Grey v. European Health Spas, Inc.

• Decision Date: 09 February 1977
• Docket Number: N-75-223 and N-75-229.,Civ. No. N-75-37
• Citation: 428 F. Supp. 841
• Court: U.S. District Court — District of Connecticut
• Parties: Harold GREY v. EUROPEAN HEALTH SPAS, INC. Rosemary PASQUALE v. EUROPEAN HEALTH SPAS, INC. Otis WILLIAMS v. EUROPEAN HEALTH SPAS, INC.

428 F. Supp. 841

Harold GREY v. EUROPEAN HEALTH SPAS, INC.

Rosemary PASQUALE v. EUROPEAN HEALTH SPAS, INC.

Otis WILLIAMS v. EUROPEAN HEALTH SPAS, INC.

Civ. Nos. N-75-37, N-75-223 and N-75-229.

United States District Court, D. Connecticut.

February 9, 1977.

David N. Lesser, Clendenen & Lesser, New Haven, Conn., for plaintiffs.

William T. Kosturko, Betsy H. Firger, Day, Berry & Howard, Hartford, Conn., for defendant.

MEMORANDUM OF DECISION

NEWMAN, District Judge.

These three truth-in-lending cases present similar issues concerning conformity of a consumer credit contract for membership in a health spa to the truth-in-lending requirements of federal and state law. The contract form involved in the three cases is the same.

Plaintiffs seek summary judgment on either of two alleged violations of federal requirements. First, they assert that the terms "finance charge" and "annual percentage rate" as printed on the form contract do not meet the requirement that they be more conspicuous than the other required terms. Second, they claim that the terms "unpaid balance" and "total down-payment" are not used as required. Defendant denies these claims and further raises the issue of whether the plaintiffs themselves have failed to comply with the statute so as to disable them from maintaining these actions. These contentions will be discussed in turn.

Conspicuousness of the terms "finance charge" and "annual percentage rate"

The applicable regulation, 12 C.F.R. § 226.6(a), and Conn. Bank. Reg. § 36-395-5(a)¹ provides that where the terms "finance charge" and "annual percentage rate" are required, they shall be printed more conspicuously than "other terminology required by this part." Plaintiffs argue that the terms "finance charge" and "annual percentage rate" are not printed more conspicuously than other required terms, specifically, the identity of the creditor, a disclosure required by 12 C.F.R. § 226.8(a) and Conn. Bank. Reg. § 36-395-7(a); and terms such as "MEMBER ACKNOWLEDGES THAT HE HAS READ AND RECEIVED A FILLED-IN, SIGNED COPY OF THIS AGREEMENT" and "NOTICE TO BUYER," allegedly required under other consumer protection statutes.

There is no truth-in-lending requirement that the terms "finance charge" and "annual percentage rate" be the most conspicuous items on the contract. The requirement is that these terms be more conspicuous than the other terms required by 12 C.F.R. Part 226. Thus there is no merit to the argument that "finance charge" and "annual percentage rate" should be printed more conspicuously than terms required by other consumer protection statutes or otherwise appearing on the contract, unless these terms are required by 12 C.F.R. Part 226.

The identity of the creditor, however, is arguably a disclosure required by 12 C.F.R. Part 226, since § 226.8(a) requires that "the creditor shall furnish the customer with a duplicate of the instrument or a statement by which the required disclosures are made and on which the creditor is identified." (Emphasis added). Yet even this very section undermines plaintiffs' claim. A fair reading of the emphasized portion indicates that although the creditor's identity is in one sense "required" by this section, and thus implicitly by Part 226, it is not one of the "required disclosures" as that term is used in the regulations. The fact that § 226.8(a) sets up the creditor identification requirement but in the same breath refers to the "required disclosures" indicates an intent to keep the concepts separate. If the creditor's identity were intended to be one of the "required disclosures" and treated the same way as the other disclosures, the underlined portion would have read: "by which the required disclosures, including the creditor's identity, are made." Taking Part 226 as a whole, it is fair to say that the "terminology required by this part" does not include the creditor's identity requirement of § 226.8(a) but only the "required disclosures" as that term is used in § 226.8(a) itself. The staff of the Federal Reserve Board appears to have adopted this interpretation. FRB Official Staff Interpretation, No. FC-0001, 41 F.R. 41907, CCH Consumer Credit Guide ¶ 31,449 (Aug. 31, 1976, effective Sept. 22, 1976).

