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Vance v. National Benefit Association – Other Consumer Issues

JERRY VANCE, Plaintiff



Case No. 99 C 2627



1999 U.S. Dist. LEXIS 13846

August 26, 1999, Decided

August 26, 1999, Filed

SUBSEQUENT HISTORY: [*1] As Corrected September 28, 1999.

DISPOSITION: Defendants’ motion to dismiss granted in part and denied in part. Defendants Green Country Acceptance Corporation and Spirit Bank dismissed as defendants with regard to Count II.

COUNSEL: For JERRY VANCE, plaintiff: Cathleen M. Combs, Daniel A. Edelman, James O. Latturner, Jeffrey Scott Sell, Edelman & Combs, Chicago, IL.

For NATIONAL BENEFIT ASSOCIATION, LLC, GREEN COUNTRY ACCEPTANCE CORPORATION, ROBERT E MERRICK, TIMOTHY L MERRICK, defendants: Eugene Joseph Kelley, Jr., John L. Ropiequet, Christopher S. Naveja, George P. Apostolides, Arnstein & Lehr, Chicago, IL.

For SPIRIT BANK, N.A., defendant: Carlton Dean Fisher, Peter D. Sullivan, Hinshaw & Culbertson, Chicago, IL.

For SPIRIT BANK, N.A., defendant: Robert Hill Smeltzer, Lowis & Gellen, Chicago, IL.

JUDGES: Harry D. Leinenweber, Judge, United States District Court.

OPINIONBY: Harry D. Leinenweber


Plaintiff Jerry Vance (“Vance”) sues National Benefit Association, LLC (“NBA”); Green Country Acceptance Corporation (“GCAC”); Spirit Bank, N.A. (“Spirit Bank”); Robert E. Merrick and Timothy Merrick (collectively, the “Merrick defendants”); and John Does 1-10. Vance alleges violations of the [*2] following:

(1) The Truth in Lending Act (“TILA”), 15 U.S.C. @ 1601 et. seq. and implementing Federal Reserve Board Regulation Z, 12 C.F.R. part 226 (Count I).

(2) The Credit Repair Organizations Act (“CROA”), 15 U.S.C. @ 1679 et. seq. (Count II).

(3) Illinois and Oklahoma state law. (Counts III and IV).

NBA, GCAC, and the Merrick defendants have moved to dismiss. Spirit Bank has filed a separate motion to dismiss.


The facts may be summarized as follows: Vance is a resident of Illinois. Spirit Bank is a national bank with headquarters in Tulsa, Oklahoma. NBA is a limited liability company with a place of business in Tulsa. GCAC is a corporation with its place of business in Tulsa. The Tulsa addresses for NBA and GCAC are identical.

Vance purchased a membership in NBA. According to NBA’s Association Benefit Guide, members are entitled to various benefits, including a dental referral network, a grocery coupon program, and car rental discounts. The principal benefit of membership, however, is an unsecured Visa credit card with a starting credit limit of $ 300.

The cash price of the membership was $ 1,209. [*3] Vance signed a retail installment contract to pay the membership fee. He paid a “cash down payment” of $ 219. In fact, however, no cash changed hands. Rather, the down payment was charged to the Visa credit card issued as a benefit of NBA membership. According to the Customer Disclosure Form provided to Vance, after the $ 219 down payment was charged to the Visa card, he would have $ 36 in available credit.

The retail installment contract disclosed an Annual Percentage Rate of 18.9 percent. The Visa card application disclosed an Annual Percentage Rate of 19.9 percent.

After Vance signed the retail installment contract, the contract was assigned to GCAC.


Exhibits to the Complaint

Vance has attached a number of exhibits to his complaint. The exhibits include the disputed TILA disclosure documents and other documents relating to the transaction at issue. In Vance’s response to the motions to dismiss, he argues that the defendants “cannot rely on anything outside the complaint without turning the motion into one for summary judgment. In particular, they cannot rely on recitals in exhibits which the plaintiff attaches to the complaint and which are alleged [*4] to be implements of fraud.” Plaintiff’s Consolidated Response at 3.

