McLeod v. Sears, Roebuck & Co. (In Re McLeod)

Citations: 245 B.R. 518; 41 U.C.C. Rep. Serv. 2d (West) 302; 43 Collier Bankr. Cas. 2d 1391; 2000 Bankr. LEXIS 194; 2000 WL 242647Docket: 19-42988

Court: United States Bankruptcy Court, E.D. Michigan; February 10, 2000; Us Bankruptcy; United States Bankruptcy Court

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Sears, Roebuck and Co. filed a motion for summary judgment in response to a complaint by Donald McLeod alleging violations of the automatic stay and a permanent injunction following his bankruptcy discharge. The case involved a dispute over the repossession of goods for which Sears claimed a perfected purchase money security interest. The McLeods filed for Chapter 7 bankruptcy on February 9, 1998, and received a discharge on June 1, 1998. After the discharge, Sears sent a demand letter on July 30, 1998, asserting its lien remained valid and subsequently initiated a state court action for repossession on September 24, 1998.

The parties agreed on several facts, including that the McLeods scheduled their debt to Sears as unsecured and had opened a revolving charge account in 1990. The account was governed by a security agreement, which specified that Sears retained a security interest in the merchandise purchased, allowing repossession only of unpaid items. The disputed items included various electronics, jewelry, and luggage purchased between 1996 and 1997. The court found in favor of Sears, granting its motion for summary judgment, concluding that the actions taken by the defendant did not violate the bankruptcy discharge provisions.

Payments are allocated according to the Account Agreement, prioritizing unpaid insurance, returned payment charges, finance charges, purchases in order of transaction, and then late charges. If multiple items are charged on the same date, payments apply first to the lowest-priced items or as required by law. The Defendant claims the oldest item for repossession is a miter saw purchased on October 9, 1996, and asserts that as of September 28, 1996, the Debtor owed $1,744.33. Following total payments of $647 since then, the Defendant concludes that the Debtor has not fully compensated for the saw or any subsequent purchases. The Debtor does not contest this account status but challenges the perfection of the Defendant's security interest, which was not contested during the bankruptcy proceedings.

The Defendant has moved for summary judgment under the relevant Federal Rules, asserting no genuine issue of material fact exists. Summary judgment is appropriate when the moving party is entitled to judgment as a matter of law, and mere factual disputes do not defeat a properly supported motion. A genuine issue arises only if a reasonable fact-finder could rule in favor of the non-moving party.

Regarding jurisdiction, the Defendant initially claimed the court lacked subject matter jurisdiction but seems to have abandoned this position. However, the court must independently verify its jurisdiction. The Debtor alleges a post-discharge violation of the Bankruptcy Code's permanent injunction. If the Defendant's security interest is unperfected, their lien would not survive bankruptcy, violating the injunction. Conversely, if the security interest is perfected, repossession is permissible under the injunction. The jurisdictional issue is tied to the merits of the Debtor's claim, making dismissal for lack of jurisdiction inappropriate.

In Odom v. Slavik, the court elucidates that jurisdiction must be maintained when an issue integral to the offense or cause of action also relates to jurisdiction, unless the claim is clearly immaterial or frivolous. Under the Michigan Uniform Commercial Code, 'consumer goods' are defined as items primarily used for personal, family, or household purposes. The parties agreed on the description of the items but not on their intended use; however, the nature of the items suggests they qualify as consumer goods. The defendant has categorized the goods as such, and the debtor has not contested this characterization.

For a security interest to attach, the debtor must sign a security agreement describing the collateral, value must be given, and the debtor must have rights to the collateral. A security agreement is defined as one that creates or provides for a security interest, and the collateral description is deemed sufficient if it reasonably identifies the items. Notably, a financing statement is not necessary to perfect a purchase money security interest in consumer goods, meaning that such security interests are perfected upon attachment.

