United States District Court, Northern District of Illinois, E.D
July 29, 1971
FRANK A. GARZA, FOR HIMSELF AND, AS A MEMBER AND REPRESENTATIVE OF THE CLASS DESCRIBED IN THE COMPLAINT, ON BEHALF OF ALL MEMBERS OF THE CLASS DESCRIBED IN THE COMPLAINT, PLAINTIFF,
CHICAGO HEALTH CLUBS, INC., A CORPORATION, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Will, District Judge.
This class action suit brought under Section 130 of the
Consumer Credit Protection Act, popularly known as the Truth in
Lending Act, 15 U.S.C. § 1640, alleges that the defendants have
violated Sections 121, 125 and 128 of that Act, 15 U.S.C. § 1631,
1635 and 1638, and Federal Reserve Board Regulation Z,
12 C.F.R. § 226, by failing to make certain required disclosures
before the consummation of a credit transaction. The defendant
(hereafter referred to as CHC) moves Chicago Health Clubs, Inc.
to dismiss Paragraph 7d of Count I of the Amended Complaint and
Paragraph E of the prayer for relief contained therein and
further moves to make the Amended Complaint more definite.
Paragraph 7d of the Amended Complaint alleges a violation of
Regulation Z and of the Act claiming that CHC caused:
"Customers to execute Retail Installment Contracts
which result or may result in a security interest
being retained or acquired in real property which is
used or expected to be used as the principal
residence of the customer without giving such
customer complete notices of his right of rescission
in the form required, all as provided in Section
226.9(a), (b) and (f) of Regulation Z."
Attached to the "Amendment to the Amended Complaint" is a copy of
the involved installment contract. Contained therein is both a
confession of judgment clause and a provision whereby CHC waives
any interest in any real estate of the buyer. This latter clause
"Notwithstanding any provision hereof or of
applicable law, holder irrevocably waives and
releases all rights to make a judgment confessed
hereon a lien on any real property now or hereafter
owned by the Buyer or in which the Buyer may now or
hereafter have an interest."
In support of plaintiff's claimed violation of § 125 of the Act
and Paragraph 226.9 of Regulation Z, the facts pleaded and
inferrable from the Amended Complaint, viewed most favorably to
the plaintiff, are: CHC included a confession of judgment clause
in its contract with the plaintiff which constituted a security
interest within the meaning of Regulation Z; plaintiff owned real
estate which was his principal place of residence; CHC failed to
give plaintiff the rescission notice called for by the Act and
Regulation Z; and CHC's confession of judgment clause purported
to waive any lien in plaintiff's real estate. We believe that, as
to this claim, the plaintiff can prove no set of facts in support
of his claim which would entitle him to relief. The motion to
dismiss this claim, therefore, is well founded. Conley v. Gibson,
355 U.S. 41
, 47, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). Cf.
Austin v. House of Vision, Inc., 404 F.2d 401
(7th Cir. 1969).
Section 125 of the Act grants the right of rescission to any
person to whom credit is extended if a security interest is
retained or acquired in any real property which is used or
expected to be used by the obligor as his residence. Under the
power granted to it by the Act, the Federal Reserve Board has
promulgated 12 C.F.R. § 226.9 to effectuate the purposes of
Section 125 of the Act. For the purposes of § 226.9, security
interests are interpreted by the Board to include confession of
judgment clauses and cognovit provisions which make it possible
for the holder of an obligation containing such provisions, under
state law, to record a lien on property of the obligor simply by
recordation of the entry of judgment with the obligor being
afforded no opportunity to enter a defense against such action
prior to entry of the judgment. Board Interpretation, 12 C.F.R.
§§ 226.202(b), (c), 34 F.R. 8698.
We believe that had the Federal Reserve Board extended the
above interpretations concerning security interests to all
confessed liens which under state law could result in a judgment
against the debtor without notice, Paragraph 7d of the Amended
Complaint might state a cause of action. However, the Board's
interpretation of Regulation Z specifically excluded from the
operation of the rescission portions of the Act and Regulation
those confession of judgment clauses which, as does the one here
involved, exclude a lien on all residential real estate. The
"Confessions of judgment clauses and cognovit
provisions which, by their terms, exclude a lien on
property which is used or is expected to be used as
the principal residence of the customer, would not
bring a transaction under the provisions of § 226.9."
Board Interpretation, 12 C.F.R. § 226.202(d).
