Fitts et al v. King Richard's Auto Center, Inc.

Filing 40

MEMORANDUM AND ORDER - So Ordered by Chief Judge Mary M Lisi on 2/3/09. (Barletta, Barbara)

UNITED S T A T E S D I S T R I C T C O U R T D I S T R I C T OF R H O D E I S L A N D N I C H O L A S FITTS and L O R R A I N E FITTS, Plaintiffs, C.A. No. 1)7-147ML
v.

KING R I C H A R D ' S A U T O C E N T E R , INC., d / b / a E A S T PROVIDENCE MITSUBISHI, Defendant. M E M O R A N D U M AND O R D E R In this action, Plainti ffs, N i c o l a s and Lorraine Fitts, seek m o n e y d a m a g e s from Defendant, K i n g R i c h a r d ' s Auto Center, Inc., d/b/a East P r o v i d e n c e M i t s u b i s h i , ( " E P M " or " D e f e n d a n t " ) , for alleged v i o l a t i o n s o f the T r u t h in Lending Act, ( " T l L A " ) , 15 U.S.C. § 1601 et. seq. On D e c e m b e r 5, 2008, the C o u r t h e l d a b e n c h trial. For the r e a s o n s set forth below, j u d g m e n t shall e n t e r in favor o f Defendant.

I. Facts
Plaintiff, N i c o l a s F i t t s ("Mr. Fitts") is a resident o f W h i t i n s v i l l e , Massachusetts. D e f e n d a n t is an a u t o m o b i l e d e a l e r s h i p located in East P r o v i d e n c e , R h o d e Island. In September 2006 Mr. Fitts visited EPJ\I in s e a r c h o f a vehicle with b e t t e r gas m i l e a g e t h a n the vehicle he o w n e d at that time, a 2001 "ord Taurus. Fitts traded in the 2001 T a u r u s and purchased a 2002 Ford Focus. A b o u t 1 w e e k after the p u r c h a s e , a p r o b l e m arose w i t h the F o c u s and Mr. Fitts and his

mother, Plaintiff, Lorraine Fitts ("Ms. Fitts"), returned to EPM. U p o n Mr. Fitts' return, the manager o f E P M asked Mr. Fitts whether he "wanted to drive a Mercedes . . . [for] the same payments and the same p r i c e " as the Focus. December 5, 2008, Transcript at 12 ("Transcript"). Mr. Fitts then test drove a 2002 Mercedes Kompressor and agreed to purchase the vehicle. Subsequently, Mr. Fitts and Ms. Fitts signed " s o m e paperwork" w i t h a sales representative and then met with a financing representative o f EPM. Mr. Fitts testified that, at the time he initially met with the financing representative, he had not yet agreed on a price for the Mercedes. Mr. Fitts stated that the individual he believed to be the manager o f E P M informed him that the Mercedes was " g o i n g to be the same payments and the same price [as he had paid for the Focus.]

I t was going to be a straight-up trade . . . . " Id. at 15. Although Mr Fitts understood that he would
be trading in the Taurus as part o f the purchase o f the Mercedes, Plaintiffs testified that there was no discussion about the trade-in value o f the Taurus. Upon meeting w i t h the financing representative, Mr. Fitts learned that the monthly payment on the Mercedes would be $429, approximately $69 more than the monthly payment on the Focus. In spite o f this difference, however, Ms. Fitts signed the retail installment sales agreement as " B U Y E R " and Mr. Fitts signed it as "CO B U Y E R . " Exhibit 1. Mr. Fitts testified that he could not remember the purchase price o f the Focus or the Mercedes but after he spoke to the financing representative he understood that the monthly payment on the Mercedes was $429, and "acceptable," and t h a t the interest rate for the credit being extended to him was 12.39%. Transcript at 27. Plaintiffs received a copy o f the retail installment sales agreement ("RISA") which listed the cash price o f the Mercedes as $19,300. The pertinent section o f the RISA appears below:

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ITEMIZATION Of AMOUNT FINANCED 1. C.lh Pric. (Indud!" any aectllOrlellIld I4lIVlcel) . . · · . . · · . . . . . . · . · . . · . · . . . · . . · . . . · . . · . · · . . · . . ·· S 2. Total Downpayment '" Net nad,·in $ 353. 28 +Cuh Downpayment S MIA Your Trad. . in is 8 ~ FORD TAYRU~ S ......,ear 'Make Model 3. Unpaid Bel.rlte 01 Calli Prlc. (1 minUI 2) · · · . · · · . S 4. Amounts Paid to Othera onYour 8the"(0Ihtr Chargtl). A. Cost of Optionll CIJdIt Insuranc, lor theTerm ollhis ConlracrP.id to:'" . .. (N.me oIlnsur.nc. Company) - - f U r ' ',' MIA Credil Uleln·. $ , NJ.A- 'Dlsilbillly. Acclden!& Hulth Ins. $ HI A S B. Cost 01 Opdonll MeChanical AiPair Insurance Covering CtI1aln Mechanice' Repairs Peid 10:
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19300.00

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C. COlt 01 Single Inttrtltlnsurance Iorthltarm 01 this agreement · · . · · . · · · · · . . . . . . . ·. S_ _....J_ O. StiR TalC. . Paid toGovll'nment AgtncltI · · . · · · · · · · · · · · · · · · . · · · · · · · . · · · . S E. Clftlficatt 01 Tid. F . Paid kl Govnmenl Ag.nclts. .. . . . . .. . . . . · . . . . . . · . . . . . . s . 114.00 F. Other Chtrges ($tIIII' must IcItntIfy who wftIl"lCllvt payment and describe purpoIt)
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Total Amounts P.id to otterson Your 81h1" (Other Charges) · · . . · · · · · · · · · · · · . · . . · · . · · . . · · . · · . · . · · · · · s- - 2 6 Z l . . O Q . . . (4)

355,00

Ms. Fitts testified that the " N e t Trade-In" amount on the RISA o f $353.28 was never explained by EPM. Ms. Fitts testified that she informed a representative o f EPM that the Taurus was subject to an outstanding loan o f approximately $10,000 and that she understood EPM would pay the loan on the Taurus. Ms. Fitts signed a "negative equity disclosure" statement that identified the negative equity in the Taurus as $4,500. Exhibit 2. Ms. Fitts could not remember i f anyone at the dealership lead her to believe she was going to receive credit for the Taurus in

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addition to the $10,000 owe d on it. The owner o f EPM, Richard Palumbo, testified that EPM assigned a value o f $5,500 to the Taurus and that he informed Plaintiffs o f the $5,500 value. Palumbo testified that the $5,500 assigned value o f the Taurus was the difference between the anticipated p a y o f f o f the loan, $10,000, and the $4,500 negative equity in the Taurus. Palumbo asserted that the $5,500 value assigned to the Taurus was reflected in the credit EPM extended to Plaintiffs and that EPM "allocat[ed] the value o f the Taurus to the transaction." Transcript at 65. Palumbo testified that the actual p a y o f f amount o f the loan was $9,646.72. Palumbo explained that the $352.28 figure listed as " N e t Trade In" on the RISA was the difference between the estimated p a y o f f amount o f the loan on the Taurus, $10,000, and the actual confirmed payoff amount o f the loan, $9,646.72. The cash price on the RISA was comprised o f the anticipated loan p a y o f f on the Taurus, $10,000, plus $9,300 "from the [Fitts] by cash or financing." Exhibit 6. Palumbo testified that the "selling price" o f the Mercedes was $14,800.

II. Analysis
The parties agree that this transaction is subject to TILA. The purpose o f TILA is to promote the "informed use o f credit" by consumers. Ritter v. Durand Chevrolet. Inc., 945 F. Supp. 3 8 1 , 3 8 4 (D. Mass. 1996) (internal quotation marks and citation omitted). TILA imposes strict liability on creditors when certain disclosures are not made. Id. TILA requires a "meaningful disclosure o f 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 o f credit. . . . " 15 U.S.C. § 1601(a). A creditor's disclosure obligations are governed by Regulation Z, 12 C.F.R. 226 et. seq.

