Laseter, Jr. et al v. ClimateGuard Design & Installation, LLC et al
Filing
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MEMORANDUM Opinion and Order Signed by the Honorable Young B. Kim on 3/14/2013. (ma,)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
WENDELL J. LASETER, JR. and
CASSANDRA M. LASETER,
Plaintiffs,
v.
CLIMATEGUARD DESIGN &
INSTALLATION, LLC and
ADMIRALS BANK, formerly known
as DOMESTIC BANK,
Defendants.
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No. 12 CV 3719
Magistrate Judge Young B. Kim
March 14, 2013
MEMORANDUM OPINION and ORDER
Wendell and Cassandra Laseter entered into a contract with ClimateGuard Design &
Installation, LLC (“ClimateGuard”) to purchase a new roof for their house, and took out a
mortgage from Admirals Bank (“Admirals”) to finance the project. Two years later the roof
began to leak, requiring thousands of dollars’ worth of repair. The Laseters brought this suit
against Climateguard and Admirals seeking rescission of the mortgage under the Truth in
Lending Act (“TILA”), 15 U.S.C. § 1635, alleging that the defendants omitted material
disclosures from the Truth In Lending Disclosure Statement they included in the financing
documents. The suit includes a second count for breach of contract under state law.
Currently before the court is Admirals’s motion to dismiss the Laseter’s TILA claim either
for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1),
or alternatively, under Rule 12(b)(6) for failure to state a claim.1 For the following reasons,
the motion is denied:
Facts
The Laseters allege the following facts, which, for purposes of the current motion to
dismiss—whether for lack of jurisdiction or for failure to state a claim—this court accepts
as true. See Independent Trust Corp. v. Stewart Info. Servs. Corp., 665 F.3d 930, 934 (7th
Cir. 2012); see also Lagen v. United Cont’l Holdings, Inc., __F.Supp.2d__, 12 CV 4056,
2013 WL 375213, at *2 (N.D. Ill. Jan. 31, 2013). On August 14, 2009, ClimateGuard
representatives visited the Laseters’ home and sold them a new roof. (R. 1, Compl. ¶ 10.)
That same day, the Laseters signed a “sales/retail installment contract,” which included a
section labeled “Disclosures Required by Federal Law.” (Id. ¶ 11 & Ex. A.) Those
disclosures included only “estimates” of key terms, like the annual percentage rate, total of
payments, and number of payments. (Id. ¶ 12 & Ex. A.) After the Laseters signed the sales
contract, ClimateGuard—which had a prior arrangement with Admirals (then d/b/a Domestic
Bank) for the referral of clients—arranged for the Laseters to take out a mortgage from
Admirals to pay for the new roof. (Id. ¶¶ 13-14.) Two weeks after the Laseters signed the
sales contract, they signed the loan documents. (Id. ¶ 15 & Exs. C-E.)
Among the documents the Laseters received or signed in connection with the
mortgage, Admirals provided them with a Truth-In-Lending Disclosure Statement. (Id. ¶ 15
On October 15, 2012, the parties consented to the jurisdiction of this court. (R. 25);
see 28 U.S.C. § 636(c).
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& Ex. C.) In the top third of that document are boxes setting forth the annual percentage rate
(“APR”), finance charge, amount financed, total of payments, and a payment schedule
conveying the number and amount of payments and the date on which the first payments are
due. (Id. Ex. C.) Those boxes do not disclose the interval or schedule of the payments. (Id.
¶ 16 & Ex. C.) On a separate page, however, Admirals provided a schedule setting forth the
number and amount of payments, and stating that those payments are due “monthly.” (Id.
Ex. C.)
Two years after ClimateGuard installed the Laseter’s new roof, it began to leak. (Id.
¶ 17.) When the Laseters complained to ClimateGuard about the leaky roof, it refused to
remedy the problem, saying it was no longer in the roofing business. (Id. ¶¶ 19-20.) The
Laseters estimate that repairing the roof will cost them in the range of $6,900 to $9,950. (Id.
