Marjorie JOSEPH et al., Appellants, v. NORMAN‘S HEALTH CLUB, INC., et al., Appellees. Barbara C. MORSE et al., Appellants, v. NORMAN‘S HEALTH CLUB, INC., et al., Appellees.
Nos. 75-1141, 75-1142
United States Court of Appeals, Eighth Circuit
March 5, 1976
Rehearing and Rehearing En Banc Denied March 30, 1976
532 F.2d 86
Gerald A. Rimmel and Alan E. Popkin, St. Louis, Mo., for appellees.
Gerald A. Rimmel, Susman, Schermer, Willer & Rimmel, St. Louis, Mo., for appellees Boston Securities, Inc., of Kirkwood, Boston Securities of Florissant, Boston Securities, Inc., of Moline Acres, Boston Securities, Inc., and Boston Securities Corp. of Missouri.
Alan E. Popkin and Richard C. Witzel, Rosecan, Popkin & Chervitz, St. Louis, Mo., for appellee Consolidated Finance Corp.
Before CLARK,* Associate Justice and LAY and ROSS, Circuit Judges.
LAY, Circuit Judge.
These appeals, brought by the plaintiffs in two consolidated class actions, involve the scope and application of the Truth in Lending Act (TILA),
Facts
The facts are substantially undisputed. Between 1960 and 1971, Norman R. Saindon owned and operated a chain of health clubs in the St. Louis, Missouri area. “Lifetime memberships” were offered to the public for $360, payable in 24 equal monthly installments of $15 each. Before the Truth in Lending Act became effective, a few memberships were also sold for cash at discounts of 10 to 15 percent off the total installment price.3 The district court found that it was the intention of the Health Club to sell almost all memberships on the installment plan and to discount all the notes to finance companies. Ninety-eight percent of club members chose to sign installment notes. 386 F.Supp. at 783.
The Club had dealt with seven or more finance companies since 1960, but by the
The Club‘s practice was to require customers purchasing a membership on the installment plan to sign a promissory note and to fill out a standard credit application form. The latter was used to provide credit information to the finance companies. Once these forms had been filled out, the Club would often notify one of the finance companies the same day. The finance company would conduct an immediate credit check on the customer and would call the customer to verify that he had signed the membership contract. If the finance company found the new member to be an acceptable credit risk, the Club would assign the note to the finance company without recourse. The finance company would pay the Club the face amount of the note less the amount of the discount provided in the agreements.
Thereafter, the finance company would treat the club member whose note it had accepted just as it treated its own direct loan customers. The finance company would send the club member a payment coupon book as well as instructions that all payments were to be made directly to the finance company and a notice that a late charge would be assessed for late payments. The club member‘s account was carried on Consolidated‘s books as a “loan” with the member described as the “customer” and the finance company as the “lender“. Defendant Consolidated would notify the club members who had made a certain number of payments that they were now preferred customers of Consolidated. Boston similarly designated club accounts as “loans“.
The discount, that is, the difference between the face amount of the customer notes and the cash amount which the finance companies would pay the Club upon assignment of each customer note, was substantial. It ranged from $85 to $165 on the $360 notes. The discount rate was the same on all notes at any one time, but it was renegotiated upward from time to time.
The District Court‘s Decision.
The district court held that the installment note form violated TILA in several respects. It held that the price reduction of 10 percent or more which had been allowed the four members who paid cash after July 1, 1969 indicated that there was an undisclosed finance charge of 10 percent imposed on installment customers. The district court held that the failure to disclose this and certain other facts rendered the Health Club liable to the plaintiffs.
On the other hand, the district court found that the finance companies had not extended consumer credit and thus had no obligation to make disclosures to the class members. The court similarly found that the Club was not acting as a “conduit” for the finance companies since there was no interlocking control between the Club and the finance companies and the latter did not specifically participate in the initial loan transaction.
