Opinion
Rehearing Denied March 27, 1974.
As Modified April 4, 1974.
Opinion on pages 764-774 omitted.
HEARING GRANTED
Hearing Granted May 29, 1974.
[112 Cal.Rptr. 573]Palley & Schwartz, Inc. and Michael R. Palley, Los Angeles, for plaintiffs and appellants.
Paul, Hastings, Janofsky & Walker, Oliver F. Green, Jr., and Geoffrey L. Thomas, Los Angeles, for defendants and respondents.
BEACH, Associate Justice.
Plaintiff appeals from judgment of dismissal after order sustaining defendants' general demurrers to plaintiff's third amended complaint.
Appellant brought a class action against defendants claiming violations of the federal 'Truth-in-Lending Act' and of the California Usury Law. Based upon these two alleged causes of action, but as separate and further causes of action, plaintiff prayed for declaratory relief and for injunctive relief. Appellant's purported causes of action arise from the purchase of a membership in defendant La Lanne's health club or spa.
FACTS PLEADED.
The facts pleaded and material to our consideration here are:
1. On June 20, 1970, appellant entered into a contract with one of the La Lanne spas for a seven year spa membership. The total price for this membership was $408 whether appellant paid cash in one lump sum or paid in 24 monthly installments of $17 per month. Appellant elected to pay in installments.
2. After the membership agreement was executed by appellant, it was sold by the La Lanne spa to Universal at a discount of approximately 62.5% of the $408 contract price.
3. The price (called by plaintiff the 'true total price') of membership benefits which appellant was purchasing from the [112 Cal.Rptr. 574] La Lanne spa is computed in taking 62.5% of $408, or approximately $255.
4. Defendant La Lanne is the seller of the services (and operator or owner of the gymnasium or spas which they use). Defendant Universal is a finance company which purchased the membership contract and has purchased other contracts of defendant La Lanne.
APPELLANT'S CONTENTIONS.
Appellant contends that:
1. There was in fact a finance charge because the contract was sold by defendant La Lanne to defendant Universal at a discount, and therefore under the Act defendants were required to disclose said amount of discount as a finance charge under the provisions of the Act.
2. The written agreement which was used violates the 'Truth-in-Lending Act,' Consumer Credit Protection Act, 15 U.S.C. §§ 1601 et seq. (the Act), and Regulation Z of the Federal Reserve Board, 12 C.F.R. § 226 (Regulation Z) in that the defendant did not disclose thereby or therein the finance charges which were charged to plaintiff.
3. The amount of the discount constitutes a form of interest in excess of the lawful rate allowed by article XX, section 22 of the California Constitution and is therefore usurious.
4. Because the principal was payable in more than four installments, the defendants were required to disclose the finance charges and other terms listed by the Act as required disclosures.
5. Even if there were no finance charges imposed, other disclosures were required to be made because of the 'Four Installment Rule' and because defendant Universal was a creditor.
THE STATUTE AND REGULATIONS.
The Truth-in-Lending Act was promulgated by Congress as an attempt '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.' (15 U.S.C. § 1601.) Under the Act, the Federal Reserve Board is charged with the obligation of making regulations to effectuate the purposes of the Act. (15 U.S.C. § 1604.) Pursuant to the above section, the Federal Reserve Board promulgated Regulation Z, which defines the coverage of the Act.
The Act requires that: 'Each creditor shall disclose clearly and conspicuously in accordance with the regulations of the Board, to each person to whom consumer credit is extended and upon whom a finance charge is or may be imposed, the information required under this part.' (§ 1631.)
Section 1638 of the Act lists the information which, if applicable to the contract, must be clearly and conspicuously disclosed therein. Some of the information which must be disclosed includes the cash price, the time price, the down payment, the amount of the finance charge, the amount financed, and the finance charge expressed as an annual percentage rate.
Regulation Z defines various terms used in the Act. The principal terms about which the parties in the case at bench dispute include 'finance charge,' 'creditor,' and 'consumer.'
ISSUES.
1] Although several other subordinate issues are raised and contentions made, the crux of this matter and upon which the plaintiff's complaint passes or fails is plaintiff's first contention set forth above. Thus, the question for our determination is: Does the business practice of selling to a third party, consumer time purchase contracts at discount constitute the imposition of a 'finance charge' on the consumer within the meaning of the Act? We conclude that it does not.
DISCUSSION.
Three federal cases cited by appellant seem at first glance to support appellant: Strompolos v. Premium Readers Service, D.C., 326 F.Supp. 1100 (magazine subscription) [112 Cal.Rptr. 575] ; Joseph v. Norman's Health Club, Inc., D.C., 336 F.Supp. 307 (health club membership); Garza v. Chicago Health Clubs, Inc., D.C., 347 F.Supp. 955 (health club membership). A careful reading of them disclosed that they do not decide the issue before us. The cases are similar to ours but none hold that the selling of contracts at discount constitutes or is tantamount to the imposition of a finance charge.