The position taken by the Board is thus quite clear. In
addition, it has consistently confirmed in its Opinion Letters
that the use of an effective disclaimer of waiver or lien as to
real estate meeting the requirements of Board Interpretation
226.202(d) avoids the interdictions of § 226.9 of Regulation Z
and § 125 of the Act despite the creditor's reliance on and use
of a confession of judgment provision. See, F.R.B. Opinion
Letters, August 14, 1969, June 26, 1969, 4 CCH Consumer Credit
Guide, ¶¶ 30,150, 30,064. We believe that theseinterpretations of
the Act and Regulation Z by the Board are entitled to great
weight, are consistent with the purposes of the Act and the
plenary powers granted to the Board, and are not plainly
erroneous. We, therefore, are without authority to overturn these
administrative interpretations of Regulation Z and the Act.
Bowles v. Seminole Rock & Sand Co., 325 U.S. 410
, 414, 65 S.Ct.
1215, 1217, 89 L.Ed. 1700 (1945); Udall v. Tallman, 380 U.S. 1
4, 85 S.Ct. 792, 13 L.Ed.2d 616 (1965); McCall Coal Co. v. United
States, 374 F.2d 689
, 691 (4th Cir. 1967).
Accepting the Board's interpretations as correct and binding,
the crucial element of the involved contract becomes the
provision quoted above from the confession of judgment clause
wherein CHC waives any interest in any real estate owned by the
plaintiff. We must determine if this waiver meets the
requirements of § 226.202(d) so as not to bring the entire
transaction under 12 C.F.R. § 226.9.
CHC states that the controlling language of this proviso to its
cognovit provision is carefully drafted to be a complete and
total exclusion of any actual or potential interest in any real
property and clearly meets the substantive requirements of the
Board interpretation. The plaintiff, on the other hand, notes
that the Board has interpreted § 226.9(a) to mean that a
transaction is still subject to the right of rescission if the
waiver of lien on residential real estate is ineffective, see
12 C.F.R. § 226.902, F.R.B. Opinion Letters, August 14, 1969, August
22, 1969, 4 CCH Consumer Credit Guide ¶¶ 30,150, 30,450, and
Federal Trade Commission Informal Staff Opinion, June 16, 1970,
4 CCH Consumer Credit Guide ¶ 30,539, and contends that CHC's
attempted waiver is ineffective. We must therefore turn to
Illinois law to determine if CHC's waiver of lien is effective so
as to prevent a rescission right from attaching to its confession
of judgment clause.
The plaintiff contends that Illinois has no provisions for
"waiver" of a judgment lien and a judgment rendered on any
confession clause would be a lien on real estate, with the only
manner for such lien to be released being by payment.
Ill.Rev.Stat. Ch. 77, §§ 1, 68a. This conclusion that a judgment
rendered on a confession clause would be a lien on real estate,
however, overlooks the fact that § 1 of Chapter 77 describes
additional affirmative steps which a judgment creditor must take
to cause his judgment to become a lien on real estate. His
judgment does not become such a lien until he files a Memorandum
of his judgment or a certified copy of the judgment either in the
office of the Recorder of Deeds in the county in which the real
estate is located or with the appropriate registrar of title,
with a notation of same entered upon the last certificate of
title (depending on whether or not the land is registered under
the Torrens System). he obtains no lien on real estate. In
Illinois, therefore, unless the judgment creditor takes these
additional steps, he obtains no lien on real estate.
The Federal Reserve Board does not define its use of the word
effective as concerns an effective waiver of lien on real estate.
We believe that CHC is correct in its suggestion that its waiver
must be considered effective if two tests are met: 1) the
covenant imposes an
obligation or duty upon the covenantor which lies within his
power to perform; 2) predictable remedies exist to prevent a
breach or to restore the injured party after breach.
The waiver provision in the contract between the plaintiff and
CHC must be deemed a covenant that if the holder obtains a
judgment, he will refrain from taking the additional steps
necessary to create a lien on any real property. We believe this
covenant satisfies both tests defined above and must be
considered an effective waiver. Under Illinois law, a judgment
may become a lien on real estate only upon the judgment
creditor's affirmative act of recording a Memorandum; therefore,
it is within his power and control to refrain from recording so
that his judgment does not become a lien on real estate. If the
defendant or any holder of the contract were able to obtain a
Memorandum of Judgment which was then recorded in the appropriate
office so as to create a lien on real estate, the judgment debtor
clearly has adequate remedies to clear title and recover damages
from the holder for breach of contract. Negative covenants are as
valid and enforceable in Illinois as other kinds of contract
terms assuming that they do not violate the public policy of the
State. Canfield v. Spear, 44 Ill.2d 49, 254 N.E.2d 433 (1969),
upholding and enforcing a covenant not to compete; Smithereen Co.
v. Renfroe, 325 Ill.App. 229, 59 N.E.2d 545 (1st Dist. 1945),
upholding a covenant not to use trade secrets; Paschen v.
