Kedziora v. Citicorp Nat. Services, Inc.
| Decision Date | 21 November 1991 |
| Docket Number | No. 91 C 3428.,91 C 3428. |
| Citation | 780 F. Supp. 516 |
| Parties | Thomas S. KEDZIORA and Merrilou Kedziora, Plaintiffs, v. CITICORP NATIONAL SERVICES, INC., Citicorp Acceptance Company, Inc., and Citicorp, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
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Donald Rendler-Kaplan, Daniel Edelman, Lawrence Walner, Chicago, Ill., for plaintiffs.
Alan N. Salpeter, Lynne M. Raimondo, Jeffrey S. Kinsler, Victoria R. Collado, Chicago, Ill., for defendants.
Thomas and Merrilou Kedziora ("Kedzioras") have sued Citicorp National Services, Inc. ("Citicorp National") and its subsidiaries Citicorp Acceptance Company, Inc. and Citicorp (all three corporations are collectively referred to in this opinion as "Citicorp," treated for convenience as a singular noun)1, claiming that automobile leases issued by Citicorp violated the Consumer Leasing Act, 15 U.S.C. §§ 1667-1667e (the "Act")2 and its implementing regulations as well as Illinois law. Jurisdiction is grounded in 28 U.S.C. § 1331 and in this Court's supplemental jurisdiction under 28 U.S.C. § 1367.
Citicorp has moved under Fed.R.Civ.P. ("Rule") 12(b)(6) to dismiss the Complaint. For the reasons discussed in this memorandum opinion and order, the motion (1) is granted as to Counts II and III and (2) is granted in part and denied in part as to Counts I, IV and V.
Kedzioras incurred a substantial "termination charge" when they defaulted on their 60-month car lease ("Lease") after 22 months. Insurance proceeds paid the bulk of the charge, but a balance remained due for which Kedzioras were personally liable. Rather than pay the balance, Kedzioras brought suit to challenge the validity of certain of the Lease terms.
Kedzioras assert five claims in the class action suit that they initially filed in the Circuit Court of Cook County.4 Count I contends that the termination charge was "unreasonable" and therefore a violation of the Act. Count II says that Citicorp had failed to disclose adequately the termination charges required by the lease, also in violation of the Act. Count III asserts that Citicorp's failure to disclose the purchase option price at the end of the lease term also violated the Act. Count IV states that the default and early termination charges constitute unenforceable penalties in violation of Illinois common law. Count V alleges that the termination charges and inadequate disclosure constituted unfair and deceptive business practices in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.St. ch. 121½, ¶¶ 261-272.
Citicorp removed the case to federal court pursuant to 28 U.S.C. § 1446. It then filed its motion to dismiss in lieu of an answer, and the parties have briefed the motion at length.
Congress has enacted a broad-based regulatory scheme to govern the consumer credit industry (Sections 1601-1693r). As a whole that scheme is commonly known as the Truth in Lending Act ("TILA"), while the sections applicable to consumer leases (Sections 1667-1667e) are known as the Consumer Leasing Act. In passing the Act Congress sought (Section 1601(b)):
to assure meaningful disclosure of the terms of leases of personal property for personal, family, or household purposes so as to enable the lessees to compare more readily the various lease terms available to him, limit balloon payments in consumer leasing, enable comparison of lease terms with credit terms where appropriate, and to assure meaningful and accurate disclosures of lease terms in advertisements.
TILA's damage provisions (Section 1640) are made applicable to claims under the Act as well (by Section 1667d). Definitions under TILA (Section 1602) naturally apply to the Act, for Congress chose to embed the Act within the TILA structure. For the same reason, general rules of construction applicable in TILA cases must also apply in cases under the Act. Courts have consistently held that TILA must be liberally construed in the consumer's favor (see, e.g., Pearson v. Easy Living, Inc., 534 F.Supp. 884, 890 (S.D.Ohio 1981)) and that even the most technical disclosure violations — whether or not they cause actual damage or deception — may trigger liability for the offending creditor (Smith v. No. 2 Galesburg Crown Finance Corp., 615 F.2d 407, 416-17 (7th Cir.1980)).
