Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 91 C 3428--Ruben Castillo, Judge.
Before EASTERBROOK, RIPPLE, and KANNE, Circuit Judges.
EASTERBROOK, Circuit Judge.
This case under the Consumer Leasing Act, 15 U.S.C. secs. 1667-1667e, presents three questions. First, must a lessor that uses the sumof-the-digits method (also known as the Rule of 78s) to calculate unearned interest explain what the method entails? Second, after disclosing that it will use the Rule of 78s, must the lessor actually use it? Third, may a district court use the supplemental jurisdiction, 28 U.S.C. sec. 1367, to order members of a plaintiff class (which becomes a defendant class in a counterclaim) to pay what they owe on consumer leases?
The class certified in this case comprises persons whose automobile leases have been assigned to Citicorp National Services and terminated before expiration. A subclass includes lessees whose terminations were involuntary. Merrilou Channell (and her former husband Thomas Kedziora) represent both the class and the subclass. Their leased automobile was destroyed in a collision, an event the lease treats as an early termination. The lease provides for an early termination charge computed as the sum of: (a) all unpaid amounts then due under this Lease, (b) all remaining Monthly Payments due after the date I terminate this Lease reduced by the unearned amount of the Lease Charge (Item 28(a)) determined by the Sum-of-the-Digits method, and by the total amount of any sales, use or rental tax (shown in item 24) for those Monthly Payments, (c) an amount equal to any disposition charge shown in Item 27, (d) the Estimated End of Term Wholesale Value of Vehicle shown in item 28, and (e) any government fees and taxes in connection with early termination of this Lease.
After the car was wrecked 23 months into a 60 month lease, Citicorp calculated an early termination charge of $12,994.14. The Kedzioras signed their insurance proceeds of $10,360 over to Citicorp, leaving a balance of $2,688.14. Instead of paying, they filed this suit under the Consumer Leasing Act, contending that Citicorp had violated the Act. Judge Shadur held that referring to the Rule of 78s by name satisfies both the Act and the regulatory requirement that the lease state "conditions under which the lessee or lessor may terminate the lease prior to the end of the lease term and the amount or method of determining the amount of any penalty or other charge for early termination." 12 C.F.R. sec. 213.4(g)(12). See 780 F. Supp. 516 (1991); 844 F. Supp. 1289 (1994). Judge Shadur also disposed of numerous other contentions that plaintiffs have since dropped. The case then was transferred to Judge Castillo, who concluded that Citicorp violated the Act by using a method other than the Rule of 78s when the termination is involuntary--even though the method Citicorp actually used is more favorable to lessees. 883 F. Supp. 1155 (1995). This led to judgment in Citicorp's favor with respect to the principal class, but a judgment in favor of the subclass that Judge Castillo fixed at $100 per vehicle. 901 F. Supp. 1321 (1995). Judge Castillo then rebuffed Citicorp's demand for judgment on the balance due under the leases. After holding that it lacks jurisdiction over Citicorp's claims based on the contract, the court entered a final judgment giving each class member a credit of $100 in any later collection action. Citicorp is required to write checks only to subclass members who have paid their termination charges in full.
Plaintiffs' principal argument is that a reference to "the Sum-of-the-Digits method" is incomprehensible to an average consumer and therefore violates the requirement that disclosures be clear and conspicuous. 12 C.F.R. sec. 213.4(a)(1). (This is part of the Federal Reserve Board's Regulation M. The Board has established the operative disclosure requirements using power delegated by 15 U.S.C. sec. 1604 and sec. 1667a; the latter statute contains an independent clarity requirement.) Part (b) of the termination clause in the lease requires the lessee to remit all of the scheduled monthly payments, less the portion of those payments that represents interest on the amounts implicitly loaned to finance the transaction. The implicit interest is "unearned" because the lessee pays the balance at the time of termination, when the loan ends. The lease names a method of determining which portion of the monthly payments represents unearned interest, but only a rare consumer would know what it means. Citicorp replies with a confession and avoidance: it allows that "the Sum-of-the-Digits method" could be right out of Jabberwocky so far as the normal consumer is concerned, but it contends that the regulatory requirement is met by giving the name of a method rather than the details of a method. Section 213.4(g)(12) says that the lease must contain the "amount or method of determining the amount of any penalty or other charge for early termination" (emphasis added). The statute itself uses a similar formula: "the amount or method of determining any penalty or other charge for . . . early termination." 15 U.S.C. sec. 1667a(11). The Rule of 78s is the "method of determining the amount" due; and Citicorp's use of this method, as opposed to some other method, is disclosed clearly and conspicuously.