Pashkow, 63 Ill.App.2d 56, 211 N.E.2d 576 (1st Dist. 1965),
enforcing a covenant restricting a real estate development to
single family residences. We believe that were the holder of the
contract to violate or threaten or be about to violate the
covenant of waiver in this contract, the judgment debtor could go
into an appropriate state court to seek injunctive relief to
prevent such action or to clear his title. This waiver,
therefore, must be deemed effective.
Plaintiff argues also that CHC's waiver is not effective
because § 1 of Chapter 77, Ill.Rev.Stat., does not provide for
any form of "waiver". Plaintiff's argument, however, is without
merit. It assumes that the creation of a lien upon real estate is
automatic. We have previously shown that this is not the case.
Moreover, express provisions for waiver of rights created by
statute are not always necessary for the waiver to be effective
in Illinois. See, e.g., Wingard v. Peters, 329 Ill.App. 644,
69 N.E.2d 908 (2d Dist. 1946), recognizing that a party may waive
the benefits of the Statute of Limitations even though there is
no express statutory basis for such a waiver.
CHC apparently drafted its contract to fall squarely within the
terms of 12 C.F.R. § 226.202(d) and, we believe, has succeeded in
that attempt. The Board has determined that a confession of
judgment clause which, by its terms, excludes a lien on
residential real estate does not bring the credit transaction
within the terms of that portion of the Truth in Lending Act or
Regulation Z which allows a purchaser a right of rescission. By
including within its confession of judgment clause the provision
that it waives the right to make a judgment so confessed a lien
on all real property, CHC has met and gone beyond the
requirements of the Board. Irrespective of whatever other
violations of the Truth in Lending Act and/or Regulation Z that
CHC may be charged with, CHC has not violated §§ 226.9(a), (b),
and (f) of Regulation Z as alleged by plaintiff in ¶ 7d of Count
I of the Amended Complaint. Defendant's motion to dismiss this
portion of the complaint, therefore, will be granted.
CHC next moves to dismiss that portion of Paragraph E of the
Prayer for Relief of the Amended Complaint which asks that:
"* * * CHICAGO HEALTH CLUBS, INC., be ordered to
cease and desist from failing to make all disclosures
required by Section 226.10 of Regulation Z in any
to aid, promote, or assist directly or indirectly any
extension of consumer credit * * *"
CHC moves to dismiss on the grounds that neither Section 226.10
of Regulation Z nor Chapter 3 of the Act from which this
regulation is derived creates any private right of enforcement
and that, in any event, no allegations of fact are set forth in
the Amended Complaint upon which the relief claimed could be
The defendant notes the following regarding private causes of
action under Section 3 of the Act. The Act was divided by
Congress into separate chapters with its enforcement delegated to
various federal agencies. The only civil cause of action or
remedy for violation of the Act that appears in the text of the
Act is in Chapter 2, 15 U.S.C. § 1631-1644, dealing with credit
transactions. Chapter 3 of the Act, 15 U.S.C. § 1661-1665,
dealing with credit advertising, creates no civil cause of action
and is to be enforced by the Federal Trade Commission. The
defendant finally notes that the Court of Appeals for the Eighth
Circuit has determined that a private action for damages based on
false credit advertising cannot be maintained under the Act, and
urges that the language of the opinion supports its theory that
a federal court has no jurisdiction to enjoin allegedly
fraudulent credit advertising, Jordan v. Montgomery Ward & Co.,
442 F.2d 78 (8th Cir. 1971). In the circumstances of this case,
we need not, however, resolve this issue and we assume, without
deciding, that we do have jurisdiction to enjoin fraudulent
credit advertising upon the request of an injured private
The Amended Complaint makes no reference to CHC's credit
advertising practices nor asserts any facts which touch this
subject. For this reason alone, this portion of the complaint
should be stricken because plaintiff has not met even the minimal
standards of notice pleading called for by Rule 8 of the Federal
Rules of Civil Procedure. After reading plaintiff's brief in
opposition to the motion to dismiss, however, we believe that
plaintiff is seeking this injunction in order to compel
disclosure in CHC's advertising of those matters which he alleges
in Paragraph 7 of his complaint, were improperly not disclosed in
the Retail Installment Contract discussed above. Plaintiff
appears to claim that this material is required to be disclosed
by Chapter 3 of the Act. Even interpreting plaintiff's complaint
as including these assertions from his brief, we believe that
this reliance on Chapter 3 of the Act is misplaced.
