Bokros v. Associates Finance, Inc.

• Decision Date: 06 December 1984
• Docket Number: No. 84 C 6126.,84 C 6126.
• Parties: Csaba BOKROS, Plaintiff, v. ASSOCIATES FINANCE, INC., Defendant.
• Court: U.S. District Court — Northern District of Illinois

607 F. Supp. 869

Csaba BOKROS, Plaintiff, v. ASSOCIATES FINANCE, INC., Defendant.

No. 84 C 6126.

United States District Court, N.D. Illinois, E.D.

December 6, 1984.

Andy Norman, Chicago, Ill., for plaintiff.

Andrew B. David, Bob Clark, Jr., Arvey, Hodes, Costello & Burman, Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Csaba Bokros ("Bokros") charges Associates Finance, Inc. ("Associates") with violations of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601-1667e,¹ and various state statutory and common law rules. On Associates' motion, this Court dismissed Bokros' original complaint and this action because the limitations periods applicable under TILA (one for rescission and one for damage actions) had run, thus eliminating the sole basis for federal jurisdiction. Bokros then filed an Amended Complaint (the "Complaint") seeking to meet Associates' objections. Associates in turn renewed its Fed.R.Civ.P. ("Rule") 12(b)(6) motion to dismiss, which this Court granted from the bench October 24, 1984. Bokros now moves for a order vacating the dismissal and reinstating the lawsuit. For the reasons stated in this memorandum opinion and order that motion is denied.

Facts²

On July 11, 1979 Bokros entered into an agreement with Robert Thomas & Associates ("Thomas") to borrow $17,000. Part of the loan proceeds — $8,000 — was used to retire a mortgage on Bokros' residence, while more than half — $9,000 — was used to help finance the purchase of a tractor-trailer. Bokros' obligation to repay the principal sum plus finance charges, calling for monthly installments over a five-year period, was secured by a junior mortgage on Bokros' house.

Though Bokros received $17,000 in loan proceeds, the note and security agreement memorializing the loan (the "Note,"³ no copy of which was supplied to Bokros) reflected loan proceeds of $20,000, to which a finance charge of $12,400 was added, for a total repayment obligation of $32,400. While the printed terms of the Note contemplated a loan secured by a security interest, with a space provided for a description of the collateral, no such description was included. Indeed the space allotted for describing collateral other than a motor vehicle simply contained the following handprinted term: "Prepayment penalty of 5% of principal balance will be in effect for 1 yr." Moreover the line provided for specifying the annual percentage rate on the loan was left blank. In two places the Note specified 60 monthly payments of $540 each beginning in August 1979. Bokros also signed and delivered a "business loan" affidavit (Appendix A, the "Affidavit"; see Ill.Rev.Stat. ch. 17, ¶ 6404(c), formerly ch. 74, ¶ 4(c)) attesting (1) he was engaged in the trucking business, doing business as Bokros Trucking, and (2) the loan proceeds were to be used solely to carry on the business (referring specifically to "down payment on tractor-trailer").

In 1981 Bokros and his wife experienced financial difficulties and filed for relief under Chapter 13 of the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 1301-1330. Before that, however, Thomas had assigned the Note to Associates, which filed with the Cook County Recorder of Deeds a mortgage on Bokros' residence reflecting a principal debt of $20,000 plus finance charges. After the assignment Bokros had been making the monthly payments under the Note to Associates, though after the Chapter 13 filing he made payments to the Chapter 13 trustee, who in turn made payments to Bokros' creditors, including Associates. In all Associates has received payments of at least $29,953.93 on the outstanding obligations.

In 1983 Bokros asked Associates for, and received, a copy of the Note. In light of the discrepancy as to principal amount and other omissions, Bokros decided to invoke TILA. On April 24, 1984 he notified Associates he was rescinding the loan under TILA § 1635. Associates refused to honor the rescission, leading Bokros to initiate this lawsuit July 18, 1984.

Claimed Bases for Vacating Dismissal

Bokros makes a three-part argument in support of his motion:

1. Thomas' loan to him was a consumer credit transaction subject to the provisions of TILA.

2. Associates took the Note subject to any claims and defenses Bokros would have asserted against Thomas.

3. Both TILA limitations provisions were tolled because both Thomas and Associates fraudulently concealed from Bokros his right to rescind the loan.

