Smith v. Cash Store Management

• Decision Date: 27 October 1999
• Docket Number: No. 99-2472,99-2472
• Citation: 195 F.3d 325
• Parties: (7th Cir. 1999) Valerie D. Smith, Plaintiff-Appellant, v. The Cash Store Management, Inc.; The Cash Store, Ltd.; Harold L. Ahlberg; Trevor L. Ahlberg; and John Does 1-10, Defendants-Appellees
• Court: U.S. Court of Appeals — Seventh Circuit

Page 325

195 F.3d 325 (7th Cir. 1999)

Valerie D. Smith, Plaintiff-Appellant, v. The Cash Store Management, Inc.; The Cash Store, Ltd.; Harold L. Ahlberg; Trevor L. Ahlberg; and John Does 1-10, Defendants-Appellees.

No. 99-2472

United States Court of Appeals, Seventh Circuit

Argued September 10, 1999

Decided October 27, 1999

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 1726--Suzanne B. Conlon, Judge.

Before Flaum, Manion, and Diane P. Wood, Circuit Judges.

Flaum, Circuit Judge.

Valerie Smith sued The Cash Store, Ltd.; The Cash Store Management, Inc.; and The Cash Store Management, Inc.'s officers and directors (collectively "Cash Store") on behalf of a putative class for violations of the Truth in Lending Act ("TILA"), 15 U.S.C. sec. 1601 et seq., and Illinois state contract law and consumer fraud statutes. This is an appeal from the district court's dismissal of Smith's suit for failure to state a claim under TILA. For the reasons set forth below, we affirm in part and reverse in part.

Background

Cash Store operates at least sixteen loan establishments in Illinois. These establishments specialize in making short-term, high interest "payday loans," typically two weeks in duration and carrying annual percentage rates greater than 500%. When a Cash Store customer is granted a loan, the customer writes out a check, post-dated to the end of the loan period, for the full amount that he is obligated to pay. At the end of the two week period, the customer has the option of continuing the loan for an additional two week period by paying the interest.

Between June 13, 1998 and September 19, 1998, Smith obtained eight such loans from Cash Store. On each occasion she signed a standard "Consumer Loan Agreement" form. Each loan agreement stated an annual interest rate of 521%. Each loan agreement also contained the statement: "Security. Your post-dated check is security for this loan." Upon entering into or renewing each loan, Cash Store stapled to the top of the loan agreement a receipt which labeled the finance charge in red ink as either a "deferred deposit extension fee" or a "deferred deposit check fee," depending on whether the transaction was a renewal or an original loan.

The details of the loan agreement are important because the content and presentation of such agreements are regulated under TILA, 15 U.S.C. sec. 1601 et seq., and implementing Federal Reserve Board Regulation Z ("Regulation Z"), 12 C.F.R. sec. 226. Congress enacted TILA to ensure that consumers receive accurate information from creditors in a precise, uniform manner that allows consumers to compare the cost of credit from various lenders. 15 U.S.C. sec. 1601; Anderson Bros. Ford v. Valencia, 452 U.S. 205, 220 (1981). Regulation Z mandates that: "The creditor shall make the disclosures required by this subpart clearly and conspicuously in writing, in a form that the consumer may keep. The disclosures shall be grouped together, shall be segregated from everything else, and shall not contain any information not directly related to the [required] disclosures . . . ." 12 C.F.R. sec. 226.17(a)(1). The mandatory disclosures, which must be grouped in a federal disclosure section of a written loan agreement, include, among other things, the finance charge, the annual percentage rate, and any security interests that the lender takes. 12 C.F.R. sec. 226.18.

On March 16, 1999, Smith filed a class action complaint, amended on April 6, 1999, against Cash Store in the United States District Court for the Northern District of Illinois. She sued on behalf of a putative class for violations of TILA, for relief from an unconscionable loan contract, and for violations of the Illinois Consumer Fraud Act. The district court dismissed with prejudice the TILA claims for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6), and then exercised its discretion to dismiss without prejudice the remaining supplemental state claims, as permitted by 28 U.S.C. sec. 1367(c)(3).

Discussion

Smith argues on appeal that two of Cash Store's practices violate TILA, and that the district court's dismissal of the claims was therefore erroneous. The first practice relates to the receipts that Cash Store routinely stapled to the top of Smith's loan agreements. Smith contends that the receipts physically obscured the required federal disclosures and that they characterized the finance charges in a misleading way. The second practice relates to the security interest disclosures, which Smith contends were inaccurate. We address each of these allegations in turn.

