APPEAL from the Circuit Court of Cook County; the Hon. CHARLES
BARRETT, Judge, presiding.
MR. JUSTICE SULLIVAN DELIVERED THE OPINION OF THE COURT:
This matter involves a consolidation of three class actions in which the plaintiffs, retail purchasers, challenged the revolving charge account arrangements of the defendants, retail sellers. Specifically, in identical amended complaints, plaintiffs asked (1) that defendants be enjoined from using the "previous balance" method of computing interest or finance charges, and (2) that they and each member of the class they purported to represent receive a refund of finance charges.
Motions to dismiss the amended complaints were sustained, and on appeal plaintiffs contend (1) that the Illinois Retail Installment Sales Act (Ill. Rev. Stat. 1971, ch. 121 1/2, pars. 501-533) does not permit the use of the previous balance method of computing finance charges, (2) that sections 4.1, 4.2 and 4.3 of the Illinois Interest Act (Ill. Rev. Stat. 1971, ch. 74, pars. 4.1, 4.2 and 4.3) govern the revolving charge accounts of defendants, and (3) that the previous balance method is an unconscionable agreement in violation of section 2-302 of the Uniform Commercial Code (Ill. Rev. Stat. 1971, ch. 26, par. 2-302).
There is no factual dispute. Each of the defendants uses the previous-balance method in computing its finance charges. Under this arrangement the defendants determine a billing period (one month) and mail their purchasers a statement showing the balance owed at the end of the first billing period, which we will refer to as the first-cycle balance. It reflects all debits and credits to the purchaser's account during the first month. Finance charges are not included in the first-cycle balance to allow the purchaser to pay that balance in full at any time prior to the end of the second cycle, in which event no finance charges are assessed on the first-cycle balance. However, if the first-cycle balance is not offset in full by payments and/or credits during the second cycle, a charge of 1 1/2% on the full amount of the first-cycle or previous balance is included in the second-cycle balance sent to the customer. Similarly, for ensuing cycles the finance charge is based upon the unpaid balance at the end of the previous cycle.
The operation of the previous-balance method may be more readily understood from the following illustrations which assume that the rate of computation is 1 1/2% per month and that the customer's first billing cycle ended on April 20.
(A) Assuming a single purchase of $100 on April 5 with no payments made or credits given during the first cycle, no finance charge is assessed on April 20 and the customer is informed that if the entire amount is paid before the end of the second cycle (May 20) no finance charges will then be assessed for the first cycle.
(B) Under (A) above there would be a balance on April 20 of $100 (previous balance for second cycle). Assuming a credit of $20 on April 25 for the return of goods purchased in the first cycle, a purchase of $20 on April 21 and a payment of $40 on May 15, inasmuch as the $100 first cycle or previous balance was not paid in full, the May 20 bill would include a finance charge of $1.50 (1 1/2% of the previous balance (April 20) of $100).
(C) Under (B) above the second cycle balance would be $61.50 (previous balance for the third cycle) and assuming $61.50 was paid on June 2 and on June 4 another $100 purchase was made, there would be no finance charge at the end of the third cycle on June 20 because the $61.50 second cycle balance had been paid in full. There would, however, be a third cycle previous balance of $100.
It can be seen that under the previous-balance method a finance charge is made on the first-cycle balance at the end of the subsequent cycle which does not take into consideration the payments made or credits given during that cycle unless they are in full payment of the previous balance. The plaintiffs argue that the charges, therefore, being on the previous balance are greater than they would be on the actual unpaid balance at the time they are assessed, and they maintain that this practice is in violation of the provisions of the Illinois Retail Installment Sales Act and the Illinois Interest Act. They urge that the "unpaid balance" method is the legally permissible method which should be used by defendants. Under it the finance charges would be made on an unpaid balance struck after deducting all payments and credits (but not including current purchases) up to the billing date of the cycle just closed. Under this method in (B) above, the finance charge made on April 20 would have been assessed on $40 instead of $100 under the previous balance method.
Plaintiffs initially contend that section 528 *fn1 of the Retail Installment Sales Act provides for the use of the unpaid-balance method of computation of finance charges and does not permit the use of the previous-balance method. They present four arguments in support of this position.
First, they assert that the term "previous balance" does not appear any place in section 528 and that the unpaid-balance method is mandated because of the following wording of that section:
"[M]ay * * * charge * * * a finance charge not exceeding 18¢ per $10 per month, computed on all amounts unpaid thereunder from month to month, * * *. The finance charge under this Section may be computed for all unpaid balances from month to month within a range of not exceeding $10 on the basis of the median amount within the range if, as so computed, the same rate of finance charge is applied to all unpaid balances within the range." (Emphasis added.)
The significant portion of this section provides that finance charges are to be computed on "all amounts unpaid thereunder from month to month." Plaintiffs argue that the previous-balance method does not compute charges on "all amounts unpaid" because payments and credits in the second cycle in less than the full amount of the first cycle or previous balance are not considered and, as a result, the finance charges assessed at the end of the second cycle are not on the unpaid balance at that time. Defendants maintain that the previous-balance method is computed on an unpaid balance from month to month because the balance is struck at the end of the first cycle which is a correct "unpaid balance" at that time but no charge is made then so that the customer may avoid any charge by payment in full during the next cycle. Defendants also say that the unpaid-balance method urged by plaintiffs would violate section 528 because when the balance is struck, at the end of the second cycle, it does not include purchases made during that cycle and, therefore, would not be a correct "unpaid balance."
