The opinion of the court was delivered by: MORAN
Plaintiff Alan J. Wiskup has brought this action against Liberty Buick Company and U.B. Vehicle Leasing (UBVL) for their use of automobile lease forms that allegedly violate the disclosure requirements of the Consumer Leasing Act, 15 U.S.C. § 1667 et seq. (CLA), and several state statutes, and impose unreasonable termination charges in violation of federal and state law. Plaintiff further claims that UBVL has failed to pay interest on security deposits, in violation of the Illinois U.C.C.. Defendants move to dismiss the entire complaint.
For the reasons stated below, we grant this motion in part and deny it in part.
On April 30, 1994, Liberty Buick leased a 1994 Jeep Cherokee to Alan Wiskup for a four-year period.
Under the lease Wiskup was obligated to make 48 monthly payments of $ 387.62, for a total of $ 18,605.76. Wiskup also paid a $ 450 refundable security deposit at the inception of the lease. In addition to its payment terms the lease contained two provisions concerning early termination: one to cover voluntary terminations, and the other terminations by default. The first gave the lessee the right to voluntarily terminate the lease after the end of the first year, but obligated him to pay the lessor:
A) the total of unpaid monthly rental payments remaining until the end of this Lease, minus (B) UBVL's unearned profit according to the accounting method called the sum of the months digits method, plus (C) the estimated residual value of the Vehicle (what it will be worth, if in good condition, at the end of the Lease term) calculated on the date of this Lease, minus (D) the sales price of the Vehicle, less repair, reconditioning and sale costs, plus (E) an early termination charge equal to 5% of the net amount in clauses (A), (B), and (C) above.
(Am.Compl.Ex.A (Vehicle Lease Agreement P19)).
The second provision gave the lessor the right to terminate the lease and take back the vehicle in the event of lessee's default. In this situation the lessee's payment obligations would be virtually identical to his obligations under the voluntary early termination provision, except that he would not have to pay the 5% early termination charge (Am. Compl. Ex. A (Vehicle Lease Agreement P28)).
Approximately eleven months into the lease plaintiff had trouble making his lease payments and his wife contacted defendants to determine whether they could refinance the lease (Pl. Resp. to Defs. Mot. to Dismiss Am. Compl. App. D and E). Among other options, the Wiskups apparently considered buying out the lease and purchasing the vehicle (id. at 8, App.D at 47-48, App. E at 40). Seventeen months into the lease Wiskup returned the vehicle and the lease was terminated. The termination seems to have been carried out under the lease's default provision rather than its early voluntary termination provision, although this is not entirely clear from the pleadings.
Plaintiff alleges that the lease violates the disclosure requirements of the CLA because it does not mention defendants' policy of retaining interest earned on security deposits, and because it does not sufficiently describe the unearned profit used to calculate rebates for early terminations and defaults (Count I).
He also claims that the lease imposes an unreasonable penalty for early termination, in violation of the CLA and state law, because it makes use of the "sum of the months digits" method in calculating rebates, and because it imposes a 5% early termination charge (Counts II and III). Next, plaintiff claims that defendants violated Illinois' Uniform Commercial Code, 810 ILCS 5/9-207, by retaining interest earned on security deposits (Count IV). Finally, plaintiff claims that defendants' retention of interest from security deposits, combined with their failure to disclose this retention in the lease, violates Illinois' Consumer Fraud Act, 815 ILCS 505/1 et seq., and Uniform Deceptive Trade Practices Act, 815 ILCS 510/1 et seq. (Count V).
Defendants have moved to dismiss Wiskup's entire complaint for failure to state a claim. Fed.R.Civ.P. 12(b)(6). We will not dismiss a complaint "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); see also Gorski v. Troy, 929 F.2d 1183, 1186 (7th Cir. 1987). In considering a motion to dismiss we must assume the truth of all well-pleaded factual allegations, and make all possible inferences in favor of the plaintiff. Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972); Vaden v. Village of Maywood, Illinois, 809 F.2d 361, 363 (7th Cir.), cert. denied, 482 U.S. 908, 96 L. Ed. 2d 381, 107 S. Ct. 2489 (1987).
1. The Consumer Leasing Act
Plaintiff claims that defendants' lease violates the CLA in two ways. First, it violates the Act's disclosure requirements because it fails to define the term "unearned profit," and does not inform the consumer that the lessor retains the interest from security deposits. Second, the lease violates the Act's prohibition on unreasonable termination penalties, because it employs the "sum of the months digits" method (also called the "Rule of 78s") to calculate rebates, and charges a 5% penalty for early voluntary termination. We will first deal with the disclosure allegations, and then the unreasonable penalty claims.
a. CLA Disclosure Requirements (Count I)
Wiskup claims that two elements of the lease violate the CLA's disclosure requirements. First, defendants retain interest earned from security deposits, but do not disclose this policy in the lease. The failure to mention this retention of interest, Wiskup argues, violates 15 U.S.C. §§ 1667a(4), (5), and possibly (8). Second, defendants fail to define the term unearned profit, in violation of 15 U.S.C. § 1667a(11). We will deal with each of these contentions in turn.
i. Interest from Security Deposits
Section 1667a(4) of the CLA requires the lessor to provide a statement of "[the] amount of other charges payable by the lessee not included in the periodic payments." Section 1667a(5) requires a statement of "the amount or method of determining the amount of any liabilities the lease imposes upon the lessee at the end of the term." Finally, section 1667a(8) requires a "description of any security interest held or to be retained by the lessor in connection with the lease and a clear identification of the property to which the security interest relates." Plaintiff argues that defendants' retention of interest amounts to a charge or a liability under these sections and that it must therefore be disclosed in the lease. Alternatively, he argues that both the security deposit and the interest earned from it are security interests under the CLA, and thus defendants' policy of retaining the interest must be disclosed.