On the other hand, Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568, 100 S.Ct. 790, 798, 63 L.Ed.2d 22 (1980) (emphasis and brackets in original), quoting S.Rep. 96-73, p. 3 (1979), has stressed:
Meaningful disclosure does not necessarily mean more disclosure. Rather, it describes a balance between "competing considerations of complete disclosure ... and the need to avoid ... informational overload."
That principle too must apply to the Act.
Two provisions of the Act supply the grounds for Kedzioras' federal claims. First is the provision mandating "clear and conspicuous" disclosure (Section 1667a) of various lease terms, including "the amount or method of determining any penalty or other charge for delinquency, default, late payments, or early termination" (Section 1667a(11)). Second is the provision governing liability on expiration or termination of a lease, which mandates in part (Section 1667b(b)):
Penalties or other charges for delinquency, default, or early termination may be specified in the lease but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the delinquency, default, or early termination, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an inadequate remedy.
Congress here very nearly copied the exact language of the Uniform Commercial Code and the Restatement (Second) of Contracts (1981) on liquidated damages (see Ill.Rev.Stat. ch. 26, § 2-718(1); Restatement § 356(1)). Legislative history informs us that the resemblance to the UCC was intentional (S.Rep. No. 94-590, 94th Cong., 2d Sess. 7, 1976 U.S.Code Cong. & Admin.News 431 at 437 says "The language is taken from the Uniform Commercial Code's provision on liquidated damages, and should be applied flexibly"). By logical extension, then, Congress must have intended that any settled judicial interpretation of the UCC and the Restatement should govern the interpretation of Section 1667b(b). At any rate, the remainder of the statute and the implementing regulations shed no light on Section 1667b(b), so that the UCC and the Restatement are the only logical tools with which to give content to the amorphous term "reasonable."
By referring to "anticipated or actual" harm, then, Congress surely intended that courts should look to the Restatement's perspective on the identical terms — a perspective that stresses temporal considerations of reasonableness. Liquidated damages clauses are to be upheld if they provided a reasonable estimate as of the time of contracting or if they in fact turn out to provide a reasonable approximation of actual damages (Yockey v. Horn, 880 F.2d 945, 952-54 (7th Cir.1989)). In other words, a liquidated damages clause that may in a particular case happen to produce damages far out of proportion to demonstrable actual damages is still valid as long as it was reasonable ex ante.
Implementing regulations issued by the Federal Reserve (12 C.F.R. § 226.1 et seq., commonly known as "Regulation Z," and 12 C.F.R. § 213, commonly known as "Regulation M"5) give further definition to the statutory requirements just outlined. Those regulations, and additional elements of the statutory scheme relevant to the case, are touched on below.
As the passages quoted earlier indicate, Section 1667b imposes substantive requirements of reasonableness on termination penalties or other charges, whereas Section 1667a imposes no substantive requirements on lease terms. Instead it merely requires adequate disclosure of the terms.
Kedzioras leased a 1989 Pontiac Grand Prix from Citicorp on September 1, 1988. Over the course of the 60-month lease they were to pay Citicorp a total of $16,727.40. On August 19, 1990 the Grand Prix was demolished in an accident. Because the accident damaged the leased vehicle "beyond reasonable repair," it had the effect of triggering a default under Kedzioras' lease with Citicorp (Lease ¶ 8). Kedzioras thus became obligated to pay Citicorp a termination charge with five components (Lease ¶ 17):
That formulation produced a termination charge of $12,994.14. Kedzioras received an insurance payment of $10,360, which they turned over to Citicorp, leaving a balance of $2,688.14 for which Kedzioras were personally liable. Lease ¶ 17 obligated Citicorp to sell the vehicle "at wholesale or retail, as you Citicorp determine," and to reduce the termination charge by the amount of the sale price. Because Citicorp could not of course sell a destroyed vehicle, that offset was provided by the insurance proceeds instead.
Various other provisions of the Lease bear on Kedzioras' claims. However, it is probably more meaningful to recount those provisions in the context of the discussion that follows, rather than prolong this preliminary description of the Lease in the abstract.
Kedzioras claim that five aspects of the...
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