MOURNING v. FAMILY PUBLICATIONS SERVICE, INC.
Legal provision: Truth in Lending
Argument of Eric Schnapper
Chief Justice Warren E. Burger: We will hear first this morning in number 71-829, Mourning against Family Publications.
Mr. Schnapper, you may proceed whenever you are ready.
Mr. Eric Schnapper: Mr. Chief Justice, may it please the court.
This is the first case to reach this court arising out of one of the most important federal statute for the protection of the consumers.
The Truth in Lending Act of 1968.
That statute was enacted to inform consumers about the cost of credit and about the other terms of credit transactions.
Congress was particularly concerned, to aid consumers like the plaintiff in this case, a 75 year old widow living on a government pension of $82.50 a month, who can ill afford high finance charges or excessive financial commitments.
Defendant admits that it failed to make several disclosures applied by the regulations of Federal Reserve Board but claims that those regulations are invalid.
The facts of the case are as follows.
On August 19th, 1969 following a telephone solicitation, Mrs. Mourning entered into a contract with the defendant Family Publications Service for the purchase of four magazines.
The contract is set out on pages 6 and 7 of the printed appendix.
Under the terms of the contract, Mrs. Mourning was to receive Life, Holiday, Ladies Home Journal and Travel and Camera for period of five years.
Chief Justice Warren E. Burger: You would help me counsel, because I wonder if -- I am not sure I have spelled it out accurately.
What would be the price of each of these if you just subscribe by mail in the ordinary course?
Mr. Eric Schnapper: There is nothing in the record to indicate what the price would have been.
Chief Justice Warren E. Burger: Do you think that's not important to the case?
Mr. Eric Schnapper: Under the terms of the regulation and the statute, it's not.
Whether or not, she was given a good price is ultimately something that she under our economic system ought to been able to determine for self.
One of the problems that arises out of the failure of the defendant to disclose the total price of the goods was that even she had been aware, the terms offered by the publisher directly.
She had no way of making that comparison.
Chief Justice Warren E. Burger: Well if it's an inflated price on a package deal in order to conceal carrying charges, isn't that pretty important?
Mr. Eric Schnapper: Well, absent the regulation it would be necessary to inquire about the general practices of the defendant as to whether or not, it was inflating as prices --the whole purpose of the regulation was to make that very detailed and complicated factual inquiry unnecessary, both to avoid deterring private actions such as this one and to make sure that the statute itself was administrative, otherwise the Federal Reserve Board and other enforcement agencies would be in the business of trying to compare the prices for other magazines or bicycles or television sets with the prices charged in contracts like this for all the consumer contracts that are signed every day in country.
Chief Justice Warren E. Burger: But in the classical usury cases, isn't it ordinarily an important factor of evidence to show that the automobile, particular automobile had listed price, a cash price and a time price.
That's the way you improve your concealed usury.
Mr. Eric Schnapper: Well, that that.
Chief Justice Warren E. Burger: Do you say that under these regulations that becomes irrelevant now?
Mr. Eric Schnapper: That's correct.
Under the regulations that problem is not the one that has to be dealt with by the board or by plaintiffs seeking to prove that the information should have been disclosed.
Mrs. Mourning paid $3.95 down and agreed to pay $3.95 a year for two-and-a-half years.
The contract did not disclose that the cost of magazines was $122.45 in order to disclose the amount due after the down payment was $118.50.
In addition, the contract did not disclose, would have been revealed first time, the first time in this court by the defendant that if Mrs. Mourning had paid cash for the magazines, she might well have paid less to the defendant itself.
All of this information withheld from Mrs. Mourning by the defendant.
It was required to be disclosed two consumers in credit transactions covered by the Truth in Lending Act.
Mrs. Mourning refused to make any payments under the contract after the initial down payments.
On December of 16th, 1969 defendant sent Mrs. Mourning at first of at least 8 dunning letters, all of which are set out on pages 14-21 of the printed appendix.
The first letter stated that FPS had had Mrs. Mourning's subscriptions entered for the entire five year period and her contract could not be canceled.
On December 28th of that year FPS sent Mrs. Mourning a second letter stating that FPS had paid for the magazines in advance and that Mrs. Mourning had incurred an obligation to repay FPS.
