Opinion
SC-08-3396.
Decided March 27, 2009.
Kevin Sanders, Plaintiff, pro se, Charlotte, NC.
Paul Quartararo, Esq., Quartararo Quartararo, PLLC, Attorneys for the Defendant, Fishkill, NY.
This matter arises out of plaintiff's claim that the defendant placed an unauthorized freeze on his checking account held at the Hudson Valley Federal Credit Union (hereinafter HVFCU), without prior notice being given to him. Plaintiff is suing defendant for $3,488.30, which sum represents the amount frozen in plaintiff's checking account and transferred to plaintiff's non-secured "readi-cash" loan, which was also maintained at HVFCU.
A trial was held on January 12, 2009 and January 13, 2009. The plaintiff appeared pro se and the defendant was represented by Paul Quartararo, Esq. This Court having reviewed the evidence and duly deliberated upon same, finds and determines the matter as follows:
FINDINGS OF FACTS AND CONCLUSIONS OF LAW:
Plaintiff had an individual checking account with HVFCU. In the year 2000, plaintiff took out a seven (7) year car loan with HVFCU to purchase a 2000 BMW. In 2001, plaintiff took out an unsecured readi-cash line of credit with HVFCU in the amount of $4,000.00. On January 31, 2005, plaintiff refinanced his auto loan. On August 8, 2006, the plaintiff was arrested on criminal charges and his BMW was seized by the Dutchess County Task Force shortly after his arrest. On August 25, 2006 the plaintiff called HVFCU and notified them that his car had been seized by law enforcement. On February 15, 2007, plaintiff pled guilty to a felony. On May 16, 2007, plaintiff was sentenced on the criminal charges. It is unclear when or where the BMW was seized or how the parties know that it was seized by the Dutchess County Task Force, but the plaintiff admits that it was seized by law enforcement. Defendant forfeited possession of the BMW by signing the title over to the Dutchess County Task Force. Defendant's forfeiture occurred prior to plaintiff signing the forfeiture documents on the BMW with the District Attorney's Office. On May 16, 2007 (the date defendant was sentenced), as part of the plea bargain negotiated between plaintiff's attorney and the District Attorney's Office, plaintiff also signed papers forfeiting the BMW over to law enforcement.
The date the plaintiff called HVFCU and notified them that his car had been seized by law enforcement (August 25, 2006), was the date HVFCU deemed the loan to be in default, notwithstanding the fact that plaintiff's auto loan payments were up-to-date. On February 16, 2007, following a default on plaintiff's auto loan, HVFCU froze the money in the checking account. Without providing prior notice to the plaintiff, HVFCU elected to accelerate plaintiff's readi-cash loan, and transferred the funds out of plaintiff's checking account to pay the balance owed under the readi-cash note. Plaintiff only became aware that his account was frozen when he unsuccessfully attempted to use his ATM card in February 2007. As a result of the account being frozen, plaintiff could not access his money, and plaintiff defaulted in paying his auto loan and his readi-cash loan in February 2007. Prior to this, plaintiff payments on both loans appear to have been current and timely paid.
The auto loan was charged off by HVFCU in the sum of approximately $8,000.00 and $354.25 was charged off in the readi-cash account. Plaintiff subsequently filed for bankruptcy.
Plaintiff claims that defendant had no right to do this and initiated this small claims action. The issue before this Court is whether the plaintiff is entitled to judgment in the amount of $3,488.30, the amount HVFCU seized from plaintiff's checking account and applied toward the balance of his readi-cash account.
Plaintiff argues that the defendant had no right to transfer this money to his readi-cash loan, because the loan was an unsecured loan, requiring no collateral, and plaintiff had not defaulted on payments for that loan. The plaintiff further contends that defendant breached the terms of the loan agreement by releasing the BMW without securing any compensation for the value on the vehicle, which monies plaintiff could have used to settle the debt that plaintiff owed HVFCU. Plaintiff further argues that when HVFCU seized his account, transferred the funds as security for an unsecured loan, refused to communicate with him, and sent the matter to a collection agency, it acted unlawfully, and is liable for the amount it transferred to his readi-cash loan.
