KSB

Judge Berger

12-20662 Cunningham (Doc. # 31) - Document Text

The relief described hereinbelow is SO ORDERED.
SIGNED this 8th day of April, 2013.

 


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

CHARLES DAVID CUNNINGHAM and Case No. 12-20662
CHARITY LYNN CUNNINGHAM,
Debtors.

MEMORANDUM OPINION AND ORDER DENYING IN PART AND
GRANTING IN PART DEBTORS’ MOTION TO DETERMINE SECURITY INTEREST
OR, IN THE ALTERNATIVE, TO REDEEM (Doc. No. 15)


Comes on for hearing the Debtors’ Motion for Order Determining that Certain Personal
Property Owned by the Debtor Is Not Subject to Any Security Interest, or, in the Alternative,
Granting Debtors’ Request to Redeem Property1 (hereinafter “Motion”). Creditor Capital One,
N.A., the owner of the account previously owned by HSBC Bank Nevada, N.A. (hereinafter
“Capital One”), filed a response2 to the Motion. Debtors filed a separate brief in support3 of their

1

 Doc. No. 15.

2

 Doc. No. 21.

3

 Doc. No. 28.

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Motion to which Capital One filed a brief in opposition.4 The matter was submitted to this Court
on the parties’ briefs, including attachments thereto.

This matter constitutes a core proceeding5 and the Court has jurisdiction to decide the
matter in controversy.6

Upon review of the pleadings, the Court’s file, and the arguments of counsel, the Court is
prepared to rule.

Background

Debtors filed a joint Chapter 7 petition under the United States Bankruptcy Code.7 Prior
to the filing of the bankruptcy petition, Debtors purchased personal property in the form of
consumer goods (“Consumer Goods”) from Best Buy, N.A., a national retailer of consumer
electronics and related products and services. Some of Debtors’ purchases were made on credit
provided by Capital One. In their brief, the Debtors concede that they purchased on the Capital
One account “two ipods, a camera, a computer, and other micellaneous [sic] . . . .”8 The items
were purchased in 12 separate consumer transactions and are consumer goods. Three documents
are pertinent to the Court’s analysis. These documents are attached as exhibits to Capital One’s
brief in opposition9 to the Motion. In a footnote to its brief, Capital One describes these
documents as follows:

4

 Doc. No. 30.
5 11 U.S.C. §157(b).
6 28 U.S.C. §1334.
7 11 U.S.C. §101 et seq., hereinafter the “Code.”
8 Doc. No. 28, at 1.


9

 Doc. No. 30.
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Exhibit C [credit application] is the application signed by Debtor, which states,
“you grant the Bank a purchase money security interest in the goods purchased on
your Account.” Furthermore, the application states in that same section that the
cardholder, here the Debtors, agree to the terms and conditions of the Cardholder
Agreement (attached as Exhibit D is the Cardholder Agreement). It states in
paragraph 17 of the Cardholder Agreement entitled “Security,” “you grant us a
purchase money security interest in the goods purchased with your Card.”. [sic]
Therefore, clearly the requisite language for Debtors to grant Secured Creditor
[Capital One] a purchase money security interest exists.10

Exhibit C, the “Application,” is coincidental to Debtors’ first purchase and is dated January 16,
2010. It appears that it was signed by both Debtors. The Application provided to the Court is a
single-sided page. The Application contains the language recited above by Capital One; it is
buried in a 16-line paragraph in a small font. This Court found it necessary to use a magnifying
glass to find and read the language. The language appears in the ninth and tenth lines of the
paragraph. With the assistance of a magnifying glass, the Court also was able to find buried in
the sixth line of this Application paragraph that the Debtors agreed to the terms and conditions of
the Cardholder Agreement. The Application indicates that the Cardholder Agreement would be
sent to the Debtors after the Application and initial purchase of consumer products on January
16, 2010. The Cardholder Agreement is not signed. Buried in 41 numbered paragraphs in small
print in the Cardholder Agreement is language that refers to Debtors granting to Capital One “a
purchase money security interest in the goods purchased with your Card.”11 Exhibit B to Capital
One’s brief in opposition is comprised of 12 Best Buy receipts (“Receipts”), all but one of which
were signed by one of the Debtors. The Receipts contain basic information, such as the location
of the Best Buy store, a brief description of items purchased and the price of these items, and the