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Santos-Rodriguez v. D o r a l Mortgage C o m . , 485 F.3d 12, (1st Cir. 2007)1. TILA requires creditors to " d i s c l o s e clearly and accurately all the material terms o f a credit transaction." Megitt v. Indymac Bank. F.S.B., 547 F. Supp. 2d 56, 59 (D. Mass. 2008) (internal quotation marks and citation omitted). " T I L A addresses defects in disclosures related to o b t a i n i n g credit; it does not address shortcomings in disclosures related to o t h e r aspects o f a c o n t r a c t . " Slover-Becker v. Pitre Cluysler Plymouth J e e p o f S c o t sdale. Inc., 409 F. Supp. 2d 1158, 1163 (D. Ariz. 2005). Plaintiffs allege t h a t E P M violated TILA by (1) failing to disclose the negative equity in the Taurus, and, (2) by disclosing a sales price for the Mercedes t h a t was h i g h e r t h a n a c a s h buyer would have p a i d for the Mercedes. E P M contends that the R I S A meets the negative equity disclosure requirements o f T I L A and t h a t the sales price o f the M e r c e d e s was properly disclosed. In essence, Plaintiffs c o m p l a i n a b o u t the m a n n e r in w h i c h the T a u r u s trade-in was treated by E P M on the RISA. Plaintiffs argue t h a t E P M did not give t h e m any credit for the Taurus. EPM asserts t h a t the value o f the T a u r u s was allocated to the p u r c h a s e p r i c e o f the Mercedes. The parties agree t h a t Plaintiffs had negative equity in the T a u r u s . ' T I L A does not require t h a t negative equity in a t r a d e d - i n vehicle be separately disclosed on the RISA. Slover-Becker, 409 F. Supp. 2d 1158. The s t a f f commentary to Regulation Z specifically addresses the reporting o f negative equity on a t r a d e d - i n vehicle: C o n t e n t o f Disclosures, 18(c) Itemization o f A m o u n t F i n a n c e d

'Regulation Z was promulgated by the Federal Reserve Board and is "an authoritative interpretation o f TILA. The Board-published official s t a f f commentary to regulation Z is dispositive in T I L A cases unless the commentary is demonstrably irrational." Carve v. Long Beach Mortgage Co., 470 F. Supp. 2d 3 , 6 n.2 (D. Mass. 2007). 2"Negative equity is the amount by which the outstanding loan balance exceeds the value o f the trade-in vehicle." In re Johnson, 380 B.R. 236, 238 n.2 (Bankr. D. Or. 2007) (internal quotation marks and citation omitted).

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Comment 18(c)- 2 is revised in response to requests for guidance by creditors offering credit sales w h e n downpayments involve a trade-in and an existing lien t h a t e x c e e d s the value o f the trade-in. (See c o m m e n t 2 ( a ) ( l 8 ) - 3 , where a c o n s u m e r o w e s $10,000 on an existing automobile l o a n and the trade-in value o f the a u t o m o b i l e is $8,000, leaving a $2,000 deficit.) The a m o u n t by w h i c h the lien exceeds the trade-in value w o u l d be reflected in the a m o u n t financed. (See § 226.18(b).) A s s u m i n g the c a s h price for the new car was $20,000, the a m o u n t financed w o u l d be $22,000 ($20,000 representing the c a s h price plus $2,000 representing the excess o f the lien o v e r the trade-in value financed by the creditor.) The regulation provides great flexibility for disclosing the itemization o f amount financed. C o m m e n t 18(c)-2 iii . . . is revised to clarify t h a t any amounts financed by the c r e d i t o r and representing the excess o f the lien o v e r the trade-in value ($2,000 in this e x a m p l e ) m u s t appear in the i t e m i z a t i o n o f the a m o u n t financed. However, creditors may also add other categories to explain, in this example, the c o n s u m e r ' s trade-in value o f $8,000, the c r e d i t o r ' s p a y o f f o f the existing lien o f $1 0,000, and the resulting a m o u n t o f $2,000 included in the a m o u n t financed. Truth in Lending, 63 Fed. Reg. 16,669, 16,673 (April 6, 1998) (emphasis added). EPM insists t h a t it did exactly w h a t the s t a f f commentary to regulation Z allows, "namely

