Ortegel v. ITT Thorp Corp.

• Citation: 569 N.E.2d 586,210 Ill.App.3d 669
• Decision Date: 18 March 1991
• Docket Number: No. 2-90-0827,2-90-0827
• Parties: , 155 Ill.Dec. 405 Fred J. ORTEGEL, et al., Plaintiffs-Appellants, v. ITT THORP CORPORATION, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 586

569 N.E.2d 586

210 Ill.App.3d 669, 155 Ill.Dec. 405

Fred J. ORTEGEL, et al., Plaintiffs-Appellants, v. ITT THORP CORPORATION, Defendant-Appellee.

No. 2-90-0827.

Appellate Court of Illinois,

Second District.

March 18, 1991.

Gantar & DeMartini, Ltd., Michael W. Gantar, Antioch, for Fred J. Ortegel and Lucille M. Ortegel.

O'Neill & Bockelman, Scott H. Kenig, O'Neill & Bockelman, P.C., Lake Forest, for ITT Thorp Corp.

Justice McLAREN delivered the opinion of the court:

Plaintiffs, Fred and Lucille Ortegel, appeal from an order of the circuit court which denied their motion for summary judgment and granted summary judgment in favor of defendant, ITT Thorp Corporation, on its cross-motion. The sole issue on appeal is whether the Illinois Interest Act (Ill.Rev.Stat.1989, ch. 17, par. 6401 et seq.) prohibits loan charges from being computed on the basis of the "Rule of 78's" when the loan is a residential real estate mortgage in excess of $25,000. We affirm.

Plaintiffs filed a complaint in the circuit court based on a note executed by plaintiffs on December 29, 1983, and held by defendant. According to the terms of the note, defendant loaned to plaintiffs $44,554.67. The note was to accrue interest at a rate of 19.93%. This resulted in plaintiffs agreeing to pay total finance charges of $43,991.41. Therefore, the total amount of the note was $88,546.08. The note stated in relevant part:

"I promise to pay the Lender the Total of Payments beginning on the due date of the first payment and on the corresponding date of each succeeding month * * *. The final payment is equal to the entire amount remaining unpaid. * * *

* * * * * *

I may prepay in any amount at any time. Upon prepayment in full, I shall be entitled to a credit of any unearned Interest Charges computed according to the Rule of 78. No portion of the Prepaid Finance Charge is refundable." (Emphasis in original.)

The monthly payment amount was $750. The last payment, due on January 4, 1989, was to be in the amount of $44,296.08.

In their amended complaint, plaintiffs alleged that the terms and conditions of the note were in violation of the Interest Act in that: (1) section 4(2)(a), which applies to loans bearing an interest rate in excess of 8%, prohibits prepayment penalties or charges (see Ill.Rev.Stat.1989, ch. 17, par. 6404(2)(a)); (2) section 5 prohibits any charge for a loan except as authorized by statute (see Ill.Rev.Stat.1989, ch. 17, par. 6412); (3) section 4a(f)(13) only allows interest to be computed according to the "Rule of 78's" if the residential mortgage loan is less than $25,000 (see Ill.Rev.Stat.1989, ch. 17, par. 6410(f)(13)); therefore, sections 4a and 5 of the Interest Act prohibit computation according to the "Rule of 78's" for any residential mortgage loan in excess of that amount; and (4) section 6 of the Interest Act provides that, where one knowingly contracts for unlawful interest or charges in connection with any loan, the obligor may recover an amount equal to twice the total of all interest and charges, plus attorney fees and costs (see Ill.Rev.Stat.1989, ch. 17, par. 6413). According to plaintiffs, they were entitled to recovery under section 6 of the Interest Act.

Defendant filed a motion for sanctions, in which it alleged that on October 6, 1989, it filed a complaint for foreclosure on plaintiffs' residence and that, in response to the foreclosure suit, plaintiffs filed the instant action. Defendant believed it was entitled to sanctions because plaintiffs alleged defendant violated sections 4(2) and 4a of the Interest Act, but those paragraphs did not apply to the note. Defendant also filed a motion for summary judgment in which it argued that section 4a of the Interest Act only applies to loans of not more than $25,000. Defendant further argued that under Illinois case law, the Rule of 78's does not violate section 4(2)(a) of the Interest Act.

Plaintiffs, in their motion for summary judgment, argued that they were entitled to judgment as a matter of law based on their interpretation of sections 4, 4a, and 6 of the Interest Act.

The court ruled on the cross-motions in a written order. The court first noted that there were no genuine issues of material fact, and the court could rule as a matter of law. The court recognized that the use of the Rule of 78's in long-term consumer credit transactions has been widely criticized, since a "disproportionate share of the finance charge is allocated to the creditor in the early portion of the transaction, and the refund of the unearned finance charge is lower than when the actuarial method is utilized." The court opined that, in general, the Rule of 78's favors creditors. However, the court did not believe the fairness of the Rule was the issue. Rather, the court believed the issue was whether the Interest Act precluded the use of the Rule of 78's in this cause.

