Walker v. Wallace Auto Sales, Inc.

• Decision Date: 18 September 1998
• Docket Number: No. 97-3824,97-3824
• Citation: 155 F.3d 927
• Parties: Carl A. WALKER, Margaret A. Walker, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. WALLACE AUTO SALES, INCORPORATED, Guardian National Acceptance Corporation, and John Does, One-Ten, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 927

155 F.3d 927

Carl A. WALKER, Margaret A. Walker, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. WALLACE AUTO SALES, INCORPORATED, Guardian National Acceptance Corporation, and John Does, One-Ten Defendants-Appellees.

No. 97-3824.

United States Court of Appeals Seventh Circuit.

Argued April 9, 1998.

Decided Sept. 18, 1998.

Daniel A. Edelman (argued), Edelman & Combs, Chicago, IL, for Carl A. Walker and Margaret M. Walker.

Michael Kreloff (argued), Northfield, IL, for Wallace Auto Sales, Inc.

Arthur L. Klein (argued), Eugene J. Kelley, Jr., John L. Ropiequet, Christopher S. Navaja, Arnstein & Lehr, Chicago, IL, Brian G. Shannon, R. Christopher Cataldo, Jaffe, Snider, Raitt & Heuer, Detroit, MI, for Guardian National Acceptance Corp.

Before CUMMINGS, CUDAHY and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

Carl and Margaret Walker ("the Walkers") brought this lawsuit against Wallace Auto Sales ("Wallace") and Guardian National Acceptance Corporation ("Guardian") on behalf of themselves and all others similarly situated. In their nine-count amended complaint, the Walkers alleged that the defendants systematically imposed hidden finance charges on automobile purchases in violation of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601-1693r, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18

U.S.C. §§ 1961-1968, the Illinois Consumer Fraud Act, 815 ILCS 505/2, and the Illinois Sales Finance Agency Act, 205 ILCS 660/8.5. The district court dismissed the Walkers' TILA claim because the conduct alleged by the Walkers did not constitute a violation of that Act. In addition, the court dismissed the Walkers' remaining claims because, in its view, those claims could not survive in the absence of the TILA violation. For the reasons set forth in the following opinion, we reverse the district court's dismissal of the Walkers' TILA claim against Wallace, affirm its dismissal of the TILA claim against Guardian and remand the Walkers' remaining claims to the district court for further consideration.

I BACKGROUND

A. Facts ¹

On August 31, 1995, the Walkers agreed to purchase a used 1989 Lincoln Continental from Wallace. In order to finance this purchase, the Walkers entered into a retail installment contract ("the contract") with Wallace. The contract listed the cash price of the automobile as $14,040. ² In addition to that amount, the Walkers agreed to pay $699 for an extended warranty and $61 for license, title and taxes. The Walkers made a down payment of $1,500, leaving $13,300 as the amount to be financed on the sales contract. The Walkers agreed to finance this balance at an annual percentage rate of 25% over a period of four years (48 monthly installments of $441 each). Under these terms, the Walkers were to pay $7,868 in interest over the course of those four years, giving the sales contract a total value of $21,168. All of this information was clearly delineated on the face of the contract.

After the sale was complete, Wallace promptly assigned the contract to Guardian, "a specialized indirect consumer finance company engaged primarily in financing the purchase of automobiles through the acquisition of retail installment contracts from automobile dealers." R.21 p 7. Guardian purchased the contract at a discount of $7,182 from the total value.

B. Proceedings in the District Court

As noted above, the Walkers filed a nine-count amended complaint against Wallace and Guardian in the district court alleging violations of TILA, RICO and two state law consumer protection statutes. The gravamen of the Walkers' complaint is that Wallace artificially inflated the cost of the vehicle to cover the discount at which Guardian purchased the Walkers' sales contract and therefore imposed a "hidden finance charge" on them in violation of TILA, 15 U.S.C. § 1638(a)(3). ³ This same allegation serves as the basis for the Walkers' RICO and state law-based claims.

Wallace and Guardian filed a motion to dismiss the Walkers' amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The district court first examined the Walkers' TILA claim. The court began its analysis of that claim by noting that the regulations interpreting TILA's disclosure requirements exempt specific charges from those requirements. Specifically, the Official Staff Commentary to the regulations provides that:

Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash 12 C.F.R. Pt. 226, Supp. I at 308-09. The commentary further states that "[a] discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer." Id. In the district court's view, the "hidden finance charge" alleged by the Walkers was in fact a "cost of doing business" and was therefore exempt from TILA's disclosure requirements. The court therefore held that the Walkers had not pleaded sufficient facts to state a claim under TILA. In addition, the court dismissed the Walkers' RICO and state law-based claims because, in its view, those claims could not survive in the absence of a TILA violation.

price of the property or services sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition.

II DISCUSSION

We review de novo the district court's decision to dismiss, taking the Walkers' factual allegations as true and drawing all reasonable inferences in their favor. See Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 669-70 (7th Cir. 1998). In evaluating the Walkers' complaint, we read their complaint as a whole, see Black v. Lane, 22 F.3d 1395, 1400 (7th Cir.1994), and shall affirm the district court's order of dismissal only if " 'it appears beyond doubt that [the Walkers] can prove no set of facts in support of [their] claim which would entitle [them] to relief,' " Strasburger v. Board of Educ., 143 F.3d 351, 359 (7th Cir.1998) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). ⁴

A. The Walkers' TILA Claim

In order to assess the sufficiency of the Walkers' TILA claim against Wallace and Guardian, we must first examine the statutory and regulatory framework under which it arises.

Congress enacted TILA "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair billing and credit card practices." 15 U.S.C. § 1601(a); see also Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283, 285 (7th Cir.1997) (stating that TILA's purpose is "to protect consumers from being misled about the cost of credit"); Brown v. Marquette Sav. & Loan Ass'n, 686 F.2d 608, 612 (7th Cir.1982) (stating that Congress enacted TILA to "provide information to facilitate comparative credit shopping and thereby the informed use of credit by consumers"). In order to effectuate this purpose, TILA requires creditors to disclose clearly and accurately to consumers any finance charge that the consumer will bear under the credit transaction. See 15 U.S.C. § 1638(a)(3). These stringent disclosure requirements are designed to prevent creditors from circumventing TILA's objectives by burying the cost of credit in the price of the goods sold. See Mourning v. Family Publications Serv., Inc., 411 U.S. 356, 364, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973); see also Gibson, 112 F.3d at 287 (stating that, under TILA, if merchant charges credit customers a higher "cash" price for an item than cash customers, then that extra charge is a finance charge and must be disclosed as such).

TILA defines a "finance charge" as the "sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit." 15 U.S.C. § 1605(a). In addition, the regulations implementing TILA (known collectively as "Regulation Z") provide that:

The finance charge is the cost of consumer credit as a dollar amount. It includes 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. It does not include any charge of a type payable in a comparable cash transaction.

12 C.F.R. § 226.4(a). Regulation Z further provides that the term "finance charge" includes "[c]harges imposed on a creditor by another person for purchasing or accepting a consumer's obligation, if the consumer is required to pay in cash, as an addition to the obligation, or as a deduction from the proceeds of the obligation." Id. § 226.4(b)(6).

These provisions, however, are qualified by the Federal Reserve Board's Official Staff Commentary to Regulation Z ⁵ which exempts specific charges from TILA's disclosure requirements:

Costs of doing business. Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or services sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition. For example:

A discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer.

12 C.F.R. Pt. 226, Supp. I at 308-09.

In this case, the Walkers allege that the defendants violated TILA by artificially inflating the "cash price" of the vehicle purchased by...