Edwards v. Your Credit Inc

• Court: Court of Appeals for the Fifth Circuit
• Decided: July 27, 1998
• Docket: 97-30826
• Status: Published

Opinion

UNITED STATES COURT OF APPEALS FIFTH CIRCUIT

____________

No. 97-30826 ____________

CONNIE EDWARDS,

Plaintiff-Appellant,

versus

YOUR CREDIT INC,

Defendant-Appellee.

Appeal from the United States District Court for the Middle District of Louisiana

July 21, 1998

Before GARWOOD, SMITH, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Connie Edwards (“Edwards”) appeals the district court’s grant

of summary judgment in favor of Your Credit, Inc. (“Your Credit”).

Edwards alleges that Your Credit violated the Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1601 et seq., and Regulation Z, 12 C.F.R.

§ 226, by improperly disclosing an insurance premium on her loan

financing applications. She contends that Your Credit should have

included the premium in the finance charge rather than in the

amount financed on the applications, an error that allegedly

resulted in the understatement of the finance charge and the annual

percentage rate (“APR”). Finding a genuine dispute of material fact to exist, we reverse and remand.

I

Edwards financed the purchase of a TV and VCR on two separate

occasions with Your Credit, a consumer finance company. Your

Credit makes small loans to consumers to finance the purchase of

consumer goods at high interest rates, and in return, takes back a

security interest in the item financed. Your Credit does not file

a Uniform Commercial Code-1 (“UCC”) financing statement to perfect

its security interest; instead, it purchases nonfiling insurance.

This nonfiling insurance, as we discuss below, protects Your Credit

from losses sustained solely as a result of its failure to file a

financing statement.1

On each occasion, Edwards purchased an item costing $100.

Each time, when Edwards completed a loan application, Your Credit

disclosed to her that it had added $7.38 as a premium for credit

life insurance and $20 as a premium for nonfiling insurance to the

item’s cost as part of the amount financed, for an amount financed

of $127.38. Based on an APR of 168.89 percent, Your Credit then

calculated the finance charge on this $127.38, which came to

$39.95. Thus, Edwards paid a total of $167.33 on each occasion, or

$67.33 in financing costs for each $100 purchase.

Using the $20, Your Credit paid a premium under a master

nonfiling insurance policy (the “policy”) that Voyager Property and

Casualty Insurance Company (“Voyager”), a separate and unrelated

1 This opinion contrasts nonfiling insurance with general default insurance, which, for purposes of this opinion, “protect[s] the creditor against the consumer’s default or other credit loss.” 12 C.F.R. § 226.4(b)(5). insurance company, had previously issued it. The policy provided,

in pertinent part, that it covers losses sustained where Your

Credit is damaged through being prevented from obtaining possession

of the secured property or enforcing its rights under the security

agreement “solely as the result of the failure of the Insured duly

to record or file the Instrument with the proper public officer or

public office.” Voyager’s agent, Consumer Insurance Associates,

Inc. (“CIA”), administered the policy. The Administrative Services

Agreement between Voyager and CIA gave CIA the “sole right to pay,

compromise, reject or deny any such [nonfiling] claim.”

Edwards filed a class action lawsuit alleging that Your Credit

had violated TILA, Regulation Z, and state law2 by improperly

disclosing the nonfiling insurance premium in the amount financed.

She alleged that by including the premium in the amount financed

rather than in the finance charge, Your Credit had understated the

finance charge and the APR. If Your Credit had properly included

the premium in the finance charge, Edwards alleged that the APR

would have been 263 percent, rather than 168.89 percent. Because

Your Credit calculated the finance charge based on the amount

financed, Edwards also argued that it improperly charged her

interest on the premium when it included the premium in the amount

financed.

Edwards premised her claim on two alternative theories. She

first argued that although the policy required Voyager to pay for

2 Edwards later dismissed her state law claims when she filed an amended complaint.

-3- losses sustained solely as a result of Your Credit’s failure to

file a financing statement, the policy did not reflect the actual

practices of Your Credit and Voyager because Your Credit routinely

submitted and Voyager (through CIA) routinely paid claims for any

loss, no matter what the cause. In other words, Edwards argued

that the claims practices of Your Credit and Voyager transformed

the policy into a general default insurance policy for purposes of

the proper TILA disclosure method, and that TILA therefore required

that the premium be included in the finance charge. Second,

Edwards claimed that Voyager and Your Credit had an informal

understanding pursuant to which Voyager would cancel the policy if

Your Credit submitted aggregate claims valued in excess of 89.25

percent of the aggregate premiums paid. This 89.25 percent figure

allegedly served as an informal “stop-loss” provision and prevented

the risk of loss from shifting from Your Credit to Voyager. No

risk having shifted, Edwards reasoned, Your Credit had effectively

retained the premium as a sort of self-insurance or bad-debt

reserve, which again required Your Credit to include it in the

finance charge.

Prior to ruling on whether to certify the suit as a class

action, the district court granted summary judgment in favor of

Your Credit. The court first noted that the policy’s language

unambiguously established that the policy covered losses due to the

failure to file a financing statement. It then purported to look

behind the policy’s language to determine whether Voyager and Your

Credit’s claims practices had “reformed” the policy into general

-4- default insurance, either through mutual error or fraud. It

concluded that although Voyager may have paid claims for which it

was not liable, no mutual error or fraud had occurred because both

Voyager and Your Credit had intended the policy to cover nonfiling

insurance. The court also looked at summary judgment record

deposition testimony to determine that the 89.25 percent figure was

only an internal figure that Voyager used to calculate its expected

profits and losses and not an informal stop-loss agreement.

Finding no evidence that Your Credit was aware of this figure, the

court rejected this argument as well, and granted summary judgment

in favor of Your Credit. Because the court concluded that Your

Credit did not violate TILA, it did not address Your Credit’s

arguments that the McCarran-Ferguson Act, 15 U.S.C. § 1012(b),

preempted this action. Edwards’ timely appeal followed.

II

We review a district court’s grant of summary judgment de

novo. See New York Life Ins. Co. v. Travelers Ins. Co., 92 F.3d

336, 338 (5th Cir. 1996). We also review district court

determinations of state law de novo. See Salve Regina College v.

Russell, 499 U.S. 225, 239, 111 S. Ct. 1217, 1221, 113 L. Ed. 2d

190 (1991). Summary judgment is appropriate when the record

discloses “that there is no genuine issue of material fact and that

the moving party is entitled to a judgment as a matter of law.”

FED. R. CIV. P. 56(c). The moving party bears the initial burden

of identifying those portions of the pleadings and discovery in the

record that it believes demonstrate the absence of a genuine issue

-5- of material fact, but it is not required to negate elements of the

nonmoving party’s case. See Celotex Corp v. Catrett, 477 U.S. 317,

325, 106 S. Ct. 2548, 2554, 91 L. Ed. 2d 265 (1986). Once the

moving party meets this burden, the nonmoving party must set forth

specific facts showing a genuine issue for trial and not rest upon

the allegations or denials contained in its pleadings. See FED. R.

CIV. P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-

57, 106 S. Ct. 2505, 2514, 91 L. Ed. 2d 202 (1986). Factual

controversies are construed in the light most favorable to the

nonmovant, but only if both parties have introduced evidence

showing that an actual controversy exists. See Little v. Liquid

Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc).

III

Congress enacted TILA to promote the “informed use of credit

. . . [and] an awareness of the cost thereof by consumers” by

“assur[ing] a meaningful disclosure of credit terms so that the

consumer will be able to compare more readily the various credit

terms available to him.” 15 U.S.C. § 1601(a); see also Beach v.

Ocwen Fed. Bank, __ U.S. __, 118 S. Ct. 1408, 1409-10, 140 L. Ed.

2d 566 (1998); Mourning v. Family Publications Serv., Inc., 411

U.S. 356, 363-69, 93 S. Ct. 1652, 1657-60, 36 L. Ed. 2d 318 (1973);

Fairley v. Turan-Foley Imports, Inc., 65 F.3d 475, 479 (5th Cir.

1995). TILA requires a lender to disclose, inter alia, three

pieces of information to a borrower: the amount financed, the

finance charge, and the APR. See 15 U.S.C. § 1638. The APR is

calculated by reference to the duration of a loan, its payment

-6- terms, and the finance charge. See 15 U.S.C. § 1606; First Acadiana

Bank v. FDIC, 833 F.2d 548, 550 (5th Cir. 1987).

