Edwards v. Your Credit Inc ( 1998 )

UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
____________
No. 97-30826
____________
CONNIE EDWARDS,
Plaintiff-Appellant,
versus
YOUR CREDIT INC,
Defendant-Appellee.
Appeal from the United States District Court
for the Middle District of Louisiana
July 21, 1998
Before GARWOOD, SMITH, and EMILIO M. GARZA, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
Connie Edwards (“Edwards”) appeals the district court’s grant
of summary judgment in favor of Your Credit, Inc. (“Your Credit”).
Edwards alleges that Your Credit violated the Truth in Lending Act
(“TILA”), 15 U.S.C. §§ 1601 et seq., and Regulation Z, 12 C.F.R.
§ 226, by improperly disclosing an insurance premium on her loan
financing applications. She contends that Your Credit should have
included the premium in the finance charge rather than in the
amount financed on the applications, an error that allegedly
resulted in the understatement of the finance charge and the annual
percentage rate (“APR”). Finding a genuine dispute of material
fact to exist, we reverse and remand.
I
Edwards financed the purchase of a TV and VCR on two separate
occasions with Your Credit, a consumer finance company. Your
Credit makes small loans to consumers to finance the purchase of
consumer goods at high interest rates, and in return, takes back a
security interest in the item financed. Your Credit does not file
a Uniform Commercial Code-1 (“UCC”) financing statement to perfect
its security interest; instead, it purchases nonfiling insurance.
This nonfiling insurance, as we discuss below, protects Your Credit
from losses sustained solely as a result of its failure to file a
financing statement.1
On each occasion, Edwards purchased an item costing $100.
Each time, when Edwards completed a loan application, Your Credit
disclosed to her that it had added $7.38 as a premium for credit
life insurance and $20 as a premium for nonfiling insurance to the
item’s cost as part of the amount financed, for an amount financed
of $127.38. Based on an APR of 168.89 percent, Your Credit then
calculated the finance charge on this $127.38, which came to
$39.95. Thus, Edwards paid a total of $167.33 on each occasion, or
$67.33 in financing costs for each $100 purchase.
Using the $20, Your Credit paid a premium under a master
nonfiling insurance policy (the “policy”) that Voyager Property and
Casualty Insurance Company (“Voyager”), a separate and unrelated
1
This opinion contrasts nonfiling insurance with general
default insurance, which, for purposes of this opinion, “protect[s]
the creditor against the consumer’s default or other credit loss.”
12 C.F.R. § 226.4(b)(5).
insurance company, had previously issued it. The policy provided,
in pertinent part, that it covers losses sustained where Your
Credit is damaged through being prevented from obtaining possession
of the secured property or enforcing its rights under the security
agreement “solely as the result of the failure of the Insured duly
to record or file the Instrument with the proper public officer or
public office.” Voyager’s agent, Consumer Insurance Associates,
Inc. (“CIA”), administered the policy. The Administrative Services
Agreement between Voyager and CIA gave CIA the “sole right to pay,
compromise, reject or deny any such [nonfiling] claim.”
Edwards filed a class action lawsuit alleging that Your Credit
had violated TILA, Regulation Z, and state law2 by improperly
disclosing the nonfiling insurance premium in the amount financed.
She alleged that by including the premium in the amount financed
rather than in the finance charge, Your Credit had understated the
finance charge and the APR. If Your Credit had properly included
the premium in the finance charge, Edwards alleged that the APR
would have been 263 percent, rather than 168.89 percent. Because
Your Credit calculated the finance charge based on the amount
financed, Edwards also argued that it improperly charged her
interest on the premium when it included the premium in the amount
financed.
Edwards premised her claim on two alternative theories. She
first argued that although the policy required Voyager to pay for
2
Edwards later dismissed her state law claims when she
filed an amended complaint.
-3-
losses sustained solely as a result of Your Credit’s failure to
file a financing statement, the policy did not reflect the actual
practices of Your Credit and Voyager because Your Credit routinely
submitted and Voyager (through CIA) routinely paid claims for any
loss, no matter what the cause. In other words, Edwards argued
that the claims practices of Your Credit and Voyager transformed
the policy into a general default insurance policy for purposes of
the proper TILA disclosure method, and that TILA therefore required
that the premium be included in the finance charge. Second,
Edwards claimed that Voyager and Your Credit had an informal
understanding pursuant to which Voyager would cancel the policy if
Your Credit submitted aggregate claims valued in excess of 89.25
percent of the aggregate premiums paid. This 89.25 percent figure
allegedly served as an informal “stop-loss” provision and prevented
the risk of loss from shifting from Your Credit to Voyager. No
risk having shifted, Edwards reasoned, Your Credit had effectively
retained the premium as a sort of self-insurance or bad-debt
reserve, which again required Your Credit to include it in the
finance charge.
Prior to ruling on whether to certify the suit as a class
action, the district court granted summary judgment in favor of
Your Credit. The court first noted that the policy’s language
unambiguously established that the policy covered losses due to the
failure to file a financing statement. It then purported to look
behind the policy’s language to determine whether Voyager and Your
Credit’s claims practices had “reformed” the policy into general
-4-
default insurance, either through mutual error or fraud. It
concluded that although Voyager may have paid claims for which it
was not liable, no mutual error or fraud had occurred because both
Voyager and Your Credit had intended the policy to cover nonfiling
insurance. The court also looked at summary judgment record
deposition testimony to determine that the 89.25 percent figure was
only an internal figure that Voyager used to calculate its expected
profits and losses and not an informal stop-loss agreement.
Finding no evidence that Your Credit was aware of this figure, the
court rejected this argument as well, and granted summary judgment
in favor of Your Credit. Because the court concluded that Your
Credit did not violate TILA, it did not address Your Credit’s
arguments that the McCarran-Ferguson Act, 15 U.S.C. § 1012(b),
preempted this action. Edwards’ timely appeal followed.
II
We review a district court’s grant of summary judgment de
novo. See New York Life Ins. Co. v. Travelers Ins. Co., 92 F.3d
336, 338 (5th Cir. 1996). We also review district court
determinations of state law de novo. See Salve Regina College v.
Russell, 499 U.S. 225, 239, 111 S. Ct. 1217, 1221, 113 L. Ed. 2d
190 (1991). Summary judgment is appropriate when the record
discloses “that there is no genuine issue of material fact and that
the moving party is entitled to a judgment as a matter of law.”
FED. R. CIV. P. 56(c). The moving party bears the initial burden
of identifying those portions of the pleadings and discovery in the
record that it believes demonstrate the absence of a genuine issue
-5-
of material fact, but it is not required to negate elements of the
nonmoving party’s case. See Celotex Corp v. Catrett, 477 U.S. 317,
325, 106 S. Ct. 2548, 2554, 91 L. Ed. 2d 265 (1986). Once the
moving party meets this burden, the nonmoving party must set forth
specific facts showing a genuine issue for trial and not rest upon
the allegations or denials contained in its pleadings. See FED. R.
CIV. P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-
57, 106 S. Ct. 2505, 2514, 91 L. Ed. 2d 202 (1986). Factual
controversies are construed in the light most favorable to the
nonmovant, but only if both parties have introduced evidence
showing that an actual controversy exists. See Little v. Liquid
Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc).
III
Congress enacted TILA to promote the “informed use of credit
. . . [and] an awareness of the cost thereof by consumers” by
“assur[ing] a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various credit
terms available to him.” 15 U.S.C. § 1601(a); see also Beach v.
Ocwen Fed. Bank, __ U.S. __, 118 S. Ct. 1408, 1409-10, 140 L. Ed.
2d 566 (1998); Mourning v. Family Publications Serv., Inc., 411
U.S. 356, 363-69, 93 S. Ct. 1652, 1657-60, 36 L. Ed. 2d 318 (1973);
Fairley v. Turan-Foley Imports, Inc., 65 F.3d 475, 479 (5th Cir.
1995). TILA requires a lender to disclose, inter alia, three
pieces of information to a borrower: the amount financed, the
finance charge, and the APR. See 15 U.S.C. § 1638. The APR is
calculated by reference to the duration of a loan, its payment
-6-
terms, and the finance charge. See 15 U.S.C. § 1606; First Acadiana
Bank v. FDIC, 833 F.2d 548, 550 (5th Cir. 1987).
