GREGORY v. METRO AUTO SALES, INC.

Filing 18

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE GERALD A. MCHUGH ON 1/27/16. 1/28/16 ENTERED AND COPIES EMAILED.(rf, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

RODNEY GREGORY, on behalf of himself
and all others similarly situated,
Plaintiff,
v.
METRO AUTO SALES, INC.
d/b/a VALUE KIA,
Defendant.

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MCHUGH, J.

CIVIL ACTION
No. 15-2601

JANUARY 27, 2016
MEMORANDUM

This is a putative class action in which Plaintiff accuses an auto dealer of deceptive trade
practices related to Plaintiff’s purchase of an automobile. Plaintiff claims that Metro Auto
secretly inflated the price of the vehicle he purchased in order to offset the generous credit it
offered for trade-ins as part of a sales promotion. Plaintiff also claims that Defendants failed to
disclose frame damage to the vehicle. He asserts that Metro violated the Truth In Lending Act
(TILA) and the Unfair Trade Practices and Consumer Protection Law (UTPCPL), and Metro
now moves to dismiss.
I.

Facts
As alleged in the First Amended Complaint (hereinafter the “Complaint”), in 2014

Defendant was advertising a program it called “Cash for Clunkers.” Through the program
Defendant promised to provide “at least $4,500 for any trade accepted towards a vehicle
purchase” from Defendant. Compl. at ¶ 8. In June of 2014, Plaintiff, Rodney Gregory, visited
Defendant’s location to take advantage of the program by trading in his 1995 Jeep Cherokee for
a 2012 Ford Escape. Id. at ¶ 9. Plaintiff completed the transaction by signing a Retail
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Installment Contract (RISC) that set the terms of the trade and sale. The cash sale price of the
Ford Escape was $29,214; the down payment was $1000, and Defendant valued the trade-in
vehicle at $4,500. Id. at ¶ 12.
Plaintiff now brings two claims against Defendant. First, he alleges that Defendant
inflated the cash price of the Ford Escape and the trade-in price of the Jeep Cherokee in order to
make the RISC more attractive to a third party purchaser. Essentially, Plaintiff claims that his
trade-in vehicle was worth far less than the trade-in value Defendant gave for it, and that
Defendant inflated the cash price of the Ford Escort to compensate for the difference. This
strategy would have the effects of (1) making it appear that Defendant was being far more
generous with its trade-in than it was, and (2) improving the loan-to-collateral ratio of the RISC.
Plaintiff alleges this practice violated the TILA.
Second, Plaintiff alleges that the Ford Escape had frame damage that Defendant failed to
disclose. The failure to disclose the car’s history, Plaintiff contends, violated Pennsylvania’s
UTPCPL.
Plaintiff has cast his Complaint as a class action on behalf of all those wronged by
Defendant’s practices. Defendant has moved to dismiss the Complaint in its entirety. Defendant
contends that the dispute is governed by an arbitration agreement, and that the TILA, UTPCPL,
and class claims are insufficiently pleaded.
II.

Legal Standard
Defendant has moved to dismiss Plaintiff’s Complaint pursuant to Federal Rule of Civil

Procedure 12(b)(6). Fowler describes a two-part test for 12(b)(6) motions to dismiss in this
circuit. First, the court must separate the factual and legal elements of the claim. Fowler v.
UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). Second, accepting the Complaint’s factual

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allegations as true, the court must decide whether the plaintiffs have alleged facts that show they
are entitled to relief. Id. If Plaintiff has failed to allege facts that show he is entitled to relief,
Defendant’s Motion must be granted.
III.

Applicability of the Arbitration Agreement
Preliminarily, Metro contends that all of Plaintiff’s claims must be submitted to binding

arbitration. A document Defendant identifies as the contract between the parties included a
checkbox with a caption stating, “BUYER ACKNOWLEDGES THAT IF THIS BOX IS
CHECKED, THIS AGREEMENT CONTAINS AN ARBITRATION CLAUSE.” Memo
Supporting Mot. to Dismiss at 6. Plaintiff’s signature appears just below the checked box, and
the text of the arbitration clause is on the next page of the document. This clause, Defendant
avers, binds Plaintiff to arbitrate his claims. Plaintiff counters that the arbitration agreement is
not binding because it is contained only in a “buyer’s order” rather than the RISC, and for that
reason cannot under Pennsylvania law constitute a binding arbitration agreement.
Plaintiff is correct. The Federal Arbitration Act (“FAA”) provides that valid arbitration
agreements shall be enforceable and entitle a party to a valid agreement to an order compelling
the arbitration. 9 U.S.C. § 4. However, the existence of an arbitration agreement depends on
state law. “To determine whether the parties have agreed to arbitrate, we apply ordinary statelaw principles that govern the formation of contracts.” Century Indem. Co. v. Certain
Underwriters at Lloyd’s, London, 584 F.3d 513, 524 (3d Cir. 2009); Trippe Mfg. Co. v. Niles
Audio Corp., 401 F.3d 529, 532 (3d Cir. 2005) (“The FAA instructs courts to refer to principles
of applicable state law when determining the existence and scope of an agreement to arbitrate.”).
In Pennsylvania, as a matter of statute, a “RISC subsumes all other agreements relating to the
sale” of a vehicle under the Motor Vehicle Sales Finance Act. Knight v. Springfield Hyundai,