The district court held that only the method, and not the way the method works, needs to be disclosed. It is hard to read the statute and regulation any other way. "Clear and conspicuous manner"--the language of sec. 1667a--means visible, not simple. "Manner" refers to the mode of presentation, not the degree of comprehension. The Act and Regulation M do not define "clear and conspicuous," but the words are staples of commercial law. The Uniform Commercial Code defines "conspicuous" as "so written that a reasonable person against whom it is to operate ought to have noticed it." UCC sec. 1-201(10). A disclaimer of the warranty of merchantability is enforceable if conspicuous, see UCC sec. 2-316(2), even if the average consumer hasn't the vaguest idea what a "warranty of merchantability" entails. Regulation M calls for the use of 10-point type at a minimum. 12 C.F.R. sec. 213.4(a)(1). At all events, it is not clear why we would want to read Regulation M as plaintiffs do, even if we could. Some states now require lenders and lessors to spell out the details. Here is what Illinois requires lenders to tell consumers in loan agreements:
Unearned finance charges under the Rule of 78ths are computed by calculating for all fully unexpired monthly installment payments, as originally scheduled or deferred, which follow the day of payment, the portion of the precomputed interest that bears the same ratio to the total precomputed interest as the balances scheduled to be outstanding during that monthly installment period bear to the sum of all scheduled monthly outstanding balances originally contracted for. 205 ILCS 670.16(m).
Just how is that going to help the average consumer? A beneficial set of disclosure rules gives the consumer information that can be put to use, while withholding technical information that distracts attention from the rest of the disclosures--as the Supreme Court pointed out in addressing a parallel question under the Truth in Lending Act, too much information ("information overload") can be as bad as too little. Ford Motor Co. v. Milhollin, 444 U.S. 555, 568 (1980). Recitation of indigestible matters can make it hard for consumers to find what they really care about. Cf. Todd v. Societe BIC, S.A., 9 F.3d 1216, 1218-19 (7th Cir. 1993) (en banc). Reference to the Rule of 78s without further elaboration enables consumers to engage in comparison shopping: if most lessors use that method of computing unearned interest, then consumers can ignore it and compare the price terms. And of course lessors who offer more favorable terms can explain to consumers why their approach is better.
How much information is optimal can be a nice question, on which, fortunately, we need not reach an independent conclusion. The Federal Reserve has the leading role, and Regulation M says that the lessor may disclose either the amount or the method of getting to an amount. Plaintiffs want Citicorp to give a set of examples that would help consumers understand how the rule works; indeed, plaintiffs really want Citicorp to give a table of amounts ("if you terminate in month 13, you owe us $x; if you terminate in month 14, you owe us $y . . ."). Disclosures of amounts would satisfy the regulation. But so do disclosures of methods, such as the Rule of 78s, and we are not authorized to withdraw that option from lenders just because we think that tables of amounts, or mathematical formulae, would be more readily understood.
The Federal Reserve has a thorough revision of Regulation M under consideration. Published for comment last year, the revisions would make it clear that Citicorp took an appropriate course:
[G]iven the complexity of the methods involved, a lessor is permitted--in giving the full description of its early termination method--to include a reference to the name of a generally accepted method of computing the unamortized gross or capitalized cost (also known as the "adjusted lease balance") ...