TILA defines the finance charge as the “sum of all charges,
payable directly or indirectly by the person to whom the credit is
extended, and imposed directly or indirectly by the creditor as an
incident to the extension of credit.” 15 U.S.C. § 1605(a); 12
C.F.R. § 226.4(a). A finance charge includes a “[p]remium or other
charge for any guarantee or insurance protecting the creditor
against the obligor’s default or other credit loss.” § 1605(a)(5);
12 C.F.R. § 226.4(b)(5). Some charges do not have to be included
in the finance charge, including filing fees paid to public
officials to perfect a security interest, see § 1605(d)(1), and the
“premium payable for any insurance in lieu of perfecting any
security interest otherwise required by the creditor in connection
with the transaction, if the premium does not exceed the fees and
charges . . . which would otherwise be payable.” § 1605(d)(2); 12
C.F.R. § 226.4(e)(2). “If a creditor collects and simply retains a
fee as a sort of self-insurance against nonfiling it may not be
excluded from the finance charge.” Regulation Z, Official Staff
Interpretation, 12 C.F.R. § 226, Supp. I, at 312 (1995) (emphasis
in original).
Understating the finance charge is a “type of fraud that goes
to the heart of the concerns that actuate the Truth in Lending
Act.” Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283, 287
(7th Cir. 1997) (Posner, C.J.). “To promote the Act’s purpose of
protecting consumers, our court has made clear that creditors must
-7-
comply strictly with the mandates of the TILA and Regulation Z.”
Fairley, 65 F.3d at 479; Smith v. Chapman, 614 F.2d 968, 971 (5th
Cir. 1980); McGowan v. King, Inc., 569 F.2d 845, 848 (5th Cir.
1978) (noting that TILA is designed to create enforcement through
a system of private attorneys general). “[T]he ‘remedial scheme of
TILA is designed to deter generally illegalities which are only
rarely uncovered and punished, and not just to compensate borrowers
for their actual injuries in any particular case.’” Fairley, 65
F.3d at 480 (quoting Williams v. Public Fin. Corp., 598 F.2d 349,
356 (5th Cir. 1979)).
IV
Your Credit initially contends that the McCarran-Ferguson Act
(“McCarran Act”), 15 U.S.C. § 1012(b), bars our consideration of
the merits of this case. The McCarran Act provides: “[n]o Act of
Congress shall be construed to invalidate, impair, or supersede any
law enacted by any State for the purpose of regulating the business
of insurance . . . unless such Act specifically relates to the
business of insurance.” § 1012(b). “The McCarran-Ferguson Act
establishes a form of inverse preemption, letting state law prevail
over general federal rules))those that do not ‘specifically
relate[] to the business of insurance.’” NAACP v. American Family
Mut. Ins. Co., 978 F.2d 287, 293 (7th Cir. 1992) (quoting
§ 1012(b)). A state law preempts a federal statute under the
McCarran Act if: (1) the federal statute does not “specifically
relate[] to the business of insurance;” (2) if the acts challenged
are part of the “business of insurance;” (3) if the state has
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enacted a law “for the purpose of regulating insurance;” and (4) if
application of the federal statute would “invalidate, impair, or
supersede” a state law.3 See Cochran v. Paco, Inc., 606 F.2d 460,
464 (5th Cir. 1979). It is undisputed that TILA does not
“specifically relate[] to the business of insurance.” Id.
Without expressing any view as to whether the other prongs
have been met, the critical issue in this case is whether Your
Credit can bring forward any state laws that application of TILA
may invalidate, impair, or supersede. The leading case construing
the meaning of the phrase “invalidate, impair or supersede” is SEC
v. National Securities, Inc., 393 U.S. 453, 462-63, 89 S. Ct. 564,
569-70, 21 L. Ed. 2d 668 (1969). In that case, the SEC sought to
unwind a merger between two insurance companies based on
misstatements in their proxy statements, although the state
insurance commissioner had previously authorized the merger. The
3
The Seventh Circuit recently suggested that phrasing the
test for McCarran Act preemption in four parts is erroneous in
light of United States Dep’t of the Treasury v. Fabe, 508 U.S. 491,
501, 113 S. Ct. 2202, 2208, 124 L. Ed. 2d 449 (1993). See Autry v.
Northwest Premium Servs., 1998 WL 237426, at *10-11 (7th Cir. May
13, 1998). The Seventh Circuit uses a three-part McCarran Act
preemption test. Id. Without mentioning our own four-part test set
out in Cochran, 606 F.2d at 464, we also recently stated that a
state law preempts a federal law under the McCarran Act if (1) the
federal law in question does not specifically relate to the
“business of insurance;” (2) the state law was enacted for the
“purpose of regulating the business of insurance;” and (3) the
federal law may “invalidate, impair, or supersede” the state
statute. See Munich Am. Reinsurance Co. v. Crawford, 141 F.3d 585,
590 (5th Cir. 1998). However, we then proceeded to examine what was
formerly prong two of the Cochran test as part of the revised
second prong; thus, in Munich we essentially combined prongs two
and three of the Cochran McCarran Act preemption test. Because
resolution of this issue is unnecessary to the outcome, we express
no opinion as to what effect, if any, Fabe may have had on our
decision in Cochran.
-9-
insurers sought to use the McCarran Act as a shield, arguing that
failure to preempt the SEC’s actions would impair, invalidate, or
supersede the state insurance commissioner’s authorization of the
merger. The Supreme Court refused to preempt the SEC’s actions,
noting that any impairment would be “indirect” because “Arizona has
not commanded something which the Federal Government seeks to
prohibit.” Id. at 463, 89 S. Ct. at 570. The Court also found that
the federal interest in protecting shareholders was compatible with
the state interest in protecting policyholders, and that the
federal and state laws were enacted to serve different ends,
further eliminating any possible impairment. Id. Thus, following
the Supreme Court’s guidance, we examine whether the conflict
between state and federal law is “direct” and the purposes for
which the state and federal laws in question were enacted. Id.
Your Credit presents several state laws that it alleges
application of TILA may invalidate, impair, or supersede. The
first two, LA. REV. STAT. ANN. § 9:3516(4) and § 9:3549, are part of
the Louisiana Consumer Credit Law, LA. REV. STAT. ANN. §§ 9:3501 et
seq. Section 9:3516(4) provides that the “[a]mount financed also
includes premiums payable for insurance procured in lieu of
perfecting a security interest otherwise required by the creditor
. . . if the premiums do not exceed the fees and charges which
would otherwise be payable.” Because this section is virtually
identical to § 1605(d)(2) of the TILA and § 226.4(e)(2) of
Regulation Z, we fail to see how application of TILA may
-10-
invalidate, impair, or supersede it.4 See National Sec., 393 U.S.
at 463, 89 S. Ct. at 570; NAACP, 978 F.2d at 295 (“Duplication
[between a state and federal law] is not conflict.”). Next,
§ 9:3549 provides that “[a]ny gain or advantage to the extender of
credit . . . from such insurance or its provisions or sale shall
not be considered as a . . . loan finance charge in violation of
this chapter in connection with any contract or agreement made
under this part.” Section 9:3549 does not define the meaning of
“such insurance,” and no courts have interpreted this section.
“This part,” however, appears to refer to Part VI of the Louisiana
Consumer Credit Law, wherein § 9:3549 is found. Part VI covers
“credit life insurance, credit dismemberment insurance, and credit
health and accident insurance.” § 9:3542(A). Since nonfiling
insurance is not one of the types of insurance listed in
§ 9:3542(A), the phrase “such insurance” in § 9:3549 would not
appear to cover nonfiling insurance. Hence, this section is simply
inapplicable.5
4
Your Credit also contends that because § 9:3516(4)
approves nonfiling insurance, we should pretermit our inquiry at
this point. Your Credit’s argument misses the mark. Whether
Louisiana approves nonfiling insurance is not in question; what is
in question is whether the premium for which Your Credit charged
Edwards was for nonfiling or general default insurance.
5
Although neither party has brought L A . R EV. STAT. ANN.