TILA defines the finance charge as the “sum of all charges,

payable directly or indirectly by the person to whom the credit is

extended, and imposed directly or indirectly by the creditor as an

incident to the extension of credit.” 15 U.S.C. § 1605(a); 12

C.F.R. § 226.4(a). A finance charge includes a “[p]remium or other

charge for any guarantee or insurance protecting the creditor

against the obligor’s default or other credit loss.” § 1605(a)(5);

12 C.F.R. § 226.4(b)(5). Some charges do not have to be included

in the finance charge, including filing fees paid to public

officials to perfect a security interest, see § 1605(d)(1), and the

“premium payable for any insurance in lieu of perfecting any

security interest otherwise required by the creditor in connection

with the transaction, if the premium does not exceed the fees and

charges . . . which would otherwise be payable.” § 1605(d)(2); 12

C.F.R. § 226.4(e)(2). “If a creditor collects and simply retains a

fee as a sort of self-insurance against nonfiling it may not be

excluded from the finance charge.” Regulation Z, Official Staff

Interpretation, 12 C.F.R. § 226, Supp. I, at 312 (1995) (emphasis

in original).

Understating the finance charge is a “type of fraud that goes

to the heart of the concerns that actuate the Truth in Lending

Act.” Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283, 287

(7th Cir. 1997) (Posner, C.J.). “To promote the Act’s purpose of

protecting consumers, our court has made clear that creditors must

-7- comply strictly with the mandates of the TILA and Regulation Z.”

Fairley, 65 F.3d at 479; Smith v. Chapman, 614 F.2d 968, 971 (5th

Cir. 1980); McGowan v. King, Inc., 569 F.2d 845, 848 (5th Cir.

1978) (noting that TILA is designed to create enforcement through

a system of private attorneys general). “[T]he ‘remedial scheme of

TILA is designed to deter generally illegalities which are only

rarely uncovered and punished, and not just to compensate borrowers

for their actual injuries in any particular case.’” Fairley, 65

F.3d at 480 (quoting Williams v. Public Fin. Corp., 598 F.2d 349,

356 (5th Cir. 1979)).

IV

Your Credit initially contends that the McCarran-Ferguson Act

(“McCarran Act”), 15 U.S.C. § 1012(b), bars our consideration of

the merits of this case. The McCarran Act provides: “[n]o Act of

Congress shall be construed to invalidate, impair, or supersede any

law enacted by any State for the purpose of regulating the business

of insurance . . . unless such Act specifically relates to the

business of insurance.” § 1012(b). “The McCarran-Ferguson Act

establishes a form of inverse preemption, letting state law prevail

over general federal rules))those that do not ‘specifically

relate[] to the business of insurance.’” NAACP v. American Family

Mut. Ins. Co., 978 F.2d 287, 293 (7th Cir. 1992) (quoting

§ 1012(b)). A state law preempts a federal statute under the

McCarran Act if: (1) the federal statute does not “specifically

relate[] to the business of insurance;” (2) if the acts challenged

are part of the “business of insurance;” (3) if the state has

-8- enacted a law “for the purpose of regulating insurance;” and (4) if

application of the federal statute would “invalidate, impair, or

supersede” a state law.3 See Cochran v. Paco, Inc., 606 F.2d 460,

464 (5th Cir. 1979). It is undisputed that TILA does not

“specifically relate[] to the business of insurance.” Id.

Without expressing any view as to whether the other prongs

have been met, the critical issue in this case is whether Your

Credit can bring forward any state laws that application of TILA

may invalidate, impair, or supersede. The leading case construing

the meaning of the phrase “invalidate, impair or supersede” is SEC

v. National Securities, Inc., 393 U.S. 453, 462-63, 89 S. Ct. 564,

569-70, 21 L. Ed. 2d 668 (1969). In that case, the SEC sought to

unwind a merger between two insurance companies based on

misstatements in their proxy statements, although the state

insurance commissioner had previously authorized the merger. The

3 The Seventh Circuit recently suggested that phrasing the test for McCarran Act preemption in four parts is erroneous in light of United States Dep’t of the Treasury v. Fabe, 508 U.S. 491, 501, 113 S. Ct. 2202, 2208, 124 L. Ed. 2d 449 (1993). See Autry v. Northwest Premium Servs., 1998 WL 237426, at *10-11 (7th Cir. May 13, 1998). The Seventh Circuit uses a three-part McCarran Act preemption test. Id. Without mentioning our own four-part test set out in Cochran, 606 F.2d at 464, we also recently stated that a state law preempts a federal law under the McCarran Act if (1) the federal law in question does not specifically relate to the “business of insurance;” (2) the state law was enacted for the “purpose of regulating the business of insurance;” and (3) the federal law may “invalidate, impair, or supersede” the state statute. See Munich Am. Reinsurance Co. v. Crawford, 141 F.3d 585, 590 (5th Cir. 1998). However, we then proceeded to examine what was formerly prong two of the Cochran test as part of the revised second prong; thus, in Munich we essentially combined prongs two and three of the Cochran McCarran Act preemption test. Because resolution of this issue is unnecessary to the outcome, we express no opinion as to what effect, if any, Fabe may have had on our decision in Cochran.

-9- insurers sought to use the McCarran Act as a shield, arguing that

failure to preempt the SEC’s actions would impair, invalidate, or

supersede the state insurance commissioner’s authorization of the

merger. The Supreme Court refused to preempt the SEC’s actions,

noting that any impairment would be “indirect” because “Arizona has

not commanded something which the Federal Government seeks to

prohibit.” Id. at 463, 89 S. Ct. at 570. The Court also found that

the federal interest in protecting shareholders was compatible with

the state interest in protecting policyholders, and that the

federal and state laws were enacted to serve different ends,

further eliminating any possible impairment. Id. Thus, following

the Supreme Court’s guidance, we examine whether the conflict

between state and federal law is “direct” and the purposes for

which the state and federal laws in question were enacted. Id.

Your Credit presents several state laws that it alleges

application of TILA may invalidate, impair, or supersede. The

first two, LA. REV. STAT. ANN. § 9:3516(4) and § 9:3549, are part of

the Louisiana Consumer Credit Law, LA. REV. STAT. ANN. §§ 9:3501 et

seq. Section 9:3516(4) provides that the “[a]mount financed also

includes premiums payable for insurance procured in lieu of

perfecting a security interest otherwise required by the creditor

. . . if the premiums do not exceed the fees and charges which

would otherwise be payable.” Because this section is virtually

identical to § 1605(d)(2) of the TILA and § 226.4(e)(2) of

Regulation Z, we fail to see how application of TILA may

-10- invalidate, impair, or supersede it.4 See National Sec., 393 U.S.

at 463, 89 S. Ct. at 570; NAACP, 978 F.2d at 295 (“Duplication

[between a state and federal law] is not conflict.”). Next,

§ 9:3549 provides that “[a]ny gain or advantage to the extender of

credit . . . from such insurance or its provisions or sale shall

not be considered as a . . . loan finance charge in violation of

this chapter in connection with any contract or agreement made

under this part.” Section 9:3549 does not define the meaning of

“such insurance,” and no courts have interpreted this section.

