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Can Stores Enforce Their Credit Card Security Agreements in California

Enforce Credit Card Security Agreement In a recent blog post I addressed the question, "Can Stores Repossess What You Bought with the Store Card?" The basic answer was that they can if their store credit card contract gave them a right to do so. In other words, the issue is whether the store's contract states that you give them a "security interest" in the items purchased—a right to repossess if you don't make the agreed payments on the card.

So, if you bought a dining room table from Mor Furniture, and three months later you couldn't make the monthly payments, could the store repossess the table? Its contract states:

"You grant us a purchase-money security interest under the Uniform Commercial Code in the goods purchased on your Account. We will retain the purchase-money security interest until such goods are paid in full."

So based on the contract it looks like Mor Furniture would have a right to repossess the table if you don't make the required payments on the store card account.

BUT WHAT IF I DO NOT HAVE A CHOICE ABOUT THAT WOULD BE PART OF THE CONTRACT, HAD NO OPPORTUNITY TO BARGAIN WITH THE FURNITURE STORE, BUT INSTEAD WAS STUCK WITH GRANTING THIS RIGHT?

Good question. That's the point of today's blog post.

After all, a legally enforceable contract is generally understood to be an agreement between two parties who have negotiated the terms of the agreement and have then come to a meeting of the minds about those terms. If there's no bargaining possible at all, is the contract legally enforceable? If there's no bargaining about whether the purchaser must give a security interest—a right to repossess—to the furniture store, is that supposed security interest legally enforceable?

To answer this we look at the law in California on "adhesion contracts." These are defined as standardized contracts written by only one of the parties, the one with virtually all the bargaining power, while the other has no power except to "adhere" to the contract or go elsewhere. They are one-sided, take-it-or-leave-it contracts.

"Adhesion contracts" are not all bad. The uniformity of standardized contracts allows businesses to provide goods and services more efficiently and thus less expensively. This allows for the greater availability and lower cost of all that consumers and businesses need. The mass distribution that is at the heart of modern commerce would be impossible if each purchase relationship had to be individually negotiated. Mor Furniture would have to pay for a lot more employees if every term of every purchase and credit contract was up for negotiation, greatly driving up the cost of their furniture.

However, "adhesion contracts" have their serious downsides. Businesses naturally write such standardized contracts in their own favor, and so include terms that are favorable to them and unfavorable for consumers. Often consumers simply don't read, or can't understand the contracts, because they are often very long and not understandable to many if not most consumers. And even if consumers did read and understand the contracts, there's no opportunity for negotiating any of the terms. As a result consumers are constantly stuck with oppressive, one-sided contracts. And they often don't find out how one-sided they are until a dispute arises.

SO ARE "ADHESION CONTRACTS" ENFORCEABLE UNDER CALIFORNIA LAW?

Often they are. Although there have been arguments that "adhesion contracts" should simply be unenforceable, California courts have not taken that position. Instead the courts have tried over the course of many decades to balance the economic necessity of standardized contracts against preventing the abuses that can result from them.

Under California law, "adhesion contracts" ARE enforceable UNLESS the contractual term in question is:

1) not within the "reasonable expectations" of the consumer, or

2) is "unconscionable."

IS IT A "REASONABLE EXPECTATION" THAT YOU WOULD GIVE A STORE CREDITOR THE RIGHT TO REPOSSESS WHATEVER YOU PURCHASED IF YOU LATER DIDN'T MAKE PAYMENTS ON THE ACCOUNT?

There's a general rule that a person complaining about one of the terms in a contract can't say she wasn't given notice of that term when she simply hadn't read the contract. You can't say you didn't know that something was in the contract if you didn't read it. And you can't say that you didn't later "reasonably expect" something to be in a contract without having read it to know what to expect.

However, the courts have also to some degree accepted the reality that if you are presented with a contract with multiple pages of fine print and you are not given any sensible opportunity to read it, you can't be held to have read and agreed to all the terms. That's, when considering whether a contractual term is "reasonably expected," the law looks to see whether the contractual term in question is buried deep in the contract or is instead prominently presented, such as with large and/or bold type.

Notice in our example that the term in the Mor Furniture contract which purports to create a security interest—the right to repossess—is in the middle of page 3 of 5 crammed pages of thousands of words written in fine print. The language used—"purchase-money security interest under the Uniform Commercial Code"—includes specialized terms of law that very few consumers would understand the meaning or impact of. And the meaning or legal impact of those technical words is not at all explained. There is nothing about those meaning that the creditor is being given a right to repossess the goods purchased.

Why is this provision in the contract not more prominent, with a simple explanation what it means? It would be easy enough to put in those few words of explanation, and to make them more conspicuous. It's almost as if they don't want you to know what you are signing away.

MUST THE TERM CREATING A SECURITY INTEREST IN THE CONTRACT OF A STORE CARD BE CLEAR AND CONSPICUOUS TO BE ENFORCEABLE AGAINST THE CONSUMER?

I am not aware of a California court case that directly answers this question. But there was a case that may help in making that argument, Jones v. Crown Life Insurance. The life insurance company did not want to pay life insurance for the death of the insured man in a vehicle accident allegedly caused by the insured's driving while intoxicated. A clause in the life insurance contract excluded payout if the death was caused by a criminal offense.

The California Court of Appeals decided that the contract was an adhesion contract because the insured had no opportunity to negotiate about its terms. The exclusionary clause was ruled unenforceable because it was buried deep in the contract, not at all conspicuously presented.

In our situation with the Mor Furniture contract, there is a very sensible argument that you would not have had "constructive notice" of the contractual term creating a security interest, since it was buried deep in the contract and was altogether inconspicuous, even though it was arguably one of the most important provisions of the deal. In effect it could be argued that in the eyes of the law you have no real opportunity to read that term of the contract. And so that term would not be enforceable—Mor Furniture would not have a right to repossess the table if you failed to make payments on the account.

IS IT "UNCONSCIONABLE" TO GIVE A SECURITY INTEREST IN WHAT YOU'RE PURCHASING?

Under California law a contractual term is "unconscionable" if it "overly harsh or one-sided." But is giving a store a security interest in what you buy "overly harsh or one-sided"?

Probably not. One commentator summarized the law in this regard as follows:

It is not enough for a party to an adhesion contract to show that a provision is unfavorable; provisions which courts typically enforce do not receive special consideration just because they are contained in an adhesion contract. But, where a provision is one-sided and placed in the contract by the drafter for no other purpose than to gain an unfair advantage, the courts will consider such provisions substantively unconscionable. When these substantively unconscionable provisions appear in adhesion contracts, courts will not enforce the provisions.

By this standard I would say that the Mor Furniture security interest term is not "unconscionable." Security interest language in contracts is being enforced all the time—this is a basic component of debtor-creditor law. It does give creditors an advantage—you are more likely to pay the Mor Furniture account to avoid your table from being repossessed. The same way that you would more likely pay on a vehicle loan because the creditor is a lienholder on the title and will repossess your car if you don't pay the loan. But I don't see that the security interest language was not put into the Mor Furniture contract "for no other purpose than to gain an unfair advantage."

THE BOTTOM LINE

Whether a term in a store credit card's contract creating a security interest is enforceable likely turns on whether it is buried in the fine print and stated in legalese, or rather is presented conspicuously and in language that makes clear what it means.

So, have your attorney review the contract to see if it includes your granting of a security interest, and if so whether it is likely enforceable or not.

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