10 Doc. No. 30, at 2 n.1.
11 See Doc. No. 30, Exhibit D ¶ 17.


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date and time of the sale. The Receipts also state “Payment Type: BBY CARD/HSBC.” The

following language appears below the place of signature:

KEEP YOUR RECEIPT!
I HAVE READ AND AGREE TO ALL
RETURN AND REFUND POLICIES
PRINTED ON THE BACK OF THIS
RECEIPT AND POSTED IN THE
STORE. I HAVE RECEIVED GOODS
AND/OR SERVICES IN THE AMOUNT
SHOWN ABOVE.
BESTBUY.COM RETURN AND EXCHANGE
INFORMATION AND PRICE MATCH POLICY
MAY VARY SLIGHTLY FROM IN-STORE POLICY.
PLEASE LOG ONTO WWW.BESTBUY.COM
FOR COMPLETE DETAILS


Only the front of the Receipts were provided to the Court. Whatever is contained on the

reverse side of the Receipts was not provided. Regardless, it appears that the reverse side of the

Receipts only contain language pertinent to the return and refund policies of Best Buy. There is

no reference on the Receipts to security interests, purchase money or otherwise, retained by

anyone. The Receipts also do not contain a reference to the Application or the Cardholder

Agreement.

Analysis

Debtors request a determination by this Court that Capital One does not hold a security
interest, purchase money or otherwise, in the Consumer Goods purchased by Debtors at Best
Buy. If the Court does find that such a security interest exists, then the Debtors plead in the
alternative that this Court grant the Debtors’ redemption of the Consumer Goods and approve a
redemption value in the amount of $130.00. Capital One argues that it does hold a purchase

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money security interest in the Consumer Goods and that if the Debtors were to redeem the
Consumer Goods under Code §722, the Consumer Goods have a value of $2,100. The Debtors
assert that the balance on the Capital One account is $1,556.49.

Capital One does not dispute that the transactions in question are “consumer
transactions” or that the products purchased by the Debtors are “consumer goods.”12 A security
agreement is simply “an agreement that creates or provides for a security interest.”13 One
alternative to authenticate a security agreement is for the debtors to sign it.14 With regard to the
descriptions of the collateral in which the secured party takes an interest, Kansas law provides:

84-9-108. (a) Sufficiency of description. Except as otherwise provided in
subsections (c), (d), and (e), a description of personal or real property is
sufficient, whether or not it is specific, if it reasonably identifies what is
described.

. . .

(e) When description by type insufficient. A description only by type of
collateral defined in the uniform commercial code is an insufficient description
of: . . .
(2) in a consumer transaction, consumer goods, a security
entitlement, a securities account, or a commodity account.
With respect to the sufficiency of the collateral description for consumer transactions contained

in a security agreement, it has been observed:

Revised Article 9 continues the requirement that a security agreement or
financing statement contain a description of the collateral that reasonably
identifies the collateral. The use of categories or types of collateral defined under
the UCC (i.e., inventory) is still permitted. However, in consumer transactions
and a limited number of other situations, a description by type or class of

12 See K.S.A. 84-9-102(a)(23) and (a)(26) defining the terms.
13 See K.S.A. 84-9-102(a)(72).
14 See K.S.A. 84-9-102(a)(7)(A).


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collateral is ineffective as to after-acquired property. Note that Revised

Article 9 permits “supergeneric” descriptions in the financing statement such as

“all assets” or “all personal property” but not in the security agreement.15

Property “type” descriptions of collateral are not sufficient for consumer goods.16 The
essence of the Debtors’ argument is that the description of the Consumer Goods in which Capital
One asserts a security interest is insufficient as it only refers to the type of collateral, and Capital
One therefore does not have a security interest in the Consumer Goods. Debtors argue that any
security interest that Capital One may have never attached to the Consumer Goods because an
insufficient description is fatal to the attachment of Capital One’s security interest to the
Consumer Goods. In response, Capital One argues that the description is sufficient if one
combines the language contained in the Application, the Receipts, and the Cardholder
Agreement. The issue before the Court is whether the description is sufficient as required by