“This part,” however, appears to refer to Part VI of the Louisiana

Consumer Credit Law, wherein § 9:3549 is found. Part VI covers

“credit life insurance, credit dismemberment insurance, and credit

health and accident insurance.” § 9:3542(A). Since nonfiling

insurance is not one of the types of insurance listed in

§ 9:3542(A), the phrase “such insurance” in § 9:3549 would not

appear to cover nonfiling insurance. Hence, this section is simply

inapplicable.5

4 Your Credit also contends that because § 9:3516(4) approves nonfiling insurance, we should pretermit our inquiry at this point. Your Credit’s argument misses the mark. Whether Louisiana approves nonfiling insurance is not in question; what is in question is whether the premium for which Your Credit charged Edwards was for nonfiling or general default insurance. 5 Although neither party has brought L A . R EV. STAT. ANN. § 9:3516(23)(a) (i) to our attention, we note that Louisiana amended the definition of “loan finance charge” in 1997 by deleting the phrase “premium or other charge for any guarantee or insurance protecting the lender against the consumer’s default or other credit loss.” 1997 La. Acts 1033 § 1. Because Edwards financed her purchases in January, 1996, this amendment, if it has any effect, would only matter if it were to apply retroactively. No legislative history exists to indicate whether the amendment was intended to have retroactive effect. Louisiana courts have

-11- Our conclusions with regard to §§ 9:3516(4) and 9:3549 are

strengthened by our finding with regard to Your Credit’s next

argument))namely, Your Credit and amici Consumer Credit Insurance

Association (“CCIA”) argue that Louisiana has created a

comprehensive regulatory scheme through the Louisiana Consumer

Credit Law, and that this regulatory scheme may be disrupted if

TILA is not preempted. See Crawford v. American Title Ins. Co.,

518 F.2d 217, 218 (5th Cir. 1975) (“The McCarran Act renders the

federal antitrust laws inapplicable when state legislation

generally proscribes, permits or otherwise regulates the conduct in

question and authorizes enforcement through a scheme of

administrative supervision.”). Our review of Louisiana case law

suggests that Louisiana has not, in fact, regulated the conduct in

question. “The basic difference between the federal and state laws

is that the Truth in Lending [Act] is a disclosure law whereas the

[Louisiana Consumer Credit Law] governs the essentials of the

transaction itself.” Reliable Credit Corp. v. Smith, 418 So. 2d

1311, 1314 n.2 (La. 1982); see also Dengel v. Hibernia Nat. Bank of

New Orleans, 539 So. 2d 947, 949 (La. Ct. App. 1989) (“Both sides

agree that Louisiana has no disclosure requirements.”); Kathleen M.

Overcash, Note, Usury and Consumer Credit Law in Louisiana, 53

TULANE L. REV. 1439, 1462-63 & n.175 (1979). As TILA and state law

indicated that the statute in effect at the time the parties enter into the transaction is the statute that should be applied to determine whether the statute has been violated. See Plan Inv. of New Orleans, Inc. v. Fiffie, 405 So. 2d 1094, 1095 (La. Ct. App. 1980). Accordingly, we will not consider what effect, if any, this amendment may have.

-12- were enacted for different purposes to serve different ends, no

direct impairment exists. See also United States v. Cavin, 39 F.

3d 1299, 1305 (5th Cir. 1994) (holding that the McCarran Act did

not strip federal court of jurisdiction over a criminal prosecution

for mail fraud by operators of an insurance business even though

Louisiana state insurance regulators also sought criminal

convictions for the same conduct).

Finally, CCIA presents the Louisiana Unfair Trade Practices

Law (“LUTPL”),6 LA. REV. STAT. ANN. § 22:1211 et seq., for our

consideration. It reasons that since LUTPL may also cover the acts

complained of here and LUTPL does not provide a private cause of

action, if TILA and its private cause of action are not preempted,

Louisiana’s choice not to provide a private remedy under LUTPL may

be invalidated, impaired, or superseded. We recently noted that

the “precise degree to which a state statute may be impaired so as

to trigger the McCarran-Ferguson Act is not well settled.” Munich

Am. Reinsurance Co. v. Crawford, 141 F. 3d 585, 595 (5th Cir.

1998). Although the circuits have split on whether McCarran Act

preemption arises where both state and federal law prohibit the

same action but the state does not provide a private cause of

6 CCIA also suggests that LUTPL may provide an alternative basis for McCarran Act preemption because Louisiana has chosen to regulate deceptive trade practices. We have previously rejected this precise argument in FTC v. Dixie Finance Co., 695 F.2d 926, 930 (5th Cir. 1983), albeit under the second prong of McCarran Act preemption test set forth in Cochran, 606 F.2d at 464. The analysis set forth in Dixie Finance is equally applicable in this case, and for the sake of brevity, we will not repeat it.

-13- action,7 we have no occasion to address this question here for two

reasons. First, CCIA mischaracterizes Louisiana law. Louisiana

courts have not adopted a unified position as to whether LUTPL

includes a private right of action. Compare Herndon & Assocs.,

Inc. v. Gettys, 659 So. 2d 842, 846 n.3 (La. Ct. App. 1995)

(rejecting contention that the “commissioner has exclusive

jurisdiction over allegations of unfair practices in the insurance

industry”) and Citizens Bank & Trust Co. v. West Bank Agency, Inc.,

540 So. 2d 440, 443 (La. Ct. App. 1989) (same), with Clausen v.

Fidelity & Deposit Co. of Maryland, 660 So. 2d 83, 86 (La. Ct. App.

1995) (finding no private cause of action to exist under LUTPL

where no valid, underlying and substantive claim exists upon which

insurance coverage could be based); see also Tatum v. Colonial

Lloyds Ins. Co., 702 So. 2d 1076, 1077 (La. Ct. App. 1997) (stating

that Clausen applies only where no valid, underlying and

substantive insurance claim can be brought). Even if no private

7 The First, Fourth, Seventh, and Ninth Circuits hold that if a practice is illegal under both state and federal law but federal law provides for a stronger remedy, the McCarran Act does not preempt the federal law. See Villafane-Neriz v. FDIC, 75 F.3d 727, 735-36 (1st Cir. 1996) (Federal Deposit Insurance Act); Merchants Home Delivery Serv., Inc. v. Frank B. Hall & Co., 50 F.3d 1486, 1492 (9th Cir. 1995) (RICO); NAACP, 978 F.2d at 295-97 (holding that McCarran Act did not preempt application of Fair Housing Act against redlining by insurance companies where state law outlawed the practice but provided no private remedy); Mackey v. Nationwide Ins. Cos., 724 F.2d 419, 421 (4th Cir. 1984) (same). The Eighth Circuit has found the McCarran Act preempts a federal law when the federal remedy is stronger, see Doe v. Norwest Bank of Minnesota, N.A., 107 F.3d 1297, 1307 (8th Cir. 1997) (RICO), while the Sixth Circuit has adopted both positions. Compare Kenty v. Bank One, Columbus, N.A., 92 F.3d 384, 393 (6th Cir. 1996) (RICO) with Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1363 (6th Cir. 1995) (Fair Housing Act).

-14- right of action exists under LUTPL, however, the contention that

Louisiana has a reasoned policy against allowing private suits

based on fraud and misrepresentations by insurance companies is

incorrect. Louisiana permits private fraud and misrepresentation

actions against insurance companies. See Morlte v. Certified

Lloyds, 569 So. 2d 1120, 1124 (La. Ct. App. 1990); see also Gettys,

659 So. 2d at 846 n.2. Since Louisiana has not seen fit to

prohibit these suits, CCIA’s argument that remedies under LUTPL and

TILA differ significantly enough to potentially give rise to

McCarran Act preemption is meritless. See Sabo v. Metropolitan Life

Ins. Co., 137 F.3d 185, 195 (3rd Cir. 1998) (finding no McCarran

Act preemption because even though a Pennsylvania statute similar

to LUTPL did not contain a private cause of action, state courts

had held that common law actions for fraud and misrepresentation

covered the same ground).

We have found no state enactment that might be impaired,

invalidated, or superseded by the application of TILA. As such, the

McCarran Act does not preempt TILA here, and we turn to the merits.

V

A

The district court held that the language of the policy

unambiguously created nonfiling insurance. It then treated Edwards’

argument that the claims practices of Your Credit transformed the

policy into general default insurance as an argument that the

policy had been reformed, which it stated may occur in the case of

either fraud or mutual error. Finding neither present, the court

-15- rejected Edwards’ argument. The court concluded that “[i]f Voyager

is paying claims under the policy for which it is not liable, then

Voyager has a cause of action against Your Credit to recover these

claims. Voyager’s decision to pay a claim it may not be required

to pay does not constitute a violation of TILA or Regulation Z.”

On appeal, Edwards contests the district court’s conclusion that

her argument should be analyzed as sounding in reformation. She

renews her contention that Your Credit’s claims practices

transformed the policy into one insuring against general default.

We agree with the district court that the policy’s language

unambiguously created a nonfiling insurance policy. See American

Aviation & Gen. Ins. Co. v. Georgia Telco Credit Union, 223 F.2d

206, 207 (5th Cir. 1955). We disagree, however, with the court’s

conclusion that Edwards’ argument sounds in reformation.

