Opinion
NO. C-97-20118 RMW, [Docket No. 180].
March 13, 2000.
William E. Kennedy, Law Office of William E. Kennedy, Santa Clara, CA, Counsel for Plaintiff.
Eric Wright, Scott Maurer, East San Jose Community Law Center, San Jose, CA, Counsel for Plaintiff.
Jonathan D. Wolf, William E. Adams, Berliner Cohen, San Jose, CA, Counsel for Defendants.
Jonathan P. Hayden, Daniel K. Slaughter, Sarah E. Margolies, Heller Ehrman White McAuliffe, San Francisco, CA, Counsel for Defendants.
ORDER RE MOTION FOR PARTIAL SUMMARY JUDGMENT
The motion of defendants Household Retail Services, Inc. ("HRSI"), Household Bank (Nevada) National Association ("HBNV"), and Household Bank (Illinois) National Association ("HBIL"), (collectively "Household Defendants") for Partial Summary Judgment was heard on March 10, 2000. The court has read the moving and responding papers and heard oral argument of counsel. For the reasons set forth below, the court denies the motion.
I. BACKGROUND
Defendant Fidelity Water Systems, Inc. ("Fidelity Water") distributes water treatment devices to water retailers, including defendant Fidelity Purewater, Inc. ("Fidelity"). Plaintiff alleges that Fidelity and its president Scott Batiste ("Batiste") sell these water purification systems to homeowners through deceptive door-to-door sales practices. Most purchasers of these water purification systems finance the systems through a private label credit card offered by Household Defendants. Plaintiff alleges that Household Defendants are involved in a financing scheme with Fidelity which does not provide the required credit disclosures to the consumers. Household Defendants allege that the credit plan is an open-end credit plan as defined by the Truth in Lending Act ("TILA") and that the proper open-end credit disclosures are given to each applicant. Plaintiff alleges that the credit plan is actually a closed-end credit plan, and the more stringent disclosures required by TILA for closed-end credit plans are not given. Plaintiff's motion for class certification was denied on February 17, 2000. Plaintiff was given leave to file an amended complaint and to make a renewed motion for certification of the TILA claims.
II. LEGAL STANDARDS
Summary judgment shall be granted if the evidence shows "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Here, Household Defendants move for summary judgment on the ground that there is no genuine dispute of fact that the Household credit plan is an open-end credit plan. Under TILA, "the term `open end credit plan' means a plan under which the creditor reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance." 15 U.S.C. § 1602(i). The regulations mirror the language of the statute.
"Open-end credit" means consumer credit extended by a creditor under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.12 C.F.R. § 226.2(a)(20). "`Closed-end credit' means consumer credit other than `open-end credit' as defined in this section. 12 C.F.R. § 226.2(a)(10).
The statute and the regulations are not consistent in whether a hyphen should be used between the words "open" and "end" when describing a credit plan. The court prefers the usage with the hyphen.
III. ANALYSIS
The parties concede that this case turns on a determination of whether the Household Defendants reasonably contemplated repeat transactions under the credit plan. Summary judgment is generally an inappropriate way to decide questions of reasonableness because "the jury's unique competence in applying the `reasonable man' standard is thought ordinarily to preclude summary judgment." TSC Indus. v. Northway, Inc., 426 U.S. 438, 450 n. 12 (1976). The Ninth Circuit, however, has characterized as "meritless" the contention that "reasonableness is always a question of fact which precludes summary judgment." West v. State Farm Fire Casualty Co., 868 F.2d 348, 350 (9th Cir. 1989); see also In re Software Toolworks Inc., 50 F.3d 615, 621 (9th Cir. 1994) (specifically rejecting the argument that reasonableness "is a question for the jury, even on undisputed facts.") (discussing questions of due diligence in securities litigation). "[W]hile reasonableness is generally a question of fact for the jury, it becomes a question of law and loses its triable character if the undisputed facts leave no room for a reasonable difference of opinion." West, 868 F.2d at 350. Thus, the circumstances under which a court may resolve the question of reasonableness as a matter of law are extremely limited. "[R]easonableness becomes a question of law appropriate for determination on motion for summary judgment when only one conclusion about the conduct's reasonableness is possible."Id. at 351. The court may grant summary judgment in plaintiff's favor on the question of reasonableness only where "no rational jury could conclude that the defendant had not acted reasonably." Software Toolworks, 50 F.3d at 622. Accordingly, the court may grant summary judgment in defendant's favor on the question of reasonableness only where no rational jury could conclude that the defendant acted unreasonably.Construing the evidence in the light most favorable to plaintiff, the non-moving party, the court determines that repeat transactions on the credit plan account for 2-3 % of the total dollar volume of transactions on the accounts, and approximately 1 % of the accounts generate a repeat transaction in any given month. See Kennedy Dec. ¶¶ 18-21. In order for the court to grant the motion for summary judgment, the court would have to conclude that no rational jury could conclude that it was unreasonable for the Household Defendants to contemplate repeat transactions based on this data.
