Judge Somers

12-20434 Murphy (Doc. # 29) - Document Text

SIGNED this 2nd day of May, 2013.




In Re:


On September 21, 2012, the Court heard arguments on Debtor's Motion for Order
Determining that Certain Personal Property Owned by the Debtor is not Subject to any
Security Interest, or, in the Alternative, Granting Debtor's Request to Redeem Property
(Motion).1 Debtor appeared by Patrick E. Henderson. Capital One, the creditor claiming
a security interest and opposing the Motion, appeared by Michael Berman. The Court
issued an oral ruling from the bench finding that the personal property in issue is subject

1 Dkt. 13.

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to a security interest and stating that the Court would prepare a written order

incorporating by reference the oral findings of fact and conclusions of law. Such an order

was prepared and signed on September 24, 2012. It stated:

After hearing the statements of counsel and carefully
considered (sic) the briefs of the parties, the Court, ruling
from the bench, held that, under the terms of the Best Buy
credit card agreement and the facts of this case, the security
interest attached to the items purchased and was automatically
perfected because the items are consumer goods under Article
9 of the Uniform Commercial Code. The Court stated on the
record its Findings of Fact and Conclusions of Law, which are
incorporated herein by this reference. If the Court's oral
findings and rulings are transcribed, the Court orders that the
draft transcription be submitted to the Court for the purpose of
making technical corrections, including incorporation of
correct names, punctuation, paragraphing, quotations,
footnotes, and legal citations.2

This order was not a final order because, as stated in the order, the Court made no ruling

on Debtor’s alternative request to redeem personal property and the Motion remains

pending for determination of that issue. Proceedings for an interlocutory appeal have not

been initiated.

On April 8, 2013, Bankruptcy Judge Berger, sitting in Kansas City, signed a

memorandum opinion and order in In re Cunningham, case no. 12-20662, ruling under

facts indistinguishable from those before the Court in this case, that no security interest

attached to consumer goods purchased using a Best Buy credit card. There are now

conflicting decisions on this issue in the same division of the United States Bankruptcy

2 Dkt. 25.

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Court for the District of Kansas. I am filing this memorandum expressly stating the
analysis and findings of fact and conclusions of law orally stated at the conclusion of
arguments, supplemented by reference to Cunningham, as I believe the bar is best served
by having the analysis that led to the oral ruling set out in a written opinion.


On May 23, 2012, Debtor filed her motion asserting that four items of personal
property are not subject to a purchase money security interest (PMSI) as claimed by
creditor Capital One. The property is four items of electronics purchased from Best Buy
using a Best Buy credit card. Debtor claims the value of the property is $50.00, not
$1,613.30, the amount of Capital One's claim.3 According to Debtor, there is no PMSI
because the description of the collateral in the alleged security agreement is not
sufficiently specific. HSBC, the original holder of the debt, has sold its claim to Capital
One. Capital One asserts that it has an automatically perfected PMSI under the terms of
the Debtor’s agreements with Best Buy and the value is approximately $1,200.00, but if
Debtor redeems she should be required to pay the balance of Capital One's claim in the
approximate amount of $1,613.00.4

The Best Buy credit Application, signed by Debtor, provides: “You grant the Bank
a purchase money security interest in the goods purchased on your Account.” It also
provides: “you agree to the terms and conditions of the Cardholder Agreement and

3 Dkt. 13.

4 Dkt. 15.


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Disclosure Statement which shall be sent to you with the Card.” That Cardholder
Agreement includes a full paragraph about security, which includes the statement, “you
grant us a purchase money security interest in the goods purchased with your Card . . ..”
Capital One has provided copies of the sales receipts for the four items, but they do not
incorporate the terms of the Application or the Cardholder Agreement. There is no
security agreement provision on the receipts.


The question is whether the security interest attached to the four items; if it
attached, perfection was automatic since the goods are consumer goods. The condition
for attachment which is in issue requires that the Debtor has authenticated a security
agreement that provides a description of the collateral.5 The sufficiency of descriptions of
collateral is addressed by K.S.A. 84-9-108 (2012 Supp.), which provides in part:

(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.
(b) Examples of reasonable identification. Except as
otherwise provided in subsection (d), a description of
collateral reasonably identifies the collateral if it identifies the
collateral by:
(1) Specific listing;
(2) category;
(3) except as otherwise provided in subsection
(e), a type of collateral defined in the uniform
commercial code;
5 K.S.A. 84-9-203(b)(3)(A) (2012 Supp.).

