Osborne v. Bank of America, Nat. Ass'n

• Decision Date: 23 September 2002
• Docket Number: No. 3:02-0364.,3:02-0364.
• Citation: 234 F.Supp.2d 804
• Parties: Aaron L. OSBORNE and Bonita R. Osborne, husband and wife, on behalf of themselves and all others similarly situated, Plaintiffs, v. BANK OF AMERICA, NATIONAL ASSOCIATION, Defendant.
• Court: U.S. District Court — Middle District of Tennessee

234 F.Supp.2d 804

Aaron L. OSBORNE and Bonita R. Osborne, husband and wife, on behalf of themselves and all others similarly situated, Plaintiffs, v. BANK OF AMERICA, NATIONAL ASSOCIATION, Defendant.

No. 3:02-0364.

United States District Court, M.D. Tennessee, Nashville Division.

September 23, 2002.

COPYRIGHT MATERIAL OMITTED

Clinton W. Watkins, Brentwood, TN, Michael E. Terry, Nashville, TN, Wyman O. Gilmore, Jr., Grove Hill, AL, Richard T. Dorman, Robert T. Cunningham, Jr., John T. Crowder, Jr., David G. Wirtes, Jr., Cunningham, Bounds, Yance, Crowder & Brown, LLC, Mobile, AL, for Plaintiffs.

William L. Harbison, John Scott Hickman, Sherrard & Roe, Nashville, TN, Andrew L. Sandler, Anand S. Raman, Skadden, Arps, Slate, Meagher & Flom, LLP, Washington, DC, for Defendant.

MEMORANDUM and ORDER

TRAUGER, District Judge.

This case is before the court on defendant's Motion to Dismiss (Docket No. 32), to which the plaintiffs have responded (Docket No. 38), and defendant has replied (Docket No. 40).

Background and Procedural History

In January 2000, plaintiffs sought automobile financing from Crest Cadillac, a Nashville, Tennessee dealership, to facilitate their purchase of one of the dealership's automobiles. (Docket No. 1, Comp. at ¶ 29) Crest arranged for plaintiffs to obtain financing in the amount of $25,915.72 from defendant Bank of America, National Association (Bank of America). (Id. at ¶¶ 30, 31) To secure the credit, plaintiffs signed a retail installment contract that charged plaintiffs an annual interest rate of 10.69% (the Contract APR) for a period of six years and obligated the plaintiffs to pay $9,461.48 in finance charges. (Id. at ¶¶ 31, 32) At the time they contracted for the financing, plaintiffs believed that the interest rate to which they agreed was calculated on the basis of objective lending criteria alone. (Id. at ¶¶ 33, 34) Plaintiffs now believe that the contract APR included a subjective Finance Charge Markup determined by Crest and authorized by Bank of America, which caused them, as African-Americans, to pay a higher finance charge than a similarly situated white customer, in violation of the Equal Credit Opportunity Act, 15 U.S.C. § 1619a et seq. (Id. at ¶¶ 48-51) Plaintiffs seek class-wide equitable relief on behalf of themselves and all similarly situated African-Americans. In support of their claim, plaintiffs allege the following facts.

Bank of America provides credit to automobile purchasers through an indirect lending program, in which dealers originate consumer auto loans on Bank of America's behalf. (Id. at ¶¶ 6-8) The indirect lending program utilizes a retail credit pricing system that incorporates two components into the APR charged to the customer: the "Buy Rate" and the "Finance Charge Markup". (Id. at ¶ 5) The "Buy Rate" is the "minimum finance charge for a particular customer after consideration of all risk related variables pertaining to the customer's purchase." The Buy Rate is established by Bank of America based upon a customer's credit worthiness, as reflected in the risk "tier" assigned to the customer. The "Finance Charge Markup" is "the non-risk charge added to the Buy Rate" by the dealer. The Markup is incorporated into the Contract APR without the customer's knowledge and paid by the customer to Bank of America. A portion of the Markup is then rebated back to the dealer, with the remaining portion retained by Bank of America. Plaintiffs allege that the use of these Markups results in African-American customers paying significantly higher finance charges than white customers of equal credit worthiness. (Id. at ¶¶ 48-50, 56)

Plaintiffs assert that Bank of America is responsible for the racially discriminatory effects of Markups under the ECOA because: (1) Bank of America is a creditor under ECOA; (2) Bank of America participates in the decision to extend or renew credit; (3) Bank of America knew that its policy of encouraging subjective Markups through the use of dealer incentives caused African-Americans to pay higher finance charges than white customers of comparable credit worthiness. (Id. at ¶¶ 38-41) Alternatively, plaintiffs assert that Bank of America is legally liable under the ECOA because dealers who originate loans on Bank of America's behalf act as Bank of America's agents and/or Bank of America has a non-delegable duty to ensure that its automobile financing policies do not have a disparate impact on African-Americans.¹ (Id. at ¶¶ 43-45)