The letter also stated, this is a credit account and as such must be repaid by you on a monthly basis much the same as if you had purchased any other type of monthly, any other type of merchandise on a monthly budget plan.
On April 23rd, 1970 Mrs. Mourning brought this action in the District Court for the Southern District of Florida suing to enforce the Truth in Lending Act, federal jurisdiction to enforce the statute expressly conferred upon District Courts by section 1640 of the statute.
Mrs. Mourning in her amended complaint alleged that the contract with FPS was a credit transaction covered by the Truth in Lending Act and that the disclosures required by the Act had not been made.
Plaintiffs sought statutory damage of $100 plus legal fees and cost.
FPS in its answer asserted three defenses relevant here.
FPS urged first that none of the disclosure provision of the act applied to this transaction because the contract did not involve the finance charge.
As a second defense FPS asserted that the Act did not apply to the contract because FPS had not extended credit to Mrs. Mourning.
Finally, FPS maintained that even if the contract were covered by the Act, neither Mrs. Mourning or any other consumer could enforce the statute because FPS had not imposed to finance charge under this type of contract.
FPS concedes however that it did not make the disclosures which plaintiff claims are legally required.
On October 30th, 1970 the District Court granted Mrs. Mourning's motion for summary judgment.
That court ruled that the transaction was subject to the Truth in Lending disclosure requirements because the purchase price was payable in more than four installments.
The District Court upheld and applied the four installments promulgated by the Federal Reserve Board which requires that disclosures be made to consumers in any transaction involving more than four installments without regard to whether or not finance charge is proved and would have been imposed.
The District Court also held that the instant contract involved the extension of credit by FPS to Mrs. Mourning.
Judgment was entered on behalf of the plaintiff the amount of $100 plus cost and Attorney's fees.
The Court of Appeals reversed on appeal and order the complaint dismissed.
In an opinion by Judge Coleman, Court of Appeals agreed that the Four Installment Rule required FPS to make the disclosures withheld in this case.
But the Court of Appeals held that that rule was invalid because it was not within the Federal Reserve Board's power to promulgate regulations under the act.
The Court of Appeals also held that the Four Installment Rule was unconstitutional because it constituted conclusive presumptions that all transactions with more than four installments involved a hidden finance charge.
The Court of Appeals did not rule under two additional defenses raised by FPS and the District Court.
The writ of certiorari was sought in this court to review the decision of the Fifth Circuit in validating the Four Installment Rule.
FPS did not urged in the proceedings below that the Four Installment Rule was unconstitutional and expressly does not rely on that ground before this court.
FPS does argue however, that Four Installment regulation exceeded the board's rule making authority under the Truth in Lending Act.
Statute involved was enacted in 1968 with the expressed purpose of giving to consumers a meaningful disclosure of credit terms so that the consumer would be able to compare more readily the various credit terms available to him and to avoid the uninformed use of credit.
The statute arose out of seven years of hearings and committee findings that consumers were generally, unaware of the terms of their loans, contracts and other credit transactions.
The legislative history revealed that creditors generally withheld vital information and that the value of what was disclosed, was often impaired by widely disparate terminology and accounting methods.
In addition to express the stated purpose quoted contained in section 1601 of the Act.
Section 1604 of the statute specifically authorized that Federal Reserve Board to promulgate whatever regulations it might deem necessary or proper to effectuate the purposes of the statute.
In addition to delegating this general regulatory responsibility to the board, Congress also enacted a number of specific provisions requiring several disclosures under various circumstances.
These disclosures include price of the goods, the amount to be paid after the down payment, the finance charge involve and your annual interest rate of finance charge expressed as a percentage.
The statute and regulations also require the standardized terminology be used to facilitate comparison of various contract.
Some of the problems as to how the purpose of meaningful disclosure would be achieved and dealt with detail by congress in these substantive provisions.
Other problems were left untreated for resolution by the board itself.
Congress provided the enforcement of the statute and regulations will be left primarily to private parties suing such as Mrs. Mourning and also mandated enforcement of the statute and regulations by various federal agencies.
The Four Installment Rule whose validity is at issue.
It's contained in 12 CFR section 226.2(k) and it's set on page 4 on petitioners brief.
The effect of the rule is to require disclosures be made two consumers, in any credit transactions payable on more than for installments, regardless of whether the creditor admits to imposing a finance charge in that transactions or others.
