Skip to main content

Search

Unfair and Deceptive Acts and Practices: 10.5.3.1 General

Another way to finance a purchase is for the seller to arrange for financing that is directly provided by a third-party lender. Then that lender is not the seller’s assignee and under common law does not step into the shoes of the seller. Nevertheless, the FTC Holder Rule generally applies to this transaction and makes the lender or the lender’s assignee subject to all claims and defenses the consumer can raise against the seller.

Unfair and Deceptive Acts and Practices: 10.5.6.1 General

Often the consumer will obtain credit not from a seller, but directly from a lender, and the consumer has claims or defenses not against the seller but directly against the lender that arise from the nature of the loan origination or the terms of the loan. Examples might include payday loans, home equity loans, loans to purchase a home, or auto title loans.

Unfair and Deceptive Acts and Practices: 10.5.6.2 The Elements of Holder-in-Due-Course and the Shelter Rule

An assignee attains holder-in-due-course status, and thereby avoids most defenses the consumer could raise against the assignor, if it is: (1) assigned a negotiable instrument and (2) is a holder for value, who takes the instrument in good faith and without notice of various items listed in U.C.C. § 3–302(a)(2).

U.C.C. § 3–104(a) sets out seven basic requirements for a note to be a negotiable instrument, a precondition to holder-in-due-course status. The note must:

Unfair and Deceptive Acts and Practices: 10.5.6.3.1 No holder in due course in home improvement contracts or other credit sales

When a home improvement contractor or any other seller of goods or services enters into a retail installment contract with the consumer, the FTC Holder Rule voids any claim of holder-in-due-course status or any waiver-of-defense clause for any assignee of that credit obligation.347 The same result is reached when the home improvement contractor or other seller refers the consumer to a lender or has a business relationship with a lender who gives the consumer a purchase money loan.

Unfair and Deceptive Acts and Practices: 10.5.6.3.2 No holder in due course in land installment sales

In a land installment sale, the seller is the originating creditor, and the credit obligation will be evidenced by a detailed contract with many conditions written into the contract. To be negotiable an instrument must contain a written promise to pay money that must be unconditional, and there must be no other undertaking. The typical land installment sales contract has many such undertakings, including that the seller will turn over the land upon full payment.353 The drafters of the 1990 version of Article 3 stated:

Unfair and Deceptive Acts and Practices: 10.5.6.3.6 Option ARMs

U.C.C. § 3–104(a) requires that a negotiable instrument contain a promise to pay a fixed amount of money. An “option ARM” note may fail to meet this requirement. An option ARM is an adjustable rate mortgage that sets an initial monthly payment that is too low even to pay the interest that accrues on the loan, and provides that the unpaid interest is to be added to the principal.

Unfair and Deceptive Acts and Practices: 10.5.6.3.8 No holder in due course when borrower delinquent prior to first transfer of instrument

To be a holder in due course the holder must take the instrument without notice that the note is overdue.376 Thus a transferee cannot become a holder in due course if it is on notice that the note is delinquent. It can still acquire the rights of a holder in due course under the shelter rule if it takes the note from a holder in due course or someone with the rights of a holder in due course.

Unfair and Deceptive Acts and Practices: 10.5.6.3.9 No holder in due course when assignee takes in bad faith or is on notice of consumer defenses

To be a holder in due course the holder must take the instrument without notice that the note lacks an authorized signature or has been altered; that someone else has a claim to the instrument; or that any party has a defense or a “claim in recoupment” (a claim arising out of the transaction that gave rise to the instrument).377 Defects apparent on the face of the documents, such as unfair contract terms, Truth in Lending Act violations, or usurious interest rates, should defeat holder-in-due-course status.

Unfair and Deceptive Acts and Practices: 10.5.6.3.10 No holder in due course when note comes with “luggage” or incorporates mortgage or other provisions

To be negotiable, a note must contain a written promise to pay money that is unconditional and there must be no other undertaking. In order to have an unconditional promise to pay, the note itself must not contain an express condition.384 Additionally, the note cannot be “subject to” or “governed by” another document or obligation.385

Unfair and Deceptive Acts and Practices: 10.6.2.1 Consumer Claims Within the Merchant’s Insurance Coverages

A source of recovery that is often available regardless of the seller’s solvency is the seller’s insurance policy. Sellers typically purchase insurance on a voluntary basis to protect themselves from lawsuits and other potential losses. If the policy applies to the type of claims the consumer has against the merchant, the consumer may be able to recover even if the seller is otherwise judgment-proof.

Unfair and Deceptive Acts and Practices: 10.6.2.2 Is There Insurance in Place?

Even if an insurance policy will pay on the consumer’s claim, another issue is whether the now insolvent company kept the insurance coverage in force. If the insurance coverage pays on claims arising during the insurance policy, then the question is whether the coverage was in force at the time of the UDAP violation. If the coverage pays only on claims filed during the policy period, then the coverage will have to be in force at the time the consumer files the UDAP claim in court.

Unfair and Deceptive Acts and Practices: 10.6.3 Consumer Recovery Funds

A number of states have set up consumer recovery funds, either for particular industries or for all consumer transactions. For example, recovery funds for real estate transactions are common, a few states have recovery funds for motor vehicle transactions,419 and a number of states have recovery funds for students defrauded by for-profit schools.420

Unfair and Deceptive Acts and Practices: 10.7 UDAP Claims Against Sellers or Creditors Filing for Bankruptcy

Frequently, a company engaging in unfair or deceptive practices will teeter on the brink of insolvency. The company may file for bankruptcy protection before the UDAP claim can be brought or will respond to UDAP actions or judgments by filing for bankruptcy. Consumers should not treat this as the end of the matter.

The bankrupt entity may not be the only liable party. As discussed throughout this chapter, UDAP claims are often available against a wide variety of parties that have some involvement in the scam.

Unfair and Deceptive Acts and Practices: 10.8.3 Survival of Action After Defendant’s Death

When a UDAP defendant dies during the pendency of a UDAP case, the state’s general statute about survival of actions should be consulted.458 The legal analysis may be the same when a UDAP defendant is deceased as when the plaintiff is deceased and, in that case, the action is likely to survive.459 Even where a survival statute does not appear to apply to the UDAP claim, the court may hold that the claim survives because of the remedial purposes of the UDAP statut