Cody v. Community Loan Corp. of Richmond County, 76-1687

Decision Date02 January 1979
Docket NumberNo. 76-1687,76-1687
PartiesJessie CODY, Sallie Mae Cody and all others similarly situated, Plaintiffs- Appellees, v. COMMUNITY LOAN CORPORATION OF RICHMOND COUNTY, Defendant-Appellant. James TOUCHSTONE, Glenda Touchstone, Inez Singleton and all others similarly situated, Plaintiffs-Appellees, v. COMMUNITY LOAN & INVESTMENT CORPORATION OF AUGUSTA, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

W. Rhett Tanner, Richard M. Kirby, Atlanta, Ga., for defendant-appellant.

T. J. Foss, Augusta, Ga., Ernest V. Harris, Athens, Ga., John L. Cromartie, Jr., Harry W. Pettigrew, Atlanta, Ga., for plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of Georgia.

Before BROWN, Chief Judge, THORNBERRY and MORGAN, Circuit Judges.

THORNBERRY, Circuit Judge:

These consolidated cases come before us in a different posture than the other cases 1 we have decided today involving the McCarran-Ferguson Act ("McCarran Act"), 15 U.S.C. §§ 1011 Et seq., and the Truth in Lending Act ("TIL"), 15 U.S.C. §§ 1601 Et seq. Here the district court rejected the McCarran Act defense, reached the merits of the TIL claims, and entered judgment for plaintiffs. We affirm.

I. FACTUAL BACKGROUND

Community Loan Corporation of Richmond County and Community Loan & Investment Corporation of Augusta (hereinafter "Community") are separately incorporated but share the same officers and board of directors. They are wholly-owned subsidiaries of Aristar, Inc., the parent corporation of a financial conglomerate that operates more than 400 loan offices in 26 states and owns the Diamond State Life Insurance Company and the Diamond State Agency. Community is a lender licensed under the Georgia Industrial Loan Act, Ga.Code Ann. §§ 25-301 Et seq.

In 1972 Aristar developed a program to offer cancer insurance for sale in the loan offices of its subsidiaries. This insurance was to be issued by American Family Life Assurance Company and was to be offered in addition to the credit life, accident and health, and property insurance customarily written in connection with loan transactions. 2 The annual premium $40 on an individual policy, $60 on a family policy was to be paid by Community to American Family out of the proceeds of the loan. Pursuant to a brokerage agreement between American and Diamond State Agency, for each cancer policy sold in the loan office, 50% Of the premium would be returned in the form of a sales commission to Diamond State Agency. Of that amount, $10 or $12 would be disbursed to the loan manager who sold the insurance policy and $2 or $5 to his district supervisor. Diamond State Agency also received a $2 application fee and a $2.40 credit toward the purchase of American Family stock for each cancer policy sold.

Despite some initial qualms about selling these "CancerCare" policies, 3 Aristar and Community decided to implement the sales program on an experimental basis in Georgia and South Carolina. The program was arranged by Diamond State Life Insurance Company and American Family, with Diamond State to oversee the licensing of Community's loan managers and to ensure compliance with state insurance regulations. Community's loan managers eventually became licensed insurance agents of American Family, and the Georgia sales program was instituted in January 1973. The South Carolina program never got off the ground, apparently because of licensing difficulties.

The program was temporarily halted in April 1973, apparently because of the sales techniques of some overzealous loan managers who added the price of the cancer policy to the loan without the borrower's knowledge or consent. Internal correspondence indicates attempts to correct this practice, 4 and the sales program was reinstated in July. However, it was terminated in early 1974.

Plaintiffs Jessie and Sallie Mae Cody, James and Glenda Touchstone, and Inez Singleton were Community customers who applied for loans in February and March 1973. While handling the loan applications, Community's loan managers, acting as agents of American Family, sold the plaintiffs CancerCare policies. Each plaintiff signed a loan contract and a separate application for cancer insurance, although the record strongly suggests that they did not know they were purchasing the cancer insurance. The first year's premium was deducted from the loan proceeds and was indicated as a disbursement to the customer and American Family. Community then issued checks payable to American Family and the customer, and the insurance applications and checks were forwarded to American Family for approval and issuance of the policies.

