Edwards v. Your Credit Inc.

• Decision Date: 21 July 1998
• Docket Number: No. 97-30826,97-30826
• Citation: 148 F.3d 427
• Parties: Connie EDWARDS, Plaintiff-Appellant, v. YOUR CREDIT, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 427

148 F.3d 427

Connie EDWARDS, Plaintiff-Appellant, v. YOUR CREDIT, INC., Defendant-Appellee.

No. 97-30826.

United States Court of Appeals, Fifth Circuit.

July 21, 1998.

As Amended on Denial of Rehearing and Rehearing En Banc Aug. 17, 1998.

Daniel A. Edelman, Louise T. Walsh, Cathleen M. Combs, James O. Latturner, Edelman & Combs, Chicago, IL, Garth Jonathan Ridge, Baton Rouge, LA, for Plaintiff-Appellant.

Claudia Sue Dunn, Pickering Cotogno, New Orleans, LA, Harold D. Stratton, Jr., Stephen Dean Ingram, Stratton & Cavin, Albuquerque, NM, for Defendant-Appellee.

Franklin G. Burt, Markham R. Leventhal, Farrokh Jhabvala, Jorden, Burt, Berenson & Johnson, LLP, Miami, FL, for Consumer Credit Ass'n, Amicus Curiae.

Appeal from the United States District Court for the Middle District of Louisiana.

Before GARWOOD, SMITH and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Connie Edwards ("Edwards") appeals the district court's grant of summary judgment in favor of Your Credit, Inc. ("Your Credit"). Edwards alleges that Your Credit violated the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq., and Regulation Z, 12 C.F.R. § 226, by improperly disclosing an insurance premium on her loan financing applications. She contends that Your Credit should have included the premium in the finance charge rather than in the amount financed on the applications, an error that allegedly resulted in the understatement of the finance charge and the annual percentage rate ("APR"). Finding a genuine dispute of material fact to exist, we reverse and remand.

I

Edwards financed the purchase of a TV and VCR on two separate occasions with Your Credit, a consumer finance company. Your Credit makes small loans to consumers to finance the purchase of consumer goods at high interest rates, and in return, takes back a security interest in the item financed. Your Credit does not file a Uniform Commercial Code-1 ("UCC") financing statement to perfect its security interest; instead, it purchases nonfiling insurance. This nonfiling insurance, as we discuss below, protects Your Credit from losses sustained solely as a result of its failure to file a financing statement. ¹

On each occasion, Edwards purchased an item costing $100. Each time, when Edwards completed a loan application, Your Credit disclosed to her that it had added $7.38 as a premium for credit life insurance and $20 as a premium for nonfiling insurance to the item's cost as part of the amount financed, for an amount financed of $127.38. Based on an APR of 168.89 percent, Your Credit then calculated the finance charge on this $127.38, which came to $39.95. Thus, Edwards paid a total of $167.33 on each occasion, or $67.33 in financing costs for each $100 purchase.

Using the $20, Your Credit paid a premium under a master nonfiling insurance policy (the "policy") that Voyager Property and Casualty Insurance Company ("Voyager"), a separate and unrelated insurance company, had previously issued it. The policy provided, in pertinent part, that it covers losses sustained where Your Credit is damaged through being prevented from obtaining possession of the secured property or enforcing its rights under the security agreement "solely as the result of the failure of the Insured duly to record or file the Instrument with the proper public officer or public office." Voyager's agent, Consumer Insurance Associates, Inc. ("CIA"), administered the policy. The Administrative Services Agreement between Voyager and CIA gave CIA the "sole right to pay, compromise, reject or deny any such [nonfiling] claim."

Edwards filed a class action lawsuit alleging that Your Credit had violated TILA Regulation Z, and state law ² by improperly disclosing the nonfiling insurance premium in the amount financed. She alleged that by including the premium in the amount financed rather than in the finance charge, Your Credit had understated the finance charge and the APR. If Your Credit had properly included the premium in the finance charge, Edwards alleged that the APR would have been 263 percent, rather than 168.89 percent. Because Your Credit calculated the finance charge based on the amount financed, Edwards also argued that it improperly charged her interest on the premium when it included the premium in the amount financed.

