APPEAL from the Circuit Court of Marion County; the Hon.
RAYMOND O. HORN, Judge, presiding.
MR. PRESIDING JUSTICE KARNS DELIVERED THE OPINION OF THE COURT:
Plaintiff-appellee brought suit in the Circuit Court of Marion County to recover money owed under two installment sales contracts. From a judgment for the plaintiff, defendants appeal.
Plaintiff-appellee, Personal Finance Company, is the assignee of two retail installment sales contracts under which the defendants, Bennie and Joyce Meredith, purchased a food freezer, notions, staples and frozen meat from Tri-State Foods Company. One contract provided for the purchase by the defendants of a food freezer at a cash price of $748.00, credit life insurance of $12.91, and a finance charge of $232.69, payable in 24 monthly installments of $41.40. The other contract was for "notions, staples, and frozen meat" at a cash price of $552.06, credit life insurance of $1.94, and a finance charge of $43.66, payable in six monthly installments of $99.61. The contracts were assigned to the plaintiff approximately a month after their execution.
Defendants made eight payments totaling $339.63 on the food freezer contract and total payments of $493.03 on the other contract. Plaintiff sought to collect the amounts owed on the contracts in the sum of $758.60, plus attorneys fees totaling $253.30 and $1.31 as interest accrued since maturity of the second contract, and were granted judgment for the full amount requested.
The defendants attempted to assert three affirmative defenses to the plaintiff's action: that the contracts were unconscionable, that they failed to comply with the Truth in Lending Act (15 U.S.C. § 1601 et seq.) and Regulation Z (12 C.F.R. § 226 et seq., and that they failed to comply with the Illinois Retail Installment Sales Act. (Ill. Rev. Stat. 1975, ch. 121 1/2, par. 501 et seq.) These defenses were stricken on motion by the trial court as insufficient in law. Defendants then petitioned the court to vacate this order, an evidentiary hearing was held, and the trial court confirmed its previous order and entered judgment for the plaintiff. The defendants here contend that the trial court erred in enforcing a contract term which wavied the buyer's right to assert against an assignee of the contract any claim or defense which they had against the seller unless they notified the sellor or assignee of the defense or claim within five days of the delivery of the merchandise purchased.
The record discloses that the defendants were induced to purchase these items by a salesman of Tri-State Foods who appeared at their home one evening while they were preparing to go bowling. They asked him to come back another night, but when he told them he was in town just that day they agreed to listen to him. The defendants testified that they agreed to purchase the food freezer and the frozen meats because the salesman made it sound "like a really good deal." They stated that at that time they did not receive a copy of the contract and the payment terms were not filled in on the contracts. Nor apparently were they furnished with a notice that they had three days to rescind the agreement as required by section 2B of the Consumer Fraud Act. Ill. Rev. Stat. 1975, ch. 121 1/2, par. 262B.
The defendants also maintained that the contract price of the food freezer ($748) was about $300 more than the price quoted them by the salesman and that they thought they were only purchasing the freezer and the meat. The salesman did not testify, as neither the assignee nor the defendants knew his whereabouts. The record discloses that when the contracts were executed defendants were both employed but at the time of the suit they were not.
1 Defendants first contend that the waiver of defense clause is unenforceable against them because it fails to comply with section 2D of the Consumer Fraud Act (Ill. Rev. Stat. 1975, ch. 121 1/2, par. 262D). Waiver of defense clauses in a security agreement as a general rule are enforceable by an assignee who takes the instrument for value, in good faith and without notice of any claim or defense against the instrument except as to any "real" defense which the obligee has. (Ill. Rev. Stat. 1975, ch. 26, par. 9-206(1); ch. 121 1/2, par. 517.) Thus, a security agreement containing a waiver of defense clause, such as the instant contracts, is given attributes of negotiability by these provisions. Section 2D of the Consumer Fraud Act provides that where a negotiable instrument is executed as a full or partial payment by a consumer in a retail installment sales transaction, if it does not contain the following notice to the consumer buyer, in ten-point type, then the consumer may assert against the holder of the instrument any defenses he has against the seller. The statutorily prescribed notice is as follows:
You have the right to give the assignee named (or if no assignee is named, to give the seller) written notice of any defense or right of action which you may have against the seller within 5 days of delivery of the merchandise described herein. If a notice is not received within that time, you may not assert such defense or right of action against the assignee." Ill. Rev. Stat. 1975, ch. 121 1/2, par. 262D.
