United States District Court, Central District of Illinois, Springfield Division
August 25, 1999
WILLIAM D. HAHN, PLAINTIFF,
MCKENZIE CHECK ADVANCE OF ILLINOIS, LLC, DOING BUSINESS AS NATIONAL CASH ADVANCE, AND JOHN DOES 1-10, DEFENDANTS.
The opinion of the court was delivered by: Richard Mills, District Judge.
The dispositive issue in this Truth in Lending Act case relates
to whether, under Illinois law, a post-dated check can be used to
secure repayment of a "payday loan."
In short, the answer is "yes."
Motion to Dismiss allowed.
I. Facts alleged in the complaint
A. General allegations
Defendant National Cash Advance ("NCA") operates "payday loan"
establishments throughout various locations in the Central
District of Illinois. "Payday loans" are short term, high
interest rate loans, that are typically two weeks in duration and
carry annual percentage rates of over 500 percent. At the end of
the two week term, the customer has the option of continuing the
loan for an additional period by paying the interest.
During the year prior to the filing of this action, Plaintiff
William D. Hahn obtained three payday loans from NCA for
nonbusiness purposes. On September 25 and October 8, 1998, Hahn
borrowed $200.00 on each occasion by paying $44.00 as a finance
charge on each of the loans. In addition, on November 2, 1998,
Hahn borrowed $175.00 by paying $39.00 as a finance charge. On
each occasion, he wrote a post-dated check in the amount of the
loan and the financing charge. In addition, he signed a "Consumer
Loan Agreement" which included the following statement: "[y]our
post-dated check is security for this loan." Hahn alleges that
the above statement stands for the proposition that the "borrower
is giving a security interest in the post-dated check."
Hahn also alleges that, under Illinois law, an ordinary check
does not operate as an assignment of the underlying bank account,
and thus, it does not create any sort of meaningful security
interest. Thus, he argues that NCA's security interest disclosure
violates the Truth in Lending Act, 15 U.S.C. § 1601 et seq.
("TILA"), and Regulation Z, 12 C.F.R. § 226.17 and 226.18.
Count I of the Complaint is a class action claim against NCA
for a violation of TILA via Hahn's November 2, 1998 loan. Count
II is an individual claim for a TILA violation based on Hahn's
September and October "payday loan" transactions. Count III is a
class action claim for unconscionability against all Defendants.
Lastly, Count IV is a class action claim under the Illinois
Consumer Fraud Act, 815 ILCS 505/2, against all Defendants.
Defendants move to dismiss all counts.
II. Legal Standard for Motion to Dismiss
In ruling on a motion to dismiss, the Court must accept well
pleaded allegations of the complaint as true. See Hishon v. King
& Spalding, 467 U.S. 69, 104 S.Ct. 2229, 2233, 81 L.Ed.2d 59
(1984); Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101,
1104 (7th Cir. 1984), cert. denied, 470 U.S. 1054, 105 S.Ct.
1758, 84 L.Ed.2d 821 (1985). Although a complaint is not required
to contain a detailed outline of the claim's basis, it
nevertheless must contain either direct or inferential
allegations respecting all the material elements necessary to
sustain a recovery under some viable legal theory. Car
Carriers, 745 F.2d at 1106. Mere conclusions, without supporting
factual allegations, are insufficient to support a claim for
relief. Cohen v. Illinois Inst. of Tech., 581 F.2d 658, 663
(7th Cir. 1978). Dismissal should not be granted unless it
appears beyond doubt that the plaintiff can prove no set of facts
in support of his claim that would entitle him to relief. Conley
v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
A. TILA claims
The Truth in Lending Act was designed to protect consumers from
misleading or untruthful credit terms. See 15 U.S.C.
§ 1601; Brown v. Marquette Sav. and Loan Ass'n, 686 F.2d 608,
613 (7th Cir. 1982). In essence, a creditor is liable under TILA
if the disclosure of the credit terms is inaccurate or
misleading. According to the Complaint, the misleading disclosure
in this case relates to the statement, "Your post-dated check is
security for this loan."
Defendants first argue that Counts I and II must be dismissed
because NCA did not state that it held the post-dated check as a
"security interest," but merely as a "security" for the loan. In
the alternative, Defendants argue that even if NCA represented
that it received a security interest in a post-dated check, NCA's
representations were not misleading because the applicable law
allows a party to receive a security interest in the post-dated
check, and the representation in the Consumer Loan Application is
in compliance with TILA.
In contrast, Plaintiff argues that, as a matter of law, a
post-dated check cannot create a security interest as defined by
Regulation Z, 12 C.F.R. § 226.18. Mainly, he argues that a check
cannot be a "security interest" because the check itself has no
"intrinsic value and [it] does not create a security interest in
the underlying bank account." In other words, Plaintiff alleges
that this statement is misleading because under Illinois law, a
post-dated check cannot serve as a collateral for the very loan
that it is intended to pay.