Garza holds simply that a financier, such as defendant Universal in the case at bench, may be subject to the Act, by reason of the definition of a 'creditor' in Regulation Z, and thus become liable for failure to disclose the required information. The decision in Garza did not at all require or involve the definition of 'finance charge' or any inquiry into the question now before us. The finance companies in Garza were simply held to be subject to the provisions of the law not because purchasing contracts at discount constituted a hidden finance charge, but because plaintiff's description of the companies alleged in the pleadings met the definition of 'creditor' by reason of the allegation that the companies extended credit directly to the consumers through the 'conduit' or 'front man' of the seller.
As to Strompolos, it holds no help for our inquiry here. Strompolos holds only that the 'Four Installment Rule' of Regulation Z is constitutional. In its opinion the court there made the following statement:
'Although the defendant contends that it charges the same unitary price for both credit and cash sales, it is readily apparent that a seller in any industry which sells primarily or almost exclusively on a long term credit basis could easily set a theoretical unitary cash and credit price which he knows no one will pay in less than four installments and thus exempt himself and his industry from the coverage of the Act. Merely because a so-called 'cash' price is the same as for a thirty installment repayment plan does not indicate that the 'cash' price does not include substantial financing charges in a very real sense.
'. . .
'Neither the law, the Federal Reserve Board nor the courts are so simplistic as to believe that a person in the business of extending long term credit should be permitted in effect to abolish the Truth in Lending Act by merely charging a single 'cash or credit' price knowing full well that the great bulk of its customers will never pay in less than, for example, thirty months.' (Strompolos v. Premium Readers Service, supra, 326 F.Supp. 1100, 1103.)
However, Strompolos does not hold and nothing in the quoted language (relied on by Joseph) can be interpreted to mean that installment contracts are presumed to contain a finance charge, even though a seller sells 'primarily or exclusively on long term credit,' and even if he sells 'knowing full well that the great bulk of its customers will never pay in less than, for example, thirty moths.' (Strompolos v. Premium Readers Service, supra, 326 F.Supp. 1100, 1103.)
In Joseph, the plaintiffs claimed that finance companies themselves directly extended the credit. The defendants there contended that there was not imposed a 'finance charge' for the reason, as shown by the pleadings, that all parties agreed that the notes given for membership were for the same amount whether paid in a lump sum, 24 months, or 30 months. In reply to this, the court there noted that 'the identical contention was presented in Strompolos,' and then quoted the same paragraphs which we set forth above from page 1103 of Strompolos. The court in Joseph then says:
'This Court agrees with the above analysis of Regulation Z and concludes that the fact that the cash or credit price of the Health Club memberships was the same, is not conclusive on the issue of whether or not a finance charge was imposed.
'Without determining whether the consumer credit involved here is a 'credit sale' or a 'consumer loan' [See, Stefanski v. Mainway Budget Plan, Inc., 326 F.Supp. 138 (S.D.Fla.1971)], the Court observes that the promissory notes executed by [112 Cal.Rptr. 576] plaintiffs are deficient with respect to the disclosures required by the Act and Regulation Z, if in fact, a finance charge was imposed.' (Page 317.) (Italics in original.)
In this last paragraph the court correctly states that disclosures are required if, in fact, a finance charge was imposed. The court then goes on to describe that question in that case as a question of fact with the following:
'The notes executed by plaintiffs disclose, among other things, that the annual finance charge is '$0' and the annual rate is '0%'. However, since plaintiffs have alleged that a finance charge was in fact included in the face amount of the notes, and defendants contend that no finance charge was imposed, a material fact is in dispute and summary judgment is inappropriate.' (Page 318.) (Emphasis added.) In so stating however, the court did not say that the other facts alleged in the complaint, if true, (or what other facts) constitute finance charging as a matter of law. Such question is placed squarely in issue in the case presently before us.
We assume as true all of the allegations of fact alleged by plaintiff. But we must distinguish facts from arguments, conclusions and contentions. The facts which plaintiff here has alleged are that the finance company purchased the contract from the seller at 62.5% if its value. After alleging this fact, plaintiff then comes to a conclusion of law and states that therein lies the hidden finance charge. Thus, the only material fact alleged is the purchase of the membership contract by Universal at a discount rate of 37.5. However, the next step in plaintiff's assertions, that such purchase at a discount rate of 37.5% is a finance charge, is a conclusion of law which is unsupported by the federal law and cases, not supported by any California authority, and contrary to the law in California.
