Szumny v. American General Finance

• Decision Date: 13 April 2001
• Docket Number: No. 99-4056,99-4056
• Citation: 246 F.3d 1065
• Parties: (7th Cir. 2001) FRANK J. SZUMNY, Plaintiff-Appellant, v. AMERICAN GENERAL FINANCE, INCORPORATED and AMERICAN SECURITY INSURANCE COMPANY, Defendants-Appellees
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1065

246 F.3d 1065 (7th Cir. 2001)

FRANK J. SZUMNY, Plaintiff-Appellant, v. AMERICAN GENERAL FINANCE, INCORPORATED and AMERICAN SECURITY INSURANCE COMPANY, Defendants-Appellees.

No. 99-4056

In the United States Court of Appeals For the Seventh Circuit

Argued September 6, 2000

Decided April 13, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 CV 439--Wayne R. Andersen, Judge. [Copyrighted Material Omitted]

Before CUDAHY, COFFEY and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

Frank Szumny brought this action against American General Finance, Inc. ("AGFI") on behalf of a putative class. He alleged violations of the Truth in Lending Act ("TILA"), 15 U.S.C. sec. 1601 et seq.; the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq.; and the Illinois Consumer Installment Loan Act, 205 ILCS 670/1 et seq. The district court dismissed Mr. Szumny's suit for failure to state a claim under TILA. For the reasons set forth in the following opinion, we affirm the judgment of the district court.

I BACKGROUND

A.

The district court dismissed this case under Rule 12(b)(6) of the Federal Rules of Civil Procedure. We must, therefore, take all facts alleged in the complaint, and any inferences that might be reasonably drawn from those factual allegations, in the light most favorable to the plaintiff. See Autry v. Northwest Premium Servs., Inc., 144 F.3d 1037, 1039 (7th Cir. 1998). 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 in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

B.

Mr. Szumny signed a consumer loan note with AGFI in April 1998. The loan of $1,135.05 carried a finance charge of $408.95 and an annual percentage rate of 27.99%. In the disclosure statement provided to Mr. Szumny pursuant to TILA, AGFI disclosed a security interest, described as "Home Office Equip, TV/Video/Audio Equip, Pool/Patio Equip." R.22, Ex.D.

AGFI requires that its customers purchase personal property insurance to protect the secured collateral. This coverage may be purchased either through AGFI and financed under the contract, or it may be obtained from another insurer. Mr. Szumny elected to purchase the requisite insurance from AGFI, through American Security Insurance Co. ("ASIC").¹ AGFI acted as ASIC's agent for purposes of the sale. The insurance premium was $52.08; AGFI, as the creditor, was named the primary loss payee on the policy.

C.

On January 26, 1999, Mr. Szumny filed a class action complaint against AGFI. He sued on behalf of a putative class for violations of TILA, the Illinois Consumer Fraud and Deceptive Practices Act, and the Illinois Consumer Installment Loan Act.

More precisely, Mr. Szumny alleged that AGFI's description of the collateral was inadequate to constitute a security interest under state law; the description was not sufficiently specific, and it impermissibly encompassed various household goods. He argued, moreover, that AGFI required consumers to create security interests in its favor only as a subterfuge to sell insurance on the underlying collateral. Although he acknowledged that he was not required to purchase insurance through AGFI, Mr. Szumny nevertheless contended that AGFI knew that its description of the security interest was inadequate and that it never intended to enforce the interest. AGFI therefore violated TILA, Mr. Szumny asserted, by claiming on the disclosure form a security interest it did not possess under state law.

Mr. Szumny also contended that, because AGFI did not possess a valid security interest in his property, it was required to include the cost of the insurance premium in the finance charge and annual percentage rate figures. In his view, including the amount of the insurance premium within the amount financed violated TILA.

The district court dismissed with prejudice the TILA claim for failure to state a claim upon which relief can be granted, see Fed. R. Civ. P. 12(b)(6), and then dismissed without prejudice the supplemental state law claims. We shall set forth in more detail the reasoning of the district court in our discussion of each of the issues presented to us on appeal.