Edwards premised her claim on two alternative theories. She first argued that although the policy required Voyager to pay for losses sustained solely as a result of Your Credit's failure to file a financing statement, the policy did not reflect the actual practices of Your Credit and Voyager because Your Credit routinely submitted and Voyager (through CIA) routinely paid claims for any loss, no matter what the cause. In other words, Edwards argued that the claims practices of Your Credit and Voyager transformed the policy into a general default insurance policy for purposes of the proper TILA disclosure method, and that TILA therefore required that the premium be included in the finance charge. Second, Edwards claimed that Voyager and Your Credit had an informal understanding pursuant to which Voyager would cancel the policy if Your Credit submitted aggregate claims valued in excess of 89.25 percent of the aggregate premiums paid. This 89.25 percent figure allegedly served as an informal "stop-loss" provision and prevented the risk of loss from shifting from Your Credit to Voyager. No risk having shifted, Edwards reasoned, Your Credit had effectively retained the premium as a sort of self-insurance or bad-debt reserve, which again required Your Credit to include it in the finance charge.

Prior to ruling on whether to certify the suit as a class action, the district court granted summary judgment in favor of Your Credit. The court first noted that the policy's language unambiguously established that the policy covered losses due to the failure to file a financing statement. It then purported to look behind the policy's language to determine whether Voyager and Your Credit's claims practices had "reformed" the policy into general default insurance, either through mutual error or fraud. It concluded that although Voyager may have paid claims for which it was not liable, no mutual error or fraud had occurred because both Voyager and Your Credit had intended the policy to cover nonfiling insurance. The court also looked at summary judgment record deposition testimony to determine that the 89.25 percent figure was only an internal figure that Voyager used to calculate its expected profits and losses and not an informal stop-loss agreement. Finding no evidence that Your Credit was aware of this figure, the court rejected this argument as well, and granted summary judgment in favor of Your Credit. Because the court concluded that Your Credit did not violate TILA, it did not address Your Credit's arguments that the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), preempted this action. Edwards' timely appeal followed.

II

We review a district court's grant of summary judgment de novo. See New York Life Ins. Co. v. Travelers Ins. Co., 92 F.3d 336, 338 (5th Cir.1996). We also review district court determinations of state law de novo. See Salve Regina College v. Russell, 499 U.S. 225, 239, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991). Summary judgment is appropriate when the record discloses "that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. C IV. P. 56(c). The moving party bears the initial burden of identifying those portions of the pleadings and discovery in the record that it believes demonstrate the absence of a genuine issue of material fact, but it is not required to negate elements of the nonmoving party's case. See Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). Once the moving party meets this burden, the nonmoving party must set forth specific facts showing a genuine issue for trial and not rest upon the allegations or denials contained in its pleadings. See F ED. R. C IV. P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-57, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986). Factual controversies are construed in the light most favorable to the nonmovant, but only if both parties have introduced evidence showing that an actual controversy exists. See Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994) (en banc).

III

Congress enacted TILA to promote the "informed use of credit ... [and] an awareness of the cost thereof by consumers" by "assur[ing] a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him." 15 U.S.C. § 1601(a); see also Beach v. Ocwen Fed. Bank, --- U.S. ----, 118 S.Ct. 1408, 1409-10, 140 L.Ed.2d 566 (1998); Mourning v. Family Publications Serv., Inc., 411 U.S. 356, 363-69, 93 S.Ct. 1652, 1657-60, 36 L.Ed.2d 318 (1973); Fairley v. Turan-Foley Imports, Inc., 65 F.3d 475, 479 (5th Cir.1995). TILA requires a lender to disclose, inter alia, three pieces of information to a borrower: the amount financed, the finance charge, and the APR. See 15 U.S.C. § 1638. The APR is calculated by reference to the duration of a loan, its payment terms, and the finance charge. See 15 U.S.C. § 1606; First Acadiana Bank v. FDIC, 833 F.2d 548, 550 (5th Cir.1987).

TILA defines the finance charge as the "sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit." 15 U.S.C. § 1605(a); 12 C.F.R. § 226.4(a). A finance charge includes a "[p]remium or other charge for any guarantee or insurance protecting the creditor against the obligor's default or other credit loss." § 1605(a)(5); 12 C.F.R. § 226.4(b)(5). Some charges do not have to be included in the finance charge, including filing fees paid to public officials to...