The plaintiffs characterize the membership transactions as, in substance, a consumer loan extended by the finance companies to the members, with the proceeds paid on the members’ account to the Club. They urge that the discount on the note is the finance charge in the transaction. Thus, in plaintiffs’ view, the Club served as a conduit for the finance companies who were the true “extenders” of consumer loans in
The finance companies, on the other hand, contend that the only consumer credit transaction within the intended scope of the Act was a credit sale by the Club to the plaintiffs. The subsequent purchase at a discount of the promissory notes by the finance companies, it is urged, was a bona fide commercial or business transaction exempted from TILA disclosure requirements until the 1974 amendments.5
The fundamental question is whether Congress intended the finance companies to bear some responsibility for TILA disclosures under the circumstances disclosed. We think it did.
An Overview of the Act.
The fundamental purpose of the Truth in Lending Act,
The Act was intended to change the practices of the consumer credit industry, and the statute reflects Congress’ view that this should be done by imposing disclosure requirements on those who “regularly” extend or offer to extend consumer credit.6 In interpreting the Act, the Federal Reserve Board and the majority of courts have focused on the substance, rather than the form, of credit transactions, and have looked to the practices of the trade, the course of dealing of the parties, and the intention of the parties in addition to specific contractual obligations. Thus, in Mourning v. Family Publications Service, Inc., supra, the Supreme Court said:
The hearings held by Congress reflect the difficulty of the task it sought to accomplish. Whatever legislation was passed had to deal not only with the myriad forms in which credit transactions then occurred, but also with those which would be devised in the future. . . . The language employed evinces the awareness of Congress that some creditors would attempt to characterize their transactions so as to fall one step outside whatever boundary Congress attempted to establish. 411 U.S. at 365, 93 S.Ct. at 1658, 36 L.Ed.2d at 327.
The statute requires certain information, such as total finance charges and the applicable annual percentage rate, to be disclosed “to each person to whom consumer credit is extended and upon whom a finance charge is or may be imposed.”
Congress defined “creditor” broadly to include all “who regularly extend, or arrange for the extension of, [consumer] credit for which the payment of a finance charge is required, whether in connection with loans, sales of property or services, or otherwise.”
The Liability of the Finance Companies Under the Act.
In the instant case, the finance companies operated under a definite working arrangement with the Club. The evidence discloses that (1) the finance companies were alerted almost simultaneously with the customer‘s execution of a note; (2) an immediate credit check was then made by the finance companies; (3) if the customer‘s note was accepted, the finance companies paid the Club the amount of the note less the discount; (4) the finance companies accepted assignments without recourse to the Club, thus relying solely on the customer for payment; (5) the finance companies often contacted the customer the same day and upon approving him, the companies would send out their payment book describing the manner of payment and notice of late charges (not mentioned in the note assigned); (6) the finance companies carried the note on their books as a “loan” and listed a “finance charge“; and (7) thereafter, the finance companies treated the club member in the same manner as they did their direct consumer loan customers. The situation was no different than if the finance companies had gone to the Club with the prospective member, paid the Club for the membership and then taken the customer‘s note just as they did take it.
We find, as have all but one of the courts faced with similar facts, that where the third-party financer becomes intimately involved in the relevant credit transactions it may become liable as an extender of
Contrary to the view taken by the district court, we find nothing in the Act which requires the extender of credit to have an interlocking directorate with an arranger or for the two to be commonly controlled in order to have the duty to disclose. Such a requirement would not further the policy of the Act which is to provide full disclosure of hidden finance costs to the consumer. The district court recognized that the regulations encompass a situation in which one party serves as a conduit or arranger of credit to be extended by a third party.9 In order to find the arranger liable, he must operate under some “business or other relationship” with the extender of credit. However, there is no evidence that the Federal Reserve Board intended these words to mean anything more than pursuing in the regular course of business a practice of channeling credit business to another.10 This obviously means more than isolated or even periodic discounting of consumer paper between commercial enterprises. Without attempting to limit the definition, we think it clearly encompasses credit transactions which are prearranged and systematically carried out as in this case. It is important to remember, though, that Regulation Z, § 226.2(f) does not discuss the requisite proof of liability as a credit extender; it relates only to the liability of one who arranges credit to be extended by another. The focal issue here, as earlier stated, is
The Discount as a Finance Charge.
