Court Opinion

ID: 3147363
Source: CourtListenerOpinion
Date Created: 2015-10-22 18:30:23.948355+00
Date Added: 2024-06-11T12:36:46.643473
License: Public Domain

FIFTH DIVISION
                                                                             July 30, 2010

No. 1-09-2318

FELICIA RANDLE,                                                  )   Appeal from the
                                                                 )   Circuit Court of
                Plaintiff-Appellant,                             )   Cook County
                                                                 )
       v.                                                        )   No. 09 MI 111754
                                                                 )
AMERICASH LOANS, LLC.,                                           )   Honorable
                                                                 )   Dennis M. McGuire,
                Defendant-Appellee.                              )   Judge Presiding.
                                                                 )
                                                                 )

       JUSTICE FITZGERALD SMITH delivered the opinion of the court:

       This cause of action arose from the dismissal of plaintiff Felicia Randle’s claim that

defendant AmeriCash Loans, LLC (AmeriCash) violated the Truth in Lending Act (TILA) (15

U.S. C. §1638 (2006)), and the Illinois Interest Act (815 ILCS 205/4 (West 2006)), by failing to

disclose a security interest. The trial court disagreed with plaintiff, granting AmeriCash’s motion

to dismiss the claim. On appeal, plaintiff contends that it was improper for the trial court to

dismiss her complaint because she properly stated a cause of action. For the following reasons,

we reverse.

                                        I. BACKGROUND

       AmeriCash is an Illinois company that provides short term loans to borrowers under the

Consumer Installment Loan Act (Loan Act) (205 ILCS 670/1 (West 2006)). On November 25,

2008, plaintiff took out a $2,000 installment loan from AmeriCash, which generated an
No. 1-09-2318

installment note and disclosure statement, a wage assignment form, and a loan selection,

disclosure, and information form. The installment note and disclosure statement contained a

“federal box” near the top of the page for Truth in Lending Act disclosures. In that box,

AmeriCash disclosed the annual percentage rate, finance charge, amount financed, payment

schedule, prepayment options. AmeriCash also wrote in that box, “[y]our wage assignment is

security for this loan.”

        The loan, disclosure, and information form executed by plaintiff required her to choose

from three different repayment options. Option A constituted repayment by a discretionary

allotment that would automatically be deducted from the applicant’s payroll check. Option B

was repayment by a personal check or an electronic funds transfer from a personal checking or

savings account. Option C was repayment of a signature installment loan payable by cash or

money order. Plaintiff chose option A, an installment loan payable by a voluntary payroll

deduction.

        The loan selection, disclosure, and information form also included an “Optional Pre-

Authorization to Electronic Fund Transfer” (EFT), which appeared on the second page of the

form. The EFT authorization form authorized AmeriCash to electronically debit or issue a bank

draft against plaintiff’s check account (1) if she was in default of the loan agreement, or (2) if

plaintiff provided the lender with a check as payment for an installment payment and such

deposited check was subsequently dishonored by her bank, (3) if she was in default of the loan

agreement, to collect the full amount of the unpaid balance due under the agreement, including

late charges or returned check fees, or (4) if her automatic payroll deduction had not been

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No. 1-09-2318

initiated prior to the due date of the first installment under the agreement. The EFT authorization

further authorized AmeriCash to either (a) electronically debit or (b) issue a bank draft against

the plaintiff’s checking account to collect the amount of regularly scheduled payments due under

the initial terms of the agreement on their regularly scheduled due dates. The following then

appeared in the EFT authorization form:

                “I can revoke this authorization by giving notice of revocation to

                lender. Any revocation is effective only after lender has received

                written notice from me to revoke this authorization in such time

                and manner as to afford a reasonable opportunity to act upon the

                notice. I also have the right to stop payment of the debit entry by

                notification to my bank at least three business days before the

                scheduled date of the entry.”

       Plaintiff signed the EFT authorization form, but failed to specify the name of her bank, or

provide her checking account number, in the spaces provided on the form.

       On April 14, 2009, plaintiff filed a two-count amended complaint against AmeriCash.