Plaintiff cites two recent auto lease cases to support his argument, Werbosky v. Ford Motor Credit Co., 1996 U.S. Dist. LEXIS 1816, 1996 WL 76133 (S.D.N.Y. 1996), and Demitropoulos v. Bank One Milwaukee, N.A., 924 F. Supp. 894 (N.D.Ill. 1996). In Werbosky, the plaintiff alleged that Ford Motor Credit retained the interest earned from security deposits but did not inform the lessees that it would do so. The court first found that this policy violated New York Uniform Commercial Code § 9-207, which provides that a secured party who holds property as collateral must ultimately remit any profits obtained from that property to the debtor. Because Ford Motor Credit had a duty to return the interest to the lessee, its retention of that interest amounted to a charge or liability that had to be disclosed under §§ 1667a(4) and (5) of the CLA. Similarly, the court in Demitropoulos first found that the defendant's policy of retaining interest from security deposits violated state law, and then found that this policy had to be disclosed as a charge or liability under the CLA. Furthermore, the Demitropoulos court found that the defendant had a security interest in the security deposits under § 1667a(8), and that interest earned on the security deposits was additional security that had to be disclosed. Demitropoulos v. Bank One Milwaukee, N.A., 924 F. Supp. at 898.
Both Werbosky and Demitropoulos focus primarily on whether the relevant state law imposes a duty on lessors to remit interest from security deposits to lessees. Having found such a duty, both courts appear to conclude that its breach is self-evidently a charge or liability under the CLA. We decline to follow this approach. In determining whether defendants' retention of interest must be disclosed under the CLA, we will look to the text of the statute, its context and legislative history, and the implementing regulations issued by the Federal Reserve Board. See Gaydos v. Huntington National Bank, 941 F. Supp. 669, 1996 WL 598464 at *2-3 (N.D.Ohio 1996). We will not look to state law, particularly given the fact that a general duty to remit interest from security deposits is not recognized in every state.
See Parry v. Ford Motor Credit, 575 F. Supp. 204, 206 (S.D.Ohio, 1983) ("the violation of state law does not itself constitute a TILA violation unless TILA independently proscribes the activity").
Neither the CLA nor Regulation M explicitly requires disclosure of lessors' policy of retaining interest earned from security deposits. Nor does the language of the statute, considered more generally, appear to require such disclosure. Section 1667a(4) requires, in relevant part, that lessors disclose "the amount of other charges payable by the lessee not included in the periodic payments." On its face, this language does not appear to cover interest retained from security deposits. Such interest is not "payable by the lessee to the lessor," 12 C.F.R. § 213.4(g)(5), in the ordinary meaning of that phrase. Rather, any interest earned on the security deposit is paid to the lessor by a third party, such as the bank in which the deposit has been placed. One can argue that in giving up the use of the security deposit for a year the lessee has also given the lessor the opportunity to earn interest on that money. Thus, the plaintiff has paid the lessor the time-value of the security deposit, an implicit charge that must be disclosed under the CLA. But this conclusion is not required by the language of the statute.
Similarly, the language of § 1667a(5), which requires disclosure of "the amount or method of determining the amount of any liabilities the lease imposes upon the lessee at the end of the term," does not self-evidently cover the interest earned from security deposits. Although, once again, one could argue that the loss of the time-value of the security deposit constitutes a liability under the CLA, this reading is not required. Indeed, where the statute and relevant regulations discuss specific end-of-term liabilities, they refer to additional sums owed to the lessor by the lessee, such as "the difference between the estimated value of the property and its realized value at ... the end of the lease term." 12 C.F.R. § 213.4(g)(13). Once again, the language of the statute does not on its face appear to apply to interest earned from security deposits.
Because the explicit language of the statute does not obviously cover plaintiff's claim, we must "consider the implicit character of the statutory scheme." Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 560, 100 S. Ct. 790, 63 L. Ed. 2d 22 (1980). The CLA, 15 U.S.C. § 1667-1667e, was enacted in 1976 as an amendment to the Truth in Lending Act, 15 U.S.C. § 1601 et seq. ("TILA"). The primary purpose of the TILA 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." 15 U.S.C. § 1601(a). By increasing the information available to consumers, the TILA is supposed to promote a more stable credit market, facilitate greater competition among creditors, and enhance consumers' ability to protect themselves from unfair practices. Id.
Congress enacted the CLA in 1976 because consumer leases, which were not subject to the disclosure requirements of the TILA, were increasingly being used as an alternative to credit purchases. Like the original TILA, the CLA's primary purpose is to require such disclosures as are necessary to "enable the lessee to compare more readily the various lease terms available to him," 15 U.S.C. § 1601(b). But because lease transactions are often used as alternatives to credit transactions, Congress also intended the CLA disclosure requirements to "enable comparison of ...