As a general rule, where an exhibit contradicts an allegation in the complaint, the exhibit trumps the allegation. Northern Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 454 (7th Cir. 1998). Nevertheless, there is an exception to this rule where an exhibit is offered for reasons unrelated to its truth. Northern Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 455 (7th Cir. 1998). For example, in Southern Indiana Gun the plaintiff claimed that the defendants prevented it from holding a gun show due to their disagreement with the plaintiff’s political views. The plaintiff attached a letter written by one of the defendants as an exhibit to its complaint. In the letter the defendant suggested that the gun show was banned due to legitimate safety concerns. The plaintiffs argued that the statements in the letter should trump the allegations in the complaint. The court concluded that the letter was not introduced for its truth and therefore did not contradict the complaint: “Although plaintiffs should exercise care in attaching documents to complaints, we do not [*5] believe that they should be forced to accept as true every statement made within documents that do not by their nature imply some level of credibility.” Id. at 456.

Vance errs by concluding that the court must completely disregard the exhibits simply because the complaint alleges fraud. Under Southern Indiana Gun, a court should consider the exhibits in context rather than disregard them entirely. The court will consider the exhibits, but in doing so it will “consider why a plaintiff attached the documents, who authored the documents, and the reliability of the documents.” Id. at 455.

Jurisdiction Over the Merrick Defendants

A federal court sitting in Illinois has personal jurisdiction over a party only if an Illinois court would also have jurisdiction. Fed. R. Civ. P. 4(e). The complaint alleges that Robert Merrick is the principal officer and the principal equity owner of NBA and that he “personally devised, approved and authorized the contracting and credit practices complained of herein.” Complaint, P 8. The complaint alleges that Timothy Merrick is the president of GCAC and that he also “personally devised, approved and authorized [*6] the contracting and credit practices complained of herein.” Complaint, P 9. The plaintiff alleges on information and belief that the Merrick defendants are relatives of each other.

The Merrick defendants argue that they are protected from Illinois jurisdiction by the Illinois fiduciary shield doctrine. This doctrine holds that an individual is shielded from jurisdiction if his contact with Illinois is limited to his acts as a corporate fiduciary. Nevertheless, the fiduciary shield doctrine does not apply to senior corporate officers who are in a position to decide whether a corporation will conduct business in the state. Brujis v. Shaw, 876 F. Supp. 975, 980 (N.D. Ill. 1995). Robert Merrick is the principal officer of NBA, and Timothy Merrick is the president of GCAC. As holders of these high-ranking positions, they were in a position to decide whether GCAC and NBA would conduct business in Illinois. They are therefore not protected by the fiduciary shield.

The Merrick defendants also argue that they cannot be held liable for the alleged acts of corporations of which they are principals. The court finds this argument unpersuasive in light of FTC v. Amy Travel Service, Inc., 875 F.2d 564 (7th Cir. 1989) [*7] and a number of similar cases cited by the plaintiff. (Amy Travel involved alleged violations of the Federal Trade Commission Act. CROA violations may be prosecuted by the Federal Trade Commission as violations of the Federal Trade Commission Act. 15 U.S.C. @ 1679h(b).) Amy Travel held that an individual may be held liable for a corporation’s violations of federal consumer protection statutes if “the individual defendants participated directly in the practices or acts or had authority to control them.” Id. at 573. Vance’s allegation that the Merricks “personally devised” the challenged credit practices leads to the reasonable inference that the Merricks participated directly in the practices or had authority to control them. Id. at 573. Therefore, the court finds that it has individual jurisdiction over the Merrick defendants.