First, the Truth-in-Lending Act expressly exempts loans by corporate lenders to corporate borrowers. (15 U.S.C. § 1603.) The rule recognizes that the business of buying and selling commercial paper is not within the ambit of the Act and supports the theory or conclusion that discounting is not 'interest charging' or 'finance charging' and that Congress and the Federal Reserve Board intended to exclude discount practice.
, 3] The sale of notes at discount is not to the extent of the discount a charge of interest under the California law. Thus, any extension or interpretation of the federal case holdings would conflict with the decisional law of California interpreting the effects of the same business practice of discounting commercial paper. The purchase of a note at discount is not a charge of interest (and hence exempt from the Usury Law). (Moe v. Transamerica Title Ins. Co., 21 Cal.App.3d 289, 300, 98 Cal.Rptr. 547; Milana v. Credit Discount Co., 27 Cal.2d 335, 163 P.2d 869; Sharp v. Mortgage Security Corp., 215 Cal. 287, 9 P.2d 819.) The California cases cited by appellant as holding a financial lender liable to a consumer are distinguishable and do not impose liability because of any illegal interest charge which arose simply by the finance company buying the paper at discount from the seller. Two cases will suffice for examples: Morgan v. Reasor Corp., 69 Cal.2d 881, 73 Cal.Rptr. 398, 447 P.2d 638, and Connor v. Great Western Sav. & Loan Assn., 69 Cal.2d 850, 73 Cal.Rptr. 369, 447 P.2d 609, both cited by plaintiff in support of her contentions. In Morgan v. Reasor Corp., the court held that where the sellers of a house failed to properly prepare and place in a written contract the necessary information all as required by the Unruh Act, the finance company which purchased the contract would not be entitled to collect as a holder in due course where the finance company either participated in the actual preparation of the void instrument or had constructive knowledge that the written instrument as prepared by the sellers of the house was clearly defective. The defects in that case did not arise from the sale of the contract at discount but were inherent defects in the preparation of the papers and documents constituting the contract. [112 Cal.Rptr. 577] In Connor v. Great Western, a lending institution was held liable for damages to home owners arising by reason of cracked slabs occasioned by the negligence of the builder. The court there held that the lender itself was negligent in permitting the homes to be built in the manner in which they were built because it knew or should have known that the builder himself was inexperienced and negligent and nonetheless loaned money to the builder. Also, the lender was active in several other ways in the conduct and physical acts of building and developing the subdivision. The court held that the lender's own conduct thus created negligence, which negligence simply created a direct liability to the home purchasers. But this liability was not based simply on the fact that the lender in fact loaned money to the builder and took notes and deeds of trust executed by the purchasers. The cases such as Morgan and Connor have nothing to do with the questions of whether or not the purchase of consumer paper at discount constitutes the imposition of a 'finance' or 'interest' charge.
In the instant case, plaintiff simply seeks to use the fact of the purchase of the paper at discount by Universal as a means of making Universal liable as a party and to show that it is therefore liable for buying the paper at a large discount and yet not disclosing that fact. This seems to be a bootstrap argument.
4] Accepting plaintiff's allegation that the Universal company is really the principal and seller and La Lanne is merely its agent and employee, the result is that we still have the seller, Universal, selling a service for $408. The result is, as correctly characterized by respondents, a question of pricing. Plaintiff complains that the services were worth only 62.5% of the $408. That is immaterial because the Act does not apply to pricing matters.
In her complaint appellant appears to be saying that respondents should be charging a cash price of only $255. This objection relates not to the disclosures made by respondents, but rather to their pricing policy. However, this subject matter goes far beyond the scope of the Act, which does not purport to control a merchant's pricing policy. This is affirmed in Regulation Z, § 226.1, which states:
, 6] 'Neither the act nor this part is intended to control charges for consumer credit, or interfere with trade practices except to the extent that such practices may be inconsistent with the purpose of the act.' Even with what may be charged or priced for credit, the Act '[n]either regulates the credit industry, nor does it impose ceilings on credit charges. It provides for full disclosure of credit charges, rather than regulation of the terms and conditions under which credit may be extended.' (H.R. Rep. 1040, 90th Cong.2d Sess. (1968); U.S.Code Cong. & Admin.News 1968, pp. 1962 at 1963.) Appellant alleges in her complaint, 'the price charged greatly exceeded the fair market value of the defendants' services.' Appellant's statement underscores the basic misconception of her complaint. Whatever may be the 'fair market value' of health spa services has nothing whatsoever to do with the Act. Appellant's argument that respondents should have charged less than they did for the spa services does not state a cause of action thereunder. Nowhere in the Act or in the regulations does it say that 'finance charge,' 'credit charge' or 'interest' for the purpose of the Act shall or does include the amount of discount at which any installment payment contract is sold or assigned (by the dealer or seller in the original sale) to a third party or finance company. If Congress or the Federal Reserve Board had so intended, either one could easily have so stated. The omission does not appear to be accidental. We believe that the established commercial practice of discounting paper was not intended to be included in the Act.
