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Spina v. Toyota Motor Credit Corp.

November 12, 1998

JOSEPH SPINA AND BARBARA SPINA, INDIVIDUALLY, AND AS REPRESENTATIVES ON BEHALF OF A CLASS OF SIMILARLY SITUATED PERSONS, AND ROCK-TRED CORPORATION, A CORPORATION, INDIVIDUALLY, AND AS REPRESENTATIVES ON BEHALF OF A CLASS OF SIMILARLY SITUATED PERSONS, PLAINTIFF-APPELLANTS,
v.
TOYOTA MOTOR CREDIT CORPORATION, DEFENDANT-APPELLEE.



The opinion of the court was delivered by: Justice Leavitt

Appeal from the Circuit Court of Cook County

Honorable Robert V. Boharic, Judge Presiding.

Plaintiffs Joseph and Barbara Spina and Rock-Tred Corporation leased automobiles from defendant Toyota Motor Credit Corporation (Toyota). Plaintiffs, on behalf of themselves and others similarly situated, filed a two-count complaint against Toyota, alleging Toyota's refusal to pay interest on plaintiffs' security deposits violated section 9-207 of the Illinois Uniform Commercial Code (UCC) (810 ILCS 5/9-207(2)(c) (West 1996)) and the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 1996)). The chancery court granted Toyota's motion to dismiss (see 735 ILCS 5/2-615 (West 1996)), and plaintiffs now appeal.

Our review of the trial court's decision in this case is de novo. Vernon v. Schuster, 179 Ill. 2d 338, __, 688 N.E.2d 1172 (1997). As did the trial court, we must ask whether the allegations of plaintiffs' complaint, when viewed in a light most favorable to plaintiffs, are sufficient to state a cause of action upon which relief can be granted. See 735 ILCS 5/2-615; Vernon, 179 Ill. 2d at __. According to plaintiffs' complaint, on December 29, 1990, Rock-Tred entered into a three-year closed-end lease for a 1991 Lexus LS 400. The lease was immediately assigned to Toyota. As a requirement of the lease, Rock- Tred paid a refundable security deposit of $500. On August 1, 1992, the Spinas entered into a three-year closed-end lease for a 1992 Lexus SC 300, and that lease was also immediately assigned to Toyota. The Spinas paid the same security deposit as Rock-Tred.

Regarding the security deposit, both leases contained the following provision: "Security Deposit: We may use the security deposit to pay all amounts that you should pay under this Lease but do not. If you perform all of your obligations under this Lease, the security deposit will be returned to you at the end of the lease term." According to plaintiffs' complaint, their security deposits "were mixed and commingled in accounts containing funds belonging to" Toyota, who had use of the funds throughout the term of the lease. Plaintiffs further alleged Toyota "utilized the security deposits, in a manner that causes the deposits to increase in value through accrued interest or other investment or permits defendant otherwise to profit or enjoy other economic benefits from its possession of such deposits ('profits')."

The first count of plaintiffs' complaint alleges Toyota's handling of their security deposits violates section 9-207(2) of the UCC. Section 9-207(2) provides: "Unless otherwise agreed, when collateral is in the secured party's possession ***

(c) the secured party may hold as additional security any increase or profits (except money) received from the collateral, but money so received, unless remitted to the debtor, shall be applied in reduction of the secured obligation." 810 ILCS 5/9-207(2)(c). Plaintiffs assert money given as a security deposit in connection with an automobile lease constitutes "collateral" creating a "security interest" within the meaning of the UCC. Under section 9-207, according to plaintiffs' complaint, Toyota was required either to remit any interest received on their security deposits or to apply that interest to reduce their obligations under the lease. The chancery court found section 9-207 inapplicable to automobile lease security deposits and dismissed plaintiffs' complaint.

As did the chancery court, we begin by noting Illinois has a long history of regulating security deposits through specific legislation. In 1921, Illinois adopted "an Act relating to money deposited or advanced under contracts for the use of the rental of personal property." See Ill. Rev. Stat. 1985, ch. 29, pars. 9-14 (Rental Act), repealed by P.A. 85-733, sec. 6, effective Jan. 1, 1988. Paragraph 9 of the Rental Act provided: "In all contracts for the use or rental of personal property by the terms of which money is advanced or deposited as security ***, the money so advanced shall be deposited at interest with a bank, trust company or savings and loan association ***, in trust for the use of the parties to such contract or agreement." Ill. Rev. Stat. 1985, ch. 29, para. 9. In regards to interest earned on such security deposits, paragraph 14 of the Rental Act provided: "Any interest which accrues while the money advanced is so deposited shall be kept with the principal sum and shall be disposed of in the same manner as the principal sum in accordance with the provisions of this Act." Ill. Rev. Stat. 1985, ch. 29, para. 14.

In 1987, the Illinois legislature repealed the Rental Act and replaced it with the Consumer Deposit Security Act, Ill. Rev. Stat. 1987, ch. 29, par. 951 et seq., now 815 ILCS 165/1 et seq. (West 1996) (Deposit Act). Under the new Deposit Act, "[a]ny lessor who requires a deposit from a lessee in connection with a consumer lease" may either (1) post a $10,000 surety bond with the Illinois Attorney General guaranteeing the refund of such security deposits, or (2) place the security deposit in an account with a bank, trust company, or a savings and loan association. See 815 ILCS 165/3. Only if a lessor chooses to deposit the funds in an interest-bearing account will "the party entitled to the deposit at the end of the lease" receive interest on the deposit at the termination of the lease; security deposits less than $150 are excluded from this requirement. 815 ILCS 165/3(b).

