Opinion
Case No. 1:00cv 695
May 23, 2001
OPINION
This is an action brought under the federal Truth in Lending Act (TILA), 15 U.S.C. § 1601-1641. Plaintiffs Michael Rockey and Terry Rockey, husband and wife, are residents of Kent County, Michigan. Plaintiffs allege that on August 15, 2000, they purchased a 1997 Chevrolet Blazer from defendant Courtesy Motors, Inc., doing business in Kent County as Courtesy Dodge. Plaintiffs purchased an extended warranty on the Blazer. On the retail installment contract, under "amounts paid to others," $1,590 was listed as the price of the extended warranty. Plaintiffs contend that defendant never paid the full $1,590 to any third party, but retained hundreds of dollars for itself as a "secret profit." The amount retained by a car dealer on the sale of extended warranties (also known as vehicle service contracts) is referred to as an "upcharge." Plaintiff's first amended complaint asserts that defendant's improper itemization violated the requirements of TILA, 15 U.S.C. § 1638(a)(2)(B)(iii), and Regulation Z, 12 C.F.R. § 226.18(c)(1)(iii). Plaintiffs also claim that defendant's actions violated numerous state laws. Plaintiffs seek monetary damages, as well as declaratory and injunctive relief.
By opinion and order entered March 13, 2001, the court denied plaintiffs' motion for class certification, finding that the individual issues of causation and damages under TILA predominated over common questions. The court further determined that the pendent state-law claims should be dismissed without prejudice, because they presented novel questions of state law. Consequently, only the federal TILA claims brought by Michael and Terry Rockey remain pending before the court.
Plaintiffs have moved for partial summary judgment, requesting a finding in their favor on the issue of liability under TILA. (Motion, docket # 17). Defendant opposes the motion. Because the material facts are undisputed, the motion presents only an issue of law, on which oral argument would not be helpful. The court therefore elects to decide the motion without a hearing. W.D. MICH. LCIVR 7.2(d). For the reasons set forth below, the court concludes that plaintiffs are entitled to a partial summary judgment on the issue of defendant's violation of TILA, but that the questions of causation and damages must be submitted to a jury.
Summary Judgment Standard
Summary judgment is appropriate when the record reveals that there are no issues as to any material fact in dispute and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Parker v. Metropolitan Life Ins. Co., 121 F.3d 1006, 1009 (6th Cir. 1997) ( en banc); Sable v. General Motors Corp., 90 F.3d 171, 175 (6th Cir. 1996); Payne v. Board of Education, 88 F.3d 392, 397 (6th Cir. 1996) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986)). The standard for determining whether summary judgment is appropriate is "whether `the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.'" See Adcox v. Teledyne, Inc., 21 F.3d 1381, 1385 (6th Cir. 1994) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. at 251-52); see also, EEOC v. United Parcel Serv., No. 99-4367, ___ F.3d ___, 2001 WL 473062, at *3 (6th Cir. May 7, 2001); Henderson v. Ardco, Inc., No. 99-0407, ___ F.3d ___, 2001 WL 410173, at *2 (6th Cir. Apr. 24, 2001). The court must consider all pleadings, depositions, affidavits, and admissions on file, and draw all justifiable inferences in favor of the party opposing the motion. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Wathen v. General Elec. Co., 115 F.3d 400, 403 (6th Cir. 1997).
Facts
On August 15, 2000, plaintiffs agreed to purchase a 1997 Chevrolet Blazer from defendant Courtesy Motors, Inc., doing business in Kent County as Courtesy Dodge. One of the items demanded by plaintiffs as a condition of purchase was an extended warranty. Under "amounts paid to others," the Automobile Retail Installment Contract listed the amount of $1,590 for the extended warranty. (docket # 16, Ex. 2). It is undisputed that defendant did not pay the entire amount to a third party, but retained $715.00 for itself as a fee or commission.
Discussion
TILA requires creditors to make certain cost-of-credit disclosures before credit is extended. 15 U.S.C. § 1638(b). These disclosures include the identity of the creditor, the amount financed, the finance charge, the annual percentage rate, and other enumerated disclosure items. 15 U.S.C. § 1638(a). Congress passed TILA "to assure 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." 15 U.S.C. § 1601(a). TILA grants broad authority to the Federal Reserve Board to promulgate regulations necessary to implement the Act. 15 U.S.C. § 1604 (a); see Mourning v. Family Pub. Serv., Inc., 411 U.S. 356, 366 (1973). Courts interpreting TILA defer to the regulations developed by the Federal Reserve Board. See Begala v. PNC Bank, Ohio, Nat'l Ass'n, 163 F.3d 948, 950 (6th Cir. 1998). Pursuant to its grant of authority, the Federal Reserve Board has adopted Regulation Z, 15 C.F.R. § 226.1, et seq.
