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Walker and Walker v. Wallace Auto Sales, Inc – Other Consumer Issues

CARL A. WALKER, MARGARET A. WALKER, on behalf of themselves and all others similarly situated, Plaintiffs -Appellants

v.

WALLACE AUTO SALES, INCORPORATED, GUARDIAN NATIONAL ACCEPTANCE CORPORATION, and JOHN DOES, One-Ten, Defendants-Appellees

No. 97-3824
UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT
155 F.3d 927; 1998 U.S. App. LEXIS 22663
April 9, 1998, Argued
September 18, 1998, Decided
PRIOR HISTORY: [*1] Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 96 C 5506. Ann Claire Williams, Judge.
DISPOSITION: AFFIRMED IN PART; REVERSED AND REMANDED IN PART.
COUNSEL: For CARL A. WALKER, MARGARET M. WALKER, on behalf of themselves and all others similarly situated, Plaintiffs – Appellants: DANIEL A. EDELMAN, edelman & combs, CHICAGO, IL USA.
For WALLACE AUTO SALES, INCORPORATED, Defendant – Appellee: MICHAEL KRELOFF, Northfield, IL.
For GUARDIAN NATIONAL ACCEPTANCE CORPORATION, Defendant – Appellee: Arthur L. Klein, Eugene J. Kelley, Jr., John L. Ropiequet, christopher S. Naveja, ARNSTEIN & LEHR, Chicago, IL USA. Brian G. Shannon, R. Christopher Cataldo, JAFFE, SNIDER, RAITT & HEUER, Detriot, MI USA.
JUDGES: Before CUMMINGS, CUDAHY and RIPPLE, Circuit Judges.
OPINIONBY: RIPPLE
OPINION: RIPPLE, Circuit Judge. Carl and Margaret Walker (“the Walkers”) brought this lawsuit against Wallace Auto Sales (“Wallace”) and Guardian National Acceptance Corporation (“Guardian”) on behalf of themselves and all others similarly situated. In their nine-count amended complaint, the Walkers alleged that the defendants systematically imposed hidden finance charges on automobile purchases in violation of the Truth in Lending Act (“TILA”), 15 U.S.C. 1601-1693r . . .
The district court dismissed the Walkers’ TILA claim because the conduct alleged by the Walkers did not constitute a violation of that Act. In addition, the court dismissed the Walkers’ remaining claims because, in its view, those claims could not survive in the [*2] absence of the TILA violation. For the reasons set forth in the following opinion, we reverse the district court’s dismissal of the Walkers’ TILA claim against Wallace, affirm its dismissal of the TILA claim against Guardian and remand the Walkers’ remaining claims to the district court for further consideration.
I. BACKGROUND
A. Facts n1
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n1 Because this case comes to us on appeal from the dismissal of the complaint, we take the facts as alleged in the complaint as true for purposes of our review. See, e.g., Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 1998 WL 388921, at *11 n.1 (7th Cir. 1998).
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On August 31, 1995, the Walkers agreed to purchase a used 1989 Lincoln Continental from Wallace. In order to finance this purchase, the Walkers entered into a retail installment contract (“the contract”) with Wallace. The contract listed the cash price of the automobile as $ 14,040. n2 In addition to that amount, the Walkers agreed to pay $ 699 for an extended warranty and $ 61 for license, title [*3] and taxes. The Walkers made a down payment of $ 1,500, leaving $ 13,300 as the amount to be financed on the sales contract. The Walkers agreed to finance this balance at an annual percentage rate of 25% over a period of four years (48 monthly installments of $ 441 each). Under these terms, the Walkers were to pay $ 7,868 in interest over the course of those four years, giving the sales contract a total value of $ 21,168. All of this information was clearly delineated on the face of the contract.
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n2 According to the August 1995 “Blue Book” used car guide, the car purchased by the Walkers had a retail value of $ 8,300.
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After the sale was complete, Wallace promptly assigned the contract to Guardian, “a specialized indirect consumer finance company engaged primarily in financing the purchase of automobiles through the acquisition of retail installment contracts from automobile dealers.” R.21 P 7. Guardian purchased the contract at a discount of $ 7,182 from the total value.