Count I alleged that AmeriCash violated TILA and Federal Reserve Regulation Z (12 C.F.R. §

226.17 (2008) due to its inaccurate security interest disclosures. Specifically, plaintiff alleged

that the segregated federal disclosures failed to include the security interest taken in the EFT

authorization. Count II alleged that AmeriCash violated the Illinois Interest Act (815 ILCS 205/4

(West 2006)). Such violation was premised on an alleged violation of the disclosure

requirements of the Consumer Installment Loan Act (205 ILCS 670/16 (West 2006)), which are

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No. 1-09-2318

incorporated by reference into the Illinois Interest Act. See 815 ILCS 205/4 (West 2006).

However, the Consumer Installment Loan Act provides that compliance with TILA shall be

deemed compliance with the disclosure requirements of the Consumer Installment Loan Act.

See 205 ILCS 670/16 (West 2006). Thus, plaintiff’s Illinois Interest Act claim rose and fell with

her TILA claim.

       On June 10, 2009, AmeriCash filed a motion to dismiss plaintiff’s amended complaint,

alleging that plaintiff’s TILA claim, and therefore her Illinois Interest Act claim, failed as a

matter of law because EFT authorizations are not security interests and the disclosures made by

AmeriCash were in full compliance with all applicable statutes. It further alleged that an EFT is

simply a method of payment, like a voluntary payroll deduction, which does not need to be

disclosed. AmeriCash requested that the complaint be dismissed for failing to state a claim for

which relief could be granted, pursuant to section 2-615 of the Illinois Code of Civil Procedure

(735 ILCS 5/2-615(West 2006)) .

       Plaintiff then responded that the EFT authorization was the functional equivalent of a

check which gave AmeriCash rights and remedies under the Illinois bad check statute and, thus

provided AmeirCash with a security interest that had to be disclosed pursuant to the TILA.

       AmeriCash replied that an EFT authorization is not the functional equivalent of a check

because Article 3 of the Uniform Commercial Code (UCC), which includes the Illinois bad check

statute, does not apply to electronic fund transfers. 810 ILCS 5/3-101 et seq. (West 2006).

AmeriCash further alleged that an EFT authorization does not constitute a security interest under

Article 9 of the UCC which provides for the creation of security interests in personal property

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No. 1-09-2318

(815 ILCS 5/9-101 et seq. (West 2006)). It finally argued that the UCC does not apply to EFT

authorizations at all because electronic fund transfers are governed by the Electronic Fund

Transfer Act (EFTA) (15 U.S.C. §1693 (2006)), which does not provide for a remedy for the

cancellation or rejection of an electronic funds transfer.

       On September 1, 2009, arguments were heard on AmeriCash’s motion to dismiss.

Counsel for AmeriCash argued that plaintiff’s contention was that the EFT should have been

disclosed in the TILA disclosure federal box on the first page of the loan selection, disclosure,

and information form. AmeriCash argued that plaintiff’s argument required the trial court to find

that the EFT authorization constituted a security interest and that such a finding would be wrong

for several reasons: (1) the EFT form was never completed so it could not have been used; (2) the

EFT authorization was disclosed, even if it was in the wrong place; (3) the EFT authorization

was not required in order for the loan to be extended to plaintiff; (4) there was no grant of any

interest in property as required under TILA for a security interest; and (5) the EFT authorization

was voluntary and revocable by plaintiff.

       Plaintiff’s counsel then argued that if a borrower confers to a lender additional rights and

remedies beyond those that the lender would otherwise have on the face of the document,

meaning the terms of the loan agreement itself, that borrower has given the lender a security

interest. Counsel alleged that in this case, the EFT authorization gave AmeriCash the right to

electronically debit plaintiff’s bank account and demand drafts to that account in the event of

default, thus creating a security interest. Counsel further averred that plaintiff had used

AmeriCash in the past, and even though she did not fill out certain portions of the EFT

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No. 1-09-2318

authorization form, AmeriCash had that information on file.

       The trial court found 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. Moreover, the trial court found that

the EFT authorization form did not contain the relevant information regarding plaintiff’s bank

account. The trial court noted, however, that even if the relevant bank information had been on

the form, its findings would remain the same. The trial court then granted AmeriCash’s section

2-615 motion to dismiss. Plaintiff now appeals.

                                           II. ANALYSIS

       On appeal, plaintiff argues that the trial court erred in granting AmeriCash’s motion to

dismiss because the EFT authorization form constituted a security interest in her checking

account which should have been disclosed pursuant to the TILA.