This opinion will consider each contention in turn.

1. Applicability of TILA

TILA § 1603(1) exempts from TILA's provisions:

Credit transactions involving extensions of credit primarily for business, commercial or agricultural purposes, or to government or governmental agencies or instrumentalities, or to organizations.

To determine whether an extension of credit falls within that exemption, the court "must examine the transaction as a whole and the purpose for which the credit was extended." Tower v. Moss, 625 F.2d 1161, 1166 (5th Cir.1980).

Bokros argues the loan does not qualify as primarily for business or commercial purposes, because nearly half its proceeds were used to retire Bokros' existing residential mortgage. See Gallegos v. Stokes, 593 F.2d 372, 375 (10th Cir.1979) (loan extended for purchase of a pickup truck for both personal and business use was subject to TILA's disclosure requirements).

That contention is of course belied by the representations in the Affidavit, in which Bokros explicitly affirmed the loan proceeds were to be used for business purposes. While the Affidavit is not conclusive on that score, given the necessity to examine the transaction as a whole, it is strong evidence of the loan's character. But even apart from the all-or-none characterization in the Affidavit, on Bokros' own current statement of the facts (Complaint Count I ¶ 3) more than half the proceeds — $9,000 of the $17,000 — were in fact used for down payment on a tractor-trailer for his business (unquestionably a "business" or "commercial" purpose).

After all TILA § 1603 does speak in terms of "primarily." And even though Gallegos, 593 F.2d at 375 did talk of "a factual issue to be resolved by the trier of fact," it was referring to a mixed factual bag with permissible inferences going either way. By contrast Tower, which said "the nature of the credit transaction is ultimately determined by the entire surrounding factual circumstances" (625 F.2d at 1166 n. 4), considered a set of facts that were not in dispute and resolved the TILA exemption question as a matter of law (id. at 1166-67). It is worth noting that is precisely how courts deal with the analogous (or, rather, even more factually oriented) question whether the "dominant purpose" of a contract is for sale of goods or for services, governing the applicability vel non of UCC Article 2; see, e.g., WICO Corp. v. Willis Industries, 567 F.Supp. 352, 355 (N.D.Ill.1983) and cases cited there.

If "primarily" is to have any substantive content (as it must), in the context of a loan like Bokros' — taken out for two discrete purposes — it must refer to the use of more than half the funds. That use, for purchase of the tractor-trailer, was concededly for "business or commercial ... purposes." Because the loan thus involved an "extension of credit primarily for business or commercial ... purposes," TILA was inapplicable to the loan under TILA § 1603(1) as a matter of law.

This opinion could end right now. But because Bokros must founder on still another ground, it may be worth some further discussion on the assumption the primary purpose of the loan could pose a factual question. If so, the principles of Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957), recently reaffirmed in Hishon v. King & Spalding, ___ U.S. ___, 104 S.Ct. 2229, 2233, 81 L.Ed.2d 59 (1984), would require going forward.

2. Liability of Associates as Assignee

TILA § 1641 defines the scope of an assignee's liability:

(a) Except as otherwise specifically provided in TILA, any civil action for a violation of TILA ... which may be brought against a creditor may be maintained against any assignee of such creditor only if the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement.

However a different rule controls the right to rescission provided by TILA § 1635. On that score TILA § 1641(c) provides:

Any consumer who has the right to rescind a transaction under section 1635 of this title may rescind the transaction as against any assignee of the obligation.

That unequivocal language is confirmed by the legislative history (S.Rep. No. 368, 96th Cong., 1st Sess. 32-33, reprinted in 1980 U.S.Code Cong. & Ad.News 236, 268):

In addition, this section eliminates ambiguity on the question of assignee liability for rescission by stating explicitly that a consumer's exercise of this right is effective against an assignee. Without such protection for the consumer, the right of rescission would provide little or no effective remedy.

Thomas' assignment of the loan, in other words, did not suspend Bokros' rights under TILA § 1635, even as against Associates.⁴

3. Limitations Analysis

Under TILA § 1635(a), a debtor who has entered into a credit transaction subject to TILA and who, as part of the transaction, has granted the creditor a security interest in his principal dwelling:

shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later, by notifying the creditor, in accordance with regulations of the Board, of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject

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