Murphy v. Ford Motor Credit Co.

• Decision Date: 28 August 1980
• Docket Number: 79-2061,Nos. 79-1822,s. 79-1822
• Citation: 629 F.2d 556
• Parties: Thaddeus S. MURPHY, Appellee, v. FORD MOTOR CREDIT CO. and Hilltop Lincoln Mercury, Inc., Appellants. Thaddeus S. MURPHY, Cross-Appellant, v. FORD MOTOR CREDIT CO. and Hilltop Lincoln Mercury, Inc., Cross-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 556

629 F.2d 556

Thaddeus S. MURPHY, Appellee, v. FORD MOTOR CREDIT CO. and Hilltop Lincoln Mercury, Inc., Appellants.

Thaddeus S. MURPHY, Cross-Appellant, v. FORD MOTOR CREDIT CO. and Hilltop Lincoln Mercury, Inc.,

Cross-Appellees.

Nos. 79-1822, 79-2061.

United States Court of Appeals Eighth Circuit.

Submitted May 20, 1980.

Decided Aug. 28, 1980.

Lawrence W. Treece, Denver, Colo., for Ford Motor Co. & Hilltop.

Kenneth M. Chackes, Chackes & Hoare, St. Louis, Mo., for T. S. Murphy.

John R. Essner, Legal Services of Eastern Missouri, St. Louis, Mo., argued, Gayle C. Williams, Richard B. Teitelman, and Rodney H. Powell, St. Louis, Mo., on brief, for amicus curiae, Cynthia Sims.

John C. Shepherd, John S. Sandberg and Steven P. Sanders, St. Louis, Mo., for appellants, Ford Motor Co., et al.

Before HENLEY and McMILLIAN, Circuit Judges, and ROY, ^* Judge.

ROY, District Judge.

This appeal is brought by Ford Motor Credit Corporation ( "Ford" ) and Hilltop Lincoln Mercury ( "Hilltop" ) from a decision in the District Court ¹ in favor of the plaintiff, Thaddeus Murphy ( "Murphy" ), on an allegation of a violation of the Consumer Credit Protection Act. This Act is known as the "Truth In Lending Act" (TILA), and is found at 15 U.S.C. §§ 1601, et seq. TILA has been translated into regulations by the Federal Reserve Board, those regulations being in the form of "Regulation Z", found at 12 C.F.R. §§ 226.1, et seq. Those portions of TILA and Regulation Z which are at issue herein are 15 U.S.C. § 1638(a)(10) and 12 C.F.R. § 226.8(a)(1), (b)(5) which relate to the disclosure of security interests created in favor of lenders.

Jurisdiction in District Court was predicated on 15 U.S.C. § 1640(e) and in this Court is based on 28 U.S.C. §§ 1291 and 1294.

In the trial court, Murphy alleged that appellants failed to disclose the identity of Ford as a creditor, failed to identify all of the property to which the security interests related, failed to disclose the right to accelerate on default, failed to put all required disclosures on the same side of the page, failed to put the required disclosures in meaningful sequence, and failed to provide Murphy and his co-signer with a written disclosure statement. Murphy prevailed only on the allegation that the security interest created in favor of Ford by the assignment of any returned or unearned insurance premiums was not disclosed as such security interests are required to be by the Act. Appellants brought this appeal alleging that the assignment of the premiums did not amount to a security interest and that the District Court erred in that determination. Murphy filed a cross-appeal based on the amount of attorney's fees which was awarded, claiming that $500.00 was insufficient.

The section of the installment sales agreement which is the subject of this appeal stated, on the back of the instrument:

The Property shall be at Buyer's risk. Buyer shall obtain and maintain at his own expense for so long as any amount remains unpaid hereunder insurance protecting the interest of Buyer and Seller against loss, damage or destruction of or to the Property in such forms and amounts as Seller may require . . . .

Buyer hereby assigns to Seller any monies payable under such insurance, by whomever obtained, including returned or unearned premiums, and Seller is hereby authorized on behalf of both Buyer and Seller to receive or collect same, to endorse checks or drafts in payment thereof, to cancel such insurance or to release or settle any claim with respect thereto. The proceeds from such insurance shall be applied toward replacement of the Property or payment of the indebtedness hereunder in the sole discretion of the Seller.

The District Court, relying on Edmondson v. Allen-Russell Ford, Inc., 577 F.2d 291 (5th Cir. 1978), cert. denied, 441 U.S. 951, 99 S.Ct. 2180, 60 L.Ed.2d 1057 (1979), held that the assignment of insurance premiums was a security interest as contemplated by 15 U.S.C. § 1638(a)(10) and that appellants' failure to disclose it as such constituted a violation of TILA.

