A Consumer Good Is an Item Used or Bought Primarily for Personal, Family, or Household Purposes.
Office 4 Creating an Enforceable Article 9 Security Interest
Chapter 11 Enforceability And Zipper Of Security Interests In Consumer Transactions
A. Generally
Secured transactions involving consumers are commercial transactions simply they are different in that consumers often lack bargaining ability and often exercise not fully understand the nature and consequences of whatsoever bargain is struck. New Article 9 does somewhat more than old Article ix to protect consumers. However, many consumer protections are in laws outside Article 9 and these laws tin can affect the operation of Article 9 rules where the debtor is a consumer. The purpose of this affiliate is to explore the limitations on the enforceability of security interests in consumer cases plant in Article 9 and in the law exterior of Article ix.
B. The Article ix Consumer Protections
As noted in Chapter 5 (Classification of Collateral), under new section 9-102(a)(23) goods are "consumer appurtenances" if they are used or bought for use primarily for personal, family or household purposes. In Chapter 8 (The Specifics of Enforceability -- A Security Understanding Authenticated past the Debtor or Its Equivalent) we saw that a clarification of consumer goods by blazon, i.eastward., as "consumer appurtenances," was resisted by courts under one-time Article 9 in the belief that a more than detailed description was necessary to compensate for the fact that about consumers had little understanding of secured transactions.
We also saw in Chapter 8 (The Specifics of Enforceability -- A Security Agreement Authenticated by the Debtor or Its Equivalent) that new Commodity ix codifies the resistance to the apply of a "consumer goods" description in a security agreement past providing in new section 9-108(e)(ii) that a description simply by blazon is insufficient equally to consumer goods in a consumer goods transaction. A "consumer transaction," as defined in new section 9-102(a)(26), is 1 in which an individual debtor incurs an obligation for personal, family, or household purposes and the obligation is secured by an interest in collateral that is held or acquired primarily for personal, family unit or household purposes.
Where the collateral in a consumer transaction constitutes consumer appurtenances the transaction will be a "consumer-goods transaction" as divers in new department 9-102(a)(24). Every bit is made explicit in the definition in new section 9-102(a)(26), a "consumer transaction" includes a "consumer-appurtenances transaction," but the quondam is broader in that the collateral need not be consumer goods but rather need only exist "held or caused primarily for personal, family, or household purposes."
The more inclusive definition applies to new section ix-108(e)(two) which, in addition to barring the use of a clarification by type equally to consumer goods, provides that a description of investment property collateral as "investment property" or a "securities entitlement" or a "securities account" or "commodity account" likewise is insufficient in a consumer transaction.
The next problem gives y'all the opportunity to explore the limitations establish in new section 9-108(e)(2) over again.
Problem 11.1(interactive)
The facts of Trouble eight.eleven, in Chapter viii (The Specifics of Enforceability -- A Security Agreement Authenticated by the Debtor or Its Equivalent), were as follows: Byron Buyer runs a technology consulting business out of his habitation. Byron owns a refrigerator, a large screen television and a personal reckoner. Only the personal figurer is used in Byron'south business. Byron likewise has a securities business relationship with Broker, Inc. Byron borrows from Fix Lender to pay some debts arising in connection with the consulting business and Byron gives Set a security interest in the foregoing items of property.
Would a description such equally "consumer goods" or "all the debtor'southward consumer goods" be sufficient as to the personal computer?
Would a description "consumer goods" or "all the debtor's consumer goods" exist sufficient as to the refrigerator and television?
Would a clarification such as "debtor's securities accounts" be sufficient as to the account with Broker, Inc.?
Would your answers be dissimilar if Byron borrowed from Ready Lender to finance a holiday?
In Chapter 9 (The Specifics of Enforceability -- After-Acquired Property, Proceeds and Future Advances) you learned that there is another Commodity ix limitation on the enforceability of a security interest where the debtor is a consumer. New department nine-204(b)(1) provides that a security involvement does non adhere under an afterward-acquired holding clause to consumer goods, as additional security, other than to accessions, unless the debtor acquires rights in the consumer appurtenances inside ten days after the secured political party has given value.