The debtor entered a revolving charge account with the defendant in 1990 and added his wife as an authorized buyer in 1997. Although the debtor did not sign the SearsCharge Agreement, Michigan law considers a retail charge agreement accepted if the account is used. The debtor's wife signed sales slips for purchases made after she became an authorized buyer, which incorporated the SearsCharge Agreement and granted a security interest to the defendant.

The debtor argues that the description of the collateral is inadequate, asserting that items must be specifically identified if multiple similar items exist in a household. He provides examples of how various items were described on the sales slips. In support of his argument, the debtor cites a case where the security agreement's collateral definition did not include accounts receivable, indicating a potential inadequacy in the collateral description.

The court determined that the security agreement did not establish a security interest in the subcontractor account as it was not included in the collateral description. The debtor failed to relate this finding to the current case, and the court found no relevant connection. The debtor referenced *In re Carlos*, which applied a two-part test under California law regarding the sufficiency of collateral descriptions. This test allows for either a specific description to distinguish collateral from other items or a general description if the debtor likely owns only one item. While *Carlos* supported the debtor's position, it was governed by California law, and no equivalent standard exists under Michigan law, which emphasizes that a description must enable identification without requiring excessive detail.

The Michigan statute's commentary rejects strict requirements like the 'serial number' test. In this case, the security interest pertained to consumer goods purchased by the debtors, so the description needed only to be sufficient for both parties to identify the items. The court found that the standards from *Carlos* were improperly applied to this context, noting that the descriptions provided were adequate to inform third parties of the need for further inquiry.

The sales slips indicated that the items were purchased under a SearsCharge Agreement granting Sears a security interest until full payment, further supported by the parties' stipulation regarding the terms of the charge account and security agreement. The court concluded that the agreement and sales slips collectively satisfied the statutory requirements for a valid security interest, with all elements of attachment fulfilled, including the provision of value and possession of the merchandise by the debtors. Consequently, the defendant held a perfected security interest at the time of the items' purchase.

Debtor presents five challenges to Defendant's security interest, all of which the Court deems unsuccessful. First, Debtor incorrectly cites Oszajca v. Sears, Roebuck, Co., arguing its relevance under Vermont law while failing to recognize that Michigan law applies and that the appellate court reversed the pertinent ruling. Moreover, the Vermont statute differs materially from Michigan's. Second, Debtor claims Defendant did not comply with the Michigan Retail Installment Sales Act, assuming the agreement is a retail installment contract rather than a retail charge agreement. The Court finds the agreement to be a retail charge agreement and notes that even if it were an installment contract, compliance with the payment formula is not necessary as the formula matches that of the SearsCharge Agreement, which Debtor acknowledged receiving and agreeing to. Third, Debtor argues that Defendant violated the Uniform Commercial Code's transformation rule, which is irrelevant here since the SearsCharge Agreement uses a first purchased, first paid formula, ensuring that each item’s security interest is limited to its purchase price until fully paid. Lastly, Debtor challenges the security interest's validity based on the commingling doctrine but fails to apply relevant facts, relying instead on a case that is not applicable to the current situation. The Court concludes that Defendant has adhered to the relevant legal standards and that Debtor's arguments lack merit.

Debtor argues that 'commingling' occurs when items are mixed in an account with others, referencing Mich. Comp. Laws Ann. 440.9315, which allows a perfected security interest in goods to persist even when they become part of a product or mass. However, the Court finds that items charged to a revolving charge account do not qualify as part of a 'product or mass' under this statute. Debtor claims some items were gifts to others, suggesting this defeats the security interest under the 'sale or gift to next door neighbor' exception. This argument is dismissed as it is based on a mere belief without supporting evidence, and Debtor misinterprets Mich. Comp. Laws Ann. 440.9307(14), which specifies that a donee is not considered a buyer for value. Moreover, Debtor incorrectly assumes that 'knowledge of the security interest' refers to the debtor's understanding rather than the buyer's knowledge. Consequently, the Court concludes that Defendant holds a perfected security interest in the goods, which survived Debtor’s bankruptcy as a valid lien. The Court grants the motion, affirming that Defendant did not breach the permanent injunction and instructs Defendant to submit a consistent order.