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KEDZIORA v. CITICORP NATL. SERVS.

November 19, 1991

THOMAS S. KEDZIORA and MERRILOU KEDZIORA, Plaintiffs,
v.
CITICORP NATIONAL SERVICES, INC., CITICORP ACCEPTANCE COMPANY, INC., and CITICORP, Defendants.


Milton I. Shadur, United States District Judge


The opinion of the court was delivered by: SHADUR

Thomas and Merrilou Kedziora ("Kedzioras") have sued Citicorp National Services, Inc. ("Citicorp National") and its subsidiaries Citicorp Acceptance Company, Inc. and Citicorp (all three corporations are collectively referred to in this opinion as "Citicorp," treated for convenience as a singular noun), *fn1" claiming that automobile leases issued by Citicorp violated the Consumer Leasing Act, 15 U.S.C. §§ 1667-1667e (the "Act"), *fn2" and its implementing regulations as well as Illinois law. Jurisdiction is grounded in 28 U.S.C. § 1331 and in this Court's supplemental jurisdiction under 28 U.S.C. § 1367.

 Citicorp has moved under Fed. R. Civ. P. ("Rule") 12(b)(6) to dismiss the Complaint. For the reasons discussed in this memorandum opinion and order, the motion (1) is granted as to Counts II and III and (2) is granted in part and denied in part as to Counts I, IV and V.

 Allegations of the Complaint3

 Kedzioras incurred a substantial "termination charge" when they defaulted on their 60-month car lease ("Lease") after 22 months. Insurance proceeds paid the bulk of the charge, but a balance remained due for which Kedzioras were personally liable. Rather than pay the balance, Kedzioras brought suit to challenge the validity of certain of the Lease terms.

 Kedzioras assert five claims in the class action suit that they initially filed in the Circuit Court of Cook County. *fn4" Count I contends that the termination charge was "unreasonable" and therefore a violation of the Act. Count II says that Citicorp had failed to adequately disclose the termination charges required by the lease, also in violation of the Act. Count III asserts that Citicorp's failure to disclose the purchase option price at the end of the lease term also violated the Act. Count IV states that the default and early termination charges constitute unenforceable penalties in violation of Illinois common law. Count V alleges that the termination charges and inadequate disclosure constituted unfair and deceptive business practices in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.St. ch. 121 1/2, paras. 261-272.

 Citicorp removed the case to federal court pursuant to 28 U.S.C. § 1446. It then filed its motion to dismiss in lieu of an answer, and the parties have briefed the motion at length.

 Congress has enacted a broad-based regulatory scheme to govern the consumer credit industry (Sections 1601-1693r). As a whole that scheme is commonly known as the Truth in Lending Act ("TILA"), while the sections applicable to consumer leases (Sections 1667-1667e) are known as the Consumer Leasing Act. In passing the Act Congress sought (Section 1601(b)):

 to assure meaningful disclosure of the terms of leases of personal property for personal, family, or household purposes so as to enable the lessees to compare more readily the various lease terms available to him, limit balloon payments in consumer leasing, enable comparison of lease terms with credit terms where appropriate, and to assure meaningful and accurate disclosures of lease terms in advertisements.

 TILA's damage provisions (Section 1640) are made applicable to claims under the Act as well (by Section 1667d). Definitions under TILA (Section 1602) naturally apply to the Act, for Congress chose to embed the Act within the TILA structure. For the same reason, general rules of construction applicable in TILA cases must also apply in cases under the Act. Courts have consistently held that TILA must be liberally construed in the consumer's favor (see, e.g., Pearson v. Easy Living, Inc., 534 F.Supp. 884, 890 (S.D. Ohio 1981)) and that even the most technical disclosure violations--whether or not they cause actual damage or deception--may trigger liability for the offending creditor ( Smith v. No. 2 Galesburg Crown Finance Corp., 615 F.2d 407, 416-17 (7th Cir. 1980)).

