United States v. Bland (159 F. Supp. 395, 1958)

THOMSEN, Chief Judge.

Defendants (the Blands) have moved for judgment in their favor at the close of plaintiff’s case in this action brought by the United States as assignee of the Blands’ promissory note. This note had been endorsed without recourse by TriTilt Storm Window Company, the original payee, to Baltimore Federal Savings & Loan Association, and thereafter assigned by the Loan Association to the United States. It had been given in connection with an instalment sale of storm windows and doors by Tri-Tilt to the Blands, and had been insured under Title I of the National Housing Act, 12 U.S.C.A. § 1701 et seq.

The motion raises the issue whether the sale comes within the purview of the Maryland Retail Instalment Sales Act, Ann.Code of Md., 1957 ed., Art. 83, secs. 128 to 153. It is admitted that Tri-Tilt did not comply with the requirements of the Maryland Act, so, if the transaction comes within that act the agreement of sale and the instruments signed by the Blands were void, the Blands had a right to cancel the agreement and receive a refund of any payment made, and the note is subject to all defenses which the Blands might have asserted against TriTilt or the Loan Association. Sec. 128 (b), sec. 128(c) (1) and sec. 147.

Other questions are raised by the answer of the Blands, and by the third party complaint which they filed against Tri-Tilt and the Loan Association, but those questions are not before the court on this motion.

Witnesses called by the United States Attorney testified with respect to the course of dealings between the several parties; counsel for the respective parties cross-examined these witnesses and offered in evidence numerous exhibits. The case has been fully and ably briefed, and the court has had the benefit of a memorandum filed on behalf of the Maryland Bankers Association as amicus curiae.

The Maryland Retail Installment Sales Act

The Maryland Retail Installment Sales Act was enacted in 1941. It reflects the view that improvident and careless consumers who buy on the instalment plan need legal protection, since buyers ordinarily do not read their contracts and associated papers carefully. Stride v. Martin, 184 Md. 446, 451, 41 A.2d 489. “Because of the misleading or ambiguous manner of stating the finance rate and other charges in the usual installment contract, few installment buyers are aware of the rate or charges which they are actually paying.” Research Bulletin No. 6, Maryland Legislative Council, September, 1940, p. 34. The act “was passed to protect instalment plan buyers. Its purpose was ‘not only to prevent actual frauds but to close avenues to fraud.’ ” Griffin v. Baltimore Federal Savings & Loan Ass’n, 204 Md. 154, 159, 102 A.2d 804, 806.

The act provides that every instalment sale agreement, as that term is defined in sec. 152(b), shall contain certain provisions (sec. 129) and shall not contain other provisions (sec. 130), and that a copy of such agreement shall be delivered by the seller to the buyer (sec. 128). If the provisions of the act are not complied with, the agreement of sale and the instruments signed by the buyer are void (sec. 128(b)) and the buyer may cancel the agreement and receive a refund of all payments and deposits made (sec. 128(c) (1)).

The act recognizes the close relationship between dealers and “sales finance companies”, and many of its provisions are made applicable to such finance companies as well as to sellers. Art. 83, secs. 130-133, 146, 157, specifically refer to finance companies as defined in sec. 152(h); others apply to all holders. See sec. 152(i). Sec. 147 provides:

“Separate notes. If, as part of an installment transaction, a note is taken by the seller or finance company, such note shall refer to the installment agreement out of which it arises and, in the hands of any subsequent holder, such note shall be subject to all defenses which the buyer might have asserted against the seller or finance company, except that an acknowledgment of delivery of a copy of the agreement by the buyer pursuant to § 128 shall be conclusive proof of such delivery in favor of any assignee of such note without actual knowledge to the contrary.”

Sec. 152 contains the following definition, among others:

“(b) ‘Installment sale agreement’ means any contract for the retail sale of goods, negotiated or entered into in this State, under which (1) part or all of the price is payable in one or more payments subsequent to the making of such contract, and (2) the seller has retained a security interest in the goods sold or has taken collateral security for the buyer’s obligation; * *

The Issue Defined

All of the parties agree that the sale in the case at bar was a retail sale of goods, negotiated and entered into in this State. The price was payable in instalments after the making of the contract. The Blands concede that no security interest in the goods was retained by the seller. The issue to be de-

cided, therefore, is whether the seller “has taken collateral security for the buyer’s obligation”, as the term collateral security is defined in sec. 152(p);

“(p) ‘Collateral security’ means any security, other than a security interest in goods which are the subject of an installment sale agreement, which is given to secure performance of any obligation of the buyer or any surety or guarantor for him under an installment sale agreement, renewal or extension thereof, or refund agreement, and shall include the undertakings of any surety or guarantor for the buyer and any interest in, encumbrance on, or pledge of, property or goods other than goods the subject of the installment sale agreement.”