¶ 21.) They now invoke what they assert is their right to rescind the mortgage under TILA,
alleging that the payment schedule was improperly disclosed and that the process of requiring
them to sign financing documents two weeks after they signed a binding sales contract is
“confusing and obfuscatory.” (Id. ¶ 26.) The Laseters also seek damages stemming from
ClimateGuard’s alleged breach of contract. (Id. ¶ 33.)
Analysis
In the current motion to dismiss count one of the complaint, Admirals argues that the
Laseters’ claim for rescission under TILA is untimely and therefore must be dismissed either
for lack of subject matter jurisdiction or for failure to state a claim. TILA gives a consumer
three days following the consummation of a loan to rescind the agreement, unless the lender
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does not deliver required material disclosures, in which case the right to rescind extends to
three years. 15 U.S.C. § 1635(a), (f); 12 C.F.R. § 1026.23(a). The Laseters gave notice of
their intent to rescind the agreement on April 18, 2012, less than three years after they
entered into the loan agreement. (R. 1, Compl. Exs. C & H.) Admirals argues that the
Laseters are not entitled to the three-year rescission period, and that therefore their notice is
untimely and their federal claim time barred. Admirals argues that the Truth-In-Lending
Disclosure Statement attached to the Laseters’ complaint is clear on its face and that there
is nothing objectively confusing about entering into a sales contract two weeks before
signing the financing documents to fund the work described in the sales contract. (R. 19,
Mot. at 5-6.) In response, the Laseters defend their invocation of the three-year rescission
period, arguing that the disclosure statement failed to properly disclose the loan’s payment
schedule and that separating the execution of the sales contract from the execution of the loan
documents by two weeks is a practice that is likely to confuse the ordinary consumer. (R.
22, Resp. at 8-12.)
This court must begin its analysis of the motion by addressing the jurisdictional
question. Admirals has not cited any cases to support its argument that this court lacks
subject matter jurisdiction to review a claim brought under TILA where the notice of
rescission is untimely. The Supreme Court has interpreted TILA’s three-year rescission
period as a statute of repose, see Beach v. Ocwen Fed. Bank, 523 U.S. 410, 419 (1997),
meaning that it “‘serves as an unyielding and absolute barrier to a cause of action, regardless
of whether that cause has accrued,’” see McCann v. Hy-Vee, Inc., 663 F.3d 926, 930 (7th Cir.
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2011) (quoting Klein v. DuPuy, Inc., 506 F.3d 553, 557 (7th Cir. 2007)). Although some
circuits have characterized TILA’s three-year limitation on the right of rescission as being
jurisdictional, see, e.g., Miguel v. Country Funding Corp., 309 F.3d 1161, 1164 (9th Cir.
2002), the Seventh Circuit has made clear that in its view, “there is nothing jurisdictional
about § 1635(f)’s period of repose,” Doss v. Clearwater Title Co., 551 F.3d 634, 639 (7th
Cir. 2008). Instead, the three-year limitation serves as “merely a precondition to a
substantive right of relief.” Doss, 551 F.3d at 639. The Laseters interpreted Admirals’s
motion to dismiss as asserting that this court lacks jurisdiction over their TILA claim because
it believes the claim to be meritless. But as they point out, “[j]urisdiction . . . is not defeated
. . . by the possibility that the averments might fail to state a cause of action on which
petitioners could actually recover. For it is well settled that the failure to state a proper cause
of action calls for a judgment on the merits and not for a dismissal for want of jurisdiction.”
See Bell v. Hood, 327 U.S. 678, 682 (1946). Because Admirals has not shown that this court
lacks jurisdiction to review the Laseters’ TILA claim, this court will view the current motion
through the lens of Rule 12(b)(6).