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(4) quantity;
(5) computational or allocational formula or
procedure; or
(6) except as otherwise provided in subsection
(c), any other method, if the identity of the collateral is objectively
. . .

(e) When description by type insufficient. A description only
by type of collateral defined in the uniform commercial code
is an insufficient description of:
(1) A commercial tort claim; or
(2) in a consumer transaction, consumer goods,
a security entitlement, a securities account, or a
commodity account.
Debtor contends that describing the collateral as “goods purchased on your Account”
does not comply with K.S.A. 84-9-108. The argument is that since the sale was a
consumer transaction, subsection (e)(2) applies and was violated because it prohibits
description by type of collateral and, in the Debtor’s view, “goods purchased” is a type of
collateral. Debtor contends that the security agreement must describe the specific goods
purchased, such as TV or VCR.

Debtor's proposed construction of K.S.A. 84-9-108(e)(2) is not correct. The
“description by type” not permitted for consumer goods is the “types” of collateral
defined in the UCC, such as accounts, chattel paper, consumer goods, deposit accounts
equipment, general intangibles, and so forth. “Goods purchased on your Account” is not
a “type of collateral defined in the uniform commercial code.” The purpose of the
collateral description in the security agreement is to define the security interest as
between the parties; unlike a financing statement, the purpose of a security agreement is


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not to give notice to third parties.6 The description “goods purchased on your Account”
adequately defines the collateral between the Debtor and the holder of the account.

This case is nearly identical to In re Ziluck, 7 which held debtors consumer goods
purchased using a Radio Shack credit card were subject to security interests granted by
the Radio Shack Account and Security Agreement signed by the debtor describing the
collateral as “all merchandise charged to your Account.” The court rejected the debtor’s
argument that the description of the collateral was insufficient, finding that it “reasonably
identifies the property subject to the security interest - namely any property purchased
with the subject credit card.” Ziluck is identified as correctly decided in Barkley Clark’s
treatise on Article 9, which states, “it is always possible for the issuer [of a credit card] to
retain a security interest in items purchased with the credit card, so long as the credit card
application includes security agreement language.”8

Research conducted before the hearing revealed one case reaching a contrary
result, In re Shirel.9 In that case, the Bankruptcy Judge held that the description of
collateral as “all merchandise purchased with the credit card” in a credit card form from
an appliance center was insufficient for a security interest to attach to a refrigerator

6 Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1298 (10th Cir. 1986).
7 139 B.R. 44 (S.D. Fla. 1992).
8 Barkely Clark and Barbara Clark, The Law of Secured Transactions under the Uniform

Commercial Code ¶ 12.02[1](A.S. Pratt 2012).
9 251 B.R. 157 (Bankr. W.D. Okla. 2000).

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purchased using the card. I believe he erroneously found the purpose of the security
agreement was to give notice to third parties of the items which are subject to the security
interest. Inquiry notice to third parities is the function of a financing statement, which is
not required for a PMSI in consumer goods. When evaluating the sufficiency of the
description, the Shirel court then focused only on the phrase “all merchandise,” ignoring
the phrase “purchased with the credit card,” and found the phrase “all merchandise”
imprecise. The Ziluck case was cited in a footnote as reaching a contrary result, but it
was rejected since it was not decided under Oklahoma law or by the Tenth Circuit.

As stated above, the Cunningham decision also reaches a contrary result.
Although the facts in Cunningham are indistinguishable from those in this case and the
issue presented was identical, analysis focused upon construction of the three documents
involved in each sale transaction, rather than on the UCC requirements for description of
collateral. The Court concluded that "[a]n enforceable security agreement has never
existed between these parties as to the" consumer goods purchased from Best Buy
because “[t]he 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. 84-9-203(b)(3)(A).” This Court
respectfully disagrees. As discussed above, it is my conclusion that the description of the
goods in the Application and the Cardholder Agreement is sufficient under K.S.A. 84-9108(
e) and the security interest therefore attached under K.S.A. 84-9-203(b)(3)(A).


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For the foregoing reasons, the Court denies the portion of Debtor’s Motion seeking
a determination that Capital One’s security interest did not attach to the consumer goods
purchased with Debtor’s Best Buy credit card. The security interest granted in the
Application attached when the goods were purchased using the Best Buy credit card and
was automatically perfected.

The foregoing constitute Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure which make Rule 52(a)
of the Federal Rules of Civil Procedure applicable to this matter.



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