THE 'MORE THAN FOUR INSTALLMENTS RULE'.
The 'more than four installments rule' is found in section 226.2(k) of Regulation Z. This section defines 'consumer credit' [112 Cal.Rptr. 578] in terms of transactions 'for which either a finance charge is or may be imposed or which, pursuant to an agreement, is or may be payable in more than four installments.' By the plain language of this rule, it applies to transactions which do not involve a 'finance charge' if such transactions are payable in more than four installments. The Supreme Court has confirmed this interpretation of the rule in Mourning v. Family Publications Service, 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318. The Mourning case held that, even trough the contract price is payable in more than four installments, a finance charge is not necessarily involved. Appellant's theory is that because her contract provided for repayments in more than four installments, there necessarily was a finance charge imposed upon her, which was not disclosed in the membership contract.
'The rule was intended as a prophylactic measure; it does not presume that all creditors who are within its ambit assess finance charges, but, rather, imposes a disclosure requirement on all members of a defined class in order to discourage evasion by a substantial portion of that class.' (Emphasis added.) (Mourning v. Family Publications Service, supra, 411 U.S. at p. 376, 93 S.Ct. at p. 1664, 36 L.Ed.2d at p. 334.)
The Supreme Court noted in Mourning, supra, that Congress was well aware that the cost of credit could be buried in the price of goods sold. (411 U.S. at p. 366, 93 S.Ct. at p. 1659, 36 L.Ed.2d at p. 328.) Creditors could claim that no finance charge had been imposed, merely by assuming the cost of extending credit as an expense of doing business to be recouped as part of the price charged in the transaction. The 'more than four installments rule,' the court suggested, was promulgated by the Federal Reserve Board in response to this anticipated deceptive practice.
However, the way in which the rule dealt with the phenomenon of burying the finance charge in the cash price was not by creating a conclusive presumption that a contract payable in more than four installments automatically contained a finance charge. Rather, the rule simply required that merchants who claimed to have no finance charge must make other significant disclosures, including the total cash price or inflated installment price, thereby inducing the consumer to 'comparison shop' for a competitive product without the inflated cash or installment price. The intended effect of the rule was thus to deprive the merchant of the incentive to bury his finance charge by making sure that the charge appeared in one place or another on the contract.
Senator Paul Douglas, the founding father of the Act, has pointed out that disclosure of the finance charge is not the only piece of information from which a consumer may make an informed choice about the true costs of goods and services. Senator Douglas stated in legislative hearings:
'. . . this bill does not provide for judgments solely on the basis of the . . . annual interest rate or the total finance charges. It also provides that there will be a statement of the cash price or delivery price of the property or service to be acquired. Both things are to be stated, price and finance charges, and the judgment of the consumer can be on the basis of both of these factors, not merely on one alone; and if a merchant tries to have a low finance charge and bury it in a high cash price or delivered price, then the purchaser can shop on price just as much as on the finance charges.' (Senate Hearings on S. 1740 before a subcommittee of the Senate Subcommittee on Banking and Currency, 87th Cong., 1st Sess. at 447-448, quoted in Mourning v. Family Publications Service, supra, 411 U.S. at pp. 366-367, 93 S.Ct. at pp. 1659-1660, 36 L.Ed.2d at pp. 328-329.)
0] From the foregoing we conclude: (1) An installment sale does not necessarily mean that there is a finance charge. (2) The fact that a contract is sold at a discount by the seller of the goods or merchandise does not indicate or [112 Cal.Rptr. 579] demonstrate that there is a finance charge. (3) There is no presumption that a contract sold at discount contains a 'finance charge' within the meaning of the Act. (4) The sale of a retail installment sales contract at a discount does not by that reason alone come within the provisions of the California Usury Law. Thus, from a reading of the plaintiff's complaint shorn of contentions and legal arguments, there is no showing that the defendants failed to make disclosures required by the Act. At the hearing of the demurrers to the second amended complaint, the court remarked that in order to state a cause of action against defendants, 'plaintiffs should allege that the price charged would have been less if not paid in installments, or that the price had been raised to hide a finance charge.' The plaintiff has not so alleged in her third amended complaint. We believe this absence of such suggested allegation is significant. The judgment of dismissal is affirmed.
ROTH, P. J., and COMPTON, J., concur.