• 1 We believe that the previous-balance method does compute finance charges on an unpaid balance each month. It appears to us that under this method an unpaid balance is determined at the end of each billing cycle which is the previous balance for the next cycle. Defendants could make a finance charge at the end of the first cycle under an appropriate calculation but, apparently for business reasons rather than on account of legal requirements, they prefer not to make any charge at that time. This election not to do so, we believe, constitutes a waiver of the finance charge for the first cycle conditioned upon payment in full during the second cycle. We conclude that the previous-balance method used by defendants here does compute finance charges on "all amounts unpaid thereunder from month to month" within the provisions of section 528 and it is not significant that the words "previous balance" do not appear in that section.
Plaintiffs, in their second argument, suggest that section 528 of the Retail Installment Sales Act should be read with section 502.7, which provides:
"`Retail Charge Agreement' * * * means an instrument prescribing the terms of a retail installment transaction * * * under the terms of which the finance charge is to be computed in relation to the buyer's unpaid balance from time to time."
They assert, when taken together, these sections reveal a legislative intent that finance charges should be computed on the unpaid balance and not on the previous balance. We disagree. The only restriction we find in reading these sections is that the finance charge must be computed on an unpaid balance which is struck in each billing cycle. In Siebert v. Sears Roebuck & Co., 4 CCH, Consumer Credit Rptr., par. 99164 (No. 407558, Super. Ct. Cal., Alameda Co., (May, 1972)), balance was defined as the sum total of the debits and credits in the account at the time the balance is struck. We note also that section 525 of the Retail Installment Sales Act provides in part as follows:
"(b) The seller * * * must promptly supply the buyer under the agreement, as of the end of each monthly period (which need not be a calendar month) or other regular period agreed upon by the seller and the buyer in which there is any unpaid balance under that agreement a statement reciting the following terms * * *;
(1) the unpaid balance under the retail charge agreement at the beginning and end of the period;
(2) unless otherwise furnished by the seller to the buyer by sales slip, memorandum, or otherwise, an identification of the goods or services purchased during the period, the cash price and the date of each purchase;
(3) the payments made by the buyer to the seller and any other credits to the buyer during the period;
(4) the amount of any finance charge expressed as an annual percentage rate."
Under this provision the seller must supply the buyer with a statement reciting the unpaid balance at the beginning and at the end of each billing period. The previous-balance method reflects all debits and credits during each billing period, and we believe it satisfies the legislative intent of sections 502.7, 525 and 528.
In their third argument plaintiffs point to court decisions of other jurisdictions which they contend are in support of their position that the previous-balance method of assessing finance charges is not permitted. They cite Montgomery Ward & Co. v. O'Neil, 4 CCH Consumer Credit Rptr., par. 99,535 (Nos. 373,670 and 373,678, Minn. Dist. Ct. 2d Jud. Dist. (April, 1971)), wherein Ward's revolving credit card program, using the previous-balance method, was held to be usurious in violation of Minnesota's usury statute. We note, however, that there was no Retail Installment Sales Act in effect in Minnesota when that suit was commenced and the legality of Ward's method of computing finance charges was decided pursuant to the State's usury statute. Subsequently, while an appeal was pending, a statute was enacted which specifically declared revolving charge accounts, including those using the previous-balance method, as they existed in the State prior to the passage of the statute, to be legal and enforceable. Thereafter, the Minnesota Supreme Court remanded the matter to the trial court, which held that the new legislation was retroactive and legalized Ward's credit plan.
Plaintiffs also cite the New York case of Zachary v. R.H. Macy & Co., 31 N.Y.2d 443, 293 N.E.2d 80, which has been the subject of considerable comment in the briefs of all parties. Defendants initially relied heavily on the trial court ruling which sustained the use of the previous-balance method under a New York statute which provided that finance charges be "computed on the outstanding indebtedness from month to month." Subsequent to the filing of the initial briefs here, the New York Supreme Court, Appellate Division, reversed the trial court, and in their reply brief plaintiffs placed great import upon its holding that the previous-balance method was not permitted under the New York statute. All parties here agree that the New York statute was substantially similar to section 528 of our Retail Installment Sales Act. Interestingly, after all the briefs were filed here, the New York Court of Appeals, the highest court of that State, reversed the Appellate Division in Zachary v. R.H. Macy & Co. (1972), 31 N.Y.2d 443, 293 N.E.2d 80, stating at page 455:
"Undoubtedly, the term `outstanding indebtedness', in its ordinary sense denotes only the amount `owing or unpaid' [citations]. But the term can only be measured by reference to some particular point in time, which may well be the amount outstanding at the beginning of a cycle (under the previous balance), at the close of a cycle (under the closing balance) or on an average daily basis during the cycle (under the average daily balance). Taken alone, there is nothing in the ...