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THIRD DIVISION

November 12, 1998

No. 1-97-1162

JUSTICE LEAVITT delivered the opinion of the court:

Plaintiffs Joseph and Barbara Spina and Rock-Tred Corporation leased automobiles fromdefendant Toyota Motor Credit Corporation (Toyota). Plaintiffs, on behalf of themselves andothers similarly situated, filed a two-count complaint against Toyota, alleging Toyota's refusal topay interest on plaintiffs' security deposits violated section 9-207 of the Illinois UniformCommercial Code (UCC) (810 ILCS 5/9-207(2)(c) (West 1996)) and the Illinois ConsumerFraud and Deceptive Business Practices Act (Consumer Fraud Act) (815 ILCS 505/1 et seq.(West 1996)). The chancery court granted Toyota's motion to dismiss (see 735 ILCS 5/2-615(West 1996)), and plaintiffs now appeal.

Our review of the trial court's decision in this case is de novo. Vernon v. Schuster, 179 Ill. 2d 338,__, 688 N.E.2d 1172 (1997). As did the trial court, we must ask whether the allegations ofplaintiffs' complaint, when viewed in a light most favorable to plaintiffs, are sufficient to state acause of action upon which relief can be granted. See 735 ILCS 5/2-615; Vernon, 179 Ill. 2d at__. According to plaintiffs' complaint, on December 29, 1990, Rock-Tred entered into athree-year closed-end lease for a 1991 Lexus LS 400. The lease was immediately assigned toToyota. As a requirement of the lease, Rock-Tred paid a refundable security deposit of $500. OnAugust 1, 1992, the Spinas entered into a three-year closed-end lease for a 1992 Lexus SC 300,and that lease was also immediately assigned to Toyota. The Spinas paid the same securitydeposit as Rock-Tred.

Regarding the security deposit, both leases contained the following provision:

"Security Deposit: We may use the security deposit to pay all amounts that you should pay underthis Lease but do not. If you perform all of your obligations under this Lease, the security depositwill be returned to you at the end of the lease term."

According to plaintiffs' complaint, their security deposits "were mixed and commingled inaccounts containing funds belonging to" Toyota, who had use of the funds throughout the term ofthe lease. Plaintiffs further alleged Toyota "utilized the security deposits, in a manner that causesthe deposits to increase in value through accrued interest or other investment or permitsdefendant otherwise to profit or enjoy other economic benefits from its possession of suchdeposits ('profits')."

The first count of plaintiffs' complaint alleges Toyota's handling of their security depositsviolates section 9-207(2) of the UCC. Section 9-207(2) provides:

"Unless otherwise agreed, when collateral is in the secured party's possession

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(c) the secured party may hold as additional security any increase or profits (except money)received from the collateral, but money so received, unless remitted to the debtor, shall beapplied in reduction of the secured obligation." 810 ILCS 5/9-207(2)(c).

Plaintiffs assert money given as a security deposit in connection with an automobile leaseconstitutes "collateral" creating a "security interest" within the meaning of the UCC. Undersection 9-207, according to plaintiffs' complaint, Toyota was required either to remit any interestreceived on their security deposits or to apply that interest to reduce their obligations under thelease. The chancery court found section 9-207 inapplicable to automobile lease security depositsand dismissed plaintiffs' complaint.

As did the chancery court, we begin by noting Illinois has a long history of regulating securitydeposits through specific legislation. In 1921, Illinois adopted "an Act relating to moneydeposited or advanced under contracts for the use of the rental of personal property." See Ill. Rev.Stat. 1985, ch. 29, pars. 9-14 (Rental Act), repealed by P.A. 85-733, sec. 6, effective Jan. 1, 1988.Paragraph 9 of the Rental Act provided:

"In all contracts for the use or rental of personal property by the terms of which money isadvanced or deposited as security ***, the money so advanced shall be deposited at interest witha bank, trust company or savings and loan association ***, in trust for the use of the parties tosuch contract or agreement." Ill. Rev. Stat. 1985, ch. 29, para. 9.

In regards to interest earned on such security deposits, paragraph 14 of the Rental Act provided:

"Any interest which accrues while the money advanced is so deposited shall be kept with theprincipal sum and shall be disposed of in the same manner as the principal sum in accordancewith the provisions of this Act." Ill. Rev. Stat. 1985, ch. 29, para. 14.

In 1987, the Illinois legislature repealed the Rental Act and replaced it with the ConsumerDeposit Security Act, Ill. Rev. Stat. 1987, ch. 29, par. 951 et seq., now 815 ILCS 165/1 et seq.(West 1996) (Deposit Act). Under the new Deposit Act, "[a]ny lessor who requires a depositfrom a lessee in connection with a consumer lease" may either (1) post a $10,000 surety bondwith the Illinois Attorney General guaranteeing the refund of such security deposits, or (2) placethe security deposit in an account with a bank, trust company, or a savings and loan association.See 815 ILCS 165/3. Only if a lessor chooses to deposit the funds in an interest-bearing accountwill "the party entitled to the deposit at the end of the lease" receive interest on the deposit at thetermination of the lease; security deposits less than $150 are excluded from this requirement. 815ILCS 165/3(b).

