Douglas v. Beneficial Finance Co. of Anchorage, 71-1893.

Citation469 F.2d 453
Decision Date07 November 1972
Docket NumberNo. 71-1893.,71-1893.
PartiesSandra J. DOUGLAS, for herself and as representative of a class, Plaintiff-Appellee, v. BENEFICIAL FINANCE CO. OF ANCHORAGE et al., Defendants-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

William M. Burke (argued), George R. Richter, Jr., of Sheppard, Mullin, Richter & Hampton, Los Angeles, Cal., Murphy L. Clark, of Hughes, Thorsness, Lowe, Gantz & Clark, Anchorage, Alaska, for defendants-appellants.

R. Brock Shamberg (argued), John E. Reese, of Alaska Legal Services Corp., Anchorage, Alaska, for plaintiff-appellee.

Before MERRILL, DUNIWAY and TRASK, Circuit Judges.

DUNIWAY, Circuit Judge:

Douglas, the appellee, brought a class action in the District Court for the District of Alaska against seven Alaska Beneficial Finance Companies (collectively referred to as Beneficial), alleging that they had violated the Federal Truth-in-Lending Act (the Act), 15 U.S.C. §§ 1601-1665, by failing to disclose as security interests certain confession of judgment clauses in their promissory notes. On April 20, 1971, the district court entered a preliminary injunction restraining Beneficial from collecting on the notes pending the outcome of the action. That injunction is the subject of this appeal. We reverse.

Ordinarily, the grant or denial of a preliminary injunction is a matter within the discretion of the district court, and it will not be reversed absent an abuse of that discretion. See King v. Saddleback Junior College District, 9 Cir., 1970, 425 F.2d 426, 429. An exception to this rule applies when such grant or denial is based upon an erroneous legal premise; the order is then reviewable as is any other conclusion of law. Delaware & Hudson Railway Co. v. United Transportation Union, 146 U.S.App.D.C. 142, 1971, 450 F.2d 603, 619-623; Ring v. Spina, 2 Cir., 1945, 148 F.2d 647, 650. As will be seen, this is such a case.

The confession of judgment clause used by Beneficial reads:

"Undersigned jointly and severally authorize and empower any attorney of law of any court of record of the State of Alaska or elsewhere in the United States to appear for undersigned, or any one of undersigned, in an action on this note in any court of the United States, State of Alaska or elsewhere in the United States at any time after default in the payment of the amount of any installment of principal and interest thereon, and confess judgment against any one or all of the undersigned for the amount due with interest and charges permitted by said Section 06.20.260, of the Alaska Statutes, all without benefit of valuation and appraisal laws."

Section 1638 of the Act provides, in part:

"(a) In connection with each consumer credit sale not under an open end credit plan, the creditor shall disclose each of the following items which is applicable: . . . .
(10) A description of any security interest held or to be retained or acquired by the creditor in connection with the extension of credit, and a clear identification of the property to which the security interest relates."

The Board of Governors of the Federal Reserve System (15 U.S.C. § 1602 (b)), is given authority by 15 U.S.C. § 1604 as follows:

"The Board shall prescribe regulations to carry out the purposes of this subchapter. These regulations may contain such classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of this subchapter, to prevent circumvention or evasion thereof, or to facilitate compliance therewith."

Pursuant to this authority the Board has defined "security interest" as including "confessed liens whether or not recorded," 12 C.F.R. § 226.2(z), and has issued an interpretation of this regulation stating:

"(b) In some of the States, confession of judgment clauses or cognovit provisions are lawful and make it possible for the holder of an obligation containing such clause or provision to record a lien on property of the obligor simply by recordation entry of judgment; the obligor is afforded no opportunity to enter a defense against such action prior to entry of the judgment.
(c) Since confession of judgment clauses and cognovit provisions in such States have the effect of depriving the obligor of the right to be notified of a pending action and to enter a defense in a judicial proceeding before judgment may be entered or recorded against him, such clauses and provisions in those States are security interests . . . ." 12 C.F.R. § 226.202.

The district court construed Alaska law to be that Beneficial could not obtain judgment under the clause in question unless the obligor first had notice and an opportunity to defend against the action. Nonetheless, it held that the confession of judgment clause was a security interest under the Board's interpretation...

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