summer 2003-05 Retail installment sale contract ruled not to constitute security agreement

Number 52
Summer 2003

Retail installment sale contract ruled not to constitute security agreement

In Empresas Berríos v. Esteves, 2003 Bankr. LEXIS 767, the U.S. Bankruptcy Appellate Panel for the First Circuit affirmed the decision of the Bankruptcy Court that the installment sale contract in question did not contain language needed to create a lien under the Uniform Commercial Code.

Retail installment sale contract

Bankruptcy debtor Francisco J. Esteves Ortiz had purchased some home furnishings and appliances for his household use from Empresas Berríos. Because he was to pay the purchase price in installments, he execute a retail installment sale contract. The seller filed the contract with the Registry of Commercial Transactions of the Office of the Secretary of State, pursuant to the provisions of the Commercial Transactions Act, i.e., Article 9 of the Uniform Commercial Code.

Bankruptcy

About a year later, Esteves filed a petition under Chapter 13 of the Bankruptcy Code. Berríos in turn filed a proof of claim, asserting to have a security interest in the consumer goods. The debtor challenged the secured status of the credit, and the bankruptcy judge ruled in favor of the challenge. Berríos then appealed the decision to the Bankruptcy Appellate Panel, who affirmed.

“Security agreement”

The central legal question posed was whether the retail installment sale contract constituted a “security agreement,” as the term is employed in the Commercial Transactions Act. That was so in light of the fact that the execution of such a document is an essential condition for the institution of a valid security interest that can be opposed to bind third parties and bankruptcy debtors.

One of the problems faced by the panel was that for some reason the Puerto Rico law, contrary to its counterparts in the 50 states, does not define “security agreement.” Nevertheless, because the Puerto Rico Legislature recognized in the law’s statement of motives the economic integration of the Puerto Rico financial industry with its United States counterpart, and intended that the statute place Puerto Rico commercial law on par with comparable United States legislation, the panel decided to follow the stateside definition. “Virtually all of the states adopting the Uniform Commercial Code define a ‘security agreement’ as ‘an agreement which creates or provides for a security interest,'” the panel said.

Language

Although a security agreement need not have any particular form nor employ any sacramental words, it must convey the intention of the parties to encumber assets to serve as collateral security to an obligation. “It is not necessary that the parties sign a separate document labeled as a security agreement. So long as several documents collectively indicate an intent to create a security interest, they may together satisfy the requirement.”

On the other hand, documents that simply describe a loan or describe collateral do not serve this purpose, even if recorded. The panel gave several examples, among these:

l a promissory note standing alone is not sufficient to act as a security interest;

l a financing statement alone does not establish that in fact a security agreement has been agreed upon;

l even a financing statement with a list of collateral and invoices for goods sold is insufficient.

Esteves’s contract

The panel then examined the retail installment sale contract signed by Esteves, and concluded that “nothing [therein] prescribes any form or content regarding the creation of a security interest.”

The panel described the contract in some detail, indicating that it contained provisions for the sale of the goods, their description, consumer disclosure information required by the Truth-in-Lending Act and the Retail Installment Sales Act, the extension of credit and its repayment in installments, late payment fees, an assignment provision and an acknowledgment that the buyer had received a copy of the document; but no clause to the effect that the debt was secured by the goods purchased. “The language in the Contract merely reflects an agreement that the Creditor is extending consumer credit to the Debtor and the Debtor is purchasing from the Creditor certain consumer goods identified in the Contract. There is no express language in the Contract creating or granting a security interest or reserving title to the Creditor until the balance of the purchase price is paid.” “As no security interest was created under the provisions of the Commercial Transactions Act, the attachment necessary to result in an enforceable security interest did not occur.”

Berríos’s credit was ruled to be unsecured. n

© 2003 Goldman Antonetti