The Receipt Claim

TILA requires that a creditor make the required disclosures "clearly and conspicuously in writing . . . ." 12 C.F.R. sec. 226.17. Smith alleges that the cash register receipt that Cash Store stapled to the upper lefthand corner of the loan agreements physically covered up some of the required disclosures. Furthermore, on her receipts were printed, in red, the terms "deferred deposit extension fee" or "deferred deposit check fee," whereas the term "finance charge" is used in the federal disclosure box. Smith argues that both of these practices render the required disclosures on the loan agreement neither "clear" nor "conspicuous."

The district court dismissed the claim relating to the Cash Store receipt on the ground that the allegations did not state a cause of action. It held that neither Cash Store's stapling of a receipt to the loan documents nor the printed contents of the receipt violated TILA, having found that "Cash Store's practice of stapling a small receipt to its TILA disclosures could not reasonably confuse or mislead Smith as to the terms of the loan." Smith v. Cash Store Mgmt., Inc., No. 99 C 1726, 1999 WL 412447, at *3 (N.D. Ill. June 8, 1999).

A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts to support his claim which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645, 648 (7th Cir. 1997). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Caremark, 113 F.3d at 648 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). As we recently stated, "Rule 12(b)(6) should be employed only when the complaint does not present a legal claim." Johnson v. Revenue Mgmt. Corp., 169 F.3d 1057, 1059 (7th Cir. 1999). Because the district court may not dismiss the complaint under Rule 12(b)(6) unless it is legally insufficient, we review that decision de novo. Caremark, 113 F.3d at 648.

As noted above, Regulation Z requires that "[t]he creditor shall make the disclosures required by this subpart clearly and conspicuously." 12 C.F.R sec. 226.17. The "sufficiency of TILA-mandated disclosures is to be viewed from the standpoint of an ordinary consumer, not the perspective of a Federal Reserve Board member, federal judge, or English professor." Cemail v. Viking Dodge, 982 F. Supp. 1296, 1302 (N.D. Ill. 1997).

Whether or not Cash Store's practices run afoul of Regulation Z is a factual issue, and the district court therefore erred in dismissing the receipt claims under Rule 12(b)(6). In her amended complaint, Smith contends that the stapled receipt contradicted and obfuscated the required disclosures. Am. Compl., para. 19. Her claim may fail on the facts, "but assessing factual support for a suit is not the office of Rule 12(b)(6)." Johnson, 169 F.3d at 1059. Although our holding does not preclude Cash Store from arguing, at the summary judgment stage, that Smith cannot prove her claims, Smith's complaint alleging that the stapled receipt obscured the disclosures and that the printed contents of the receipt were confusing or misleading states a valid legal claim under TILA, and that is sufficient to pass Rule 12(b)(6) scrutiny.

The Security Interest Claim

Smith also contends that the district court erred in holding that Cash Store's statement, "Your post-dated check is security for this loan," was a lawful disclosure under TILA. TILA requires creditors to disclose accurately any security interest taken by the lender and to describe accurately the property in which the interest is taken. 15 U.S.C. sec. 1638; 12 C.F.R. sec. 226.18. Regulation Z defines "security interest" as "an interest in property that secures performance of a consumer credit obligation and that is recognized by state or federal law." 12 C.F.R. sec. 226.2(a)(25). Smith contends that Cash Store's statement in the loan agreement violates TILA because, under Illinois law, the check does not serve as security.

Subject to narrow exceptions, "hypertechnicality reigns" in the application of TILA. Cowen v. Bank United of Texas, FSB, 70 F.3d 937, 941 (7th Cir. 1995). Regulation Z specifies that certain federal disclosures must be grouped together in the loan agreement and also directs that the agreement "not contain any information not directly related to the [required] disclosures." 12 C.F.R. sec. 226.17(a)(1). In Bizier v. Globe Financial Services Inc., the First Circuit explained that overinclusive security interest disclosures "cannot be dismissed as de minimis or hypertechnical." Overinclusive disclosures might deter a borrower's "future borrowing or property acquisition out of an exaggerated belief in the security interest to which they would be subject, or [give] a lender an apparent right which, even if ultimately unenforceable, could serve as a significant bargaining lever in any future negotiations concerning rights or obligations under the loan." 654 F.2d 1, 3 (1st Cir. 1981); see also Tinsman v. Moline Beneficial Fin. Co., 531 F.2d 815, 818-19 (7th Cir. 1976) (holding that an overbroad disclosure of security interests violated TILA).¹ All TILA disclosures must be accurate, Gibson v....