Jacobson v. General Finance Corp.

• Decision Date: 24 April 1992
• Docket Number: No. 2-91-0635,2-91-0635
• Citation: 227 Ill.App.3d 1089,170 Ill.Dec. 441,592 N.E.2d 1121
• Parties: , 170 Ill.Dec. 441 Jeffrey M. JACOBSON et al., Plaintiffs-Appellees, v. GENERAL FINANCE CORPORATION, Defendant-Appellant. Second District
• Court: United States Appellate Court of Illinois

Page 1121

592 N.E.2d 1121

227 Ill.App.3d 1089, 170 Ill.Dec. 441

Jeffrey M. JACOBSON et al., Plaintiffs-Appellees, v. GENERAL FINANCE CORPORATION, Defendant-Appellant.

No. 2-91-0635.

Appellate Court of Illinois,

Second District.

April 24, 1992.

Lawrence X. Pusateri, Bruce N. Menkes, Mark W. Daliere, Craig A. Varga (argued), Peterson & Ross, Schloerb & Seidel, Chicago, for General Finance Corp.

James J. Magee, Magee Negele & Associates, Round Lake, for Jeffrey M. and Joy E. Jacobson.

Justice NICKELS delivered the opinion of the court:

Plaintiffs, Joy E. Jacobson and her son, Jeffrey M. Jacobson, brought suit in the circuit court of Lake County against defendant, General Finance Corporation of Illinois, alleging that a loan agreement with defendant provided for the collection of unlawful interest. Plaintiffs sought recovery pursuant to section 6 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.1989, ch. 17, par. 6413). Plaintiffs contend that the agreement provided that upon prepayment of the loan in full, defendant would be entitled to collect an amount of interest based upon the "Rule of 78's" (Rule of 78's) in violation of the Interest Act, subjecting defendant to liability under section 6.

Plaintiffs and defendant filed cross-motions for summary judgment. The circuit court granted plaintiffs' motion and denied defendant's motion in a memorandum order. The court subsequently entered judgment for plaintiffs and against defendant in the amount of $68,346 and awarded attorney fees of $17,086.50, plus costs to plaintiffs. Defendant appeals the entry of summary judgment in favor of plaintiffs and the denial of its motion for summary judgment. Defendant also appeals from the order of damages and attorney fees entered for plaintiff.

The issues on appeal are: (1) whether use of the Rule of 78's in calculating the refund credit due upon prepayment of a loan of $25,000 secured by a residential real estate mortgage is authorized under section 4a of the Interest Act; (2) whether use of the Rule of 78's in calculating said refund is prohibited by section 4 of the Interest Act; (3) whether statutory damages were improperly awarded to plaintiffs; (4) whether attorney fees were improperly awarded and computed according to a contingent fee agreement; and (5) what effect, if any, recent amendments to sections 4 and 4a have to this appeal.

The pleadings and affidavit of plaintiffs' attorney establish the following facts. Plaintiffs borrowed $25,000 for 15 years (180 monthly payments) at a 13.75% rate of interest from Sko-Fed Credit Corporation and executed a promissory note. The loan was secured by a mortgage on plaintiffs' personal residence. (Plaintiffs refer to this as a first mortgage in their amended complaint, and defendant's verified answer admitted this allegation. However, defendant refers to the mortgage as a "second" mortgage. The trial court referred to it as a second mortgage.) Sometime after May 29, 1986, General Finance Corporation purchased and took an assignment of the loan obligation and security interest. Under the terms of the promissory note, plaintiff was to repay $25,000 in principal plus interest of $34,173, for a total of $59,173, said amount to be divided into 180 monthly payments. The promissory note contained the following provision:

"REBATE FOR PREPAYMENT: Borrower(s) may prepay this note in full (by cash, renewal or refinancing, or a new loan) one month or more before the final installment due date and receive a statutory refund or credit of the total of applicable interest for all fully unexpired installment periods as originally scheduled or as deferred which follow the day of prepayment. This statutory computation employs the sum of the digits' method, also known as the 'Rule of 78's.' Prepayment in full will reduce both the Finance Charge and Insurance Charge for the loan."

Plaintiffs requested a payoff statement from defendant prior to September 13, 1989. According to defendant, the payoff balance on the loan as of September 13, 1989, was $25,976.10. Defendant applied the Rule of 78's as provided for in the promissory note in determining the payoff balance. Plaintiffs paid $25,976.10 to defendant in prepayment of the loan. Plaintiffs then filed their complaint against defendant on May 22, 1990.

In ruling in favor of plaintiffs' motion for summary judgment, the circuit court found that the loan was not made for the purchase price of real estate, or an interest therein, and thus section 4a of the Interest Act did not preclude use of the Rule of 78's in the case. (ILL.REV.STAT.1989, ch. 17, par. 6410.) However, the court found that section 4(3) of the Interest Act prohibited the use of the Rule of 78's when a loan was secured by a mortgage on residential real estate. (Ill.Rev.Stat.1989, ch. 17, par. 6404(3).) It determined that section 4a was a general provision and that section 4(3) was the more applicable provision to the case at bar. Therefore, use of the Rule of 78's was prohibited. The court noted that if sections 4a and 4(3) could not be construed as such, section 4(3) was the more recently enacted provision, and it again controlled.