§ 9:3516(23)(a) (i) to our attention, we note that Louisiana
amended the definition of “loan finance charge” in 1997 by deleting
the phrase “premium or other charge for any guarantee or insurance
protecting the lender against the consumer’s default or other
credit loss.” 1997 La. Acts 1033 § 1. Because Edwards financed
her purchases in January, 1996, this amendment, if it has any
effect, would only matter if it were to apply retroactively. No
legislative history exists to indicate whether the amendment was
intended to have retroactive effect. Louisiana courts have
-11-
Our conclusions with regard to §§ 9:3516(4) and 9:3549 are
strengthened by our finding with regard to Your Credit’s next
argument))namely, Your Credit and amici Consumer Credit Insurance
Association (“CCIA”) argue that Louisiana has created a
comprehensive regulatory scheme through the Louisiana Consumer
Credit Law, and that this regulatory scheme may be disrupted if
TILA is not preempted. See Crawford v. American Title Ins. Co.,
518 F.2d 217, 218 (5th Cir. 1975) (“The McCarran Act renders the
federal antitrust laws inapplicable when state legislation
generally proscribes, permits or otherwise regulates the conduct in
question and authorizes enforcement through a scheme of
administrative supervision.”). Our review of Louisiana case law
suggests that Louisiana has not, in fact, regulated the conduct in
question. “The basic difference between the federal and state laws
is that the Truth in Lending [Act] is a disclosure law whereas the
[Louisiana Consumer Credit Law] governs the essentials of the
transaction itself.” Reliable Credit Corp. v. Smith, 418 So. 2d
1311, 1314 n.2 (La. 1982); see also Dengel v. Hibernia Nat. Bank of
New Orleans, 539 So. 2d 947, 949 (La. Ct. App. 1989) (“Both sides
agree that Louisiana has no disclosure requirements.”); Kathleen M.
Overcash, Note, Usury and Consumer Credit Law in Louisiana, 53
TULANE L. REV. 1439, 1462-63 & n.175 (1979). As TILA and state law
indicated that the statute in effect at the time the parties enter
into the transaction is the statute that should be applied to
determine whether the statute has been violated. See Plan Inv. of
New Orleans, Inc. v. Fiffie, 405 So. 2d 1094, 1095 (La. Ct. App.
1980). Accordingly, we will not consider what effect, if any, this
amendment may have.
-12-
were enacted for different purposes to serve different ends, no
direct impairment exists. See also United States v. Cavin, 39 F.
3d 1299, 1305 (5th Cir. 1994) (holding that the McCarran Act did
not strip federal court of jurisdiction over a criminal prosecution
for mail fraud by operators of an insurance business even though
Louisiana state insurance regulators also sought criminal
convictions for the same conduct).
Finally, CCIA presents the Louisiana Unfair Trade Practices
Law (“LUTPL”),6 LA. REV. STAT. ANN. § 22:1211 et seq., for our
consideration. It reasons that since LUTPL may also cover the acts
complained of here and LUTPL does not provide a private cause of
action, if TILA and its private cause of action are not preempted,
Louisiana’s choice not to provide a private remedy under LUTPL may
be invalidated, impaired, or superseded. We recently noted that
the “precise degree to which a state statute may be impaired so as
to trigger the McCarran-Ferguson Act is not well settled.” Munich
Am. Reinsurance Co. v. Crawford, 141 F.3d 585, 595 (5th Cir.
1998). Although the circuits have split on whether McCarran Act
preemption arises where both state and federal law prohibit the
same action but the state does not provide a private cause of
6
CCIA also suggests that LUTPL may provide an alternative
basis for McCarran Act preemption because Louisiana has chosen to
regulate deceptive trade practices. We have previously rejected
this precise argument in FTC v. Dixie Finance Co., 695 F.2d 926,
930 (5th Cir. 1983), albeit under the second prong of McCarran Act
preemption test set forth in Cochran, 606 F.2d at 464. The
analysis set forth in Dixie Finance is equally applicable in this
case, and for the sake of brevity, we will not repeat it.
-13-
action,7 we have no occasion to address this question here for two
reasons. First, CCIA mischaracterizes Louisiana law. Louisiana
courts have not adopted a unified position as to whether LUTPL
includes a private right of action. Compare Herndon & Assocs.,
Inc. v. Gettys, 659 So. 2d 842, 846 n.3 (La. Ct. App. 1995)
(rejecting contention that the “commissioner has exclusive
jurisdiction over allegations of unfair practices in the insurance
industry”) and Citizens Bank & Trust Co. v. West Bank Agency, Inc.,
540 So. 2d 440, 443 (La. Ct. App. 1989) (same), with Clausen v.
Fidelity & Deposit Co. of Maryland, 660 So. 2d 83, 86 (La. Ct. App.
1995) (finding no private cause of action to exist under LUTPL
where no valid, underlying and substantive claim exists upon which
insurance coverage could be based); see also Tatum v. Colonial
Lloyds Ins. Co., 702 So. 2d 1076, 1077 (La. Ct. App. 1997) (stating
that Clausen applies only where no valid, underlying and
substantive insurance claim can be brought). Even if no private
7
The First, Fourth, Seventh, and Ninth Circuits hold that
if a practice is illegal under both state and federal law but
federal law provides for a stronger remedy, the McCarran Act does
not preempt the federal law. See Villafane-Neriz v. FDIC, 75 F.3d
727, 735-36 (1st Cir. 1996) (Federal Deposit Insurance Act);
Merchants Home Delivery Serv., Inc. v. Frank B. Hall & Co., 50 F.3d
1486, 1492 (9th Cir. 1995) (RICO); NAACP, 978 F.2d at 295-97
(holding that McCarran Act did not preempt application of Fair
Housing Act against redlining by insurance companies where state
law outlawed the practice but provided no private remedy); Mackey
v. Nationwide Ins. Cos., 724 F.2d 419, 421 (4th Cir. 1984) (same).
The Eighth Circuit has found the McCarran Act preempts a federal
law when the federal remedy is stronger, see Doe v. Norwest Bank of
Minnesota, N.A., 107 F.3d 1297, 1307 (8th Cir. 1997) (RICO), while
the Sixth Circuit has adopted both positions. Compare Kenty v.
Bank One, Columbus, N.A., 92 F.3d 384, 393 (6th Cir. 1996) (RICO)
with Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1363 (6th
Cir. 1995) (Fair Housing Act).
-14-
right of action exists under LUTPL, however, the contention that
Louisiana has a reasoned policy against allowing private suits
based on fraud and misrepresentations by insurance companies is
incorrect. Louisiana permits private fraud and misrepresentation
actions against insurance companies. See Morlte v. Certified
Lloyds, 569 So. 2d 1120, 1124 (La. Ct. App. 1990); see also Gettys,
659 So. 2d at 846 n.2. Since Louisiana has not seen fit to
prohibit these suits, CCIA’s argument that remedies under LUTPL and
TILA differ significantly enough to potentially give rise to
McCarran Act preemption is meritless. See Sabo v. Metropolitan Life
Ins. Co., 137 F.3d 185, 195 (3rd Cir. 1998) (finding no McCarran
Act preemption because even though a Pennsylvania statute similar
to LUTPL did not contain a private cause of action, state courts
had held that common law actions for fraud and misrepresentation
covered the same ground).
We have found no state enactment that might be impaired,
invalidated, or superseded by the application of TILA. As such, the
McCarran Act does not preempt TILA here, and we turn to the merits.
V
A
The district court held that the language of the policy
unambiguously created nonfiling insurance. It then treated Edwards’
argument that the claims practices of Your Credit transformed the
policy into general default insurance as an argument that the
policy had been reformed, which it stated may occur in the case of
either fraud or mutual error. Finding neither present, the court
-15-
rejected Edwards’ argument. The court concluded that “[i]f Voyager
is paying claims under the policy for which it is not liable, then
Voyager has a cause of action against Your Credit to recover these
claims. Voyager’s decision to pay a claim it may not be required
to pay does not constitute a violation of TILA or Regulation Z.”
On appeal, Edwards contests the district court’s conclusion that
her argument should be analyzed as sounding in reformation. She
renews her contention that Your Credit’s claims practices
transformed the policy into one insuring against general default.
We agree with the district court that the policy’s language
unambiguously created a nonfiling insurance policy. See American
Aviation & Gen. Ins. Co. v. Georgia Telco Credit Union, 223 F.2d
206, 207 (5th Cir. 1955). We disagree, however, with the court’s
conclusion that Edwards’ argument sounds in reformation.
Reformation is an equitable remedy that may be used when a contract
between the parties fails to express their true intent, either
because of mutual mistake or fraud. See, e.g., Richard v. United
States Fidelity & Guar. Co., 175 So. 2d 277, 288 (La. 1965).