B. Proceedings in the District Court [*4]
As noted above, the Walkers filed a nine-count amended complaint against Wallace and Guardian in the district court . . . . The gravamen of the Walkers’ complaint is that Wallace artificially inflated the cost of the vehicle to cover the discount at which Guardian purchased the Walkers’ sales contract and therefore imposed a “hidden finance charge” on them in violation of TILA, 15 U.S.C. 1638(a)(3). n3 This same allegation serves as the basis for the Walkers’ RICO and state law-based claims.
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n3 That section provides in pertinent part:
(a) Required disclosures by creditor
For each consumer credit transaction other than under an open end credit plan, the creditor shall disclose each of the following items, to the extent applicable:
. . . .
(3) The “finance charge”, not itemized, using that term.
15 U.S.C. 1638(a)(3). Under TILA, finance charge is defined 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).
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Wallace and Guardian filed a motion to dismiss the Walkers’ amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The district court first examined the Walkers’ TILA claim. The court began its analysis of that claim by noting that the regulations interpreting TILA’s disclosure requirements exempt specific charges from those requirements. Specifically, the Official Staff Commentary to the regulations provides that:
Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or services sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition.
12 C.F.R. Pt. 226, Supp. I at 308-09. The commentary further states that “[a] discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer.” Id. In the district court’s view, the “hidden finance charge” [*6] alleged by the Walkers was in fact a “cost of doing business” and was therefore exempt from TILA’s disclosure requirements. The court therefore held that the Walkers had not pleaded sufficient facts to state a claim under TILA. In addition, the court dismissed the Walkers’ RICO and state law-based claims because, in its view, those claims could not survive in the absence of a TILA violation.
II. DISCUSSION
We review de novo the district court’s decision to dismiss, taking the Walkers’ factual allegations as true and drawing all reasonable inferences in their favor. . . . .
A. The Walkers’ TILA Claim
In order to assess the sufficiency of the Walkers’ TILA claim against Wallace and Guardian, we must first examine the statutory and regulatory framework under which it arises.
Congress enacted TILA “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair billing and credit card practices.” 15 U.S.C. 1601(a); see also Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283, 285 (7th Cir. 1997) (stating that TILA’s purpose is “to protect consumers from being misled about the cost of credit”); Brown v. Marquette Sav. & Loan Ass’n, 686 F.2d 608, 612 (7th Cir. 1982) (stating that Congress enacted TILA to “provide information to facilitate comparative credit shopping and thereby the informed use of credit by consumers”). In order to effectuate this purpose, TILA requires creditors to disclose clearly and accurately to consumers any finance charge that the consumer will bear under the credit transaction. See 15 U.S.C. 1638(a)(3). These stringent disclosure requirements [*8] are designed to prevent creditors from circumventing TILA’s objectives by burying the cost of credit in the price of the goods sold. See Mourning v. Family Publications Serv., Inc., 411 U.S. 356, 364, 36 L. Ed. 2d 318, 93 S. Ct. 1652 (1973); see also Gibson, 112 F.3d at 287 (stating that, under TILA, if merchant charges credit customers a higher “cash” price for an item than cash customers, then that extra charge is a finance charge and must be disclosed as such).
TILA defines a “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). In addition, the regulations implementing TILA (known collectively as “Regulation Z”) provide that:
The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.
12 C.F.R. 226.4(a). [*9] Regulation Z further provides that the term “finance charge” includes “charges imposed on a creditor by another person for purchasing or accepting a consumer’s obligation, if the consumer is required to pay in cash, as an addition to the obligation, or as a deduction from the proceeds of the obligation.” Id. 226.4(b)(6).
These provisions, however, are qualified by the Federal Reserve Board’s Official Staff Commentary to Regulation Z n5 which exempts specific charges from TILA’s disclosure requirements:
Costs of doing business. Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or services sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition. For example:
A discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer.