This issue has been divided into two subsidiary questions, based upon the principal contentions advanced by defendants.

I. The Blands’ first contention is that the promissory note on which this action is brought, given by them to TriTilt, with its provision for confession of judgment, itself amounts to such collateral security.

II. Their second contention is that under all of the facts and circumstances in this case — the dealings between the Blands and Tri-Tilt, the relationship between Tri-Tilt and the Loan Association, and the dealings between the Loan Association and the Federal Housing Administration — the undertakings of the United States under the insurance features of Title I of the National Housing Act, together with the obligation assumed by the Loan Association to TriTilt, amount to such collateral security.

I.

The United States and the third party defendants, Tri-Tilt and the Loan Association, word the first question as follows: “In the sale of chattels in the State of Maryland (i. e., storm windows, storms doors, heating units, and similar items) where there is no retention of title clause in the contract but where the contract recites a cash price and provides for payments in instalments of certain sums of money per month, and where a confessed judgment promissory note for the gross amount, including finance charges and interest, is executed, does such note constitute ‘collateral security’ within the purview of Article 83, section 152, sub-paragraphs (b) and (P) ?”

The word collateral and the term collateral security have been given various definitions, depending upon the problem under consideration. But all of the definitions, including that in the act itself, Md.Code, Art. 83, sec. 152(p), require some security in addition to the personal obligation of the debtor. Jones on Collateral Securities, 3d Ed., sec. 1, states: “The term ‘collateral security’ necessarily implies the transfer to the creditor of an interest in, or lien on, property, or an obligation which furnishes a security in addition to the responsibility of the debtor; therefore, the execution and delivery by the debtor of additional unsecured evidences of his own indebtedness does not in any legal sense constitute collateral security”. In re Waddell-Entz Co., 67 Conn. 324, 35 A. 257, 258, the court said: “A debtor’s additional promises to pay cannot, from the very nature of the case, be treated as collateral security for his debt, unless such additional promises are themselves secured by a lien on property, or by obligations of third persons.” This passage was quoted with approval in Jones v. Third National Bank, 8 Cir., 13 F.2d 86, 87. See also Union National Bank of Johns-town, Pa. v. People’s Savings & Trust Co., 3 Cir., 28 F.2d 326, 327.

The provision for confession of judgment contained in the note does not constitute collateral security, as that term is used in the Maryland act, especially in view of the fact that sec. 130(b) specifically forbids such a provision in any instrument taken by the seller from the buyer in connection with a retail instalment sale agreement, and sec. 149(b) provides that if such a provision is included the provision shall be absolutely void. See Griffin v. Baltimore Federal Savings & Loan Ass’n, 204 Md. 154, 102 A.2d 804.

II.

The problems raised by defendant’s second contention are more difficult. The Blands contend that under all of the facts and circumstances in this case— the dealings between the Blands and TriTilt, the relationship between Tri-Tilt and the Loan Association, and the dealings between the Loan Association and the F.H.A. — the seller has taken collateral security for the buyers’ obligation, within the definition of collateral security in sec. 152(p), which specifically includes the undertakings of any surety or guarantor for the buyer.

National Housing Act — Title I and Regulations

The National Housing Act, 12 U.S.C.A. § 1701 et seq., provides a program by which financial institutions, the building and allied industries, and the Federal Government combine to assist borrowers to make eligible improvements to their property. Pursuant to that act, the Commissioner has issued regulations which are codified in 24 C.F.R. 200.1 to 201.16. Under those regulations the financial institution, which is referred to as the insured, holds a contract of insurance and “will be reimbursed for its losses on loans made in accordance with the regulations”. Sec. 201.11(e).

Reports of a loan are to be made within 31 days from the date of the note or the date on which it is purchased by the lending institution. Sec. 201.10. At the time the Bland note was reported for insurance such transactions were insured 100%; for loans made on and subsequent to October 1, 1954, the amount of the claim is limited to 90%. If, when a claim for loss is filed, it appears that the note is not valid and enforceable against the borrowers, and therefore not insurable under sec. 201.2(a), the government’s liability is limited to a return of the premium. Sec. 201.13(d) (3). If the claim is improperly paid by the government, it may recover the amount from the lending institution under the terms of the assignment. Sec. 201.11