Berryhill v. Rich Plan of Pensacola

• Decision Date: 24 August 1978
• Docket Number: No. 76-3046,76-3046
• Citation: 578 F.2d 1092
• Parties: Herby BERRYHILL and Lucille Berryhill, Plaintiffs-Appellees, v. RICH PLAN OF PENSACOLA, a corporation, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1092

578 F.2d 1092

46 A.L.R.Fed. 642

Herby BERRYHILL and Lucille Berryhill, Plaintiffs-Appellees, v. RICH PLAN OF PENSACOLA, a corporation, et al., Defendants-Appellants.

No. 76-3046.

United States Court of Appeals Fifth Circuit.

Aug. 24, 1978.

Rehearing Denied Oct. 11, 1978.

Mayer W. Perloff, T. Dwight Reid, Mobile, Ala., Joseph J. Lyman, Washington, D. C., for defendants-appellants.

Irving Silver, Lawrence B. Voit, Irvin Grodsky, Mobile, Ala., for plaintiffs-appellees.

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

Before WISDOM, THORNBERRY, and RUBIN, Circuit Judges.

WISDOM, Circuit Judge:

In this case, we affirm the district court's finding that Herby and Lucille Berryhill are entitled to recover statutory penalties as well as attorney's fees from Rich Plan of Pensacola for Rich Plan's violation of the Truth-In-Lending Act, 15 U.S.C. § 1605(a) (1976); Regulation Z, 12 C.F.R. § 226.4(a) (1977); ¹ and the Alabama Consumer Finance law, Ala.Code tit. 5, §§ 316 and 330 (Supp.1973). We conclude, however, that the district court made an erroneous penalty award for the violation of Alabama law and reduce the judgment accordingly.

I

Rich Plan of Pensacola (Rich Plan) is a corporate franchisee of Rich Plan Corporation. It sells frozen food in quantity to home consumers. Although it offers to sell food for either cash or on credit, an overwhelming proportion of the Rich Plan sales are to credit customers.

After the Berryhills responded to a solicitation from Rich Plan, a Rich Plan salesman called on them at home. The Berryhills agreed to subscribe to Rich Plan's food service. They already owned a home freezer in which they planned to store the food.

The Berryhills signed two contracts with Rich Plan. The first, the "Food Plan Contract", was the actual order for the food the Berryhills wanted to buy. The Berryhills received food and made payments under this contract for six months. The Berryhills also signed a "Food and Freezer Service Agreement". Rich Plan would not sell the first Food Plan Contract unless the Berryhills entered into a Food and Freezer Service Agreement. This "Service" included twelve "benefits", ("obligations" of Rich Plan) entitling the Berryhills to:

1. purchase Rich Plan's premium and quality foods;

2. have all meats custom cut and packaged to fit the Berryhills' requirements;

3. receive all meats wrapped in film or heavy-duty freezer wrap after flash freezing at subzero temperatures;

4. receive home deliveries of all food orders exceeding $100;

5. have delivery of all frozen foods in refrigerated trucks and insulated containers to be placed in the Berryhills' home freezer by Rich Plan's delivery man;

6. return any unused food that did not meet the Berryhills' complete satisfaction within four months of delivery;

7. purchase all food orders exceeding $100 on credit, subject to credit approval;

8. receive price lists and order forms periodically highlighting specials;

9. receive assistance in the details of reordering food by mail or phone;

10. receive a Rich Plan identification card permitting the Berryhills to purchase food from any other Rich Plan franchisee without the necessity of purchasing an additional Food and Freezer Service Agreement;

11. receive help from Rich Plan Corporation and the National Institute of Locker and Freezer Provisioners to obtain supplies of food under the plan if the Berryhills moved to another area without a Rich Plan franchisee; and

12. call upon Rich Plan to defray all labor costs and charges for mechanical repairs to the Berryhills' home freezer for three years whether or not they purchased food from Rich Plan and thereafter provided they purchased their major food needs from Rich Plan on a regular basis. The cost of parts for the freezer not covered by the Berryhills' manufacturer's warranty were not covered in the Food and Freezer Service Agreement either.

In addition, Rich Plan agreed to obtain for the Berryhills "at no additional cost" insurance for loss of food up to $300 resulting from a mechanical breakdown of the freezer or an electrical power failure. This insurance was to last three years from the effective date of the Food and Freezer Service Agreement. There is evidence in the record that the Rich Plan salesman referred to the entire Food and Freezer Service Agreement as "insurance".

