Basham v. Finance America Corp.

• Decision Date: 16 August 1978
• Docket Number: Nos. 77-2029,s. 77-2029
• Parties: 26 UCC Rep.Serv. 787 David J. BASHAM, Linda C. Basham, Gregory D. Vogelsang and Donna I. Vogelsang, Plaintiffs-Appellants, v. FINANCE AMERICA CORPORATION, Defendant-Appellee. *through 77-2032, 77-2179, 77-2180, 78-1058 through 78-1069 and 78-1198.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 918

583 F.2d 918

26 UCC Rep.Serv. 787

David J. BASHAM, Linda C. Basham, Gregory D. Vogelsang and Donna I. Vogelsang, Plaintiffs-Appellants, v. FINANCE AMERICA CORPORATION, Defendant-Appellee. ^* Nos. 77-2029 through 77-2032, 77-2179, 77-2180, 78-1058 through 78-1069 and 78-1198.

United States Court of Appeals Seventh Circuit.

Argued June 14, 1978.

Decided Aug. 16, 1978.

Rehearing Denied in Nos. 77-2029 and 77-2030 Sept. 21, 1978.

Barry M. Barash, Galesburg, Ill., for plaintiffs-appellants.

William T. Kirby, Chicago, Ill., for defendant-appellee.

Before CUMMINGS, SPRECHER and BAUER, Circuit Judges.

SPRECHER, Circuit Judge.

This case is a consolidation of nineteen Truth in Lending actions which were either dismissed or upon which summary judgment was granted for defendants. Numerous issues are raised, the primary ones being the liability of creditors when disclosures are made in conformity with Federal Reserve Board ("Board") regulations, official staff interpretations or unofficial staff letters; the extent of required disclosure by a creditor of a security interest in after-acquired property; the compliance of various loan forms with the requirement that the disclosures therein be made clearly, conspicuously and in meaningful sequence; and whether the one-year statute of limitations on Truth in Lending actions applies to counterclaims filed by a debtor in response to a secured creditor's claim or a claim for reclamation.

I

These appeals arise out of alleged violations of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601, Et seq., The regulations promulgated thereto ("Regulation Z"), 12 C.F.R., part 226, the Illinois Uniform Commercial Code ("UCC"), Illinois Revised Statutes 1975, chapter 26, §§ 1-101, Et seq., And the Illinois Consumer Fraud Act, Illinois Revised Statutes 1975, chapter 121 1/2, §§ 261, Et seq.

All of the creditors and the transactions described in the complaints are subject to regulation under TILA, Regulation Z, the Uniform Commercial Code and the Consumer Fraud Act. All of the transactions were consumer credit transactions within the meaning of 15 U.S.C. § 1602(h), in that the party to whom credit was offered or extended was a natural person, and the money, property, or services which were the subject of the transaction were primarily for personal, family, household, or agricultural purposes. All but one of the nineteen appeals involve close-end consumer loans under 15 U.S.C. § 1639. ¹

All of these cases were decided adversely to plaintiffs upon motions to dismiss or motions for summary judgment and therefore turn almost entirely on the resolution of questions of law involving construction of the statute, regulations and loan documents. For this reason, combined with the fact that most of the legal issues involve more than one case, the facts of individual cases will be discussed only where necessary to resolve an issue or where differing facts would dictate a different result. Otherwise, in the interest of brevity, only a general description of the transaction involved will be given.

II

Plaintiffs' first claim ² is that defendants failed to disclose "(t)he amount of credit of which the obligor will have the actual use, or which is or will be paid to him or for his account or to another person on his behalf" in violation of 15 U.S.C. § 1639(a). ³ This section of the statute requires that a creditor disclose that amount designated by the above quotation in addition to all charges for insurance or other purposes, individually itemized. Finally, these two figures must be added together and disclosed to determine the total amount financed.

Defendants do not deny that they failed to disclose the amount required by § 1639(a)(1). Rather, they contend that their disclosure forms, which only included the individual itemized charges and the total amount financed, were in full compliance with the Board's Regulation Z § 226.8(d)(1), 12 C.F.R. § 226.8(d)(1), which requires disclosure of:

The amount of credit, . . . which will be paid to the customer or for his account or to another person on his behalf, including all charges, individually itemized, which are included in the amount of credit extended but which are not part of the finance charge, using the term "amount financed."

