148 F.3d 427 | 5th Cir. | 1998
Lead Opinion
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 nonfil-ing insurance, as we discuss below, protects Your Credit from losses sustained solely as a result of its failure to file a financing statement.
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 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,
Edwards premised her claim on two alternative theories. She first argued that although the policy required Voyager to pay for 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 prerhiums 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 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 appropilate 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 of material fact, but it is not required to negate elements of the nonmoving party's ease. 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
Ill
Congress enacted TILA to promote the “informed use of credit ... [and] an awareness of the cost thereof by consumers” ' by “assuring] 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 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 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 ease. 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
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 insurers sought to use the MeCarran 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 invalidate, impair, or supersede it.
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 disrupt-' ed 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 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”),
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 lam guage 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 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.
Edwards, however, contends that Your Credit and Voyager deliberately structured the form of the policy in stark contrast to 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 sub-stanee-over-form doctrine provides the proper framework for analyzing this case.
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 disclosuré, 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 eases, state law.
Because nonfiling insurance generally covers losses due solely to a secured creditor’s failure to file a financing statement, it 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 Latos, 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.
In Louisiana, as elsewhere, two steps are needed to create a fully enforceable security interest. First, & 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 LaRev.Stat. Ann. ' §§ 10:9-302(1), -303(1), -402(1), -403. By definition, therefore, a secured creditor who does not file a financing 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.
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(l)(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.
2
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.
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 therefore appease its insurer by reducing the number of claims filed.
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 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
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."
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 nonfil-ing 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
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.
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, 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. 1, 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.
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.
. 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).
. Edwards later dismissed her state law claims when she filed an amended complaint.
. The Seventh Circuit recently suggested that phrasing the test for MeCarran 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., 144 F.3d 1037, 1998 WL 237426 at *10-11 (7th Cir.1998). The Seventh Circuit uses a three-part MeCarran 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 MeCarran 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 MeCarran 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.
. 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.
. Although neither parly has brought La.Rev.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 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.
. 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.
. 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).
. 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 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 nonfil-ing 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.
. 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.RevStat. Ann. § 10:9 — 302(l)(d). Although, as a general matter, a loss solely due to a failure to
. With the exception of UCC § 9-503, Louisiana statutes correspond to the UCC for all purposes relevant to this decision.
. Section 10:9-312(5) provides:
[Pjriority between conflicting security interests in the same collateral shall be determined according to the following rules:
fe) 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.
. 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 are "used or bought for use primarily for personal, family or household purposes.” La.Rev.Stat. Ann. § 10:9-109(1).
. 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.
. 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.
..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.RevStat. Ann. § 10:9-301(3). Under § 10:9-301(l)(b), a hypothetical lien creditor prevails over an unperfected security interest. Thus, the combined operation of § 10:9-301(l)(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.
. 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.
. 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 debt- or 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.
. 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.
. 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 yo.ur 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.”
. 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.
. 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 fi.nance 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.
. 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(l)(a), - 312(5)(a), and an attempt to repossess the property would be meaningless. Edwards’ argument is factually meritless as well. The summary judgment record shows that Your Credit labored diligently to secure payment: Billeaudeaux’s deposition establishes that Your Credit’s employees attempted to contact debtors by telephone and, in many instances, went to the debtor's residence to attempt to prod the debtor into paying off the account. Moreover, Your Credit brought legal action against debtors in 13 of the 58 claims it 'filed for the month of September. The problem was not that Your Credit failed to attempt to repossess the property in question before filing a claim, but that a large percentage of the claims that Your Credit filed under the policy represent claims that could not possibly be based on covered losses. We do not suggest, however, that Edwards makes out a case merely by showing that Your Credit generally, or some of its employees, operated under a misunderstanding as to under what particular circumstances, under Article 9, certain losses might be due to nonfiling, so long as the misunderstanding was not of such scope as to be, in effect, a belief that essentially the same coverage was provided as would be afforded by general default insurance.
. 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.
Dissenting Opinion
dissenting:
The lynehpin 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.
I.
A.
Nó 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 eases 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 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318 (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, 93 S.Ct. 1652.
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 Meyers 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. Unsur--prisingly, 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, the regulation, and Louisiana law — not a court’s impression of the “economic realities” — must dictate our disposition. To be sure, the statute does not define “insurance,”
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.
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 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. ... [Tjhe 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).
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.
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 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, 81 S.Ct. 132, 5 L.Ed.2d 128 (1960). There was no economic reason to engage in the transaction — no chance for profit, other than tax-avoidance— and 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 circumstances— circumstances 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 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 hon- or the allocation of rights and duties effectuated by the parties.” Frank Lyon Co. v. United States, 435 U.S. 561, 584-85, 98 S.Ct. 1291, 55 L.Ed.2d 550 (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 reason— outside any purported desire to skirt the TILA — to 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
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 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.
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 interpretation — a quintessential question of law — into 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.
. 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”).
. 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.
. See, e.g., United States v. Wells, 519 U.S. 482, 117 S.Ct. 921, 927, 137 L.Ed.2d 107 (1997) (citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322, 112 S.Ct. 1344, 117 L.Ed.2d 581 (1992) (citing Community for Creative Non-Violence v. Reid, 490 U.S. 730, 739-40, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989))).
. 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 that a "court applying Louisiana law should interpret a policy according to its plain meaning and not distort its meaning to introduce an ambiguity”).
. 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.