In the instant case, the Four Installment Rule would have required in a minimum that FPS disclosed to Mrs. Mourning that total price of the magazines and the amount which she still owed FPS after her initial down payment.
Chief Justice Warren E. Burger: By total price you mean $120?
Mr. Eric Schnapper: $20.45.
Whether the Federal Reserve Board's Four Installment Rule is a valid, it turns upon whether it was within the Board's expressed authority to promulgate regulations as set out in the Truth in Lending Act itself.
The Authority of the Board is defined in Section 1604 of the statute reproduced on pages 3 and 4 of petitioner's brief.
That Section provides, the Board shall prescribe regulations to carry out the purposes of this Sub Chapter.
These regulations may contain such classifications, differentiations or other provisions and may provide for such adjustments or exceptions for any class of transactions as in a judgment of the Board are necessary or proper to effectuate the purposes of this sub-chapter to prevent circumvention or evasion thereof or to facilitate compliance there with.
The Four Installment Rule is necessary first to prevent evasion of the substantive requirement contained in Section 1638 of the Act.
The creditors disclosed to consumers, the finance charge in annual interest rate imposed in any credit transaction.
In the normal credit sale with which we are familiar, the merchant imposes one charge for the purchase of goods for cash and imposes an additional separate charge for the privilege of paying for the goods over an extended period of time.
Congress was particularly concerned however, that the amount of this finance charge might be hidden in the price of the goods themselves.
The Board included that such a danger was very real.
Their concern was for example, that instead of charging a $100 for television set and $20 for privilege paying for over two years, the merchant will charge $120 for the television set and inform the consumer that the credit was free.
Such a merchant would naturally assert that the annual interest rate involved was zero.
This would not merely leave consumers uninformed, but would create a false illusion at the merchant's credit with significantly less expensive than the credit of lenders such as banks which had no prices in which they could vary their finance charges.
The congressional hearings indicated that varying finance charges and prices was a problem even before the statute was enacted.
And the report to Congress by the Federal Trade Commission indicated that this practice of hiring finance charges and prices was particularly common in urban ghettos.
Rather than permit retailers to thus render the Truth in Lending Acts requirement of disclosure finance charge is a dead letter.
The Federal Reserve Board promulgated the Four Installment Rule.
A key effect of this rule is to require a creditor who may claim, he imposes no finance charges to nonetheless disclose at the very least, the total price of the goods involved in any transaction, payable within four installments.
The Board apparently reasoned as had the supporters of the statute while it was being considered by Congress.
That if consumers were at least told the total price of an item, they could compare that price with other prices and determine if a merchant were charging more than the normal amount.
In this case for example if Mrs. Mourning had been told the total prices of a magazine, it was a $122.45.
Chief Justice Warren E. Burger: Well, then later that, I am even more puzzled, why record does not contain the figures on the publisher’s subscription price for each of these magazine, which you say is irrelevant under the Regulation.
Mr. Eric Schnapper: That's correct.
I believe that the Board concluded--
Chief Justice Warren E. Burger: But you just emphasized that a merchant having a $100 price tag on something and a $120 timed price was the kind of an evil that the statute was trying to get at?
Mr. Eric Schnapper: The regulation is designed not merely to facilitate or encourage that kind of case by case inquiry as to whether there was a hidden finance charge.
The congressional hearings indicated that Congress felt that it was --
Chief Justice Warren E. Burger: Yes, I understand the thrust of the legislation alright, when you get away from the legislation and get down to a specific case under it then I should think this factor would be of some interest.
Mr. Eric Schnapper: If the Statute stood alone, an inquiry would be necessary as to whether or not this particular creditor regularly extended credit for which the finance charge was required and that would be the case because Section 1602 of the Act defining creditor, limits the substantive provisions of the Act to creditors who extend credit for which finance charge is regularly imposed.
Justice Harry A. Blackmun: Would the regulation apply to release real estate, where you reserve a total amount of rent for a period of time like two years, payable in installments over two years, it's certainly be beyond the foremost.
Mr. Eric Schnapper: Only, only under one circumstance, the Statute provides--
Justice Harry A. Blackmun: But why not under all circumstances?