It is against this statutory backdrop that we must determine whether section 9-207 of the Illinois UCC was intended to apply to the security deposits at issue in this case. The chancery court found it did not, and we are aware of no rulings by Illinois courts on this issue. A number of federal courts, however, have addressed whether this particular section of the UCC, as enacted in this and other states, applies to automobile lease security deposits. See generally Chavez, Automobile Lease Security Deposits: the Duty to Pay Interest (hereinafter Security Deposits), 1047 PLI/Corp. 857, 865-81 (1998) (summarizing federal decisions in this area, including Judge Boharic's dismissal order in the present case). Inasmuch as both parties, as well as the trial court, relied upon several of these decisions, we will briefly summarize the various federal decisions in this area of the law.

In what one commentator has referred to as "one of those path-breaking decisions that brings light to the eyes of plaintiffs' lawyers and sends chills up the spines of defense counsel," Chavez, Security Deposits, 1047 PLI/Corp. 857, 865 (1998), the United States District Court for the Southern District of New York, in February 1996, found for consumers on their claim that they were entitled to interest on their automobile lease security deposits under the UCC. See Werbosky v. Ford Motor Credit Co., No. 95 Civ. 1876, 1996 WL 76133, at *1 (S.D.N.Y. Feb. 22, 1996) (Werbosky I). In Werbosky I, Ford Credit conceded--"correctly" according to the district court--that the New York UCC applied to the security deposits at issue and that section 9-207 imposed "the duty to account to the debtor for any increases or profits." Werbosky I, 1996 WL 76133, at *1. In denying the defendant's motion to dismiss, the Werbosky I court concluded "Ford Credit ha[d] only two options with regard to the profits; it [could] either remit the interest to the lessee, or it [could] apply the interest to reduce the lessee's obligation under the lease." Werbosky I, 1996 WL 76133, at *1.

Werbosky I was followed by a decision from the United States District Court for the Northern District of Illinois in May 1996. See Demitropoulos v. Bank One Milwaukee, N.A., 924 F.Supp. 894 (N.D.Ill. 1996) (Demitropoulos II). Applying Wisconsin's version of the UCC, the Demitropoulos II court found section 207 of that Code (identical to 810 ILCS 5/9-207) applied to the plaintiffs' automobile lease security deposits. The Wisconsin Code was generally applicable to "any transaction (regardless of its form) which is intended to create a security interest in personal property ***." Demitropoulos II, 924 F.Supp. at 896; see 810 ILCS 5/9-102(1)(a). The Wisconsin Code defined a "security interest" as "an interest in personal property *** which secures payment or performance of an obligation." Demitropoulos II, 924 F.Supp. at 897; see 810 ILCS 5/1-201(37). Since "a reasonable inference [could] be drawn that the $550 deposit that Demitropoulos left with Bank One was designed to secure his obligations under the lease," the Demitropoulos II court, citing Werbosky I, concluded section 207 was applicable. Demitropoulos II, 924 F.Supp. at 897.

In January 1997, another District Court in the Northern District of Illinois, this time applying Illinois law, found for automobile lessors on the security deposit interest issue. See Wiskup v. Liberty Buick Co., 953 F.Supp. 958, 972 (N.D.Ill. 1997). As did the Demitropoulos II court, the Wiskup court began by noting the broad reach of Article 9 of the UCC. Wiskup, 953 F.Supp. at 971; 810 ILCS 5/9-102(1)(a) (Article 9 applies "to any transaction (regardless of its form) which is intended to create a security interest in personal property ***"); 810 ILCS 5/1-201(37) (defining "security interest" as "an interest in personal property *** which secures payment or performance of an obligation"). Although the court in Wiskup found plaintiff's argument that security deposits for automobile leases fall within the definition of a "security interest" to be "strong," it nevertheless concluded there were "several obstacles" to the adoption of plaintiff's position. Wiskup, 953 F.Supp. at 972. First, no Illinois court, and few other courts, had found a security deposit is a security interest within the meaning of the UCC. Second, prior to the enactment of the UCC, the majority of courts, according to the Wiskup court, viewed the giving of a security deposit as creating a debt, which would be outside the reach of the UCC, as opposed to creating a security interest. Wiskup, 953 F.Supp. at 972; see also Lawson v. Bank One Lexington, N.A., No. 96-334, slip op. at 5-7 (E.D.Ky. Sept. 19, 1997) (finding automobile lessees' security deposits not subject to section 9-207 of the UCC on the basis that security deposit created a debtor/creditor relationship).

Finally, the court in Wiskup concluded the historical regulation of security deposits in Illinois--via legislation other than the UCC-- precluded application of section 9-207 to automobile lease security deposits. The court noted the enactment of the Rental Act in 1921 and the fact that the passage of the UCC in Illinois (in 1961) had "no discernible effect" on the status of security deposits. Wiskup, 953 F.Supp. at 972. Looking to the one reported Illinois decision analyzing automobile lease security deposits, Purcell and Wardrope Chartered v. Hertz Corp., 175 Ill. App. 3d 1069, 530 N.E.2d 994 (1988), the court noted Purcell's analysis of the deposit issue under the Rental Act and the fact no mention of the UCC was made in that decision, a fact which the Wiskup court characterized as "not accidental": "The [Rental Act] imposed different, and higher, duties on the lessor than the UCC. Unlike the UCC, it required lessors to segregate security deposits from their other funds, and imposed a positive duty on them to invest these funds at ...


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