Bank of America now moves to dismiss plaintiffs' Complaint for failure to state a claim, arguing that: (1) Bank of America is only an assignee of the loans generated by dealers and, therefore, not liable to the plaintiffs under the ECOA; (2) Bank of America cannot be held liable for dealers' lending activities under plaintiff's alternative theories of agency and the non-delegable duty doctrine; (3) disparate impact claims are not cognizable under the ECOA; (4) assuming disparate impact claims are cognizable, such claims would be limited to creditworthiness determinations; and (5) plaintiffs fail to allege any causal relationship between a specific practice of Bank of America and the alleged disparate impact. (Docket No. 32)

Standard of Review

In deciding a motion to dismiss for failure to state a claim under either Rule 12(b)(6) or Rule 12(c), the court will accept the facts as the plaintiff has pleaded them as true. See Performance Contracting, Inc. v. Seaboard Surety Co., 163 F.3d 366, 369 (6th Cir.1998); Weiner v. Klais and Co., Inc., 108 F.3d 86, 88 (6th Cir.1997). The court will not dismiss for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45, 46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). "A complaint must contain either direct or inferential allegations with respect to all material elements necessary to sustain a recovery under some viable legal theory." Performance Contracting, 163 F.3d at 369. This narrow inquiry is based on whether "the claimant is entitled to offer evidence to support the claims," not whether the plaintiff can ultimately prove the facts alleged. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). "Indeed it may appear on the face of the pleadings that recovery is very remote and unlikely but that is not the test." Id.

Discussion

The ECOA prohibits creditors from discriminating against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex or marital status, or age. 15 U.S.C. § 1961. The statute defines the term "creditor" as "any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit." 15 U.S.C. § 1961(a)(e). Under regulations issued by the Federal Reserve Board, the agency charged with administering the ECOA:

The term [creditor] includes a creditor's assignee, transferee, or subrogee who so participates [in the decision to extend, renew, or continue credit].... A person is not a creditor regarding any violation of the act or this regulation committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction.

12 C.F.R. § 202.2(1).

A. Bank of America's Liability as a Creditor

In this case, Bank of America argues that it is not a creditor under § 202.2(1), which it deems the "Multiple Creditor Rule," because it obtains automobile loans through an assignment from the dealer and has no knowledge of any discriminatory actions allegedly taken by the dealers who originate those loans. Plaintiffs contend that Bank of America is an assignee in name only. As evidence, plaintiffs note that Bank of America determines a customer's creditworthiness and sets the Buy Rate for the automobile loans, as well as the maximum Markup that a dealer may apply to a customer's loan. Plaintiffs further note that dealers process the loans in accordance with Bank of America's policies and procedures; that Bank of America, rather than the dealer, bears the risk of default from the moment the loan is approved; and that Bank of America compensates dealers for originating loans by rebating to them a portion of the markup. Plaintiffs assert that, under these circumstances, Bank of America may be deemed the originating creditor for purposes of the ECOA The court agrees. Cf. Ford Motor Credit Co. v. Cenance, 452 U.S. 155, 158, 101 S.Ct. 2239, 2241, 68 L.Ed.2d 744 (1981) ("The sales were contingent upon FMCC's approval of the credit worthiness of the buyer. The acceptance of the contract and the assignment became operational simultaneously, and the assignment divested the dealer of any risk in the transaction. In short, we agree with the Court of Appeals that it would be elevating form over substance to conclude that FMCC is not a creditor within the meaning of the [Truth in Lending] Act.")

Additionally, plaintiffs have adequately alleged that Bank of America had reasonable notice of the racially discriminatory effects of dealers' subjective Markups, thereby rendering the Multiple Creditor Rule inapplicable. See United States v. Cello-Foil Products, Inc., 100 F.3d 1227, 1233 (6th Cir.1996) ("[K]nowledge, like intent, is a factual issue which may be proved by circumstantial evidence.") (citations omitted). Plaintiffs may or may not be able to substantiate this allegation after discovery. At this stage of the litigation, however, they need only allege facts which, if proven, would entitle them to relief. See Scheuer v. Rhodes, 416 U.S. at 236, 94 S.Ct. 1683. This they have done.

B. Agency Liability

Bank of America next argues that plaintiffs cannot...