Are Security Deposits Security Interests - The Proper Scope of Article 9 and Statutory Interpretation in Consumer Class Actions

Part I of this article critiques this strand of decisions (referred to collectively throughout the article as the "security deposit cases") and demonstrates that the cases rest upon a flawed understanding of Article 9's scope provisions. In these cases, courts have borrowed landlord-tenant law's traditional distinction between a "debt" and a "pledge"-a distinction used in landlord-tenant law to justify a baseline rule under which title to a security deposit passes entirely to the landlord, with the landlord having no positive duty to invest the deposit or pay interest to the tenant. As Part I explains, the security deposit cases wrongly conclude that the drafters of Article 9 intended to incorporate this distinction and exclude lease security deposits from Article 9's scope. As Part I demonstrates, the reasoning of these cases necessarily exalts form over substance to a level that one cannot reconcile with Article 9's scope provisions-the interpretation of which should be guided by economic substance rather than form.

As Part I concludes, courts should treat lease security deposits as Article 9 security interests and resolve the "interest on security deposits" issue by reference to Section 9-207 (except where other positive law or the parties' contrary agreement displace Section 9-207's applicability).