617 F.2d 1278 (7th Cir. 1980), 79-1950, Valencia v. Anderson Bros. Ford
|Citation:||617 F.2d 1278|
|Party Name:||Olga VALENCIA and Miguel Gonzalez, Plaintiffs-Appellees, v. ANDERSON BROS. FORD and Ford Motor Credit Company, Defendants-Appellants.|
|Case Date:||March 20, 1980|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
[Copyrighted Material Omitted]
Argued Jan. 11, 1980.
Rehearing and Rehearing In Banc Denied April 22, 1980.
Aaron J. Kramer, Chicago, Ill., for defendants-appellants.
Alan A. Alop, Neighborhood Legal Services, Chicago, Ill., for plaintiffs-appellees.
Before SWYGERT, SPRECHER and CUDAHY, Circuit Judges.
SPRECHER, Circuit Judge.
Defendants, Anderson Brothers Ford and Ford Motor Credit Company (Ford), appeal from the district court's order finding them in violation of the Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq. and Regulation
Z, 12 C.F.R. § 226.1 et seq., and dismissing their counterclaim. This appeal presents three issues for our consideration. First, did defendants' failure to disclose an assignment of returned or unearned physical damage insurance premiums as a security interest violate the Act and Regulation Z. Second, if this court finds such a violation, should its ruling be given only prospective effect under the doctrine of Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971) Finally, did the district court properly dismiss without prejudice defendants' counterclaim for the balance of the debt allegedly owed by plaintiffs under the installment contract at issue in this case.
On September 30, 1977, in connection with the purchase of a used 1974 Ford Pinto from Anderson Brothers Ford, the plaintiffs signed an Illinois Automobile Retail Installment Contract. This contract was subsequently assigned for value to Ford Motor Credit Company. The contract revealed that the plaintiffs were borrowing a sum of $1340.00, over a twenty-four month period, at an annual rate of interest of 21.40%. Record on Appeal, Document No. 14, Appendix A.
The contract contains on its face the following disclosure with respect to retention of security interests by the creditor:
Security Interest: Seller shall have a security interest under the Uniform Commercial Code in the Property (described above) and in the proceeds thereof to secure the payment in cash of the Total of Payments and all other amounts due or to become due hereunder.
Record on Appeal, Document No. 14, Appendix A. The reverse side of the contract contains a provision requiring the debtor to purchase and maintain physical damage insurance on the auto. While this insurance apparently may be purchased through the creditor and financed under the contract, the buyer is free to obtain such insurance elsewhere as well. Regardless of the source of the insurance, the contract provides that the debtor assigns to the creditor any returned or unearned premiums payable under the insurance policy. Such premiums may be used to purchase replacement insurance coverage or may be applied to the debt in the discretion of the creditor. Brief of Appellants at 9. In addition, the creditor is given authority to cancel the insurance policy and release or settle any claim with respect thereto. 1
Plaintiffs contracted to purchase the required insurance through Ambassador Insurance Company at an annual premium of $442.00. Because the auto was permanently returned to Anderson Brothers due to mechanical problems on October 17, 1977, no payments were made by plaintiffs on
either the insurance policy or the installment contract. 2 The policy was eventually cancelled for nonpayment of premiums.
On May 3, 1978, plaintiffs filed suit in the court below against Anderson Brothers and Ford, alleging various violations of the Truth in Lending Act, Regulation Z, and the Illinois Motor Vehicle Retail Installment Sales Act, Ill.Rev.Stat. ch. 1211/2, § 561 et seq., including defendants' failure to disclose the assignment of unearned insurance premiums as a security interest. On October 31, 1978, the district court dismissed plaintiffs' complaint for failure to state a claim on which relief could be granted. The court specifically found that an assignment of returned or unearned insurance premiums was not a security interest and thus need not have been disclosed as such on the face of the contract.
Subsequent to its October 31 decision, the district court was informed of the July 28 decision of the Fifth Circuit in Edmondson v. Allen-Russell Ford, Inc., 577 F.2d 291 (5th Cir. 1978), cert. denied, 441 U.S. 951, 99 S.Ct. 2180, 60 L.Ed.2d 1057 (1979). On the basis of that decision, the district court reinstated that portion of plaintiffs' complaint which pertained to disclosure of the assignment of unearned insurance premiums as a security interest. The district court entered summary judgment for the plaintiffs on this claim on June 5, 1979, finding itself in agreement with Edmondson that an assignment of unearned insurance premiums is a security interest that must be disclosed under 15 U.S.C. § 1638(a)(10) and 12 C.F.R. § 226.8(b)(5). The court also dismissed plaintiffs' pendent state law claims. Defendants appeal from the district court's summary judgment order; plaintiffs do not appeal from the dismissal of their other claims.