It is against this statutory backdrop that we must determine whether section 9-207 of the IllinoisUCC was intended to apply to the security deposits at issue in this case. The chancery courtfound it did not, and we are aware of no rulings by Illinois courts on this issue. A number offederal courts, however, have addressed whether this particular section of the UCC, as enacted inthis and other states, applies to automobile lease security deposits. See generally Chavez,Automobile Lease Security Deposits: the Duty to Pay Interest (hereinafter Security Deposits),1047 PLI/Corp. 857, 865-81 (1998) (summarizing federal decisions in this area, including JudgeBoharic's dismissal order in the present case). Inasmuch as both parties, as well as the trial court,relied upon several of these decisions, we will briefly summarize the various federal decisions inthis area of the law.

In what one commentator has referred to as "one of those pathbreaking decisions that brings lightto the eyes of plaintiffs' lawyers and sends chills up the spines of defense counsel," Chavez,Security Deposits, 1047 PLI/Corp. 857, 865 (1998), the United States District Court for theSouthern District of New York, in February 1996, found for consumers on their claim that theywere entitled to interest on their automobile lease security deposits under the UCC. See Werboskyv. Ford Motor Credit Co., No. 95 Civ. 1876, 1996 WL 76133, at *1 (S.D.N.Y. Feb. 22, 1996)(Werbosky I). In Werbosky I, Ford Credit conceded--"correctly" according to the districtcourt--that the New York UCC applied to the security deposits at issue and that section 9-207imposed "the duty to account to the debtor for any increases or profits." Werbosky I, 1996 WL76133, at *1. In denying the defendant's motion to dismiss, the Werbosky I court concluded "FordCredit ha[d] only two options with regard to the profits; it [could] either remit the interest to thelessee, or it [could] apply the interest to reduce the lessee's obligation under the lease." WerboskyI, 1996 WL 76133, at *1.

Werbosky I was followed by a decision from the United States District Court for the NorthernDistrict of Illinois in May 1996. See Demitropoulos v. Bank One Milwaukee, N.A., 924 F.Supp.894 (N.D.Ill. 1996) (Demitropoulos II). Applying Wisconsin's version of the UCC, theDemitropoulos II court found section 207 of that Code (identical to 810 ILCS 5/9-207) applied tothe plaintiffs' automobile lease security deposits. The Wisconsin Code was generally applicableto "any transaction (regardless of its form) which is intended to create a security interest inpersonal property ***." Demitropoulos II, 924 F.Supp. at 896; see 810 ILCS 5/9-102(1)(a). TheWisconsin Code defined a "security interest" as "an interest in personal property *** whichsecures payment or performance of an obligation." Demitropoulos II, 924 F.Supp. at 897; see 810ILCS 5/1-201(37). Since "a reasonable inference [could] be drawn that the $550 deposit thatDemitropoulos left with Bank One was designed to secure his obligations under the lease," theDemitropoulos II court, citing Werbosky I, concluded section 207 was applicable. DemitropoulosII, 924 F.Supp. at 897.

In January 1997, another District Court in the Northern District of Illinois, this time applyingIllinois law, found for automobile lessors on the security deposit interest issue. See Wiskup v.Liberty Buick Co., 953 F.Supp. 958, 972 (N.D.Ill. 1997). As did the Demitropoulos II court, theWiskup court began by noting the broad reach of Article 9 of the UCC. Wiskup, 953 F.Supp. at971; 810 ILCS 5/9-102(1)(a) (Article 9 applies "to any transaction (regardless of its form) whichis intended to create a security interest in personal property ***"); 810 ILCS 5/1-201(37)(defining "security interest" as "an interest in personal property *** which secures payment orperformance of an obligation"). Although the court in Wiskup found plaintiff's argument thatsecurity deposits for automobile leases fall within the definition of a "security interest" to be"strong," it nevertheless concluded there were "several obstacles" to the adoption of plaintiff'sposition. Wiskup, 953 F.Supp. at 972. First, no Illinois court, and few other courts, had found asecurity deposit is a security interest within the meaning of the UCC. Second, prior to theenactment of the UCC, the majority of courts, according to the Wiskup court, viewed the givingof a security deposit as creating a debt, which would be outside the reach of the UCC, as opposedto creating a security interest. Wiskup, 953 F.Supp. at 972; see also Lawson v. Bank OneLexington, N.A., No. 96-334, slip op. at 5-7 (E.D.Ky. Sept. 19, 1997) (finding automobile lessees'security deposits not subject to section 9-207 of the UCC on the basis that security depositcreated a debtor/creditor relationship).