Reformation is an equitable remedy that may be used when a contract

between the parties fails to express their true intent, either

because of mutual mistake or fraud. See, e.g., Richard v. United

States Fidelity & Guar. Co., 175 So. 2d 277, 288 (La. 1965).

Reformation might apply, for example, if Your Credit submitted a

claim arising as a result of a general default and Voyager denied

the claim. Your Credit might then argue that the policy should be

reformed because the parties intended to write a general default

policy, although the policy, as actually written, covered losses

due solely to Your Credit’s failure to file a financing statement.

Edwards, however, contends that Your Credit and Voyager

deliberately structured the form of the policy in stark contrast to

-16- its substance to take advantage of consumers for their mutual

benefit. Such an argument is akin to the substance-over-form

doctrine in tax law in which we look past the labels the parties

give to a structure to determine its economic reality. See Gregory

v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 267, 79 L. Ed. 596

(1935) (holding that the economic substance of a transaction rather

than its form determines its tax treatment); Waterman S.S. Corp.

v. Commissioner, 430 F.2d 1185, 1192 (5th Cir. 1970) (“[C]ourts

will look beyond the superficial formalities of a transaction to

determine the proper tax treatment.”), overruled on other grounds,

Utley v. Commissioner, 906 F.2d 1033, 1037 n.7 (5th Cir. 1990).

The Supreme Court and many other courts, including this one, have

applied the substance-over-form doctrine to consumer finance law.

See, e.g., Mourning, 411 U.S. at 366 n.26, 93 S. Ct. at 1659 n.26;

Meyers v. Clearview Dodge Sales, Inc., 539 F.2d 511, 515 (5th Cir.

1976) (“[A]ppellant’s argument elevates form over substance in an

effort to avoid the realities of the credit transaction.”); see

also Adiel v. Chase Fed. Sav. & Loan Ass’n, 810 F.2d 1051, 1053

(11th Cir. 1987) (same); Hickman v. Cliff Peck Chevrolet, Inc., 566

F.2d 44, 46 (8th Cir. 1977) (“The [Truth in Lending] Act is

remedial in nature, and the substance rather than the form of

credit transactions should be examined in cases arising under

it.”). Thus, the substance-over-form doctrine provides the proper

framework for analyzing this case.8

8 At oral argument, amici CCIA (appearing on behalf of Your Credit) argued that nonfiling insurance is a special form of general default insurance, and that claims under each are

-17- 1

At first glance, Edwards’ argument))that Your Credit should

have disclosed the premium in the finance charge rather than

disclosing it in the amount financed))is difficult to comprehend.

After all, Edwards knew that Your Credit was charging her for

nonfiling insurance, even if Your Credit included the premium in

the wrong category. This apparent difficulty with Edwards’

argument has puzzled more than just the district court in this

case. Although no court of appeals has addressed whether a

creditor’s claims practices can convert nonfiling insurance into

general default insurance for purposes of the proper method of TILA

disclosure, state and federal district courts have reached varying

conclusions on this question. Courts that have applied a substance-

over-form analysis to look beyond the express terms of a policy to

the surrounding circumstances have tended to find questions of

material fact preventing summary judgment or have found violations

of TILA, Regulation Z, and in some cases, state law.9 See Dixon v.

differentiated only by the basis for the claim. Assuming, arguendo, that CCIA’s argument is correct, we can determine whether a given policy should be classified as general default insurance or nonfiling insurance only by looking at the policy language and the basis of claims filed under it. By CCIA’s own argument, therefore, we must look behind the policy’s language to Your Credit’s claims practices to determine whether Edwards’ arguments have merit. 9 Some of these cases have involved purchase money security interests (“PMSIs”) on consumer goods, which are automatically perfected without the need to file a financing statement. See, e.g., LA. REV. STAT. ANN. § 10:9-302(1)(d). Although a loss solely due to a failure to file a financing statement can thus never occur on a PMSI, creditors in some of the above cases have charged debtors for nonfiling insurance. See, e.g., Myers v. W.S. Badcock Corp., No. 94-331-CA, slip op. at 4 (Fla. Cir. Ct. 1995).

-18- S & S Loan Serv. of Waycross, Inc., 754 F. Supp. 1567, 1574-75

(S.D. Ga. 1990) (finding that claims practices of insurer and

insured created a material question of fact as to whether policy

labeled as nonfiling insurance was in fact general default

insurance); Johnson v. Aronson Furniture Co., No. 96-C-117, 1997 WL

160690, at *4 (N.D. Ill. Mar. 31, 1997) (order denying motion to

dismiss); Kirby v. Heilig-Meyers Furniture Co., No. 2:95-CV-135PG,

slip op. at 2 (S.D. Miss. Oct. 31, 1996) (order denying summary

judgment on TILA claims); Walmsley v. Mercury Fin. Corp., No. 92-

433-CIV-MARCUS, slip op. at 8-13 (S.D. Fla. Sept. 10, 1993) (order

denying motion to dismiss); Myers v. W.S. Badcock Corp., No. 94-

331-CA, slip op. at 4-6 (Fla. Cir. Ct. Nov. 22, 1995), aff’d 696

So. 2d 776, 783-84 (Fla. Dist. Ct. App. 1996); Whitson v. Warehouse

Home Furnishings Distribs., Inc., CV-94-177, slip op. at 10-14

(Ala. Cir. Ct. Aug. 17, 1995) (“Whitson I”), aff’d in relevant

part, 1997 WL 626108, at *9-12 (Ala. Oct. 10, 1997) (“Whitson II”).

By contrast, courts that have only looked at a policy’s express

terms have tended to reject similar arguments to those presented by

Edwards here. See, e.g., Mitchell v. Industrial Credit Corp., 898

F. Supp. 1518, 1527-28, 1531 (N.D. Ala. 1995); In re Pinkston, 183

B.R. 986, 989-90 (Bankr. S.D. Ga. 1995). Neither Mitchell nor

Pinkston, however, analyzed the provisions of UCC Article 9, which

undercuts their persuasive authority. See Mitchell, 898 F. Supp.

at 1531; Pinkston, 183 B.R. at 989-90.

Because nonfiling insurance generally covers losses due solely

to a secured creditor’s failure to file a financing statement, it

-19- is important to clearly understand when such a loss can occur. As

commentators have noted, nonfiling insurance covers a very narrow

risk. See Jeffrey Langer & Kathleen Keest, Interest Rate Regulation

Developments in 1995: Continuing Liberalization of State Credit

Card Laws and “Non-Filing” Insurance as “Interest” Under State

Usury Laws, 51 BUS. LAW. 887, 895 (1996) (“The purpose of non-filing

insurance is to protect lenders against adverse consequences of

failing to perfect their security interest by public filing. This

is a very limited risk, as it is triggered only when another

secured party obtains priority as a result of the creditor’s

failure to record its lien.”). Full understanding of nonfiling

insurance, however, comes only from careful analysis of UCC Article

9, and, in our case, Louisiana’s enactment thereof.10

In Louisiana, as elsewhere, two steps are needed to create a

fully enforceable security interest. First, a security interest

attaches in the property collateralized when a debtor signs a

security agreement or financing statement containing a description

of the collateral for which value has been given and in which the

debtor has rights. See LA. REV. STAT. ANN. §§ 10:9-203(1), 9-402(1).

Second, that security interest is perfected (for our purposes) when

the creditor files a copy of the security agreement or financing

statement with the appropriate public officials. See LA. REV. STAT.

ANN. §§ 10:9-302(1), -303(1), -402(1), -403. By definition,

therefore, a secured creditor who does not file a financing

10 With the exception of UCC § 9-503, Louisiana statutes correspond to the UCC for all purposes relevant to this decision.

-20- statement is unperfected. The distinction between perfected and

unperfected secured creditors becomes important in § 10:9-312(5),

which provides that between two perfected secured creditors, the

creditor that perfects first in time receives priority.11 See LA.

REV. STAT. ANN. § 10:9-312(5)(a). Between two unperfected creditors,

the creditor whose security interest attaches first in time has

priority, § 10:9-312(5)(b), and in the case of a perfected creditor

and an unperfected creditor, the perfected creditor has priority.

See LA. REV. STAT. ANN. § 10:9-301(1)(a). One final note: Article 9

treats consumers somewhat differently than commercial entities.

The most important of these differences for our purposes arises in

§ 10:9-204(2), which limits the operation of after-acquired

property clauses on consumer goods to property acquired within ten

days after the secured party gives value for the item.12 See id.