Defendants also appeal from the district court's dismissal of their counterclaim. The counterclaim, filed shortly after plaintiffs filed the complaint, sought to recover the balance due from plaintiffs on the installment contract. The district court dismissed the counterclaim without prejudice in its judgment entered June 15, 1979. No explanation was given for the dismissal.
The federal Truth in Lending Act, 15 U.S.C. § 1601 et seq., was enacted in 1968
to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit. . . .
15 U.S.C. § 1601. The Act does not regulate consumer credit; rather, it requires disclosure of certain terms and conditions of credit before consummation of a consumer credit transaction. Mirabal v. General Motors Acceptance Corp., 537 F.2d 871, 874 (7th Cir. 1976). The Act is to be liberally construed to ensure achievement of its goal of meaningful disclosure. Johnson v. McCrackin-Sturman Ford, Inc., 527 F.2d 257, 262 (3d Cir. 1975).
One of the credit terms which must be disclosed under the Act is the retention or acquisition of any security interest by the creditor in a consumer credit transaction. 15 U.S.C. § 1638(a)(10). 3 The Act, however,
nowhere defines "security interest." The Federal Reserve Board, pursuant to the authority vested in it under 15 U.S.C. § 1604, 4 promulgated Regulation Z, 12 C.F.R. § 226.1 et seq., which defines "security interest" as follows:
"Security interest" and "security" mean any interest in property which secures payment or performance of an obligation. The terms include, but are not limited to, security interests under the Uniform Commercial Code, real property mortgages, deeds of trust, and other consensual or confessed liens whether or not recorded, mechanic's, materialmen's, artisan's, and other similar liens, vendor's liens in both real and personal property, the interest of a seller in a contract for the sale of real property, any lien or property arising by operation of law, and any interest in a lease when used to secure payment or performance of an obligation.
12 C.F.R. § 226.2(gg). The issue before this court is whether this definition encompasses a debtor's assignment to a creditor of returned or unearned physical damage insurance premiums.
This court is not the first court of appeals to address this issue. Both the Third and Fifth Circuits have held that an assignment of unearned insurance premiums is a security interest which must be disclosed under the TILA and Regulation Z. See Edmondson v. Allen-Russell Ford, Inc., 577 F.2d 291 (5th Cir. 1978), cert. denied, 441 U.S. 951, 99 S.Ct. 2180, 60 L.Ed.2d 1057 (1979); Shanks v. Greenbriar Dodge, Inc., 577 F.2d 296 (5th Cir. 1978); Gennuso v. Commercial Bank & Trust Co., 566 F.2d 437 (3d Cir. 1977). 5 Edmondson
is particularly damaging to defendants' case in that the contract at issue there does not differ in any material respect from the one now before us. Defendants do not attempt to distinguish Edmondson, but rather argue that it was wrongly decided and should not be followed by this court.
The heart of the Edmondson opinion, and the part which draws the greatest fire from defendants, is the Fifth Circuit's reliance on federal law, in the form of Regulation Z, rather than state commercial law to define a security interest for purposes of the TILA's disclosure requirements. Defendants argue that prior decisions of this court indicate that state law is to determine whether a security interest has been created requiring disclosure under the Act. See Basham v. Finance America Corp., 583 F.2d 918, 924 (7th Cir. 1978), cert. denied, 439 U.S. 1128, 99 S.Ct. 1046, 59 L.Ed.2d 89 (1979); Tinsman v. Moline Beneficial Finance Co., 531 F.2d 815, 818 (7th Cir. 1976). 6 Close examination of Basham and Tinsman reveals, however, that this court looked to state law in those cases to determine the scope or extent of security interests clearly claimed by creditors, not to determine whether an unidentified interest was indeed a security interest. This court's recent decision in Bulger v. Thorp Credit Inc., 609 F.2d 1255 (7th Cir. 1979), reveals that an interest may be a security interest for purposes of disclosure under the TILA even though it is not an enforceable security interest under state commercial law. Id. at 1257-58. 7
The Fifth Circuit's decision in Edmondson followed a...
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