Ex parte Household Retail Services, Inc.

• Decision Date: 01 October 1999
• Citation: 744 So.2d 871
• Court: Alabama Supreme Court
• Parties: Ex parte HOUSEHOLD RETAIL SERVICES, INC. In re Kathleen Cosby and Eugene Cosby v. Household Services, Inc., et al.

744 So.2d 871

Ex parte HOUSEHOLD RETAIL SERVICES, INC.

In re Kathleen Cosby and Eugene Cosby v. Household Services, Inc., et al.

1970473.

Supreme Court of Alabama.

October 1, 1999.

Richard S. Manley of Manley, Traeger, Perry & Stapp, Demopolis; and Andrew J. Noble III and Norman Jetmundsen, Jr., of Bradley, Arant, Rose & White, L.L.P., Birmingham, for petitioner.

Andrew P. Campbell and Charles A. McCallum III of Campbell, Waller & McCallum, L.L.C., Birmingham; Robert G. Methvin, Jr., Birmingham; Phillip W. McCallum of McCallum & Associates, Birmingham; and J.L. Chestnut of Chestnut, Sanders, Sanders & Pettaway, Selma, for respondents.

LYONS, Justice.

Household Retail Services, Inc. ("HRS"), the defendant in an action pending in the Marengo Circuit Court, seeks a writ of mandamus directing that court to vacate its October 29, 1997, order, certifying a statewide class of plaintiffs as to certain claims. We grant the petition and issue the writ.

I. Introduction

Kathleen Cosby and her husband, Eugene Cosby, acting individually and "on behalf of all Alabama residents who are similarly situated," sued HRS; Joe Porter, HRS's marketer for the sale of satellite systems to Alabama residents; and several fictitious parties, alleging breach of contract, fraud, suppression, deceit, and conspiracy. In their complaint, the Cosbys alleged the following:

"Defendant HRS is in the business of financing certain household and consumer goods, such as satellite systems. HRS has financed the sale of satellite systems to residents of the State of Alabama, including residents of Marengo County, Alabama.

"In connection with the financing of satellite systems, HRS designed and implemented a scheme, course and conspiracy to finance satellite systems without the knowledge, consent or approval of residents in the State of Alabama. In order to carry out this course, scheme, and conspiracy, HRS entered into arrangements with marketers of satellite systems, such as Porter, wherein marketers would solicit Alabama residents to purchase satellite systems. As part of the marketing and solicitation, Alabama customers, including the Plaintiff[s] here, would not be advised or informed that HRS would finance the satellite system; that hidden charges would be made on finance accounts; and that credit cards would be issued by HRS to purchasers of satellite systems. HRS conducted this scheme to defraud its customers, including the Plaintiff[s] and members of the class, to increase its profits by not disclosing and then assessing its customers with hidden charges and fees."

(Complaint, p. 3.)

The Cosbys moved for a class certification. In support of their motion, they presented evidence tending to show the following: HRS, several distributors of satellite systems, and other financing companies knowingly engaged in a purposeful scheme of conduct to defraud over 9,000 Alabama residents who purchased satellite systems from 1990 to 1996. HRS, the distributors, and the other financing companies designed and carried out a plan by which the distributors' salespersons would solicit rural, low-income, uneducated residents of Alabama and attempt to sell them satellite systems. If the prospective buyer agreed to purchase a satellite system, the salesperson would take a credit application to determine whether the transaction could be financed.

Each credit transaction was part of a financing plan developed by HRS, and someone in HRS's home office either approved or disapproved the applications of the prospective purchasers. The financing plan provided that HRS would issue the purchaser a private-label credit card. The purchaser then received monthly billing statements as if the satellite system had been purchased by the credit card. HRS, the distributors, and the other financing companies chose this financing arrangement in an attempt to be exempt from certain disclosure requirements of the Federal Truth-in-Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., and its implementing regulations, 12 C.F.R. § 226 et seq.

The TILA defines two kinds of credit: "open-end credit" and "closed-end credit." See 12 C.F.R. § 226.2 (1999). Creditors entering into "closed-end credit" transactions with consumers must disclose, among other things, (1) the number of payments to be made on the loan; (2) the amount of each monthly payment on the loan; (3) the amount financed; (4) the total finance charge; (5) the total payments; and (6) the total sale price. See 12 C.F.R. § 226.18 (1999). Creditors entering into "open-end credit" transactions with consumers through credit or charge cards, however, need not disclose the total number of payments to be made, the amount of each monthly payment, the total payments, or the total sale price. See 12 C.F.R. § 226.5a (1999). Thus, disclosure requirements for "open-end credit" or charge-card transactions are not as stringent as the disclosure requirements for "closed-end credit" transactions.

