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WAREHOUSE FURNISHING v. FARMERS FURNITURE10/10/1997
editor for losses occurring as a result of the lender's not "perfecting any security interest," but it does not allow the lender to exclude a charge for "default" insurance. In sum, Farmers Furniture's nonfiling premiums were used to create a reserve for bad debts and were not used to provide insurance.
Farmers Furniture cites Mitchell v. Industrial Credit Corp., 898 F. Supp. 1518 (N.D.Ala. 1995), for the proposition that the nonfiling fees it charges are insurance premiums and, therefore, are properly included in the amount of money financed, rather than part of the finance charge. First, we note that Mitchell did not involve purchase money security interests in consumer goods (i.e., it did not involve lending the consumer money to buy a particular good). Rather, in Mitchell, the defendant was making loans secured by collateral already owned by the plaintiffs, for which collateral the nonfiling insurance was appropriate. However, the Mitchell court entered a partial summary judgment for one of the plaintiffs, as to whose property a security interest already had been perfected when he was subsequently charged a nonfiling insurance premium:
"The third argument in support of plaintiff Martin's contention that a charge for lien insurance was improperly excluded from the finance charge of his November 17, 1992 loan is that the charge was imposed in addition to perfecting a lien rather than 'in lieu of perfecting a lien,' as required by the Mini-Code. It is undisputed that plaintiff Martin was charged a $15.00 fee for lien insurance in connection with the November 17, 1992 loan he obtained from [the defendant]. [Citation omitted.] This loan was secured by a 1973 Ford pickup and a 1979 Fairmore mobile home. . . . It is also undisputed that at the time . . . Martin obtained this loan and was charged a fee for lien insurance, these same two items which were pledged as security for this loan were the subject of a previous security agreement between Douglas Martin and [the defendant] and that [the defendant] had filed a UCC-1 financing statement covering these two items. [Citation omitted.] Thus, argues Martin, at the time of the execution of the November 17, 1992 loan, [the defendant] was in fact already perfected as to the items of collateral, and therefore, the amount charged for lien insurance was not 'in lieu of perfecting a security interest' as required by the act but was actually in addition to perfection, and as such should have been included in the finance charge. The finance charge on the November 17, 1992 loan is shown to be $328.92, and [the defendant] has admitted that this is the maximum rate permitted by the Mini-Code. [Citation omitted.] Thus, if the fee charged to plaintiff Martin for lien insurance were added to the finance charge, the finance charge would necessarily then exceed the maximum rate permitted by the Mini-Code. [Footnote omitted.] The court agrees with plaintiff Martin, and the undisputed evidence clearly shows that he was charged a $15.00 fee for lien insurance in addition to perfection rather than in lieu of perfection and that this amount should have been included in the amount financed because only fees for insurance in lieu of perfection are excluded from the definition of a finance charge."
898 F. Supp. at 1528 (emphasis added).
In Mitchell, the court held that including the nonfiling insurance premium as part of the amount financed violated the Mini-Code because the security interest was already perfected and, thus, the nonfiling insurance premium was not an insurance charge, but was a finance charge. Stated differently, the security interest was already perfected and the defendant therefore should not have charged the plaintiff for nonfiling
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