11 Section 10:9-312(5) provides:

[P]riority between conflicting security interests in the same collateral shall be determined according to the following rules:

(a) Conflicting security interests rank according to priority in time of filing or perfection. Priority dates from the time a filing is first made covering the collateral or the time the security interest is first perfected, whichever is earlier, provided that there is no period thereafter when there is neither filing nor perfection.

(b) So long as conflicting security interests are unperfected, the first to attach has priority.

Id. 12 Section 10:9-204(2) provides that “[n]o security interest attaches under an after-acquired property clause to consumer goods other than accessions [] when given as additional security unless the debtor acquires rights in them within ten days after the secured party gives value.” Id. “Consumers goods” are goods that

-21- With this discussion of Article 9 as a springboard, it is

apparent that nonfiling insurance (such as the policy at issue

here) may cover losses sustained in three possible ways. If another

secured creditor subsequently files a financing statement covering

goods previously financed by Your Credit, such a loss may be

covered because the combined operation of §§ 10:9-301(1)(a) and

-312(5) accords priority to the creditor that perfects its security

interest first, and Your Credit would have had priority save for

its failure to file a financing statement.13 §§ 10:9-301(1)(a),

-312(5)(a); see also Walmsley, No. 92-433-CIV-MARCUS, slip op. at

3 n.1 (“[W]here another creditor has filed against the same

collateral, and the debtor defaults, Mercury is in a worse position

by its failure to file, because its claim is subordinate to the

lien creditor.”). A covered loss may also occur when a debtor

sells an item financed by Your Credit to another consumer (such as

at a garage sale) and does not inform the purchaser that the item

is covered by a security interest, because under § 10:9-307(2),

Your Credit’s security interest would have been effective against

the purchaser if Your Credit had filed a financing statement.14 Id.

are “used or bought for use primarily for personal, family or household purposes.” LA. REV. STAT. ANN. § 10:9-109(1). 13 This analysis assumes that if a good is repossessed and sold, the proceeds from its sale are insufficient to satisfy the debtor’s obligations to both creditors. 14 Section 10:9-307(2) provides that “[i]n the case of consumer goods, a buyer takes free of a security interest even though perfected if he buys without knowledge of the security interest, for value and for his own personal, family, or household purposes unless prior to the purchase the secured party has filed a financing statement covering such goods.” Id.

-22- Finally, where a debtor declares bankruptcy and Your Creditor’s

secured interest would not have been avoidable if Your Credit had

filed a financing statement, a covered loss may occur.15 11 U.S.C.

§ 544(a); LA. REV. STAT. ANN. § 10:9-301(3). In other instances,

however, whether a loss may be covered depends upon the facts of

the case. For example, if Your Credit financed a purchase for a

consumer on whom another secured lender had previously filed a

financing statement covering all of the consumer’s goods, Your

Credit would have priority as to the goods it financed if more than

ten days had elapsed between the time when the other lender filed

the financing statement and Your Credit financed the purchase.

§ 10:9-204(2). In some circumstances, however, there can be no loss

due to Your Credit’s failure to file. Two such instances occurs

when a debtor skips town or gets thrown in jail and stops paying on

the account. While Your Credit may have sustained a loss, filing

a financing statement would not have prevented the debtor from

skipping town or getting thrown in jail and hence, the loss from

occurring. See Whitson II, 1997 WL 626108, at *25 (noting that

nonfiling insurance does not cover losses caused by debtors that

skip town). Again, no covered loss occurs when a debtor signs a

security agreement with another secured lender covering goods

15 Leaving aside household exemptions under 11 U.S.C. § 522, under 11 U.S.C. § 544(a), a trustee may assert the rights of a hypothetical lien creditor under LA. REV. STAT. ANN. § 10:9-301(3). Under § 10:9-301(1)(b), a hypothetical lien creditor prevails over an unperfected security interest. Thus, the combined operation of § 10:9-301(1)(b) and 11 U.S.C. § 544 means that Your Credit may sustain a loss solely as a result of its failure to file a financing statement.

-23- previously financed by Your Credit and neither files a financing

statement because Your Credit has priority over the other lender

under § 10:9-312(5)(b) and can repossess the collateralized

property if it so desires. See id.

We now turn to the summary judgment evidence in this case.

Edwards presents the summary judgment record deposition of Rebecca

J. Billeaudeaux, Your Credit’s manager in Baton Rouge, to support

her argument that Your Credit’s claims practices transformed the

policy into general default insurance for purposes of the proper

method of TILA disclosure. According to Billeaudeaux’s deposition,

Your Credit filed 58 claims under the policy for the month of

September 1996, all of which Voyager paid. Although Billeaudeaux’s

testimony is less than clear, 9 of these 58 claims may have been

based on covered losses))because another secured creditor had filed

a financing statement covering the goods in question, because the

debtor sold the goods financed to another consumer, or because of

the debtor’s bankruptcy.16 It is unclear whether another 29 claims

were based on covered losses because of imprecision in

Billeaudeaux’s answers. In 21 of these 29 claims, she indicated

that although the collateral had been “pledged” to another

creditor, no financing statement had been filed by the other

16 We emphasize the word “may” because some of these losses may not, in fact, have been covered because of limitations imposed by §§ 10:9-204(2) and -307(2). As the factual record is insufficient to enable us to make this determination and the issue is nonessential to the outcome, we assume without deciding that these nine claims were filed based on covered losses.

-24- creditor. Neither Article 9 nor Louisiana’s enactment thereof uses

the term “pledged,” so we assume that she meant that the debtor had

signed a security agreement with the other creditor covering the

good that Your Credit had financed but that the other creditor had

not filed a financing statement, meaning that the other creditor

would also be unperfected. §§ 10:9-302(1), -303(1), -402(1), -403.

In such a case, because § 10:9-312(5) gives priority to the

unperfected creditor whose interest attaches first and § 10:9-

204(2) limits the application of after-acquired property clauses

against consumers, Your Credit would have priority over the other

creditor unless the debtor had financed the good from Your Credit

within ten days after signing the security agreement with the other

creditor. §§ 10:9-204(2), -312(5)(a). Given the narrow scope of

coverage in these circumstances, it is unlikely that most of these

21 claims represent covered losses. In the other eight claims in

this category, it is impossible to determine from Billeaudeaux’s

answers whether in fact the claims were filed based on covered

losses.17 Finally, another 20 out of the 58 claims represent losses

that could not be covered by the policy. In some cases, the debtor

17 In one claim, for example, Your Credit submitted a claim for an account with an outstanding balance of $0.17. In another, Your Credit submitted a claim for $180.31 even though it had previously obtained a judgment against the debtor for $125.49 and the master policy between Voyager and Your Credit limits claims to the lesser of the value of the collateral or the outstanding balance. Your Credit attempts to negate this damaging evidence by claiming that if it later recovers a judgment against a debtor on whom it has previously filed a claim, it refunds the claim to Voyager. While laudable and partially solving the problem, Your Credit does not allege that it refunds claims to Voyager when it wrongly files a claim but does not recover any money from the debtor.

-25- skipped town or got thrown in jail; filing a financing statement

would not have prevented the debtor from skipping town or getting

thrown in jail, and so the loss would not result solely from Your

Credit’s failure to file. See Whitson II, 1997 WL 626108, at *25.

In approximately 10 of these 20 claims, Your Credit filed suit in

state court to recover the collateral, yet it nevertheless filed a

claim. Although Your Credit may have sustained a loss on these

claims, we fail to see how its loss occurred solely as a result of

its failure to file. To summarize: we assumed without deciding

that only 15.5 percent of the claims that Your Credit filed and

Voyager paid were covered; approximately 50 percent of the claims

were most likely not covered, although it is impossible to

determine for certain on the factual record now before us; another

34.5 percent of the claims represent losses that, based on the

evidence now before us, could not have been covered under the

policy. Since as many as 84.5 percent of the claims that Your

Credit filed and Voyager paid may be based on losses not covered by

the policy, Edwards has created a material question of fact as to

whether the policy insured, in substance, against general default.18

See also Dixon, 754 F. Supp. at 1574 (finding a material question

of fact because, among other reasons, there was no evidence that

the insurer evaluated or rejected a claim made under a nonfiling

insurance policy).