 On the other hand, Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568, 63 L. Ed. 2d 22, 100 S. Ct. 790 (1980) (emphasis and brackets in original), quoting S.Rep. 96-73, p. 3 (1979), has stressed:

 Meaningful disclosure does not necessarily mean more disclosure. Rather, it describes a balance between "competing considerations of complete disclosure . . . and the need to avoid . . . [informational overload]."

 That principle too must apply to the Act.

 Two provisions of the Act supply the grounds for Kedzioras' federal claims. First is the provision mandating "clear and conspicuous" disclosure (Section 1667a) of various lease terms, including "the amount or method of determining any penalty or other charge for delinquency, default, late payments, or early termination" (Section 1667a(11)). Second is the provision governing liability on expiration or termination of a lease, which mandates in part (Section 1667b(b)):

 Penalties or other charges for delinquency, default, or early termination may be specified in the lease but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the delinquency, default, or early termination, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an inadequate remedy.

 Congress here very nearly copied the exact language of the Uniform Commercial Code and the Restatement (Second) of Contracts (1981) on liquidated damages (see Ill.Rev.Stat. ch. 26, § 2-718(1); Restatement § 356(1)). Legislative history informs us that the resemblance to the UCC was intentional (S. Rep. No. 94-59, 94th Cong., 2d Sess. 7, 1976 U.S. Code Cong. & Ad. News at 437 says "The language is taken from the Uniform Commercial Code's provision on liquidated damages, and should be applied flexibly"). By logical extension, then, Congress must have intended that any settled judicial interpretation of the UCC and the Restatement should govern the interpretation of Section 1667b(b). At any rate, the remainder of the statute and the implementing regulations shed no light on Section 1667b(b), so that the UCC and the Restatement are the only logical tools with which to give content to the amorphous term "reasonable."

 By referring to "anticipated or actual" harm, then, Congress surely intended that courts should look to the Restatement's perspective on the identical terms--a perspective that stresses temporal considerations of reasonableness. Liquidated damages clauses are to be upheld if they provided a reasonable estimate as of the time of contracting or if they in fact turn out to provide a reasonable approximation of actual damages ( Yockey v. Horn, 880 F.2d 945, 952-54 (7th Cir. 1989)). In other words, a liquidated damages clause that may in a particular case happen to produce damages far out of proportion to demonstrable actual damages is still valid as long as it was reasonable ex ante.

 Implementing regulations issued by the Federal deserve (12 C.F.R. § 226, commonly known as "Regulation Z," and 12 C.F.R. § 213, commonly known as "Regulation M") *fn5" give further definition to the statutory requirements just outlined. Those regulations, and additional elements of the statutory scheme relevant to the case, are touched on below.

 As the passages quoted earlier indicate, Section 1667b imposes substantive requirements of reasonableness on termination penalties or other charges, whereas Section 1667a imposes no substantive requirements on lease terms. Instead it merely requires adequate disclosure of the terms.

 Citicorp's Lease Terms

 Kedzioras leased a 1989 Pontiac Grand Prix from Citicorp on September 1, 1988. Over the course of the 60-month lease they were to pay Citicorp a total of $ 16,727.40. On August 19, 1990 the Grand Prix was demolished in an accident. Because the accident damaged the leased vehicle "beyond reasonable repair," it had the effect of triggering a default under Kedzioras' lease with Citicorp (Lease para. 8). Kedzioras thus became obligated to pay Citicorp a termination charge with five components (Lease para. 17):

 (a) all unpaid amounts due at the time of termination;

 (b) all remaining monthly payments, "reduced by the unearned amount of the Lease Charge [in effect the total interest payment over the 5-year term of the lease, specified in Lease para. 28(a) to be $ 6,206.40] determined by the Sum-of-the-Digits method, and by the total amount of any sales, use or rental tax . . . for those monthly payments";

 (c) a "disposition charge," specified in Lease para. 27 to be $ 300;

 (d) the estimated end-of-term wholesale value of the vehicle, specified in Lease para. 28(b) to be $ 6,362; and

 (e) any government fees and taxes related to the early termination.