Household Defendants cite to Benion v. Bank One, Dayton, N.A., 144 F.3d 1056 (7th Cir. 1998) in which Chief Judge Posner affirmed summary judgment in defendant's favor on similar facts. In Benion plaintiff bought a satellite television system that was financed on a private label credit card. The defendant inBenion gave only open-end disclosures. The credit card could be used to buy related goods, such as programming, but the credit limit on the account was such that the dollar value of repeat transactions was likely to be small in comparison to the value of the initial purchase.
Plaintiff argues that defendants are attempting to evade TILA's closed-end disclosure requirements that mandate creditors disclose such information as the total finance charge and the total purchase price by allowing customers to make insignificant subsequent purchases on the account. Plaintiff argues that this loophole would allow automobile dealerships to sell cars on an open-end credit plan provided the credit plan allowed customers to purchase parts or service on the account. Conceivably this loophole would even allow houses to be financed without providing closed-end credit disclosures as long as the purchaser could apply gardening services, utility bills, or property taxes to the balance of the home loan.
The Seventh Circuit considered and rejected this same argument in Benion, holding, "if such a method of financing big-ticket purchases would be an abuse of the open-end credit provision of the Truth in Lending Act, as we may assume it would be, it could be curbed only by changing the regulatory scheme, for example by specifying a minimum ratio of subsequent purchases to original purchase." Id. at 1059. The court noted that when "an activity of a technical and specialized character is comprehensively regulated by an expert agency, as consumer credit disclosures are comprehensively regulated by the Federal Reserve Board . . . courts should generally leave the plugging of loopholes to the agency[.]" Id.
The court went on to note the same proposed amendment to the Official Staff Commentary cited by plaintiff here. The proposed amendment set forth additional factors to be considered in assessing whether a plan was open-end credit. Under the proposed factors, the present plan would probably not have qualified as open-end credit. See 62 Fed. Reg. 64769, 64772. While expressing concern over creditors' failure to disclose the total finance charge in "the financing of used automobiles and the door-to-door credit sales of satellite dishes, water treatment systems, and home improvement contracts," the Board determined that formulation of a clear rule differentiating between legitimate and illegitimate open-end credit programs was not feasible. 63 Fed. Reg. 16669, 16670 (emphasis added). The court concluded that "[i]f the Board cannot formulate such a rule in the exercise of its expert administrative discretion, we surely cannot formulate it as a matter of statutory interpretation."Benion, 144 F.3d at 1059.
Plaintiff attempts to distinguish Benion on the grounds that the present case involves exactly the type of illegitimate extension of open-end credit in the door-to-door sale of water treatment systems that concerned the Board. Moreover, plaintiff argues that the credit card in Benion could be used to purchase a variety of products from any of defendant's retail stores, while the Fidelity credit card could only be used to purchase water treatment products. Household Defendants respond that Benion is particularly controlling because the repeat transaction rate here is greater than that in Benion.
Both sets of arguments miss the mark. In Benion, the Seventh Circuit noted that the statute was ambiguous as to the amount of repeat transactions required before it became reasonable for the creditor to expect repeat transactions. The court also noted that the Board had been unable to formulate a bright line rule to distinguish legitimate from illegitimate open-end credit plans. The court therefore concluded that it would be inappropriate to formulate such a bright line rule as a matter of statutory interpretation when the Board had been unable to formulate such a rule in the exercise of its expert administrative discretion. The Seventh Circuit appears to have affirmed summary judgment in large part because in that case the "plaintiffs [did] not seek a trial (their lawyer made this clear at argument) at which to try to prove that it was unreasonable for the bank to expect repeat purchases." Id. at 1060.
The court agrees with the Seventh Circuit that no bright line rule distinguishing legitimate open-end credit plans from plans that appear to be open-end credit plans, but which are actually closed-end credit plans designed to evade TILA disclosure requirements, can be created as a matter of statutory interpretation based on the number or dollar volume of repeat transactions. Moreover, the parties do not agree that this question is appropriately resolved on summary judgment. Accordingly, the court does not feel constrained to determine whether this credit plan is open-end or closed-end as a matter of law. See Perry v. Household Retail Services, Inc., 953 F. Supp. 1370, 1375 (M.D.Ala. 1996) (denying a similar motion by HRSI for summary judgment that the anticipation of repeated transactions under a private label credit card used to finance satellite television dishes was reasonable). In fact, as a reasonable jury could disagree as to whether it was reasonable for the Household Defendants to contemplate repeat transactions, the court is likely precluded from resolving this question as a matter of law. See 12 C.F.R. § 226.2(a)(20)-.3 (1989) ("The criterion regarding repeated transactions is a question of fact to be decided in the context of the creditor's type of business and the creditor's relationship with the consumer."). Therefore, the Household Defendants' motion for summary judgment is denied.
HRSI separately moves for summary judgment on the ground that it was not a creditor for any of the transactions potentially covered by the class. HRSI relies on a declaration from its Vice President of Business Development, Cornell K. Caldwell that it was not a creditor for any of the transactions at issue. See Caldwell Dec. ¶ 3. In response, plaintiff produces a letter sent to Alex Long regarding his fidelity account on HRSI stationary.See Long Dec., Ex. C. Although marginal, this evidence is sufficient to raise a triable issue of fact as to whether HRSI was a creditor in any of these transactions, or was acting in concert with the creditors in any of these transactions.
IV. ORDER
The motion for partial summary judgment is denied.