18 Your Credit conclusorily alleges that the claims for September 1996 submitted by Edwards are unrepresentative of its overall claims practices. Your Credit did not submit any evidence of its overall claims practices to support its argument. In the absence of any such evidence, we reject Your Credit’s argument.

-26- Your Credit attempts to counter Edwards’ evidence by

submitting evidence suggesting that the policy’s substance and form

coincided. In his summary judgment record deposition, Tom E.

McCraw, Senior Vice President of Operations for Voyager, stated

that Voyager does not sell general default insurance and that he

does not know anyone who does. McCraw noted that insurers do not

sell general default insurance because it gives lenders no

incentive to attempt to collect delinquent loans. Undercutting

McCraw’s testimony is the fact that the very terms of TILA and

Regulation Z that require lenders to include premiums for general

default insurance in the finance charge, see 15 U.S.C.

§ 1605(a)(5); 12 C.F.R. § 226.4(b)(5), while allowing them to

exclude premiums for nonfiling insurance, see 15 U.S.C.

§ 1605(d)(2); 12 C.F.R. § 226.4(e)(2), create incentives for

lenders to take out policies denominated as nonfiling insurance

that are in substance (perhaps because of claims practices) general

default insurance policies. Moreover, two other factors run

contrary to McCraw’s testimony that general default policies

provide no incentive for lenders to attempt to collect delinquent

loans: good business relations with their insurer and self-

interest. Because 15 U.S.C. § 1605(d)(2) and 12 C.F.R.

§ 226.4(e)(2) limit the premium for nonfiling insurance that can be

excluded from the finance charge to the amount that the state

charges to file a financing statement, an insurer cannot raise its

rates if a creditor files excessive claims; it can only cancel the

policy. Attempts by a creditor to collect delinquent accounts

-27- therefore appease its insurer by reducing the number of claims

filed.19 Further, since a rational creditor does not want its

insurance canceled, even where no formal agreement exists to limit

claims, a creditor may attempt to monitor its claims so as to avoid

running afoul of its insurer. For losses above and beyond this

amount, self-interest may motivate a creditor to attempt to collect

delinquent accounts.

Our review of the method by which Voyager and CIA evaluated

claims to determine whether they should be paid reinforces our

conclusion that a question of material fact exists. Under the

Administrative Services Agreement between CIA and Voyager, CIA had

the “sole right to pay, compromise, reject or deny any such

[nonfiling] claim.” While the expense of review of these small

claims might be prohibitive, apparently the claims forms were not

designed to give any indication of how the claimed loss was

attributable to nonfiling. According to the summary judgment

record deposition of Tim Boan, Secretary-Treasurer of CIA, CIA

reviewed the claims that Your Credit submitted to ensure that Your

Credit had completely filled out the claims form. Boan also stated

19 In his summary judgment record deposition, Tony Gentry, President of Your Credit stated that “it’s understood that if our losses get out of control that we will be terminated; that [Voyager] won’t write our insurance any longer. And occasionally they have called up and complained because our losses they deemed excessive. . . . And so when you talk to them from time to time, it is normal for them to say, you know, ‘Are you getting your losses down’ or ‘How is your business going’ or ‘How is this particular unit doing’ . . . They are concerned because they don’t like to pay any more losses than they have to. . . . when that [default rate] gets real high we))I don’t guess ‘real high’ is a good choice of words. As the month progresses, we try to get that to an acceptable level.”

-28- that CIA occasionally audited Your Credit’s claims to ensure that

it had attempted to collect a delinquent loan prior to filing a

claim. Beyond these limited attempts at verification, Boan stated

that “we take their word” that claims are submitted for a proper

reason. Thus, Voyager’s reliance on CIA to monitor claims filings

and CIA’s acceptance of Your Credit’s averments at face value

essentially gave Your Credit freedom to file claims for any reason.

Combined with its employees’ misunderstanding of Article 9, this

became a recipe for disaster.20

20 Amicus CCIA also argues that because § 1605(d)(2) permits a creditor to exclude the “premium payable for any insurance in lieu of perfecting a security interest,” whether Voyager paid claims that it was not obligated to pay under the policy could not lead to a violation of § 1605(d)(2) because the policy also covers losses due to nonfiling. Section 1605(a)(5) requires that a “premium or other charge for any guarantee or insurance protecting the creditor against the obligor’s default or other credit loss” be included in finance charge. It strains our belief to imagine that Congress would explicitly require that a premium for general default insurance be included in the finance charge in § 1605(a)(5) yet allow the same premium to be excluded from the finance charge in § 1605(d)(2) if the insurance in question also covered defaults caused by nonfiling. See Whitson, No. CV-94-177, slip op. at 10-11 (“It would be anomalous indeed for the [Alabama] legislature to prohibit charging for default insurance in the amount financed, but to allow for the very same type of insurance under the guise of nonfiling insurance.”). Moreover, acceptance of CCIA’s argument would render the second half of § 1605(d)(2)))“in lieu of perfecting a security interest”))meaningless. Accordingly, we reject this argument. CCIA further argues that 12 C.F.R. § 226.4(b)(5) applies only to default or credit loss insurance that can be purchased in addition to charging a filing fee, not to insurance purchased in lieu of the filing fee. CCIA relies on the Truth-in-Lending Manual, which explains that “[c]ommon examples of the insurance against credit loss mentioned in § 226.4(b)(5) are mortgage guaranty insurance, holder in due course insurance, and repossession insurance.” Ralph C. Clontz, Jr., TRUTH-IN-LENDING MANUAL ¶ 2.01[2] (1997). Even if we were inclined to rely on the quoted language, this list does not pretend to be exclusive. Moreover, we see no reason to accept CCIA’s argument because the language of § 1605(d)(2) and § 226.4(b)(5)))“in lieu of perfecting a security interest”))is clear.

-29- Finally, the district court’s conclusion in this case may have

been influenced by its notion that Edwards did not suffer any harm.

The court explained that “[i]t would appear to the Court that Your

Credit did Edwards a favor by allowing her to keep her property and

allowing the policy to take care of the debt.” As we noted above,

understating a finance charge “is a type of fraud that goes to the

heart of the concerns that actuate the Truth in Lending Act.” See

Gibson, 112 F.3d at 287 (“[T]he issue is not whether these

violations are technical, or whether technical violations should be

actionable, or whether consumer class actions should be

discouraged, but whether the complaints in these actions state a

claim.”). “[T]he statutory civil penalties must be imposed for

such a violation regardless of the district court’s belief that no

actual damages resulted or that the violation is de minimis.”21

Zamarippa v. Cy’s Car Sales, Inc., 674 F. 2d 877, 879 (11th Cir.

1982). “[T]he ‘remedial scheme of TILA is designed to deter

generally illegalities which are only rarely uncovered and

punished, and not just to compensate borrowers for their actual

injuries in any particular case.’” Fairley, 65 F.3d at 480 (quoting

Williams, 598 F.2d at 356). Thus, while the harm that Edwards may

21 Congress recently enacted a safe harbor for de minimis violations of TILA. See 15 U.S.C. § 1649. Section 226.18(d)(2) of Regulation Z, issued pursuant to § 1649, provides that a finance charge will be considered accurate if the amount disclosed does not vary from the actual finance charge by more than $5 for loans under $1,000 and more than $10 for loans over $1000. Id. One court has dismissed a TILA claim where the creditor charged a nonfiling insurance premium of less than $10 on a loan of more than $1,000. See Via v. Heilig-Meyers Furniture Co., No. 97-0026-D, slip op. at 5-8 (W.D. Va. Oct. 29, 1997). Your Credit has not contended that this safe harbor is applicable here.

-30- have suffered is relevant to the damages to which she may be

entitled, see 15 U.S.C. § 1640, it is irrelevant to whether she is

entitled to bring an action.

