Joseph v. Norman's Health Club, Inc.

• Decision Date: 30 March 1976
• Docket Number: Nos. 75-1141,75-1142,s. 75-1141
• Citation: 532 F.2d 86
• Parties: Marjorie JOSEPH et al., Appellants, v. NORMAN'S HEALTH CLUB, INC., et al., Appellees. Barbara C. MORSE et al., Appellants, v. NORMAN'S HEALTH CLUB, INC., et al., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 86

532 F.2d 86

Marjorie JOSEPH et al., Appellants, v. NORMAN'S HEALTH CLUB, INC., et al., Appellees.

Barbara C. MORSE et al., Appellants, v. NORMAN'S HEALTH CLUB, INC., et al., Appellees.

Nos. 75-1141, 75-1142.

United States Court of Appeals Eighth Circuit.

Submitted Oct. 15, 1975.

Decided March 5, 1976.

Rehearing and Rehearing En Banc Denied March 30, 1976.

Martin M. Green, St. Louis, Mo., for appellants; Martin M. Green, James A. Eidelman, Anderson, Green, Fortus & Lander, Clayton, Mo., on the briefs for appellants.

Gerald A. Rimmel and Alan E. Popkin, St. Louis, Mo., for appellees.

Gerald A. Rimmel, Susman, Schermer, Willer & Rimmel, St. Louis, Mo., for appellees Boston Securities, Inc., of Kirkwood, Boston Securities of Florissant, Boston Securities, Inc., of Moline Acres, Boston Securities, Inc., and Boston Securities Corp. of Missouri.

Alan E. Popkin and Richard C. Witzel, Rosecan, Popkin & Chervitz, St. Louis, Mo., for appellee Consolidated Finance Corp.

Before CLARK, ^* Associate Justice and LAY and ROSS, Circuit Judges.

LAY, Circuit Judge.

These appeals, brought by the plaintiffs in two consolidated class actions, involve the scope and application of the Truth in Lending Act (TILA),15 U.S.C. § 1601 et seq. (1969). The defendants below were Norman's Health Club, Inc. (the Club) and two finance companies, Boston Securities, Inc. (Boston) and Consolidated Finance Corp. (Consolidated), to which the Club assigned promissory notes signed by the plaintiffs. The district court held the Club liable to plaintiffs for various violations of TILA disclosure requirements. ¹ However, the district court found that the finance companies were not "creditors" under the Act and hence had no duty to disclose to the plaintiff class. ² Joseph v. Norman's Health Club, Inc., 386 F.Supp. 780 (E.D.Mo.1974). The plaintiffs appeal from the judgment in favor of the defendant finance companies. We reverse this finding and remand the cause for further proceedings.

Facts

The facts are substantially undisputed. Between 1960 and 1971, Norman R. Saindon owned and operated a chain of health clubs in the St. Louis, Missouri area. "Lifetime memberships" were offered to the public for $360, payable in 24 equal monthly installments of $15 each. Before the Truth in Lending Act became effective, a few memberships were also sold for cash at discounts of 10 to 15 percent off the total installment price. ³ The district court found that it was the intention of the Health Club to sell almost all memberships on the installment plan and to discount all the notes to finance companies. Ninety-eight percent of club members chose to sign installment notes. 386 F.Supp. at 783.

The Club had dealt with seven or more finance companies since 1960, but by the time TILA became effective, the Club was tendering all of the notes to only defendants Boston and Consolidated. The Club had negotiated an agreement with each company providing the rate of discount and other terms under which the finance companies would purchase such notes as they determined to be creditworthy. The finance companies were not required to purchase any minimum number of notes under these agreements, but they ultimately rejected only five percent. ⁴

The Club's practice was to require customers purchasing a membership on the installment plan to sign a promissory note and to fill out a standard credit application form. The latter was used to provide credit information to the finance companies. Once these forms had been filled out, the Club would often notify one of the finance companies the same day. The finance company would conduct an immediate credit check on the customer and would call the customer to verify that he had signed the membership contract. If the finance company found the new member to be an acceptable credit risk, the Club would assign the note to the finance company without recourse. The finance company would pay the Club the face amount of the note less the amount of the discount provided in the agreements.

Thereafter, the finance company would treat the club member whose note it had accepted just as it treated its own direct loan customers. The finance company would send the club member a payment coupon book as well as instructions that all payments were to be made directly to the finance company and a notice that a late charge would be assessed for late payments. The club member's account was carried on Consolidated's books as a "loan" with the member described as the "customer" and the finance company as the "lender". Defendant Consolidated would notify the club members who had made a certain number of payments that they were now preferred customers of Consolidated. Boston similarly designated club accounts as "loans".