Finding liability, the remaining issue is whether the discount constituted a finance charge under the Act.
The district court did not discuss whether the discount on the notes assigned to the finance companies was a finance charge which should have been disclosed by the Club.11 The district court did note however that unitary price schemes, under which the seller offers goods for the same price whether paid in cash or on the installment plan, can hide a finance charge.12 386 F.Supp. at 791.
The Act defines “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, including . . . any amount payable under a discount . . . system.
15 U.S.C. § 1605(a) (emphasis added).
The fact that a particular charge may not be included in the definitions of interest found in state usury laws is not controlling, for “finance charge” under TILA was intended to include not only “interest” but many other charges for credit. H.R.Rep.No.1040, 90th Cong., 2d Sess., 2 U.S.Code Cong. & Admin.News pp. 1962, 1977 (1968). The Federal Reserve Board has ruled that discounts paid by a seller (such as the Health Club) of consumer accounts receivable must be included in the stated finance charge if and to the extent that they are passed on to the consumer. See 12 C.F.R. §§ 226.4(a), 226.406; FRB Letter No. 433 (Jan. 21, 1971) by Tynan Smith, CCH Consumer Credit Guide ¶ 30,627.
In the instant case, it is obvious that all of the discount originally agreed upon by the Club and the finance companies was passed along to the customers as a charge for use of credit.13 It may be, however, that some portion of the subsequent increases in the discount was not passed along to the customers and was rather absorbed by the Club as a reduction in its profit. On the other hand, adding more members may have permitted the seller so to reduce cost per member that it could provide the same services without increasing the face amount of the note.14 The
district court should explore this matter on remand. See 12 C.F.R. § 226.406.
Since the amount of the discounts charged by the finance companies varied from time to time, it is necessary to remand to the district court for computation of the penalty to be assessed under the Act in favor of the plaintiffs and against the finance companies.
The judgment in favor of the finance companies is vacated and the cause reversed and remanded for further proceedings.
ROSS, Circuit Judge (dissenting).
In my opinion the plaintiffs have failed to show a sufficient relationship between the health clubs and the defendant finance companies at the time the notes were executed in order to invoke the remedies of TILA. I would affirm on the basis of the well reasoned opinion of Judge Nangle. Joseph v. Norman‘s Health Club, Inc., supra.
Notes
Banta, Negotiability in Consumer Sales: The Need for Further Study, 53 Neb.L.Rev. 195 (1974) (emphasis added).Because few people can afford to pay cash for consumer goods and services, and because most dealers in such goods and services are not in the business of lending money, the typical consumer-dealer transaction involves a third-party financer. The most common method of financing the purchase of goods and services is the three-party installment credit sale. Under this arrangement, when the consumer purchases goods from the dealer, he obligates himself to pay the dealer in a series of monthly installments by signing an installment sales contract . . . . [T]he dealer may assign to a financer the right to receive the monthly payments. In substance, what this amounts to is an indirect loan from the financer to the consumer.
The plaintiffs allege that TILA as originally enacted makes the finance companies liable as assignees under
(Emphasis added).(f) “Arrange for the extension of credit” means to provide or offer to provide consumer credit which is or will be extended by another person under a business or other relationship pursuant to which the person arranging such credit receives or will receive a fee, compensation, or other consideration for such service or has knowledge of the credit terms and participates in the preparation of the contract documents required in connection with the extension of credit. It does not include honoring a credit card or similar device where no finance charge is imposed at the time of that transaction.
FRB Letter No. 538 (July 21, 1971) by J. L. Robertson, CCH Cons. Credit Guide ¶ 30,752.Banks should take appropriate measures to see that they do not purchase or accept as collateral dealer paper concerning which the consumer has not received a complete and accurate disclosure statement. . . . The bank may be subject to whatever defenses or damage claims the customer may have under the Truth in Lending Act with regard to such paper.
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. 411 U.S. at 366, 93 S.Ct. at 1659, 36 L.Ed.2d at 328.