       A motion to dismiss based on section 2-615 of the Illinois Code of Civil Procedure

admits all well-pleaded facts and attacks the legal sufficiency of the complaint. La Salle National

Bank v. City Suites, Inc., 325 Ill. App. 3d 780, 790 (2001). “The question presented by a section

2-615 motion to dismiss is whether the allegations of the complaint, when viewed in a light most

favorable to the plaintiff, are sufficient to state a cause of action upon which relief can be

granted.” La Salle, 325 Ill. App. 3d at 790. Legal conclusions and factual conclusions which are

not supported by allegations of specific facts will be disregarded in ruling on a motion to dismiss.

La Salle, 325 Ill. App. 3d at 790. We review a dismissal of a section 2-615 motion de novo. La

Salle, 325 Ill. App. 3d at 789.

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No. 1-09-2318

       Plaintiff contends that the EFT authorization form constituted a security interest in her

checking account, which therefore should have been disclosed in the federal disclosure box on

the loan agreement pursuant to TILA. Specifically, plaintiff contends that the EFT authorization

afforded AmeriCash additional rights and remedies in the event that plaintiff defaulted on the

loan agreement. AmeriCash responds that EFT authorizations do not constitute security interests

because they are merely methods of payment and do not afford lenders additional rights and

remedies. We start by looking at the applicable statute.

       Congress enacted TILA to ensure that consumers receive accurate information from

creditors in a precise, uniform manner that allows consumers to compare the cost of credit from

various lenders. 15 U.S.C. §1601 (2006); Anderson Bros. Ford v. Valencia, 452 U.S. 205, 220,

68 L. Ed. 2d 783, 794-95, 101 S. Ct. 2266, 2274 (1981). Federal Reserve Board Regulation Z,

the federal regulation promulgated pursuant to TILA, mandates that: “The creditor shall make the

disclosures required by this subpart clearly and conspicuously in writing, in a form that the

consumer may keep. *** The disclosures shall be grouped together, shall be segregated from

everything else, and shall not contain any information not directly related to the [required]

disclosure ***.” 12 C.F.R. §226.17(a)(1) (2008). The mandatory disclosures, which must be

grouped in a federal disclosure section of a written loan agreement, include, among other things,

the finance charge, the annual percentage rate, and any security interests that the lender takes. 12

C.F.R. §226.18 (2008).

       TILA requires creditors to disclose accurately any security interest taken by the lender and

to describe accurately the property in which the interest is taken. 15 U.S.C. §1638 (2006); 12

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No. 1-09-2318

C.F.R. §226.18 (2006). TILA does not include a definition of “security interest,” but 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.” 12 C.F.R. §226.2(a)(25) (2008). Thus, the

“threshold test is whether a particular interest in property is recognized as a security interest

under applicable law.” Official Staff Commentary, 12 C.F.R. pt. 226, Supp. I (2008).

       Illinois law defines a “security interest” as “an interest in personal property *** which

secures payment or performance of an obligation.” 810 ILCS 5/1-201(37) (West 2006). By

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. 810 ILCS 5/9-103(12) (West 2006) (“ ‘Collateral’ means the property

subject to a security interest,” and includes accounts and chattel paper which have been sold);

Smith v. The Cash Store Management, Inc., 195 F.3d 325, 329 (7th Cir. 1999) (applying Illinois

law). Because TILA restricts what information a lender can include in its federal disclosures, the

question before us is whether the EFT authorization form can meet the statutory requirements of

“collateral” or “security interest.” Smith, 195 F.3d at 329. Plaintiff submits that AmeriCash’s

EFT authorization form in the loan agreement is equivalent to a traditional check, which has been

found to be a security interest under Illinois law.

       Plaintiff primarily relies on Smith v. The Cash Store Management, Inc., 195 F.3d 325

(7th Cir. 1999), and Hahn v. McKenzie Check Advance of Illinois, LLC, 202 F.3d 998 (7th Cir.

2000), for her proposition that the EFT authorization form is equivalent to a postdated check.

Because little Illinois case law addresses TILA security interest disclosure requirements, reliance

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No. 1-09-2318

on Seventh Circuit precedent interpreting those requirements is appropriate. See Wilson v.

