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Croysdale v. Franklin Savings Association

decided: July 12, 1979.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 77 C 3395 -- Prentice H. Marshall, Judge.

Before Pell and Tone, Circuit Judges, and Kirkland, Senior District Judge.*fn*

Author: Pell

The plaintiffs, Donald and Martha Croysdale, brought this suit under the Truth in Lending Act (TILA), 15 U.S.C. § 1601 Et seq., and Regulation Z, 12 C.F.R. § 226.1 Et seq. The subject matter of this action is the adequacy of the disclosures made by the defendant, Franklin Savings Association, in connection with a residential mortgage loan agreement. While the plaintiffs purport to challenge the nondisclosure of an acceleration clause in the event of the sale of the mortgaged property, the gravamen of their complaint is that there was no disclosure of the fact that the acceleration resulted in the creditor's retention of unearned finance charges. The district court, after hearing arguments upon essentially uncontested facts, dismissed the plaintiffs' complaint and entered judgment for the defendant. The plaintiffs appeal from that judgment.*fn1

The plaintiffs purchased a home in Elmhurst, Illinois, in May 1976. To finance the purchase, they executed a note and mortgage with the defendant. The loan proceeds were distributed on May 21, 1976. The plaintiffs paid interest separately for the period from May 21, 1976, to June 1, 1976, apparently for the purpose of causing all of the financed payments to fall due on the first day of each month. Beginning on June 1, 1976, principal and interest were payable in equal monthly installments of $360.28 for a total of 348 monthly installments. The monthly payments were to be applied first to interest on the unpaid balance at the specified rate and then to the principal. The promissory note further provided that the interest for each month should be added to the unpaid balance as of the first day of the month at the rate of one-twelfth of the annual interest rate and should be calculated upon the unpaid balance as of the last day of the preceding month. The disclosure notice provided that there was no prepayment penalty and that if the monthly payment was received after the fifteenth of the month there would be an additional amount due of one-twelfth of one per cent of the unpaid balance. The disclosure statement also showed the amount being financed as the principal amount owing as of the first day of June 1976.

The plaintiffs did not make the monthly payment due on May 1, 1977, until May 13, 1977. On that same day the plaintiffs sold the mortgaged property. Pursuant to the due-on-sale clause in the note and mortgage, the entire principal balance became due at once. The plaintiffs paid the balance to obtain a release of the mortgage, the amount paid including the full amount owing on May 1st plus the unpaid balance of the principal. Although the balance was paid in full on the thirteenth of May, before the end of the month, the defendant did not refund any part of the monthly payment due at the beginning of the month.

The plaintiffs argue that because of the due-on-sale clause they had to pay interest for the entire month although they had the use of the defendant's money for only thirteen days. The TILA disclosure statement mentioned neither the due-on-sale clause nor its possible effects. As previously noted, the principal issue in this appeal is whether the failure to disclose the effects of the due-on-sale clause violated TILA or Regulation Z. The plaintiffs also argue that the disclosure statement was misleading because it created the impression that interest would be computed on a per diem basis when the loan was outstanding for less than the entire month.

The plaintiffs initially argue that the due-on-sale clause being an acceleration clause, there should have been notification of this fact in the Regulation Z disclosure notice. We have been cited numerous cases reflecting the divergent views taken on the necessity of disclosure of an acceleration clause, such views ranging from "never," through "sometimes," to "always." See for a discussion of the various views, St. Germain v. Bank of Hawaii, 573 F.2d 572 (9th Cir. 1977). TILA and Regulation Z make no specific provision for disclosure of the right of acceleration and an examination of the cases cited reveals that the question has ordinarily been treated, not because of any real belief that it per se is required to be disclosed but because of its impact upon the cost or terms of financing. To the extent that an occasional case may have adopted a per se rule we reject, as did the district court in the present case, such a view. Indeed, the plaintiffs do not seem to disagree that the crucial aspect of requiring disclosure of an acceleration clause is when there is some impact upon financing costs. In their brief, they observe, "It makes sense to require disclosure of acceleration rights when the exercise of such rights has measurable financial repercussions for the borrower." We do not necessarily disagree with the underlying thought but point out that in plaintiffs' proposed situation, if any aspect of the transaction is subject to disclosure, it would be the particular repercussion of the acceleration and not the acceleration itself.*fn2

For our present purposes we will assume that the due-on-sale clause is an acceleration clause, and hold that there is no duty of disclosure of an acceleration clause under TILA or Regulation Z unless it has some bearing on the cost or terms of financing as provided in the statute and accompanying regulation. The plaintiffs contend that the failure to rebate what they call unearned interest does have such a bearing so we turn to the question of whether there was a duty to notify that if there was an acceleration by virtue of sale of the mortgaged property and the payoff occurred during the course of the month, there would be no refund of the interest included in the monthly payment paid or payable at the beginning of the month.*fn3

Although relying generally upon a claimed violation of TILA, the plaintiffs specifically base their argument on three subsections of Regulation Z, 12 C.F.R. § 226.8(b)(4), (6), and (7). An examination of these three subsections, which will be discussed as to applicability separately hereinafter, would seem to indicate that if any one is found applicable and controlling the other two would not be. Nevertheless, inasmuch as the plaintiffs are apparently willing to rely upon any one of the three which will produce a reversal, we will discuss all three.

Regulation Z, 12 C.F.R. § 226.8(b)(4), provides for disclosure of:

The amount, or method of computing the amount, of any default, delinquency, or similar charges payable in the event of late payments.

As we have already mentioned, the Regulation Z disclosure notice here did specify the charge that would be made if the monthly payment was late, i. e., after the fifteenth of the month. In referring to subsection (4), the plaintiffs construe it as requiring disclosure "of late payment charges and other default charges," apparently attempting to bring their case within its ambit on the basis that the defendant in its loan instruments characterized the sale of the mortgaged property as a default. Such a construction, however, violates the plain meaning and intended scope of subsection (4). We have previously referred to the discussion in St. Germain of the incorrect reading of the subsection contained in Garza, and the St. Germain analysis is applicable here. In our reading of subsection (4) we find no basis for thinking that the required disclosure included any "other default" charge than one which is "payable in the event of late payments." The words "default," "delinquency," and "similar" each modify "charges," and the charges in turn are those payable in the event of late payments. We find no indication that the plaintiffs are audaciously claiming that they are within the ambit of the subsection by virtue of having made the May payment thirteen days late. In any event there was no separate charge in the loan instruments for such a late payment, such an additional charge not being provided for until the payment was more than fifteen days late. We hold, therefore, that the defendant did not have to make a disclosure pursuant to subsection 226.8(b)(4).

Regulation Z, 12 C.F.R. § 226.8(b)(6), provides for disclosure of:

A description of any penalty charge that may be imposed by the creditor or his assignee for prepayment of the principal of the obligation (such as a real estate mortgage) with an explanation of the method of computation of such ...

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