SECURED TRANSACTIONS
Fall 2015
PROBLEM SET 4
Consumer-Related Limitations on Attachment of a Security Interest
In addition to the previous reading for Problem Sets 2 and 3, carefully read §§ 9-102(a)(24), 9102(a)(26), 9-108, 9-109, 9-203, 9-204, 16 C.F.R. § 444.2, and selected provisions from Chapter 408
of the Missouri Statutes (also at the end of the Problem Set).
1.
Your day begins with an e-mail message from Joe Smith at Neighborly Finance:
Last year, we loaned Phil Peters $50,000 so he could pay the tuition bills for his children.
He granted us a security interest in his car, his checking account, and the salary he earns
from MU as a law professor. Last month, he defaulted. With interest, he now owes us
$55,000. We repossessed and sold his car for $24,000. His checking account is at First Bank.
Please call and direct First Bank to turn over the money in Peters’s checking account to us.
If that’s not enough to cover the remaining $31,000 due on the loan, please call MU and
direct them to start paying Peters’s salary to us until his loan is paid off.
How do you respond, and why?
2.
Upon returning to your desk following your afternoon workout at the gym, you discover a
phone message from Joe Smith at Neighborly Finance:
In January 2015, we loaned Dennis Crouch $30,000. The loan was for three purposes: (1)
to pay off some medical bills; (2) to finance his two-month vacation in the Seychelles; and
(3) to purchase a new laptop computer to take on his vacation. He signed a security
agreement that granted us a security interest in “all of the Debtor’s consumer goods,
including after-acquired.” Crouch was supposed to pay us back by August 15, and that
hasn’t happened.
We went to his house earlier today and took possession of four things: (a) Crouch’s flatscreen TV, which he bought in 2013; (b) the laptop computer he bought for his trip; (c) a
Rolex watch he inherited in June 2015; and (d) his car. Ten minutes ago, I got an angry
phone call from Crouch’s lawyer demanding that we return everything, because we didn’t
have a valid security interest in any of the items we took. I think I can just ignore his
demand, but wanted to check with you just to make sure I’m not missing something.
What’s your advice to Joe Smith? What additional information, if any, would you need to provide
him with complete advice?
16 C.F.R. 444 et seq.
Federal Trade Commission
Trade Regulations: Credit Practices
§ 444.1 Definitions.
(a)
Lender. A person who engages in the business of lending money to consumers within the
jurisdiction of the Federal Trade Commission.
(b)
Retail installment seller. A person who sells goods or services to consumers on a deferred
payment basis or pursuant to a lease-purchase arrangement within the jurisdiction of the Federal
Trade Commission.
(c)
Person. An individual, corporation, or other business organization.
(d)
Consumer. A natural person who seeks or acquires goods, services, or money for personal,
family, or household use.
(e)
Obligation. An agreement between a consumer and a lender or retail installment seller.
(f)
Creditor. A lender or a retail installment seller.
(g)
Debt. Money that is due or alleged to be due from one to another.
(h)
Earnings. Compensation paid or payable to an individual or for his or her account for
personal services rendered or to be rendered by him or her, whether denominated as wages, salary,
commission, bonus, or otherwise, including periodic payments pursuant to a pension, retirement, or
disability program.
(i)
Household goods. Clothing, furniture, appliances, one radio and one television, linens, china,
crockery, kitchenware, and personal effects (including wedding rings) of the consumer and his or
her dependents, provided that the following are not included within the scope of the term household
goods: (1) Works of art; (2) Electronic entertainment equipment (except one television and one
radio); (3) Items acquired as antiques; and (4) Jewelry (except wedding rings).
(j)
Antique. Any item over one hundred years of age, including such items that have been
repaired or renovated without changing their original form or character.
(k)
Cosigner. A natural person who renders himself or herself liable for the obligation of another
person without compensation. The term shall include any person whose signature is requested as a
condition to granting credit to another person, or as a condition for forbearance on collection of
another person's obligation that is in default. The term shall not include a spouse whose signature
is required on a credit obligation to perfect a security interest pursuant to State law. A person who
does not receive goods, services, or money in return for a credit obligation does not receive
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compensation within the meaning of this definition. A person is a cosigner within the meaning of
this definition whether or not he or she is designated as such on a credit obligation.
§ 444.2 Unfair credit practices.
(a)
In connection with the extension of credit to consumers in or affecting commerce, as
commerce is defined in the Federal Trade Commission Act, it is an unfair act or practice within the
meaning of Section 5 of that Act for a lender or retail installment seller directly or indirectly to take
or receive from a consumer an obligation that:
(1)
Constitutes or contains a cognovit or confession of judgment (for purposes other than
executory process in the State of Louisiana), warrant of attorney, or other waiver of the right
to notice and the opportunity to be heard in the event of suit or process thereon.
(2)
Constitutes or contains an executory waiver or a limitation of exemption from
attachment, execution, or other process on real or personal property held, owned by, or due
to the consumer, unless the waiver applies solely to property subject to a security interest
executed in connection with the obligation.
(3)
Constitutes or contains an assignment of wages or other earnings unless: (i) The
assignment by its terms is revocable at the will of the debtor, or (ii) The assignment is a
payroll deduction plan or preauthorized payment plan, commencing at the time of the
transaction, in which the consumer authorizes a series of wage deductions as a method of
making each payment, or (iii) The assignment applies only to wages or other earnings
already earned at the time of the assignment.
(4)
Constitutes or contains a nonpossessory security interest in household goods other
than a purchase money security interest.
MISSOURI REVISED STATUTES
Selected Provisions, Chapter 408
§ 408.551. Applicability of sections 408.551 to 408.562—credit transaction defined. Sections
408.551 to 408.562 shall apply to any credit transaction made primarily for personal, family or
household purposes pursuant to sections 365.010 to 365.160 and sections 408.100 to 408.370. For
the purposes of this section, unless the context requires otherwise, “credit transaction” shall mean
any retail installment transaction as defined by section 365.020 or any loan subject to section
408.100 or any second mortgage loan as defined by section 408.231 or any retail time transaction
as defined in section 408.250.
§ 408.560. Unenforceable provisions in note or credit contract. The following provisions when
contained in any note or credit contract or the contract of any guarantor of a credit transaction shall
be void and unenforceable:
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(1)
A power of attorney to confess judgment;
(2)
An assignment of wages;
(3)
A waiver or limitation of any exemption given by law to the borrower exempting the
borrower’s property from attachment or execution, except insofar as the waiver or limitation
applies to property in which the lender has been granted a security interest to secure the
credit transaction;
(4)
A security interest in consumer goods which are identified only as a general class of
goods, such as “household goods” or “furniture”; and
(5)
A waiver of any right of action against the lender or his assignee or other person
acting on behalf of the lender in the collection of payments under the contract or in the
repossession of goods.
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