Magistrate Judge Kauffman made a Report and Recommendation
[Doc. # 95] denying two separate motions by Defendants to
dismiss this case for lack of subject matter jurisdiction
pursuant to Fed.R.Civ.P. 12(b)(1). Before the Court are
Defendant ACRI's Objection to Magistrate's Report and
Recommendation [Doc. # 96] and Defendant Holmberg's Objection
to Magistrate's Report and Recommendations Regarding Defendant
Holmberg's Motion to Dismiss for Lack of Subject Matter
Jurisdiction [Doc. # 99]. The Court, pursuant to
28 U.S.C. § 636(b)(1)(C), shall undertake a de novo determination of
those portions of the recommendation to which objections were
On May 8, 1989, Plaintiffs Donald D. Diehl and Laurie S. Diehl
("Diehl") entered into an agreement with Defendant the ACRI
Company ("ACRI") to purchase windows for their home. Two
contracts, both dated May 8, 1989, were signed by the parties.
One of the contracts was handwritten and stated that Plaintiffs
were giving ACRI a security interest only in the windows
purchased from ACRI. The other contract was typed and stated
that Plaintiffs were giving ACRI a security interest in both
the windows purchased from ACRI and in Plaintiff's residence
(i.e. a second mortgage). Plaintiffs' signatures on the real
estate mortgage were certified by Defendant Shirley A. Holmberg
("Holmberg"), a notary public and an employee of ACRI.
While all of the parties agree that Plaintiffs' true signatures
appear on both contracts and on the mortgage, they sharply
disagree on precisely how the contracts and mortgage were
signed and whether Plaintiffs understood that a mortgage was
being taken on their residence. Plaintiffs claim that they just
signed a group of papers without reading them and that ACRI
never gave them a copy of the mortgage or the typed contract.
Thus, it was not until Plaintiffs filed for bankruptcy that
they first learned of ACRI's mortgage interest in their
residence. Defendants assert that they did give Plaintiffs a
typed version of the contract along with all the required
notices and statements.
Plaintiffs filed a four-count Complaint against Defendants on
May 8, 1992. pursuant to the Truth In Lending Act (TILA),
15 U.S.C. § 1635(b) [Count I]; the Illinois Consumer Fraud and
Deceptive Business Practices Act, Ill.Rev.Stat. 1987, ch. 121
1/2, § 261 et. seq. [Count II]; the Illinois Commercial Code,
Ill.Rev.Stat. 1987, ch. 26, § 3-407(2) [Count III]; and the
Illinois Notary Public Act, Ill.Rev.Stat. 1987, ch. 102, §
201-101 et. seq. Plaintiffs moved for summary judgment, but the
Court denied that motion in an Order dated December 3, 1993.
Defendants now move to dismiss Plaintiffs' TILA claim pursuant
to Fed.R.Civ.P. 12(b)(1) based upon the running of the statute
of limitations period.
Defendants seek to dismiss Plaintiffs' rescission claim under
TILA for lack of subject matter jurisdiction pursuant to
Federal Rule of Civil Procedure 12(b)(1). On such a motion,
Plaintiffs have the burden of proof that jurisdiction does in
fact exist. Kontos v. United States Dept. of Labor,
826 F.2d 573, 576 (7th Cir. 1987); Western Transp. Co. v. Couzens
Warehouse & Dist., Inc., 695 F.2d 1033, 1038 (7th Cir. 1982)
quoting Mortensen v. First Federal Savings and Loan Ass'n.,
549 F.2d 884, 891 (3d Cir. 1977). Moreover. it is proper for
the district court to look beyond the jurisdictional
allegations in the Complaint and to view whatever evidence has
been submitted in determining
whether it has subject matter jurisdiction over the case.
Roman v. United States Postal Serv., 821 F.2d 382, 385 (7th
Plaintiffs claim an action for rescission under 15 U.S.C. § 1635.
Regulation Z, which interprets this section, requires
that a consumer exercise his right to rescission within three
business days from either the date of consummation, delivery of
notice of the right to rescind, or delivery of all material
disclosures, whichever occurs last. 12 C.F.R. § 226.23(a).
However, if the notice of right to rescind or material
disclosures are not delivered, then the consumer has three
years after consummation to bring a rescission action.
15 U.S.C. § 1635(f); 12 C.F.R. § 226.23(a).
In its previous Order of December 3, 1993, this Court made
clear that the three-year period of limitations found in
15 U.S.C. § 1635(f) does not apply to the instant case because the
term "material disclosure," as defined in
12 C.F.R. § 226.23(a)(3) n. 48, does not include disclosure of a security
interest. Diehl v. The Acri Co., 92-1224, 1993 WL 818766
(Dec. 3, 1993), at 9-10. Plaintiff has not convinced the Court
that its previous holding was improper.*fn2 Thus, Plaintiff
can only premise jurisdiction in this Court on the three day
statute of limitations found in Regulation Z.