The "boosted security" qualification is necessary to prevent new section nine-204(b)(1) from disallowment enforcement of a security interest taken by a seller in consumer appurtenances that the seller has contracted to sell simply that have not all the same been made or acquired by the seller or a security interest of a lender in consumer goods that the debtor has not however bought. In other words, the department is non intended to bar enforcement of a security interest in specific consumer appurtenances that a seller has contracted to sell simply have not yet been acquired or made by the seller or of a security interest in specific consumer appurtenances that the debtor has non yet bought.
As explained in Chapter nine (The Specifics of Enforceability -- After-Acquired Holding, Gain and Future Advances), accessions, equally defined in new department nine-102(a)(1), are goods that are attached or integrated into other goods and so as to become part of other appurtenances but not lose their identity, for example, a new engine in an automobile. As will be seen in Part VI at that place are special priority rules for dealing with accessions.
You may explore the awarding of new department 9-204(b)(1) in the next problem.
Problem 11.2 (interactive)
Assume the original facts of Problem 11.1. Presume further, however, that the security agreement described the collateral as "consumer appurtenances, existing and futurity acquired" and likewise "securities accounts, existing and hereafter acquired." 1 month later on the original loan and security agreement Byron acquired a stereo arrangement for personal use and also opened some other personal securities account with See-Trade, an online brokerage business firm.
Is Ready Lender's security involvement in the stereo system enforceable?
Is Set's security interest in the new securities business relationship enforceable?
Suppose that at the fourth dimension Byron acquired the stereo system, Byron likewise purchased additional memory for his personal estimator. Would Set up accept an enforceable security interest in the computer retentiveness?
C. Consumer Protections Outside Commodity nine
Consumer transactions in which after-caused holding security interests are created frequently involve then-called "serial of sales." In these situations the debtor acquires several items on credit from the same seller. Frequently, there will be a general agreement providing that every item purchased becomes collateral for the debt associated with each item previously purchased and each previously-purchased item is collateral for the debt associated with the afterward-acquired items.
The following case will illustrate. Debtor purchases a fridge from Seller and Seller takes a security interest in the refrigerator to secure its unpaid price. Debtor signs a security understanding that provides that Seller will have a security involvement in any appliances purchased later past Debtor from Seller to secure the debt owed on the refrigerator and the refrigerator will be security for the debts incurred in the buy of the afterward items. A week after Debtor purchases a stove from Seller. The debt owed on the fridge will be secured past interests in the refrigerator and the stove and the debt owed on the stove volition be secured past interests in the stove and the fridge.
Such arrangements are referred to equally "cross collateral" security agreements because each item subsequently purchased becomes security for each particular previously purchased (and vice versa). Cross collateralizing is not uncommon in the business concern world and there is cipher in Article nine that directly prevents it. Still, where the debtor is a consumer a cantankerous collateral security organisation may run across difficulty. Depending on the timing of the purchases, new section nine-204(b)(1) limiting the enforceability of security interests in after-acquired consumer goods could utilise. Simply, law outside of article nine too may limit the enforceability of the security interests without regard to the timing of the purchases.
Many of y'all will recall from contracts form the well-known case of Williams v. Walker-Thomas Furniture Co, 350 F.second 445 (D.C. Cir. 1965). You likely will think in general terms what happened in that case, but the stance is worth reading over again. You may do then by clicking on the instance name.
Oversimplifying somewhat, the buyer-debtors in Williams had entered into serial of sales agreements that provided for cross collateralizing. Subsequently having paid for many or nigh of the items purchased the debtors defaulted at which point the creditor repossessed every item. The court of appeals concluded that the agreements may accept been unenforceable on grounds of unconscionability, especially every bit provided for in UCC Commodity two, section 2-302, and remanded for a determination of whether the cross collateralizing arrangements were unconscionable.
