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Associates Finance, Inc. v. Cedillo





APPEAL from the Circuit Court of De Kalb County; the Hon. CARL A. SWANSON, Jr., Judge, presiding.


Defendants and counterplaintiffs Ramon S. Cedillo and Dora N. Cedillo (hereinafter borrowers) appeal only from the denial of their counterclaim alleging violations of the Truth in Lending Act (15 U.S.C. § 1601 et seq. (1976)) and Federal Reserve Board Regulation Z (12 C.F.R. § 226.1 et seq.) (hereinafter the Act and Regulation Z).

The material facts are not in dispute. On May 25, 1977, borrowers entered into a loan agreement with plaintiff, Associates Finance, Inc., for the sum of $5556.73, which included a finance charge of $1388.19; at that time, borrowers also signed a loan disclosure statement and a "State Loan Statement." Defendants failed to make the monthly payments after June 2, 1978. Plaintiff filed a notice for the issuance of a writ of replevin on December 13, 1978, seeking possession of certain items of personal property of the borrowers which secured the debt. The court ordered the writ to be issued on December 28, 1978, provided that the term "etc." was deleted from the list of goods to be replevied. In their counterclaim filed on January 11, 1979, borrowers sought damages of $1000 plus costs and attorney's fees pursuant to section 1640(a) of the Consumer Protection Act, as amended (15 U.S.C. § 1640(a)(1976)); it was alleged that certain disclosure requirements in the disclosure statement and the loan agreement violated section 226.8(b)(5) of Regulation Z (12 C.F.R. § 226.8(b)(5)), which requires a clear identification of all the property covered by the security agreement. Plaintiff raised the one-year statute of limitations (15 U.S.C. § 1640 (e)(1976)) as an affirmative defense in its answer to borrowers' counterclaim. After a nonevidentiary hearing except for the documents attached to the pleadings, the trial court granted possession of the replevied property to plaintiff and denied defendants' counterclaim. Defendants appeal from the denial of their counterclaim only.

• 1 Noting first that State courts> have jurisdiction to enforce the Act (15 U.S.C. § 1640(e) (1976); Lake Shore National Bank v. McCann (1979), 78 Ill. App.3d 580, 396 N.E.2d 1301; Ninth Liberty Loan Corp. v. Hardy (1977), 53 Ill. App.3d 601), we believe that a threshold consideration is whether borrowers' counterclaim is barred by section 1640(e) of the Act, which provides that actions under section 1640(e) may be brought "within one year from the date of the occurrence of the violation." (15 U.S.C. § 1640(e) (1976); Allensworth v. Ben Franklin Savings & Loan Association (1979), 71 Ill. App.3d 1041, 1045, 389 N.E.2d 684.) Borrowers place great emphasis on Wood Acceptance Co. v. King (1974), 18 Ill. App.3d 149, 309 N.E.2d 403, in support of their contention that the Federal statute of limitations is inapplicable to the case at bar. In that case, the plaintiff filed an action to recover a deficiency judgment allegedly due after the repossession and resale of defendant's automobile purchased under a retail installment contract. Similarly, the defendant filed a counterclaim alleging violations of the Truth in Lending Act. The court held that the counterclaim was not barred by the one-year statute of limitations contained in 15 U.S.C. § 1640(e)(1976), notwithstanding the fact that the defendant admitted that he did not file his counterclaim within the one-year period. The court cited section 17 of the Limitations Act (Ill. Rev. Stat. 1971, ch. 83, par. 18), providing that a defendant may plead a setoff or counterclaim barred by a statute of limitations, while held and owned by him, to any action, the cause of which was owned by the plaintiff or person under whom he claims, before such setoff or counterclaim is so barred. The court noted that its research into the congressional hearing on the enactment of the Truth in Lending Act failed to disclose the purpose behind the one-year filing period, but the court emphasized that the Act was intended to safeguard the consumer in connection with the utilization of credit and that the enforcement of the Act is accomplished largely through the institution of civil actions. For this reason, the court continued, no provision was made for investigative or enforcement machinery at the Federal level, on the assumption that the civil penalty section would secure substantial compliance with the Act. It was further stated that the placement of such responsibility on the often-unknowledgeable consumer lends support for the conclusion that the penalty sought to be imposed on violators of the Act should not be circumvented where the debtor's obligation is not stale and the debtor raises the statute by way of a counterclaim arising out of the same occurrence. The court accordingly concluded that the one-year limitations period of section 1640(e) was not such an integral part of the Act as to outweigh the combined purposes of the Federal Act and section 17 of the Illinois Limitations Act. See generally Annot., 36 A.L.R. Fed. 657, 668-69 (1978). See also Public Finance Corp. v. Riddle (1980), 83 Ill. App.3d 417, 403 N.E.2d 1316.

Plaintiff attempts to distinguish Wood Acceptance Co. on the basis that its holding is expressly limited to a situation "where the debtor's obligation is not stale." (18 Ill. App.3d 149, 151.) Plaintiff contends in the present case that borrowers' obligation has been discharged in bankruptcy and it cannot be fundamentally fair to allow a discharged debtor to pursue a claim against a creditor who is seeking nothing from him in return. Plaintiff's argument is unpersuasive. The record on appeal does not reveal whether defendants were discharged in bankruptcy. Also, the counterclaim here was brought in response to plaintiff's complaint seeking the issuance of a writ of replevin; although it is not clear from the record, apparently borrowers voluntarily returned the secured property to plaintiff pursuant to a court order entered in this case. Under such circumstances, plaintiff cannot be heard to say that defendants' obligation is stale.

