Continental Oil Company v. Burns

• Decision Date: 15 September 1970
• Docket Number: Civ. A. No. 3909.
• Citation: 317 F. Supp. 194
• Parties: CONTINENTAL OIL COMPANY, a Delaware corporation, Plaintiff, v. Arthur F. BURNS, individually and as Chairman of the Board of Governors of the Federal Reserve System, et al., Defendants.
• Court: U.S. District Court — District of Delaware

317 F. Supp. 194

CONTINENTAL OIL COMPANY, a Delaware corporation, Plaintiff, v. Arthur F. BURNS, individually and as Chairman of the Board of Governors of the Federal Reserve System, et al., Defendants.

Civ. A. No. 3909.

United States District Court, D. Delaware.

September 15, 1970.

Alexander L. Nichols, George Tyler Coulson and Joseph C. Kelly, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for plaintiff.

Joseph C. Kelly, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., and Frederick M. Rowe, of Kirkland, Ellis, Hodson, Chaffetz, Masters & Rowe, Washington, D. C., of counsel, for American Petroleum Institute, amicus curiae.

F. L. Peter Stone, U. S. Atty., Wilmington, Del., William D. Ruckelshaus, Asst. Atty. Gen., Harland F. Leathers and A. James Barnes, Attys., Dept. of Justice, Washington, D. C., for defendants.

OPINION

LATCHUM, District Judge.

This action was brought under the Declaratory Judgment Act, 28 U.S.C. § 2201, by Continental Oil Company ("Continental") against the Board of Governors of the Federal Reserve System ("the Board") and the Federal Trade Commission ("the Commission") seeking a declaratory judgment that Interpretation § 226.401 of the Truth in Lending Act¹ ("the Act"), issued by the Board on April 22, 1969, is invalid. The American Petroleum Institute was granted leave to appear as amicus curiae and to file a memorandum in support of Continental's prayer for a declaratory judgment. Continental has also moved for an injunction restraining the defendants from taking any action in reliance on the interpretation. The case is before this Court on cross Motions for Summary Judgment.

As a threshold consideration this Court holds that it has jurisdiction under the Declaratory Judgment Act, 28 U.S.C. § 2201, and the Administrative Procedure Act, 5 U.S.C. § 704, to examine the narrow issue of whether or not Interpretation § 226.401 is an interpretative rule, as the government claims, or is a substantive legislative rule, as the plaintiff contends. Abbott Laboratories v. Gardner, 387 U.S. 136, 87 S.Ct. 1507, 18 L.Ed.2d 681 (1967); City of Chicago v. United States, 396 U.S. 162, 90 S.Ct. 309, 24 L.Ed.2d 340 (1969).

Under Section 105 of the Act, 15 U.S. C. § 1604, the Board is authorized to prescribe regulations to implement the Act's provisions. Section 108, 15 U.S.C. § 1607, places general enforcement authority in the Commission. In accordance with its authority the Board issued Federal Reserve Regulation Z, 12 CFR Par. 226, a comprehensive set of regulations governing transactions within the scope of the Act. Regulation Z became effective on July 1, 1969, the date the Act became operative.

Section 105 also allows the Board to make "exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of the Act." Accordingly, the Board in Regulation Z, section 226.4(c), 12 CFR § 226.4(c), provided, "A late payment, delinquency, default, reinstatement, or other such charge is not a finance charge if imposed for actual unanticipated late payment, delinquency, default, or other such occurrence." (Emphasis added).

On April 22, 1969 the Board issued Interpretation § 226.401 to Section 226.4(c) of Regulation Z. The interpretation was promulgated on May 10, 1969 and published in 34 Fed.Reg. 7571. This interpretation, 12 CFR § 226.401, reads:

"Some vendors bill their customers for property or services purchased under the terms of a credit plan which requires that the full amount of each billing be paid within a stipulated period after billing, with no privilege of paying in instalments. If a bill is not paid within that stipulated period of time, the vendor imposes a service charge periodically on the unpaid balance until the account is paid in full. The question arises as to whether Regulation Z applies to such transactions.

"When in the ordinary course of business a vendor's billings are not paid in full within that stipulated period of time, and under such circumstances the vendor does not, in fact, regard such accounts in default, but continues or will continue to extend credit and imposes charges periodically for delaying payment of such accounts from time to time until paid, the charge so imposed comes within the definitions of a `finance charge' (§ 226.2(q)) applicable in each case to the amount of the unpaid balance of the account. Under such circumstances the credit so extended comes within the definition of `open end credit' in § 226.2(r), the vendor is a creditor as defined in § 226.2(m), and the disclosures required for open end credit accounts under § 226.7 shall be made."

