Opinion
No. 99 C 3828.
February 28, 2000.
MEMORANDUM AND ORDER
This case arises from two separate loan transactions. Defendant Chartwell Financial Services is a small consumer loan company that specializes in the short-term, high-interest loans that are better known as "payday" loans. Whereas the typical payday loan requires a customer to put up a post-dated check as security for the loan, in this case Chartwell required Plaintiffs Yvonne Sharp and Bettie Lee to relinquish part of the principal of the loan back to Chartwell to secure their repayment. Both Plaintiffs were unable to pay back their loans, and now sue Chartwell alleging that each of the transactions violated the Truth in Lending Act, and the Illinois Consumer Fraud Act. Additionally Sharp sues Chartwell for violation of the Equal Credit Opportunity Act. Sharp also alleges that Defendant Margaret Valerius, Chartwell's collection agent, violated the Fair Debt Collection Act in a collection letter she sent to Sharp. Chartwell and Valerius have moved to dismiss Plaintiffs' complaint for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons stated below, the motions are DENIED.
I. Standard for a 12(b)(6) Motion to Dismiss
In ruling on a motion to dismiss, the Court must assume the truth of all facts alleged in Plaintiffs' complaint, construing their allegations liberally and viewing them in the light most favorable to them. Fed.R.Civ.P. 12(b)(6). See, e.g., McMath v. City of Gary, 976 F.2d 1026, 1031 (7th Cir. 1992); Gillman v. Burlington Northern. R.R. Co., 878 F.2d 1020, 1022 (7th Cir. 1989). Dismissal is properly granted only if no set of facts which the Plaintiffs could prove consistent with their pleadings would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-56, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Kunik v. Racine County, Wis., 946 F.2d 1574, 1579 (7th Cir. 1991), citing, Hishon v. King Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984).
II. Background
The following facts are derived from Plaintiffs' complaint and are considered true for the purposes of ruling on the motions to dismiss.
A. Yvonne Sharp
On or about June 20, 1998, Chartwell made Sharp a loan for the stated amount of $500. However, Sharp only received $400. Chartwell's cash collateral practice requires its customers to revert a portion of the loan back to Chartwell as security for her repayment. In this case, Chartwell retained $100 of the loan. The finance charge for the loan was $700 and the disclosed annual percentage rate ("APR") was 458.42%.
Sharp only managed to repay $140 on the loan. When she fell short on making repayment, Just, using the name "Jordan" made several telephone calls to her demanding repayment beginning in August 1998 and continuing through May 1999. Just invoked racial and gender-based epithets against her and threatened to increase the amount she owed Chartwell.
In another attempt to collect Sharp's debt, on May 25, 1999, Valerius sent her a letter ("Notice") which advised her that she was delinquent on repayment of her loan which had ballooned to $3,711.36. The notice informed Sharp that unless she repaid the debt within 30 days, legal proceedings could be instituted against her. Valerius' letter also counseled Sharp to notify her within 30 days if she disputed any portion of the loan.
B. Bettie Lee
On October 15, 1998, Chartwell made Lee a loan for the stated amount of $800. In her case, Chartwell retained a $400 cash collateral — meaning that Lee only received $400. The finance charge for her loan was $900, and the APR was 381.88%.
DISCUSSION
Count I — Truth In Lending Act
Plaintiffs' TILA claim concerns Chartwell's cash collateral practice. In this case, Chartwell retained $100 of Sharp's $500 loan, while Lee was required to put up $400 as cash collateral on her $800 loan. Sharp and Lee assert, however, that in reality a $500 loan with a $100 "cash collateral" is only a $400 loan and; an $800 loan with a $400 cash collateral is only a $400 loan. Additionally, Chartwell's practice is to have its customers pay the disclosed APR on the entire amount stated as the loan, without accounting for the amount that was reduced because of the cash collateral. Therefore, Sharp and Lee allege that the cash collateral is essentially a hidden finance charge because customers end up paying a higher interest rate on the portion of the loan they actually receive.
Chartwell responds that the cash collateral functions as security for the loan and it is returned with interest when the customer repays the loan. Therefore, Chartwell contends, it is in compliance with the TILA. The Seventh Circuit has recently held that the cash collateral practice is not a valid security for the loan, holding that:
"did not serve to reduce the creditor's risk by providing it with an interest in property it could take or sell upon default. Rather, Chartwell used the cash security as a means to reduce the amounts of money it initially put at risk. Put another way, the real effect of the cash collateral required by Chartwell was not to make the loans more secure, but to reduce the amounts of the loans."Williams v. Chartwell Financial Services, 2000 WL 137128, *4 (7th Cir. 2000).