K.S.A. 84-9-108(e)(2) to allow attachment and enforceability under K.S.A. 84-9-203(b)(3)(A).
Aside from an insufficient description of the collateral, Debtors do not argue that Capital One
did not comply with the other prerequisites of a security interest with respect to enforceability
and attachment. As to these terms, K.S.A. 84-9-203 provides in pertinent part:
84-9-203. (a) Attachment. A security interest attaches to collateral when
it becomes enforceable against the debtor with respect to the collateral, unless
an agreement expressly postpones the time of attachment.

(b) Enforceability. Except as otherwise provided in subsections (c)
through (i), a security interest is enforceable against the debtor and third parties
with respect to the collateral only if:
(1) Value has been given;
15 John K. Pearson and J. Scott Pohl, A Brief Overview of Revised Article 9 in Kansas, J. KANSAS BAR
ASS’N, Sept. 2003, at 24 (footnotes omitted) (emphasis added).

16 Id. at 29, citing K.S.A. 84-9-108(e) in n.110.

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(2) the debtor has rights in the collateral or the power to transfer
rights in the collateral to a secured party; and
(3) one of the following conditions is met:
(A) The debtor has authenticated a security agreement that
provides a description of the collateral and, if the security
interest covers timber to be cut, a description of the land
concerned; . . . .17
Capital One directs this Court to Baldwin v. Hays Asphalt Constr., Inc., 18 for the
proposition that the entire security agreement may be contained in more than one document. The
Baldwin case involved a commercial transaction and by definition was not a consumer
transaction. The facts in Baldwin are interesting. A security agreement was signed between the
parties in 1990, the purpose of which was to collateralize the debtor’s performance under a lease
that was executed two years later. Also, the debtor as a fictitious entity was not formed until two
years after execution of the security agreement. Under the 1994 version of the Uniform
Commercial Code (“U.C.C.”), the Baldwin court found that the original security agreement did
not need to identify the debt that was secured.19 The Baldwin court observed: “In determining
whether a security interest exists, the intent of the parties controls, and that intent may best be
determined by examining the language used and considering the conditions and circumstances
confronting the parties when the contract was made.”20 The Baldwin court observed that under
the U.C.C., timing and sequence were not relevant as to the execution of more than one
document to establish a security agreement.

17 Emphasis added.
18 20 Kan. App. 2d 853, 855 (1995).
19 Baldwin, 20 Kan. App. 2d at 856.
20 Id. at 857. However, under the revised U.C.C., intent may no longer be controlling. See Hitchin Post


Steak Co. v. Gen. Elec. Capital Corp. (In re HP Distrib., LLP), 436 B.R. 679, 695 (Bankr. D. Kan. 2010) (discussing
leases, disguised security agreements, and the economic realities test under K.S.A. 84-1-203(c)).

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A case not cited by the parties that is somewhat instructive is In re McLeod. 21 Citing to
the Michigan version of the U.C.C., the court observed: “Attachment of a security interest occurs
when (1) debtor has signed a security agreement which contains a description of the collateral;

(2) Value has been given; and (3) The debtor has rights in the collateral.”22 The description of
the collateral is sufficient “if it reasonably identifies what is described.”23 Under Michigan law,
a retail charge agreement was considered signed and accepted by the buyer if the charge account
were used by the applicant.24 In McLeod, the debtor or his wife signed each of the sales slips.
“The sales slips identified the item(s) purchased, incorporated the SearsCharge Agreement, and
granted Defendant [Sears] a security interest.”25 The McLeod court ultimately found that Sears
enjoyed a purchase money security interest in the consumer goods purchased on the retail charge
account. This “composite-document theory” has found a home with other courts.26 The deciding
factor that underpins these decisions is that the Sears sales slips contained simple and clear
purchase money security interest language. Courts have treated the Sears sales slips as security
agreements when “(1) the sales slip incorporates a long-form security agreement by reference,
(2) the retailer is prepared to present evidence of its general documentation practices, and (3) the
sales slip contains solid ‘granting’ language and a transaction-specific description of the
merchandise.”27
21 245 B.R. 518 (Bankr. E.D. Mich. 2000).
22 McLeod, 245 B.R. at 522 (internal quotations and statutory citation omitted).
23 Id. (internal quotations omitted).