[it] . . . increas[ed] the sales price on the RISA." D e f e n d a n t ' s Post-Trial M e m o r a n d u m at 4.
Plaintiffs argue t h a t a representative from EPM stated that E P M w o u l d sell the Mercedes for the same price as the Focus; h o w e v e r Plaintiffs presented no evidence w h a t s o e v e r as to the price o f the Focus. Plaintiffs, however, clearly understood that the Taurus trade-in was p a r t o f the purchase price o f the Mercedes. Plaintiffs also understood t h a t E P M w o u l d be paying o f f the outstanding lien e n c u m b e r i n g the T a u r u s as part o f the purchase o f the Mercedes. Consequently, in order for Plaintiffs to be credited w i t h the actual cash value assigned to the Taurus, the outstanding lien on the T a u r u s had to be p a i d off. The record reflects t h a t the actual c a s h price o f the Mercedes was $14,800, which was comprised o f $9,300 from the Plaintiffs by c a s h or financing and the $5,500 figure that EPM assigned as the c a s h value o f the T a u r u s trade-in. The c a s h price o f $ 1 4 , 8 0 0 , however, did not 6

take into account the negative equity o f $4,500 in the Taurus. Consequently, EPM increased the cash price o f the Mercedes, $14,800, by the negative equity in the Taurus trade-in, $4,500, and arrived at a RISA cash price o f $ 1 9 , 3 0 0 . The manner in which EPM treated the negative equity in the Taurus was consistent with TILA requirements. See generally Slover-Becker, 409 F. Supp. 2d 1158; see also 63 Fed. Reg. at 16,673. Plaintiffs also argue that EPM violated TILA by "disclosing a sales price for the Mercedes that was higher than t h a t w h i c h a cash buyer would have paid, thereby failing to disclose the true cost o f credit being extended" to Plaintiffs. Complaint at ~ 22b. Slover-Becker also closes this purported avenue o f relief. There was no difference in the amount [Plaintiffs], or anyone else in a comparable transaction, would be required to pay [Defendant] for the Mercedes . . . whether the transaction was for cash or finance. The increase in the sales price was not a product o f the fact that [Plaintiffs were] buying the Mercedes on credit . . . it was the result o f the equity in the [Taurus]. Slover-Becker, 409 F. Supp. 2d at 1163. The "cash price was clearly inflated; however the S t a f f Interpretation permits a creditor to include charges that are equally imposed in cash and credit transactions to be included in the cash price." Id. Although the theory is not specifically raised in the complaint, Plaintiffs also contend that the "amount financed" figure on the RISA is "wrong because it was computed by deducting the fictitious $353.28 from the ' c a s h p r i c e ' o f the Mercedes in the ' i t e m i z a t i o n o f amount financed' section o f the RISA." Plaintiffs' Post-Trial Memorandum at 4. The transaction was initially structured based on the understanding that the p a y o f f amount on the Taurus lien was $10,000. When the lien amount was verified by EPM it was determined to be $9,646.72. Thus, the difference in the anticipated p a y o f f amount o f the loan - which was an integral part o f the

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calculation o f the cash price o f the Mercedes - and the actual p a y o f f amount o f the loan was $353.28. That amount was returned to Plaintiffs as a credit on the RISA. Although Defendant could have better explained its treatment o f that amount on the RISA, the amount clearly does not represent a TILA violation; in fact, it was a credit to Plaintiffs reducing the overall purchase price o f the Mercedes, and consequentially the total amount financed. The Court concludes t h a t Plaintiffs have failed to carry their burden o f proving a TILA violation. The Clerk is directed to enter j u d g m e n t in favor o f Defendant.

SO ORDERED:

MaryM. 1 C h i e f United States District Judge February ~2009.

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