Plaintiffs' TILA claim is based upon an alleged violation of the "itemization" requirements of TILA. If the consumer so requests, the creditor must provide "a written itemization of the amount financed." 15 U.S.C. § 1638(a)(2)(B). The Act defines the term "itemization of the amount financed" to comprehend a number of items, including:
(iii) each amount that is or will be paid to third persons by the creditor on the consumer's behalf, together with an identification of or reference to the third person;15 U.S.C. § 1638(a)(2)(B)(iii). Similarly, Regulation Z requires a written itemization of the amount financed, including: "any amounts paid to other persons by the creditor on the consumer's behalf. The creditor shall identify those persons." 12 C.F.R. § 226.18(c)(1)(iii). In the present case, plaintiffs assert that defendant's disclosure of a $1,590 warranty charge as an amount "paid to others" was false and violated these provisions, in that defendant did not pay the entire amount to others, but retained $715 for itself as a fee or commission.
The seminal case in this area is Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283 (7th Cir. 1997). In that case, the Seventh Circuit consolidated appeals from three class action lawsuits asserting TILA violations by Chicago-area car dealers. The three consolidated appeals were from district court dismissals of claims similar to that asserted by plaintiffs in the present case: an alleged TILA violation arising from the failure to disclose an "upcharge" retained by the dealer. The Seventh Circuit found the complaints stated two possible TILA violations. The first was based on alleged unequal charges against cash and credit customers for the same warranty, resulting in a hidden "finance charge." Plaintiffs' first amended complaint does not contain any factual allegations supporting this type of claim.
The second TILA violation observed by the Seventh Circuit in Gibson v. Bob Watson Chevrolet was the type plaintiffs allege in this case: a false representation in the itemization.
Second, the Act requires the lender or creditor to provide "a written itemization of the amount financed," including "each amount that is or will be paid to third persons by the creditor [the dealer here] on the consumer's behalf, together with an identification of or reference to the third person." 15 U.S.C. § 1638(a)(2)(B)(iii). The argument that Bob Watson Chevrolet (as before, we're using Gibson's case as typical of all three cases) violated this provision is straightforward, and let us start with it. The amount to be paid to North American on Gibson's behalf is not stated correctly in the written itemization of the amount financed that Gibson received. It is true that a consumer is not entitled to the statement unless he makes a written request for it, § 1638(a)(2)(B); 12 C.F.R. § 226.18(c)(2), and there is no indication that Gibson did. But the creditor is allowed to skip this stage and simply provide the itemization of the amount financed without being asked for it. 12 C.F.R. Pt. 226, Supp. I § 18(c)(1). That appears to be what Bob Watson Chevrolet did. In any event, it furnished the itemization, and the itemization contains a false representation.112 F.3d at 285. "Section 1638(a)(2)(B)(iii) is free-standing. It requires disclosure — meaning, we do not understand the defendants to deny, accurate disclosure, Fairley v. Turan-Foley Imports, Inc., 65 F.3d 475, 479 (5th Cir. 1995) — of amounts paid to third persons by the creditor on the consumer's behalf, whether or not cash customers pay less. Bob Watson Chevrolet did not accurately disclose the amount that it paid North American for the extended warranty on the car that Gibson purchased. It said it paid $800, in fact it paid less." 112 F.3d at 285.
In holding that the complaint stated a claim under TILA, the Seventh Circuit was guided by Official Staff Commentary issued by the Federal Reserve Board as part of Regulation Z. The commentary addresses the specific situation posed here, in which the creditor retains a portion of the disclosed charge:
2. Charges added to amounts paid to others. A sum is sometimes added to the amount of a fee charged to a consumer for a service provided by a third party (such as an extended warranty or service contract) that is payable in the amount in comparable cash and credit transactions. In the credit transaction, the amount is retained by the creditor. Given the flexibility permitted in meeting the requirements of the amount financed itemization (see the commentary to section 226.18(c)), the creditor in such cases may reflect that the creditor has retained a portion of the amount paid to others. For example, the creditor could add to the category "amount paid to others" language such as "(we may be retaining a portion of this amount)."
Official Staff Commentary § 226.18(c)(1)(iii). The Official Staff Commentary contemplates that the creditor might comply with the itemization requirements of TILA and Regulation Z by either disclosing the amount of the commission or merely referring to its existence. A complete failure to disclose, however, would violate the Act.