12 C.F.R. Pt. 226, Supp. I at [*10] 308-09.
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n5 The official staff opinions of the Federal Reserve Board construing TILA and Regulation Z are binding on this court unless they are “‘demonstrably irrational.'” McGee v. Kerr-Hickman Chrysler Plymouth, Inc., 93 F.3d 380, 383-84 (7th Cir. 1996) (quoting Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565, 63 L. Ed. 2d 22, 100 S. Ct. 790 (1980)).
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In this case, the Walkers allege that the defendants violated TILA by artificially inflating the “cash price” of the vehicle purchased by the Walkers to cover the cost of the discount at which Guardian purchased the Walkers’ sales contract. The Walkers contend that, by passing on the cost of Guardian’s discount to the Walkers, the defendants imposed a “hidden finance charge” on them in violation of TILA, 15 U.S.C. 1638(a)(3). The defendants, however, contend that the Walkers’ TILA claim must be dismissed because the “hidden finance charge” alleged by the Walkers was in fact a “cost of doing business” and was therefore exempt from TILA’s disclosure requirements. [*11] See 12 C.F.R. Pt. 226, Supp. I at 308-09.
As an initial matter, we note that, under TILA, Guardian may only be charged as an assignee, not a creditor. See 15 U.S.C. @ 1602(f); 12 C.F.R. Pt. 226, Supp. I at 300. Accordingly, the Walkers must properly allege a cause of action against Wallace (the creditor) before it can assert a claim against Guardian (the assignee). We therefore turn first to the issue of whether the Walkers’ amended complaint states a valid TILA claim against Wallace.
1. Wallace’s Liability
In paragraph 27 of the Walkers’ amended complaint, they allege that:
It is the standard policy of Wallace and other dealers who receive financing from Guardian to charge hidden finance charges on vehicles sold on time. The purported cash price of vehicles sold in this manner substantially exceeds the value of the vehicle, and the price at which comparable vehicles are sold for cash, and includes part of the finance charge.
R. 21 P 27. In the next paragraph, the Walkers further allege that this “hidden finance charge resulted from the need of [Wallace] to pass on to the consumer the discount imposed by Guardian.” Id. P 28. It is our task to discern whether [*12] these allegations are sufficient to state a claim against Wallace under TILA.
As we noted above, TILA requires creditors to disclose clearly and accurately any finance charge that the consumer will bear in a particular credit transaction. As the definitions set forth above indicate, this means that a creditor-merchant must disclose to a consumer buying on credit exactly how much he will pay for that credit. See 12 C.F.R. 226.4(a) (defining finance charge as “the cost of consumer credit as a dollar amount”). In this case, the Walkers allege that Wallace is charging higher prices to customers who are buying cars on credit than to customer who are paying cash. In other words, credit customers, such as the Walkers, are paying higher “cash” prices only because they are buying on credit. The higher cash price paid by these customers is therefore part of the cost of buying on credit. Under TILA, such a cost is a finance charge and must be disclosed to the consumer as such. Accordingly, we conclude that the Walkers have alleged sufficient facts to state a cause of action against Wallace under TILA.
Our conclusion that the Walkers allege sufficient facts to state a cause of action under [*13] TILA is supported by the Supreme Court’s exposition of the concept and effect of a “hidden finance charge” in Mourning. In that case, the Court noted that “one means of circumventing the objectives of the Truth in Lending Act, as passed by Congress, was that of ‘burying’ the cost of credit in the price of goods sold.” Id. at 366. The Court explained further that, in many credit transactions, creditors sought to evade TILA’s mandate by claiming that no finance charge had been charged and assuming “the cost of extending of credit as an expense of doing business, to be recouped as part of the price charged in the transaction.” Id. To illustrate this concept, the Court provided the following example:
Two merchants might buy watches at wholesale for $ 20 which normally sell at retail for $ 40. Both might sell immediately to a consumer who agreed to pay $ 1 per week for 52 weeks. In one case, the merchant might claim that the price of the watch was $ 40 and that the remaining $ 12 constituted a charge for extending credit to the consumer. From the consumer’s point of view, the credit charge represents the cost which he must pay for the privilege of deferring payment of the debt [*14] he has incurred. From the creditor’s point of view, much simplified, the charge may represent the return which he might have earned had he been able to invest the proceeds from the sale of the watch from the date of the sale until the date of payment. The second merchant might claim that the price of the watch was $ 52 and that credit was free. The second merchant, like the first, has foregone the profits which he might have achieved by investing the sale proceeds from the day of the sale on. The second merchant may be said to have ‘buried’ this cost in the price of the item sold. By whatever name, the $ 12 differential between the total payments and the price at which the merchandise could have been acquired is the cost of deferring payment.
