Szumny, Frank J. v. American Gen'l Finan ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-4056
FRANK J. SZUMNY,
Plaintiff-Appellant,
v.
AMERICAN GENERAL FINANCE,
INCORPORATED and AMERICAN SECURITY
INSURANCE COMPANY,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 CV 439--Wayne R. Andersen, Judge.
Argued September 6, 2000--Decided April 13, 2001
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, Inc., 112 F.3d 283, 285 (7th Cir. 1997)
(explaining that TILA’s purpose is to "protect
consumers from being misled about the cost of
credit"). TILA is a disclosure statute; it does
not regulate substantively consumer credit but
rather "requires disclosure of certain terms and
conditions of credit before consummation of a
consumer credit transaction." Valencia v.
Anderson Bros. Ford, 617 F.2d 1278, 1282 (7th
Cir. 1980), rev’d on other grounds, 452 U.S. 205(1981). "A creditor’s substantive rights are
still governed by state law; federal law merely
classifies those rights for disclosure purposes."
Id. at 1285./2
Smith v. Cash Store Management, Inc., 195 F.3d
325 (7th Cir. 1999), illustrates in a
particularly graphic way the different roles
played by state law governing security interests
and TILA--a difference that explains the lack of
absolute congruence between a state definition of
a security interest and a security interest for
purposes of TILA. In Smith, the lender indicated
in its TILA disclosure statement that "[the
consumer’s] post-dated check is security for this
loan." Id. at 326. The plaintiff argued that this
disclosure violated TILA because Illinois law
does not permit a borrower’s post-dated check to
serve as collateral for security interests and,
therefore, that the statement in the TILA
disclosure was inaccurate. We rejected that
argument. Although the check may not have
constituted a security interest as defined in
state law, it did represent additional security
for the loan, and the lender did not violate TILA
by stating that the post-dated check served as
security. See id. at 330-31. The purpose of TILA-
-notice to the consumer--was fulfilled by
disclosing the check.
The differences between state statutes
establishing security interests and TILA also are
demonstrated by the rule that, although TILA
disclosures must be accurate, see Williams v.
Chartwell Fin. Servs., Ltd., 204 F.3d 748, 753
(7th Cir. 2000), lenders may be overinclusive in
their disclosures if "unsure whether a particular
interest is a security interest under applicable
law." 12 C.F.R. Pt. 226, Supp. I sec.
226.2(a)(25)(1); see also Smith, 195 F.3d at 328
n.1. Lenders, of course, should not disclose
nonexistent security interests because
overinclusive disclosures might deter a
borrower’s "future borrowing or property
acquisition out of an exaggerated belief in the
security interest to which [he] would be subject,
or [give] a lender an apparent right which, even
if ultimately unenforceable, could serve as a
significant bargaining lever in any future
negotiations concerning rights or obligations
under the loan." Id. at 328 (citing Bizier v.
Globe Fin. Servs., Inc., 654 F.2d 1, 3 (1st Cir.
1981)). However, a lender’s reasonable, bona fide
attempt to describe the security interest it
intends to take in the chattels of the consumer
does not violate TILA but, rather, is
commensurate with its purpose.
B. Household Goods
Mr. Szumny also claims that AGFI violated TILA
by claiming a security interest in household
goods, in contravention of the Federal Trade
Commission ("FTC") Credit Practices Rule, 16
C.F.R. sec. 444 et seq. That rule prohibits
creditors from taking a nonpurchase money
security interest in certain household goods. Mr.
Szumny argues that AGFI’s attempt to take a
security interest in his patio and pool
equipment, as well as electronic equipment,
violates this provision. Because AGFI never had a
security interest to disclose, he submits, such a
disclosure violated TILA.
The district court rejected Mr. Szumny’s
argument. The court first noted that Mr. Szumny
had not alleged that AGFI actually violated the
rule; he averred merely that "AGFI might have an
invalid (at least under this rule) security
interest because its claim on plaintiff’s
personal property may encompass household goods.
He has not alleged that the security interest
does this." R.40 at 7. Moreover, even if Mr.
Szumny adequately had alleged that AGFI violated
the Credit Practices Rule, the district court was
not convinced that, without more, a TILA claim
was presented. The court noted that the accuracy
of disclosures are evaluated when the disclosures
are made; it is irrelevant whether a security
interest is later deemed invalid because it
impermissibly purports to encompass household
goods.
The district court also determined that the
commentary to Regulation Z specifically includes
household goods as an acceptable category for
TILA disclosure purposes. The court explained
that Mr. Szumny confused AGFI’s "duty to disclose
its security interest under the TILA with the
extent to which it may be able to enforce that
interest under state and federal law." R.40 at 8.
The commentary to Regulation Z accounts for this
distinction, the court maintained, because it
sets out household goods as a permissible
category under TILA, then warns that certain laws
prohibit security interests in those goods. AGFI
ultimately may find its security interest in
household goods worthless, but that probability
does not constitute a TILA violation.
We agree with the district court’s conclusion.