A careful reading of this portion of Regulation Z indicates that it requires only the disclosures spelled out in §§ 1639(a)(2) and (a)(3) of the TILA, which defendants here gave, thereby implicitly allowing the actual proceeds of the loan to remain undisclosed. ⁴

Assuming, without deciding, that defendants must comply with the statute even where it differs from the Board's regulations, ⁵ it is clear that failure to disclose the actual proceeds of the loan violates § 1639(a)(1) of the TILA. Thus we are presented with a situation, accounted for by Congress in 15 U.S.C. § 1640(f), where action in good faith conformity with Regulation Z is found violative of the TILA:

No provision of this section or section 1611 of this title imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule, regulation, or interpretation thereof by the Board or in conformity with any interpretation or approval by an official or employee of the Federal Reserve System duly authorized by the Board to issue such interpretations or approvals under such procedures as the Board may prescribe therefor, notwithstanding that after such act or omission has occurred, such rule, regulation, interpretation, or approval is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.

Since defendants' disclosures have followed the requirements of Regulation Z ⁶ no civil liability may be imposed upon them according to § 1640(f) for having failed to make the disclosure required by § 1639(a)(1). Therefore, the district court properly concluded that no claims existed on this basis. ⁷

III

Plaintiffs claim that defendants' loan documents attempt to grant the creditor an overbroad and unlawful security interest in the debtors' after-acquired consumer goods. ⁸ A creditor desiring to hold a security interest must make the following disclosure under 15 U.S.C. § 1639(a)(8):

A description of any security interest held or to be retained or acquired by the creditor in connection with the extension of credit, and a clear identification of the property to which the security interest relates.

Regulation Z, § 226.8(b)(5), 12 C.F.R. § 226.8(b)(5) requires:

A description or identification of the type of any security interest held or to be retained or acquired by the creditor in connection with the extension of credit, and a clear identification of the property to which the security interest relates or, if such property is not identifiable, an explanation of the manner in which the creditor retains or may acquire a security interest in such property which the creditor is unable to identify. In any such case where a clear identification of such property cannot properly be made on the disclosure statement due to the length of such identification, the note, other instrument evidencing the obligation, or separate disclosure statement shall contain reference to a separate pledge agreement, or a financing statement, mortgage, deed of trust, or similar document evidencing the security interest, a copy of which shall be furnished to the customer by the creditor as promptly as practicable. If after-acquired property will be subject to the security interest, or if other or future indebtedness is or may be secured by any such property, this fact shall be clearly set forth in conjunction with the description or identification of the type of security interest held, retained or acquired.

The legal extent of a security interest is determined according to state law and section 9-204(2) of the Illinois Uniform Commercial Code (UCC) Ill.Rev.Stat. ch. 26, § 1-101 Et seq., provides in relevant part:

No security interest attaches under an after-acquired property clause to consumer goods other than accessions (Section 9-314) when given as additional security unless the debtor acquires rights in them within 10 days after the secured party gives value.

Therefore, plaintiffs argue that defendants violated section 1639(a)(8) of the TILA and section 226.8(b)(5) of Regulation Z by claiming to cover more than UCC section 9-204(2) allows and by failing to disclose the time limitation imposed on such clauses by this section of the UCC.

The leading case in this circuit on the after-acquired property security interest is Tinsman v. Moline Beneficial Finance Co., 531 F.2d 815 (7th Cir. 1976). There this court held that disclosures of security interests that fail to indicate state law limitations on such security interests do not fulfill the disclosure requirements of the TILA and Regulation Z. In particular, debtors' security interest there covered more property than allowed by the statute and also did not disclose that any security interest was limited to property acquired within 10 days after the secured party gives value.

The security interest clauses in three of the four cases involved here do not contain any reference to a time limitation. ⁹ This failure to indicate this limitation on the security interest violates the TILA and Regulation Z under our holding in Tinsman. See also Pollock v. General Finance Corp., 535 F.2d 295, 300 (5th Cir. 1976), Aff'd on rehearing, 552 F.2d 1142, 1144-45 (5th Cir. 1977), Cert. denied, 434 U.S. 891, 98 S.Ct. 265, 54 L.Ed.2d 176 (1977); Johnson v. Associates Finance, Inc., 369 F.Supp. 1121, 1122-23 (S.D.Ill.1974).

Defendants, however, claim reliance on unofficial staff opinions of the Board for the contention that the disclosure here was made in good faith reliance upon Board interpretations of the TILA and therefore subject to no civil liability under section 1640(f). See Federal Reserve Letters Nos. 829, 983 and 1053, CCH Consumer Credit Guide PP 31,151, 31,323, and 31,393...