Glaire v. La Lanne-Paris Health Spa, Inc.

Decision Date02 December 1974
Docket NumberLANNE-PARIS
CourtCalifornia Supreme Court
Parties, 528 P.2d 357 Linda L. GLAIRE, Plaintiff and Appellant, v. LAHEALTH SPA, INC., et al., Defendants and Respondents. L.A. 30315. In Bank

Palley & Schwartz and Michael R. Palley, Los Angeles, for plaintiff and appellant.

Paul, Hastings, Janofsky & Walker, Oliver F. Green, Jr., and Geoffrey L. Thomas, Los Angeles, for defendants and respondents.

MOSK, Justice.

On behalf of herself and others similarly situated, plaintiff Linda L. Glaire brought a class action against defendants La Lanne-Paris Health Spa, Inc., hereinafter 'La Lanne,' and Universal Guardian Acceptance Corporation, hereinafter 'Universal,' together with other named health clubs and finance companies. 1 The complaint charged defendants with violating that portion of the Consumer Credit Protection Act commonly known as 'Truth-in-Lending' (15 U.S.C. § 1601 et seq.) and with exacting interest in excess of the legal rate prescribed in article XX, section 22, of the California Constitution. Based upon these allegations, but as separate and further causes of action, plaintiff also sought declaratory relief to define the rights of members of the class under existing consumer contracts with defendants and injunctive relief to prevent the formulation of similar such contracts in the future. Defendants successfully filed general demurrers to each of the alleged causes and a judgment of dismissal was entered thereon from which plaintiff now appeals. We conclude the trial court erred in sustaining the demurrers and therefore reverse the judgment.

Our only concern in this case is whether plaintiff has succeeded in stating a cause of action. In assessing the sufficiency of a complaint against a general demurrer, we must treat the demurrer as admitting all material facts properly pleaded. (Scott v. City of Indian Wells (1972) 6 Cal.3d 541, 549, 99 Cal.Rptr. 745, 492 P.2d 1137; Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713, 63 Cal.Rptr. 724, 433 P.2d 732.) Furthermore, we bear in mind our well established policy of liberality in reviewing a demurrer sustained without leave to amend: 'the allegations of the complaint must be liberally construed with a view to attaining substantial justice among the parties.' (Youngman v. Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 244--245, 74 Cal.Rptr. 398, 401, 449 P.2d 462, 465; see also Scott v. City of Indian Wells (1972) supra; MacLeod v. Tribune Publishing Co. (1959) 52 Cal.2d 536, 542, 343 P.2d 36; Lemoge Electric v. County of San Mateo (1956) 46 Cal.2d 659, 664, 297 P.2d 638; Matteson v. Wagoner (1905) 147 Cal. 739, 742, 82 P. 436; Code Civ.Proc. § 452.)

From the complaint the following facts emerge. Plaintiff, whose posture typifies that of her class, purchased a seven-year membership in a health club owned and operated by La Lanne. The price of the membership was $408, regardless of whether the sum was paid in cash at the outset or paid over a two-year period in monthly installments of $17 each. Plaintiff elected to pay over time, as do most of La Lanne's customers, and accordingly entered into a standard form contract which declared that no 'service charge' was made for the extension of credit and provided that any default in installment payments would render the entire balance due. As a matter of course in its business practice, La Lanne thereupon sold plaintiff's contract to Universal at a discount of 37.5 percent. La Lanne thus immediately received $255 in cash and plaintiff became obligated to Universal for the full $408 payable over two years. La Lanne and Universal are interlocking corporations with common ownership and control, and Universal regularly assists La Lanne in its financing by accepting chattel paper at a discount.

Plaintiff's principal allegation is that La Lanne and Universal failed to comply with certain provisions of the federal Truth-in-Lending legislation. Truth-in-Lending was enacted in 1968 to supply a measure of uniformity to 'the divergent, and at times fraudulent, practices by which consumers were informed of the terms of the credit extended to them.' (Mourning v. Family Publications Service, Inc. (1973) 411 U.S. 356, 363, 93 S.Ct. 1652, 1658, 36 L.E.2d 318; see also H.R.Rep. No. 1040, 90th Cong., 1st Sess. (1967); Sen.Rep.No.392, 90th Cong., 1st Sess. (1967).) Its purpose is explicit in the act: 'The Congress finds that economic stablization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various terms available to him and avoid the uninformed use of credit.' (15 U.S.C. § 1601.)