Factually, we conclude that another genuine dispute of

material fact exists. Some summary judgment record deposition

testimony indicates that Your Credit attempted to repossess

debtors’ property even when it filed a claim under the policy;

therefore, the policy may not have helped Edwards to keep her

property. Moreover, because Your Credit included the premium for

the nonfiling insurance in the amount financed, it charged Edwards

interest on the premium, causing her some actual (albeit small)

monetary loss. See Myers, 696 So. 2d at 784 (“By including the

charges in the amount to be financed, Badcock acquired a fund from

which it could offset bad debt losses at the expense of its credit

customers. This tactic also increased the base upon which interest

would be computed for those credit customers.”). Edwards may have

also been harmed because the understated APR and finance charge may

have led her to choose to purchase goods on credit rather than with

cash. See Gibson, 112 F.3d at 287. Other summary judgment record

testimony, however, indicates that Edwards believed that she

benefitted from Your Credit taking out nonfiling insurance because

the insurance ensured that they would not place a lien on the goods

she purchased. Finally, Your Credit argues that Edwards and other

consumers may, on balance, have benefitted from Your Credit’s

claims practices because these claims practices may have increased

Your Credit’s capital base, thereby allowing it to make more loans

-31- and loans to consumers with poor credit histories.

Therefore, although we believe that isolated incidences of

claims filed for noncovered losses may not state a cause of action

for violation of TILA and Regulation Z, the sheer magnitude of Your

Credit’s improper claims practices in this case creates a genuine

dispute of material fact as to whether those claims practices

transformed the policy into one insuring against general default

for purposes of its proper disclosure under TILA.22. We express

no opinion as to whether summary judgment may be appropriate on a

more fully developed record than we now have before us, if that

record indicates that the form and substance of the Policy may, in

fact, coincide.

B

Edwards concedes that no stop-loss provision appears in the

policy, but contends that an informal stop-loss agreement existed

between Your Credit and Voyager to limit the value of aggregate

claims filed to 89.25 percent of total premiums paid. Edwards

contends that this alleged stop-loss agreement prevented risk of

loss from shifting from Your Credit to Voyager because it ensured

that Voyager would never suffer a loss on the policy. Therefore,

22 Edwards also contends that “an attempt to repossess the collateral is a necessary prerequisite to claiming a loss under the nonfiling policy.” Given our foregoing discussion of Article 9, it is apparent that this argument is legally incorrect. If Your Credit examined public filings of financing statements, for example, and determined that another creditor had subsequently filed a financing statement covering the property that Your Credit financed, Your Credit may have suffered a loss solely as a result of its failure to file a financing statement, §§ 10:9-301(1)(a), -312(5)(a), and an attempt to repossess the property would be meaningless.

-32- she claims that the policy is not insurance, but rather a bad-debt

reserve held by Voyager, which she contends must be disclosed in

the finance charge. See Regulation Z, Official Staff

Interpretation, 12 C.F.R. § 226, Supp. I, at 312 (1995). After

noting that no stop-loss provision appears in the policy, the

district court determined that Edwards had failed to raise a

dispute of material fact on this argument. It found that no

informal stop-loss agreement existed between Voyager and Your

Credit because even though certain internal documents of Voyager

and CIA indicated that they desired to limit claims to 89.25

percent of aggregate premiums paid in order to earn a profit of

10.75 percent for themselves, neither these internal documents nor

the information in them was conveyed to Your Credit.

We agree with the district court that Edwards has failed to

establish a genuine dispute of material fact with regard to whether

an informal stop-loss agreement existed between Your Credit and

Voyager. Tim Boan of CIA testified that losses could be “120 or

even 140" percent. Although internal documents bearing the 89.25

percent figure floated around inside CIA and Voyager, Edwards has

failed to adduce any evidence that these figures were communicated

to Your Credit. Tony Gentry, President of Your Credit, also

testified in his summary judgment record deposition that neither he

nor Your Credit employees were aware of internal CIA-Voyager profit

and loss projections. Finally, at various times during the period

in question, the Baton Rouge office of Your Credit filed claims in

excess of 89.25 percent of aggregate premiums. Accordingly, we

-33- affirm the district court’s grant of summary judgment with regard

to this argument.23

VI

For the foregoing reasons, the district court’s grant of

summary judgment in favor of Your Credit is VACATED and the case is

REMANDED for appropriate proceedings.

ENDRECORD

23 Because Edwards has failed to establish the existence of a material dispute of genuine fact on this argument, we do not reach the difficult legal question of whether risk shifting under a master insurance policy is determined by reference to the master policy or the policies issued under the master policy.

-34- JERRY E. SMITH, Circuit Judge, dissenting:

The lynchpin of the majority opinion is its legal conclusion

that we may characterize an insurance policy not according to its

unambiguous terms or to the state law controlling its

application, but by the performance of the insurer under the

policy. Because I cannot join in this unprecedented application

of the substance-over-form doctrine, I respectfully dissent.

I agree with the majority that insurance purchased “in lieu

of” filing under 15 U.S.C. § 1605(d)(2) cannot cover risks that

would not have arisen, but for the creditor's failure to file.24

I cannot agree, however, that this policy, which by its terms and

under Louisiana law covered only such risks, is anything but non-

filing insurance in accordance with § 1605(d)(2).

I.

A.

No other court of appeals has looked beyond the explicit

terms of an insurance policy to characterize its nature according

to the claims payment practices of the insurer. The majority's

citation of other TILA cases is inapposite, for those cases

properly looked to substance over form to give meaning to the

necessarily ambiguous terms “credit” and “creditor” in the Act.

Thus, the Court in Mourning v. Family Publications Serv., 411

24 Cf., e.g., WEBSTER'S THIRD NEW INT'L DICTIONARY 1306 (1986) (defining “in lieu of” as “in the place of; instead of”); American Aviation & Gen. Ins. Co. v. Georgia Telco Credit Union, 223 F.2d 206, 207 (5th Cir. 1955) (pre-TILA non-filing policy covers losses “solely from [creditor's] failure to file”). U.S. 356 (1973), decided that Congress had intended merchants not

to be able to escape “creditor” status simply by reformulating

what would otherwise be credit transactions as “installment

sales.” Id. at 363-69.

Also, for example, in Joseph v. Norman's Health Club, Inc.,

532 F.2d 86 (8th Cir. 1976), the case cited for its substance-

over-form analysis in both Myers v. Clearview Dodge Sales, Inc.,

539 F.2d 511, 515 (5th Cir. 1976), and Hickman v. Cliff Peck

Chevrolet, Inc., 566 F.2d 44, 46 (8th Cir. 1977), a health club

sold “lifetime memberships' for $360, payable in twenty-four

monthly installments of $15, or for cash, with a discount of ten

to fifteen percent, and then sold the notes to finance companies.

532 F.2d at 88. Unsurprisingly, the court found these to be

credit transactions in substance. See Joseph, 532 F.2d at 93-94.

Here, there is no comparable need to engage in a searching

substance-over-form analysis, for there is no ambiguity that

needs resolution. In Joseph, on the other hand, Congress

expressed concern in the terms of the statute, in the delegation

of rulemaking capability, and in the legislative history, that

the term “credit” not be used in a hyper-formal sense to restrict

the TILA's coverage. See Mourning, 411 U.S. at 363-69. In

essence, Congress knowingly left a statutory interstice to be

filled by regulators and courts. See id. at 365.

The statute, the regulation, and Louisiana lawSSnot a

court's impression of the “economic realities”SSmust dictate our

-36- disposition. To be sure, the statute does not define

“insurance,”25 but that does not give us carte blanche to create

a new rule of law under which insurance is characterized not by

its terms but by a fact-intensive, substance-over-form analysis

that cannot be resolved on summary judgment.

Rather, the silence of the statute directs us to the

regulations and to the applicable background of state common law.

The Supreme Court has often remarked that courts must look to the

established meaning of common law terms when interpreting

statutes.26 Furthermore, Regulation Z provides that otherwise

undefined terms “have the meanings given to them by state law or

contract.” 12 C.F.R. § 226.3(b)(3) (1998). The rights and

obligations of the parties under this policy, and the

characterization of that policy as non-filing insurance or

something else, depend upon the controlling state law.

B.

Under Louisiana law, which governs this policy, the

arrangement between Your Credit and Voyager is non-filing

insurance. A Louisiana insurance contract is interpreted

according to general contract principles. See Battig v. Hartford

25 Again, I note that we may properly decide what sort of insurance qualifies as insurance purchased “in lieu of filing.” That is, we may decide what sort of risks may be covered by a policy in order to fall within the statutory terms. It goes far beyond our role as statutory interpreters, however, when we define as a matter of federal law which risks the policy covers. 26 See, e.g., United States v. Wells, 117 S. Ct. 921, 927 (1997) (citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322 (1992) (citing Community for Creative Non-Violence v. Reid, 490 U.S. 730, 739-40 (1989))).

