Edmondson v. Allen-Russell Ford, Inc.

• Decision Date: 28 July 1978
• Docket Number: ALLEN-RUSSELL,No. 76-3773,76-3773
• Citation: 577 F.2d 291
• Parties: Catherine EDMONDSON, Plaintiff-Appellee, v.FORD, INC., Defendant, Ford Motor Credit Company, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 291

577 F.2d 291

Catherine EDMONDSON, Plaintiff-Appellee, v. ALLEN-RUSSELL FORD, INC., Defendant Ford Motor Credit Company, Defendant-Appellant.

No. 76-3773.

United States Court of Appeals Fifth Circuit.

July 28, 1978.

Morton P. Levine, James R. Beach, Jr., Atlanta, Ga., for Ford Motor credit co.

Jay E. Loeb, Atlanta, Ga., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before WISDOM, GOLDBERG and RUBIN, Circuit Judges.

GOLDBERG, Circuit Judge:

This case, like Shanks v. Greenbriar Dodge, Inc., 577 F.2d 296, (5th Cir. 1978), also decided today, requires us to determine whether an assignment of returned or unearned premiums of physical damage insurance must be disclosed as a security interest under the Truth-In-Lending Act ("the Act"), 15 U.S.C.A. § 1638(a)(10) (1974), ¹ and Regulation Z, 12 C.F.R. § 226.8(b)(5). ² We hold that such assignments do constitute security interests for purposes of Regulation Z and must be disclosed. We further hold that the disclosure here was inadequate to meet the requirements of Regulation Z and the Act.

The facts in this case are straightforward. On April 24, 1975, plaintiff-appellee Catherine T. Edmondson entered into an "Automobile Retail Instalment Contract" with defendant Allen-Russell Ford, Inc. ("Allen-Russell") for the purchase of a used 1970 MG Midget automobile. The contract was subsequently assigned by Allen-Russell to defendant-appellant Ford Motor Credit Co. ("Ford"). The contract included on its face a disclosure statement as required by the Truth-In-Lending Act. Plaintiff brought suit on May 19, 1975 alleging that defendants ³ had failed to comply with the disclosure requirements of the Act and Regulation Z in several respects. Following cross-motions for summary judgment, the case was referred to Bankruptcy Judge Ezra Cohen, sitting as special master. The special master made recommendations on four issues. The district court, "find(-ing) itself in agreement with the special master's conclusion that the defendant failed to disclose the fact that it asserted a security interest in returned or unearned premiums of the automobile insurance" in violation of 12 C.F.R. § 226.8(b)(5), adopted the special master's recommendation on that issue and awarded the plaintiff judgment in the amount of $1000 and $900 in reasonable attorney's fees against defendant Ford. It is from this order of final judgment, founded solely on the returned or unearned insurance premium issue, that Ford now appeals.

Two provisions from the combined disclosure statement and installment contract are important in the resolution of this case. Paragraph 13 on the face of the disclosure statement provides as follows:

(13) Security Interest: Seller shall have a security interest under the Uniform Commercial Code in the Property (described above) ( ⁴ and in the proceeds thereof to secure the payment in cash of the Total of Payments and all other amounts due or to become due hereunder.

The reverse side of the document, headed "Additional Terms and Conditions," provides in paragraph 18 ⁵ that

Buyer hereby assigns to seller any monies payable under such insurance, by whomever obtained, including returned or unearned premiums . . . . The proceeds from such insurance, by whomever obtained, shall be applied toward replacement of the Property or payment of the indebtedness hereunder in the sole discretion of Seller.

Appellant contends, primarily, that the assignment created by paragraph 18 does not constitute a security interest and therefore need not be disclosed and, secondarily, that if the assignment is held to constitute a security interest, it is adequately disclosed in paragraph 13 on the face of the contract. We reject both contentions.

I. Creation of a Security Interest

Appellant's first argument seems to be that because the returned or unearned insurance premiums are "assigned," they cannot be the subject of a security interest. Appellant further devotes considerable effort to an analysis of the Uniform Commercial Code as enacted in Georgia to establish that assignments of proceeds of insurance are excluded from treatment as "security interests" under Georgia law.