The interpretation thus sets forth three criteria for determining when a "late payment" charge must be considered a "finance" charge. If (1) in the ordinary course of business the creditor's billings are not paid within the stipulated time and yet the creditor does not regard the accounts as being in default, (2) the creditor continues to extend credit, and (3) the creditor imposes periodic late charges from time to time until the bill is paid, then the "late payment" charge is considered to be a "finance" charge and not an "actual unanticipated late payment" charge.

Section 4 of the Administrative Procedure Act, 5 U.S.C. § 553, requires that rule making by an agency be preceded by "general notice of proposed rule making" in the Federal Register at least thirty days before the effective date of the proposed rule, and further requires that the agency afford interested persons "an opportunity to participate in the rule making through submission of written data, views, or arguments with or without opportunity for oral presentation." Exempt from the general requirements of notice and opportunity for comment are "interpretative rules." 5 U.S.C. § 553(b) (A).

Plaintiff and amicus claim that Interpretation § 226.401 is not merely an interpretative rule, but is in fact a substantive regulation and, as such, is invalid because the Board failed to give prior notice and opportunity for comment as required by Section 4 of the Administrative Procedure Act, 5 U.S.C. § 553. Plaintiff Continental further contends that because of the unexpected adoption of this interpretation, it is threatened with enforcement action by the Commission and the possibility of large civil liability as a result of a number of class actions filed by its customers. The government contends that Interpretation § 226.401 is an interpretative rule, not a substantive regulation, and thus is excluded from the requirements of the Administrative Procedure Act's notice and opportunity for comment provisions.

A great distinction exists between interpretative rules and substantive regulations issued by administrative agencies, especially in the formalities necessary for issuance and in the legal impact accorded them. An administrative interpretation or interpretative rule is a clarification or explanation of existing laws or regulations rather than a substantive modification in or adoption of new regulations. Substantive legislative rules and regulations "create law * * * whereas interpretative rules are statements as to what the administrative officer thinks the statute or regulation means." Gibson Wine Co. v. Snyder, 194 F.2d 329, 331 (D.C.Cir. 1952). See also 1 K. Davis, Administrative Law Treatise § 5.01 et seq.

The Federal Reserve Board and its vice chairman have characterized Interpretation § 226.401 as an "interpretative rule."² However, both the United States Supreme Court and this Court have rejected the argument that the label given to a rule by an administrative agency is determinative. Columbia Broadcasting System, Inc. v. United States, 316 U.S. 407, 62 S.Ct. 1194, 86 L.Ed. 1563 (1942); Pharmaceutical Manufacturers Association v. Finch, 307 F.Supp. 858 (D.Del.1970).

As this Court pointed out in Pharmaceutical Manufacturers Association v. Finch, supra, the determination that a rule or regulation is subject to the notice and comment provisions of Section 4 of the Administrative Procedure Act should be based upon the basic purpose of the statutory requirements rather than upon facile semantic distinctions. "The basic policy of Section 4 at least requires that when a proposed regulation of general applicability has a substantial impact on the regulated industry, * * * notice and opportunity for comment should first be provided." 307 F.Supp. at 863. In determining that the regulations had such "substantial impact" that it would violate the basic policies of the Administrative Procedure Act not to allow notice and the opportunity for comment prior to promulgation, this Court in the PMA case weighed (1) the complexity and pervasiveness of the rules issued, (2) the drastic changes effected in existing law by the rules, (3) the degree of retroactivity and its impact and (4) the confusion and controversy engendered by practical difficulties of compliance with the new rules.

This Court is of the opinion that Interpretation § 226.401 is in fact an interpretative rule and as such was not subject to the notice and opportunity for comment provisions of Section 4 of the Administrative Procedure Act. The interpretation is not a complex and all pervasive set of regulatory matter. Instead it merely represents an attempt to clarify or define what is meant and what is not meant by the term "actual unanticipated late payment" charge.³ Expressing an agency's view of the definition of a term used in a statute or regulation is uniformly held to be interpretative. United States v. 353 Cases, Etc., 247 F.2d 473 (8th Cir. 1957).

Interpretation § 226.401 did not effect a drastic change in the existing law. Section 226.4 of Regulation Z describes the finance charge as "the sum of all charges, payable directly or indirectly by the customer, and imposed directly or indirectly by the creditor as an incident to or as a condition of the extension of credit." (Emphasis added). Included are any ...