In its motion, Chartwell contends that since the cash collateral is returned with interest upon the customer's successful repayment of the loan, it is exempted from the TILA regulation that requires a lender to make additional disclosures when cash is used as security for the loan. 12 C.F.R. § 226.18 (r). This exception permits a lender to escape the disclosure requirement when the cash is placed in an interest-bearing account that earns at least 5% per year. In Williams, the Seventh Circuit held that Chartwell's cash collateral requirement does not fit within this TILA exemption because the drafters of TILA: "did not intend the deposit provisions to apply to any kind of deposit, but only to traditional forms of deposit accounts." Id. at *6.
The Williams court ruled that "the cash collateral required by Chartwell does not constitute a deposit account, and because the cash collateral did not function as a security interest, Chartwell's failure to disclose the impact of that collateral on the APRs constitutes a violation of TILA." Id. at *7. In light of Williams, the Court DENIES Chartwell's motion to dismiss Count I of Plaintiffs' complaint.
Count II — Fair Debt Collection Practices Act
Sharp's complaint alleges that Valerius' notice letter violated the FDCPA, because it "contradicts, overshadows, and confuses" a debtor's rights under the Act. § 1692(g). The Seventh Circuit has ruled that "it is implicit that the debt collector may not defeat the statute's purpose by making the required disclosures in a form or within a context in which they are unlikely to be understood by the unsophisticated debtors who are the particular objects of the statute's solicitude." Bartlett v. Heibel, 128 F.3d 497, 500 (7th Cir. 1997). Thus, it is an "unsophisticated consumer" standard that court's employ to determine whether a collection letter violates § 1692(g)(a).Id., Johnson v. Revenue Mgmt. Corp., 169 F.3d 1057, 1060 (7th Cir. 1999); Gammon v. GC Servs. Ltd. Partnership, 27 F.3d 1254, 1257 (7th Cir. 1994).
Valerius contends that the mere allegation in Sharp's complaint that the notice letter "contradicts, overshadows, and confuses" fails to state a claim. The Seventh Circuit has held that "a contention that a debt-collection notice is confusing is a recognized legal claim; no more is needed to survive a motion under Rule 12(b)(6)." Johnson, 169 F.3d at 1059. More recently, the Seventh Circuit held that "a complaint alleging that a particular notice confuses recipients may not be dismissed under Fed.R.Civ.P. 12(b)(6) — not only because "this notice is confusing' states a claim on which relief may be granted, but also because district judges are not good proxies for the `unsophisticated consumers' whose interests the statute protects." Walker v. National Recovery, Inc., 200 F.3d 500, 501 (7th Cir. 1999). The basis of Valerius' motion is that Sharp has not sufficiently stated a claim simply by alleging that Valerius' notice letter was confusing. However, the Seventh Circuit has clearly ruled that Sharp's allegations survive a motion to dismiss. It is clear that the Court must DENY Valerius' motion to dismiss Count II.
Count III — Equal Credit Opportunity Act
Count III of Sharp's complaint alleges that Just called her and invoked both racial and gender-based epithets and, also, threatened to increase the amount of money she would owe Chartwell. Sharp alleges that these acts violated the Equal Credit Opportunity Act, which prohibits a creditor from discriminating on the basis of race against "any applicant, with respect to any aspect of a credit transaction." 15 U.S.C. § 1691 (a). Chartwell's motion denies that these calls ever occurred, but contends that Just is not an employee of Chartwell and, as a matter of law, does not qualify as a "creditor." Secondly, Chartwell argues that because it had already extended Sharp a loan, Just's phone calls do not constitute discrimination in a "credit transaction."
Sharp's complaint alleges that: "Defendant Joseph Just Jr., also known as `Jordan,' is an individual who works for [Chartwell]." Thus, Sharp has adequately pled that Just is an employee of Chartwell who violated the ECOA. McMath, 976 F.2d at 1031; Gillman, 878 F.2d at 1022.
Chartwell's second argument is that because Sharp was an existing customer, Just's attempts to collect her repayment was not a credit transaction. The relevant provision of the ECOA reads: "(a) Activities constituting discrimination. It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction — (1) on the basis of race . . ." 15 U.S.C. § 1691. According to the ECOA's implementing provisions, the Federal Reserve Board's Regulation B, the term "credit transaction" refers to: "[E]very aspect of an applicant's dealings with a creditor regarding an application for credit or an existing extension of credit (including, but not limited to . . . collection procedures)." 12 C.F.R. § 202.2 (m) (emphasis added).
