Garza v. Chicago Health Clubs, Inc.

• Decision Date: 15 September 1972
• Docket Number: No. 71 C 643.,71 C 643.
• Citation: 347 F. Supp. 955
• Parties: Frank A. GARZA, for himself and, as a member and representative of the class described in the complaint, on behalf of all members of the class described in the complaint, Plaintiff, v. CHICAGO HEALTH CLUBS, INC., a corporation, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

347 F. Supp. 955

Frank A. GARZA, for himself and, as a member and representative of the class described in the complaint, on behalf of all members of the class described in the complaint, Plaintiff, v. CHICAGO HEALTH CLUBS, INC., a corporation, et al., Defendants.

No. 71 C 643.

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

September 15, 1972.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Albert Koretzky, Chicago, Ill., for plaintiff.

Michael L. Sklar, Barry A. Pitler, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

McLAREN, District Judge.

The complaint in this class action alleges violations of the Consumer Credit Protection Act, popularly known as the "Truth in Lending Act" (hereinafter "TIL"), 15 U.S.C. § 1601 et seq.; Regulation Z, promulgated by the Federal Reserve Board under TIL, 12 C.F.R. § 226.1 et seq.; and the Illinois Retail Installment Sales Act (hereinafter "RISA"), Ill.Rev.Stat. ch. 121½, § 501 et seq.

I.

Defendant Chicago Health Clubs (hereinafter "CHC") moves to dismiss and strike certain parts of the Second Amended Complaint. CHC's contentions will be dealt with here in the order in which they are raised in its motion.

Paragraph 7(d) of Count I of the complaint alleges that the contract signed by plaintiff Garza violates TIL and Regulation Z by failing to properly disclose that the entire balance would become due immediately on default without demand or notice and without providing for a partial refund of the finance charge in that event. CHC denies that such disclosure is required. Plaintiff's position is that the acceleration of the balance on default is a "prepayment" within Regulation Z § 226.8(b)(6) and (7). This term is not defined in the Regulation and has not been judicially interpreted. CHC argues that the word should be read only to include voluntary prepayment by the debtor before maturity.

It is well recognized that, in the absence of specific technical meaning or legislative definition, words used in statutes and regulations should be accorded their ordinary meaning. See, e. g., Richards v. United States, 369 U.S. 1, 9, 82 S.Ct. 585, 7 L.Ed.2d 492 (1962); United States v. L. R. Foy Construction Co., 300 F.2d 207, 210 (10th Cir. 1962). The ordinary meaning of "prepayment" favors CHC's interpretation. The fact that § 226.8(b)(4) deals separately with "charges payable in the event of late payment" also shows that the drafters of the Regulation saw a difference between default and prepayment. The Court concludes that § 226.8(b)(6) relates to prepayment in its ordinary sense, and that part of paragraph 7(d) which erroneously relies on that section in alleging a failure to provide for a partial refund of the finance charge on acceleration is therefore dismissed.

The first part of paragraph 7(d), which alleges that the acceleration clause was not properly disclosed, nevertheless states a claim upon which relief may be granted. The fact that plaintiff has postulated a faulty theory in support of the claim does not justify dismissal if there are grounds for relief on another theory. See, e. g., Nord v. McIlroy, 296 F.2d 12, 14 (9th Cir. 1961); Huey v. Barloga, 277 F.Supp. 864, 872 (N.D.Ill. 1967). TIL § 128(a)(9), 15 U.S.C. § 1638(a)(9), and Regulation Z § 226.8(b) (4) require the proper disclosure of "charges payable in the event of late payments."

The word "charges" is not defined in the statute or regulations and has not been interpreted in this context by the courts. Black's Law Dictionary 294 (4th ed. 1951) treats "charges" as a synonym for "obligation" and "claim." The courts have defined the word as meaning a pecuniary burden or expense, Sunderland v. Day, 12 Ill.2d 50, 145 N.E. 2d 39, 40 (1957), and "`expenses which have been incurred, or disbursements made, in connection with a contract. . . .'" Weiner v. Swales, 217 Md. 123, 141 A.2d 749, 750 (1958). Considering these definitions and the purpose of the statute and regulation to inform consumers of credit costs and terms so they can effectively choose between sources of credit (TIL § 102, 15 U.S.C. § 1601), it seems clear that the acceleration of the balance of the debt should be considered a "charge" and that the allegations in the first part of paragraph 7(d) are therefore sufficient.