This interpretation is supported by the reasons behind the requirement that "finance charge" and "annual percentage rate" be printed conspicuously. These two terms, of all the truth-in-lending disclosures, best serve the functions of making the consumer aware of the costs of credit and enabling him to undertake comparative shopping for credit. Setting them off from the other numerical terms such as "amount financed" or "unpaid balance of cash price" facilitates the purposes for which truth-in-lending laws were enacted and minimizes confusion in what could be a bewildering array of numbers. The relative sizes of the required numerical disclosures and the creditor's name affect neither the purposes of the act nor the potential for confusion.

On this contract form the terms "finance charge" and "annual percentage rate" are substantially more conspicuous than the other numerical truth-in-lending disclosures surrounding them. They are significantly larger, prominently displayed in boldface type, and printed all in capital letters, in contrast to the surrounding terms, which are in lower case except for initial capitals. In short, the terms "finance charge" and "annual percentage rate" stand out from the other disclosures and quite definitely catch the eye. This fact distinguishes the conspicuousness cases plaintiffs cite, none of which deals with the relative size of the creditor's identity.

Failure to use the terms "unpaid balance" and "total downpayment"

The next alleged violation is the defendant's failure to use the terms "total downpayment" and "unpaid balance." To understand whether these omissions constitute a violation requires an outline of the sequence of computations contemplated by the pertinent regulation. The starting point is the "cash price." From this is subtracted a sub-total consisting of the sum of the "cash downpayment" and the "tradein." This sub-total is called the "total downpayment." The result of this first subtraction is called the "unpaid balance of cash price." To this is added an item that includes all other charges not included in the finance charge. This item has no required name, but will be referred to herein as "other charges." The result of this addition is called the "unpaid balance." From this is subtracted a sub-total consisting of the sum of the "prepaid finance charge" and the "required deposit balance." This sub-total is called the "total prepaid finance charge and required deposit balance." The result of this second subtraction is called the "amount financed." To this is added the "finance charge." The result of this addition is called the "deferred payment price." The sequence of items, identified by letters, may be portrayed as follows:

(a) cash price (b) cash downpayment + (c) trade-in --------------------- = (d) total downpayment - (d) total downpayment --------------------- = (e) unpaid balance of cash price + (f) other charges -------------------------------- = (g) unpaid balance (h) prepaid finance charge + (i) required deposit balance ---------------------------- = (j) total prepaid finance charge and required deposit balance - (j) total prepaid finance charge and required deposit balance ------------------------------------ = (k) amount financed + (l) finance charge -------------------- = (m) deferred payment price

Defendant's disclosure form omits items (d) and (g). Defendant contends these terms are not "applicable" within the meaning of the regulation. In its view a term is not applicable if its only function is to repeat an identical amount disclosed earlier in the sequence to which no other sum has been added or subtracted. In these transactions, since there is no "trade-in," the "cash downpayment" is the same as the omitted term "total downpayment," and since there are no "other charges," the "unpaid balance of cash price" is the same as the omitted term "unpaid balance."

Three unreported decisions support the defendant's position, at least with respect to omission of the term "unpaid balance" when there are no "other charges." St. Germain v. Bank of Hawaii, Civ.No. 75-0143, CCH Consumer Credit Guide ¶ 98,434 (D.Hawaii Apr. 12, 1976); Rolader v. Georgia Power Co., Civ.No. 19,818, CCH Consumer Credit Guide ¶ 98,551 (N.D.Ga. June 23, 1975); Ivey v. Atlanta Gas Light Co., Civ.No. C74-521A, CCH Consumer Credit Guide ¶ 98,704 (N.D.Ga. Nov. 1, 1974). This position is also supported in staff letters of the Federal Reserve Board. Federal Reserve Board Public Position Letter No. 536, CCH Consumer Credit Guide ¶ 30,748 (Sept. 23, 1971); Federal Reserve Board Letter No. 740, CCH Consumer Credit Guide ¶ 31,059 (Dec. 28, 1973).

Plaintiffs' contention draws some support from the Second Circuit's decision, affirming the decision of this Court, in Ives v. W. T. Grant Co., 522 F.2d 749 (2d Cir. 1975). Ives held that a violation occurred when the term "unpaid balance" was omitted, even though "amount financed" was disclosed, in a situation where the amounts were identical, i. e., there were no intermediate items to be deducted of the sort identified as items (h), (i), and (j) in the schematic computation, supra. See also Federal Reserve Board Letter No. 842, CCH Consumer Guide ¶ 31,165 (Sept. 19, 1974) (requiring use of the term "unpaid balance" even when identical to "amount financed").

Obviously, the phrase "as applicable" in the regulation requiring disclosure of terms implies that in some situations some terms will not be applicable and therefore need not be disclosed. Thus, in these cases, even the plaintiffs do not complain that there is no disclosure of a "trade-in" since in fact there is no "trade-in." At a minimum the phrase "as applicable" permits the omission of items (b), (c), (...