Admirals’s substantive argument is that TILA’s statute of repose bars the Laseters’
TILA claim because the Laseters failed to meet the precondition to their claim by filing a
timely notice of rescission. A statute of repose is an affirmative defense, and “[c]omplaints
need not anticipate or attempt to defuse potential defenses.” See Doe v. Smith, 429 F.3d 706,
709 (7th Cir. 2005). But dismissal under Rule 12(b)(6) is appropriate where a complaint
“sets out all of the elements of an affirmative defense,” see Independent Trust Corp., 665
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F.3d at 935, such as where “the facts pleaded in the complaint establish that a claim is time
barred,” Logan v. Wilkins, 644 F.3d 577, 582 (7th Cir. 2011). Although technically, where
allegations “show that there is an airtight defense” based on a limitations period, dismissal
should be sought through a motion for judgment on the pleadings under Rule 12(c), but “this
comes to the same thing as a dismissal under Rule 12(b)(6),” and the Seventh Circuit has
used the two rules “interchangeably.” See Richards v. Mitcheff, 696 F.3d 635, 637-38 (7th
Cir. 2012).
Whether the Laseters are bound by the three-day or three-year rescission period—and
thus whether their TILA claim is time-barred—turns on the adequacy of the disclosures
Admirals provided them when the loan was signed. See 15 U.S.C. § 1635(a), (f); 12 C.F.R.
§ 1026.23. TILA was designed to benefit consumers by helping them “to compare more
readily the various credit terms available to [them] and avoid the uninformed use of credit.”
15 U.S.C. § 1601(a); see also Handy v. Anchor Mortg. Corp., 464 F.3d 760, 762 (7th Cir.
2006). In support of that goal, the regulations implementing TILA mandate that for each
transaction involving a mortgage security, the creditor must disclose, among other things, the
amount financed, the finance charge, the APR, the variable rate, the total of payments, and
the payment schedule. See 12 C.F.R. § 1026.18. The sufficiency of a creditor’s disclosures
is an objective question, see Smith v. Check-N-Go of Ill., Inc., 200 F.3d 511, 515 (7th Cir.
1999), and is viewed from the standpoint of the ordinary consumer, see Smith v. Cash Store
Mgmt., Inc., 195 F.3d 325, 327-28 (7th Cir. 1999). Because TILA is a consumer-protection
statute, it “does not easily forgive ‘technical errors.’” Handy, 464 F.3d at 764. Indeed, the
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Seventh Circuit has made clear that in reviewing the adequacy of TILA-mandated
disclosures, “‘hyper-technicality reigns.’” Hamm v. Ameriquest Mortg. Co., 506 F.3d 525,
529 (7th Cir. 2007) (quoting Handy, 464 F.3d at 764). This means that “lenders are generally
strictly liable under TILA for inaccuracies, even absent a showing that the inaccuracies are
misleading.” Smith, 195 F.3d at 328.
The Laseters assert that they are entitled to the benefit of the three-year rescission
period because, according to them, Admirals inadequately disclosed the loan’s payment
schedule. The Truth-In-Lending statement is attached to their complaint and so it is a part
of the pleadings that this court may consider without converting the motion to dismiss to one
for summary judgment. See Fed. R. Civ. P. 10(c); Tierney v. Vahle, 304 F.3d 734, 738 (7th
Cir. 2002). That statement includes on the first page what is known as the “federal box,”
where the TILA-mandated disclosures typically are listed. See Van Jackson v. Check ‘N Go
of Ill., Inc., 193 F.R.D. 544, 548 (N.D. Ill. 2000). Although here the federal box conveys
several of the required disclosures, including the APR, finance charge, number of payments,
and amount of payments, see 15 U.S.C. § 1602(v) (listing material disclosures), it does not
provide the schedule of payments, (R. 1, Compl. Ex. C). But on the following page,
separated from the other mandated disclosures and appearing in a description of the lenders’
requirements regarding mortgage-guarantee insurance, there appears a chart listing both the
number and amount of the loan and insurance payments, and describing those payments as
being due “monthly.” (Id.) The Laseters argue that because the payment schedule appears
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outside of the federal box, separated from the other mandated disclosures, the form amounts
to a technical TILA violation.