Reformation might apply, for example, if Your Credit submitted a
claim arising as a result of a general default and Voyager denied
the claim. Your Credit might then argue that the policy should be
reformed because the parties intended to write a general default
policy, although the policy, as actually written, covered losses
due solely to Your Credit’s failure to file a financing statement.
Edwards, however, contends that Your Credit and Voyager
deliberately structured the form of the policy in stark contrast to
-16-
its substance to take advantage of consumers for their mutual
benefit. Such an argument is akin to the substance-over-form
doctrine in tax law in which we look past the labels the parties
give to a structure to determine its economic reality. See Gregory
v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 267, 79 L. Ed. 596
(1935) (holding that the economic substance of a transaction rather
than its form determines its tax treatment); Waterman S.S. Corp.
v. Commissioner, 430 F.2d 1185, 1192 (5th Cir. 1970) (“[C]ourts
will look beyond the superficial formalities of a transaction to
determine the proper tax treatment.”), overruled on other grounds,
Utley v. Commissioner, 906 F.2d 1033, 1037 n.7 (5th Cir. 1990).
The Supreme Court and many other courts, including this one, have
applied the substance-over-form doctrine to consumer finance law.
See, e.g., Mourning, 411 U.S. at 366 n.26, 93 S. Ct. at 1659 n.26;
Meyers v. Clearview Dodge Sales, Inc., 539 F.2d 511, 515 (5th Cir.
1976) (“[A]ppellant’s argument elevates form over substance in an
effort to avoid the realities of the credit transaction.”); see
also Adiel v. Chase Fed. Sav. & Loan Ass’n, 810 F.2d 1051, 1053
(11th Cir. 1987) (same); Hickman v. Cliff Peck Chevrolet, Inc., 566
F.2d 44, 46 (8th Cir. 1977) (“The [Truth in Lending] Act is
remedial in nature, and the substance rather than the form of
credit transactions should be examined in cases arising under
it.”). Thus, the substance-over-form doctrine provides the proper
framework for analyzing this case.8
8
At oral argument, amici CCIA (appearing on behalf of Your
Credit) argued that nonfiling insurance is a special form of
general default insurance, and that claims under each are
-17-
1
At first glance, Edwards’ argument))that Your Credit should
have disclosed the premium in the finance charge rather than
disclosing it in the amount financed))is difficult to comprehend.
After all, Edwards knew that Your Credit was charging her for
nonfiling insurance, even if Your Credit included the premium in
the wrong category. This apparent difficulty with Edwards’
argument has puzzled more than just the district court in this
case. Although no court of appeals has addressed whether a
creditor’s claims practices can convert nonfiling insurance into
general default insurance for purposes of the proper method of TILA
disclosure, state and federal district courts have reached varying
conclusions on this question. Courts that have applied a substance-
over-form analysis to look beyond the express terms of a policy to
the surrounding circumstances have tended to find questions of
material fact preventing summary judgment or have found violations
of TILA, Regulation Z, and in some cases, state law.9 See Dixon v.
differentiated only by the basis for the claim. Assuming,
arguendo, that CCIA’s argument is correct, we can determine whether
a given policy should be classified as general default insurance or
nonfiling insurance only by looking at the policy language and the
basis of claims filed under it. By CCIA’s own argument, therefore,
we must look behind the policy’s language to Your Credit’s claims
practices to determine whether Edwards’ arguments have merit.
9
Some of these cases have involved purchase money security
interests (“PMSIs”) on consumer goods, which are automatically
perfected without the need to file a financing statement. See,
e.g., LA. REV. STAT. ANN. § 10:9-302(1)(d). Although a loss solely
due to a failure to file a financing statement can thus never occur
on a PMSI, creditors in some of the above cases have charged
debtors for nonfiling insurance. See, e.g., Myers v. W.S. Badcock
Corp., No. 94-331-CA, slip op. at 4 (Fla. Cir. Ct. 1995).
-18-
S & S Loan Serv. of Waycross, Inc., 754 F. Supp. 1567, 1574-75
(S.D. Ga. 1990) (finding that claims practices of insurer and
insured created a material question of fact as to whether policy
labeled as nonfiling insurance was in fact general default
insurance); Johnson v. Aronson Furniture Co., No. 96-C-117, 1997 WL
160690, at *4 (N.D. Ill. Mar. 31, 1997) (order denying motion to
dismiss); Kirby v. Heilig-Meyers Furniture Co., No. 2:95-CV-135PG,
slip op. at 2 (S.D. Miss. Oct. 31, 1996) (order denying summary
judgment on TILA claims); Walmsley v. Mercury Fin. Corp., No. 92-
433-CIV-MARCUS, slip op. at 8-13 (S.D. Fla. Sept. 10, 1993) (order
denying motion to dismiss); Myers v. W.S. Badcock Corp., No. 94-
331-CA, slip op. at 4-6 (Fla. Cir. Ct. Nov. 22, 1995), aff’d 696
So. 2d 776, 783-84 (Fla. Dist. Ct. App. 1996); Whitson v. Warehouse
Home Furnishings Distribs., Inc., CV-94-177, slip op. at 10-14
(Ala. Cir. Ct. Aug. 17, 1995) (“Whitson I”), aff’d in relevant
part, 1997 WL 626108, at *9-12 (Ala. Oct. 10, 1997) (“Whitson II”).
By contrast, courts that have only looked at a policy’s express
terms have tended to reject similar arguments to those presented by
Edwards here. See, e.g., Mitchell v. Industrial Credit Corp., 898
F. Supp. 1518, 1527-28, 1531 (N.D. Ala. 1995); In re Pinkston, 183
B.R. 986, 989-90 (Bankr. S.D. Ga. 1995). Neither Mitchell nor
Pinkston, however, analyzed the provisions of UCC Article 9, which
undercuts their persuasive authority. See Mitchell, 898 F. Supp.
at 1531; Pinkston, 183 B.R. at 989-90.
Because nonfiling insurance generally covers losses due solely
to a secured creditor’s failure to file a financing statement, it
-19-
is important to clearly understand when such a loss can occur. As
commentators have noted, nonfiling insurance covers a very narrow
risk. See Jeffrey Langer & Kathleen Keest, Interest Rate Regulation
Developments in 1995: Continuing Liberalization of State Credit
Card Laws and “Non-Filing” Insurance as “Interest” Under State
Usury Laws, 51 BUS. LAW. 887, 895 (1996) (“The purpose of non-filing
insurance is to protect lenders against adverse consequences of
failing to perfect their security interest by public filing. This
is a very limited risk, as it is triggered only when another
secured party obtains priority as a result of the creditor’s
failure to record its lien.”). Full understanding of nonfiling
insurance, however, comes only from careful analysis of UCC Article
9, and, in our case, Louisiana’s enactment thereof.10
In Louisiana, as elsewhere, two steps are needed to create a
fully enforceable security interest. First, a security interest
attaches in the property collateralized when a debtor signs a
security agreement or financing statement containing a description
of the collateral for which value has been given and in which the
debtor has rights. See LA. REV. STAT. ANN. §§ 10:9-203(1), 9-402(1).
Second, that security interest is perfected (for our purposes) when
the creditor files a copy of the security agreement or financing
statement with the appropriate public officials. See LA. REV. STAT.
ANN. §§ 10:9-302(1), -303(1), -402(1), -403. By definition,
therefore, a secured creditor who does not file a financing
10
With the exception of UCC § 9-503, Louisiana statutes
correspond to the UCC for all purposes relevant to this decision.
-20-
statement is unperfected. The distinction between perfected and
unperfected secured creditors becomes important in § 10:9-312(5),
which provides that between two perfected secured creditors, the
creditor that perfects first in time receives priority.11 See LA.
REV. STAT. ANN. § 10:9-312(5)(a). Between two unperfected creditors,
the creditor whose security interest attaches first in time has
priority, § 10:9-312(5)(b), and in the case of a perfected creditor
and an unperfected creditor, the perfected creditor has priority.
See LA. REV. STAT. ANN. § 10:9-301(1)(a). One final note: Article 9
treats consumers somewhat differently than commercial entities.
The most important of these differences for our purposes arises in
§ 10:9-204(2), which limits the operation of after-acquired
property clauses on consumer goods to property acquired within ten
days after the secured party gives value for the item.12 See id.