 That formulation produced a termination charge of $ 12,994.14. Kedzioras received an insurance payment of $ 10,360, which they turned over to Citicorp, leaving a balance of $ 2,688.14 for which Kedzioras were personally liable. Lease para. 17 obligated Citicorp to sell the vehicle "at wholesale or retail, as you [Citicorp] determine," and to reduce the termination charge by the amount of the sale price. Because Citicorp could not of course sell a destroyed vehicle, that offset was provided by the insurance proceeds instead.

 Various other provisions of the Lease bear on Kedzioras' claims. However, it is probably more meaningful to recount those provisions in the context of the discussion that follows, rather than prolong this preliminary description of the Lease in the abstract.

 Count I: Unreasonable Termination Charges

 Kedzioras claim that five aspects of the termination charge are not "reasonable" within the meaning of Section 1667b This opinion will deal with each of them in turn.

 Kedzioras maintain that the pre-12-months formula is unreasonable because it imposes extremely high costs on a lessee who returns a nearly-new car to the finance company. *fn6" Discounting to present value is widely recognized as an essential element of enforceable liquidated damages provisions in general (see, e.g., this Court's opinion in Heller Financial, Inc. v. Burry, 633 F.Supp. 706, 707 (N.D. Ill. 1986); United Leasing & Financial Services, Inc. v. R.F. Optical, Inc., 103 Wis. 2d 488, 309 N.W.2d 23, 27 (Wis.App. 1981)) and in the context of accelerated auto lease payments in particular ( Moore v. Ford Motor Credit Co., 778 S.W.2d 657, 659 (Ky.App. 1989); Adams v. D & D Leasing Co. of Georgia, 191 Ga. App. 121, 381 S.E.2d 94, 96 (Ga.App. 1989)). Lease provisions that require acceleration without reduction to present value invariably shift the time value of future payments from lessee to lessor. And any formula that is guaranteed to produce greater than actual damages necessarily results in an unenforceable penalty rather than a valid assessment of liquidated damages ( Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1290 (7th Cir. 1985)). *fn7"

 Citicorp, however, insists that the pre-12-months formula is reasonable as a matter of law. Almost as an afterthought to its substantive arguments, its R. Mem. 6 adds that Kedzioras should not obtain relief based on "hypothetical fact patterns unrelated to the circumstances of this case." Kedzioras terminated in the 24th month of their lease, so that the pre-12-months formula obviously played no part in determining their liability. That being so, this Court cannot reach the merits of this aspect of the parties' quarrel because Kedzioras lack standing to litigate that aspect of the Lease.

 Courts have consistently held that the ordinary principle of "no harm, no foul" does not limit the availability of TILA remedies under Section 1640. No proof of actual damage or deception is required to obtain relief ( Smith, 615 F.2d at 416-17). That broad approach to standing furthers the broad remedial purposes of TILA by empowering anybody who signs a lease to recover upon proof of nondisclosure in violation of the statute, whether or not the particular nondisclosure produced a demonstrable injury ( Brown v. Marquette Savings & Loan Ass'n, 686 F.2d 608, 614 (7th Cir. 1982); see also Williams v. Public Finance Corp., 598 F.2d 349, 355 (5th Cir. 1979) (redress of injuries and deterrence are statutory goals)).

 As said earlier in this opinion, Congress specified that the TILA remedial scheme should apply to consumer leasing cases under the Act (Section 1667d(a), incorporating Section 1640). Kedzioras in effect argue that Congress embedded within the Act the entire TILA remedial scheme, including the broad approach to standing. Thus they claim standing to contest the reasonableness of a Lease provision under Section 1667b(b) even though the provision had not the slightest effect upon them--not because there was no demonstrable harm from a provision that actually applied to them, but rather because the provision did not apply to them at all. That notion seems extraordinarily problematic in Article III "case or controversy" terms, but that need not ultimately be decided because Kedzioras' contention must be rejected as a matter of statutory application.

