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VAN JACKSON v. CHECK `N GO OF ILLINOIS

September 21, 2000

ADELE M. VAN JACKSON, LIZABETH MACCOGNO, JAMES MILTON, CATHERINE STURGESS, GWEN JOHNSON-HARRIS, LAURITA COBB, HEATHCLIFF ANDERSON, KATHERINE NEWSOM, KENNETH STRYBEL, LINDA RUTH BUTLER, CHANEL L. TELL, BETTIE TALLEY F/K/A BETTIE PERRY, TYRONE TILLMAN, DIANE BURGIN, J.R. DAVIS, AND VENUS JONES, PLAINTIFFS,
V.
CHECK `N GO OF ILLINOIS, INC., CNG FINANCIAL CORPORATION, JARED A. DAVIS, DAVID DAVIS, AND JOHN DOES 1-10, DEFENDANTS.



The opinion of the court was delivered by: Bucklo, District Judge.

MEMORANDUM OPINION AND ORDER

I.

TILA requires a lender to provide "[w]here the credit is secured, a statement that a security interest has been taken in . . . property not purchased as part of the credit transaction identified by item or type." 15 U.S.C. § 1638(a)(9); see also 12 C.F.R. § 226.18(m) ("Security interest [disclosure]. The fact that the creditor has . . . acquire[d] a security interest . . . in other property identified by item or type."). All disclosures required by federal law must be grouped together and "conspicuously segregated" from other information. 15 U.S.C. § 1638(b)(1).

I denied the defendants' motion to dismiss the plaintiffs' TILA claims because I found that they had violated § 1638(a)(9) by failing to disclose that postdated checks secured the loans. See Van Jackson v. Check `N Go, 193 F.R.D. 544 (N.D.Ill. 2000) (more detailed discussion of the matter, including quotations from the purported disclosures). As I explained there, the defendants did not make the required disclosure and that the law did not bar statutory damages when "a required disclosure is hidden in the fine print at the end of an indigestible chunk of legalistic boilerplate, and outside the federal box, set apart from the defendants' own statement in that box about `Our Disclosures to You.'" Id. at 549 (citing Leathers v. Peoria Toyota-Volvo, 824 F. Supp. 155, 158 (N.D.Ill. 1993)) (Where "[t]he actual reference to the [collateral was] outside the `Federal Box' [it] cannot be considered to be part of the required disclosures.").

Understandably, the plaintiffs now ask for summary judgment on the TILA counts. I concluded in my previous opinion that the defendants were liable under § 1638(a)(9), and unless they have an argument that I was wrong, I will grant that motion. They now argue that they were not required to disclose that the postdated checks secured the loans because, they say, the Seventh Circuit has held that a postdated check is a "security" for a loan, not a "security interest" for a loan. See Smith v. Cash Store Management, 195 F.3d 325, 331 (7th Cir. 1999). Indeed, the defendants say that it would be illegal to disclose a "security interest" that does not exist. See Basham v. Finance America Corp., 583 F.2d 918, 924 (7th Cir. 1978) (overbroad statement of security interest violated TILA); Tinsman v. Moline Beneficial Finance Co., 531 F.2d 815, 818 (7th Cir. 1976) (same).

This is a bold and striking argument.*fn1 The defendants turn around a Seventh Circuit holding that the disclosure requirement is satisfied by saying that a postdated check is a "security," rather than a "security interest," and argue that because the Seventh Circuit says that the postdated check is merely a security, and therefore, by implication, not a security interest, the fact that it secures the loan need not, and perhaps may not, be disclosed at all. One has to admire this display of lawyerly technical virtuosity. However, I am not persuaded.

A.

First, Smith does not actually hold that a postdated check in a payday loan context is not a security interest. It holds, rather, that a payday lender did not violate TILA's § 1638(a)(9) by stating that the postdated check was a "security" rather than a "security interest." Indeed, Smith plainly does not decide whether a postdated check taken as a "security" by a payday lender is a security interest or not. The Smith court stated that for an instrument to be "collateral" or "collateral security" under Illinois law, the collateral must have "some value beyond the promise to pay contained in the loan agreement itself." Smith, 195 F.3d at 330. Some additional value "is created by the [Illinois] bad check statute and other legal provisions governing instruments." Id. at 331. The reasoning is that, because the lender has remedies available to him under the bad check statute, 810 ILCS 5/3-806, the check has value beyond the paper on which it is written. The postdated check, then, is clearly collateral security.

The Seventh Circuit carefully says that "[t]his is not to say that by putting up a check as collateral, a lender . . . necessarily takes a security interest in the amount printed on the face of the instrument." 195 F.3d at 330 (emphasis in original). This extremely precise and qualified statement does not deny that a postdated check might well be a security interest, or even that a lender might indeed take a security interest in the amount printed on the face of the instrument (although that is not the issue presented here). The partial dissent in that case noted as much, stating that in its view, on the contrary, "possessing a post-dated check does not create a security interest.'" Id. (Manion, J., dissenting in part and concurring in the judgment). This view, however, was not adopted by the panel majority, which did not find it necessary to reach the question, but confined itself to whether it was a TILA violation to list the check as a "security." In a subsequent per curiam opinion, the court refused to expand on this holding or to rule that a postdated check was not a security interest. See Hahn v. McKenzie Check Advance, 202 F.3d 998 (7th Cir. 2000).

B.

Regulation Z defines a "`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). In this context, the postdated checks secure the performance of the borrowers' obligations to repay the payday loans, and that interest is recognized by state law in the form of the bad check statute and by federal case law in the form of Smith. These checks are therefore security interests within the meaning of § 1638(a)(9). That the lender uses the term "security" and not "security interest" makes no difference. The Official Staff Interpretation to Regulation Z does not insist on any magic words: "No specified 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.'" 12 C.F.R. pt. 226, Supp. I ¶¶ 18(m) & 6(c).

Moreover, I agree with the many federal courts in Illinois that, in this context, have found that "as a matter of law, there is no meaningful distinction between the term `security interest' and `security' in this context." Hahn v. McKenzie Check Advance, 61 F. Supp.2d 813, 815 (C.D.Ill. 1999) (Mills, J.), aff'd on other grounds by 202 F.3d 998 (7th Cir. 2000).*fn2

Indeed, it would make no sense to treat the taking of the postdated check as anything but a security interest in the sense of § 1638(a)(9). The payday lender in this case takes the postdated check with the intention of using the state bad check law to secure otherwise questionable collateral — a possibly bad check from someone who probably could not get conventional credit, or he would not be using a service that charged over 500% interest. That is, the lender uses the postdating and the state bad check law to create the functional equivalent of a security interest, something that will secure its loan by providing collateral. The defendants invoke the formalistic fact that the statute requires disclosure of a "security interest," but the lender has only used the term "security," with the imprimatur of the Seventh Circuit, which has said that it is not a violation to use that term. Legal presumptions that "rest on formalistic distinctions rather than actual market realities are generally disfavored. . . ." Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 466, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992) (antitrust context). The market reality is that the postdated check is taken precisely to create what amounts to ...


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