Martin v. Commercial Securities Co., Inc.
| Citation | 539 F.2d 521 |
| Decision Date | 27 September 1976 |
| Docket Number | No. 75-2519,75-2519 |
| Parties | James L. MARTIN, Plaintiff-Appellee, v. COMMERCIAL SECURITIES COMPANY, INC., Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Harry V. Singreen, New Orleans, La., for defendant-appellant.
Herschel C. Adcock, Sheldon D. Beychok, Baton Rouge, La., amici curiae, for Louisiana Bankers Association.
John F. Robbert, New Orleans, La., for plaintiff-appellee.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before WISDOM and MORGAN, Circuit Judges, and LYNNE, District Judge.
This appeal presents an issue of first impression in this circuit, involving substantial consequences both to consumers and to the consumer credit industry. That issue, ultimately stated, is whether an acceleration clause in a consumer note is a term of credit required to be disclosed by the Truth in Lending Act (the Act) 1 and Regulation Z 2 promulgated thereunder.
On August 30, 1973, James L. Martin obtained a consumer loan from Commercial Securities Company, Inc. (Commercial), in the principal amount of $464.67. At the time of this credit transaction Martin executed a combination promissory note and chattel mortgage under which he obligated himself to pay $720.00 3 in twenty-four equal monthly installments. The various terms and provisions of the note and mortgage were set out on both sides of the document executed by Martin. However, the face of the form was also designated to serve as the Truth in Lending Act Disclosure Statement for this transaction. A copy of this combination form was delivered to Martin at the time the loan transaction was consummated.
On the reverse side of the document, not a part of the disclosure statement, appeared the following provision in the first paragraph concerning Commercial's right to accelerate payment:
Upon the happening of any of the following defaults, the note shall be ipso facto matured without any putting in default or presentment; moreover, the mortgagee may proceed by ordinary process, with or without resort to the security, or by executory process, and cause the property to be seized and sold under legal process with or without appraisement to the highest bidder, payable cash:
(1) failure to pay any installment punctually. . . . (Emphasis added).
The disclosure statement on the face of Commercial's form contained a provision setting out the charges assessable against Martin in the event of late payment of an installment, but this provision did not mention the remedies provided for on the reverse side of the form. 4 Commercial also delineated within its disclosure statement the method for computing the portion of the finance charge that would be rebated if Martin were to prepay the obligation. 5
On August 28, 1974, Mr. Martin instituted this action in the United States District Court for the Eastern District of Louisiana, alleging that the disclosure statement delivered to him did not comply with the Truth in Lending Act and Regulation Z thereunder, and seeking statutory damages for inadequate credit disclosures. The complaint set forth two specific alleged violations of the Act and Regulations:
(1) The failure to disclose the correct annual percentage rate by failing to include the cost of credit life insurance and accident and health insurance as a component of the finance charge as required by Regulation Z, § 226.4(a)(5), 12 C.F.R. § 226.4(a)(5); and
(2) The failure to disclose the amount, or method of computing the amount of any default, delinquency, or similar charges payable in the event of late payment as required by Regulation Z, § 226.8(b)(4), 12 C.F.R. § 226.8(b)(4).
These issues were submitted to the court on cross motions for summary judgment.
On May 9, 1975, the district court granted the motion of plaintiff, Martin, for summary judgment, holding that Commercial's failure to set forth its acceleration provision in the disclosure statement portion of Martin's note-chattel mortgage form constituted a violated of section 128(a)(9) of the Truth in Lending Act, 6 and of section 226.8(b)(4) of Regulation Z. 7 The district court considered the additional alleged violation of Regulation Z, § 226.4(a)(5), but found that the defendant had fully complied with the requirements of that regulation; therefore, the cost of credit insurance was not includable as a part of the finance charge. No appeal has been taken from that ruling. Thus, we are concerned only with the court's determination that the creditor's acceleration provision was a required disclosure under the Act and Regulation Z. We reverse.
