In re Hanley
| Citation | 111 BR 709 |
| Decision Date | 12 March 1990 |
| Docket Number | Bankruptcy No. 89-80262,89-80875 and 89-71262,89-8087 and 89A-7147.,Adv. No. 89-8084 |
| Parties | In re George Brian HANLEY, Lynda Laureen Hanley, Debtors. Barry M. BARASH, Chapter 7 Trustee for Lynda L. Hanley, et al., Plaintiff, v. ROYCE, INC., d/b/a Royce Rentals, Defendant. In re Richard Charles GROOM, Debtor. Richard C. GROOM, Plaintiff, v. ROYCE, INC., d/b/a Royce Rentals, Defendant. In re Charles LaVerne SPENCER and Georgianne Spencer, Debtors. Charles LaVerne SPENCER and Georgianne Spencer, Plaintiffs, v. ROYCE, INC., d/b/a Royce Rentals, and Dennis J. Cain, Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Central District of Illinois |
Barry M. Barash, Galesburg, Ill., for plaintiffs.
Thomas L. Perkins, Peoria, Ill., for defendants.
Originally, this Court issued its Opinion denying the Defendant's Motions to Dismiss filed in In re Hanley and in In re Groom 105 B.R. 458 (1989). The Defendant then filed Motions to Alter or Amend Judgment. While these two cases were pending, a third case, In re Spencer, was filed against the Defendant, who filed a similar Motion to Dismiss which raised the same issues that are raised in Hanley and Groom. A hearing was held on the two motions to alter or amend judgment and the latest motion to dismiss and they were taken under advisement.
Prior to each of the Debtors filing their separate bankruptcy proceedings, each Debtor had entered into Rental Purchase Agreements (AGREEMENTS) with the Defendant. Although not identical, the AGREEMENTS are similar. Each of the AGREEMENTS sets forth the amount of the cash price of the property subject to the AGREEMENTS and indicates that the cash price is the price at which the Debtors may purchase the property on the date of the AGREEMENTS. The AGREEMENTS then go on to provide for an initial rental period, which is either one or two weeks. The Debtors are not obligated to renew the rental aspect of the AGREEMENTS but at their option may do so for additional periods by sending renewal period lease payments for as long as the Debtors want to renew the AGREEMENTS. The AGREEMENTS indicate the total number and the total amount of rental payments necessary to acquire ownership of the property on the rental payment basis. For example, Lynda L. Hanley's agreement with the Defendant provides the cash price for a clothes dryer is $338.00 plus tax, the initial rental period is two weeks, the renewal period is on a weekly basis, and in order to acquire ownership of the property, the total number of rental payments and the total amount of rental payments is 91 and $788.06, respectively. The Defendant has the obligation to maintain the property. The Debtors are liable for any damage to the property which is in the excess of ordinary wear and tear. They can obtain insurance to cover this risk, but are not obligated to do so. Each AGREEMENT has an Early Buy-Out Option, which permits the Debtors to buy the property at any time during the effective period of the AGREEMENT by paying a price equal to the total of all scheduled payments less the total of payments made, times 50%, except during the first ninety days of the AGREEMENT when the percentage adjustment is 40%.
After the Debtors filed their bankruptcy proceedings, adversary proceedings were filed against the Defendant alleging that the AGREEMENTS violated the Federal Consumer Leasing Act (FCLA), 15 U.S.C. Section 1667 et seq., and regulations promulgated thereto (Regulation M), 12 C.F.R. Part 213, and the Federal Truth-in-Lending Act, 15 U.S.C. Section 1601, et seq., (TILA) and regulations promulgated thereto (Regulation Z), 12 C.F.R. Part 226.
In response, the Defendant filed Motions to Dismiss on the basis that the AGREEMENTS are not subject to the provisions of either FCLA or TILA and the regulations promulgated pursuant thereto. Specifically, the Defendant argued the AGREEMENTS are not consumer leases as defined by the FCLA and Regulation M, because the Debtors have the right to terminate the AGREEMENTS at will after the initial rental period, and therefore they are not contracts for the use of personal property for a period of time exceeding four months, and the AGREEMENTS do not constitute credit sales under TILA, as the Debtors are not obligated to make payments in an amount substantially equivalent to or in excess of the total value of the property subject to the AGREEMENT.
In response, the Plaintiff took the position that the AGREEMENTS are either sales or lease transactions and fall within the scope of one of the two Federal Consumer Protection Acts. In his view, the AGREEMENTS are in fact disguised security agreements and subject to TILA.
This Court's previous Opinion in Hanley and Groom, found that the AGREEMENTS were not subject to FCLA, as to fall within the provisions of FCLA the AGREEMENTS must constitute a consumer lease, and to constitute a consumer lease the AGREEMENTS must obligate the debtor for a period exceeding four months, but as the debtors were not contractually bound to make payments for a period of time exceeding four months, there was no contractual relationship falling within the scope of the definition of the term "consumer lease".
As to the alleged TILA violations, the opinion began with a reference to the following definitions of "credit sale" and "creditor" found in both TILA and Regulation Z. In TILA the term "credit sale" means:
Section 226.2(a) of Regulation Z defines these two terms as follows:
(17) "Creditor" means:
The opinion then addressed the arguments raised by the parties and found that the agreement did not fall within that portion of the definitions pertaining to bailments or leases as there was no penalty associated with termination of the agreements and the debtors did not agree or were not obligated to pay a sum substantially equivalent to or in excess of the value of the property subject to the agreements. They were only obligated to make one small payment with anything else at their option.
However, the opinion went on to find, that notwithstanding the fact the agreements did not fall within the inclusive language referring to bailments and leases, the agreements could constitute a "credit sale" if it could be established the defendant is a "creditor", a term defined to mean a person who regularly extends consumer credit that is subject to a finance charge, and that determination could only be made after a full evidentiary hearing.
In response, the Defendant filed Motions to Alter or Amend Judgment as to the TILA portion of the opinion. The basis of the motions is twofold. First, the Court's construction of TILA and Regulation Z results in an application of the definition in three instances which renders the second alternative, which is expressly stated in the statute and regulation, a nullity since it subsumes within the broad scope of the newly created third alternative. Second, using other definitions found in Section 226.2(a) of Regulation Z, in order to have a "credit sale," the defendant must be a "creditor,"1 and in order to be a "creditor", "consumer credit" must be extended2, and to extend "consumer credit" there must be "credit"3, and to have "credit", a "debt" must be incurred, which is not a defined term under TILA or Regulation Z. The defendant goes on to argue that because the Debtors are not obligated to the Defendant, there is no debt.
The effect of this Court's previous opinion was to delay a determinative ruling until an evidentiary hearing was held. The Defendant, through its Motion to Alter or Amend Judgment seeks to avoid such a hearing and obtain a determinative ruling at the motion stage of the cases. Courts are not disposed to make such a determination at this stage of a case. In Clark v. Rent-it Corp., 685 F.2d 245 (8th Cir.1982), the court held that the plaintiff was entitled to a hearing on the issue of whether a rental agreement with an option to purchase was a credit sale and reversed the district court which had granted the defendant's motion to dismiss for reasons similar to those raised by the Defendant in the cases before this Court. See, also Waldron v. Best T.V. and Stereo Rentals, Inc., 485 F.Supp. 718 (D.Maryland 1979) where the court also refused to decide at...
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