Dennis v. Old Republic Ins. Co., 1-90-2107
| Decision Date | 06 August 1991 |
| Docket Number | No. 1-90-2107,1-90-2107 |
| Citation | 218 Ill.App.3d 637,578 N.E.2d 1010 |
| Parties | , 161 Ill.Dec. 364 Mildred DENNIS, Patricia Murphy, and Richard Moore, Jr., on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. OLD REPUBLIC INSURANCE COMPANY, Defendant-Appellant (LaSalle Bank Lake View, f/k/a Lake View Trust & Savings Bank, Defendant). |
| Court | United States Appellate Court of Illinois |
Lord, Bissell & Brook, Chicago (Edward C. Fitzpatrick and Albert E. Fowerbaugh, Jr., of counsel), for defendant-appellant.
Lawrence Walner & Associates, Ltd., Chicago (Lawrence Walner and Daniel A. Edelman, of counsel), for plaintiffs-appellees.
Plaintiffs Mildred Dennis, Patricia Murphy, and Richard Moore, Jr. brought suit on behalf of themselves and others similarly situated against defendants Old Republic Insurance Company (Old Republic) and LaSalle Bank Lake View (LaSalle Bank) to recover for damages incurred in calculating the refund credit due upon prepayment of alleged retail installment contracts. Old Republic's motion to dismiss the complaint was denied by the circuit court. Thereafter, the circuit court certified the order for interlocutory appeal under Illinois Supreme Court Rule 308 (134 Ill.2d R. 308), raising as issues (1) whether the use of the Rule of 78's in calculating the refund credit due upon prepayment of a loan under $25,000 which is secured by a mortgage on residential real estate is authorized by section 4a of "An act in relation to the rate of interest and other charges in connection with sales on credit and the lending of money" (Interest Act) (Ill.Rev.Stat.1987, ch. 17, par. 6410); (2) whether the use of the Rule of 78's in calculating the refund credit due upon prepayment of a loan is prohibited by section 4 of the Interest Act (Ill.Rev.Stat.1987, ch. 17, par. 6404(3)); and (3) whether the Interest Act applies to the alleged "retail installment" sales contracts entered into by the parties.
Of the three named plaintiffs in this case, Mildred Dennis (Dennis) is the only one with a claim against Old Republic; thus, only Dennis' claim will be discussed. The facts giving rise to Dennis' claim are as follows.
In the spring of 1987, Dennis purchased home improvement goods and services from House of Beauty Builders (House of Beauty). House of Beauty then undertook to secure financing for Dennis from LaSalle Bank. The contract entered into between Dennis and House of Beauty, dated June 25, 1987, provided for the sale of goods and services, including installation of a new bathtub, ceilings, panelling, and flooring and provided for the "payoff of Drexel Bank $2,000.00." Also on June 25, 1987, another document, entitled "retail installment contract," was signed by Dennis. This document, as part of the contract between Dennis and House of Beauty, provided that the amount financed was $13,500 ($2000 to go to Drexel Bank) payable in 84 installments of $265.92. The retail installment contract listed the annual percentage rate, finance charge, and other required disclosures.
In addition, the retail installment contract provided that a mortgage on Dennis' home would be taken as security. House of Beauty then had Dennis sign a trust deed on her home to secure payment.
Thereafter, House of Beauty assigned the contract to LaSalle Bank, which subsequently assigned it to Old Republic after plaintiff refused, due to alleged defects in the work performed, to make payments. In its letter advising Dennis of the assignment, Old Republic described Dennis' obligation as an "installment loan." Old Republic attempted, pursuant to the contract, to accelerate the balance, using the Rule of 78's 1. The contract stipulated that involuntary acceleration, triggered by nonpayment, was to be treated the same as voluntary prepayment. In the event of prepayment, the contract provided that "the Buyer shall receive a rebate of unearned finance charge computed on the Rule of 78's."
Subsequently, Dennis filed suit against LaSalle Bank and Old Republic, alleging that the use of the Rule of 78's to calculate her rebate of unearned finance charges was prohibited by section 4 of the Interest Act (Ill.Rev.Stat.1987, ch. 17, par. 6404(3)). Dennis contended that the actuarial method 2 was the proper method for calculating her rebate.
In response, Old Republic moved to dismiss Dennis' complaint under section 2-615 of the Code of Civil Procedure (Ill.Rev.Stat.1987, ch. 110, par. 2-615). For support, Old Republic contended that the contract, a retail installment contract, was governed, not by the Interest Act, but by the Retail Installment Sales Act (RISA). Section 7 of RISA expressly permits a seller to use the Rule of 78's to calculate the refund credit due upon prepayment of an obligation. (Ill.Rev.Stat.1987, ch. 121 1/2, par. 507.) The circuit court denied Old Republic's motion and certified the order for interlocutory appeal.