The Truth in Lending Act is remedial legislation intended "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." Truth in Lending Act, § 102, 15 U.S.C. § 1601 (1970); see Thomas v. Myers-Dickson Furniture Company, 479 F.2d 740 (5th Cir. 1973). The congressional finding that "(t)he informed use of credit results from an awareness of the cost thereof by consumers" is the principal theme of the Act. Consequently, the Act and the regulations promulgated thereunder require the full disclosure of certain credit terms which Congress and the Federal Reserve Board have deemed essential to the "informed use of credit." Under the Act and the regulations the creditor is required to furnish, in most credit transactions, certain specified information to the credit customer. In a separate disclosure statement or on the face of the instrument evidencing the obligation, the creditor must set out, in a straightforward manner and in a meaningful sequence, certain of the terms governing the extension of credit. "It is hoped that the credit customer, armed with a list of the credit terms considered most important by Congress, will be equipped to choose the credit contract that best fits his needs and his ability to repay the loan." Johnson v. McCrackin-Sturman Ford, Inc., 527 F.2d 257, 263 (3d Cir. 1975). Consequently, "disclosure" is a term of art under the Truth in Lending Act, referring to the information to be provided the consumer and the manner in which that information is presented.
In determining whether disclosure of the creditor's right to accelerate the maturity of the debtor's obligation upon default is required by the Truth in Lending Act, we turn to the following pertinent or relevant sources: the Truth in Lending Act itself; Regulation Z; the Federal Reserve Board Interpretations of Regulation Z, 12 C.F.R. §§ 226.101 et seq.; and the staff opinions of the Federal Reserve Board. See Philbeck v. Timmers Chevrolet, Inc., 499 F.2d 971, 976 (5th Cir. 1974). While section 128 of the Act and section 226.8(b) of the regulations enumerate the credit terms to be disclosed in consumer credit sales not under an open end credit plan, neither section specifically requires disclosure of the creditor's right to accelerate payment upon default, nor is there any official board interpretation requiring such a disclosure. It is highly illuminating that there is no reference in the Act, the Regulations, or the Official Interpretations of the Federal Reserve Board to acceleration clauses or the right to accelerate payments, even though they are a common feature of installment notes and are traditional creditors' remedies. 8
Nonetheless, appellee argues that Commercial's failure to include the acceleration clause within the disclosure statement portion of its form violated section 128(a)(9) of the Act, which requires disclosure of "default, delinquency, or similar charges payable in the event of late payments," and section 226.8(b)(4) of Regulation Z, which provides for disclosure of "the amount, or method of computing the amount, of any default, delinquency, or similar charges payable in the event of late payments." The district court agreed with appellee and concluded that the acceleration of a loan upon default was a "charge" within the meaning of sections 128(a)(9) and 226.8(b)(4), its earlier opinion in the case of Meyers v. Clearview Dodge Sales, Inc., 384 F.Supp. 722 (E.D.La.1974). Meyers presented this same issue, in the context of the credit sale of an automobile, and the conclusion of the court was based upon the reasoning of Garza v. Chicago Health Clubs, Inc., 347 F.Supp. 955 (N.D.Ill.1972), the seminal case dealing with the issue presented on this appeal. The Garza court reasoned that the word "charges" in section 226.8(b)(4) of Regulation Z should be accorded its ordinary meaning absent a specific technical meaning or legislative definition, 9 and then found that:
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." 10
As did the Garza court, the district court in Meyers concluded with respect to a creditor's right to accelerate payment upon default that "(t)he Truth in Lending Act was intended to require the disclosure of exactly this type of credit information." 11
The Garza and Meyers opinions find support for their conclusion that an acceleration clause is a "charge" required to be disclosed under section 128(a)(9) of the Act, and section 226.8(b)(4) of Regulation Z, from the "Congressional findings and declaration of purpose " section of the Act. 12 After initially...
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