Following Gibson, at least two other appellate courts have found that the failure to disclose a hidden commission or "upcharge" violates the itemization requirement of TILA and Regulation Z. See Jones v. Bill Heard Chevrolet, Inc., 212 F.3d 1356, 1361 (11th Cir. 2000) (failure to reveal retention by a car dealer of a portion of the charge for an extended warranty), overruled in part by Turner v. Beneficial Corp., 242 F.3d 1023 (11th Cir. 2001) ( en banc) (detrimental reliance is an element of a TILA claim for actual damages); Green v. Levis Motors, Inc., 179 F.3d 286, 294 (5th Cir. 1999) (failure to reveal retention by car dealer of part of a licensing fee violated TILA); see also Cirone-Shadow v. Union Nissan of Waukegan, 955 F. Supp. 938, 942-43 (N.D.Ill. 1997) (collecting cases predating Gibson). Given the unanimity of circuit court authority on the issue, I conclude that the Sixth Circuit would likewise hold that the undisclosed retention of a portion of a charge disclosed under the "amounts paid to others" itemization violates TILA and Regulation Z.
Defendant nevertheless argues that the disclosure of the hidden commission is not required by TILA because it is not a "material disclosure" as defined in 15 U.S.C. § 1602(u). The flaw in defendant's argument, however, is that the disclosure requirements of TILA and Regulation Z are not limited to the material disclosures named in section 1602(u). See Cirone-Shadow, 955 F. Supp. at 941-42. Defendant's argument in this regard is ingenious but ultimately unpersuasive. It is not supported by any direct authority, but is based upon inferences drawn from inapposite cases. In light of the clear trend of Court of Appeals decisions in plaintiffs' favor, the court must reject defendant's construction of the statute.
Similarly unpersuasive is defendant's argument that the amount paid for the extended warranty cannot be deemed part of the "finance charge," because the same amount would be charged to cash customers as well as credit customers. The flaw in this analysis is that the statute itself requires, as part of the itemization of the amount financed, a disclosure of each amount paid to third persons by the creditor on the consumer's behalf. 15 U.S.C. § 1638 (a)(2)(iii). Thus, defendant is guilty of failing to differentiate between the "finance charge" and the "amount financed," as those terms are used in TILA. Although the hidden commission is clearly not part of the finance charge, it is one of the items that must be enumerated as part of the amount financed.
For the foregoing reasons, the court concludes that plaintiffs are entitled to a partial summary judgment as a matter of law on the question whether defendant violated the requirements of TILA in failing to disclose the amount (or at least the existence) of the retained commission. Plaintiffs are not, however, entitled to a complete judgment on all liability issues. This court's previous opinion with regard to the class certification issue discussed in detail the authorities holding that statutory damages are not available for the particular TILA violation involved herein. ( See Opinion, docket # 23, at 21-23). Plaintiffs in this case are therefore limited to an award of actual damages, for which they are required to show that the TILA violation was the proximate cause. See Turner v. Beneficial Corp., 242 F.3d at 1026; Perrone v. General Motors Acceptance Corp., 232 F.3d 433, 440 (5th Cir. 2000), cert. denied, 121 S.Ct. 1601 (2001); Peters v. Jim Lupient Oldsmobile Co., 220 F.3d 915, 917 (8th Cir. 2000); see also Rugumbwa v. Betten Motor Sales, No. 1:00cv 363, 2001 WL 385086, at *6 (W.D.Mich. Mar. 29, 2001); Rockey v. Courtesy Motors, No. 1:00cv 695, ___ F.R.D. ___, 2001 WL 310602, at *13-14 (W.D.Mich. Mar. 13, 2001). Courts have rejected arguments by plaintiffs that actual damages should be equal to the amount of the upcharge. See Cirone-Shadow, 955 F. Supp. at 942. Rather, to satisfy the causation element, a plaintiff must demonstrate that, but for the misrepresentation, better terms could have been secured, that is, that plaintiffs would have obtained a different warranty or a lower price. See Anderson v. Rizza Chevrolet, Inc., 9 F. Supp.2d 908, 913 (N.D.Ill. 1998). Because genuine issues of material fact exist concerning causation under this test, plaintiffs are not entitled to a complete summary judgment on the issue of liability. Issues of causation and damages must be the subject of further proceedings.
PARTIAL SUMMARY JUDGMENT
In accordance with the opinion filed this date:
IT IS ORDERED that plaintiffs' motion for partial summary judgment (docket # 17) be and hereby is GRANTED IN PART AND DENIED IN PART.
IT IS FURTHER ORDERED that plaintiffs are granted a summary judgment on the issue of violation of the Federal Truth In Lending Act by defendant. All issues of causation and damages are reserved for further proceedings.
DONE AND ORDERED this 23rd day of May, 2001.