger’s proposed redemption/settlement, viewing it as contingent and not equivalent to an Article 9 tender of full performance plus expenses.
- The court left intact the net outcome: AFC’s recovery of roughly $165,000 (debt balance and collection-related costs) and Schwibinger’s approximately $12,000 recovery on limited counterclaims.

## Legal Principles

- A collateral substitution and extension of payment deadlines does not amount to a novation absent clear agreement changing the underlying payment structure; continued nonpayment can still constitute default under the original terms.
- After default, a secured party may dispose of collateral only in a commercially reasonable manner as to method, manner, time, place, and terms; commercial reasonableness may permit non-auction and bulk sales when consistent with the collateral’s condition and market.
- A debtor’s Article 9 right to redeem generally requires tender of full performance and associated expenses before disposition; a secured party is not required to accept uncertain or conditional proposals tied to future events.
- Targeted damages for discrete overreach in repossession efforts may be awarded without defeating an otherwise valid deficiency where repossession and disposition are otherwise lawful and commercially reasonable.

## Conclusion

The Seventh Circuit affirmed a deficiency judgment for a floor-plan lender, holding that a collateral “swap out” did not eliminate later default and that the lender’s post-default sale strategy—including a bulk sale tailored to problematic, unknown-mileage vehicles—was commercially reasonable under UCC Article 9; limited debtor counterclaim damages did not alter the deficiency outcome.


Automotive Fin. Corp. v. Smart Auto Ctr., Inc., 334 F.3d 685 (7th Cir. 2003)