The Laseters’ argument finds some support in the Seventh Circuit’s decision in Hamm
and in cases following it. In Hamm, the borrowers challenged a disclosure statement that
included the number and amount of payments and the date on which the first payments were
due, but gave no indication of how often payments were to be made. 506 F.3d at 527. In
reviewing the disclosures, the Seventh Circuit relied on the FRB Staff Commentary to
TILA’s regulations specifying that the lender disclose the period of payments. Id. at 528.
The Staff Commentary states that:
To meet this requirement creditors may list all of the payment due dates. They
also have the option of specifying the ‘period of payments’ scheduled to repay
the obligation. As a general rule, creditors that choose this option must
disclose the payment intervals or frequency, such as ‘monthly’ or ‘bi-weekly,’
and the calendar date the beginning payment is due.
Id. (quoting 12 C.F.R. Pt. 226, Supp. I, para. 18(g)(4)(i)). Reiterating the importance of
giving TILA a hyper-technical reading, the court held that a lender’s failure to disclose
mandated information “in the specified way, leaving the borrower to make assumptions,”
amounts to a TILA violation. Id. at 529. Accordingly, even though the court conceded that
the average borrower would understand that a mortgage with 360 payments over
approximately 30 years contemplates a monthly payment, a lender still must include “the
word ‘monthly’ alongside the number of payments.” Id. at 530. It was not enough that other
documents provided to the borrowers had referred to the monthly payment period. Id. Since
Hamm, several cases from this district have held that the failure to provide the payment
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schedule along with the other required disclosures triggers the extended rescission period.
See, e.g., Iroanyah v. Bank of America, 851 F.Supp.2d 1115, 1122 (N.D. Ill. 2012); Stewart
v. BAC Home Loans Servicing, No. 10 CV 2033, 2011 WL 862938, at *7 (N.D. Ill. March
10, 2011); Briscoe v. Deutsche Bank Nat’l Trust Co., No. 08 CV 1279, 2008 WL 4852977,
at *2 (N.D. Ill. Nov. 7, 2008); Hubbard v. Ameriquest Mortg. Co., 624 F.Supp.2d 913, 919
(N.D. Ill. 2008); Lippner v. Deutsche Bank Nat’l Trust Co., 544 F.Supp.2d 695, 700-01 (N.D.
Ill. 2008).
Although the holding of Hamm and cases following it seem to point clearly in favor
of the Laseters’ argument, there is dicta in Hamm that gives this court pause. In finding that
the absence of a specific payment schedule violates TILA, the Seventh Circuit emphasized
that if the disclosure forms “had mentioned the ‘monthly’ nature of the payments at all, we
would have a different case here altogether.” Hamm, 506 F.3d at 530. As noted above, the
document attached as Exhibit C to the Laseters’ complaint includes on what appears to be
the second page, outside of the federal box, a reference to the payments being due “monthly.”
(R. 1, Compl. Ex. C.) The term appears in a chart affiliated with a disclosure explaining the
mortgage-guaranty insurance amount included in the amount the Laseters were required to
make monthly. (Id.) Specifically, the form reads:
As a condition to the loan, the lender requires Title I mortgage-guaranty
insurance. In order to purchase said insurance, the monthly payments have
been scheduled as follows:
No. of Payments
Amount
When Due
120
185.69
MONTHLY
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Principal & Interest
120
12.24
MONTHLY
197.93
Title I Insurance
Total Payment Amount
(Id.) Thus the question becomes whether this separate reference to the payment schedule
outside the federal box makes this a “different case . . . altogether” alluded to in Hamm. 506
F.3d at 530.
