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
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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!)
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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
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• 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)
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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!
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