Kenney v. Landis Financial Group, Inc., 71-C-32-CR.

• Decision Date: 30 March 1972
• Docket Number: No. 71-C-32-CR.,71-C-32-CR.
• Citation: 349 F. Supp. 939
• Parties: Wally KENNEY, on behalf of himself and all other persons similarly situated, Plaintiff, v. LANDIS FINANCIAL GROUP, INC., Defendant.
• Court: U.S. District Court — Northern District of Iowa

349 F. Supp. 939

Wally KENNEY, on behalf of himself and all other persons similarly situated, Plaintiff, v. LANDIS FINANCIAL GROUP, INC., Defendant.

No. 71-C-32-CR.

United States District Court, N. D. Iowa, Cedar Rapids Division.

March 30, 1972.

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Everett Meeker, Washington, Iowa, for plaintiff.

Donald A. Wine and Ronald L. Hersbergen, Des Moines, Iowa, Edward J. Heiser, Jr., Milwaukee, Wis., for defendant.

ORDER

McMANUS, Chief Judge.

This matter is before the court on defendant's motions to dismiss the complaint, as originally filed and as amended, and to dismiss the class action; and on motions by both plaintiff and defendant for summary judgment. All motions have been resisted and both parties have submitted extensive briefs and affidavits in support of their respective positions.

In his complaint plaintiff alleges that on or about July 29, 1971 defendant extended consumer credit to plaintiff. The amount financed totalled $643.62 and was comprised of a $600.92 cash advance, insurance, and other charges. The finance charge on the transaction was $218.38. At the time of the transaction defendant prepared and delivered two documents to plaintiff: a combined note-disclosure statement and a security agreement. Plaintiff attached copies of these documents to his pleading. There appears to the court to be some discrepancy between the documents attached by plaintiff to the complaint and those attached by defendant to its answers to plaintiff's interrogatories filed March 21, 1972. To the extent the documents agree the court will treat them as undisputed and consider the parties' respective motions as they relate thereto.

Plaintiff by this action seeks relief, on behalf of himself and all other persons similarly situated, for alleged violations by defendant of the Federal Truth in Lending Act (Act), Title I, 15 U.S.C. § 1601 et seq., of the Consumer Credit Protection Act, and the regulations promulgated thereunder, FRB Regulation Z, 12 C.F.R. § 226.1 et seq.¹ Jurisdiction is granted by the Act.² The transaction involved here does not come within the statutory or regulatory definitions of "open end credit plan"³ or "credit sale"⁴ and thus is an "other than open end" consumer credit plan. Plaintiff's allegations of violation appear in paragraphs 8 through 32 of the complaint. Each paragraph will be considered individually under the conditions stated in the paragraph immediately above.

In paragraph 8 of the complaint plaintiff alleges that the disclosure statement and the security agreement indicate that defendant has a secured interest in certain of plaintiff's goods "but the said disclosure statement and security agreement do not contain either a clear description or an itemized list of the consumer goods that constitute the property to which the security interest relates. . . ."

To facilitate explanation the court will undertake to describe the pertinent portion of the disclosure statement attached to plaintiff's complaint. Under the segment of the disclosure statement designated "Security" it is stated that the loan is secured by a security agreement dated "July 29, 1971" covering "Household Goods." To the immediate right of this statement is a large brace encompassing a list of items under the heading "Description." The box preceding the item "Household Goods and Appliances" is marked with an "X." The boxes preceding the other words of the list, "Motor Vehicle(s)," "Farm Equipment . . ." and "Other," are not so marked. Beneath the list is the sentence: "See Security Agreement(s) for itemized list of property covered."

Plaintiff alleges that this disclosure is inadequate and violates section 226.8(b)(5) of Regulation Z which requires the description of any security interest acquired by the creditor in connection with the extension of credit and "a clear identification of the property to which the security interest relates."⁵

The court cannot agree with defendant's position that like disclosure under section 9-110 of the Uniform Commercial Code (U.C.C.)⁶ reasonable identification is all that is required under section 226.8(b)(5). Such an interpretation would change the literal meaning of the statute.⁷ Also, in addition to the literal differences in the language of respective statutes are the respective legislative purposes for their enactment. The main purpose of Article 9 of the U. C.C. is to consolidate and make uniform the law governing security interests in personal property and fixtures.⁸ The expressed congressional purpose for the enactment of subchapter I of the Act is: "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit."⁹ Thus, the court is of the view that the case law regarding sufficiency of disclosure under the U.C.C. is by necessity distinguishable from application here.