Count I

Under TILA and Regulation Z, a lender is required to make various disclosures relating to the cash down payment, annual percentage rate, finance charge, and other information. The disclosures must be made “clearly and conspicuously” and “grouped together.” 15 U.S.C. @ 1632 [*8] (a); 12 C.F.R. @ 226.17. In Count I, which is against NBA only, Vance alleges that NBA violated these disclosure requirements. Specifically, the complaint alleges that “the device of financing the ‘cash down payment’ under the retail installment contract financing the purchase of the membership agreement on a credit card to be issued pursuant to the membership agreement is a sham or subterfuge which has the effect of understating the annual percentage rate, finance charge, total of payments and total sale price.” Complaint, P 24.

In his response to the defendants’ motions to dismiss, Vance argues that by structuring the transaction as a credit card charge combined with a retail installment contract, NBA violated TILA’s prohibition against loan splitting. Loan splitting may be defined as a situation where the debtor “wanted, requested, and expected to receive a single loan, consummated in one transaction, but [the lender] documented and made disclosure for the loan as if it were two separate transactions.” In re Buckles, 189 B.R. 752, 760 (D. Minn. 1995). Loan splitting violates TILA because “the giving of two separate disclosure statements for a single loan transaction [*9] is a violation of TILA’s requirement of a single, comprehensible disclosure of the cost of credit.” Id.

Applying these principles to this case, the question is: did the credit card charge and the retail installment contract constitute one loan impermissibly split into two? The answer will have to wait for another day, as “the issue of whether one transaction or two transactions occurred is a factual determination and thus, cannot be resolved on a motion to dismiss.” Rendler v. Corus Bank, N.A., 1998 U.S. Dist. LEXIS 14246, at *22, 96 C 7351, 1998 U.S. LEXIS 14246 (N.D. Ill., Sept. 3, 1998) at *22, citing Buckles and Hemauer v. ITT Financial Services, 751 F. Supp. 1241 (W.D. Ky. 1990). Therefore, the defendants’ motion to dismiss must be denied as to Count I.

Count II

Count II alleges violations of the Credit Repair Organizations Act, 15 U.S.C. @ 1679 (“CROA”). Unlike Count I, which was against NBA only, Count II is against all of the defendants. In Count II, Vance alleges that the defendants violated 15 U.S.C. @ 1679b(a)(3) which states that no person may “make or use any untrue or misleading representations of the services [*10] of the credit repair organization.” Vance also alleges that the defendants violated 15 U.S.C. @ 1679b(a) (4) which states that no person may “engage, directly or indirectly, in any act, practice or course of business that constitutes or results in the commission of . . . a fraud or deception” in connection with the sale of the services of a credit repair organization. Two motions to dismiss this count have been filed: one by Spirit Bank and one by the other defendants.

In its motion to dismiss, defendant Spirit Bank argues that it is exempt from CROA because it is not a “credit repair organization.” The court agrees that Spirit Bank is not a “credit repair organization.” Under U.S.C. @ 1679a (3) (B) (iii), the term “credit repair organization” specifically excludes banks. n1 Nevertheless, one need not be a credit repair organization to be subject to CROA. Some of CROA’s prohibitions, such as @ 1679b(b), apply only to credit repair organizations. Other prohibitions apply to any “person.” Vance’s complaint alleges a violation of @ 1679b(a), which prohibits any “person” from engaging in certain conduct. Therefore, the court finds that Spirit Bank is subject [*11] to the CROA provision at issue here, 15 U.S.C. @ 1679b(a).

– – – – – – – – – – – – – – – – – -Footnotes- – – – – – – – – – – – – – – – – –

n1 “Credit repair organization” is defined as follows:

The term ‘credit repair organization’ –

(A) means any person who uses any instrumentality of interstate commerce or the mails to sell, provide, or perform (or represent that such person can or will sell, provide, or perform) any service, in return for the payment of money or other valuable consideration, for the express or implied purpose of –

(I) improving any consumer’s credit record, credit history, or credit rating; or

(ii) providing advice or assistance to any consumer with regard to any activity or service described in clause (I); and

(B) does not include –

(I) any nonprofit organization which is exempt from taxation under Section 501(c)(3) of Title 26;

(ii) any creditor (as defined in section 1602 of this title), with respect to any consumer, to the extent the creditor is assisting the consumer to restructure any debt owed by the consumer to the creditor; or

(iii) any depository institution (as that term is defined in Section 1813 of Title 12) or any Federal or State credit union (as those terms are defined in section 1752 of Title 12) or any affiliate or subsidiary of such a depository institution or credit union.

