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

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1 Assignment 4 Attachment of the Security Interest: Legal Limitations on the Use of Consumer Goods as Collateral (Under Article 9 or Other Law) Litton borrowed $50,000 from Neighborly Finance to pay school tuition for his kids Litton authenticated a security agreement that covered: (a) his car; (b) his checking account; (c) his MU salary NF has already repossessed and sold Litton s car after default Can it now proceed against his salary? His checking account? Problem 1 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 Litton 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 Litton in Problem 1 invalid Instead, it means Article 9 is irrelevant to the question whether NF has a valid interest in Litton s salary Whether NF has a valid interest in those items will be governed by law other than UCC Article 9 1

2 Problem 1: Litton s Salary RSMo : an assignment of wages is void when included in any note or credit contract in consumer credit transactions Thus, NF cannot direct Litton s employer to turn over Litton s salary check to NF NF can reduce its claim against Litton to judgment and can reach a portion of his wages through garnishment (subject to limits on wage garnishment 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 Litton s checking account that is enforceable under Article (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) He 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 NF, Litton, and depository bank But, in many states, the agreement would have to give NF exclusive control over the account (impractical for Litton s personal checking account!) 2

3 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 Litton had sold his car and put the sale proceeds in his checking account, NF would ve had SI in the funds as proceeds of the car [Assignment 3] 1 yr. ago: Neighborly Finance loaned $20,000 to Crouch; security agreement covered all of Debtor s consumer goods, incl. after-acquired After Crouch defaulted, NF repossessed: (1) His TV (bought in 2012) (2) His laptop (bought in 2014) (3) His Rolex (inherited 2014) (4) His car Did NF have a valid Article 9 SI in each item? Problem 2 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 contained 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 What if Crouch s loan had been for business purpose? If so, loan wouldn t have been a consumer transaction, description would ve been effective to attach to his existing consumer goods [ 9-108(b)(3)] But Article 9 still limits 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 [ 9-204(b)(1)] 3

4 If loan had been for business purposes: TV: Bank s SI would have attached (he owned it prior to entering security agreement) Watch: Bank s SI would NOT have attached (acquired six months later) Car: answer would depend on when Crouch acquired the car (yes, but only if before Bank made the loan or within 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., assume NF has valid SI in Crouch s car, and six months later Crouch later puts new tires on the car; NF s SI in the car would also extend to the new 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 (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 ] 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 4

5 NF s SI in Litton s car was a nonpossessory, nonpurchase money SI Did that violate the FTC Rule? No; car is not household goods under FTC Rule (definition is not coextensive with Article 9 s definition of consumer goods ) Problem 1 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 can still be valid under Article 9! 5