The plaintiffs brought suit on behalf of themselves and others similarly situated, alleging violations of TIL's credit sale disclosure requirements, 15 U.S.C. § 1638(a); 12 C.F.R. § 226.8(c). 5 They sought the statutory penalty and attorneys' fees allowed under 15 U.S.C. § 1640(a). 6 The district court certified the cases as class actions and, by stipulation of the parties, they were submitted as though they had been tried to the court without a jury. The court ultimately entered judgment for plaintiffs, and Community appealed.

II. THE McCARRAN ACT

The district court concluded that the McCarran Act exemption 7 was unavailable to Community because Georgia did not regulate disclosures accompanying the sale of insurance, and, even if it did, TIL would not conflict with Georgia law. We agree that the McCarran Act does not bar application of TIL, but for different reasons.

The McCarran Act is explored in depth in Cochran v. Paco, Inc., ante, 606 F.2d 460, and we refer the reader to that opinion for essential background. There we held that the lending activities of a premium finance company do not constitute the "business of insurance" and that the McCarran Act does not preclude application of TIL's disclosure requirements. Similarly, in Perry v. Fidelity Union Life Ins. Co., ante, 606 F.2d 468, we concluded that premium financing by an insurance company in connection with the sale of an insurance policy is not the "business of insurance" for McCarran Act purposes, and that TIL is thus applicable to such a loan transaction.

The instant case presents a hybrid situation. Plaintiffs contend that Community made a "credit sale" of an insurance policy and thus should have made the disclosures required when a credit sale occurs. See footnote 8, Infra. For purposes of our McCarran Act analysis, we assume that the loan managers, acting in their dual capacities as employees of Community and licensed agents of American Family, made a credit sale of cancer insurance and that Community was a "seller" under TIL.

The sale of an insurance policy is undoubtedly the "business of insurance" for McCarran Act purposes. Securities & Exchange Comm'n v. National Securities, Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). However, Perry makes clear that the lending activities of an insurance company are apart from that business: "the financing activity is purely ancillary to the insurance relationship between the insurance company and the policyholder." 606 F.2d at 470. Thus, Community's Selling of the cancer insurance policies constituted the "business of insurance," although its Financing of them on a credit sale basis did not.

The mere fact that Community sold the policies that it financed does not preclude application of TIL, since the financing is insufficient to invoke the McCarran Act exemption. Accordingly, any inquiry into the nature of state regulation or the conflict between the state scheme and TIL is unnecessary. Cochran v. Paco, Inc., supra, 606 F.2d at 467 n.15. We thus turn to the TIL questions presented by this case.

III. THE TRUTH IN LENDING ACT

Plaintiffs urged in the district court that the transaction involved not only a loan but also a credit sale of an insurance policy as to which the required disclosures had not been made. Community contended that the transaction was simply a loan, that all consumer loan disclosures had been made in accordance with TIL, and that no credit sale disclosures were required.

The gravamen of plaintiffs' complaint was that Community made disclosures only as to the total amount of the loan and did not make separate disclosures as to the cost of financing the annual premiums on the cancer policies. The Touchstone transaction is illustrative. At the top of one legal-size page, Community made the following disclosures:

                Date finance charge begins to accrue_________                  02-08-73
                Schedule of Payments__________                 one of $85 and 23 of $85
                Total payments_______________________________                  $2040.00
                Interest_____________________________________                  $ 281.38
                Service fee__________________________________                  $ 105.60
                FINANCE CHARGE_______________________________                  $ 386.98
                Amount financed______________________________                  $1653.02
                Life Insurance premium_______________________                  $  76.70
                Disability insurance premium_________________                  $  71.40
                Property insurance premium___________________                  $   0.00
                Official fees________________________________                  $   3.50
                Net to customer(s)___________________________                  $1501.42
                ANNUAL PERCENTAGE RATE_______________________                    21.07%
                Amount of insurance
                   Life______________________________________                  $2040.00
                   Disability ins. benefits__________________                  $  85.00
                Term (mos.)__________________________________                        24
                First payment due____________________________                  03-15-73
                Maturity date________________________________                  02-08-75
                Amount of note_______________________________                  $2040.00
                

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