Of course, Plaintiffs' TILA claims do not literally fall within
the three-day statute of limitations because they were brought
on May 8, 1992, a full three years after consummation of the
transaction on May 8, 1989.*fn3 However, Plaintiffs assert
that the doctrine of equitable tolling should be applied to
this case in order to toll the statute of limitations in their
favor. TILA is subject to equitable tolling in cases where
fraudulent concealment is alleged. King v. California
784 F.2d 910 (9th Cir. 1986), cert. denied, 484 U.S. 802, 108
S.Ct. 47, 98 L.Ed.2d 11 (1987); Jones v. TransOhio Sav.
Ass'n., 747 F.2d 1037 (6th Cir. 1984); Bokros v. Assoc.
Finance, Inc., 607 F. Supp. 869 (N.D.Ill. 1984). In our
previous Order, the Court found that issues of disputed fact
existed so as to preclude summary judgment for Plaintiff on the
rescission issue. Diehl v. The Acri Co., 92-1224, 1993 WL
818766 (Dec. 3, 1993), at 11-12.
Nevertheless, the case stands in a very different procedural
posture at this stage of the litigation. Unlike a motion for
summary judgment, where the Court must leave issues of disputed
material fact for the jury, Fed.R.Civ.P. 56, a 12(b)(1) motion
to dismiss allows the Court to itself decide issues of disputed
material fact. Crawford v. United States, 796 F.2d 924,
927-28 (7th Cir. 1986). The Seventh Circuit has presented a
strong preference for district courts to resolve all
jurisdictional issues prior to trial on the basis that "no case
can properly go to trial if the court is not satisfied that it
has jurisdiction." Id. at 928. No format is specified by
statute or rule for evidentiary hearings on jurisdiction; any
rational mode of inquiry will do. Id. at 929. The Seventh
Circuit suggests that the district court look to the documents
submitted by the parties and, "treating the summary judgment
procedures in Fed.R.Civ.P. 56 loosely as a form of trial by
affidavit, the court may look to those procedures for guidance
in organizing a documentary inquiry into jurisdiction."*fn4
Id. at 928.
The Court finds that under the jurisdictional standard of Rule
12(b)(1), Plaintiffs' equitable tolling claim must fail. Even
if equitable tolling did apply in this case, it would only toll
the three day statute of limitations until Plaintiffs
discovered ACRI's second mortgage on their home. As noted in
the Court's previous Order, "Plaintiffs were aware of the
existence of ACRI's security interest in their residence at
least as early as February 4, 1992." Diehl v. Acri, 92-1224
(Dec. 3, 1993), at 12 n. 6. In a letter to ACRI dated February
4, 1992, from the Diehls' attorney, Richard E. Barber, Barber
stated, "I represent Don and Laurie Diehl. You claim to have a
mortgage against their property." Affidavit of Ben Acri, § 3,
Def. Ex. 15. The letter went on to offer a $1,000 settlement of
ACRI's mortgage claim. Id.
This letter shows that Plaintiffs were on notice of ACRI's
claimed security interest in their residence at least as early
as February 4, 1992. Plaintiffs have offered no evidence to
rebut this fact, and it is their burden to do so on a 12(b)(1)
motion. Kontos, 826 F.2d at 576; Western Transp., 695 F.2d
at 1038. Because Plaintiffs did not file their rescission claim
until May 8, 1992, the three-day limitation period had already
expired.*fn5 Thus, Plaintiffs' rescission claim was untimely
filed and this Court has no jurisdiction to consider it. The
Court dismisses the rescission claim of Count I with prejudice.
Plaintiffs also argue that they alleged a "non-tracking" claim
in their Complaint pursuant to 15 U.S.C. § 1638(a)(9) and
Regulation Z, 12 C.F.R. § 226.18(m). That statute requires that
all property covered by a security interest be disclosed. The
remedy for such a claim is damages in the amount of twice the
finance charge but not less than $100 nor more than $1,000, as
well as costs and reasonable attorney's fees.
15 U.S.C. § 1640(a)(2)(A)(i) & 1640(a)(3). Plaintiffs claim that they
alleged the facts necessary for such an action when they pled:
In plaintiffs' Exhibit 1, the only claimed (or disclosed)
security interest was in the "goods or property being
purchased" (i.e., the windows), whereas, in plaintiffs' Exhibit
3, the mortgage, in addition to the goods and property being
purchased, the mortgage discloses the consumers gave a security
interest in the nature of a mortgage on their principal
residence in Abingdon, Illinois.