15 U.S.C. @ 1679a(3).

– – – – – – – – – – – – – – – – -End Footnotes- – – – – – – – – – – – – – – – – [*12]

Spirit Bank also argues that it should be dismissed as a defendant because Vance “fails to allege any specific violation of CROA” by Spirit Bank. Instead, defendants argue, Vance has impermissibly alleged that the defendants “collectively violated” CROA.

The court finds that Vance has adequately pleaded a CROA violation by Spirit Bank. The Complaint alleges that Spirit Bank agreed with NBA that NBA would sponsor members for a Spirit Bank Visa card. Complaint, P 15. CROA prohibits any person from “directly or indirectly” engaging in “any act, practice, or course of business” that results in the commission of a deception. 15 U.S.C. @ 1679b(a)(3). Agreeing with NBA to issue Spirit Bank Visa cards to NBA members constitutes at least indirect involvement in the allegedly deceptive course of business at issue in this case. The court finds that these factual allegations are specific enough to state a violation under CROA. Therefore, Vance has sufficiently pleaded a CROA claim against Spirit Bank.

In their separately filed motion to dismiss, the Merrick defendants and GCAC claim that they are exempt from CROA because they are not credit repair organizations. (The [*13] defendants do not dispute Vance’s assertion that NBA qualifies as a credit repair association.) As discussed above, this argument fails because CROA applies to persons as well as credit repair organizations.

Count III

Count III, which is against all the defendants, alleges unfair and deceptive acts and practices under the Illinois Consumer Fraud Act (“ICFA”), 815 ILCS 505/2 and the analogous Oklahoma consumer fraud statute, 15 O.S. @ 752 (1). The elements of a claim under ICFA are: ” (1) a deceptive act or practice, (2) intent on the defendants’ part that plaintiff rely on the deception, and (3) that the deception occurred in the course of conduct involving trade or commerce.” Siegel v. Levy Organization Development Co., 153 Ill. 2d 534, 180 Ill. Dec. 300, 304, 607 N.E.2d 194, 198 (Ill. 1992). ICFA claims must be pleaded with specificity pursuant to Rule 9(b) of the Federal Rules. See, e.g., Gallagher Corp. v. Massachusetts Mut. Life Ins. Co., 940 F. Supp. 176, 180 (N.D. Ill. 1996). A plaintiff must state “the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which [*14] the misrepresentation was communicated.” Id.

The defendants first argue, relying on Lanier v. Associates Finance, 114 Ill. 2d 1, 499 N.E.2d 440, 101 Ill. Dec. 852 (1986) and Weatherman v. Gary-Wheaton Bank of Fox Valley, N.A., 186 Ill. 2d 472, 1999 Ill. LEXIS 684, 239 Ill. Dec. 12, 713 N.E.2d 543 (Ill. Sup. Ct., June 17, 1999), that ICFA is preempted by TILA. Lanier and Weatherman did hold that compliance with TILA is a defense to certain claims brought under ICFA. Nevertheless, Lanier and Weatherman are inapplicable at this stage because it has not yet been determined whether the defendants complied with TILA.

The defendants next argue that ICFA only applies to the entity which directly perpetrated the alleged fraud. Defendants argue that Spirit Bank, GCAC, and the Merrick defendants did not have any direct dealings with the plaintiff, and so they cannot be held liable. The defendants do not contend that Vance has alleged insufficient direct dealings by NBA.