 TILA is fundamentally a disclosure statute. It imposes no substantive requirements of reasonableness in lending or leasing. To require proof of actual damages in a nondisclosure case under Section 1640 would ill-serve the statute's fundamental purpose of "assuring meaningful disclosure" so that consumers may comparison-shop for credit in a meaningful way (Section 1601(a)). What plaintiff could ever hope to prove that his or her injuries resulted from a particular nondisclosure? *fn8" Nondisclosure is too slippery a beast to capture through more traditional notions of legal harm. Because no single nondisclosure is readily defined as the source of an injury, courts that interpret TILA basically indulge the presumption that every nondisclosure in violation of law is the source of an injury: the violation of the statutory right to full information. As Warth v. Seldin, 422 U.S. 490, 500, 45 L. Ed. 2d 343 , 95 S. Ct. 2197 (1975) (citation omitted) said in a different context:

 The actual or threatened injury required by Art. III may exist solely by virtue of 'statutes creating legal rights, the invasion of which creates standing. . . ."

 Part of the Act--its Section 1667(a)--performs a virtually identical information-compelling function to the disclosure provisions of TILA. When Congress passed the Act it included a statement of purpose (Section 1601(b)) virtually identical to the statement of purpose under TILA (Section 1601(a)). Identical injury requirements therefore ought to apply under both those statutes.

 But that rationale does not logically extend to claims of substantive unreasonableness under Section 1667b(b). Injuries that flow from the unreasonableness of a particular lease provision are far easier to define than injuries from nondisclosure. Any plaintiff injured by specific lease provisions can reasonably be expected to recognize the source of his or her harm and litigate accordingly. Kedzioras' own complaint illustrates that truth: Apart from their arbitrarily-imported objection to the pre-12-months formula, they have sued over various other lease provisions that did actually figure in the calculation of their liability. Where injury is so readily defined and so likely to be litigated, there is no reason to think that Congress meant to apply anything but the traditional concept of injury-in-fact to the plaintiff that is necessary to create an Article III case or controversy ( Valley Forge Christian College v. Americans United for the Separation of Church and State, Inc., 454 U.S. 464, 486, 70 L. Ed. 2d 700 , 102 S. Ct. 752 (1982)).

 Moreover, this opinion has already observed that Congress essentially used the language of the common law of contracts in Section 1667b(b). At common law a plaintiff cannot sue to recover damages under a contract because it contained a separable unenforceable provision that has no applicability in his or her own case. Common-law notions of actual damage therefore ought to apply.

 To reiterate: What Kedzioras are trying to do here is to get out of a lease. To do so they have combed through their Lease in search of unlawful provisions: unlawful because they are unreasonable or undisclosed. Any and all undisclosed provisions may create an Article III injury. But arguably unreasonable provisions create no injury unless they actually figure in the calculation of "penalties or other charges" as applied to Kedzioras. If the pre-12-months formula had been undisclosed, Kedzioras could litigate that nondisclosure because it could arguably have entered into their contracting decision--but they cannot litigate a disclosed provision that had no impact whatever on them, just on the basis that it would have been unreasonable as to some hypothetical other lessee.

 This Court therefore holds that a plaintiff bringing a claim under Section 1667b(b) has no standing to litigate the reasonableness of a lease provision that caused him or her no actual injury because it never became applicable to him or her. Accordingly the portion of Count I pertaining to the pre-12-months formula is dismissed.

 This opinion moves on to the remaining elements of Count I. By contrast, each of those relates to aspects of the termination formula that apply to early termination at any point in the Lease--before or after 12 months have passed. Those provisions did indeed have the type of ...


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