To begin with, Chapter 3 is structured to require disclosures
of certain credit terms if, but only if, the advertisement first
makes a claim that relates to credit terms. See, §§ 142, 144 of
the Act, 15 U.S.C. § 1662, 1664; 12 C.F.R. §§ 226.10(a), (d).
Even assuming that injunctive relief can be granted to a private
party under Chapter 3, plaintiff has alleged no facts relating to
defendant's advertising practices necessary to invoke the
provisions of Chapter 3.
Second, it is doubtful whether the defendant's Retail
Installment Contract, the only document to which we are referred
and the apparent target of plaintiff's entire complaint, can be
considered an advertisement under Chapter 3 of the Act. It
appears clear from the legislative history of the Act and from
the inclusion of Section 145 of the Act, 15 U.S.C. § 1665,
relieving the media from any potential liability under this
chapter, that Congress visualized the term advertisement to
include only the traditional notice for the selling of goods and
services designed and generally circulated to attract public
attention. Under this definition of the term, the contract
entered into between the parties to this suit could not be deemed
to be an advertisement.
Finally, even assuming that CHC's Retail Instalment Contract
can be considered an advertisement, it is still clear that the
plaintiff is not entitled to relief under Chapter 3 of the Act.
None of the disclosures mentioned in
paragraph 7 of the Amended Complaint which the plaintiff accuses
CHC of omitting from its "advertisement" are required to be made
in advertising by Chapter 3. In short, defendant's contract, as
advertising, complied with Chapter 3.
We conclude, therefore, that even if we make several
questionable assumptions, no basis exists for plaintiff's prayer
for relief as concerns credit advertising and 12 C.F.R. § 226.10.
The defendant's motion to dismiss is granted as to that portion
of Paragraph E of the Prayer for Relief of the Amended Complaint
CHC further moves this Court under Rule 12(e), Fed.R.Civ.P., to
order plaintiff to make Paragraphs 7a, 7b and 7d of the Amended
Complaint more definite and certain because they allegedly are so
vague that it cannot form a responsive pleading. Paragraph 7d has
been dismissed above so only the first two paragraphs remain
relevant to this motion. These two paragraphs accuse the
defendants of violating the Act and regulation Z by failing to
make the following required disclosures before consummation of
any credit transaction:
"a. No clear and conspicuous disclosure was made to
any customer of the security interest to be retained
or acquired in connection with the extension of
credit nor was any explanation given of the manner in
which a security interest could be acquired in any
customer's property as required by Section 226.8(b)
(5) of Regulation Z;
b. Failing to make all disclosures above or adjacent
to the place for the customer's signature, contrary
to Section 226.8(a) of Regulation Z."
As to Paragraph 7a, CHC contends that the plaintiff should be
required to set forth the manner in which a security interest is
alleged to have been created or to be acquired by the defendant
as well as the nature and circumstances of the disclosure
deficiency in its contract. As to Paragraph 7b, CHC believes that
the plaintiff should be required to allege which of the
disclosures required by the cited regulation failed to meet the
location requirement of the regulation.
We do not believe that CHC's motion is well founded. The
plaintiff is not required to set out in detail the facts upon
which he bases his claims. Conley v. Gibson, supra. The details
are available to this defendant through the utilization of the
pretrial discovery techniques authorized in Rules 26-37,
inclusive of the Federal Rules of Civil Procedure. The
plaintiff's complaint meets the minimum requirements of notice
pleading of Rule 8(a)(2), Fed.R.Civ.P., and thus necessitates
the rejection of defendant's motion. It is clear that Rule 12(e)
"is designed to strike at unintelligibility rather than want of
detail. If the pleading meets the requirement of Rule 8 and
fairly notifies the opposing party of the nature of the claim, a
motion for a more definite statement will not be granted." 2A
Moore's Federal Practice ¶ 12.18; Fairmont Foods Co. v.
Manganello, 301 F. Supp. 832 (S.D.N.Y. 1969); State of Tennessee
ex rel. Davis v. Hartman, 306 F. Supp. 610 (E.D.Tenn. 1969).
Although plaintiff conceivably could have drafted his complaint
in greater detail, his failure to do so is not inconsistent with
the spirit of the modern rules of procedure that are designed to
reduce complexity in pleading yet increase the pretrial knowledge
of the litigants concerning the positions of their opponents
through liberal pretrial discovery. The plaintiff has clearly put
CHC on notice of the nature of his claims. Accordingly, CHC's
motion for a more definite statement is denied.
An order consistent with the foregoing will be entered.
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