Jody James and Barbara James v. Ford Motor Credit Company and Del Norte Motor Company , 638 F.2d 147 ( 1980 )

BREITENSTEIN, Circuit Judge.

This action, which arose in Colorado, seeks recovery of a statutory civil liability for failure to disclose in an automobile installment purchase contract the right of the seller to a returned and unearned insurance premium on a policy covering physical damage insurance. The claim is made under the Truth in Lending Act, TILA, 15 U.S.C. § 1601 et seq. as implemented by Federal Reserve Board Regulation Z, 12 C.F.R. § 226. The district court granted a motion to dismiss and the plaintiffs-buyers appeal. We affirm.

The plaintiffs-appellants, Jody and Barbara James, purchased a pick-up truck from defendant-appellee Del Norte Motor Company and executed an installment purchase contract which was assigned to Ford Motor Credit Corporation. The contract shows a cash price of $5395.00, down payments of cash and trade-in totalling $900.50, and a balance due of $4,494.50. To this are added other charges consisting of $359.84 for insurance and $5.50 registration fee. Also added is a finance charge of $1,238.92, at an annual interest rate of 15.40%. The balance due is payable in monthly installments of $169.41.

Paragraph 13 of the signed face page of the contract reads:

“Security Interest: Seller shall have a security interest under the Uniform Commercial Code in the Property (described above) and to the proceeds thereof to secure the payment in cash of the Total of Payments and all other amounts due or to become due thereunder.”

Paragraph 15 on the face page provides that the terms and conditions on the reverse side are incorporated by reference. Paragraph 18 on the reverse side relates to insurance and among other things provides:

“Buyer hereby assigns to Seller any monies payable under such insurance, by whomever obtained, including returned or unearned premiums, and Seller hereby is authorized on behalf of both Buyer and Seller to receive or collect same, * *. The proceeds from such insurance, by whomever obtained, shall be applied toward replacement of the Property or payment of the indebtedness hereunder in the sole discretion of the Seller.”

TILA requires, 15 U.S.C. § 1631(a), that a creditor “clearly and conspicuously, in accordance with the regulations of the Board” disclose the information mandated by the Act. Reg. Z, 12 C.F.R. § 226.8(a) provides that all the disclosures be made on either:

“(1) The note or other instrument evidencing the obligation on the same side of the page and above the place for the customer’s signature; or (2) One side of a separate statement which identifies the transaction.”

Failure to disclose properly the required information subjects the offender to a civil liability of not more than $1,000.00 plus reasonable attorneys’ fees. 15 U.S.C. § 1640(a). The purchasers sue for the statutory liability and attorneys’ fees. The trial court held that the assignment of the returned and unearned portion of the insurance premium was not a security interest under the Colorado version of the Uniform Commercial Code. See Colo.Rev.Stat. (1973) § 4-9-102.

TILA requires, 15 U.S.C. § 1638(a)(10), the disclosure of “[a] description of any security interest held or to be retained or acquired by the creditor in connection with the extension of credit, and a clear identification of the property to which the security interest relates.” The act does not define “security” or “security interest.” Reg. Z provides, 12 C.F.R. § 226.2(gg):

“ ‘Security interest’ and ‘security’ means 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 [various liens and a lease interest securing performance of an obligation].”

The reference to the Uniform Commercial Code specifically declares that it is not a limitation. Although the interplay of federal and state law presents problems, the right to the TILA civil liability for nondisclosure rests on federal law. TILA is remedial legislation, designed to prevent predatory creditor practices, and must be liberally construed to effectuate the intent of Congress. See Mourning v. Family Publications Service, Inc., 411 U.S. 356, 365, 93 S.Ct. 1652, 1658, 36 L.Ed.2d 318 and Littlefield v. Walt Flanagan and Company, 10 Cir., 498 F.2d 1133, 1136.

Three circuits have held that nondisclosure of the seller’s right to unearned and returned premiums violates TILA and subjects the seller to the statutory liability. See Gennuso v. Commercial Bank & Trust Company, 3 Cir., 566 F.2d 437; Edmondson v. Allen-Russell Ford, Inc., 5 Cir., 577 F.2d 291, cert. denied 441 U.S. 951, 99 S.Ct. 2180, 60 L.Ed.2d 1057; and Valencia v. Anderson Brothers Ford, 7 Cir., 617 F.2d 1278. The last of these, Valencia, was decided on March 20, 1980.

On March 31, 1980, the President approved the “Truth in Lending Simplification and Reform Act” as Title VI of the “Monetary Control Act of 1980.” P.L. 96-221, 94 Stat. 132. Section 614(a) amends 15 U.S.C. § 1638(a), the disclosure section of TILA. Subsection (a)(9) reads, U.S.Code Cong. & Admin.News, No. 3, May 1980, 94 Stat. 179:

“Where the credit is secured, [the creditor shall disclose to the extent applicable] a statement that a security interest has been taken in (A) the property which is purchased as part of the credit transaction, or (B) property not purchased as part of the credit transaction identified by item or type.”