-37- Accident & Indem. Co., 608 F.2d 119 (5th Cir. 1979). Louisiana

law provides that

the parties' intent, as reflected by the words of the

policy, determines the extent of coverage. Such intent

is to be determined in accordance with the plain,

ordinary, and popular sense of the language used in

the policy, unless the words have acquired a technical

meaning. . . . An insurance contract should not be

given an interpretation which would enlarge or restrict

its provisions beyond what is reasonably contemplated

by its terms or which would lead to an absurd

conclusion. If the language in an insurance contract

is clear and unambiguous, the agreement must be

enforced as written. In such a case, the meaning and

intent of the parties to the written contract must be

sought within the four corners of the instrument and

cannot be explained or contradicted by parol evidence.

. . . [T]he use of extrinsic evidence is proper only

where a contract is ambiguous after an examination of

the four corners of the instrument.

Highlands Underwriters Ins. Co. v. Foley, 691 So. 2d 1336, 1340

(La. App. 1st Cir. 1997) (citations omitted).27

27 See also, e.g., LA. CIV. CODE ANN. art. 2046 (West 1987) (stating that "when the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent"); Heinhuis v. Venture Assoc., 959 F.2d 551, 553 (5th Cir. 1992) (holding (continued...)

-38- This insurance contract unambiguously defines the scope of

its coverage. By its plain terms, the agreement insures against

losses incurred “solely as the result of the failure of the

Insured duly to record or file.” Under Louisiana law,

accordingly, the policy is non-filing insurance.28

Furthermore, it does not matter whether the contract

included an explicit or implicit stop-loss provision: Insurers

are permitted, under Louisiana law, to limit their liability and

impose reasonable conditions on their obligations, so long as

those do not conflict with law or public policy. See Scarborough

v. Travelers Life Ins. Co., 718 F.2d 702, 707 (5th Cir. 1983).

In short, the characterization of this insurance policy is

directly controlled by Louisiana law, under which the policy

covers only losses caused by failure to file. A federal court

should not interfere by holding to the contrary.

II.

Even if it is sometimes appropriate to apply a substance-

over-form analysis to characterize insurance under the TILA, the

form of this policy is not at odds with its substance. Rather,

the form of the policy and the pattern of performance thereunder

(...continued) that a “court applying Louisiana law should interpret a policy according to its plain meaning and not distort its meaning to introduce an ambiguity”).

28 It may be that Your Credit filed, and Voyager paid, claims not within the scope of the coverage. That, however, is not properly the subject of this suit under the TILA. If bogus claims were filed and paid, Voyager and not Edwards may sue to enforce the terms of the policy.

-39- are in keeping with legitimate business practices, rather than

the sort of sham to which courts will assign consequences based

on its substance, rather than form. Substance-over-form is

inapplicable on these facts.

The substance-over-form principle is a doctrine of tax law

that prohibits taxpayers from avoiding the tax consequences of a

transaction by disguising it as something that it is not. Thus,

for example, where a taxpayer purchased bonds with an interest

rate of 2.5 percent and financed that purchase with a debt to the

bond issuer at a rate of 3.5 percent, the Supreme Court found the

transaction to be a “sham,” crafted solely as a tax avoidance

scheme. See Knetsch v. United States, 364 U.S. 361, 366 (1960).

There was no economic reason to engage in the transactionSSno

chance for profit, other than tax-avoidanceSSand the Court

therefore looked to substance rather than form. The search for

substance over form has been analogized to the practice of

piercing the corporate veil. See 1 BORIS I. BITTKER AND LAWRENCE

LOKKEN, FEDERAL TAXATION OF INCOME, ESTATES AND GIFTS ¶ 4.3.3, at 4-34

n.36 (2d ed. 1989). In either case, however, the respective

doctrines are applied only in exceptional

circumstancesSScircumstances unlike those presented here.

An individual's chosen form will not be set aside lightly.

Indeed, it has been said that “lawyers who do not know that

sometimes form controls, should not be practicing law.” Id.

at 4-34 (quoting PAUL, STUDIES IN FEDERAL TAXATION 89 n.304 (1937)).

Thus, where there is a “genuine multiple-party transaction with

-40- economic substance which is compelled or encouraged by business

or regulatory realities, is imbued with tax-independent

considerations, and is not shaped solely by tax-avoidance

features that have meaningless labels attached, the Government

should honor the allocation of rights and duties effectuated by

the parties.” Frank Lyon Co. v. United States, 435 U.S. 561,

584-85 (1978). Similarly, when a corporation is not used for an

illegal purpose, its veil will be pierced only where it is a sham

or is the alter ego of its shareholders. See Fidelity & Deposit

Co. v. Commercial Cas. Consultants, Inc., 976 F.2d 272, 274-5

(5th Cir. 1992). Courts pierce veils and look to transactions'

“substance” only when they are convinced that legal formalities

are devoid of real consequence, used solely to avoid tax or other

liability.

There is a legitimate business reason for Voyager’s payment

of claims beyond the terms of the policy: The cost of

investigating those claims would have been far greater than the

value of the claims paid. As far as I am aware, it is a common

and perfectly legitimate practice for an insurer to pay, rather

than always to dispute, claims outside the scope of coverage.

This policy specifically provided that the insurer retained the

right to “pay, compromise, reject, or deny” any claim. An

insurer may choose to pay a claim for any reason, with or without

an evaluation of its merit. The TILA does not impose on insurers

a duty to investigate. There is a legitimate business

reasonSSoutside any purported desire to skirt the TILASSto

-41- characterize the policy as non-filing insurance rather than as

general default. Although Voyager might pay small claims, there

is every reason to believe that it would investigate and, in

appropriate circumstances, refuse to pay claims involving any

significant amount of money. The summary judgment is consistent

with this conclusion. Therefore, the policy’s coverage of risk

arising “solely as a result from the . . . failure to file” is

not an empty formality, but has real substance. Even were it

generally appropriate to apply a substance-over-form analysis to

characterize insurance policies, the policy at issue here would

remain what it purports to be: insurance purchased in lieu of

filing.

III.

Finally, I note the policy implications of this

unprecedented and improper application of the substance-over-form

doctrine. The majority's rule will encourage litigation, for

plaintiffs may properly read this decision as holding that a

pattern of performance will trump plain contractual provisions in

determining parties' rights and obligations. Once such

litigation is filed, the majority's fact-intensive analysis will

allow most, if not all, plaintiffs to survive summary judgment.

Furthermore, by effectively imposing a duty to investigate

and dispute potentially bogus claims, this rule will hamper the

free and efficient functioning of the insurance industry. In

essence, this duty to investigate will hinder insurers from

-42- issuing small policies, where the likely value of claims asserted

will be less than the likely cost of investigation. That is, a

rational insurer should calculate its rates based upon the

settlement value of claims: their dollar amount or the cost of

disputing them, whichever is lower. Under this rule, insurers

must instead incur and pass on the cost of disputing all

potentially illegitimate claims, even where its settlement value

is less than the cost of disputing it.

Moreover, the majority's rule will do nothing to help

debtors such as Edwards. True, the inclusion of non-filing

insurance premiums in the amount financed raises the effective

interest rate on the underlying principal. But if the market

will bear such a high price for money, which it apparently will,

there is every reason to believe that creditors will continue to

charge that price. Whether some portion of the total price is

included (and disclosed) on one line rather than another is

largely irrelevant to the debtor's bottom line: the amount he

pays for the loan.

Where the market will bear a given bottom line, creditors

will naturally achieve this bottom line by the inclusion of

various charges. And debtors will continue to pay astronomical

prices for cash. While we may believe that certain debtors act

improvidently, and while we may privately condemn certain

creditors for tempting individuals with the lure of quick money

at high rates, as a matter of both law and economics we cannot

prevent these transactions from taking place.

-43- IV.

The majority disregards the unambiguous language of this

insurance policy and its plain effect under Louisiana law. It

requires a federal court to characterize the scope and coverage

of an insurance policy according to the performance of the

parties thereunder. As a result, it transforms contract

interpretationSSa quintessential question of lawSSinto a question

of fact that will almost always allow industrious plaintiffs to

survive summary judgment. Because I cannot join this

unprecedented departure, I respectfully dissent.

-44-