II DISCUSSION

A. TILA Disclosure Requirements

Mr. Szumny maintains on appeal that state law should govern the adequacy of disclosure of security interests under TILA, just as it controls the adequacy of disclosure when security interests are created under Illinois' Uniform Commercial Code. Specifically, Mr. Szumny contends that AGFI's description of the collateral underlying the security interest was not sufficiently detailed; it did not delineate with the required precision the encumbered property. Thus, he concludes, no security interest exists, and a violation of TILA arises because AGFI has described a security interest that it does not possess.

In rejecting Mr. Szumny's claim, the district court, relying on our decision in In re Dingledine, 916 F.2d 408 (7th Cir. 1990), determined that AGFI had complied with TILA's requirement that security interests in property be described by item or type. See 15 U.S.C. sec. 1638(a)(9). The district court explained that courts have been "loath" to apply state requirements and federal requirements from other federal regulatory schemes to TILA disclosure rules. R.40 at 5. Although recognizing that state law may give debtors different, even better, protections with respect to the required description of collateral, the court cautioned that such requirements should not be confused with the TILA requirement that the property subject to the security interest be accurately described for purposes of advising the debtor of his rights under TILA. The district court, therefore, took the view that TILA does not require perfect congruence between the description of security interests required by state law and that required by TILA.

The district court was correct. TILA mandates that lenders disclose, in statements to consumers, property subject to security interests by "item or type." 15 U.S.C. sec. 1638(a)(9). Regulation Z, promulgated by the Federal Reserve Board to implement TILA, similarly instructs creditors to include in their disclosures descriptions of security interests by item or type. The regulation provides that:

For each transaction, the creditor shall disclose the following information as applicable: . . . . (m) Security interest. The fact that the creditor has or will acquire a security interest in the property purchased as part of the transaction, or in other property identified by item or type.

12 C.F.R. sec. 226.18(m). Because the Federal Reserve Board is the agency charged with TILA's administration, we accord its regulation deference. See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566 (1980) (explaining that the Court "has often repeated the general proposition that considerable respect is due the interpretation given [a] statute by the officers or agency charged with its administration. . . . This traditional acquiescence in administrative expertise is particularly apt under TILA, because the Federal Reserve Board has played a pivotal role in setting [the statutory] machinery in motion. . . .") (internal quotations omitted).

The official commentary to Regulation Z, also instructive here, has been regarded as an "authoritative interpretation" of TILA and Regulation Z by this court. In re Dingledine, 916 F.2d at 411. The commentary echoes the "item or type" requirement, explaining that:

In nonpurchase money transactions, the property subject to the security interest must be identified by item or type. This disclosure is satisfied by a general disclosure of the category of property subject to the security interest, such as "motor vehicles," "securities," "certain household items," or "household goods." (Creditors should be aware, however, that the Federal credit practices rules, as well as some state laws, prohibit certain security interests in household goods.) At the creditor's option, however, a more precise identification of the property or goods may be provided.

12 C.F.R. Pt. 226, Supp. I, sec. 226.18(m)(2) (emphasis supplied).

Thus, because TILA and the regulation promulgated to implement it require only a general description of a category of property, AGFI's description of "Home Office Equip, TV/Video/Audio Equip, Pool/Patio Equip." passes muster. Indeed, in Dingledine, 916 F.2d at 411, we recognized that TILA's disclosure requirements were designed to give adequate notice to the debtor of the existence of security interests under state law so that the debtor could further investigate, by reference to the documents required by state law, the specific contours of that security interest:

[The description at issue] is sufficiently general in nature to put the consumer on notice that the disclosure statement is disclosing only the fact of a security interest in the consumer's property, not the specific property covered by the security interest. The consumer must look to the security agreement to ascertain the exact items securing the loan. The Federal Reserve Board certainly contemplated this result when it decided to allow the disclosure to identify the property by a "general disclosure of the category of property. . . ." While a more specific description of categories or a more detailed description of property certainly is possible, the commentary leaves that to the discretion of the creditor.

Id.

We note that this general disclosure requirement is compatible with TILA's consumer-protection purpose. TILA was enacted 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." 15 U.S.C. sec. 1601(a); see also Gibson v. Bob Watson Chevrolet- Geo,...