The court examined the relevant case law and statutory history to conclude that section 5 of the Interest Act did not apply. The court then considered, in light of Lanier v. Associates Finance, Inc. (1986), 114 Ill.2d 1, 101 Ill.Dec. 852, 499 N.E.2d 440, and Currie v. Diamond Mortgage Corp. (7th Cir.1988), 859 F.2d 1538, whether the prohibition against prepayment penalties applied to the instant cause. The court found that, under Lanier and Currie, the Rule of 78's did not constitute a prepayment penalty, since the interest charges were assessed at the beginning, and plaintiffs would have paid them regardless of early payment.

The court also decided that the 1986 amendment to subsection 3 of section 4 of the Interest Act had prospective application only and, since the mortgage here was entered into prior to the subsection's enactment, the subsection did not apply. The court also denied defendant's motion for sanctions because the state of the law was not certain on the issue presented. Plaintiffs filed a motion to reconsider, which was denied. This timely appeal followed.

Summary judgment is an appropriate means of disposing of a cause where, as here, there are no genuine issues of material fact. (Ill.Rev.Stat.1989, ch. 110, par. 2-1005(c); Puttman v. May Excavating Co. (1987), 118 Ill.2d 107, 112, 112 Ill.Dec. 722, 514 N.E.2d 188.) Since the facts are not in dispute and the only question is one of statutory interpretation, we may review the issue as a matter of law.

The proper interpretation of a statute must reflect the intent of the legislature. (County of Du Page v. Graham, Anderson, Probst & White, Inc. (1985), 109 Ill.2d 143, 151, 92 Ill.Dec. 833, 485 N.E.2d 1076.) The starting point for this determination is the statutory language itself. (Kirwan v. Welch (1989), 133 Ill.2d 163, 165, 139 Ill.Dec. 836, 549 N.E.2d 348.) Where the language of the statute is certain and unambiguous, the court must enforce the law as written without resorting to supplemental principles of statutory construction. Henry v. St. John's Hospital (1990), 138 Ill.2d 533, 541, 150 Ill.Dec. 523, 563 N.E.2d 410.

Plaintiffs argue that the Interest Act does not authorize the use of the Rule of 78's for determining interest in this case. Specifically, plaintiffs claim that since section 4a of the Interest Act authorizes such a computation method for loans of $25,000 or less and section 4(2)(a) prohibits any charge for prepayment, the use of Rule of 78's is prohibited in residential mortgages over $25,000.

Defendant responds that section 4a is inapplicable here because that section is limited to loans of $25,000 or less, and the loan here was in excess of $88,000. We agree with defendant that section 4a, by its express terms, applies only to loans secured by a mortgage which is of an "amount not more than $25,000." See Ill.Rev.Stat.1989, ch. 17, par. 6410(a).

The section which applies to the note at issue, section 4(2)(a) of the Interest Act, provides:

"Whenever the rate of interest exceeds 8% per annum on any written contract, agreement or bond for deed providing for the installment purchase of residential real estate, or on any loan secured by a mortgage on residential real estate, it shall be unlawful to provide for a prepayment penalty or other charge for prepayment." (Ill.Rev.Stat.1989, ch. 17, par. 6404(2)(a).)

Plaintiffs contend that computation of interest via the Rule of 78's constitutes a prepayment penalty or charge for prepayment.

Before we can determine the validity of plaintiffs' assertion, we must first examine the Rule of 78's. Our supreme court, in Lanier (114 Ill.2d 1, 101 Ill.Dec. 852, 499 N.E.2d 440), has explained the Rule of 78's as follows:

"Under the Rule of 78's, which is also known as the sum-of-the-digits method, a higher percentage of the total finance charge for a loan is attributable to the first months of the loan than is attributable to the last months." (Lanier, 114 Ill.2d at 6, 101 Ill.Dec. 852, 499 N.E.2d 440.)

The simplest example of the operation of the rule is premised on a 12-month loan. The numbers 1 through 12 are added together for a total sum of 78. Then, the finance charges are distributed in increments of 78ths, so that in the first month, the debtor will pay 12/78 of the total finance charge, 11/78 of the total in the second month and so on, until the last payment, which is only 1/78 of the charge.

The effect of this allocation is that if the debtor prepays after the first month, the creditor will have earned 12/78 of the finance charge, and the debtor will be credited 66/78 of the total finance charge. However, if the loan is prepaid after six months, the debtor is only entitled to a credit of 21/78. The detriment of prepaying is less at the beginning and end of the term than during the middle of the loan term. As the supreme court recognized, the Rule of 78's does not provide an accurate approximation of unearned finance charges. Lanier, 114 Ill.2d at 7, 101 Ill.Dec. 852, 499 N.E.2d 440.

Unlike the actuarial method of computation, the Rule of 78's does not...