Sharp alleges that Just's phone calls: 1) harassed her on the basis of race and gender and; 2) threatened to increase the amount she owed Chartwell. The phone calls were certainly part of the collection process. Just's threat to increase the amount of money she owed Chartwell during phone calls where he also insulted her race and gender raises the level of concern that she was unfairly treated. Thus, Sharp has stated a claim that she was discriminated against in the "credit transaction" on the basis of race and gender. Chartwell's motion to dismiss this count is DENIED.
Count IV — Unconscionability
Plaintiffs' complaint alleges that the Chartwell contracts are unconscionable because Chartwell: (1) charges "exorbitant" interest rates which exceed 100% of the principal; (2) fails to adequately disclose the terms of its loans and; (3) employs outrageous collection methods.
Chartwell relies on the Illinois Consumer Credit Installment Act, which provides in part: "Every licensee may lend a principal amount not exceeding $25,000 and may charge, contract for and receive thereon interest at the rate agreed upon by the licensee and the borrower subject to the provisions of this Act." 205 ILCS 670/1 et seq. (1999). Therefore, Chartwell's motion to dismiss this count argues that Illinois law does not limit the amount of a finance charge that a lender may charge.
Although Illinois law may not expressly limit the finance charge that a lender may charge its customer does not mean that the contract is not unconscionable. In Illinois, an unconscionable contract exhibits "the absence of meaningful choice by one of the parties as well as contract terms which are unreasonably favorable to the other party." Lamed v. First Chicago Corp., 636 N.E.2d 1004, 1006 (Ill.App. Div. 1994). Illinois law also holds that unconscionability refers to the inequality of bargaining power between the parties to the contract: "[r]elevant factors include gross disparity in bargaining positions of the parties together with terms unreasonably favorable to the stronger party." R.H. Donnelley Corp., v. Krasny Supply Co., 592 N.E.2d 8, 12 (Ill.App.Ct. 1991).
In other payday loan cases, this Court has refused to dismiss unconscionability claims on the grounds that the interest rates at issue "are not inconsistent with an absence of meaningful choice." Cobb v. Monarch Finance Corp., 913 F. Supp. 1164, 1179 (N.D.Ill. 1995); see also, Pinkett v. Moolah Loan Co., 1999 WL 1080596 at *5 (N.D.Ill. Nov. 2, 1999) ("It is because the [payday loan customers] were "forced to swallow unpalatable terms' that the inference of unconscionability may be made" (citation omitted)). The issue of whether Plaintiffs had a meaningful choice on how the terms of their agreements were structured is a factual one. Plaintiffs' complaint sufficiently alleges a claim for unconscionability. Therefore, Chartwell's motion to dismiss Count IV is DENIED.
Count V — Illinois Consumer Fraud Act
Plaintiffs allege that Chartwell violated the Illinois Consumer Fraud Act ("ICFA") by: (1) charging exorbitant interest rates for loans in excess of 100%; (2) failing to make proper disclosures in connection with such loans; and (3) using outrageous collection methods. Chartwell argues that Plaintiffs' complaint does not allege facts which "equate to a misrepresentation or concealment of material fact."
To establish a claim under the ICFA, a claimant must allege facts that show: (1) a deceptive act or practice by the defendant; (2) the defendant's intent that the plaintiff rely on the deception; and (3) that the deception occurred in the course of conduct involving trade or commerce. Cripe v. Leiter, 703 N.E.2d 100, 103 (Ill.App. Div. 1998); Connick v. Suzuki Motor Co., 675 N.E.2d 584 (Ill.App. Div. 1996). Plaintiffs' complaint satisfies each of the elements of the ICFA. First, Plaintiffs' allege that Chartwell's cash collateral practice essentially charges interest on money that is never actually loaned to its customers. Second, Plaintiffs' allege that Chartwell intended for them to rely on the alleged deception. The ICFA requires only that the creditor intends for the consumer to rely on its practice, because a party "is considered to intend the necessary consequences of his own acts or conduct." Warren v. LeMay, 491 N.E.2d 464, 474 (Ill.App. Div. 1986); see, Dwyer v. American Express Co., 652 N.E.2d 1351 at 1357 (Ill.App. Div. 1995); Heastie v. Community Bank of Greater Peoria, 727 F. Supp. 1133 at 1139 (N.D.Ill. 1989) ("Intent is not a material fact under the Consumer Fraud Act."). Finally, Plaintiff's sufficiently allege that the fraud occurred in "the course of trade or commerce." Therefore, the Court declines to dismiss Count V of Plaintiffs' complaint.
CONCLUSION
For the reasons stated above, the Court DENIES Defendants' motion [12-1] to dismiss Plaintiffs' complaint. SO ORDERED.