The discount, that is, the difference between the face amount of the customer notes and the cash amount which the finance companies would pay the Club upon assignment of each customer note, was substantial. It ranged from $85 to $165 on the $360 notes. The discount rate was the same on all notes at any one time, but it was renegotiated upward from time to time.

The District Court's Decision.

The district court held that the installment note form violated TILA in several respects. It held that the price reduction of 10 percent or more which had been allowed the four members who paid cash after July 1, 1969 indicated that there was an undisclosed finance charge of 10 percent imposed on installment customers. The district court held that the failure to disclose this and certain other facts rendered the Health Club liable to the plaintiffs.

On the other hand, the district court found that the finance companies had not extended consumer credit and thus had no obligation to make disclosures to the class members. The court similarly found that the Club was not acting as a "conduit" for the finance companies since there was no interlocking control between the Club and the finance companies and the latter did not specifically participate in the initial loan transaction.

The plaintiffs characterize the membership transactions as, in substance, a consumer loan extended by the finance companies to the members, with the proceeds paid on the members' account to the Club. They urge that the discount on the note is the finance charge in the transaction. Thus, in plaintiffs' view, the Club served as a conduit for the finance companies who were the true "extenders" of consumer loans in the ordinary course of business within the meaning of TILA, and it is urged that all of the defendants are jointly liable for failure to disclose the finance charge and certain other information.

The finance companies, on the other hand, contend that the only consumer credit transaction within the intended scope of the Act was a credit sale by the Club to the plaintiffs. The subsequent purchase at a discount of the promissory notes by the finance companies, it is urged, was a bona fide commercial or business transaction exempted from TILA disclosure requirements until the 1974 amendments. ⁵

The fundamental question is whether Congress intended the finance companies to bear some responsibility for TILA disclosures under the circumstances disclosed. We think it did.

An Overview of the Act.

The fundamental purpose of the Truth in Lending Act, 15 U.S.C. § 1601 et seq., is to require creditors to disclose the "true" cost of consumer credit, so that consumers can make informed choices among available methods of payment. See 15 U.S.C. § 1601; Mourning v. Family Publications Service, Inc., 411 U.S. 356, 364-65, 93 S.Ct. 1652, 1658, 36 L.Ed.2d 318, 326 (1973); Warren & Larmore, Truth in Lending: Problems of Coverage, 24 Stan.L.Rev. 793 (1972); W. Willier & F. Hart, Consumer Credit Handbook (1969). The Act is remedial in nature.

The Act was intended to change the practices of the consumer credit industry, and the statute reflects Congress' view that this should be done by imposing disclosure requirements on those who "regularly" extend or offer to extend consumer credit. ⁶ In interpreting the Act, the Federal Reserve Board and the majority of courts have focused on the substance, rather than the form, of credit transactions, and have looked to the practices of the trade, the course of dealing of the parties, and the intention of the parties in addition to specific contractual obligations. Thus, in Mourning v. Family Publications Service, Inc., supra, the Supreme Court said:

The hearings held by Congress reflect the difficulty of the task it sought to accomplish. Whatever 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. . . . The language employed evinces the awareness of Congress that some creditors would attempt to characterize their transactions so as to fall one step outside whatever boundary Congress attempted to establish. 411 U.S. at 365, 93 S.Ct. at 1658, 36 L.Ed.2d at 327.

The statute requires certain information, such as total finance charges and the applicable annual percentage rate, to be disclosed "to each person to whom consumer credit is extended and upon whom a finance charge is or may be imposed." 15 U.S.C. § 1631(a). "Credit" includes "the right granted by a creditor to a customer to . . . incur debt and defer its payment." Reg. Z, 12 C.F.R. § 226.2(l ). The Act does not apply to loans or credit sales made "for business and commercial purposes", 15 U.S.C. § 1603(1); it covers only extensions of consumer credit, defined in the Act as credit "offered or extended (to) a natural person . . . primarily for personal, family, household, or agricultural purposes." 15 U.S.C. § 1602(h). Failure to comply renders the creditor liable to the consumer in an amount equal to twice the finance charge, but not less than $100 or more than $1000. 15 U.S.C. § 1640(a). In the Act, Congress gave the Federal Reserve Board broad authority to promulgate...