Taylor v. Quality Hyundai, Inc.

• Decision Date: 21 August 1998
• Docket Number: 97-1208,Nos. 96-3658,s. 96-3658
• Citation: 150 F.3d 689
• Parties: Jerry and Mary TAYLOR, et al., Plaintiffs-Appellants, v. QUALITY HYUNDAI, INC., Bank One Milwaukee, N.A., and Bank One Chicago, N.A., Defendants-Appellees. Davita M. SMITH, et al., Plaintiffs-Appellants, v. DESI AUTO SALES, INC., and Guardian National Acceptance Corp., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 689

150 F.3d 689

Jerry and Mary TAYLOR, et al., Plaintiffs-Appellants, v. QUALITY HYUNDAI, INC., Bank One Milwaukee, N.A., and Bank

One Chicago, N.A., Defendants-Appellees.

Davita M. SMITH, et al., Plaintiffs-Appellants, v. DESI AUTO SALES, INC., and Guardian National Acceptance

Corp., Defendants-Appellees.

Nos. 96-3658, 97-1208.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 22, 1997.

Decided July 20, 1998.

Rehearing Denied Aug. 21, 1998.

Daniel A. Edelman, Cathleen M. Combs, Michelle A. Weinberg, Tara L. Goodwin, James O. Latturner (argued), Beth I. Solomon, Edelman & Combs, Chicago, IL, for Plaintiffs-Appellants Jerry and Mary Taylor.

Daniel A. Edelman, Cathleen C. Cohen, James O. Latturner (argued), Edelman & Combs, Chicago, IL, for Plaintiffs-Appellants Davita M. Smith.

James J. Roche, Monica M. Tynan, Roche & Associates, Chicago, IL, for Defendant-Appellee Quality Hyundai, Inc.

Kevin M. Flynn, Joseph A. Cari, Jr., Lisa J. Finks, John P. Buckley (argued), Ungaretti & Harris, Chicago, IL, for Defendants-Appellees Bank One, Milwaukee, N.A., Bank One, Chicago, N.A.

John DeSimeon, Elk Grove Village, IL, for Defendant-Appellee DeSi Auto Sales, Inc.

Mark S. Bernstein, Ray G. Rezner, Richard A. Saldinger, Barack, Ferrazzano, Kirschbaum & Perlman, Chicago, IL, Brian G. Shannon (argued), R. Christopher Cataldo, Jaffe, Snider, Raitt & Heuer, Detroit, MI, for Defendant-Appellee Guardian National Acceptance Corp.

George A. Platz, Robert M. Hatch, Malik R. Diab, Lovell, White & Durrant, Chicago, IL, for Amicus Curiae American Financial Services Association.

Before CUDAHY, KANNE, and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

In Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283 (7th Cir.1997), this court held that consumers stated a claim under the Truth in Lending Act (TILA), 15 U.S.C. §§ 1601 et seq., when they charged that automobile dealers had not disclosed their retention of a portion of extended warranty charges reported as "Amounts Paid to Others on Your Behalf." The two cases we have consolidated for opinion purposes, both of which were dismissed below, raise in part the same question, and in part the related question whether a dealer's assignee is liable for such alleged misrepresentations by the dealer. We conclude that Gibson controls the question of dealer liability, which is raised only in the appeal in Taylor v. Quality Hyundai, Inc., 150 F.3d 689 (7th Cir.1998), and it requires us to remand that part of the case to the district court for further proceedings. As for the assignees, however, we agree with the district courts that Congress has precluded liability unless the violation is apparent on the face of the disclosure statement or other assigned documents, and that the relevant statements here do not meet that standard. We therefore affirm the decisions below on the question of assignee liability.

The facts in these cases are similar, both to each other and to the facts presented in Gibson. Jerry and Mary Taylor bought a new Hyundai Accent in July 1995, and they bought an extended warranty from the dealer, Quality Hyundai, at the same time. They signed a motor vehicle retail installment contract committing them to pay $12,081 for the car (minus a $900 down payment), and $1,395 for the extended warranty. In conjunction with the sale, Quality gave them a TILA disclosure form that included, under the now-familiar heading "Amounts Paid to Others for You," an entry reporting $1,395 paid to the warranty provider. After the sale, Quality assigned the entire installment contract to Bank One Chicago (although the contract signed by the Taylors designated Bank One Milwaukee as the assignee). The story in Davita Smith's case is practically identical, except that she bought her car (a 1991 Mercury Cougar) from DeSi Auto Sales, her TILA form showed $799 "Paid to Others for You" for an extended warranty, and her installment contract was assigned to Guardian National Acceptance Corporation ("Guardian").