11
Section 10:9-312(5) provides:
[P]riority between conflicting security interests in the same
collateral shall be determined according to the following rules:
(a) Conflicting security interests rank according to
priority in time of filing or perfection. Priority dates
from the time a filing is first made covering the
collateral or the time the security interest is first
perfected, whichever is earlier, provided that there is
no period thereafter when there is neither filing nor
perfection.
(b) So long as conflicting security interests are
unperfected, the first to attach has priority.
Id.
12
Section 10:9-204(2) provides that “[n]o security interest
attaches under an after-acquired property clause to consumer goods
other than accessions [] when given as additional security unless
the debtor acquires rights in them within ten days after the
secured party gives value.” Id. “Consumers goods” are goods that
-21-
With this discussion of Article 9 as a springboard, it is
apparent that nonfiling insurance (such as the policy at issue
here) may cover losses sustained in three possible ways. If another
secured creditor subsequently files a financing statement covering
goods previously financed by Your Credit, such a loss may be
covered because the combined operation of §§ 10:9-301(1)(a) and
-312(5) accords priority to the creditor that perfects its security
interest first, and Your Credit would have had priority save for
its failure to file a financing statement.13 §§ 10:9-301(1)(a),
-312(5)(a); see also Walmsley, No. 92-433-CIV-MARCUS, slip op. at
3 n.1 (“[W]here another creditor has filed against the same
collateral, and the debtor defaults, Mercury is in a worse position
by its failure to file, because its claim is subordinate to the
lien creditor.”). A covered loss may also occur when a debtor
sells an item financed by Your Credit to another consumer (such as
at a garage sale) and does not inform the purchaser that the item
is covered by a security interest, because under § 10:9-307(2),
Your Credit’s security interest would have been effective against
the purchaser if Your Credit had filed a financing statement.14 Id.
are “used or bought for use primarily for personal, family or
household purposes.” LA. REV. STAT. ANN. § 10:9-109(1).
13
This analysis assumes that if a good is repossessed and
sold, the proceeds from its sale are insufficient to satisfy the
debtor’s obligations to both creditors.
14
Section 10:9-307(2) provides that “[i]n the case of
consumer goods, a buyer takes free of a security interest even
though perfected if he buys without knowledge of the security
interest, for value and for his own personal, family, or household
purposes unless prior to the purchase the secured party has filed
a financing statement covering such goods.” Id.
-22-
Finally, where a debtor declares bankruptcy and Your Creditor’s
secured interest would not have been avoidable if Your Credit had
filed a financing statement, a covered loss may occur.15 11 U.S.C.
§ 544(a); LA. REV. STAT. ANN. § 10:9-301(3). In other instances,
however, whether a loss may be covered depends upon the facts of
the case. For example, if Your Credit financed a purchase for a
consumer on whom another secured lender had previously filed a
financing statement covering all of the consumer’s goods, Your
Credit would have priority as to the goods it financed if more than
ten days had elapsed between the time when the other lender filed
the financing statement and Your Credit financed the purchase.
§ 10:9-204(2). In some circumstances, however, there can be no loss
due to Your Credit’s failure to file. Two such instances occurs
when a debtor skips town or gets thrown in jail and stops paying on
the account. While Your Credit may have sustained a loss, filing
a financing statement would not have prevented the debtor from
skipping town or getting thrown in jail and hence, the loss from
occurring. See Whitson II, 1997 WL 626108, at *25 (noting that
nonfiling insurance does not cover losses caused by debtors that
skip town). Again, no covered loss occurs when a debtor signs a
security agreement with another secured lender covering goods
15
Leaving aside household exemptions under 11 U.S.C. § 522,
under 11 U.S.C. § 544(a), a trustee may assert the rights of a
hypothetical lien creditor under LA. REV. STAT. ANN. § 10:9-301(3).
Under § 10:9-301(1)(b), a hypothetical lien creditor prevails over
an unperfected security interest. Thus, the combined operation of
§ 10:9-301(1)(b) and 11 U.S.C. § 544 means that Your Credit may
sustain a loss solely as a result of its failure to file a
financing statement.
-23-
previously financed by Your Credit and neither files a financing
statement because Your Credit has priority over the other lender
under § 10:9-312(5)(b) and can repossess the collateralized
property if it so desires. See id.
2
We now turn to the summary judgment evidence in this case.
Edwards presents the summary judgment record deposition of Rebecca
J. Billeaudeaux, Your Credit’s manager in Baton Rouge, to support
her argument that Your Credit’s claims practices transformed the
policy into general default insurance for purposes of the proper
method of TILA disclosure. According to Billeaudeaux’s deposition,
Your Credit filed 58 claims under the policy for the month of
September 1996, all of which Voyager paid. Although Billeaudeaux’s
testimony is less than clear, 9 of these 58 claims may have been
based on covered losses))because another secured creditor had filed
a financing statement covering the goods in question, because the
debtor sold the goods financed to another consumer, or because of
the debtor’s bankruptcy.16 It is unclear whether another 29 claims
were based on covered losses because of imprecision in
Billeaudeaux’s answers. In 21 of these 29 claims, she indicated
that although the collateral had been “pledged” to another
creditor, no financing statement had been filed by the other
16
We emphasize the word “may” because some of these losses
may not, in fact, have been covered because of limitations imposed
by §§ 10:9-204(2) and -307(2). As the factual record is
insufficient to enable us to make this determination and the issue
is nonessential to the outcome, we assume without deciding that
these nine claims were filed based on covered losses.
-24-
creditor. Neither Article 9 nor Louisiana’s enactment thereof uses
the term “pledged,” so we assume that she meant that the debtor had
signed a security agreement with the other creditor covering the
good that Your Credit had financed but that the other creditor had
not filed a financing statement, meaning that the other creditor
would also be unperfected. §§ 10:9-302(1), -303(1), -402(1), -403.
In such a case, because § 10:9-312(5) gives priority to the
unperfected creditor whose interest attaches first and § 10:9-
204(2) limits the application of after-acquired property clauses
against consumers, Your Credit would have priority over the other
creditor unless the debtor had financed the good from Your Credit
within ten days after signing the security agreement with the other
creditor. §§ 10:9-204(2), -312(5)(a). Given the narrow scope of
coverage in these circumstances, it is unlikely that most of these
21 claims represent covered losses. In the other eight claims in
this category, it is impossible to determine from Billeaudeaux’s
answers whether in fact the claims were filed based on covered
losses.17 Finally, another 20 out of the 58 claims represent losses
that could not be covered by the policy. In some cases, the debtor
17
In one claim, for example, Your Credit submitted a claim
for an account with an outstanding balance of $0.17. In another,
Your Credit submitted a claim for $180.31 even though it had
previously obtained a judgment against the debtor for $125.49 and
the master policy between Voyager and Your Credit limits claims to
the lesser of the value of the collateral or the outstanding
balance. Your Credit attempts to negate this damaging evidence by
claiming that if it later recovers a judgment against a debtor on
whom it has previously filed a claim, it refunds the claim to
Voyager. While laudable and partially solving the problem, Your
Credit does not allege that it refunds claims to Voyager when it
wrongly files a claim but does not recover any money from the
debtor.
-25-
skipped town or got thrown in jail; filing a financing statement
would not have prevented the debtor from skipping town or getting
thrown in jail, and so the loss would not result solely from Your
Credit’s failure to file. See Whitson II, 1997 WL 626108, at *25.
In approximately 10 of these 20 claims, Your Credit filed suit in
state court to recover the collateral, yet it nevertheless filed a
claim. Although Your Credit may have sustained a loss on these
claims, we fail to see how its loss occurred solely as a result of
its failure to file. To summarize: we assumed without deciding
that only 15.5 percent of the claims that Your Credit filed and
Voyager paid were covered; approximately 50 percent of the claims
were most likely not covered, although it is impossible to
determine for certain on the factual record now before us; another
34.5 percent of the claims represent losses that, based on the
evidence now before us, could not have been covered under the
policy. Since as many as 84.5 percent of the claims that Your
Credit filed and Voyager paid may be based on losses not covered by
the policy, Edwards has created a material question of fact as to
whether the policy insured, in substance, against general default.18
See also Dixon, 754 F. Supp. at 1574 (finding a material question
of fact because, among other reasons, there was no evidence that
the insurer evaluated or rejected a claim made under a nonfiling
insurance policy).
