In re Cunningham
80 U.C.C. Rep. Serv. 2d (West) 576, 2013 Bankr. LEXIS 1454, 489 B.R. 602 (2013)
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Rule of Law:
For a security interest in consumer goods to be enforceable under the Uniform Commercial Code, the authenticated security agreement must contain a description of the collateral that is more specific than a mere description by type. A creditor cannot create an enforceable security interest by combining multiple documents if the only document that specifically describes the collateral, such as a sales receipt, lacks any language granting a security interest and does not incorporate the other documents by reference.
Facts:
- Debtors signed a credit application at Best Buy to open a store credit card account with Capital One's predecessor, HSBC.
- The application contained fine-print language stating that the Debtors granted a purchase money security interest in goods purchased on the account and agreed to the terms of a Cardholder Agreement.
- Capital One later mailed the Debtors a Cardholder Agreement, which they did not sign, that also contained a clause granting a security interest.
- Over time, the Debtors used the credit card to make 12 separate purchases of consumer electronics, including iPods, a camera, and a computer.
- For 11 of the 12 purchases, one of the Debtors signed a sales receipt that listed the specific items purchased.
- The sales receipts did not mention a security interest, the credit application, or the cardholder agreement; they only referenced return and refund policies.
Procedural Posture:
- The Debtors filed a joint petition for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the District of Kansas.
- Within the bankruptcy case, the Debtors filed a motion requesting the court to determine that creditor Capital One did not hold a valid security interest in consumer goods purchased from Best Buy.
- Alternatively, the Debtors' motion requested to redeem the property for $130.00 if the court found a valid security interest existed.
- Capital One filed a response and a brief in opposition to the Debtors' motion, asserting that it held a valid purchase money security interest in the goods.
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Issue:
Does a creditor have an enforceable security interest in consumer goods when the signed credit application and unsigned cardholder agreement describe the collateral only by type, and the signed sales receipts that specifically identify the goods do not contain any language granting a security interest or incorporate the other documents by reference?
Opinions:
Majority - Berger, J.
No. A creditor does not have an enforceable security interest under these circumstances because the collection of documents fails to create a valid security agreement under Kansas law. The Kansas Uniform Commercial Code (UCC), specifically K.S.A. 84-9-108(e)(2), explicitly states that for consumer goods, a description of collateral merely by 'type' is insufficient. The language in the credit application and cardholder agreement describing the collateral as 'goods purchased on your Account' or 'goods purchased with your Card' is an impermissible description by type. While the sales receipts contain a specific description of the goods, they cannot be used to cure the defect in the other documents. The receipts are not part of a security agreement because they contain no language granting a security interest and do not incorporate the application or cardholder agreement by reference. The court distinguished this case from others involving Sears, where the sales slips themselves contained explicit language granting a security interest. Therefore, because no single authenticated document contains a sufficient description of the collateral, a security interest never attached to the consumer goods.
Analysis:
This case underscores the strict UCC requirements for creating an enforceable security interest in consumer goods, providing a significant protection for consumers. It serves as a warning to creditors that they cannot rely on a 'composite-document' theory to piece together a security agreement from disconnected documents. The ruling clarifies that point-of-sale documents, like receipts, must be explicitly integrated into the security agreement or contain granting language on their own to be effective. This decision pressures lenders, especially third-party financiers for retailers, to ensure their documentation is clear, integrated, and compliant at every step of the consumer transaction to avoid their security interests being deemed unenforceable in bankruptcy.