In opposition, the defendant argues that the cross-collateralization clauses, set forth in both loans, gave HVFCU the authority to transfer the funds upon default of the loan. More specifically, the defendant contends that the plaintiff defaulted with respect to the terms of the auto loan when the BMW was seized by legal process because the terms provide that one is in default on the loan agreement if "the collateral or any of my money in your possession is seized or attached by legal process." Once the plaintiff was in default on the auto loan, plaintiff automatically entered into default on his readi-cash loan, because the terms of both loans provide that one is in default on either loan if the debtor is "in default on any other loan with you [HVFCU]." Since plaintiff was deemed to be in default on both loans (by virtue of the BMW being seized), the defendant contends that the terms of the loan authorized HVFCU to then seize plaintiff's checking account and transfer those funds to his readi-cash loan to satisfy the debt obligations on that loan. Defendant relies, in part, upon the provision that gives a security interest in all loans to apply to any delinquent loans, which is in the Truth in Savings Disclosure that plaintiff signed at the time of his application. More specifically, the terms on both loans (under the section entitled "Lien on Savings/Security Interest") provide as follows:
"If I am in default on any financial obligation to you, I understand that Federal Law permits you to enforce a statutory lien on all accounts in which I have an ownership interest (except IRA or other retirement accounts) by transferring funds from these accounts to satisfy my obligations. I further understand that you may restrict my access to these accounts." Defendant's Trial Exhibit D; also see, Defendant's Trial Exhibit G.
Plaintiff counters this argument by highlighting the fact that since his readi-cash loan account was an unsecured loan, for which no collateral was required, HVFCU was not authorized to transfer his money to secure collateral where none was ever required under the terms of the loan — irrespective of whether a default had occurred. Plaintiff further contends that the defendant is liable to him for the money in that HVFCU failed to provide prior notice that it was going to seize his account.
The defendant, in turn, argues that even though the readi-cash account was delineated an unsecured loan, there was a cross-collateralization clause in that agreement as well, which specifically provided that the collateral on the loan secures any other loan obligations owed to HVFCU "now or in the future." Since the auto loan's existence preceded the readi-cash loan, the readi-cash loan fell under those loans issued to the plaintiff "in the future" and vice versa. Thus, the cross-collateral clause of both loans activated, thereby authorizing the defendant to restrict plaintiff's access to his account, enforce a lien, and transfer the funds to satisfy the balance on the readi-cash note, and to do so without notice to the plaintiff. The defendant relies, in part upon "The Close End Note, Security Agreement and Federal Disclosure Statement" that was signed by the defendant to support its position. The "Default" provision in this agreement allows HVFCU to take security without notice to the debtor. More specifically, the clause provides as follows:
" If I am in default, the credit union may demand immediate payment of my entire loan. I understand that the credit union also has other rights including the right without prior notice to me, to retake the security and after giving notice of sale as required by law, to sell the security in a reasonable manner. I understand if the amount the credit union receives at the sale does not pay my unpaid, balance, Finance Charges, late charges and costs of protecting, retaking, repairing, storing and selling the security and collections costs, reasonable attorney's fees, and court costs, that I agree to pay any remaining amount as permitted by law." Defendant's Trial Exhibit D (emphasis added).
This Court is empowered by statute to adjudicate small claims in such a manner as to do "substantial justice" between the parties according to the rules of substantive law. Uniform City Court Act § 1804. The party bringing the small claim has the burden of proof and may not obtain a judgment unless he or she has demonstrated a prima facie case of liability on the part of the other party. Here, although the plaintiff argues that HVFCU acted unlawfully, and is liable for the amount it transferred to his readi-cash loan, there is no legal precedent supporting this proposition and the terms of the contract bespeak otherwise.
The substantive rule of law provided in the Uniform Commercial Code authorizes security agreements to create or provide for a security interest in after-acquired collateral. U.C.C. § 9-204(a). It also authorizes that a security agreement can provide that the collateral secures the note or that accounts be sold in connection with future advances or other value, even if same is not the advance or value given pursuant to the commitment note. U.C.C. § 9-204(c). This provision validates "cross-collateral" clauses where collateral acquired at any time and secures advances whenever they are made. U.C.C. § 9-204, Comment 2; 95 NY JUR., Secured Transaction § 82. It gives the secured party more than a mere equitable interest in the after-acquired property, and it means that no supplemental agreement covering the new collateral needs to be executed because the secured party takes a security interest in after-acquired property, as HVFCU did here. U.C.C. § 9-204, Comment 2; 95 NY JUR., Secured Transaction § 82. The parties are at liberty to agree that a security interest secures any obligation whatsoever, whether or not the advances or value are given pursuant to a commitment, which again, is what occurred in this matter. U.C.C. § 9-204, Comment 2; 95 NY JUR., Secured Transaction § 82.
