Irby-Greene v. M.O.R., Inc.

• Decision Date: 05 January 2000
• Docket Number: No. 99-1501-A.,99-1501-A.
• Citation: 79 F.Supp.2d 630
• Parties: Patricia IRBY-GREENE, Plaintiff, v. M.O.R., INC., t/a Auto Maxx, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

79 F.Supp.2d 630

Patricia IRBY-GREENE, Plaintiff, v. M.O.R., INC., t/a Auto Maxx, et al., Defendants.

No. 99-1501-A.

United States District Court, E.D. Virginia, Alexandria Division.

January 5, 2000.

Christopher Dikran Koomey, Alexandria, VA, for plaintiff.

David Reza Mahdavi, Fracassi Mahdavi, L.L.P., Falls Church, VA, for defendant M.O.R., Inc.

Michael McGettigan, Richards, McGettigan, Reilly & West, P.C., Alexandria, VA, Eugene J. Kelley, Jr., John L. Ropiequet, Christopher S. Naveja, Amstein & Lehr, Chicago, IL, for defendant Credit Acceptance Corp.

MEMORANDUM OPINION

ELLIS, District Judge.

In this dispute, a disgruntled purchaser of a used car has sued the seller of the car, and the assignee of the installment sales contract for the car. The assignee's threshold dismissal motion presents the following questions:

(1) Is the amount of the discount involved in the assignment of the contract a hidden finance charge in violation of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., for which the assignee may be liable?

(2) Is the assignee of a contract liable for the seller's misrepresentation of the car's mileage, in violation of the Odometer Act, 49 U.S.C. § 32705?

I

Plaintiff Patricia Irby-Greene purchased a used automobile on credit from defendant M.O.R., Inc., t/a Auto Maxx ("Auto Maxx") on April 23, 1999. In this regard, plaintiff signed an installment sales contract which established the credit terms and provided for assignment of the contract to defendant Credit Acceptance Corporation ("CAC"). According to the contract, the "cash price" for the car was $4,500.00, but the final purchase price included mechanical repair insurance, taxes, and other fees, bringing the total cash price to $5,954.75. Plaintiff made a $1125.00 down payment and Auto Maxx financed the remaining $4,829.75 for two years at an annual percentage rate of 22%. Under this arrangement, plaintiff was obligated to pay a total of $6,013.20 in twenty-four equal monthly installments of $250.55. Thus, the total sale price of the car, including the down payment, taxes, fees, warranty, and interest was $7,138.20 ($6,013.20 in principal and interest and $1125.00 in down payment).¹ Auto Maxx assigned the contract to CAC at an undisclosed discount from its face value.²

Plaintiff now contends that the amount by which the contract was discounted on assignment was a finance charge, and that both Auto Maxx and CAC are liable under TILA for Auto Maxx's failure to treat the discount as such. Plaintiff also contends that Auto Maxx intentionally understated the car's actual mileage by nearly 40,000 miles, in violation of the Odometer Act. Specifically, plaintiff alleges that the mileage was represented as being 73,297 miles, but that Auto Maxx had documents indicating the car's actual mileage was in excess of 113,000 miles. In its motion to dismiss, CAC argues that limits on assignee liability in this context bar both claims brought against it.

II

To state a claim for assignee liability pursuant to TILA based on the creditor's³ practice of assigning installment contracts at an undisclosed discount, plaintiff must allege (i) that the amount of the discount was a finance charge, and (ii) that the failure to disclose the discount as a finance charge was "apparent on the face of the disclosure statement." See 15 U.S.C. § 1641(a). With respect to the first question, Regulation Z, TILA's implementing regulation, teaches that a finance charge is any "charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit." 12 C.F.R. § 226.4.⁴ And, as TILA and the Regulation make clear, all finance charges must be disclosed as such, and a creditor may not include a finance charge as an element of the "amount financed." See 15 U.S.C. § 1605 (defining "finance charge"); 12 C.F.R. § 226.18 (requiring disclosure and itemization of, inter alia, the finance charge and the amount financed). The purpose of the TILA disclosure requirement is to ensure that the consumer receives "a meaningful disclosure of credit terms," and is thus able to "compare more readily the various credit terms available to him" as well as to "avoid the uninformed use of credit." 15 U.S.C. § 1601(a). In short, the finance charge must represent and disclose to the consumer the actual cost of obtaining credit. See Walker v. Wallace Auto Sales, Inc., 155 F.3d 927, 932 (7th Cir.1998) ("[A] creditor-merchant must disclose to a consumer buying on credit exactly how much he will pay for that credit.").