The decision and opinion in Williams generated much contend. Detractors complained that considering cross collateral clauses are not expressly barred and implicitly are approved by the provision authorizing later on-caused collateral arrangements (now new section nine-204(a)) and the floating lien concept discussed in Chapter ix (The Specifics of Enforceability -- After-Acquired Holding, Proceeds and Future Advances), such clauses should not be denied effect as beingness unconscionable. However, these objections overlooked certain of import features of the contracts at outcome in Williams.
The contracts in Williams consolidated the debts incurred as to each item purchased and provided for single monthly payments on the consolidated debts. Moreover, under the contracts all of the items purchased served as collateral until all of the consolidated debt had been paid. It was these features of the contract that allowed the sellers to repossess every item when the debtors failed to make a monthly payment fifty-fifty though the debtors had paid more than the amount of the debts incurred for some or fifty-fifty well-nigh of the items.
A way to avert unconscionability challenges in series of sales contracts is to provide that each monthly payment will be applied to the debt created past each particular purchased in the order of purchase and when enough had been paid to satisfy the debt associated with a particular item the security involvement in that detail volition be released. This type of payment and release arrangement is conveniently referred to every bit first-in-outset-out (FIFO) secured financing.
You may explore the application of unconscionability doctrine in the next problem. The problem too illustrates the possible overlap of unconscionability doctrine with the Article nine limitations examined in subpart B.
Problem xi.3 (interactive)
Betty Buyer has entered into a contract with Sid Seller under which Sid agrees to sell furnishings and appliances "on time" and Betty signs an agreement under which each particular becomes security for each item subsequently-purchased and each later-purchased particular becomes security for each earlier purchased item (i.e., there is cross collateralizing of all the items purchased). In the description of the collateral section of the agreement "consumer goods" appears. The security agreement further provides that all the debt arising from the secured sales shall be consolidated and paid in equal monthly installments. The security understanding finally provides that in the event of a default at any time earlier the entire debt owing is paid Sid may retake all the items purchased. Betty then makes several purchases of personal use appurtenances from Sid. Buyer commencement purchases a large screen boob tube. A week afterward Betty purchases a stereo arrangement. A month later Betty purchases a dishwasher and a refrigerator.
Is the description of the collateral sufficient to back up enforceability and attachment of the security interests in the television, stereo system, dishwasher and refrigerator?
Suppose the understanding describes the collateral every bit "an Hitachi telly, serial number xyz123," and a specific description of each later-purchased item is added to the bones agreement at the time each item is purchased. Equally to which items is there still an enforceability difficulty under Article 9?
If all of the later-purchased items were purchased within ten days of the buy of the television, would there be an enforceability problem under Article nine.
If all of the later-purchased items were purchased within ten days of the purchase of the television, would in that location be an enforceability problem under the law outside Article ix?
How might the contracts be revised to avoid whatever objections to enforceability you accept identified?
Cross-collateralizing and other "blanket" security arrangements have been the target of special statutes exterior Commodity ix. These laws were inspired past a common belief that, in the consumer setting, coating security arrangements can exist especially oppressive because the appurtenances oftentimes are worth much more to the debtor than they are to the creditor and the issue is to give creditors undue "leverage." ARS § 44-5501 is such a police force.ARS § 44-5501(C) provides:
C. Neither the seller of consumer goods or services nor his assignee may take whatever other security for a consumer credit sale other than (i) a security interest in appurtenances sold or as to which services have been rendered and (2) in the realty to which such appurtenances may be affixed. If the seller or assignee elects not to retake the appurtenances, simply brings an action for the unpaid rest, the goods may not thereafter be retaken and are not subject to judicial procedure to enforce whatsoever judgment obtained therein.
ARS § 44-5501 is limited to consumer credit sales of goods and services. "Consumer credit sale" is not defined, just is generally understood to refer to personal, family and household credit. Under subsection (C) just security interests in appurtenances that are the subject of a sale or as to which services have been rendered are enforceable. The linguistic communication could be clearer, but the intent is that a security interest in other than the appurtenances sold at the time the security involvement attaches, for example, goods later sold past the same seller to the aforementioned buyer/debtor, is not enforceable (except to the extent that a split security in these later purchased goods is created). For reasons that are not credible the limitation applies merely to sellers and assignees and not lenders.