Alternatively, Plaintiff argues that if Defendants did not
intend to disclose a security interest by using the word
"security" in the federal box, they still violated TILA because
the statute also prohibits a creditor from including information
that is not related to the required disclosures. In other words,
Plaintiff argues that the word "security" must mean "security
interest" or it violates TILA, because the word "security" is not
related to any required disclosures, e.g, the security interest
Initially, the Court finds that as a matter of law, there is no
meaningful distinction between the term "security interest" and
"security" in the context of this case. See e.g, 12 C.F.R. pt.
226 Supp. I ¶ 18(m)6 ("Terms in disclosure. No specific
terminology is required in disclosing a security interest.
Although the disclosure may, at the creditor's option, use the
term `security interest,' the creditor may designate its interest
by using, for example, `pledge,' `lien,' or `mortgage.'") Thus,
according to the Federal Reserve Board's interpretation of
Regulation Z, Defendants could have used a term that was similar
to the word "security interest" to denote its interest in the
collateral, such as the word "security." Since the Federal
Reserve Board is in charge of regulating truth in lending issues,
the Court finds the Board's liberal interpretation of Regulation
Z to be very persuasive.
Notwithstanding the argument that a post-dated check cannot
serve as a security interest as a matter of law, the Court
rejects Plaintiff's argument that the mere inclusion of the word
"security" in the federal box constitutes a violation of TILA. As
noted before, NCA was permitted to use similar terms, such as the
word "security," to describe its security interest without
violating Regulation Z. In addition, the Court rejects
Defendants' attempt at drawing a distinction between the words
"security" and "security interest." The plain reading of the
phrase "your post-dated check is security for this loan" does not
support an alternative meaning except for creating a "security
interest" in a collateral — the check itself.
Having so decided, the sole remaining issue with regard to the
TILA claims is whether, under Illinois law, a party can hold a
post-dated check as a security interest to the underlying "payday
Regulation Z defines "security interest" as "an interest in
property that secures performance of a consumer credit obligation
and that is recognized by state or federal law."
12 C.F.R. § 226.2(a)(25).
With regard to the applicable state law, the parties, along with
the Court, agree that the Illinois law controls this case.
Plaintiff argues that a post-dated check cannot be a basis for
a "security interest" because under 810 ILCS 5/3-408,*fn1 a
check does not automatically operate as an assignment of the bank
funds. Thus, he argues, the underlying bank funds cannot be
collateral for the loan. Moreover, he argues that since the
post-dated check provides no additional value and is merely a
"customer's promise or direction to pay her own funds to the
lender[,]" it too cannot be "security" for the loan.
Our sister court in the Northern District of Illinois rejected
similar arguments and held that the post-dated check can be
security for a "payday loan." See Smith v. The Cash Store
Management, Inc., No. 99-c-1726, 1999 WL 412447, at *1 (N.D.Ill.
June 8, 1999). The Court agrees with the conclusion reached by
the Smith court for several reasons: First, NCA does not state
that it has a "security interest" in the underlying funds in
Plaintiff's bank account. NCA states that it is holding the
check as "security." Thus, Section 5/3-408 has no bearing on
this issue. Second, the Illinois version of Article 9 of the
U.C.C. suggests that a party may acquire a security interest in a
negotiable instrument, such as a check. See 810 ILCS 5/9-305
("A security in . . . negotiable instruments . . . may be
perfected by the secured party's taking possession of the
collateral.") Moreover, the Court finds nothing in Illinois law
that prevents a party from taking a security interest in a
post-dated check. See, e.g., Smith, 1999 WL 412447, at * 4.
Contrary to what Plaintiff suggests, the Court finds that a
post-dated check does have intrinsic value — its
negotiability.*fn2 Furthermore, due to its negotiability, the
check itself is "property that secures performance of a credit
obligation" as defined by Regulation Z. For example, if NCA
wanted to secure payment of the loan, it can negotiate the check
to a third party, thereby receiving performance on the loan. In
other words, contrary to what Plaintiff argues, the post-dated
check provides additional rights apart from the promissory note,
and is more than just an additional promise by the consumer to
pay back the loan. Therefore, the Court finds that Defendants can
receive a security interest in a post-dated check. In turn, the
Court finds that as a matter of law, the statement "Your
post-dated check is security for this loan" is an accurate
statement which discloses NCA's security interest for TILA
Accordingly, the Court finds that there is no set of facts
which can support Plaintiff's TILA claims. Counts I and II of
Plaintiff's complaint are hereby dismissed.
B. State law claims
Hahn's federal claims are dismissed. As to the remaining state
law claims, e.g., claim for unconscionability and Illinois
Consumer Fraud Act, the Court finds that it has no independent
jurisdiction over them. The Court also declines to exercise
jurisdiction over these claims. Accordingly, the Court dismisses
the remaining state law claims for lack of subject matter
jurisdiction pursuant to 28 U.S.C. § 1367(c)(3).
Ergo, Defendants' Motion to Dismiss is ALLOWED. The Court
finds that the phrase "Your check is security for this loan"
creates a valid security interest in the negotiable, post-dated
check, and, therefore, is a truthful TILA disclosure as a matter
of law. Thus, Counts I and II are dismissed with prejudice. The
counts are dismissed for lack of subject matter jurisdiction.