Finally, the court in Wiskup concluded the historical regulation of security deposits inIllinois--via legislation other than the UCC--precluded application of section 9-207 to automobilelease security deposits. The court noted the enactment of the Rental Act in 1921 and the fact thatthe passage of the UCC in Illinois (in 1961) had "no discernible effect" on the status of securitydeposits. Wiskup, 953 F.Supp. at 972. Looking to the one reported Illinois decision analyzingautomobile lease security deposits, Purcell and Wardrope Chartered v. Hertz Corp., 175 Ill.App. 3d 1069, 530 N.E.2d 994 (1988), the court noted Purcell's analysis of the deposit issueunder the Rental Act and the fact no mention of the UCC was made in that decision, a fact whichthe Wiskup court characterized as "not accidental":

"The [Rental Act] imposed different, and higher, duties on the lessor than the UCC. Unlike theUCC, it required lessors to segregate security deposits from their other funds, and imposed apositive duty on them to invest these funds at a profit. This quasi-trust relationship, with itscorresponding rights and duties, was different in kind from the relationship between a securedparty and a debtor, and was not implicated at all by the passage of 810 ILCS 5/9-207(2)."Wiskup, 953 F.Supp. at 972-3.

As do plaintiffs in the present case, the plaintiff in Wiskup argued the subsequently enactedDeposit Act was meant to co-exist with the UCC in regulating security deposits. The districtcourt flatly rejected this argument:

"Plaintiff argues that the Consumer Deposit Security Act merely concerns itself with the return ofsecurity deposits, and only mentions interest as an incidental matter. The lessor's basic dutyconcerning interest earned from security deposits is still governed by the UCC. This argument israther thin. Both UCC 9-207 and the Consumer Deposit Security Act are concerned with exactlythe same issue: making sure that the party who gives property as security will receive it backafter fulfilling his obligations. The Consumer Deposit Security Act lays down specific rules foraccomplishing this purpose in personal property leases involving security deposits. Moreover, theAct appears to be no less rigorous than the UCC in its requirements. We do not believe that theIllinois courts would confuse the issue by applying both the UCC and the Consumer DepositSecurity Act to security deposits in automobile leases. Nor will we." Wiskup, 953 F.Supp. at 973.

See also Tarnoff v. American Honda Finance Corp., No. 96C6923, 1997 WL 461059, at *3-4(N.D.Ill. Aug. 7, 1997) (following Wiskup, finding Deposit Act, not section 9-207 of the UCC,applied to security deposits at issue, and rejecting plaintiff's argument that the two were intendedto co-exist).

Later that same month, the district court which issued the Demitropoulos II decision reconsideredits earlier decision and again found in favor of the automobile lessees under Wisconsin law. SeeDemitropoulos v. Bank One Milwaukee, N.A., 953 F.Supp. 974 (N.D.Ill. 1997) (DemitropoulosIII). In reaffirming its earlier decision that automobile lease security deposits create "securityinterests" subject to section 9-207 of the UCC, the court relied upon several other federaldecisions, including Werbosky I. See Demitropoulos III, 953 F.Supp. at 980; see also In re Barr,180 B.R. 156, 160 (Bankr. N.D.Tex. 1995) (security deposit for electrical service created Article9 security interest); In re Atlanta Times, Inc., 259 F.Supp. 820, 827 (N.D.Ga. 1966), aff'd subnom. Sanders v. National Acceptance Co., 383 F.2d 606 (5th Cir. 1967) (security deposit onequipment lease covered by section 9-207). The district court focused on, and ultimately rejected,amicus curiae's argument that such deposits are not pledges of money, subject to Article 9, butrather debts, which would be outside the scope of that Article. The court based its conclusionupon the distinction between leases for real property and those for personal property, noting thatevery case cited in support of amicus curiae's argument involved deposits given in connectionwith real property leases. Real property leases, the court reasoned, are specifically excluded fromArticle 9 coverage. Demitropoulos III, 953 F.Supp. at 980-83.

The court in Demitropoulos III specifically rejected Wiskup's analysis of the pledge/debtdistinction as a basis for finding section 9-207 inapplicable, but, nevertheless, concluded Wiskupwas not relevant to its holding:

"Ultimately, however, Wiskup does not bear on our decision because it is based on aninterpretation of Illinois, not Wisconsin law. The result in that case is a function of the interactionbetween the Illinois Consumer Deposit Security Act and the Illinois UCC, an issue we expresslydecline to address." Demitropoulos III, 953 F.Supp. at 984 n.16.