Norfolk & Western Ry. Co., 187 Ill. 2d 369, 383 (1999). “The reason that federal decisions are

considered controlling on Illinois state courts interpreting a federal statute *** is so that the

statute will be given uniform application.” Wilson, 187 Ill. 2d at 383, citing Busch v. Graphic

Color Corp., 169 Ill. 2d 325, 335 (1996). Accordingly, we find the parties’ reliance on primarily

federal cases to be appropriate in this case.

       In Smith, the court noted that “[i]t is the economic substance of the transaction that

determines whether the check serves as collateral,” and that neither “ease of recovery in the event

of default nor the simple fact that a check is an instrument are sufficient to create a security

interest.” Smith, 195 F.3d at 329. In both Smith and Hahn, the Seventh Circuit held 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. Smith, 195 F.3d at

329; Hahn, 202 F.3d at 999. The Seventh Circuit noted that a second promise to pay, identical to

the first, would not serve as collateral to secure a loan because the second promise is of no

economic significance: in the event that the borrower defaults on the first promise, the second

promise provides nothing in economic value that the creditor could seize and apply towards loan

repayment. Smith, 195 F.3d at 330.

       However, the court in Smith found that a postdated check was not merely a second,

identical promise to pay, but rather granted the lender additional rights and remedies under the

Illinois bad check statute (810 ILCS 5/3-806 (West 2006)), which mandates that if a check is not

honored, the drawer shall be liable for interest and costs and expenses incurred in the collection

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No. 1-09-2318

of the amount of the check. Smith, 195 F.3d at 330. The Smith court reasoned:

                       “[I]t is its extrinsic legal status and the legal rights and

                remedies granted the holder of the check, like the holder of a loan

                agreement, that give rise to its value. Upon default on the loan

                agreement, Cash Store would get use of the check, along with the

                rights that go with it. Cash Store could simply negotiate it to

                someone else. Cash Store could take it to the bank and present it

                for payment. If denied, Cash Store could pursue bad check

                litigation. Additional value is created through these rights because

                Cash Store need not renegotiate or litigate the loan agreement as its

                only avenue of recourse.” Smith, 195 F.3d at 330.

       Plaintiff argues the EFT authorization form at issue in the case at bar granted AmeriCash

the right to issue bank drafts against plaintiff’s checking account for the total amount due under

the agreement, and that bank drafts are legally equivalent to traditional checks under the Illinois

Uniform Commercial Code (See 12 C.F.R. pts. 210, 229 (2008)). Thus, plaintiff argues that

AmeriCash has additional rights and remedies of negotiation, transfer, and bad check remedies.

Moreover, plaintiffs contend that the EFT authorization is not merely a second, identical promise

to pay because it authorizes AmeriCash to debit her account in the event of default, for the full

amount of the unpaid balance including late fees or returned checks.

       AmeriCash responds that the EFT authorization is simply a mechanism to facilitate

repayment of a loan and is not a security interest. AmeriCash urges us to find, relying on Cobb

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No. 1-09-2318

v. Monarch Financial Corp., 913 F. Supp. 1164 (N.D. Ill. 1995), that EFT authorizations are

nearly identical to voluntary payroll deductions, which are mechanisms or methods of payment

and nothing more. In Cobb, a debtor brought suit against a group of lenders, claiming that the

discretionary allotment executed as part of the loan agreement created a security interest in the

debtor’s accounts. Cobb, 913 F. Supp. at 1177-78. The complaint alleged that, because the

security interest in the discretionary allotment was not disclosed by the creditors, their disclosure

statements violated the TILA. The loan agreements allegedly prohibited the debtor from

cancelling the discretionary allotment until the loan was paid in full and prohibited the debtor

from withdrawing funds from the accounts without defendants’ permission. The court found that

defendants’ alleged interest in the plaintiff’s accounts did not secure performance of the loan

obligation within the meaning of Regulation Z because the discretionary allotment served to

facilitate repayment of the loans, not to secure repayment upon default. Cobb, 913 F. Supp. at

1177-78. The court granted defendants’ motion to dismiss finding that the complaint failed, as a

matter of law, to allege that defendants had acquired a security interest in plaintiff’s accounts,

which was required to sustain a TILA claim. Cobb, 913 F. Supp. at 1178.