Even though state and federal laws prohibit the
taking of security interests in certain household
goods,/3 Regulation Z nevertheless lists
household goods as one permissible category of
TILA disclosures. See 12 C.F.R. Pt. 226, Supp. I,
sec. 226.18(m)(2). The commentary explicitly
notes the difference between identifying security
interests for TILA disclosure purposes and other
policies undergirding rules such as the Credit
Practices Rule; it cautions creditors to be aware
"that the Federal credit practices rules, as well
as some state laws, prohibit certain security
interests in household goods." Id. Thus, although
household goods may be exempt under other laws
from serving as collateral for security
interests, a bona fide attempt to describe a
security interest in household goods does not
make the TILA disclosure infirm. Indeed, as we
have pointed out earlier, the commentary to
Regulation Z specifically permits the creditor to
include arguable security interests within a TILA
filing. Mr. Szumny’s vague allegations do not, as
the district court noted, constitute a claim that
the listing of household goods was something
other than a bona fide attempt to disclose a
security interest.
C. Insurance Premiums
Mr. Szumny also alleges that, because AGFI did
not have a valid security interest, it was
required to include the insurance premium in the
finance charge and annual percentage rate
sections of its disclosure statement. Including
the figure in the amount financed, Mr. Szumny
argues, violated TILA. Put more clearly, Mr.
Szumny is arguing that AGFI did not possess a
valid security interest; thus, there was no
collateral to protect through personal property
insurance. Because the insurance for which Mr.
Szumny was charged covered only collateral and
there was no collateral on account of the
invalidity of the security interest, no effective
insurance actually was purchased. Consequently,
Mr. Szumny contends, the price paid for the
premium was simply an additional finance charge
and should have been disclosed as such.
We believe that this argument must be assessed
in light of TILA’s purpose of providing
information to the debtor about the obligations
that he is about to assume. Generally, Regulation
Z defines finance charges to include "[p]remiums
or other charges for insurance against loss of or
damage to property, or against liability arising
out of the ownership or use of property, written
in connection with a credit transaction." 12
C.F.R. sec. 226.4(b)(8). The regulation also
provides, however, that property insurance
premiums may be excluded from the finance charge
if the lender makes two disclosures: (1) explains
that the insurance may be obtained from anyone of
the consumer’s choice and (2) discloses the
initial term of coverage if the insurance is
purchased from the creditor. See 12 C.F.R. sec.
226.4(d)(2)(i)-(ii).
Both requirements are satisfied here. First, the
disclosure statement informs the consumer that:
You are required to maintain personal property
insurance on personal property securing this loan
other than household goods. You may obtain such
insurance from anyone you want, or provide it
through an existing policy with loss payable to
us.
You are not required to purchase personal
property insurance on your household goods to
secure this loan. If you choose to have such
insurance, you may obtain the insurance from
anyone you want.
R.22, Ex.D.
Second, the statement indicates:
If you obtain personal property insurance from or
through us which covers the collateral (other
than a motor vehicle) which secures your loan, it
will be for a term of 25 months and you will pay
$52.08. You also understand that we and/or our
insurance affiliates anticipate a benefit and/or
a profit from your purchase of insurance.
Id. Because both requirements of Regulation Z are
met, not including the insurance premiums in the
finance charge amount does not violate TILA.
Fulfilling these requisites satisfies TILA’s
informational function.
D. State Law Claims
Finally, Mr. Szumny takes issue with the
district court’s decision to dismiss the two
supplemental state claims. The decision to retain
supplemental claims is left to the discretion of
the district court. See 28 U.S.C. sec.
1367(c)(3); see also Van Harken v. City of
Chicago, 103 F.3d 1346, 1354 (7th Cir. 1997)
("[W]e acknowledge the broad discretion of
district judges in making judgments concerning
the retention of supplemental claims."). There
was no abuse of discretion here.
Conclusion
For the foregoing reasons, we affirm the
judgment of the district court.
AFFIRMED
/1 Both AGFI and ASIC were named as defendants in
this action, and both parties filed motions to
dismiss. Because AGFI was the only defendant
named in the federal TILA count (only the
Illinois Consumer Fraud Act claim was brought
against ASIC), the district court and the parties
agreed to address AGFI’s motion first.
/2 Regulation Z references state law in its
definition of a security interest. It provides
that a security interest is "an interest in
property that secures performance of a consumer
credit obligation and that is recognized by State
or Federal law." 12 C.F.R. sec. 226.2(a)(25). The
official commentary further explains that the
"threshold test" for the existence of a security
interest is "whether a particular interest in
property is recognized as a security interest
under applicable law. The regulation does not
determine whether a particular interest is a
security interest under applicable law." 12
C.F.R. Pt. 226, Supp. I sec. 226.2(a)(25).
As we note later in the text, a description of
a security interest in a TILA disclosure
statement must be a bona fide description of what
one reasonably believes to be a security interest
under state law. Regulation Z does not require,
however, a more complete analysis of the state
law governing the creation of security interests,
and, indeed, explicitly states that it is not
within its province to determine whether a
particular interest constitutes a security
interest under other law.
/3 For example, the FTC Credit Practices Rule, 16
C.F.R. sec. 444 et seq., prohibits lenders from
taking nonpurchase money security interests in
certain household goods. Household goods are
defined as:
Clothing, furniture, appliances, one radio and
one television, linens, china, crockery,
kitchenware, and personal effects (including
wedding rings) of the consumer and his or her
dependents, provided that the following are not
included within the scope of the term "household
goods":
(1) Works of art;
(2) Electronic entertainment equipment (except
one television and one radio);
(3) Items acquired as antiques; and
(4) Jewelry (except wedding rings).
16 C.F.R. sec. 444.1(i).