Despite finding in the lessee's favor on the applicability of the UCC, the court entered summaryjudgment in Bank One's favor, since there was no evidence Bank One earned interest on thesecurity deposit funds. Demitropoulos III, 953 F.Supp. at 985; see also Martin v. Gold KeyLease, Inc., 988 F.Supp. 1101, 1104, 1105 n.1 (N.D.Ill. 1997) (granting summary judgment indefendant's favor, where parties agreed defendant "did not and does not receive any money ***from the security deposits paid by [plaintiffs] to the dealer-lessors," but suggesting, in dicta, thatif the issue of section 9-207's applicability was reached, under Illinois law, Wiskup's reasoning,and not that of Werbosky I and Demitropoulos III, would prevail).

While the Wiskup analysis was rejected in Demitropoulos III, it was followed in May 1997 by theUnited States District Court for the Eastern District of New York. See Steinmetz v. Toyota MotorCredit Corp., 963 F.Supp 1294 (E.D.N.Y. 1997). In Steinmetz, the court noted New York, likeIllinois, had enacted both section 9-207 of the UCC and a more specific statute expresslyaddressing the handling of security deposits. The court found the lessors' duties under section9-207 to be "not entirely consistent" with those under the more specific state law governingdeposits, leaving the court doubtful "the New York legislature intended such an arbitrary result."Steinmetz, 963 F.Supp. at 1304. The Steinmetz court simply "respectfully disagree[d]" with theholding in Werbosky I and distinguished Demitropoulos II and III on the basis that neitherinvolved questions of conflicting state statutes--Wisconsin had no specific law potentiallyconflicting with the UCC. Steinmetz, 963 F.Supp. at 1304; see also Brooks v. General MotorsAcceptance Corp., No. 96CV3429, 1998 WL 122774, at *4 (N.D.Ill. March 16, 1998) (applyingIllinois law and following Wiskup, distinguishing Demitropoulos II on this same basis).

Plaintiffs in the present case naturally point to the decisions in Werbosky I and Demitropoulos insupport of their position on appeal. However, as the wave of other, more recent federal decisionsjust discussed demonstrates, the tide appears to have turned on plaintiffs' once-novel position, asadopted in Werbosky I and the Demitropoulos decisions. Assuming arguendo section 9-207 ofthe Illinois UCC can be interpreted as plaintiffs urge, namely, that money given as a securitydeposit in connection with an automobile lease may constitute "collateral" creating a "securityinterest" within the meaning of the UCC (see 810 ILCS 5/9-104 (listing transactions which areexcluded from Article 9, none of which are applicable here); 810 ILCS 5/9-304(1) (securityinterest in money can be perfected by the secured party's taking possession); Wiskup, 953 F.Supp.at 972 (characterizing as "strong" plaintiff's argument that automobile lease security deposits fallsquarely within the definition of a security interest); but cf. Martin, 988 F.Supp. at 1104(accepting the same assumption even though "it gives us pause to realize plaintiffs' theory is,essentially that security deposits of $725 or $525 represent collateral for their lease obligationstotalling more than $17,000 and $18,000, respectively ***")), we believe the chancery courtcorrectly concluded Werbosky I and the Demitropoulos decisions are distinguishable from thepresent case.

In Werbosky I, Ford Credit conceded the applicability of the UCC, only later arguing, in a motionfor reconsideration, that the more specific New York law governed. Werbosky I, 1996 WL 76133,at *1; Steinmetz, 963 F.Supp. at 1302; see also Brooks, 1998 WL 122774, at *4 (distinguishingWerbosky I on this basis). Moreover, whatever minimal support the Werbosky I decision lent toplaintiffs' position in this case was stripped away in Werbosky II. See In re Ford Motor CreditCo. Motor Vehicle Lease Litigation, No. 95 Civ. 1876(JSM), MDL 1160(JSM), 1998 WL159051, at *3-4 (S.D.N.Y. April 1, 1998) (Werbosky II). Werbosky II involved multiple casesconsolidated before the United States District Court for the Southern District of New Yorkpursuant to orders of the Panel on Multidistrict Litigation. Werbosky II, 1998 WL 159051, at *1.Werbosky II addressed only plaintiff Werbosky's motion for partial summary judgment andessentially overruled Werbosky I to the extent that decision held section 9-207 applicable toautomobile lease security deposits under New York law. See Werbosky II, 1998 WL 159051, at*3-4 (following Steinmetz).

Demitropoulos II and III are also easily distinguishable from the instant case. In neither of thosedecisions was the court faced with arguably conflicting statutes governing the same subjectmatter. Wisconsin, unlike Illinois and New York, has enacted no legislation dealing specificallywith security deposits, leaving the courts in that state free of statutory inhibitions when calledupon to expansively interpret section 9-207 of the UCC. See Steinmetz, 963 F.Supp. at 1304(distinguishing Demitropoulos II and following Wiskup, noting that "[i]n New York, as inIllinois, the state legislature has enacted both UCC