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: Scope Exclusions • Article 9 does not apply to: – An assignment of a claim for wages, salary, or other compensation of an employee [§ 9109(d)(3)] • Thus, NF’s security agreement doesn’t create an security interest in Peters’s salary that is enforceable under Article 9 • Peters borrowed $50,000 from Neighborly Finance to pay school tuition for his kids Problem 1 – 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 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 1 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) § 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: 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 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!) 2 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] • 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 • 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) (2) (3) (4) His TV (bought in 2013) His laptop (bought in 2015) His Rolex (inherited 2015) His car • Did NF have a valid Article 9 SI in each item? • 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? Problem 2 A. Yes B. No Problem 2 Variation 3 • 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 afteracquired clause with respect to consumer goods • Only effective as to after-acquired consumer goods acquired w/in 10 days after secured party gave value [§ 9204(b)(1)] • 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) • 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 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) 4 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 • NF’s SI in Peters’s car was a nonpossessory, nonpurchase money security interest • Did that violate the FTC Rule? Problem 1 – 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! 5