Id. at 366 n.26. The facts in this case are substantially similar to those in the Court’s hypothetical. Indeed, the Walkers allege that Wallace, like the second merchant, buried part of the cost of credit in the “cash” price. n6 As the Court noted, this extra charge above the amount paid by a cash customer is “the cost of deferring payment.” Id. Under TILA, that cost must be disclosed as a finance charge.
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n6 Wallace contends that this case is distinguishable from the hypothetical in Mourning because, in this case, Wallace did disclose a finance charge to the Walkers whereas, in the Mourning hypothetical, the second merchant advertised the watch as credit free. TILA, of course, is aimed at ensuring the full and complete disclosure of credit terms. Therefore, the fact that Wallace disclosed a portion of the finance charge to its customers does not excuse it from failing to disclose the remainder.
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Moreover, our conclusion is further strengthened by this court’s recent decision in Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283 (7th Cir. 1997). In that case, we consolidated three appeals from district court decisions dismissing claims that car dealers violated TILA by charging higher prices for warranties in credit transactions than in cash transactions. Specifically, the plaintiffs alleged that the difference between the price of the warranty in credit transactions and the price of the warranty in cash transactions constituted a finance charge that must be disclosed under TILA. In assessing the plaintiffs’ allegations, we concluded that the dealers’ alleged concealment of credit costs in the warranty price circumvented the objectives of TILA by preventing consumers from accurately gauging the cost of credit. n7 Indeed, in reversing the district courts’ dismissals of plaintiffs’ lawsuits, we stressed that the dealers’ alleged conduct constituted the “type of fraud that goes to the heart of the concerns that actuate the Truth in Lending Act.” Id. The same can be said of Wallace’s alleged practices in this case. Instead of hiding the additional finance charges in the price [*16] of warranties, Wallace allegedly hid a portion of the finance charge in the “cash” price of the cars sold to credit customers. This fraud is no different from that alleged in Gibson–in both cases, the dealers allegedly misled the consumers about the true cost of buying on credit.
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n7 To illustrate this point, Chief Judge Posner offered the following example:
If the amount retained of the fee for an extended warranty or other third-party service is greater in credit transactions than in cash transactions, then in deciding whether to pay cash or buy on credit the consumer will assume that if he pays cash he will have to pay the same additional fee to get the extended warranty; if the facts are as the plaintiffs claim, he would not. The purchaser thinks he’ll have to pay $ 800 for an extended warranty whether he pays cash or buys on credit, whereas if the retention really is smaller on cash purchases than on credit purchases and the third party’s fee net of the retention is the same, the customer will not have to pay $ 800 if he pays cash for the car.
Gibson, 112 F.3d at 287.
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Wallace, however, contends that, even if we characterize the cost allegedly imposed on the Walkers and other credit customers as a finance charge, the particular type of charge involved here, “a discount imposed on a credit obligation when it is assigned by a seller-creditor to another party,” see 12 C.F.R. Pt. 226, Supp. I at 308-09, is exempt from TILA’s disclosure requirements. As we noted earlier, the Official Staff Commentary to Regulation Z exempts certain charges from TILA’s disclosure requirements:
Costs of doing business. Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or services sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition. For example:
A discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer.
Id. This regulation [*18] makes clear that merchant-creditors are not necessarily required to disclose to consumers that they plan on selling the retail installment contract at a discount. However, if a creditor-merchant “separately imposes” the cost of the discount on the particular credit consumer, then that cost does not fit within the “cost of doing business” exemption, but rather is a finance charge and must be disclosed to the consumer as such. Therefore, the critical issue in this case is the meaning of the term “separately imposed” and whether Wallace’s alleged conduct constitutes such a separate imposition.