Complaint, Common Count, at § 9.
Defendants argue that the Court should find that Plaintiffs
have not sufficiently pled a non-tracking claim because Count I
of Plaintiffs' Complaint explicitly requests only rescission of
the transaction pursuant to 15 U.S.C. § 1635(b). However, the
Seventh Circuit has made clear that "[i]nstead of asking
whether the complaint points to the appropriate statute, a
court should ask whether relief is possible under any set of
facts that could be established consistent with the
allegations." Bartholet v. Reishauer A.G., 953 F.2d 1073,
1078 (7th Cir. 1992). Thus, specifying an incorrect legal
theory is not fatal to a complaint so long as the facts alleged
establish the foundation for a correct legal theory. Id. See
also Travis v. Boulevard Bank N.A., 880 F. Supp. 1226, 1229
(N.D.Ill. 1995) (holding that failure to identify which
provisions of TILA were violated is not valid grounds to
dismiss the Complaint). The Court finds that the facts alleged
in Plaintiffs' Complaint are sufficient to state a non-tracking
Plaintiffs do not make clear whether they are seeking damages
or only rescission by asserting a non-tracking claim. If they
are seeking rescission alone, the non-tracking claim is barred
by the three-day limitations period, as discussed above.*fn6
However, if Plaintiffs are now seeking damages pursuant to §
1640(a)(2)(A)(i), the one-year statute of
limitations of § 1640(e) is applicable to this claim. The cause
of action accrued on May 8, 1989, when the security agreement
was signed. Yet, the instant claim was not filed until May 8,
1992. Thus, to fall within the one-year statute of limitations,
Plaintiff must be able to assert equitable tolling.
Equitable tolling, in turn, depends upon a showing that
Defendants fraudulently concealed the mortgage interest from
Plaintiffs. King, 784 F.2d at 910; James, 747 F.2d at 1037;
Bokros, 607 F. Supp. at 869. Fraudulent concealment requires
more than mere nondisclosure. Bokros, 607 F. Supp. at 873-74.
It requires proof of fraudulent intent by Defendants as well as
due diligence by Plaintiffs.*fn7 Hubbard v. Fidelity
Federal Bank, 824 F. Supp. 909, 920 (C.D.Cal. 1993); Bokros,
607 F. Supp. at 874. Because this is a 12(b)(1) action, the
Court may decide the factual issues in order to determine
whether it has jurisdiction over this action. Crawford, 796
F.2d at 927-28. Moreover, the burden of proof is upon
Plaintiffs to show Defendant's fraudulent concealment as well
as their own due diligence. Kontos, 826 F.2d at 576; Western
Transp., 695 F.2d at 1038. The Court finds that Plaintiffs
have not sufficiently met this burden.
The Diehls signed a number of documents that evidence a
mortgage on their residence.*fn8 First, they signed a typed
security agreement, dated May 8, 1989, which states, "Buyers
are giving a security interest in . . . the land located at 604
N. Austin Abingdon, Il." Def. Dep. Ex. 2. Second, they signed a
document entitled "Mortgage Verification Authorization." Def.
Dep. Ex. 4. Third, they signed a document entitled "REAL ESTATE
MORTGAGE," dated May 8, 1989, which states as follows:
"This indenture witnesseth that Donald D. & Laurie S. Diehl of
604 N. Austin City of Abington State of Illinois, Mortgagor(s)
MORTGAGE and WARRANT to The Acri Company of 124 E. 18th St.
Milan Il. 61264 to secure payment of that certain Home
Improvement Retail Installment Contract of even date herewith
. . . the following described real estate, to wit: Austin's
Addition, Lot #3, Block #10 Parcel # 1333401007."
Def. Dep. Ex. 6. Fourth, the Diehls signed a notice of right to
cancel, dated May 8, 1989, stating, "You are entering into a
transaction that will result in a mortgage, lien or other
security interest (for example, a mechanic's lien) on your
home." Pl. Complaint Ex. 2. Plaintiffs now assert that
Defendants fraudulently concealed from them the existence of a
mortgage on their property. The Court cannot agree.
The only proof of fraudulent concealment offered by Plaintiffs
is that they never received a copy of the typed contract
indicating that a mortgage had been taken on their home.
However, it is clear that they signed that very document. If,
as Plaintiffs assert, they signed the contract when it was
blank, then they were not acting in a diligent manner.