       AmeriCash notes that the only difference between Cobb and the case at bar is that Cobb

involved a voluntary payroll deduction, while this case involves an electronic fund transfer.

Nevertheless, AmeriCash maintains that an electronic fund transfer is almost identical to a

voluntary discretionary allotment, which has been found to be a “mere devices for consumers to

make regular payments.” See 16 C.F.R. pt. 444 (1985).

       We note, however, that the Northern District of Illinois, the same court that decided Cobb

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No. 1-09-2318

more than 10 years ago, recently issued the case of Pinkett v. First Citizens Bank, No. 09 C 2365

(N.D. Ill. May 10, 2010) (mem. op. & order), which expressly addresses the issue at bar. In

Pinkett, the plaintiff completed a one-page application to request a loan. The plaintiff also

completed other loan documentation, including an Electronic Funds Transfer and Authorization

Agreement. Plaintiff sued Norwest Capital, claiming it took a security interest when it obtained

the authorization agreement on his checking account. Pinkett, slip op. at 5. Norwest Capital

responded that the authorization only served to facilitate the repayment of loans, and not to

secure repayment upon default, citing Cobb. Pinkett, slip op. at 5.

       The court in Pinkett noted that the “Seventh Circuit makes clear that an instrument that

grants a creditor rights to collect the debt beyond those contained in the loan agreement must be

disclosed as a security instrument.” Pinkett, slip op. at 4, citing Hahn, 202 F.3d 998, and Smith,

195 F.3d 325. The Pinkett court found Cobb to be irrelevant because in that case the account in

Cobb into which allotments from the plaintiff’s check were deposited to later be paid to the

creditor was simply a mechanism to facilitate repayment. Cobb, 913 F.Supp. at 1178; Pinkett,

slip op. at 5. The Pinkett court stated:

                “The authorization agreement states specifically that Norwest

                Capital is authorized to initiate debit entries into Pinkett’s personal

                checking account (not the allotment account), that Pinkett could

                not terminate the agreement without written notice to Norwest

                Capital in sufficient time for it to act on their rights, and that any

                debit to the account that was returned unpaid could be collected in

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No. 1-09-2318

                the same manner as an unpaid paper check. The authorization,

                then, allowed Norwest Capital to debit Pinkett’s personal checking

                account if he reneged on his promise to repay the loan through the

                allotment system.” Pinkett, slip op. at 5.

       Norwest Capital maintained that Pinkett would have an opportunity to block it from

debiting the account, but the court found that so too would a plaintiff have an opportunity to

block a party from cashing a post-dated check, and in “either instance, the creditor could pursue

remedies under Illinois’ bad check statute.” Pinkett, slip op. at 5. The court concluded that it

was clear Norwest Capital had the authority to use the debit authorization to Pinkett’s account in

the event that he defaulted, and thus Pinkett properly stated a claim that Norwest Capital took a

security interest in his checking account. Pinkett, slip op. at 5.

       We find the holding in Pinkett to be controlling in this case. Here, the EFT authorization,

like the authorization in Pinkett, states specifically that AmeriCash is authorized to initiate debit

entries into plaintiff’s checking account, that plaintiff could not terminate the agreement without

written notice to AmeriCash in sufficient time for it to act on its rights, and that any debit to the

account that was returned unpaid could be collected in the same manner as an unpaid paper

check. The authorization, then, allows AmeriCash to debit plaintiff’s checking account if she

reneged on her promise to repay the loan through the wage allotment option. Thus, we find that

plaintiff sufficiently stated a claim that AmeriCash took a security interest in her checking

account.

       We decline to address the issue of how the blank portions of the EFT authorization form

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No. 1-09-2318

affect the EFT authorization’s security interest status since the trial court has not yet had a chance

to do so. Plaintiff attempted to amend her complaint with additional information regarding

AmeriCash’s access to her bank account information, which was denied by the trial court at the

same time plaintiff’s claim was dismissed. Accordingly, we reverse the trial court’s dismissal of

plaintiff’s claim for failing to state a cause of action for which relief could be granted, and are

confident that the issue of blank spaces on the EFT authorization form will be resolved in further

proceedings in the trial court.

                                        III. CONCLUSION

       For the foregoing reasons, we reverse the judgment of the circuit court of Cook County.

       Judgment reversed.

       HOWSE and LAVIN, JJ., concur.

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