Furthermore, the reasoning from other jurisdictions is persuasive. In Lincoln First Bank v. Rupert (1977), 60 App. Div.2d 193, 400 N.Y.S.2d 618, the court held that counterclaims asserted by the debtor in an action to recover monies allegedly unpaid under a retail installment policy were not barred by the statute of limitations, even though they would have been time-barred if asserted as separate actions. The court perceived the basic inquiry to be whether the congressional purpose would be effectuated by tolling the statute of limitations in given circumstances. After examining the statute itself, the court concluded that its purpose is to protect the borrower so that he may be better able to compare the cost of credit, and that to do otherwise would frustrate the purpose of the Act.

• 2 We believe that the rationale of Rupert is equally applicable here. The transaction was entered into on May 25, 1977; plaintiff filed its complaint on December 13, 1978. It is obvious that plaintiff did not commence suit until the one-year limitation period had expired. Thus to hold, as plaintiff urges, that defendants' counterclaim is time-barred would frustrate the very purpose of the Act and provide opportunity for potential abuse.

• 3 In support of their counterclaim, borrowers assert that the disclosure of the terms of the Disclosure Statement and Loan Agreement were not in accordance with the requirements of the Truth in Lending Act, and more particularly with section 226.8(b)(5) of Regulation Z (12 C.F.R. § 226.8(b)(5)). On appeal, borrowers urge that the disclosures in the loan agreement coupled with the disclosure statement did not provide a clear identification of the property to which the security interest relates, but instead set forth a conflicting, inaccurate and indefinite identification of such property.

The purpose of the Act is "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit." (15 U.S.C. § 1601 (1976); Smith v. Chapman (5th Cir. 1980), 614 F.2d 968, 971; see also Traff v. American Finance Corp. (1979), 77 Ill. App.3d 889, 890, 396 N.E.2d 832.) Due to its remedial nature, the applicable standard is strict compliance with the technical provisions of the Act. (Smith v. Chapman (5th Cir. 1980), 614 F.2d 968, 971; Woods v. Beneficial Finance Co. (D. Ore. 1975), 395 F. Supp. 9, 12.) Regulation Z, section 226.8(b)(5), requires the creditor to include in his disclosure statement a description or identification of the type of security interest it acquired with the extension of credit, and a clear identification of the property to which the security interest relates. (Madison v. United Finance Co. (9th Cir. 1978), 571 F.2d 1125, 1126; Woods v. Beneficial Finance Co. (D. Ore. 1975), 395 F. Supp. 9, 13.) To satisfy the requirements of section 226.8(b)(5), the goods must be so clearly identified as to preclude any reasonable question regarding the particular goods to which the security interest attached. Madison v. United Finance Co. (9th Cir. 1978), 571 F.2d 1125, 1126; Woods v. Beneficial Finance Co. (D. Ore. 1975), 395 F. Supp. 9, 13-14.

Borrowers claim that the collateral has not been clearly identified. They argue that the discrepancies between the loan disclosure statement and the loan agreement present, at a minimum, a confusing situation for the debtors. First, there is the confusion generated by having two nearly identical loan documents with different categories of security. More perplexing, however, is the inconsistent use of check-off devices. For instance, the "Vehicle" box is checked on the loan disclosure statement, but marked "NA" on the loan agreement; on both documents, the identical description of the automobile follows. As the trial judge remarked, "It doesn't make any sense to itemize and say it isn't applicable, does it? Doesn't make any sense."

In our view, the disclosures made by plaintiff's preparation of the documents do not clearly identify the type of security, much less provide "enough information to preclude any reasonable questions regarding the goods to which the security interest attaches." (Woods v. Beneficial Finance Co. (D. Ore. 1975), 395 F. Supp. 9, 13-14.) An argument can be made, of course, that any reasonable person could determine that the security is borrowers' Pontiac Lemans and the household goods and appliances listed on the loan agreement. While this argument has surface appeal, it fails upon deeper analysis. The point here is that the collateral should be clearly identified and described. Although the description may be adequate, there is much room for confusion simply because two documents with conflicting check-off boxes have been used. The underlying principle of the Act is to protect the borrower through a highly technical system of disclosure requirements. As a general rule, therefore, all ambiguities in the disclosure instrument should be construed against the lender not only as the one upon whom the burden of compliance lies, but also as the one who drafted the disclosure statement. (Sneed v. Beneficial Finance Co. (D. Haw. 1976), 410 F. Supp. 1135, 1142; First Savings & Loan Association v. Kern (1977), 55 Ill. App.3d 838, 842, 370 N.E.2d 1326.) More importantly, the purpose of a disclosure statement is to disclose as precisely and as accurately as possible the terms of the loan transaction. To the extent that such a statement unreasonably obscures, confuses, or overstates the requisite information, it is violative of the Truth in Lending Act. (Sneed v. Beneficial Finance Co. (D. Haw. 1976), 410 F. Supp. 1135, 1145.) Although the Sneed court held that an internal discrepancy in the loan disclosure statement, in itself, was not sufficient cause to find a violation of the Act, it noted that from the date of its decision the courts> would take a more stringent view of the use of unclear check-off devices. 410 F. Supp. 1135, 1144.

It is now well established that an objective standard is used in determining violations of the Act. It is not necessary that the defendants actually have been deceived in order for a violation to occur. (Smith v. Chapman (5th Cir. 1980), 614 F.2d 968, 971; McGowan v. King, Inc. (5th Cir. 1978), 569 F.2d 845, 849.) Under this standard, the basis for the trial court's decision was erroneous. The trial judge reasoned as follows:

"It would appear to me that there may be a conflict in the boxes here, but I think that by signing these they were not in the dark, so to speak. In other words, it was ...

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