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81 A.3d 940, 948 (Pa. Super. Ct. 2013) (construing 12 Pa. Con. Stat. Ann. & 6221(a)(2)). In
Knight, Pennsylvania’s Superior Court held that where a “Buyer’s Order contained an arbitration
agreement, but the RISC did not. … there was no enforceable arbitration agreement.” Id. at 948–
49. Likewise, here the RISC does not contain the arbitration agreement Defendant seeks to
enforce. In its analysis of this issue, Metro simply ignores Knight. I conclude that there is not a
valid arbitration agreement binding the Plaintiff under Pennsylvania law.
IV.

Truth in Lending Act
Count I of Plaintiff’s Complaint alleges Defendant violated the Truth in Lending Act

(“TILA”). Congress adopted the TILA and authorized the Bureau of Consumer Financial
Protection to promulgate regulations to implement it “to promote the informed use of consumer
credit by requiring disclosures about its terms and cost.” 12 C.F.R. § 1026.1. Regulation Z,
which implements the TILA, requires companies that provide credit to disclose any “finance
charge” for the credit. 12 C.F.R. § 1026.18. A “finance charge” is “the dollar amount the credit
will cost” a consumer. Id.
Plaintiff contends that the $4,500 Defendant reported on the RISC was “fictitious” and
was actually “an additional charge to plaintiff to secure financing.” Compl. at ¶ 43. Plaintiff
believes this amount was a “finance charge” that should have been disclosed as such to Plaintiff.
By failing to identify it as such, Plaintiff asserts that Defendant violated the TILA and that
Defendant is therefore liable to Plaintiff under the TILA’s private remedy. 15 U.S.C. § 1640(a)
(providing civil liability for failure to comply with TILA requirements). I cannot accept
Plaintiff’s categorization of the $4,500 trade-in amount as a “finance charge.” It is reasonable,
from one perspective, to view the $4,500 trade-in value as some variety of charge imposed on
Plaintiff. If the true value of Plaintiff’s trade-in vehicle was far less than $4,500, and Defendant

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increased the cash price of Plaintiff’s new car to compensate for overpaying Plaintiff for his
trade-in, then the amount by which Defendant inflated the cash price of the new car can fairly be
deemed a charge.
But not every charge is a finance charge. Regulation Z, promulgated by the Federal
Reserve Board, is considered an authoritative interpretation of TILA. The Board-published
official staff commentary to Regulation Z is dispositive in TILA cases unless the commentary is
demonstrably irrational. Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565–68 (1980).
Regulation Z specifically exempts from the definition of “finance charges” “any charge of a type
payable in a comparable cash transaction.” Here, the charge that compensated for over-valuing
the trade-in vehicle would have been, under the facts Plaintiff has alleged, equally applicable to
consumers paying cash for a new vehicle. Plaintiff argues that “the $4,500 Cash for Clunkers
program’s purpose is to secure credit for cash poor borrowers with fictitious trade-in equity” and
therefore “such a program would play no role in a cash transaction.” Pl. Opp. to Mot. to Dismiss
at 6. This argument fails because the availability of the $4,500 trade-in was not contingent on a
consumer’s use of credit. Compl. at ¶ 8–9. A sum that a consumer must pay whether a
consumer is paying in cash or with credit is not a “finance charge.”
Other courts facing similar claims have reached the same result. Slover-Becker v. Pitre
Chrysler Plymouth Jeep of Scottsdale, Inc., 409 F. Supp. 2d 1158, 1165 (D. Ariz. 2005) (“The
cash price was clearly inflated; however, … the Staff Interpretation permits a creditor to include
charges that are equally imposed on cash and credit transactions to be included in the cash
price.”); Bledso Dodge, L.L.C. v. Kuberski, 279 S.W.3d 839, 843–44 (Tex. App. 2009) (“The
$6,100 was not a charge incurred because Kuberski was a credit customer … . It was not an

