St. Germain v. Bank of Hawaii

• Decision Date: 30 December 1977
• Docket Number: No. 76-2007,76-2007
• Citation: 573 F.2d 572
• Parties: Chuck ST. GERMAIN, Plaintiff-Appellant, v. BANK OF HAWAII, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 572

573 F.2d 572

Chuck ST. GERMAIN, Plaintiff-Appellant, v. BANK OF HAWAII, Defendant-Appellee.

No. 76-2007.

United States Court of Appeals Ninth Circuit.

Dec. 30, 1977.

John H. Paer (argued), Richard S. Kanter, Linda-Mei Leong, Legal Aid Society of Hawaii, Honolulu, Hawaii, for plaintiff-appellant.

David J. Reber (argued), of Goodsill, Anderson & Quinn, Honolulu, Hawaii, for defendant-appellee.

Appeal from the United States District Court for the District of Hawaii.

Before ELY, HUFSTEDLER and WRIGHT, Circuit Judges.

HUFSTEDLER, Circuit Judge:

The thorny question presented on this appeal is whether the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601, et seq., requires disclosure of an acceleration clause in a retail installment contract. The district court held that disclosure was not required (St. Germain v. Bank of Hawaii (D.Hawaii 1976) 413 F.Supp. 587), and it granted the Bank of Hawaii's motion for summary judgment. We reverse, holding that TILA compels a creditor making a consumer loan to disclose the creditor's right to accelerate full payment of the debt upon the debtor's default or late payment.

The contract is a standard form "Retail Installment Contract (Automobile)." The face of the contract recites in simple language important rights and duties of the parties. Section four, captioned in large type "DELINQUENCIES AND OTHER CHARGES," states that the debtor will incur a 5 percent delinquency charge, plus a part of the creditor's attorney's fees and/or collector's fees in the event of default or late payment. Section three, captioned "PREPAYMENT PRIVILEGE," states that the debtor is entitled to a refund of unearned finance charges if he pays the debt before maturity. Nothing is said about the creditor's right to accelerate if the debtor defaults or pays late nor about the possibility of any rebate of unearned finance charges if the debt is accelerated. On the back of the contract in small print, the contract says that, upon default, "the full amount hereof shall at the Seller's option be immediately due and payable and Seller shall have the rights and remedies of the holder of a retail installment contract under Chapter 476, Hawaii Revised Statutes." No reference is made to the rebate of unearned interest upon acceleration.

The question whether TILA requires disclosure of the existence and impact of an acceleration clause in a retail installment contract should have been settled early in TILA's life. Instead, the Federal Reserve Board has issued conflicting signals, and the Circuits are in disarray. The common denominators of the Board's analysis and the basis of the four divergent views of the courts are 15 U.S.C. § 1639(a)(7) (TILA § 129(a)(7)) and 12 C.F.R. § 226.8(b)(4), Regulation Z, implementing TILA. Section 1639(a)(7) provides:

"(a) Any creditor making a consumer loan . . . shall disclose each of the following items, to the extent applicable:

(7) The default, delinquency or similar charges payable in the event of late payments."

Section 226.8(b), in pertinent part, states:

"(b) In any transaction subject to this section, the following items, as applicable, shall be disclosed:

(4) The amount, or method of computing the amount, of any default, delinquency, or similar charges payable in the event of late payments."

Judicial responses to the impact of Section 226.8(b)(4) on disclosure of acceleration have split four ways. One response is that disclosure is always required because the right of acceleration is itself a "charge . . . in the event of late payments," within the meaning of TILA and Regulation Z. (Garza v. Chicago Health Clubs, Inc. (N.D.Ill.1972) 347 F.Supp. 955.) After noting that neither TILA nor Regulation Z expressly defines "charge," Garza turned to state decisions and to Black's Law Dictionary to find the meaning of "charge." The court decided that "charge" was synonymous with "obligation," "claim," and "expenses," and it concluded:

"Considering these definitions and the purpose of the statute and regulation to inform consumers of credit costs and terms so they can effectively choose between sources of credit . . . it seems clear that the acceleration of the balance of the debt should be considered a 'charge' . . . ." (347 F.Supp. at 959.)

The "always" view enjoyed a spasm of popularity among district courts, at least until two of the better known district court decisions were overturned on appeal. (Meyers v. Clearview Dodge Sales, Inc. (E.D.La.1974) 384 F.Supp. 722, rev'd (5th Cir. 1976) 539 F.2d 511, 519; Johnson v. McCrackin-Sturman Ford, Inc. (W.D.Pa.1974) 381 F.Supp. 153, rev'd (3d Cir. 1975), 527 F.2d 257.)