For an arrangement to qualify as an "open-end credit" arrangement, the TILA requires a reasonable contemplation of "repeated transactions" by the consumer. 12 C.F.R. § 226.2(a)(20) (1999). HRS and the other finance companies attempted to make their credit arrangements with Alabama satellite purchasers appear to be "open-end credit" arrangements by issuing credit cards to the purchasers. In doing so, HRS and the other distributors sought to avoid the TILA's more stringent disclosure requirements for "closed-end credit." However, these credit cards could be used only for purchases from HRS's merchants or its representatives. The credit-card purchases were also limited to programming fees, upgrades, credit life insurance, and other services strictly related to the use of the satellite system. Furthermore, the credit limit on the credit cards was usually only slightly higher (and in some cases lower) than the cost of the satellite system. Thus, the transaction was not an "open-end credit" transaction because HRS knew that there could be no "repeated transactions" under the financing agreement. Accordingly, HRS was required to, but did not, disclose the material information that should have been provided to customers in "closed-end credit" transactions.

As for the transaction that led to the basis of their individual claims, the Cosbys presented evidence indicating that in July 1994, Joe Porter, a satellite-system salesman, visited their home and made a presentation that resulted in their purchasing a satellite system. Mr. Cosby testified that he did not remember anything Porter said about the price of the satellite system, the method of financing, or the amount of monthly payments, interest, and finance charges. Mr. Cosby also testified that he signed the purchase-agreement documents, but that his signature on the financing agreement was forged. Mrs. Cosby testified that she did not read or sign any of the documents relating to the purchase of the satellite system, but she said that Porter told her that the system would cost $65 per month for 5 years and that this amount included interest, finance charges, and insurance. Because Mrs. Cosby did not sign any of the documents relating to the purchase, or the financing, of their satellite system, the account was opened in her husband's name.

At some time later, HRS purchased Mr. Cosby's account from Southeastern Cable, the distributor for which Porter was a salesman. The amount of the account was $3,390.77. When Mrs. Cosby received HRS's first bill, which was more than $65, she realized that Porter had misrepresented the terms of the financing agreement. She attempted to get HRS to lower her payment, and when it refused she stopped making payments.

The Cosbys' evidence indicated that HRS then attempted to collect the remaining balance from the Cosbys. Mrs. Cosby testified that she received several threatening and harassing telephone calls from HRS. She testified that because of these telephone calls, she accepted HRS's offer to settle the account for $2,000. The Cosbys borrowed $2,000 from a bank and paid that amount as payment in full on the account, and they kept the satellite system.

As to their suppression claim, Mrs. Cosby testified that if Porter had disclosed the proper terms of their financing agreement, i.e., that it would require payments greater than $65 a month and a time longer than 5 years to pay off their debt, they would not have purchased the satellite system. As to her responsibilities as a class representative, Mrs. Cosby knew what relief (rescission and restitution) she and her husband sought on behalf of themselves and the class. She also knew the nature of the claims she had made. She stated that she was aware that her lawyers had agreed to pay her legal expenses and that it was her duty to act in the best interest of the class. Although Mr. Cosby testified that he was not aware of the nature of the claims he had made, both Mr. and Mrs. Cosby testified at length as to their willingness to devote time and effort to see that all class members received the relief sought.

Based on this evidence and other evidentiary submissions, the trial court entered an order certifying the action under Rule 23(b)(3), Ala. R. Civ. P., as a class action involving "[a]ll residents of the State of Alabama from 1990 to 1996 who entered into a transaction for the purchase of a satellite system that was financed by [HRS] by the issuance of a charge or credit card." The trial court certified a class action on the claims of breach of contract, fraud, suppression, and conspiracy. It did not mention the deceit claim in its order. HRS then filed this petition, challenging the certification of the fraud, suppression, and conspiracy claims. HRS did not in its petition challenge the certification of the breach-of-contract claim; therefore, we do not address the certification of a class action on that claim.

A petition for a writ of mandamus is the proper method by which a party may seek review of an order...