The instant contracts, however, are not negotiable instruments as they are not payable to order or bearer. (Ill. Rev. Stat. 1975, ch. 26, par. 3-104(1)(d).) Although these contracts are not negotiable instruments and, hence, not governed by the literal language of section 2D, one court has held that the notice required by section 2D should also be required for security agreements which contain a waiver of defense clause. (Household Finance Corp. v. Mowdy, 13 Ill. App.3d 822, 300 N.E.2d 863 (2d Dist. 1973).) Although Mowdy involved an implied waiver of defense clause under section 9-206(1) of the Uniform Commercial Code, execution of a negotiable instrument together with a security agreement (Ill. Rev. Stat. 1975, ch. 26, par. 9-206(1)), we find its reasoning and analysis persuasive and applicable here. To a consumer debtor, whether he signs a negotiable instrument or a security agreement containing a waiver of defense clause, the result is the same; he can only assert against a holder or assignee of the instrument who takes it for value, in good faith, and without notice of any claim or defense one of the "real defenses" listed in section 3-305 of the Uniform Commercial Code (Ill. Rev. Stat. 1975, ch. 26, par. 3-305). Among the defenses which the consumer cannot assert are failure of consideration, fraud in the inducement and breach of warranty, perhaps the most common defenses which a consumer would have. The purpose of enacting section 2D, we believe, was to increase the likelihood that the consumer debtor would be apprised of his rights, or lack thereof, which he had as a result of executing a negotiable instrument. Assuming that this notice would enable the consumer to comprehend his contractual obligations, he would not be unfairly surprised when he later discovered that the entity to whom the installments payments had to be made was immune from his defense or claim regarding the purchased goods. Therefore we hold that section 2D of the Consumer Fraud Act is applicable to security agreements containing a waiver of defense clause in a consumer retail installment sale transaction.
2 The instant contracts did contain a notice in the language required by section 2D. However, no competent proof exists regarding whether this language is in ten-point type. The necessary language is in large, clear type on the front of the contracts and immediately above the defendant buyers' signatures. It is beneath other admonitions to the consumer buyer required by section 3 of the Retail Installment Sales Act. (Ill. Rev. Stat. 1975, ch. 121 1/2, par. 503.) Hence we believe that this language was printed and positioned on the contract in such a manner so that the buyers should have noticed it, thus informing them of the waiver of defense clause on the back of the contract. There is no indication in the record that the defendants were unable to observe this notice which could violate the policy of section 2D. (Cf. Hunt v. Perkins Machinery Co., 353 Mass. 535, 226 N.E.2d 228 (1967).) Therefore, we find no violation of section 2D of the Consumer Fraud Act.
Defendants next contend that Personal Finance may not claim the status of a holder in due course because it did not acquire the instant contract in good faith or without notice of any defense. The defense which appellants contend is patent on the contracts is the lack of a date appearing beside Bennie Meredith's signature, indicating his desire for credit life insurance. They contend this violates the Truth in Lending Act and Regulation Z. (15 U.S.C. § 1605b; 12 C.F.R. 226.4a(5).) We disagree. These provisions require only that the cost of credit life insurance be included in the finance charge unless the request for credit life insurance is separately signed and dated. Here the cost of the insurance was included in the finance charge and thus no violation existed.
Defendants also argue that the fact that Personal Finance regularly purchased "qualified" retail installment contracts from the seller, Tri-State Foods, negates the good faith requirement necessary for Personal Finance to acquire holder in due course status. Plaintiff maintains that regardless of whether it is a holder in due course, it may still enforce the instant waiver of defense clauses. While plaintiff accurately states the law in Illinois prior to the adoption of the Uniform Commercial Code (Commercial Credit Corp. v. Biagi, 11 Ill. App.2d 80, 136 N.E.2d 580 (1st Dist. 1956)), we do not believe that an assignee protected by a waiver of defense clause is entitled to the rights enjoyed by a holder in due course unless he purchases the contract for value, in good faith and without notice of a claim or defense, requirements which a holder of a negotiable instrument must fulfill to be accorded that status. (Ill. Rev. Stat. 1975, ch. 26, par. 3-302.) Section 9-206(1) of the Uniform Commercial Code and section 17 of the Retail Installment Sales Act (Ill. Rev. Stat. 1975, ch. 26, par. 9-206(1); ch. 121 1/2, par. 517) provide that an assignee who receives a contract for value, in good faith, and without notice of any claim or defense is entitled to the status of a holder in due course. This implies that one who does not so take the assigned instrument is not entitled to those rights and thus is subject to all defenses against the seller. (Ill. Rev. Stat. 1975, ch. 26, par. 3-306.) Plaintiff's position would also allow an assignee to enforce a waiver of defense clause against a debtor's "real defenses" which is clearly in conflict with the limitation placed upon the effect of these clauses by the Uniform Commercial Code (Ill. Rev. Stat. 1975, ch. 26, par. 9-206, Committee Comment 2), and is forbidden by the Retail Installment Sales Act. (Ill. Rev. Stat. 1975, ch. 121 1/2, par. 518.) We have noted above the ...