24

Id.

25

Id. at 523.
26 2 BARKLEY CLARK & BARBARA CLARK, THE LAW OF SECURED TRANSACTIONS UNDER THE UNIFORM
COMMERCIAL CODE ¶ 12.2[2] at 12-8 to 12-11 (3d ed. 2013).

27

Id. at 12-9.
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The difference between McLeod, the cases cited by Clark,28 and the case sub judice is that
the receipts signed by debtors in those cases specifically stated that Sears retained a purchase
money security interest in the goods that were purchased in the transaction. Michigan law cited
in McLeod also provided that a retail customer assumed and agreed to the terms of the credit
agreement upon use of the account. In the case sub judice, the Capital One Receipts do not
contain a reference to a purchase money security interest or any other security interest. The only
caution contained on the Capital One Receipts refers to the return and refund policies printed on
the back of the Receipts and posted in the store. There is no reference to the Cardholder
Agreement or the original Application on the Receipts. In McLeod, Sears was both the seller and
the lienholder; in contrast, in the case sub judice, Best Buy is listed at the top of the Receipts,
and the only reference to Capital One’s predecessor-in-interest HSBC is: “Payment Type: BBY
CARD/HSBC.” Capital One’s argument is that the description of the Consumer Goods is
sufficient when one considers the three documents as a single security agreement. Remove any
one of these legs and its argument, as with the metaphorical table, does not stand.

Is it enough to string together a signed Application that has buried within it purchase
money security interest language; a Cardholder Agreement that was not signed by the Debtors
that was mailed to them after the Application and buried within which is also purchase money
security interest language; and 12 Receipts which, except for one, were signed but did not
contain a reference to a security interest, the Application or the Cardholder Agreement? The
answer is no: An enforceable security agreement has never existed between these parties as to

28 Id. at ¶ 12.2[2] at 12-8 to 12-11 (3d ed. 2012)
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the Consumer Goods. If Baldwin is followed, and it is the intent of the parties that must be
discerned, then it is difficult to imagine that under these facts the Debtors intended to grant a
security interest in the Consumer Goods purchased by the Debtors. However, this Court need
not address the intent of the parties since the documentation is facially insufficient to have
created a security interest in the Consumer Goods. Capital One may not rely upon the
description of the Consumer Goods purchased on the Receipts because the Receipts are not a
component of a security agreement between the parties. The type of collateral referenced in the
“goods purchased on your Account” contained in the original Application is not sufficiently
descriptive to allow attachment and enforceability under K.S.A. 84-9-108(e) and K.S.A. 84-9203(
b)(3)(A). For the same reason, the language in the Cardholder Agreement is insufficient in
that it only grants a purchase money security interest “in the goods purchased with your Card.”
Although the Court need not reach this issue, one might ponder whether an account agreement
that is referred to in a credit application but that is later mailed to the debtors should be
considered to establish a security agreement. The U.C.C. requires that a security agreement be
authenticated, which in the Capital One situation means signed by the Debtors, and the
Agreement was never signed by the Debtors. It appears that in Baldwin, all of the documents
were signed by the debtor.

Conclusion

Although Capital One argues that a security agreement may be established with reference
to more than one form or document, in the case sub judice, the Receipts are the only documents
that contain a sufficient description of the Consumer Goods, and the Receipts are not a

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component of the security agreement. The security agreement is not enforceable under Kansas
law as to consumer goods and Capital One’s security interest never attached to the Consumer
Goods purchased by the Debtors. The security agreement is not enforceable in a consumer
transaction because, excluding the Receipts, the collateral is only described by type or class.

IT IS THEREFORE the finding of this Court that Capital One does not hold a security
interest in the Consumer Goods. The Debtors’ Motion to redeem and for valuation is denied as
moot.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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