18
Your Credit conclusorily alleges that the claims for
September 1996 submitted by Edwards are unrepresentative of its
overall claims practices. Your Credit did not submit any evidence
of its overall claims practices to support its argument. In the
absence of any such evidence, we reject Your Credit’s argument.
-26-
Your Credit attempts to counter Edwards’ evidence by
submitting evidence suggesting that the policy’s substance and form
coincided. In his summary judgment record deposition, Tom E.
McCraw, Senior Vice President of Operations for Voyager, stated
that Voyager does not sell general default insurance and that he
does not know anyone who does. McCraw noted that insurers do not
sell general default insurance because it gives lenders no
incentive to attempt to collect delinquent loans. Undercutting
McCraw’s testimony is the fact that the very terms of TILA and
Regulation Z that require lenders to include premiums for general
default insurance in the finance charge, see 15 U.S.C.
§ 1605(a)(5); 12 C.F.R. § 226.4(b)(5), while allowing them to
exclude premiums for nonfiling insurance, see 15 U.S.C.
§ 1605(d)(2); 12 C.F.R. § 226.4(e)(2), create incentives for
lenders to take out policies denominated as nonfiling insurance
that are in substance (perhaps because of claims practices) general
default insurance policies. Moreover, two other factors run
contrary to McCraw’s testimony that general default policies
provide no incentive for lenders to attempt to collect delinquent
loans: good business relations with their insurer and self-
interest. Because 15 U.S.C. § 1605(d)(2) and 12 C.F.R.
§ 226.4(e)(2) limit the premium for nonfiling insurance that can be
excluded from the finance charge to the amount that the state
charges to file a financing statement, an insurer cannot raise its
rates if a creditor files excessive claims; it can only cancel the
policy. Attempts by a creditor to collect delinquent accounts
-27-
therefore appease its insurer by reducing the number of claims
filed.19 Further, since a rational creditor does not want its
insurance canceled, even where no formal agreement exists to limit
claims, a creditor may attempt to monitor its claims so as to avoid
running afoul of its insurer. For losses above and beyond this
amount, self-interest may motivate a creditor to attempt to collect
delinquent accounts.
Our review of the method by which Voyager and CIA evaluated
claims to determine whether they should be paid reinforces our
conclusion that a question of material fact exists. Under the
Administrative Services Agreement between CIA and Voyager, CIA had
the “sole right to pay, compromise, reject or deny any such
[nonfiling] claim.” While the expense of review of these small
claims might be prohibitive, apparently the claims forms were not
designed to give any indication of how the claimed loss was
attributable to nonfiling. According to the summary judgment
record deposition of Tim Boan, Secretary-Treasurer of CIA, CIA
reviewed the claims that Your Credit submitted to ensure that Your
Credit had completely filled out the claims form. Boan also stated
19
In his summary judgment record deposition, Tony Gentry,
President of Your Credit stated that “it’s understood that if our
losses get out of control that we will be terminated; that
[Voyager] won’t write our insurance any longer. And occasionally
they have called up and complained because our losses they deemed
excessive. . . . And so when you talk to them from time to time, it
is normal for them to say, you know, ‘Are you getting your losses
down’ or ‘How is your business going’ or ‘How is this particular
unit doing’ . . . They are concerned because they don’t like to pay
any more losses than they have to. . . . when that [default rate]
gets real high we))I don’t guess ‘real high’ is a good choice of
words. As the month progresses, we try to get that to an acceptable
level.”
-28-
that CIA occasionally audited Your Credit’s claims to ensure that
it had attempted to collect a delinquent loan prior to filing a
claim. Beyond these limited attempts at verification, Boan stated
that “we take their word” that claims are submitted for a proper
reason. Thus, Voyager’s reliance on CIA to monitor claims filings
and CIA’s acceptance of Your Credit’s averments at face value
essentially gave Your Credit freedom to file claims for any reason.
Combined with its employees’ misunderstanding of Article 9, this
became a recipe for disaster.20
20
Amicus CCIA also argues that because § 1605(d)(2) permits
a creditor to exclude the “premium payable for any insurance in
lieu of perfecting a security interest,” whether Voyager paid
claims that it was not obligated to pay under the policy could not
lead to a violation of § 1605(d)(2) because the policy also covers
losses due to nonfiling. Section 1605(a)(5) requires that a
“premium or other charge for any guarantee or insurance protecting
the creditor against the obligor’s default or other credit loss” be
included in finance charge. It strains our belief to imagine that
Congress would explicitly require that a premium for general
default insurance be included in the finance charge in § 1605(a)(5)
yet allow the same premium to be excluded from the finance charge
in § 1605(d)(2) if the insurance in question also covered defaults
caused by nonfiling. See Whitson, No. CV-94-177, slip op. at 10-11
(“It would be anomalous indeed for the [Alabama] legislature to
prohibit charging for default insurance in the amount financed, but
to allow for the very same type of insurance under the guise of
nonfiling insurance.”). Moreover, acceptance of CCIA’s argument
would render the second half of § 1605(d)(2)))“in lieu of
perfecting a security interest”))meaningless. Accordingly, we
reject this argument. CCIA further argues that 12 C.F.R.
§ 226.4(b)(5) applies only to default or credit loss insurance that
can be purchased in addition to charging a filing fee, not to
insurance purchased in lieu of the filing fee. CCIA relies on the
Truth-in-Lending Manual, which explains that “[c]ommon examples of
the insurance against credit loss mentioned in § 226.4(b)(5) are
mortgage guaranty insurance, holder in due course insurance, and
repossession insurance.” Ralph C. Clontz, Jr., TRUTH-IN-LENDING MANUAL
¶ 2.01[2] (1997). Even if we were inclined to rely on the quoted
language, this list does not pretend to be exclusive. Moreover, we
see no reason to accept CCIA’s argument because the language of
§ 1605(d)(2) and § 226.4(b)(5)))“in lieu of perfecting a security
interest”))is clear.
-29-
Finally, the district court’s conclusion in this case may have
been influenced by its notion that Edwards did not suffer any harm.
The court explained that “[i]t would appear to the Court that Your
Credit did Edwards a favor by allowing her to keep her property and
allowing the policy to take care of the debt.” As we noted above,
understating a finance charge “is a type of fraud that goes to the
heart of the concerns that actuate the Truth in Lending Act.” See
Gibson, 112 F.3d at 287 (“[T]he issue is not whether these
violations are technical, or whether technical violations should be
actionable, or whether consumer class actions should be
discouraged, but whether the complaints in these actions state a
claim.”). “[T]he statutory civil penalties must be imposed for
such a violation regardless of the district court’s belief that no
actual damages resulted or that the violation is de minimis.”21
Zamarippa v. Cy’s Car Sales, Inc., 674 F.2d 877, 879 (11th Cir.
1982). “[T]he ‘remedial scheme of TILA is designed to deter
generally illegalities which are only rarely uncovered and
punished, and not just to compensate borrowers for their actual
injuries in any particular case.’” Fairley, 65 F.3d at 480 (quoting
Williams, 598 F.2d at 356). Thus, while the harm that Edwards may
21
Congress recently enacted a safe harbor for de minimis
violations of TILA. See 15 U.S.C. § 1649. Section 226.18(d)(2) of
Regulation Z, issued pursuant to § 1649, provides that a finance
charge will be considered accurate if the amount disclosed does not
vary from the actual finance charge by more than $5 for loans under
$1,000 and more than $10 for loans over $1000. Id. One court has
dismissed a TILA claim where the creditor charged a nonfiling
insurance premium of less than $10 on a loan of more than $1,000.
See Via v. Heilig-Meyers Furniture Co., No. 97-0026-D, slip op. at
5-8 (W.D. Va. Oct. 29, 1997). Your Credit has not contended that
this safe harbor is applicable here.
-30-
have suffered is relevant to the damages to which she may be
entitled, see 15 U.S.C. § 1640, it is irrelevant to whether she is
entitled to bring an action.