On the other hand, the court finds no requirement in the Act that imposes upon defendant, as alleged by plaintiff, the obligation to itemize the list of consumer goods to which its security interest attaches. The Act requires a "clear identification" but not a clear description. Thus to require particularization of the goods would go beyond the Act's scope.

It is the view of the court that the presence of the adjective "clear" preceding the word identification in the Act indicates that the goods must be identified so as to preclude any reasonable question regarding the goods to which the security interest attaches. The court notes as stated before a dispute in the written and typed words which appear on the documents filed by the respective parties. Therefore, it is the view of the court that as to paragraph 8 all motions should be denied.

In paragraph 9 of the complaint plaintiff alleges that the note provides that upon prepayment of the debt after the due date of the first installment the refund of the unearned finance charge is rebated according to the Rule of 78. Plaintiff claims that the "Rule of 78" rebate produces a smaller rebate than would a rebate computed by the actuarial method which plaintiff asserts the Iowa Small Loan Law requires, Iowa Code § 536.13(7)(c)¹⁰ and (8).¹¹ This smaller rebate, plaintiff claims, constitutes a penalty charge which the disclosure statement does not disclose; and that such failure to make this disclosure is a violation of § 226.8(b)(6) of 12 C. F.R.¹²

The agreed precomputed interest of the loan as stated on the note-disclosure statement is computed according to the maximum lawful rate: "3% per month on any part of the unpaid balance of the loan not exceeding $250; 2% per month on any part of the loan in excess of $250 but not exceeding $400; and 1½% per month on any part of the unpaid balance of the loan in excess of $400."¹³ Thus to comport with Iowa law a rebate upon full prepayment of the debt must not be less than the precomputed interest outstanding on the note as of the appropriate payment date.¹⁴ A "Rule of 78"¹⁵ or "Sum of the Digits" method of rebate computation renders a rebate to the debtor which is less than the precomputed interest. Thus it appears that the rebate computation employed by defendant is in violation of section 536.13 of the Iowa Code.¹⁶

Although defendant's method of rebate appears to violate Iowa law such rebate method does not violate the Act if the statutory and regulatory disclosure requirements of the Act are met.¹⁷ The court is of the view, however, that the "Rule of 78" rebate computation does allow defendant to retain upon prepayment of the loan an amount which is greater than the precomputed interest earned as of the date of payment. Thus the court is of the view that the Rule of 78 computation imposes a penalty and that penalty is undisclosed and unexplained in violation of 226.8(b)(6). The court cannot agree with defendant that it is required to disclose only the computation method that it actually employs. Section 226.8(b)(6) requires description of a penalty charge that it "may impose" not just that which it does impose.

In paragraph 10 plaintiff alleges that according to the note if two or more installments are in default for one month or more on any installment date the defendant may reduce the contract balance by the rebate which would be required for prepayment in full as of the installment date and the fact that the "Rule of 78" rebate is smaller than that required by the Iowa Code constitutes an additional default or delinquency charge which the disclosure statement does not disclose in violation of section 226.8(b)(4) of Regulation Z.¹⁸ The court is of the view that section 226.8(b)(4) applies only to late payments and has no application as alleged by plaintiff to the prepayment situation.

In Paragraph 11 plaintiff alleges that the notice at the bottom of the disclosure statement: "Pursuant to the Iowa Small Loan Law, Default and deferment charges may be made and a rebate of unearned interest will be made if the loan is repaid prior to maturity," is in conflict with the terms of the note which provides for a rebate of unearned interest by computation according to the Rule of 78. The disclosure statement plaintiff claims does not identify which of the two conflicting rules will be used in computing such a rebate in violation of section 226.8(b)(7).¹⁹

The court is of the view that although the notice at the bottom of the disclosure statement may be inconsistent and confusing defendant has identified the method of rebate computation as required by section 226.8(b)(7) in the part of the note-disclosure statement labeled "Prepayment Penalty and Rebate." Thus the court rules as a matter of law that section 226.8(b)(7) is not violated by the disclosure statement.

In Paragraph 12 plaintiff alleges that the disclosure statement does not contain a clear and conspicuous heading that the disclosures are made in...