Garza has the virtue of providing a uniform national rule which is consistent with the remedial intent of TILA. (See Mourning v. Family Publications Service, Inc. (1973) 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318; Sellers v. Wollman (5th Cir. 1975) 510 F.2d 119, 122; Eby v. Reb Realty, Inc. (9th Cir. 1974) 495 F.2d 646, 650.) The defect in Garza is that equating an acceleration right with the term "charge" is not consistent with the use of "charge" in the context of TILA or in Regulation Z. Thus, Section 1639(a)(7) speaks of "default, delinquency, or similar charges payable," which suggests that "charges" were intended to refer to specific monetary sums rather than an undifferentiated notion of "burden" or "obligation." (See Johnson v. McCrackin-Sturman Ford, Inc., supra, 527 F.2d at 266.) Similarly, Regulation Z requires the disclosure of "the amount, or method of computing the amount," of the charges payable in the event of late payment, strongly implying that charges are sums of money, and not the right to payment or to increase the annual percentage rate. Moreover, the Federal Reserve Board's official staff interpretation of TILA and Regulation Z is directly contrary to Garza. "(T)he mere right to accelerate contained in a contractual provision . . . is not a charge payable in the event of late payment." (Emphasis in original. No. FC-0054 (March 21, 1977) 5 CCH Consumer Credit Guide P 31,552.) Although we are not bound by the Board's official interpretation of Regulation Z nor by a staff opinion letter, both are entitled to respect; we should follow the Board's construction "unless there are compelling indications that it is wrong." (Moore v. Great Western Savings & Loan Ass'n (9th Cir. 1975) 513 F.2d 688, 690.) No compelling indications of error are present.

The polar opposite of Garza is the view that disclosure is never required. The Fifth and Tenth Circuits have adopted the "never" view. (Begay v. Ziems Motor Co. (10th Cir. 1977) 550 F.2d 1244; Martin v. Commercial Securities Co., Inc. (5th Cir. 1976) 539 F.2d 521.) ¹ These courts reasoned that Congress must not have intended to require disclosure of acceleration clauses because it said nothing expressly about them. Congressional silence about provisions as common as acceleration clauses spoke eloquently to these Circuits to evidence Congress' intent not to include them as disclosure subjects.

Congressional silence is a dubious indicium of legislative intent, especially when we are dealing with a statute like TILA, in which Congress traced very few lines on a new large canvass. Despite the lack of articulate draftsmanship, TILA manifests Congress' overriding interest in disclosure to provide consumer protection. As the Supreme Court observed in Mourning :

"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. To accomplish its desired objective, Congress determined to lay the structure of the Act broadly . . . ." (411 U.S. at 365, 93 S.Ct. at 1658.)

The Court explained that "(t)he Truth in Lending Act reflects a transition in congressional policy from a philosophy of 'Let the buyer beware' to one of 'Let the seller disclose.' By erecting a barrier between the seller and the prospective purchaser in the form of hard facts, Congress expressly sought 'to . . . avoid the uninformed use of credit.' 15 U.S.C. § 1601." (411 U.S. at 377, 93 S.Ct. at 1664.)

Other courts have adopted the view that disclosure of an acceleration clause is required under some circumstances. The leading proponent of the "sometimes" interpretation is the Third Circuit. The pivot of the intermediate interpretation, as in Garza is the "charge" concept, but the existence of a "charge" depends upon whether the creditor retains or rebates unearned interest after acceleration. The Third Circuit holds that retained interest is a "charge," the existence of which must be disclosed, unless, under state law, the retained interest must be rebated upon acceleration. (Johnson v. McCrackin-Sturman Ford Inc. (3d Cir. 1975) 527 F.2d 257.)

A variation of the "sometimes" theme is that disclosure is required if the credit agreement itself fails to provide for rebating unearned interest. That interpretation was initially accepted by a few district courts in the Fifth Circuit, until the Court of Appeals reversed. (Barrett v. Vernie Jones Ford, Inc. (N.D.Ga.1975) 395 F.Supp. 904, 908-11, rev'd (5th Cir. 1976) 543 F.2d 568; McDaniel v. Fulton National Bank of Atlanta (N.D.Ga.1975) 395 F.Supp. 422, 425-28, rev'd (5th Cir. 1976) 543 F.2d 568; see also Galie, The Acceleration Clause as a Truth in Lending Disclosure: The End of the Dilemma?, 93 Banking L.J. 317 (1976).)

The "sometimes" interpretation does not run aground upon the textual shoal of Garza, nor upon the remedial difficulty with Begay and Martin. It is not satisfactory, however, because it is too narrow to be genuinely remedial; and it also conflicts with the Federal Reserve Board's interpretation of "charge." (See Staff Op'n Letter No. 1208 (July 6, 1977) 5 CCH Consumer Credit Guide P 31,647.) The Third Circuit's addition of the state law element not only...