Fortunately we need not tarry long over the complexities of Georgia's commercial law, for appellant's argument has been anticipated by a recent decision of this court. In Elzea v. National Bank of Georgia, 570 F.2d 1248 (5th Cir. 1978), we considered whether an assignment of homestead and exemption rights constituted a security interest for purposes of Regulation Z. Our discussion in Elzea is precisely apposite here The Truth-in-Lending Act requires a creditor to disclose a "description of any security interest held or to be retained or acquired by the creditor in connection with the extension of credit." 15 U.S.C. § 1639(a)(8). Regulation Z, promulgated by the Federal Reserve Board pursuant to authority granted in the Act, defines "security interest" and "security" to "mean any interest in property which secures payment or performance of an obligation." 12 C.F.R. § 226.2(gg). The definition also lists some interests in property that are security interests. The assignment in this case, although not specifically listed, is a security interest because it is an interest in property which secures payment of an obligation.

570 F.2d at 1249. Regulation Z itself provides that the terms "security interest" and "security" "include, but are not limited to, security interests under the Uniform Commercial Code . . . ." 12 C.F.R. 226.2(gg). ⁶ We stressed in Elzea that technical characterizations "are not determinative of whether a creditor holds a security interest under Regulation Z's definition." Id. at 1249-50. Rather, "(t)his question should be answered by examining the rights which the creditor has." Id. at 1250. We noted as significant factors whether the creditor has an interest in property and whether "the assignment helps to secure payment of the obligation." Id. Even property which "cannot presently be identified and may not yet exist" may be the subject of a security interest for Regulation Z purposes. "What is important is that the . . . privilege is valuable to the debtor and he has given up this valuable privilege to the extent of his debt." Id.

The application of these principles to the facts of this case presents no difficulty; indeed, we believe this case follows a fortiori from Elzea. Viewing the economic reality of the transaction, we have no doubt that the right to unearned property insurance premiums can be a valuable economic right. Appellant's brief itself points out that "(p)ractically every secured loan is affected by insurance" and that an "assignment of returned or unearned premiums of insurance appears in virtually all consumer paper secured by property when insurance is required." Appellant's Brief at 17. We think it clear beyond peradventure that the assignment of returned or unearned premiums of physical damage insurance confers on the creditor an interest in property which helps to secure payment or performance of contractual obligations. The creditor is expressly granted "sole discretion" to apply returned premiums toward payment of the indebtedness; this discretion may, of course, be exercised in the event of default. The creditor may also apply the returned premiums toward substitute insurance on the property, thereby securing the debtor's contractual obligation to obtain and maintain insurance on the vehicle. See note 5, supra. The assignment thus meets the established definition of a security interest and must be disclosed. As the special master stated, "If the security interest was important enough for defendant to acquire, it was important enough to disclose."

In a decision closely on point, Gennuso v. Commercial Bank & Trust Co., 566 F.2d 437 (3rd Cir. 1977), rev'g 425 F.Supp. 461 (W.D.Pa.1976), the Third Circuit recently held that a clause ⁷ containing an assignment of "any return of unearned premiums" 'create(s) a security interest in the proceeds and unearned premiums of the insurance policy covering the automobile." 566 F.2d at 440 n.2. We have recently noted the desirability of uniformity in the interpretation of truth-in-lending disclosure requirements, see McDaniel v. Fulton National Bank of Georgia, 571 F.2d 948, 951 (5th Cir. 1978) (en banc), and observe that our result is consistent not only with the decision of the Third Circuit but with the result suggested by a Federal Reserve Board staff interpretation of a closely analogous issue. See FRB Public Position Letter No. 377 (July 22, 1970). ⁸ Neither principle nor precedent nor other persuasive authority supports exclusion of interests in returned insurance premiums from the disclosure requirements of Regulation Z.

II. Adequacy of Disclosure

Appellant Ford's second argument is that if a security interest was created, this security interest "is a part of the proceeds of the insurance proceeds and consequently a part of the proceeds of the 1970 MG automobile which were properly disclosed." Appellant's Reply Brief at 7. As appellant would have it, A is included in B, B is included in C, therefore A is included in C. We find this application of the transitivity principle inconsistent with the logical and policy foundations of the Act. Appellant's A's, B's, and C's cannot prevail over the commands of Regulation Z.

The "proper disclosure," in the view of appellant, was that given in paragraph 13 on the face of the disclosure statement: "Seller shall have a security interest under the Uniform Commercial Code in the Property (described above) and in the proceeds thereof . . . ." ⁹ See text at note 4, supra. Regulation Z, § 226.8(b)(5), provides that each lender must describe or identify "the type 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...