In this case, the district court concluded that the Walkers failed to allege that Wallace “separately imposed” the cost of the discount on them. In the district court’s view, even if Wallace artificially inflated the “cash price” of the automobile sold to the Walkers to cover the cost of the discount imposed by Guardian, the discount was not “separately imposed” on the Walkers because those charges were included in the cash price of the car. We cannot accept the district court’s interpretation of the term “separately imposed.” Indeed, under the district court’s interpretation, a creditor would [*19] be allowed to impose a cost on consumers buying on credit without disclosing to those customers that they are paying more only because they are buying on credit. n8 Acceptance of this view would therefore eviscerate TILA’s stated purpose to “assure a meaningful disclosure of the credit terms so that the consumer will be able to compare more readily various credit terms available to him and avoid the uninformed use of credit.” 15 U.S.C. 1601. By contrast, we believe that the term “separately imposed” must be interpreted in a manner consistent with TILA’s purpose of ensuring that consumers are informed fully of the costs of buying on credit. Accordingly, we hold that a charge should be considered “separately imposed” on a credit consumer when it is imposed in credit transactions but not in cash transactions. n9
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n8 In fact, adoption of the district court’s view in this case would severely undermine our holding in Gibson by allowing unscrupulous used car dealers to evade our holding in that case by hiding a portion of the finance charge in the cash price of the vehicle rather than concealing it as part of the price of the extended warranty. Given that TILA and Regulation Z were drafted in order to protect consumers from such untoward practices, we do not think that Congress or the Federal Reserve Board (the agency charged with drafting Regulation Z) could have intended such an anomalous result. [*20]
n9 The district court’s view appears to be that an item cannot be separately imposed on a consumer unless it appears separately on the face of the contract. Therefore, because the Walkers failed to allege that the defendants imposed the cost of the discount separately from the Walkers’ obligations to pay the purchase price of the vehicle, the district court held that the Walkers failed to allege nondisclosure of a finance charge. However, as noted above, this interpretation of the phrase “separately imposed” turns TILA on its head, rewarding a creditor for burying the cost of credit in the cash price and penalizing it for disclosing the cost as a separate line item. In our view, because a finance charge may be imposed directly or indirectly, see 15 U.S.C. 1605 & 12 C.F.R. 222.6(4), a charge may be separately imposed upon a consumer despite the fact it does not appear separately on the face of the contract. Accordingly, in this case, the fact that Wallace did not separately list the cost of discount on the face of the retail installment contract is not fatal to the Walkers’ claim.
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In their [*21] amended complaint, the Walkers allege that Wallace passed on the cost of the discount imposed by Guardian, that this cost was passed on in credit transactions only and that Wallace failed to disclose it as a finance charge. At this early stage in the proceedings, these allegations are sufficient to prevent the dismissal of the Walkers’ TILA claim against Wallace. In order to prevail in the end, however, the Walkers will have to prove their allegation that Wallace separately imposed the cost of Guardian’s discount on them. As we noted above, the commentary to Regulation Z makes it clear that it is permissible for a car dealer to assign retail installment contracts to a finance company at a discount, without disclosing the discount to customers. See 12 C.F.R. Pt. 226, Supp. I at 308-09. Moreover, the commentary specifically provides that a “charge directly or indirectly imposed by a creditor” is not considered to be a finance charge if the charge “is imposed uniformly in both cash and credit transactions.” 12 C.F.R. @ 226.4(a) & Pt. 226, Supp. I at 308. Accordingly, Wallace need not disclose the cost of the discount as a finance charge if it attempts to recoup that cost by charging [*22] all customers higher prices. Under that scenario, the discounts would not be “separately imposed” on credit consumers like the Walkers, but, like any other overhead item, would be taken into account in the price of all vehicles sold.

Finally, in arriving at the holding we reach today, we stress that nothing in the law prevents a merchant-creditor from passing on the full cost of a discount imposed by an assignee to a credit purchaser. However, if the merchant-creditor chooses this route, TILA requires that it disclose that amount to the purchaser as a finance charge. . . .