At first blush, the amount by which a contract is discounted on assignment does not appear to be a finance charge, as it is a cost imposed by the assignee on the creditor, and not by the creditor on the buyer. Indeed, the Official Staff Commentary to Regulation Z⁵ confirms that if the discount is "absorbed as a cost of doing business," the cost of the discount is not a finance charge even if "the creditor may take such cost[] into consideration" in setting the cash price. Official Staff Commentary, 12 C.F.R. Pt. 226, Supp. I at 308.⁶ Yet, this conclusion assumes there is a single price for cash and credit customers, and that this single price accounts for the reality of discounting, just as it would account for overhead and other costs of doing business. Thus, the Staff Commentary sensibly acknowledges that if the cost of the discount is "separately imposed" by the seller on a credit purchaser as a cost of that purchaser's obtaining credit, then the amount of the discount would, in fact, be a finance charge.⁷ Id. Although the meaning of the phrase "separately imposed" has been subject to varying interpretations,⁸ it seems quite clear, in light of TILA's purpose,⁹ that the cost of the discount is "separately imposed" on a credit customer if the seller, to cover the cost of the discount, would have charged a credit customer a higher price than the price charged to a cash customer.¹⁰ Indeed, were the seller to increase the price to cover the cost of the discount, he would simply be "burying the cost of credit in the price of the goods sold." Id. at 930 (citing Mourning v. Family Publications Serv., Inc., 411 U.S. 356, 364, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973)). In sum, to state a TILA claim against CAC (or Auto Maxx) based on the practice of assigning commercial paper at a discount, plaintiff must allege that Auto Maxx charged plaintiff a higher price than it would charge a cash customer to account for the discount of the contract on assignment to CAC.¹¹

In any event, whether the complaint in this case can be said to contain such an allegation need not be reached, for there is a further requirement for assignee liability under TILA that plaintiff cannot meet, namely, evidence that the violation is "apparent on the face of the disclosure statement." 15 U.S.C. § 1641(a). An assignee's sole duty under TILA is to examine the assigned documents for any irregularities or illegalities, even if the assignee has knowledge that a creditor's contracting practices may otherwise violate TILA. See Taylor v. Quality Hyundai, Inc., 150 F.3d 689, 694 (7th Cir.1998).¹² Thus, in considering a claim of assignee liability, the relevant inquiry is whether "a reasonable person can spot [any violations] on the face of the disclosure statement or other assigned documents." Taylor, 150 F.3d at 694. In other words, even assuming CAC's awareness of Auto Maxx's discounting practice, CAC cannot be held liable under TILA unless the contract itself reflects that the cash price was increased to cover the cost of the discount. See 15 U.S.C. § 1641(a). In that regard, plaintiff suggests that the failure to treat the amount of the discount as a finance charge is apparent on the face of the disclosure statement, as the contract itself discloses the fact that the contract may be assigned at a discount, but does not include the discount as a finance charge. Yet, the amount of the discount would be a finance charge only if Auto Maxx actually increased the price of the car sold to plaintiff to cover the cost of the expected discount. And significantly, even assuming that Auto Maxx increased the price of plaintiff's car to cover the discount, the contract does not reflect that fact.¹³ Indeed, the opposite is true, as the contract states that Auto Maxx "did not increase the price of the vehicle because [plaintiff] was purchasing the vehicle on credit or because this Contract would be assigned." With this clause, the disclosure statement, on its face, is unambiguous: A reasonable person considering the contract would conclude that the "cash price" was not increased to cover the cost of any discount. Thus, even assuming plaintiff has stated a claim for relief against Auto Maxx, a question not reached here, it has not stated a claim against CAC. Accordingly, Count II of the complaint against CAC must be dismissed.

III

The second question is whether CAC may be held liable for Auto Maxx's alleged violation of the Odometer Act, 49 U.S.C. § 32705. The Odometer Act provides a transferee of a vehicle with a remedy if the transferor intentionally misrepresents that vehicle's mileage. See Diersen v. Chicago Car Exchange, 110 F.3d 481, 488 (7th Cir.1997). But the Act does not establish assignee liability for the transferor's misrepresentation; indeed, it is well-established that the cause of action created by the Odometer Act exists only against a transferor.¹⁴ See Ryan v. Edwards, 592 F.2d 756, 762 (4th Cir.1979).

Thus, the issue is whether CAC, which is not a "transferor" within the meaning of the Odometer Act,¹⁵ is nonetheless liable for transferor-Auto Maxx's alleged violation of the Act. In that regard, the installment contract contains a clause which must appear in all consumer installment contracts pursuant to the so-called "FTC Holder Rule."¹⁶ This clause purports to subject any holder of the contract to all claims the buyer has...