Factually, we conclude that another genuine dispute of
material fact exists. Some summary judgment record deposition
testimony indicates that Your Credit attempted to repossess
debtors’ property even when it filed a claim under the policy;
therefore, the policy may not have helped Edwards to keep her
property. Moreover, because Your Credit included the premium for
the nonfiling insurance in the amount financed, it charged Edwards
interest on the premium, causing her some actual (albeit small)
monetary loss. See Myers, 696 So. 2d at 784 (“By including the
charges in the amount to be financed, Badcock acquired a fund from
which it could offset bad debt losses at the expense of its credit
customers. This tactic also increased the base upon which interest
would be computed for those credit customers.”). Edwards may have
also been harmed because the understated APR and finance charge may
have led her to choose to purchase goods on credit rather than with
cash. See Gibson, 112 F.3d at 287. Other summary judgment record
testimony, however, indicates that Edwards believed that she
benefitted from Your Credit taking out nonfiling insurance because
the insurance ensured that they would not place a lien on the goods
she purchased. Finally, Your Credit argues that Edwards and other
consumers may, on balance, have benefitted from Your Credit’s
claims practices because these claims practices may have increased
Your Credit’s capital base, thereby allowing it to make more loans
-31-
and loans to consumers with poor credit histories.
Therefore, although we believe that isolated incidences of
claims filed for noncovered losses may not state a cause of action
for violation of TILA and Regulation Z, the sheer magnitude of Your
Credit’s improper claims practices in this case creates a genuine
dispute of material fact as to whether those claims practices
transformed the policy into one insuring against general default
for purposes of its proper disclosure under TILA.22. We express
no opinion as to whether summary judgment may be appropriate on a
more fully developed record than we now have before us, if that
record indicates that the form and substance of the Policy may, in
fact, coincide.
B
Edwards concedes that no stop-loss provision appears in the
policy, but contends that an informal stop-loss agreement existed
between Your Credit and Voyager to limit the value of aggregate
claims filed to 89.25 percent of total premiums paid. Edwards
contends that this alleged stop-loss agreement prevented risk of
loss from shifting from Your Credit to Voyager because it ensured
that Voyager would never suffer a loss on the policy. Therefore,
22
Edwards also contends that “an attempt to repossess the
collateral is a necessary prerequisite to claiming a loss under the
nonfiling policy.” Given our foregoing discussion of Article 9, it
is apparent that this argument is legally incorrect. If Your
Credit examined public filings of financing statements, for
example, and determined that another creditor had subsequently
filed a financing statement covering the property that Your Credit
financed, Your Credit may have suffered a loss solely as a result
of its failure to file a financing statement, §§ 10:9-301(1)(a),
-312(5)(a), and an attempt to repossess the property would be
meaningless.
-32-
she claims that the policy is not insurance, but rather a bad-debt
reserve held by Voyager, which she contends must be disclosed in
the finance charge. See Regulation Z, Official Staff
Interpretation, 12 C.F.R. § 226, Supp. I, at 312 (1995). After
noting that no stop-loss provision appears in the policy, the
district court determined that Edwards had failed to raise a
dispute of material fact on this argument. It found that no
informal stop-loss agreement existed between Voyager and Your
Credit because even though certain internal documents of Voyager
and CIA indicated that they desired to limit claims to 89.25
percent of aggregate premiums paid in order to earn a profit of
10.75 percent for themselves, neither these internal documents nor
the information in them was conveyed to Your Credit.
We agree with the district court that Edwards has failed to
establish a genuine dispute of material fact with regard to whether
an informal stop-loss agreement existed between Your Credit and
Voyager. Tim Boan of CIA testified that losses could be “120 or
even 140" percent. Although internal documents bearing the 89.25
percent figure floated around inside CIA and Voyager, Edwards has
failed to adduce any evidence that these figures were communicated
to Your Credit. Tony Gentry, President of Your Credit, also
testified in his summary judgment record deposition that neither he
nor Your Credit employees were aware of internal CIA-Voyager profit
and loss projections. Finally, at various times during the period
in question, the Baton Rouge office of Your Credit filed claims in
excess of 89.25 percent of aggregate premiums. Accordingly, we
-33-
affirm the district court’s grant of summary judgment with regard
to this argument.23
VI
For the foregoing reasons, the district court’s grant of
summary judgment in favor of Your Credit is VACATED and the case is
REMANDED for appropriate proceedings.
ENDRECORD
23
Because Edwards has failed to establish the existence of
a material dispute of genuine fact on this argument, we do not
reach the difficult legal question of whether risk shifting under
a master insurance policy is determined by reference to the master
policy or the policies issued under the master policy.
-34-
JERRY E. SMITH, Circuit Judge, dissenting:
The lynchpin of the majority opinion is its legal conclusion
that we may characterize an insurance policy not according to its
unambiguous terms or to the state law controlling its
application, but by the performance of the insurer under the
policy. Because I cannot join in this unprecedented application
of the substance-over-form doctrine, I respectfully dissent.
I agree with the majority that insurance purchased “in lieu
of” filing under 15 U.S.C. § 1605(d)(2) cannot cover risks that
would not have arisen, but for the creditor's failure to file.24
I cannot agree, however, that this policy, which by its terms and
under Louisiana law covered only such risks, is anything but non-
filing insurance in accordance with § 1605(d)(2).
I.
A.
No other court of appeals has looked beyond the explicit
terms of an insurance policy to characterize its nature according
to the claims payment practices of the insurer. The majority's
citation of other TILA cases is inapposite, for those cases
properly looked to substance over form to give meaning to the
necessarily ambiguous terms “credit” and “creditor” in the Act.
Thus, the Court in Mourning v. Family Publications Serv., 411
24
Cf., e.g., WEBSTER'S THIRD NEW INT'L DICTIONARY 1306 (1986)
(defining “in lieu of” as “in the place of; instead of”); American
Aviation & Gen. Ins. Co. v. Georgia Telco Credit Union, 223 F.2d
206, 207 (5th Cir. 1955) (pre-TILA non-filing policy covers losses
“solely from [creditor's] failure to file”).
U.S. 356 (1973), decided that Congress had intended merchants not
to be able to escape “creditor” status simply by reformulating
what would otherwise be credit transactions as “installment
sales.” Id. at 363-69.
Also, for example, in Joseph v. Norman's Health Club, Inc.,
532 F.2d 86 (8th Cir. 1976), the case cited for its substance-
over-form analysis in both Myers v. Clearview Dodge Sales, Inc.,
539 F.2d 511, 515 (5th Cir. 1976), and Hickman v. Cliff Peck
Chevrolet, Inc., 566 F.2d 44, 46 (8th Cir. 1977), a health club
sold “lifetime memberships' for $360, payable in twenty-four
monthly installments of $15, or for cash, with a discount of ten
to fifteen percent, and then sold the notes to finance companies.
532 F.2d at 88. Unsurprisingly, the court found these to be
credit transactions in substance. See Joseph, 532 F.2d at 93-94.
Here, there is no comparable need to engage in a searching
substance-over-form analysis, for there is no ambiguity that
needs resolution. In Joseph, on the other hand, Congress
expressed concern in the terms of the statute, in the delegation
of rulemaking capability, and in the legislative history, that
the term “credit” not be used in a hyper-formal sense to restrict
the TILA's coverage. See Mourning, 411 U.S. at 363-69. In
essence, Congress knowingly left a statutory interstice to be
filled by regulators and courts. See id. at 365.
The statute, the regulation, and Louisiana lawSSnot a
court's impression of the “economic realities”SSmust dictate our
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disposition. To be sure, the statute does not define
“insurance,”25 but that does not give us carte blanche to create
a new rule of law under which insurance is characterized not by
its terms but by a fact-intensive, substance-over-form analysis
that cannot be resolved on summary judgment.
Rather, the silence of the statute directs us to the
regulations and to the applicable background of state common law.
The Supreme Court has often remarked that courts must look to the
established meaning of common law terms when interpreting
statutes.26 Furthermore, Regulation Z provides that otherwise
undefined terms “have the meanings given to them by state law or
contract.” 12 C.F.R. § 226.3(b)(3) (1998). The rights and
obligations of the parties under this policy, and the
characterization of that policy as non-filing insurance or
something else, depend upon the controlling state law.
B.
Under Louisiana law, which governs this policy, the
arrangement between Your Credit and Voyager is non-filing
insurance. A Louisiana insurance contract is interpreted
according to general contract principles. See Battig v. Hartford
25
Again, I note that we may properly decide what sort of insurance
qualifies as insurance purchased “in lieu of filing.” That is, we may decide
what sort of risks may be covered by a policy in order to fall within the
statutory terms. It goes far beyond our role as statutory interpreters, however,
when we define as a matter of federal law which risks the policy covers.
26
See, e.g., United States v. Wells, 117 S. Ct. 921, 927 (1997) (citing
Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322 (1992) (citing Community
for Creative Non-Violence v. Reid, 490 U.S. 730, 739-40 (1989))).