S.R. 96-368, U.S.Code Cong. & Admin. News, supra, p. 850, states the purpose of the 1980 amendments thus:

“Despite the act’s clear successes, however, there is a growing belief among consumers and creditors alike that the act could be substantially improved. There is considerable evidence, for example, that disclosure forms given consumers are too lengthy and difficult to understand. Creditors, on the other hand, have encountered increasing difficulty in keeping current with a steady stream of administrative interpretations and amendments, as well as highly technical judicial decisions. There is also evidence that many creditors have sincerely tried to comply with the act but, due to its increasing complexity and frequent changes, have nonetheless found themselves in violation and subject to litigation. In addition, this committee and other congressional and government sources have found the level of administrative enforcement by the Federal bank agencies seriously inadequate. In short, the committee believes that the interests of both consumers and creditors would be furthered by simplification and reform of the act.”

With particular reference to the amendment of the disclosure requirements of § 1638(a), the Senate Report says, U.S. Code Cong. & Admin.News 1980, p. 864:

“The security interest disclosure is also simplified to eliminate the technical disclosure of the type of security interest taken. When a security interest is being taken in property purchased as part of the credit transaction, this section requires a statement that a security interest has been or will be taken in the property purchased. When a security interest is being taken in property not purchased as part of the credit transaction, the Committee intends this provision to require a listing by item or type of the property securing the transaction, but not a listing of related or incidental interests in the property. For example, a loan secured by an automobile (not being purchased with the proceeds of the loan) would require a statement indicating that the loan is secured by an automobile but would not require a listing of incidental or related rights which the creditor may have such as insurance proceeds or unearned insurance premiums, rights arising under, or waived in accord with state law, accessions, accessories or proceeds.” (Emphasis supplied)

S.Rep.No. 96-73 says, U.S.Code Cong. & Admin.News 1980, at 879-880:

“The subcommittee learned that judging from consumer tests in other areas, the typical disclosure statement utilized today by creditors is not an effective communication device. Most disclosure statements are lengthy, written in legalistic fine print, and have essential truth in lending disclosures scattered among various contactual [sic] terms.

The result is a piece of paper which appears to be ‘just another legal document’ instead of the simple, concise disclosure form Congress intended.”

Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 100 S.Ct. 790, 63 L.Ed.2d 22 (1980), was concerned with the imposition of the statutory liability under TILA for a claimed nondisclosure of an acceleration clause. The Court concluded, at 561, 100 S.Ct. at 794, that the issue of acceleration disclosure “is not governed by clear expression in the statute or regulation, and *** it is appropriate to defer to the Federal Reserve grard and staff in determining what resolution of that issue is implied by the truth in lending enactments.” The Court examined the Federal Reserve Board staff treatment of acceleration disclosure and denied imposition of the statutory liability.

We are aware of no administrative interpretations pertinent to the particular issue before us. Public Position Letter No. 377, quoted in Edmondson, 577 F.2d 295, n. 8, relates to life insurance, not physical damage insurance. Staff Letter 1263, Consumer Credit Guide (CCH) ¶31,736 (November 23, 1977), an unofficial interpretation, leaves to state law the question of whether a security interest has been acquired by the creditor and, if so, whether that interest has been adequately identified.

In Milhollin, supra, at 568, 100 S.Ct. at 798, the Court said:

“The concept of ‘meaningful disclosure’ that animates TILA (citation omitted), cannot be applied in the abstract. Meaningful disclosure does not mean more disclosure. Rather, it describes a balance between ‘competing considerations of complete disclosure . . . and the need to avoid . . . “informational overload” ’ (citations omitted) and striking the appropriate balance is an empirical process that entails investigation into consumer psychology and that presupposes broad experience with credit practices.” (Emphasis in original).

The Milhollin approach parallels the intent of Congress in enacting the 1980 amendments and the legislative history of those amendments. The effort is to strengthen the impact of TILA by simple, concise disclosures which can be understood by consumers and creditors. The installment contract in issue identifies the security interest taken in the property purchased, the pick-up truck. The insurance charge is specifically noted on the face of the contract and is included in the total amount which must be repaid in monthly installments. The insurance on damage to the vehicle was part of the credit transaction. The right of the seller to the returned premium would seem to be part of the “proceeds” of that transaction. If not such a part, the returned premium is property not purchased. The Senate Report, U.S.Code Cong. & Admin.News 1980, supra p. 864, says with reference to property not purchased, that the disclosure need not include “a listing of incidental or related rights which the creditor may have such as insurance proceeds or unearned insurance premiums.” We are convinced that the Act does not require, and Congress did not intend it to require, an exemplification of that interest on the face of the installment contract. Because of this conclusion, we need not delve into the legal complexities of the Third Circuit decision in Gennuso, 566 F.2d 437; the Fifth Circuit decision in Edmondson, 577 F.2d 291; and the Seventh Circuit decision in Valencia, 617 F.2d 1278.

The application of Milhollin and the 1980 actions of Congress present no retroactivity problem. We are concerned only with civil liability for nondisclosure. The buyers have shown no damage. Our decision establishes no new principle of law. Rather, it recognizes the congressional intent. Application to this case furthers the operation of TILA and produces an equitable result. See Chevron Oil Co. v. Huson, 404 U.S. 97,106-107, 92 S.Ct. 349, 355, 30 L.Ed.2d 296.

Affirmed.