The cash price for the six-month Food Plan Contract signed by the Berryhills would have been $418.14. The cash price for a Food and Freezer Service Agreement would have been $399.00. Because the Berryhills bought on credit, their total cost was $451.47 for the Food Plan Contract and $485.68 for the Food and Freezer Service Agreement. Rich Plan's counsel conceded at oral argument that the Food and Freezer Service Agreement is by far the most profitable element of the transaction. Rich Plan properly completed the Food and Freezer Service Agreement before extending credit for it to the Berryhills. It disclosed a finance charge of $31.09 at an annual rate of 23.75 percent. The Berryhills did not receive a properly completed Food Plan Contract, however, until almost two weeks after credit had been extended. The partially completed form for the Food Plan Contract left by the Rich Plan salesman with the Berryhills did not disclose the cash price, the cost of credit life insurance that the Berryhills requested Rich Plan to obtain for them, the amount to be financed, and the finance charge. The completed form disclosed that the finance charge for the Food Plan Contract was $31.09, an annual rate of 23.75 percent. Neither the partially completed nor the fully completed Food Plan Contract disclosed that before extending credit Rich Plan required a buyer (1) to obtain insurance or a service agreement for the buyer's freezer or (2) to pay a membership fee.

The Berryhills received the food they ordered from Rich Plan. They were not satisfied with the delivery service or the quality of the merchandise. They did not, therefore, purchase any additional food after the first contract expired. The Berryhills continued to pay for the Food and Freezer Service Agreement, although they did not wish to do so since they were no longer ordering Rich Plan food. The Berryhills believed they were entitled to a credit toward the cost of a Rich Plan appliance from the second half of their payments on the Food Freezer Service Agreement. When Herby Berryhill inquired about the credit, he was told that his contract did not give him such a benefit. ² There is no evidence in the record to show that the Berryhills ever wrote Rich Plan before commencing this lawsuit to assert that the charge for the Food and Freezer Service Agreement was actually part of the finance charge for the Food Plan Contract, or to demand a refund of any interest over 15 percent charged on the Food Plan Contract in violation of Alabama law.

The Berryhills brought this lawsuit, alleging numerous grounds for recovery under the Truth-In-Lending Act and the Alabama Consumer Finance law. Rich Plan concedes that the Food Plan Contract violated the Truth-In-Lending Act. The Berryhills argued, and the district court agreed, that Rich Plan further violated the Truth-In-Lending Act and Regulation Z in failing to include the entire cost of the Food and Freezer Service Agreement in the finance charge disclosed for the Food Plan Contract. The district judge reasoned that obligations numbered one through nine and eleven of the Food and Freezer Service Agreement were not materially different from the obligations assumed by Rich Plan in the sale and marketing of the Food Plan Contract itself. The district judge further found that obligation number ten of the Food and Freezer Service Agreement was an illusory obligation, not sufficient to stand as a separate consideration for the Food and Freezer Service Agreement. The court found that obligation number 12 and the promise to obtain spoilage insurance were in essence, insurance that the freezer would function. The insurance, according to the district court, served to protect the security interest that Rich Plan retained in the food sold under the Food Plan Contract.

The defendant did not disclose in a clear, specific written statement to the Berryhills the cost of any required freezer insurance. Nor did Rich Plan state that the Berryhills would be free to choose the person through which such insurance would be obtained. The district court found that without these disclosures the cost of the Food and Freezer Service Agreement should have been included in the finance charge for the Food Plan Contract because it was mandatory insurance, and that the failure to do so violated the Truth-In-Lending Act. 15 U.S.C. §§ 1605(a) and (c).

The Truth-In-Lending Act sets a penalty for violations of its disclosure requirements at twice the amount of the finance charge in connection with the transaction, with a minimum liability of $100 and a maximum liability of $1,000, as well as costs and a reasonable attorney's fee. 15 U.S.C. § 1640. When the cost of the Food and Freezer Service Agreement is included in the finance charge for the Food Plan Contract, that finance charge totals $516.77, and the appropriate Truth-In-Lending Act penalty is $1,000.

In addition, the district judge found that the Food and Freezer Service Agreement constituted impermissible insurance under the Alabama Consumer Finance statute, Ala.Code tit. 5, § 331. As a result, under Alabama law the charge for the Food and Freezer Service Agreement is also part of the finance charge for the Food Plan Contract. The finance charge with the addition of the charge for the Food Plan Contract exceeds the maximum finance charge of 15 percent allowed by Ala.Code tit. 5, § 317. The district judge interpreted Ala.Code tit. 5, § 330 to set a penalty for this violation equal to ten times the amount of the excess finance charge, a total of $4,852.50.

The district court awarded the Truth-In-Lending...