for failure to state a claim of a complaint brought against a small loan
company pursuant to, among other things, the federal Truth in Lending Act
("TILA") for failure to disclose a security interest on a short term
installment loan.
A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2010/1stDistrict/July
/1092318.pdf
Plaintiff took out an installment loan from defendant AmeriCash, a short
term installment loan company. The installment note disclosure statement
given to plaintiff contained a note that stated "[y]our wage assignment is
security for this loan." The forms given to plaintiff also included, on a
separate page, an Electronic Funds Transfer ("EFT") authorization which
authorized defendant to electronically debit or issue a bank draft against
plaintiff's checking account if she defaulted on the loan, which plaintiff
signed.
Plaintiff sued AmeriCash, alleging in part that it failed to accurately
disclose the security interest taken in the EFT Authorization, in
violation of TILA. The trial court granted AmeriCash's motion to dismiss,
finding that the EFT authorization did not create additional rights and
remedies; that it was not a check; that it was not a negotiable
instrument; that it was not collateral; and therefore that it was not a
security interest. This appeal followed.
In addressing plaintiff's contention that because the EFT authorization
form constituted a security interest in her checking account, it should
have been disclosed pursuant to TILA, the appellate court first looked to
the definition of "security interest" under TILA. While TILA does not
include a definition of "security interest," Regulation Z defines it as
"an interest in property that secures performance of a consumer credit
obligation and that is recognized by State or Federal law." Under
Illinois law, a "security interest" is defined as "an interest in personal
property.which secures payment or performance of an obligation," and "[b]y
creating a security interest through a security agreement, a debtor
provides that a creditor may, upon default, take or sell the property - or
collateral - to satisfy the obligation for which the security interest is
given." Accordingly, the court determined that "the question before us is
whether the EFT authorization form can meet the statutory requirements of
'collateral' or 'security interest.'"
The court then turned its analysis to the Seventh Circuit's holding that a
postdated check with a high-interest consumer loan was a security interest
because the check confers rights and remedies in addition to those under
the loan agreement. In so doing, the Seventh Circuit held that, while an
identical second promise to pay would not serve as collateral to secure a
loan because the second promise is of no economic significance, a
postdated check confers on the holder additional rights and remedies of
negotiation, transfer, and bad check remedies. Accordingly a second,
unidentical promise that creates additional value and grants a creditor
rights to collect the debt beyond those contained in the loan agreement
must be disclosed as a security instrument under TILA.
In this case, because any debit to plaintiff's account that was returned
unpaid could be collected in the same manner as an unpaid paper check and
because the EFT authorization allowed defendant to debit plaintiff's
checking account if she breached on her promise to repay the loan through
the wage assignment option, the court ruled that plaintiff sufficiently
stated a claim that AmeriCash took a security interest in her checking
account and accordingly reversed the trial court's dismissal of
plaintiff's claim.
Let me know if you have any questions. Thanks.
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
RWutscher@kw-llp.com
http://www.kw-llp.com
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