Problem 1. Problem 1: Scope Exclusions. Problem 1: Scope Exclusion. Assignment 4

Assignment 4

Attachment of the Security Interest:

Legal Limitations on the Use of

Consumer Goods as Collateral

(Under Article 9 or Other Law)

Problem 1

• Peters borrowed $50,000 from Neighborly Finance to pay school tuition for his kids

– Peters authenticated a security agreement that covered: (a) his car; (b) his checking account; (c) his MU Law salary

• NF has already repossessed and sold Peters’s car after default • Can it now proceed against his

salary or his checking account?

Problem 1: Scope Exclusions

• Article 9 does not apply to:

– An assignment of a claim for wages, salary, or other compensation of an employee [§ 9-109(d)(3)]

• Thus, NF’s security agreement doesn’t create

an security interest in Peters’s salary that is

enforceable under Article 9

Problem 1: Scope Exclusion

• § 9-109(d) does not mean that Article 9 makes NF’s agreement with Peters invalid

• Instead, it means Article 9 is irrelevant to the question whether NF has a valid lien in Peters’s salary

– Whether NF has a valid lien on Peters’s salary is thus governed by law other than UCC Article 9

Problem 1: Peters’s Salary

• RSMo. § 408.560: an “assignment of wages”

is void when included in “any note or credit contract” in consumer credit transactions

– Thus, NF cannot direct MU to turn over Peters’s salary check to NF

• Instead, NF would have to reduce its claim against Peters to judgment and can reach a

portion of his wages through garnishment

(subject to limits noted in Problem Set 1)

Problem 1: Scope Exclusions

• Article 9 does not apply to:

– An assignment of a deposit account in a consumer transaction [§ 9-109(d)(13)]

• Thus, NF’s security agreement doesn’t create

an interest in Peters’s checking account that

is enforceable under Article 9

§ 9-102(a)(26). “Consumer transaction” means a

transaction in which (i) an individual incurs an

obligation primarily for personal, family, or household purposes, (ii) a security interest secures the obligation, and (iii) the collateral is held or acquired primarily for personal, family, or household purposes.

(i) Peters incurred debt for personal/family purpose (kids) (ii) Debt would be secured by interest in personal property (car, checking account) [“SI” under §1-201(b)(35)] (iii) He owns collateral for personal/household purposes

Problem 1: Deposit Account

• In most states, other law allows a depositor to

assign rights in a deposit account to creditors – This would be done via a three-party “control”

agreement between Neighborly Finance, Peters, and depositary bank

– But, in many states, the agreement would have to give Neighborly Finance “exclusive” control over the account (impractical if this is Peters’s personal checking account!)

Scope Exclusion: Deposit Account

• Also, even though Article 9 does not apply to

NF’s attempt to create a direct SI in the deposit account, NF could have an indirect SI in funds in the deposit account, if those funds are proceeds

of other collateral

– E.g., if Peters had sold his car and put the sale proceeds in his checking account, NF would’ve had a SI in the funds as proceeds of the car [Assignment 3]

Problem 2

• 1/2015: Neighborly Finance loaned $30,000 to Crouch; security agreement covered “all of Debtor’s consumer goods, incl. after-acquired” • After Crouch defaulted, NF

repossessed:

– (1) His TV (bought in 2013) – (2) His laptop (bought in 2015) – (3) His Rolex (inherited 2015) – (4) His car

• Did NF have a valid Article 9 SI in each item?

A. Yes

B. No

• The generic description “all consumer goods” is generally sufficient [§ 9-108(b)(3)], but it is NOT sufficient by itself if it is used in a “consumer

transaction” [§ 9-108(e)(2)]

– Crouch’s loan meets that definition [see Problem 1]

• Thus, if that was the ONLY description of the collateral in the security agreement, NF would not have obtained a valid SI in any of these four items • Lesson: if collateral is consumer goods, and loan

is a consumer transaction, secured party must describe the collateral specifically

Problem 2

Variation

• Suppose that Crouch’s loan

from Neighborly Finance had been for a business purpose, e.g., to buy new equipment and hire technicians for his patent law blog

• How would your analysis of the hypothetical in Problem 2 change, if at all?

• If Crouch’s loan is for a business purpose (e.g., not for “personal, family, or household purposes), then the loan is not a “consumer transaction”

– If so, limitation in § 9-108(e)(2) on the effectiveness of the generic description “all of Debtor’s consumer goods” would not apply

– Thus, the description would be effective to attach to Crouch’s then-existing consumer goods [§ 9-108(b)(3)] – But Article 9 still limits the effectiveness of an

after-acquired clause with respect to consumer goods

• Only effective as to after-acquired consumer goods

acquired w/in 10 days after secured party gave value [§

9-204(b)(1)]

• Thus, if loan had been for business purposes:

– TV: Bank’s SI would have attached (Crouch owned it before entering security agreement) – Watch: Bank’s SI would NOT have attached

(acquired five months later)

– Car: answer would depend on when Crouch acquired the car (yes, but only if he acquired it before NF made loan or w/in 10 days thereafter) – Laptop: same analysis as the car

• Note that this 10-day limit does not apply if

an item of after-acquired consumer goods is

an “accession” [§§ 9-204(b)(1), 9-335]

– E.g., if NF has a valid SI in Crouch’s car, and six months later Crouch puts new tires on the car, NF’s SI in the car would also extend to the tires [§ 9-335]

– Rationale: upon installation, tires effectively become part of the car (and thus covered by SI in the car)

State Law and Consumer Goods

• Other state consumer protection laws, other than Article 9, may also be relevant to limit a creditor’s ability to take consumer goods as collateral

– E.g., RSMo. § 408.560(4): a provision in a security agreement that purports to create a SI in a “general class” of consumer goods, e.g.,

“household goods,” “furniture,” is unenforceable – Rationale: likely consumer misunderstanding and

potential creditor abuse (likely avoided if specific description is required)

FTC Rule [16 C.F.R. § 444.2]

• It is an “unfair act or practice” for a lender/seller to take from a consumer a nonpossessory SI in “household goods, other than a purchase money security interest”

– Concern: such goods are personal, have little value; thus, lender/seller would really use a SI in such goods for purpose of threatening or harassing debtor into making payments

Problem 1

• NF’s SI in Peters’s car was a

nonpossessory, nonpurchase money security interest • Did that violate the FTC

Rule?

– No; car is not a “household good” under FTC Rule (definition is not coextensive with Article 9’s definition of “consumer goods”)

FTC Rule

• Note: if a lender/retail installment seller violates the FTC Rule, it is subject to administrative sanctions only (lender/seller is subject to FTC fines/penalties) • FTC Rule does not create a private right of action

that permits the debtor to invalidate a security interest that violates the FTC Rule

– Whether creditor has a valid SI is a function of STATE law); thus, a SI taken in violation of FTC rule could still be valid under Article 9!