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Accident & Indem. Co., 608 F.2d 119 (5th Cir. 1979). Louisiana
law provides that
the parties' intent, as reflected by the words of the
policy, determines the extent of coverage. Such intent
is to be determined in accordance with the plain,
ordinary, and popular sense of the language used in
the policy, unless the words have acquired a technical
meaning. . . . An insurance contract should not be
given an interpretation which would enlarge or restrict
its provisions beyond what is reasonably contemplated
by its terms or which would lead to an absurd
conclusion. If the language in an insurance contract
is clear and unambiguous, the agreement must be
enforced as written. In such a case, the meaning and
intent of the parties to the written contract must be
sought within the four corners of the instrument and
cannot be explained or contradicted by parol evidence.
. . . [T]he use of extrinsic evidence is proper only
where a contract is ambiguous after an examination of
the four corners of the instrument.
Highlands Underwriters Ins. Co. v. Foley, 691 So. 2d 1336, 1340
(La. App. 1st Cir. 1997) (citations omitted).27
27
See also, e.g., LA. CIV. CODE ANN. art. 2046 (West 1987) (stating that "when
the words of a contract are clear and explicit and lead to no absurd consequences,
no further interpretation may be made in search of the parties' intent"); Heinhuis
v. Venture Assoc., 959 F.2d 551, 553 (5th Cir. 1992) (holding
(continued...)
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This insurance contract unambiguously defines the scope of
its coverage. By its plain terms, the agreement insures against
losses incurred “solely as the result of the failure of the
Insured duly to record or file.” Under Louisiana law,
accordingly, the policy is non-filing insurance.28
Furthermore, it does not matter whether the contract
included an explicit or implicit stop-loss provision: Insurers
are permitted, under Louisiana law, to limit their liability and
impose reasonable conditions on their obligations, so long as
those do not conflict with law or public policy. See Scarborough
v. Travelers Life Ins. Co., 718 F.2d 702, 707 (5th Cir. 1983).
In short, the characterization of this insurance policy is
directly controlled by Louisiana law, under which the policy
covers only losses caused by failure to file. A federal court
should not interfere by holding to the contrary.
II.
Even if it is sometimes appropriate to apply a substance-
over-form analysis to characterize insurance under the TILA, the
form of this policy is not at odds with its substance. Rather,
the form of the policy and the pattern of performance thereunder
(...continued)
that a “court applying Louisiana law should interpret a policy according to its
plain meaning and not distort its meaning to introduce an ambiguity”).
28
It may be that Your Credit filed, and Voyager paid, claims not within
the scope of the coverage. That, however, is not properly the subject of this
suit under the TILA. If bogus claims were filed and paid, Voyager and not
Edwards may sue to enforce the terms of the policy.
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are in keeping with legitimate business practices, rather than
the sort of sham to which courts will assign consequences based
on its substance, rather than form. Substance-over-form is
inapplicable on these facts.
The substance-over-form principle is a doctrine of tax law
that prohibits taxpayers from avoiding the tax consequences of a
transaction by disguising it as something that it is not. Thus,
for example, where a taxpayer purchased bonds with an interest
rate of 2.5 percent and financed that purchase with a debt to the
bond issuer at a rate of 3.5 percent, the Supreme Court found the
transaction to be a “sham,” crafted solely as a tax avoidance
scheme. See Knetsch v. United States, 364 U.S. 361, 366 (1960).
There was no economic reason to engage in the transactionSSno
chance for profit, other than tax-avoidanceSSand the Court
therefore looked to substance rather than form. The search for
substance over form has been analogized to the practice of
piercing the corporate veil. See 1 BORIS I. BITTKER AND LAWRENCE
LOKKEN, FEDERAL TAXATION OF INCOME, ESTATES AND GIFTS ¶ 4.3.3, at 4-34
n.36 (2d ed. 1989). In either case, however, the respective
doctrines are applied only in exceptional
circumstancesSScircumstances unlike those presented here.
An individual's chosen form will not be set aside lightly.
Indeed, it has been said that “lawyers who do not know that
sometimes form controls, should not be practicing law.” Id.
at 4-34 (quoting PAUL, STUDIES IN FEDERAL TAXATION 89 n.304 (1937)).
Thus, where there is a “genuine multiple-party transaction with
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economic substance which is compelled or encouraged by business
or regulatory realities, is imbued with tax-independent
considerations, and is not shaped solely by tax-avoidance
features that have meaningless labels attached, the Government
should honor the allocation of rights and duties effectuated by
the parties.” Frank Lyon Co. v. United States, 435 U.S. 561,
584-85 (1978). Similarly, when a corporation is not used for an
illegal purpose, its veil will be pierced only where it is a sham
or is the alter ego of its shareholders. See Fidelity & Deposit
Co. v. Commercial Cas. Consultants, Inc., 976 F.2d 272, 274-5
(5th Cir. 1992). Courts pierce veils and look to transactions'
“substance” only when they are convinced that legal formalities
are devoid of real consequence, used solely to avoid tax or other
liability.
There is a legitimate business reason for Voyager’s payment
of claims beyond the terms of the policy: The cost of
investigating those claims would have been far greater than the
value of the claims paid. As far as I am aware, it is a common
and perfectly legitimate practice for an insurer to pay, rather
than always to dispute, claims outside the scope of coverage.
This policy specifically provided that the insurer retained the
right to “pay, compromise, reject, or deny” any claim. An
insurer may choose to pay a claim for any reason, with or without
an evaluation of its merit. The TILA does not impose on insurers
a duty to investigate. There is a legitimate business
reasonSSoutside any purported desire to skirt the TILASSto
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characterize the policy as non-filing insurance rather than as
general default. Although Voyager might pay small claims, there
is every reason to believe that it would investigate and, in
appropriate circumstances, refuse to pay claims involving any
significant amount of money. The summary judgment is consistent
with this conclusion. Therefore, the policy’s coverage of risk
arising “solely as a result from the . . . failure to file” is
not an empty formality, but has real substance. Even were it
generally appropriate to apply a substance-over-form analysis to
characterize insurance policies, the policy at issue here would
remain what it purports to be: insurance purchased in lieu of
filing.
III.
Finally, I note the policy implications of this
unprecedented and improper application of the substance-over-form
doctrine. The majority's rule will encourage litigation, for
plaintiffs may properly read this decision as holding that a
pattern of performance will trump plain contractual provisions in
determining parties' rights and obligations. Once such
litigation is filed, the majority's fact-intensive analysis will
allow most, if not all, plaintiffs to survive summary judgment.
Furthermore, by effectively imposing a duty to investigate
and dispute potentially bogus claims, this rule will hamper the
free and efficient functioning of the insurance industry. In
essence, this duty to investigate will hinder insurers from
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issuing small policies, where the likely value of claims asserted
will be less than the likely cost of investigation. That is, a
rational insurer should calculate its rates based upon the
settlement value of claims: their dollar amount or the cost of
disputing them, whichever is lower. Under this rule, insurers
must instead incur and pass on the cost of disputing all
potentially illegitimate claims, even where its settlement value
is less than the cost of disputing it.
Moreover, the majority's rule will do nothing to help
debtors such as Edwards. True, the inclusion of non-filing
insurance premiums in the amount financed raises the effective
interest rate on the underlying principal. But if the market
will bear such a high price for money, which it apparently will,
there is every reason to believe that creditors will continue to
charge that price. Whether some portion of the total price is
included (and disclosed) on one line rather than another is
largely irrelevant to the debtor's bottom line: the amount he
pays for the loan.
Where the market will bear a given bottom line, creditors
will naturally achieve this bottom line by the inclusion of
various charges. And debtors will continue to pay astronomical
prices for cash. While we may believe that certain debtors act
improvidently, and while we may privately condemn certain
creditors for tempting individuals with the lure of quick money
at high rates, as a matter of both law and economics we cannot
prevent these transactions from taking place.
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IV.
The majority disregards the unambiguous language of this
insurance policy and its plain effect under Louisiana law. It
requires a federal court to characterize the scope and coverage
of an insurance policy according to the performance of the
parties thereunder. As a result, it transforms contract
interpretationSSa quintessential question of lawSSinto a question
of fact that will almost always allow industrious plaintiffs to
survive summary judgment. Because I cannot join this
unprecedented departure, I respectfully dissent.
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