In order to encourage the informed use of credit, Truth-in-Lending requires merchants who regularly extend credit to disclose to each consumer certain information relevant to the cost of deferring payment. (15 U.S.C. §§ 1602, 1631.) Among other facts, a merchant must, prior to consummating a sale, conspicuously indicate the cash price, the total amount deferred, the finance and other charges, and the annual percentage rate of interest. (15 U.S.C. § 1638.) Failure to so disclose may result in civil liability to the consumer for a penalty of twice the amount of the finance charge, though not less than $100 nor more than $1,000, and for the costs of the litigation including reasonable attorney's fees. (15 U.S.C. § 1640.)

The terms of Truth-in-Lending are necessarily broad. In debating its coverage, Congress fully recognized that '(w)hatever legislation was passed had to deal not only with the myriad forms in which credit transactions then occurred, but also with those which would be devised in the future.' (Mourning v. Family Publication Service, Inc. (1973) supra, 411 U.S. 356, 365, 93 S.Ct. 1652, 1658, 36 L.Ed.2d 618.) Accordingly, in order to compel the meaningful disclosure of credit information in the extensive variety of consumer transactions and to discourage deceptive practices designed to circumvent the purposes of Truth-in-Lending, Congress delegated wide authority to the Federal Reserve Board to interpret the act's provisions and to promulgate such regulations as may be deemed necessary to preserve the act's effectiveness. (15 U.S.C. § 1604.)

On its face, Truth-in-Lending compels the disclosure of contract information only in those credit transactions 'for which the payment of a finance charge is required.' (15 U.S.C. § 1602, subd. (f).) It is not surprising, therefore, that soon after the passage of the act there began to appear various sales techniques by which merchants attempted to evade the demands of Truth-in-Lending by claiming no finance charge was imposed for a particular installment sale. The most common of these methods was the practice of 'burying' the cost of credit in the price of the merchandise sold. In this way, a creditor might cease to admit a finance charge, but in stead inflate the purported cash price in order to recoup the cost of deferred payment. 2 The practice of burying the cost of credit in an inflated cash price strikes hardest at the consumer who is dependent upon making purchases on credit: it is meaningless for such a consumer to compare other cash prices which do not include 'free' credit. Conversely, when a merchant operates primarily on a credit basis, he is little concerned with quoting prices attractive to a cash buyer and it is largely irrelevant to him and his customers how the total price is allocated between actual cash price and credit charge. (See Warren & Larmore, Truth in Lending: Problems of Coverage (1972) 24 Stan.L.Rev. 793, 817.)

To ease the problem of buried finance charges, the Federal Reserve Board, pursuant to its delegated powers, adopted the 'Four Installment Rule' as part of a series of Truth-in-Lending regulations collected under the designation 'Regulation Z.' (12 C.F.R. § 226.) Under that rule, the coverage of Truth-in-Lending is extended to all credit 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.' (12 C.F.R. § 226.2, subd. (k).) The Four Installment Rule thus removes much of the incentive to bury credit charges inasmuch as the rule brings within the ambit of the act all consumer obligations which are payable in more than four installments. Even under that rule a creditor may not be forced to 'break out,' i.e., identify, a finance charge if he insists none exists; yet the consumer is nonetheless assured the disclosure of other useful information regarding the number, dates, and amounts of payments, insurance costs, balloon payments, and default provisions, and he is afforded the general advertising safeguards of the act. (See Mourning v. Family Publications Service, Inc. (1973) supra, 411 U.S. 356, 369, 377, 93 S.Ct. 1652, 36 L.Ed.2d 618; 15 U.S.C. §§ 1638, subd. (a), 1661--1665.) As has been suggested, a consumer who is particularly dependent upon credit may be more concerned with such other information than with the existence and amount of any finance charges. (See Warren & Larmore, Truth in Lending: Problems of Coverage (1972) 24 Stan.L.Rev. 793, 817.)

In her complaint, plaintiff alleged that regardless of whether a finance charge was in fact imposed, La Lanne failed to make certain disclosures required under the Four Installment Rule. Although the rule plainly applies to the transaction at hand, the trial court sustained defendant's demurrer to the cause on the basis of a decision by the United States Court of Appeals which held the Four Installment Rule to be an unconstitutional conclusive presumption of a...

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