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GARZA v. CHICAGO HEALTH CLUBS

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,
v.
CHICAGO HEALTH CLUBS, INC., A CORPORATION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Will, District Judge.

MEMORANDUM OPINION

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 states:

  "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 Board provided:

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 ...


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