Old Republic initially contends that it is authorized by section 4a of the Interest Act to use the Rule of 78's to calculate the prepayment rebate. Section 4a provides, in pertinent part, as follows:
"On money loaned to or in any manner owing from any person, whether secured or unsecured, except where the money loaned or in any manner owing is directly or indirectly for the purchase price of real estate or an interest therein and is secured by a lien on or retention of title to that real estate or interest therein, to an amount not more than $25,000 (excluding interest) which is evidenced by a written instrument providing for the payment thereof in 2 or more substantially equal periodic installments over a period of not more than 181 months from the date of the execution of the written instrument, * * * the debtor may satisfy in full at any time before maturity the debt evidenced by the written instrument, and in so satisfying must receive a refund credit against the total amount of interest added to the principal in an amount at least as great a proportion of the total interest, as the sum of the periodical time balances after the date of payment bears to the sum of all the periodical time balances under the schedule of payments provided for in the written instrument * * *." (Emphasis added.) Ill.Rev.Stat.1987, ch. 17, par. 6410(a).
Despite the language of the statute authorizing a refund "at least as great" as that calculated by the Rule of 78's, Dennis contends that section 4a of the Interest Act does not authorize the use of the Rule of 78's. For support, Dennis relies upon Dechow v. Sko-Fed Credit (1989), 181 Ill.App.3d 367, 130 Ill.Dec. 171, 536 N.E.2d 1382.
In Dechow, the plaintiffs borrowed $49,000 for 15 years from the defendant and secured this loan with a first mortgage on their residence. When the plaintiffs attempted to prepay the loan, the defendant based its computation of the interest refund upon the Rule of 78's pursuant to the contract between the parties. The Dechow court held that use of the Rule of 78's to calculate the prepayment refund was improper. In so holding, the court reasoned that "it is untenable to suggest that the interest 'accrue' according to the Rule of 78's, since during early periods of long-term loans, the amounts constituting interest under the Rule of 78's * * * will generally exceed what has actually been collected according to the payment schedule." (Dechow, 181 Ill.App.3d at 372, 130 Ill.Dec. 171, 536 N.E.2d 1382.) Because of the resulting inequity, "the lender on a loan secured by a mortgage on residential real estate, upon prepayment, may only collect additional interest at the annual rate, essentially prorated over the period since interest on the principal balance was last paid." (Dechow, 181 Ill.App.3d at 372-73, 130 Ill.Dec. 171, 536 N.E.2d 1382.) The Dechow court further held that, despite section 4a's inapplicability to the case, if section 4a were deemed applicable, it would not "specifically authorize computation of interest due by any method other than the actuarial method * * *." Dechow, 181 Ill.App.3d at 371, 130 Ill.Dec. 171, 536 N.E.2d 1382.
Notwithstanding the Dechow holding, it appears that section 4a does indeed authorize, or at least does not prohibit, the use of the Rule of 78's. Unlike Dechow, Dennis' installment contract in the instant case was for an amount less than $25,000. Thus, unlike Dechow, the facts in the instant case fall within the purview of section 4a. Moreover, despite language to the contrary in Dechow, section 4a of the Interest Act allows for the use of the Rule of 78's in calculating the prepayment refund; the underlined language in the above quoted portion of section 4a is simply the formula for the Rule of 78's. See Lanier v. Associates Finance, Inc. (1985), 134 Ill.App.3d 183, 89 Ill.Dec. 221, 479 N.E.2d 1227 (); cf. Ortegel v. ITT Thorp Corp. (1991), 210 Ill.App.3d 669, 155 Ill.Dec. 405, 569 N.E.2d 586.
In the instant case, Dennis' contract falls within the purview of section 4a of the Interest Act. The amount of the money loaned is less than $25,000 and the written instrument evidencing Dennis' contract provided for less than 181 monthly installments. Consequently, as section 4a allows for a prepayment refund of an amount at least as great as that calculated using the Rule of 78's, the use of the Rule of 78's is proper in this case as the minimum amount of prepayment refund a lender must return.
Old Republic next contends that section 4 of the Interest Act does not prohibit the use of the Rule of 78's in calculating the prepayment refund in the instant case. Specifically, Old Republic maintains that section 4 does not conflict with section 4a of the Interest Act. In the alternative, Old Republic maintains that any conflicts should be resolved in favor...
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