In giving life to the Seventh Circuit’s direction to give TILA a hyper-technical read,
some courts have been quick to condemn material disclosures provided outside of a
disclosure form’s federal box. See, e.g., Van Jackson v. Check ‘N Go of Ill., Inc., 193 F.R.D.
at 549; Leathers v. Peoria Toyota-Volvo, 824 F.Supp. 155, 159-60 (C.D. Ill. 1993). As they
point out, TILA makes it clear that the material disclosures, including the payment schedule,
“shall be conspicuously segregated from all other terms, data, or information provided in
connection with a transaction.” 15 U.S.C. § 1638(b)(1); see also Brown v. Payday Check
Advance, Inc., 202 F.3d 987, 989 (7th Cir. 2000). The requirement to conspicuously
segregate the information is satisfied “when the creditor places all the disclosures on one side
of one document (unless there is not enough room) or groups the disclosures together within
the Federal Box.” Leathers, 824 F.Supp. at 158. By contrast, where a material term appears
on the same page as the federal box but outside the box and “in repetitive and hard to read
legalese,” the disclosure supports a claim under TILA. See Van Jackson, 193 F.R.D. at 548.
A form also may be insufficient where a required disclosure is made on the reverse side from
the federal box, in a separate context. See Donnelly v. Illini Cash Advance, Inc., No. 00 CV
094, 2000 WL 1161076, at *5 (N.D. Ill. Aug. 16, 2000). Notably, after the Laseters pointed
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to Van Jackson to argue that a disclosure outside of the federal box is insufficient, Admirals
declined to file a reply brief defending that practice.
Here, the disclosure statement attached to the complaint suggests that the payment
schedule was disclosed only in a chart on a separate page—and perhaps a separate form
entirely (it is not clear from the exhibits)—from the federal box, and in a context pertaining
to mortgage-guaranty insurance. (R. 1, Compl. Ex. C.) Although the total payment amount
listed in the chart matches the “amount of payments” listed in the federal box, even in the
chart on the second page that total is not described as being due “monthly.” (Id.) Instead,
a payment of $185.69 for “Principle & Interest” and a payment of $12.24 for “Title I
Insurance Premium” are described as being due monthly. Although it is easy to assume that
an ordinary consumer would understand that the “Total Payment Amount” listed in the chart
is the sum of the two figures listed above, and infer that the total must be paid monthly, by
omitting the word “monthly” from the total payment due, Admirals has, technically, left it
for the reader to assume that the payment total is due monthly. The Hamm decision makes
it clear that a lender may not require a borrower to make assumptions with respect to material
disclosures. 506 F.3d at 529. Giving the documents attached to the complaint a hypertechnical read, see Brown, 202 F.3d at 989, the assumption the chart requires coupled with
the fact that the term “monthly” only appears outside of and on a separate page from the
federal box, in the context of an explanation of the borrower’s obligation to purchase
mortgage-guaranty insurance, demonstrate that the lenders here failed to meet TILA’s
strictures for the conspicuous segregation of material disclosures. Accordingly, the Laseters
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have shown that they are entitled to the three-year rescission period set forth under TILA.
See 15 U.S.C. § 1635(a); 12 C.F.R. § 1026.23.
This court recognizes that this case might stretch toward the far boundary of what it
means to give TILA’s material disclosure requirements a “hypertechnical” read. But the
Seventh Circuit has been clear that hypertechnicality is the standard, which, coupled with the
holding in Hamm, binds this court to the conclusion that Admirals’s disclosure of the
payment schedule is insufficient. At the end of the day, Admirals made a choice to omit the
word “monthly” from the description of the total payments due, and to convey the schedule
with respect to the principal, interest, and insurance payments on a separate page from the
federal box. If this court were to find the form sufficient, it could encourage the practice of
separating other material disclosures from each other and placing them outside the federal
box. That would run counter to the purpose of the statute and the Seventh Circuit’s repeated
direction to hold lenders to hypertechnical compliance with TILA. See, e.g., Hamm, 506
F.3d at 529; Handy, 464 F.3d at 764. Because this court’s conclusion regarding the schedule
disclosure resolves Admirals’s argument that the TILA claim is untimely, this court need not
discuss at this time the Laseters’ alternative argument that the separation in time between the
sales contract and financing documents entitles them to the three-year rescission period.
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Conclusion
For the foregoing reasons, Admirals’s motion to dismiss count one of the complaint
is denied.
ENTER:
_________________________________
Young B. Kim
United States Magistrate Judge
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