May the Repo Man Work From Home?

The Internet of Things involves the connection of many things to the Internet that did not use to be networked. The numbers of such interconnected things is growing rapidly; the estimates vary greatly but are always counted in the billions over the next few years. The interconnection allows those things to communicate with the world, and vice versa. We have considered some of the legal issues raised by such communications, whether with the ‘world’ intended by the designer of the interconnection or with someone with unforeseen capacity or intention.

This column focuses on one communication: an ‘off’ switch, used by one party: a creditor of the owner of the interconnected thing. In particular, may a creditor under Canadian law use ‘starter interrupt technology’ to prevent a car that is subject to loan in default from starting?

Using such a technology has several advantages to the creditor or its agent: it involves less effort, it avoids the cost of towing and the risk of damage, it is less likely to require physical confrontation with the owner/debtor, and it is easily reversed if the default is cured. Arguably most of these factors are also advantages for the debtor as well. Further, it is less embarrassing for the debtor than having the car towed away in front of the neighbours.

The technology is said to have several useful features. “Properly installed”, it cannot turn off the motor of a car that is running, so the chances of causing an accident are very low. It can be associated with a series of warnings, whether the occasional beep or messages similar to the indications that one’s seatbelt has not been buckled. The timing can be adjusted to comply with statutory notice periods. It is possible to provide “emergency overrides” if the debtor has a critical need for the vehicle on a temporary basis.

Starter interrupt technology is being used in the United States, particularly for ‘sub-prime’ consumer loans. It is said to be useful to give lenders better security and thus to extend credit to people who would otherwise not qualify. There is no suggestion that it has been used for ordinary debt or for security over commercial goods. It is beyond the scope of this article whether this is socially a good idea – it lets people get cars, and therefore maybe jobs, that they could not get before, but it may come at an excessive cost financially – the interest rates are very high – and may cause people to overextend themselves unsustainably. In any event, some Canadian lenders are apparently interested in the technology.

Is this legal?

Some Canadian law

The main governing law in the common-law provinces is the Personal Property Security Act. There are some differences between the Ontario PPSA and the PPSA in the other common law provinces. (This article says nothing about the Civil Code – comments welcome.) All the PPSAs allow the creditor on default any remedies set out in the security agreement and in the Act (Ontario s. 59), subject to limits also in the Act. Nothing expressly excludes starter interrupt technology.

Ontario’s Act, but not the others, expressly permits a creditor to render unusable any collateral that is equipment, if the security interest has been perfected. (ON PPSA s. 62(1)) The corresponding provisions in other provinces speak of collateral goods not readily removed from the debtor’s premises or for which storage is not available, neither condition applying readily to the current discussion. In addition, the remedies in such cases tend to involve notice of the creditor’s action and do not expressly include disablement. Ontario adopted that remedy from Article 9-609(a)(2) of the Uniform Commercial Code. Thus the following discussion applies only in Ontario.

Three principal questions arise. First, does the use of this technology amount to rendering the vehicle unusable? Certainly it causes a temporary inability to use the vehicle. The fact that it can be applied and reversed remotely does not change that fact. It is quite possible that the technology would be held to meet this description. The contrary argument is that disablement tends to be thought of, where mentioned in the PPSA, as permanent as regards the debtor, even if reversible once the collateral is disposed of.

Second, if it is disablement, is that a problem if the car is consumer goods, given that the PPSA expressly allows rendering “equipment”unusable? Should we interpret s. 62 (Ontario) under the “expressio unius, exclusio alterius” rule, so that disabling a consumer’s vehicle is banned? Or does the silence of the Act mean that it is open to creditors and debtors to make a deal under the general rule that use of the technology is not disablement or even that its use is “permitted by law” as contemplated by s. 59(2)?

Third, if the disablement is permitted under the agreement, can the agreement also avoid the rule in s. 62(1)(b) that disablement of equipment amounts to repossession of the collateral? Consumer debtors have statutory rights in the event of repossession, including the right to have the collateral disposed of quickly (or its ownership assumed by the creditor and the debt extinguished), and the right to cure the default, but only once during the term of the agreement without a judge’s order. These rights may be inconvenient to both creditor and debtor in the case of a remote disablement where a cure may be quickly arranged and implemented. The debtor’s rights under ss. 63 to 66 are not waivable, but is the rule that disablement is repossession (found in s. 62) waivable, and thus the consequences of disablement, if it were repossession?

To what degree does the use of the remote electronic technology involve us in the discussion whether physical possession of collateral is replaced in law by the creditor’s control of it? Does that concept (control = possession) apply only where the collateral is intangible, itself in electronic form? Is the ability (and the right) to control whether the vehicle can be used, even temporarily, the equivalent of possession – and thus of repossession, which all the rights that arise in that case? May this implication also be displaced by agreement?

Some PPSAs make the right of the creditor to exercise rights in the collateral subject to the financial limits of the Execution Act or equivalent statute (ON PPSA s. 62(2)), unless a purchase-money security interest is involved (which will often be the case). Thus, if the value of the car is less than $5650 (Ontario’s figure), the starter interrupt technology may not be used.

The rights of the creditor to enforce its security agreement may also be limited by the operation of the Bankruptcy and Insolvency Act.

Anyone wishing to install and use a starter interrupt device would have to consider the unfair practices provisions of the Consumer Protection Act (ss 14 ・ 18), and also the rule in that Act about not repossessing goods once two-thirds of the price has been paid (s. 25). See also s. 65 of the Ontario PPSA.

Some American law

There is to date no case law in the United States directly on the use of starter interrupt technology. It has, however, been held in at least one decision not to constitute repossession that would require a notice under state law. In addition, a consent decree involving the Department of Justice, a state Attorney General and a subprime seller allowed the technology if there were adequate disclosure. Three states have legislated – Connecticut, Colorado and California – and impose disclosure and consent requirements, and sometimes notice and emergency-restart capacity, failing which the creditors may be sanctioned or subject to liability. Some state regulators have also issued opinions suggesting that notice of intention to use the technology, and a right to cure defaults, must be provided.

And furthermore …

Starter Interrupt technology in the US is often found as part of “automotive collateral management systems” that include a number of other features, the most common of which is probably geolocation technology (GPS). This enables creditors to locate the vehicle if the loan is in default, which is clearly useful and reduces credit risk. It is sufficiently useful to creditors that an industry has grown up to disable the GPS devices, and sometimes the starter interrupt technology as well. Naturally, such tampering is prohibited in the loan agreements. The unofficial technology arms race continues.

In Canada, putting GPS into a car to track debtors’ use, even if only on actual or probable default, would raise privacy issues. Whether disclosure to and consent of the buyer of the car could overcome these issues may be subject to debate.

It may be noted that creditors may turn off other connected devices. In one instance, a finance company activated the locks in a commercial parking garage whose owners had not paid an installment. The fate of the cars in the garage at the time was what one might call collateral damage. Will software be next? Smart TVs? Refrigerators? Fortunately, few people buy implanted medical devices on credit.

Non-conclusion

The cloud is out, the Internet of Things is in, as the source of this season’s legal technology questions. We can expect to be surprised, perhaps disturbed, and regularly challenged by the growth of interconnections where the Internet has not gone before.