The Rule of 78's, also known as the "sum of the digits" method, is a formula for computing an amount of interest due upon early payment of a loan. (Dechow v. Sko-Fed Credit (1989), 181 Ill.App.3d 367, 369, 130 Ill.Dec. 171, 536 N.E.2d 1382.) A higher percentage of the total finance charge is attributable to the first months of a loan than is attributable to the last months under this method. (Lanier v. Associates Finance, Inc. (1986), 114 Ill.2d 1, 101 Ill.Dec. 852, 499 N.E.2d 440.) Using a 12-month loan as an example of the method, a total finance charge is calculated based upon payment of the loan over its full term. Next, the numbers 1 to 12 are added together, representing the number of installments for a one-year loan, to equal 78. If the borrower repays the loan after the first month, he pays 12/78 of the total finance charge and will pay 11/78 of the total finance charge the second month, and so on. ( Dechow, 181 Ill.App.3d at 369, 130 Ill.Dec. 171, 536 N.E.2d 1382.) The creditor earns most of the finance charge during the early months of the loan term, and the amount of unearned finance charge which the debtor will be entitled to in the event of prepayment rapidly declines as the months go by. ( Lanier, 114 Ill.2d at 6-7, 101 Ill.Dec. 852, 499 N.E.2d 440.) Generally, it is plaintiffs' position herein that use of the Rule of 78's in determining the refund credit due upon prepayment of the loan was illegal. The promissory note provided for use of the Rule of 78's in calculating the refund amount upon prepayment. The trial court found that use of the Rule of 78's to calculate plaintiffs' refund credit was prohibited by statute and entered summary judgment in plaintiffs' favor.

Summary judgment is an appropriate means of disposing of a cause where, as here, there are no genuine issues of material fact and a movant is entitled to judgment as a matter of law. (Ill.Rev.Stat.1989, ch. 110, par. 2-1005(c); Puttman v. May Excavating Co. (1987), 118 Ill.2d 107, 112, 112 Ill.Dec. 722, 514 N.E.2d 188; Ortegel v. ITT Thorp Corp. (1991), 210 Ill.App.3d 669, 672, 155 Ill.Dec. 405, 569 N.E.2d 586.) Since the facts are not in dispute and the only questions involve statutory interpretation, we may review the issue as a matter of law. Ortegel, 210 Ill.App.3d at 672, 155 Ill.Dec. 405, 569 N.E.2d 586.

Defendant first contends that the trial court erred in finding that section 4(3) of the Interest Act (Ill.Rev.Stat.1989, ch. 17, par. 6404(3)) controlled the method of computing a refund credit for plaintiffs' real estate secured loan which fell within the scope of section 4a (Ill.Rev.Stat.1989, ch. 17, par. 6410). Defendant argues that section 4a(a)(i) allows the use of the Rule of 78's to compute the refund credit due on loans which come under section 4a. (Ill.Rev.Stat.1989, ch. 17, par. 6410(a)(i).) Under Dennis v. Old Republic Insurance Co. (1991), 218 Ill.App.3d 637, 161 Ill.Dec. 364, 578 N.E.2d 1010, defendant claims that section 4a controls in this case and that defendant properly applied the Rule of 78's.

Plaintiffs have not disputed that their loan came within section 4a. However, they argue in support of the trial court's decision that section 4(3) controls over section 4a in determining the refund credit due plaintiffs. They claim that the Rule of 78's is prohibited under section 4(3). Ill.Rev.Stat.1989, ch. 17, par. 6404(3).

While the parties have advanced various arguments concerning the legality of the application of the Rule of 78's to the instant loan based upon their interpretations of sections 4 and 4a of the Interest Act (Ill.Rev.Stat.1989, ch. 17, pars. 6404, 6410), we do not consider these arguments in view of the recent amendments to those sections. We have taken judicial notice of this amendatory act pursuant to defendant's motion. Public Act 87-495, effective September 13, 1991, amended section 4(3) (Ill.Rev.Stat.1989, ch. 17, par. 6404(3)) in the following manner:

"The provisions of this amendatory Act of 1985 shall apply only to contracts or loans entered into on or after the effective date of this amendatory Act, but shall not apply to contracts or loans entered into on or after that date that are subject to Section 4a of this Act, the Consumer Installment Loan Act, or the Retail Installment Sales Act, or that provide for the refund of precomputed interest on prepayment in the manner provided by such Act." (Amendatory language underlined.) Pub.Act 87-495, § 1, eff. Sept. 13, 1991.

The act also amended section 4a(a)(i) (Ill.Rev.Stat.1989, ch. 17, par. 6410(a)(i)) as follows:

"(i) [I]nterest in an amount equivalent to interest computed at a rate not exceeding 9% per year on the entire principal amount of the money...