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amount payable by him and imposed by the creditor as an incident or condition of the extension
of credit.”).
In reaching this result, I have reviewed the staff Commentary to Regulation Z in the
separate but conceptually analogous context of “negative equity,” where a pre-existing lien on a
vehicle being traded in exceeds its fair market value. In explaining the obligation of dealers in
such circumstances, where the overall price is being artificially adjusted upward, Federal
Reserve staff issued the following revised comment:
Content of Disclosures, 18(c) Itemization of Amount Financed
Comment 18(c)–2 is revised in response to requests for guidance by creditors
offering credit sales when downpayments involve a trade-in and an existing lien
that exceeds the value of the trade-in. (See comment 2(a)(18)–3, where a
consumer owes $10,000 on an existing automobile loan and the trade-in value of
the automobile is $8,000, leaving a $2,000 deficit.)
The amount by which the lien exceeds the trade-in value would be reflected in the
amount financed. (See § 226.18(b).) Assuming the cash price for the new car
was $20,000, the amount financed would be $22,000 ($20,000 representing the
cash price plus $2,000 representing the excess of the lien over the trade-in value
financed by the creditor.)
The regulation provides great flexibility for disclosing the itemization of amount
financed. Comment 18(c)–2 iii ... is revised to clarify that any amounts financed
by the creditor and representing the excess of the lien over the trade-in value
($2,000 in this example) must appear in the itemization of the amount financed.
However, creditors may also add other categories to explain, in this example, the
consumer's trade-in value of $8,000, the creditor's payoff of the existing lien of
$10,000, and the resulting amount of $2,000 included in the amount financed.
Truth in Lending, 63 Fed.Reg. 16,669, 16,673 (April 6, 1998) (emphasis added), cited by Fitts v.
King Richard's Auto Ctr., Inc., No. C.A. 07-147ML, 2009 WL 256379, at *3 (D.R.I. Feb. 3,
2009).
That approach comports with Defendant’s action here. The focus of the TILA is full
disclosure of all terms and charges. The value of the trade-in, and (by Plaintiff’s theory)

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resulting inflation of the sale price, were fully set forth in the RISC. Regardless of whether
Plaintiff was unfairly taken advantage of in the overall transaction, I do not see a violation of the
TILA. See Fitts, 2009 WL 256379, at *3. All of the financial terms of the transaction were set
forth in full. Plaintiff’s TILA claim will be dismissed.
V.

UTPCPL
Plaintiff’s Count II alleges Defendant violated Pennsylvania’s Unfair Trade Practices and

Consumer Protection Law (UTPCPL). The UTPCPL prohibits “unfair or deceptive acts or
practices in the conduct of any trade or commerce.” 73 P.S. § 201-3. The law enumerates and
defines “unfair or deceptive acts or practices” in section 201-2. Plaintiff alleges Defendant
engaged in conduct that violated multiple provisions of the UTPCPL. Plaintiff first claims that
by concealing the vehicle’s use and accident history (and the resultant decrease in the vehicle’s
value), Defendant violated the prohibition against “representing that goods or services have
sponsorship, approval, characteristics, ingredients, uses, benefits or qualities that they do not
have …” 73 P.S. § 201-2(4)(v). Plaintiff alleges Defendant also violated this paragraph by
failing to make disclosures about the car’s status that are explicitly required by regulation. The
controlling regulation declares it is “considered unfair methods of competition and unfair or
deceptive acts or practices” for a motor vehicle dealer to misrepresent certain qualities of a
vehicle. 37 Pa. Code § 301.2. The regulation specifically requires dealers to disclose prior to
sale certain conditions that exist in a vehicle, such as a frame that is “bent, cracked or twisted.”
Id. at § 301.2(5)(i). Plaintiff contends that Defendant violated the UTPCPL by failing to make
this required disclosure. In addition, Plaintiff argues that by concealing the vehicle’s history,
Defendant violated the “catchall” provision of the UTPCPL, which provides that it is unlawful to