The facts indicate that in March of 1978 Murphy purchased from Hilltop a 1977 Lincoln automobile. Murphy paid $1,300.00 as a down payment and financed the remainder. Murphy signed a retail installment loan contract for the amount remaining, and it was understood that the actual financing would be arranged through Ford.

Appellee filed this action against the appellants and at the close of the trial, the court found that the Act had been violated by both appellants and imposed the maximum statutory damages of $1,000.00 and awarded Murphy $500.00 for attorney's fees.

The issues presented by this appeal are, first, whether the District Court erred in its conclusion that the assignment of returned or unearned insurance premiums was a security interest which was required to be disclosed as such on the face of the contract or on the disclosure statement; and, second, whether the District Court abused its discretion in the award of attorney's fees of only $500.00 in light of the attorney's testimony that he spent 49.7 hours in preparation for and participation in the trial.

At the outset we note that three other circuit courts have determined that the assignment of unearned or returned insurance premiums in a retail installment contract does amount to a security interest and should be disclosed as such. Valencia & Gonzalez v. Anderson Bros. Ford, et al, 617 F.2d 1278 (7th Cir. 1980); Edmondson v. Allen-Russell Ford, Inc., supra; Elzea v. National Bank of Georgia, 570 F.2d 1248 (5th Cir. 1978); Gennuso v. Commercial Bank & Trust Co., 566 F.2d 437 (3d Cir. 1977). However, the Tenth Circuit, to some extent, has held to the contrary. James v. Ford Motor Credit Co. (10th Cir. June 24, 1980), and Hernandez v. O'Neal Motors, Inc. (10th Cir. June 24, 1980).

15 U.S.C. § 1638(a)(10) requires that the retention or acquisition of any security interest by a creditor in a consumer transaction be disclosed. However, "security interest" is not defined in TILA; rather, Congress left that detail to the Federal Reserve Board which was charged with promulgating the regulations required for the implementation of the Act. In response, the Board formulated Regulation Z. "Security interest" is defined therein at 12 C.F.R. § 226.2(gg) as follows:

. . . any interest in property which secures payment or performance of an obligation. The terms include, but are not limited to, security interests under the Uniform Commercial Code, real property mortgages, deeds of trust, and other consensual or confessed liens whether or not recorded, mechanic's, materialmen's, artisan's and other similar liens, vendor's liens in both real and personal property, the interest of a seller in a contract for the sale of real property, any lien on property arising by operation of law, and any interest in a lease when used to secure payment or performance of an obligation.

The appellants admit, in their brief, that the purpose of the assignment clause, or one of the purposes, is to use those returned or unearned premiums to apply to the debt of the debtor for the car. Appellants argue that the amount of such premiums would not be enough to offset any substantial portion of the debt owed on a car. Nevertheless, the definition given in the pertinent clause of Regulation Z does create an interest on the part of the creditor which secures payment or performance of an obligation. Therefore, the arguments of the appellants must fail under the clear definition of security interests.

As stated in Valencia & Gonzalez, supra, 617 F.2d at p. 1285:

Application of the Regulation Z definition of "security interest" in this case, as in Edmondson, poses no special problems. It is not seriously disputed that the assignment of unearned insurance premiums confers on the creditor an interest in property. Even the defendants refer to the assignment as an "incidental interest in property." Brief of Appellants at 8. Whether incidental or not, we agree with the Fifth Circuit that such an assignment is an interest in property. 577 F.2d at 294. Similarly, we agree that this property interest secures the performance or payment of an obligation. The assigned premiums may be used, in the sole discretion of the creditor, to purchase replacement insurance coverage or to pay part of the debtor's indebtedness. In either case, the assignment secures an obligation of the debtor. Id. at 294. The Creditor has the authority to cancel the insurance and cause payment of the unearned premiums to itself at any time. The contract clearly gives the creditor an interest in property which secures performance of a debtor's obligation. Such an interest is by definition a security interest for TILA purposes. 12 C.F.R. § 226.2(gg), and as such must be disclosed. Defendants do not suggest that such disclosure was made in the contract before us. (emphasis supplied)

Herein, the appellants concede that the assignment creates an "interest" in favor of the lender, albeit "incidental." The purpose of the assignment is to secure the payment or performance of the debtor's obligation, however small the amount of the unearned or returned premiums might be. The application of the proceeds of the insurance, whether in the form of an indemnity or returned or unearned premiums, places the assignment squarely within the definition of a security interest under Regulation Z. Undeniably, the premiums would go to secure "payment or performance of an obligation," i. e., the payment of the principal and interest of the amount of the loan to the debtor.

While we recognize that state law may be a factor in determining whether a security interest has been created in a given situation, an interest may, nevertheless, be a security interest for purposes of TILA even though it is not an enforceable security interest under state commercial law. Valencia & Gonzalez, supra; Bulger v. Thorp Credit, Inc. of Illinois, 609 F.2d...