We will come up dorsum to subsection (B) of ARS § 44-5501 in connection with foreclosure, simply hither y'all should be aware that it applies just to transactions where the sales prices is $i,000 or less. The question has been raised whether the dollar limit besides applies to subsection (C). The argument that the dollar ceiling does utilize is that ARS § 44-5501 is aimed at "low ticket" sales where the goods have relatively little resale value.
Some other limitation on blanket security arrangements in the consumer setting is institute in the Federal Trade Commission (FTC) Fair Credit Practices Rule in xvi CFR Role 444.2. This rule makes taking a non-purchase coin security interest in household goods an unfair trade practice. The difference between purchase and not-purchase coin security interests is explored at length in Chapter eighteen (Perfection by Doing Nothing -- Automated Perfection). As used in the FTC dominion, "other than a purchase coin security involvement" essentially means that the credit did not enable the debtor to larn the household goods involved. "Household goods" is divers in xvi CFR Function 444.1(i) to include article of clothing, piece of furniture, appliances and personal effects, but to exclude electronic equipment other than i goggle box and one radio.
Security arrangements that violate the rule technically are unfair trade practices that crave action by the FTC, but the practical effect of the rule is to brand the proscribed security interests unenforceable.
You may test your understanding of ARS § 44-5501(C) and the Fair Credit Practices Dominion in the next 2 problems.
Problem xi.4(interactive)
Betty Buyer purchases an Amana refrigerator on credit from Sid Seller for $600. The refrigerator is bought for use in Betty'southward home. Betty signs a security understanding that gives Sid an interest in the Amana fridge to secure its unpaid price. The collateral is described equally "one Amana refrigerator, serial number 125689, and a Maytag washer, serial number xx9210, and a Technics stereo, series number xyz123." At the time Betty signs the security understanding, Betty already owns the Maytag washer and Technics stereo.
Are Sid's interests in the Maytag washer and Technics stereo enforceable under ARS § 44-5501?
Problem 11.5 (interactive)
Presume the facts of Trouble xi.4. Assume further, however, that Betty Buyer paid Sid Seller for the Amana refrigerator with cash borrowed from Friendly Finance Company and the security understanding described in Trouble 11.4 named Friendly Finance Company as the secured party.
Does ARS § 44-5501(C) bar enforcement by Friendly Finance Company of the security interests in the Maytag washer and Technics stereo?
Would Friendly Finance Company be in problem under the Fair Credit Practices Rule as to the Maytag Washer? In answering this question be sure to cheque the definitions of terms used in the rule.
Would Friendly Finance Visitor be in trouble under the Off-white Credit Practices Rule as to the Technics stereo? Again, be sure to check the definitions of terms used in the rule.
The application of ARS § 44-5501 to a series of sales understanding such as that in Problem 11.3 is overcast past the fact that ARS § 44-5501(C) provides that a seller of consumer goods may not take a security interest in other than appurtenances sold and all the goods in Problem 11.3 were sold past the seller. The Off-white Credit Practices Rule more than clearly applies to the security interests in the dishwasher and refrigerator to secure the debt incurred to buy the television considering these security interests seem non to have enabled the debtor to learn rights in the idiot box within the pregnant of the FTC rule.
There also is a defalcation provision, BRA § 522(f)(i)(B), under which certain not-buy money, not-possessory interests may be avoided. That complicated provision is best treated in Affiliate 30 (Secured Political party Versus Trustee in Bankruptcy), but it is worth noting here that the FIFO approach to consolidated debt financing referred to higher up is a way to preserve the purchase money status of a security involvement and reduce the likelihood that a BRA § 522(f) attack will be successful.
Information technology also should be noted that new section 9-103(f) purports to preserve the purchase money status of security interests in cross-collateral arrangements, but that section does not apply in consumer goods transaction (separately defined in new department 9-102(a)(24)). Every bit to the intended performance of new section nine-103(f) in non-consumer-goods transactions, encounter Official Annotate 7 to new section 9-103.
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2011-08-22 update
Source: https://www.cali.org/lessons/web/ct11/chapter_11.htm
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