The Taylors and Smith alleged that the statements indicating that the extended warranty charges were "Amounts Paid to Others for You" were false, in that neither Quality nor DeSi paid the full amount to the warranty provider. In both cases the plaintiffs also alleged that the respective assignees of their 1. Liability of Quality Hyundai. To the extent the Taylors are asserting TILA claims against Quality Hyundai for the allegedly misleading disclosures on the form, their suit is identical to the one considered in Gibson. Gibson holds that persons like the Taylors may state a claim under the TILA against a dealer who fills out a TILA form in a misleading fashion. 112 F.3d at 286-87.

installment contracts, Bank One and Guardian, were sophisticated players in the lending market who must have known that the statements on the TILA forms were false. They therefore sought damages under the TILA, 15 U.S.C. § 1641(a). Both district courts ruled for the assignees. In the Taylors' the district court also concluded that Quality was not liable under the statute. In Smith's case, the district court entered a default order against DeSi and stayed Smith's motion for class certification against it. DeSi is therefore not a party to this appeal, but Guardian is properly here because the district court certified the judgment in Guardian's favor under Federal Rule of Civil Procedure 54(b). See United States v. Ettrick Wood Products, Inc., 916 F.2d 1211, 1217-18 (7th Cir.1990).

There is one additional issue not governed by Gibson, which is whether the district court erred when it denied the Taylors' motion to amend their complaint to allege that Quality systematically charged a higher mark-up on extended warranties for credit customers than it did for cash customers. On the one hand, all of the information necessary to support the proposed amendment was available to the plaintiffs long before their case was dismissed, and we normally review a district court's decisions under Federal Rule of Civil Procedure 15(a) deferentially. See Helm v. Resolution Trust Corp., 84 F.3d 874, 879 (7th Cir.1996) (abuse of discretion); Tavarez v. O'Malley, 826 F.2d 671, 678 (7th Cir.1987) (same). On the other hand, this case will receive a fresh start when it returns to the district court for further proceedings consistent with our opinion in Gibson. Thus, while we are reluctant to find that the district court abused its discretion in refusing the amendment when it did, it may wish to reconsider this ruling if the plaintiffs renew their motion on remand, in light of the intervening Gibson decision and the unlikelihood of prejudice to the defendant.

2. Liability of Guardian and Bank One. In 1975, the Federal Trade Commission (FTC) issued a regulation requiring sellers to include the following words on consumer credit contracts:

NOTICE

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

16 C.F.R. § 433.2(a) (1997). Relying on this "Holder Notice," the plaintiffs all argue that Guardian and Bank One, as holders of the consumer credit contracts in question, are vulnerable to the same TILA claims that the plaintiffs may raise against Quality and DeSi, the sellers of the extended warranties. Unfortunately for the plaintiffs, however, the FTC's regulation is not the last word on this subject.

In 1980, Congress amended the part of the TILA that deals with assignees to read as follows:

(a) Except as otherwise specifically provided in this subchapter, any civil action for a violation of this subchapter ... which may be brought against a creditor may be maintained against any assignee of such creditor only if the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement, except where the assignment was involuntary. For the purpose of this section, a violation apparent on the face of the disclosure statement includes, but is not limited to (1) a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned, or (2) a disclosure which does not use the terms required to be used by this subchapter.

15 U.S.C. § 1641(a). Prior to this amendment, the statutory provisions that assured transfer of the forms containing the TILA disclosures to the assignee also made it possible for the debtor to claim that the assignee had "knowledge" of the violation. The amendment therefore narrowed considerably the potential scope of assignee liability. See H.R. Conf. Rep. No. 96-842, at 80-81 (1980), reprinted in 1980 U.S.C.C.A.N. 298, 310-11; S. Rep. No. 96-368, at 32-33 (1979), reprinted in 1980 U.S.C.C.A.N. 236, 267-69.

Guardian and Bank One argue that the unmistakable effect of the 1980 amendment is to trump the FTC's Holder Notice, under which they would have been subject to any claims and defenses that the debtors could have asserted against the original sellers. Although no court of appeals has yet decided this question, every district court to which it has been presented has agreed with their reading of the statute. See, e.g., Taylor v. Bob O'Connor Ford, Inc., 1998 WL 177689, at * 9-11 (N.D.Ill. Apr.13, 1998); Brister v. All Star Chevrolet, Inc., 986 F.Supp. 1003, 1009-10 (E.D.La.1997); Kinzel v. Southview Chevrolet Co., 892 F.Supp. 1211, 1217(D.Minn.1995). See also Clontz, Truth-in-Lending Manual pp 8.06[c], 10.09 (rev. ed.1996). If the district courts are correct, then the only question left for us to decide is whether the violations in these cases were "apparent on the face of the disclosure statement," within the meaning of § 1641(a). But the plaintiffs have argued that we should reject this reading of the statute. We explain first why we think...