Reasonable persons do not sign blank contracts, especially when
they have signed
another copy of the same contract that was filled out in their
presence. Perhaps the Diehls signed the blank contract in the
belief that ACRI would type the handwritten terms of the first
contract onto the second blank contract. However, a reasonable
person would have waited for the typed contract to arrive in
the mail before signing it. Moreover, for three years,
Plaintiffs never requested a copy of the second contract that
they had signed in blank. This is not the behavior expected of
a diligent consumer.*fn9
Even assuming arguendo that it was reasonable for the Diehls
to sign a blank security agreement, the Court does not see how
Plaintiffs could have signed the document entitled "REAL ESTATE
MORTGAGE" and not have been aware that they had given ACRI a
mortgage on their home. Windows are not "real estate"; a
residence or land is real estate. The Diehls also signed the
"Mortgage Verification Authorization." Mrs. Diehl testified
that she understood that a mortgage pledges the residence and
land as collateral for the note. Laurie Diehl Dep. at 13. In
fact, the ACRI transaction involved a second mortgage because
there already was a mortgage on the Diehls' home. Id.
Moreover, the notice of right to cancel explicitly refers to a
"mortgage, lien or other security interest . . . on your
home." (emphasis added).
Mr. Diehl admitted in his deposition he did not read the
documents that he and his wife had signed. Donald Diehl Dep. at
31, 46. Mrs. Diehl testified that she did not pay attention to
what ACRI's salesperson told them because she let her husband
make the decisions. Laurie Diehl Dep. at 17. Plaintiffs'
counsel's characterization of the Diehls as "uneducated people"
does not excuse their lack of diligence here. Due diligence
must be judged from an objective standard in order to give that
requirement any real meaning. See, e.g., Hubbard, 824 F. Supp.
at 920 (holding that the debtors in a TILA action had a
"reasonable opportunity to discover the exact nature of their
loan."). Moreover, even if the inquiry were a subjective one,
the record reveals that Mrs. Diehl graduated from high school
and Mr. Diehl has a tenth grade education. The Diehls' lack of
a college education does not make them "uneducated." If it did,
most of the citizens of this country could be so designated.
The Diehls' testimony that they never read the documents leads
the Court to believe that the documents were not blank when
they signed them; rather, the Diehls simply did not pay
attention to the terms of their agreement. It is Plaintiffs'
burden of proof here to demonstrate that Defendants
fraudulently concealed the mortgage from them. If Plaintiffs
did not even read those documents, how can they prove that the
documents did not already contain the mortgage interest when
they signed them? Not only have Plaintiffs not met their burden
of proving due diligence on their part, they have also failed
to adequately prove that Defendants engaged in active
concealment of the mortgage on their residence. Thus, the Court
finds that the statute of limitations should not be equitably
tolled, and the Court lacks jurisdiction over Plaintiffs' TILA
claims. Plaintiffs' non-tracking claim in Count I is dismissed
State Law Claims
In order to exercise pendent, or supplemental, jurisdiction
over Plaintiffs' state law claims, the Court must have an
independent source of federal subject matter jurisdiction.
Kauth v. Hartford Ins. Co. of Illinois, 852 F.2d 951, 954
(7th Cir. 1988) citing United Mine Workers v. Gibbs,
383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966). In light
of the Court's holding that it does not have subject matter
jurisdiction over Plaintiffs' TILA claims, the Court cannot
assert supplemental jurisdiction over Plaintiffs' state law
claims in Counts II, III and IV. Thus, those claims are
dismissed without prejudice.
Both Defendants request that they be reimbursed for the
out-of-pocket expenses of this suit on the basis that the suit
is frivolous. Moreover, Defendant ACRI has asked for punitive
damages and moved for Rule 11 sanctions against Plaintiffs'
counsel. The Court finds that this suit was not so frivolous as
to lack a good faith basis in law or fact. Thus, Defendants'
counterclaims are dismissed with prejudice. Each party shall
bear their own costs.
IT IS THEREFORE ORDERED that Defendant ACRI's Objection to
Magistrate's Report and Recommendation [Doc. # 96] is
IT IS FURTHER ORDERED that Defendant Holmberg's Objection to
Magistrate's Report and Recommendations Regarding Defendant
Holmberg's Motion to Dismiss for Lack of Subject Matter
Jurisdiction [Doc. # 99] is SUSTAINED.
IT IS FURTHER ORDERED that Magistrate Judge Kauffman's Report
and Recommendation [Doc. # 95] is REJECTED.
IT IS FURTHER ORDERED that Count I of Plaintiffs' Complaint is
DISMISSED with prejudice.
IT IS FURTHER ORDERED that Counts II, III, and IV of
Plaintiffs' Complaint are DISMISSED without prejudice.
IT IS FURTHER ORDERED that Defendants' Counterclaims are
DISMISSED with prejudice.
IT IS FURTHER ORDERED that all other pending motions before
this Court and the Magistrate Judge in this case are
DISMISSED. This case is TERMINATED, each party to bear
their own costs.