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“[e]ngag[e] in any other fraudulent conduct which creates a likelihood of confusion or
misunderstanding.” 73 P.S. § 201-2(4)(xxi).
Count II of the Complaint, raising the UTPCPL claims, specifically incorporates all of
the earlier allegations in the complaint, and I construe it as alleging that Defendant’s conduct
relating to the trade-in value and alleged price inflation also violated the UTPCPL. See Compl.
at ¶ 54(b)–(d). Defendant has not moved to dismiss on that ground. Focusing on Plaintiff’s
allegations it failed to disclose frame damage, it moves to dismiss for two reasons. First, Metro
argues that it does not have a duty to disclose all types of frame damage to its customers. The
regulation only requires disclosure when a frame is “bent, cracked or twisted,” with the result
that Plaintiff’s allegation of unspecified “damage” is too vague as it may encompass types of
damage that might not be covered. Second, Defendant argues that a plaintiff making a UTPCPL
claim must allege that he justifiably relied on a defendant’s representations, which Plaintiff does
not.
Although Defendant makes a number of somewhat persuasive arguments, I find that
Plaintiff has stated a claim under the UTPCPL. I agree with Defendant that Plaintiff’s assertion
of “damage” is a broader term than the phrase “bent, cracked or twisted” that appears at 37 Pa.
Code 301.2(5)(i), and further agree that the regulation does not, on its face, require the disclosure
of all types of “damage” to a frame. The regulation employs the present tense to describe
conditions that “exist in the motor vehicle,” so frame damage that has been repaired and no
longer exists would arguably not be covered by the regulation.
That does not end the analysis. The UTPCPL is a flexible statute that prohibits
fraudulent or deceptive conduct beyond the failure to comply with this specific disclosure rule.
Pennsylvania’s “Supreme Court has stated courts should liberally construe the UTPCPL in order

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to effect the legislative goal of consumer protection.” Bennett v. A.T. Masterpiece Homes at
Broadsprings, LLC, 40 A.3d 145, 151 (Pa Super. Ct. 2012). The significance of damage to a
vehicle frame presents issues of fact, in that such damage can indicate that a vehicle was
previously involved in some form of meaningful impact. I cannot broadly hold as a matter of
law that vehicle damage supposedly repaired need not be disclosed. Plaintiff has alleged
Defendant violated multiple provisions of the UTPCPL, including the “catchall” provision that
prohibits “[e]ngaging in any other fraudulent or deceptive conduct which creates a likelihood of
confusion or of misunderstanding.” 73 Pa. Stat. § 201-2(4)(xxi). I am satisfied that Plaintiff has
alleged facts that would permit a jury to decide Defendant engaged in unfair or deceptive
practices prohibited by the UTPCPL.
Moreover, although I agree that Plaintiff cannot presume reliance, because I remain
bound by Hunt v. United States, 538 F.3d 217, 224 (3d Cir. 2008), 1 I find that actual reliance has
been adequately pleaded. Specifically, Plaintiff avers that Metro intentionally omitted material
facts about the vehicle he hoped to buy, and that such omissions caused him to proceed with the
purchase. Complaint ¶ 48–50. This is enough to survive the present motion. “[J]ustifiable
reliance is typically a question of fact for the fact-finder to decide, and requires a consideration
of the parties, their relationship, and the circumstances surrounding their transaction.” Toy v.
Metro. Life Ins. Co., 593 Pa. 20, 55, 928 A.2d 186, 208 (2007).

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See Panetta v. Milford Chrysler Sales Inc., 2015 WL 1296736 (E.D. Pa. March. 23, 2015) (noting that while the
Pennsylvania Superior Court has found the catchall provision of the UTPCPL may be proven without reliance, the
state Supreme Court has not ruled and Third Circuit law remains controlling on district courts). See also Belmont
MB Inv. Partners, Inc., 708 F.3d 470, 499 (3d Cir. 2013).

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VI.

Class Claims
Finally, Defendant challenges Plaintiff’s class claims. Defendant argues that Plaintiff has

not adequately pleaded commonality, typicality, and Plaintiff’s adequacy to represent the class.
As a the Third Circuit explained in Landsman & Funk PC v. Skinder-Strauss Assocs “in most
cases, some level of discovery is essential” to determine whether a complaint may proceed as a
class action. 640 F.3d 72, 93 (3d Cir. 2011). Making that determination requires a “rigorous
analysis” that requires the court “to venture into the territory of a claim’s merits and evaluate the
nature of the evidence.” Id.; see also Vlachos v. Choice One Cmty. Fed. Credit Union, No. 1157, 2011 U.S. Dist. Lexis 84403 at *9 (M.D. Pa. May 16, 2011) (“in general determination of
class certification on a motion to dismiss is premature”). I cannot make this complex decision on
the bare allegations now before me.
VII.

Conclusion

For these reasons, Defendant’s Motion will be granted as to the TILA claim but denied as
to Plaintiff’s UTPCPL claim and his class claims. An appropriate order follows.

/s/ Gerald Austin McHugh
United States District Court Judge

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