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AMBRE v. JOE MADDEN FORD

April 4, 1995

LAURIE AMBRE, Plaintiff,
v.
JOE MADDEN FORD, FORD MOTOR COMPANY, and BANK ONE, LAGRANGE, Defendants.



The opinion of the court was delivered by: DAVID H. COAR

 On September 26, 1992, plaintiff Laurie Ambre ("Ambre") purchased from defendant Joe Madden Ford ("Madden") a "new" 1992 Ford Explorer. To finance her purchase, Ambre entered into a retail installment contract with Madden; Madden, in turn, assigned the installment contract to Bank One, LaGrange ("Bank One"). *fn1" Under the terms of the installment contract, Bank One was granted a purchase-money security interest in the Explorer. *fn2" The installment contract also provided that

 
"upon the occurrence of any event of default, the holder of this contract shall have the rights and remedies provided by Article 9 of the Illinois Uniform Commercial Code, including, but not by way of limitation, the rights of the holder (a) to take immediate possession of the motor vehicle, with or without judicial process, and for such purpose, to enter upon the premises where it may be located; . . .

 (Mot. Turnover of Collateral, Exh. A at 2, P4).

 Bank One moves this court for entry of a order directing Ambre to "turn over" instanter the 1992 Explorer to Bank One in accordance with its in rem lien for purchase money advanced. Bank One perfected its lien in accordance with the requirements of the Illinois Vehicle Code, see 625 ILCS 5/3-202, and is named as the "First Lienholder" on the Certificate of Title of Vehicle issued to Ambre by the Illinois Secretary of State's Office. (Mot. Turnover of Collateral, Exh. B). Bank One's lien is governed by Article 9 of the Illinois Uniform Commercial Code ("Illinois UCC). Bank One maintains that it has an independent right to enforce its lien regardless of the merits of Ambre's case.

 Ambre contends, however, that she has a possessory security interest in the Explorer under Article 2, section 711(3) of the Illinois Uniform Commercial Code. *fn3" Her security interest represents the amount of principal paid through her monthly installment payments and expenses relating to the inspection, care and custody of the vehicle. *fn4" Ambre further contends that her section 2-711(3) security interest has priority over Bank One's purchase-money security interest. Ambre's priority argument is based upon the following provision contained in the installment contract:

 
Notice: any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.

 This notice, which is known as the "FTC Rule," is included in the contract pursuant to 16 C.F.R. section 433.2. *fn5"

 Ambre argues that the FTC Rule acts as a subordination clause because it placed Bank One, the assignee, on notice that its rights under the agreement are subject to all defenses and/or claims that Ambre has against Madden, the seller. Under this theory, Ambre's security interest under section 2-711(3) would be a "claim" within the meaning of the FTC Notice such that Bank One's purchase-money security interest would be "subject to" that claim.

 Ambre's argument fails for three reasons.

 First, the purpose of the FTC Rule was to modify how the holder in due course rule affected consumer purchases of goods or services on credit; it was not intended to modify the priority of security interests in the purchased goods. Under the holder in due course rule, a consumer's obligation to pay for goods or services was not conditioned upon the seller's corresponding duty to perform his promises. See Guidelines on Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses, 41 Fed. Reg. 20,022 (1976) (codified at 16 C.F.R. § 433.1 et seq.) (hereinafter "Guidelines"). As such, if a consumer purchased on credit goods that ultimately proved to be defective, his or her obligation to pay the third party creditor for the goods continued despite the seller's failure to perform. The Federal Trade Commission considered this outcome an anomaly because the creditor's right to payment was superior to that of the seller, whose right to payment was conditioned upon performance of its obligations. See FTC Preservation of Consumers' Claims and Defenses: Final Regulations, Proposed Amendment and Statement of Basis and Purpose, 40 Fed. Reg. 53,507 (1975) (codified at 16 C.F.R. § 433.1 et seq.). The FTC adopted its rule to remedy this anomaly and to redistribute the costs occasioned by seller misconduct in credit transactions to the creditor rather than the consumer. Id. at 53,522-23. The FTC Rule "preserves the consumer's rights to assert against the creditor any legally sufficient claim or defense against the seller." Guidelines, 41 Fed. Reg. at 20,023. In this manner, the FTC Rule ensures that the consumer's duty to pay the creditor is not independent of the seller's duty to perform its obligations. Importantly, "the Rule does not create new rights or defenses. The words 'Claims and Defenses' which must appear in the Notice are not given any special definition by the Commission. The phrase simply incorporates those things which, as a matter of other applicable law, constitute legally sufficient claims and defenses in a sales transaction." Id. at 20,023-24.

 The FTC Rule thus does not determine priority of security interests or otherwise subordinate a creditor's purchase-money security interest to the security interest of a buyer created under UCC 2-711(3). Indeed, the FTC's lengthy explanation of its Rule does not mention priority of security interests or otherwise analyze whether the notice has the effect of subordinating a creditor's security interest to a security interest held by a buyer. Since the FTC Rule must be printed in the text of every consumer credit contract, the FTC most certainly would have addressed this issue had the Rule been intended to affect priority of security interests. *fn6"

 Second, the priority of security interests for motor vehicles is determined exclusively by the administrative regulations of the Illinois Vehicle Code. See 92 Ill. ...


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