Here, while both notes have a cross-collateralization clause, the issue here centers upon the one in the readi-cash loan because it contains seemingly repugnant conditions. In particular, although the readi-cash loan specifically states that no collateral is being given as a security interest, the very next sentence in the agreement includes a cross-collateralization clause giving HVFCU a security interest in after-acquired property, even though no value was required under the original commitment. Plaintiff's Trial Exhibit 4. In particular it reads as follows:
"SECURITY INTEREST: I am giving you a security interest in the following property:
NO COLLATERAL
CROSS COLLATERAL CLAUSE: I also pledge any other present and future security interests (other than my home) to secure repayment of this loan or any other debts owed to you." Plaintiff's Trial Exhibit 4.
At first blush, the terms of the agreement appear contradictory, but this Court finds that the terms can be read consistently. Moreover, the law requires that the terms be read consistently and that reasonable efforts be made to harmonize all of the terms of the contract to ensure that the overall manifest purpose of the parties' agreement is met. 22 N.Y.Jur.2d., Contract § 248; Comprehensive Health Solutions Inc. v. Trustco Bank, 277 AD2d 861 (3d Dept. 2000); Jenkins v. Jenkins, 260 AD2d 380 (2d Dept. 1999). Another general rule of contract law provides that effect and meaning must be given to every term of a contract and it should be read as a whole with every part interpreted with reference to the whole, and if possible interpreted as to give effect to its general purpose. 22 NY Jur.2d., Contracts § 248. "Where the language of a contract is unambiguous and the words are plain and clear, conveying a distinct idea, there is no occasion to resort to other means of interpretation, for effect must be given to the intent as indicated by the language itself. The rules of construction are to be applied to interpret language of ambiguous or doubtful meaning only." 10 NY Jur., Contracts, § 189.
In analyzing the rules of contract law together with the UCC rules, permitting cross-collateralization clauses, this Court finds the terms of the loan to be unambiguous, consistent, and lawful. The seemingly contradictory clauses addressing collateral actually own a distinct meaning with consistent ideas intended in the terms of the note.
More specifically, HVFCU did not require the plaintiff to post any specific piece of collateral prior to issuing the readi-cash loan, even though it could have. On the other hand, HVFCU did require the applicant/plaintiff to specifically agree to a cross-collateralization clause, thereby ensuring a form of security from plaintiff. Indeed, in light of the fact that the plaintiff had taken the loan out on the BMW (2000) with them prior to the readi-cash loan being approved (2001), HVFCU exposed itself to very minimal financial risk by requiring no collateral be posted on the loan, because its financial exposure was minimized by the existence of the cross-collateralization clause, which was secured by the BMW. However, once the BMW was seized, ownership rights forfeited, and the loans were in default, HVFCU lost its security interest in the BMW and turned to its next option to secure the loan. Under the authority set forth in the terms HVFCU had incorporated under the default provision of the "Closed End Note, Security Agreement and Federal Disclosure Statement" and the Truth in Savings Disclosure (section entitled "Lien on Savings/Security Interest") that plaintiff signed at the time of his application, HVFCU secured the note by transferring the funds in plaintiff's checking account to pay the balance — all of which was authorized under the terms of the agreement that the plaintiff executed. In fact, by incorporating these terms, HVFCU fulfilled its obligations to its board of directors which requires credit unions to provide a detailed description of any collateral securing any loan approved by the credit union. Banking Law § 474.
The terms of which provide: "If I am in default, the credit union may demand immediate payment of my entire loan. I understand that the credit union also has other rights, including the right without prior notice to me, to retake the security and after giving notice of sale as required by law, to sell the security in a reasonable manner. I understand if the amount the credit union receives at the sale does not pay my unpaid, balance, Finance Charges, late charges and costs of protecting, retaking, repairing, storing and selling the security and collections costs, reasonable attorney's fees, and court costs, that I agree to pay any remaining amount as permitted by law."
The terms of which provide, "If I am in default on any financial obligation to you, I understand that Federal Law permits you to enforce a statutory lien on all accounts in which I have an ownership interest (except IRA or other retirement accounts) by transferring funds from these accounts to satisfy my obligations. I further understand that you may restrict my access to these accounts."
As such, this Court finds that the plaintiff has failed to meet his burden of proof in establishing liability on the part of the defendant, and finds that the defendant was authorized under the terms of the agreement to seize the account and transfer plaintiff's funds from his checking account to the balance owed on his readi-cash loan.
THEREFORE, it is
ORDERED that judgment is granted in favor of the defendant and the complaint is dismissed in its entirety.
SO ORDERED.