Paragraph 7(f) of Count I alleges that CHC's contract violates TIL and Regulation Z by failing adequately to describe and identify the security interest created by the confession of judgment clause. CHC moves to dismiss on the grounds that the clause itself is the security interest. The clause¹ clearly identifies the property to which it relates as required by TIL § 128(a)(10), 15 U.S.C. § 1638(a)(10). It is placed on the same side of the contract as the signature and above it, in compliance with Regulation Z § 226.8(a)(1). The only remaining basis for the claim in paragraph 7(f) is that the confession of judgment clause does not adequately disclose a "description" of the security interest, as required by TIL § 128(a)(10) and Regulation Z § 226.8(b)(5). The initial question is whether this claim presents an issue of law or fact. The legislative history of TIL is of little help in this regard. However, the Congressional debates on the bills which preceded TIL disclose a general intent that the Federal Reserve Board regulations be specific enough to allow the lending industry to understand and meet the act's requirements. Since § 226.8(b)(5) does not define "description," we must assume that the Board saw it as presenting no serious ambiguity or technical difficulty.

Although "description" could be read as requiring some sort of heading or label, the clause itself explains the consequences of confession of judgment on default. It tells the debtor that a judgment will result in levy and execution on his personal property. Although the clause is written in somewhat legalistic terms, the language is not so confusing that a debtor can not understand it. Recognizing that such a clause, differently worded, might present a question of fact, this is not the case here. The Court therefore holds that the security interest in this case is adequately described and grants CHC's motion to dismiss paragraph 7(f).

Paragraph 7(h) of Count I alleges that CHC's contract violates TIL and Regulation Z by failing to describe the security interest acquired by the confession clause in meaningful sequence by placing the same adjacent to or near other disclosures concerned with default. CHC asserts that this states no claim because the acceleration on default need not be disclosed under the requirements of the act and regulations; thus the confession clause need not be in meaningful sequence with it.

CHC's argument fails for two reasons. First, as shown above, the acceleration clause does fall within the disclosure requirements. Also, there are other charges disclosed in the contract concerning default which are covered by the requirements, to which Regulation Z § 226.6(a) requires that the confession clause be in meaningful sequence. The motion to dismiss paragraph 7(h) is therefore denied.

CHC also moves to dismiss the words "and were otherwise guilty of violating said statute and regulation" from the end of paragraph 7. This conclusory language of course gives CHC no idea of what other violations plaintiff may attempt to prove. The words will therefore be stricken with leave to amend so that plaintiff may specify such other basis he has, if any, for claiming violations of TIL and Regulation Z.

CHC's motion asserts several grounds for dismissing Count II, which is based on alleged violations of the Illinois Retail Installment Sales Act for failure to meet the requirements of pendent jurisdiction. In United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), the Court established the familiar requirement of a "common nucleus of operative fact." This is the test of a federal court's power to hear a state claim. This test is clearly satisfied here owing to the fact that both the federal and state claims are based on the alleged inadequacy of disclosure of the same terms in the same contract.

The grounds for dismissal of Count II asserted by CHC go to whether the Court should, in its discretion, decide not to exercise pendent jurisdiction in this case. The Supreme Court in Gibbs set out several factors to be considered in deciding whether to exercise pendent jurisdiction: judicial economy, convenience and fairness to the parties, the avoidance of needless decisions of state law, and the avoidance of jury confusion. Id. at 726-27, 86 S.Ct. 1130. The exercise of pendent jurisdiction here would result in judicial economy, and CHC has not shown how inconvenience or unfairness would result. The decision of the RISA claims cannot be termed "needless"; plaintiff has alleged substantial violations of the act. CHC asserts that pendent jurisdiction should not be exercised because the trial of the state claims will involve some evidence unnecessary to the federal claims due to differences in the disclosure requirements and defenses. Nevertheless, the great similarity of the sections of RISA and Regulation Z sections alleged to have been violated will result in many common questions of fact. Thus, Jordan v. Montgomery Ward and Co., 317 F.Supp. 948 (D.Minn. 1970), relied on by CHC, is inapposite. The state claims dismissed there required proof "mutually exclusive" of the TIL claims. Id. at 950. The Supreme Court in Gibbs recognized that a strong factor in favor of the exercise of pendent jurisdiction is a close relation of the state claims to questions of federal policy. This factor is present here due to the similarity of the purposes of the federal and state disclosure requirements and the fact that Illinois lenders must comply with both of them. That the RISA sections involved here have not yet been interpreted by the Illinois courts in any published opinion causes some hesitancy, but the obvious...