Under Zekman v. Direct American Marketers, 182 Ill. 2d 359, 695 N.E.2d 853, 231 Ill. Dec. 80 (1998), “knowingly receiving the benefits of another’s fraud” [*15] does not violate ICFA. 695 N.E.2d at 859. Rather, the statute covers only “actions directly done by the perpetrator of the fraud.” Id. The court concludes that the complaint does allege sufficient direct involvement by the Merrick defendants, who are alleged to have “personally devised, approved and authorized” the allegedly deceptive transactions. Complaint, P 8-9. The court also finds, however, that the complaint does not allege sufficient direct involvement by GCAC or Spirit Bank. GCAC’s only involvement was that the retail installment contract was assigned to it after the plaintiff entered into the transaction. Spirit Bank agreed to issue Spirit Bank Visa cards to NBA members. These actions may well constitute knowingly receiving the benefits of NBA’s fraud, but under Zekman such conduct does not state a violation of ICFA.

In reaching this determination that the complaint fails to state an ICFA claim against GCAC and Spirit Bank, the court notes that, as discussed above, ICFA violations must be pleaded with specificity pursuant to Rule 9 (b). If it were not for this requirement, Vance’s allegation that the defendants “jointly engaged” in intentional [*16] misrepresentation, Complaint, P 2, might have sufficed to infer direct involvement by GCAC and Spirit Bank.

In addition, the court notes that by requiring direct involvement ICFA is narrower in scope than CROA, which as discussed above covers indirect as well as direct involvement. For this reason GCAC’s and Spirit Bank’s alleged indirect involvement is sufficient to state a claim under CROA but insufficient for ICFA.

Therefore, the court finds that Spirit Bank and GCAC are entitled to dismissal of the ICFA claims against them. The Oklahoma consumer fraud statute is analogous to ICFA and so the OCPA claims against Spirit Bank and GCAC are also dismissed. NBA and the Merrick defendants remain as defendants for Count III.

Count IV

Count IV alleges unconscionability. Defendants argue that the plaintiff’s allegations do not support an unconscionability claim. Under Illinois law, “[a] contract may be treated as unconscionable where it is improvident, oppressive, or totally one-sided.” Ahern v. Knecht, 202 Ill. App. 3d 709, 150 Ill. Dec. 660, 665, 563 N.E.2d 787, 792 (Ill. App. 2 Dist. 1990). Vance has alleged that the defendants sold him a credit card on which [*17] the available credit was $ 36 for a price totaling over $ 1400. Complaint, P 2.

Spirit Bank argues that under Larned v. First Chicago Corporation, 264 Ill. App. 3d 697, 201 Ill. Dec. 572, 636 N.E.2d 1004 (Ill. App. 1 Dist. 1994) the contract cannot be found unconscionable. The court finds that this reliance on Larned is misplaced, as the only similarity between this case and Larned is that both involved credit card agreements. The allegedly unconscionable contract at issue here is far more oppressive than that in Larned, where the plaintiff alleged that a contract provision contained in a form agreement unconscionably allowed the defendant to charge credit card interest on payment due dates falling on a weekend or holiday.

In fact, Larned actually contains language supporting the plaintiff’s position. The Larned court held that “an unconscionable bargain is one which no reasonable person would make and which no reasonable person would accept.” Id. Selling a credit card on which the available credit was $ 36 for a price totaling over $ 1400 could fit this definition. The court therefore finds that the complaint states a claim for unconscionability. [*18] Cf. Ahern at 202 Ill. App. 3d 709, 150 Ill. Dec. at 665-666, 563 N.E.2d at 792-793 (charging $ 762 to repair air conditioner during heat wave was unconscionable).


Therefore, for the foregoing reasons, the motion to dismiss filed by Spirit Bank and the motion to dismiss filed by GCAC, NBA, and the Merrick defendants are GRANTED IN PART as follows: GCAC and Spirit Bank are dismissed as defendants with regard to Count III. All other claims in the two motions to dismiss are DENIED.


Harry D. Leinenweber, Judge

United States District Court

Date: August 26, 1999