Mr. Eric Schnapper: Because –-
Justice Harry A. Blackmun: Federally, the regulations reads right on it, does not?
Mr. Eric Schnapper: And the regulation requires there be an extension of credit.
Now, the statute provides that certain leases will be treated as credit sales.
I mean leases which provide that at the end of the lease, the goods were, I suppose --
Justice Harry A. Blackmun: So may be we have the wrong issue up here.
Is that it?
The only issue here is the validity of the regulation.
Mr. Eric Schnapper: That's correct.
Justice Harry A. Blackmun: Not whether there was credit at all.
Mr. Eric Schnapper: Well, that's an issue that has been raised in addition, but the problem you raised --
Justice Harry A. Blackmun: Is that issue here, whether there's credit at all?
Mr. Eric Schnapper: That issue is here.
It is our position that--
Justice Harry A. Blackmun: Did you bring it here or did somebody else?
Mr. Eric Schnapper: The defendants brought it here.
Justice Harry A. Blackmun: On a cross petition?
Mr. Eric Schnapper: No, there's an alternative ground for affirming the Court of Appeals.
Justice Hugo L. Black: I see.
Mr. Eric Schnapper: It's our position that if this Court rules that the Four Installment Rule is invalid and feels that their arguments merit detailed consideration, that that case should be remanded to the Fifth Circuit, because the Fifth Circuit didn't reach, the question of whether credit was present in this particular case.
Justice William J. Brennan: I don't have the facts that you all stipulated until this is really nothing for a fact finder with respect to whether or not this is extension of credit?
Mr. Eric Schnapper: That's essential, that's essentially correct.
There are some conflicts between the answer and the evidence as presented by plaintiff but there was no substantive evidence presented by the defendant for example, to show that the defendant hadn't in fact prepaid publishers to some extent for these magazines.
And other facts which we have set forth in our reply brief are relevant, clear showing that credit was extended in this case.
But to get back very briefly to the question that you raised, normal lease, for example, the apartment would not be covered by the statute because of the end of at lease the apartment revert to the owner of the building.
Justice Harry A. Blackmun: There wouldn’t be any credit there?
Mr. Eric Schnapper: There wouldn't be any credit.
Justice Harry A. Blackmun: It depends upon (Inaudible)
Mr. Eric Schnapper: That’s correct but more importantly the statute distinguishes those kinds of cases from a lease in which at the end of the lease period, the property goes over to the tenant or to the person who's renting materials.
If, for example, you rent a television for $10 a week and at the end of two years you can buy it for a nickel.
That's treated as a sale under the Act.
Justice Harry A. Blackmun: But not as an extension of credit.
Mr. Eric Schnapper: That would be a separate question to be resolved, but in the case of a television set of course, it would be clear that the reported tenant, lessee of the goods in fact had a possession from the beginning.
In these cases, as the evidence shows, the facts are not such as I think you may have in mind, a problem where the goods are only delivered after they are paid.
The contract in fact, involves three parties, Mrs. Mourning who bought the goods, Family Publication Service and the publishers which was a different, I don't know, we don't know exactly how many publishers there were involved.
Now the letter, the Dunning Letters which were sent to Mrs. Mourning show that, first, there were these additional parties and FPS was not in fact the seller or a publisher of the magazines.
Secondly, that assumes the right roughly after the contract was signed.
FPS turned around and contracted with publishers in advance to deliver all the magazines to Mrs. Mourning over the requisite period.
Third, FPS stated in these letters and the evidence wasn’t contradicted below that he had prepaid to some extent the cost of the magazines and they told Mrs. Mourning in several cases that she owed them money because they couldn't get a refund from the publishers.
Now there's – normally it’s not the simple case of a person selling a television set, where you in fact that have three parties, but as FPS stated in one of the letters involved, it acted as really as a financier of this whole operation.
Justice Potter Stewart: She made additional down payment of $3.95, did she?
Mr. Eric Schnapper: Yes.
Justice Potter Stewart: So in that extent she was the creditor, doesn’t she?
Mr. Eric Schnapper: Well --
Justice Potter Stewart: At least to that extent, I mean and the whole deal was that she should be the one who extended the credit, she paid in advance for getting anything and always under the contract, she would have always paid more than she got.
And that's both by the under the statute and by ordinary economic and dictionary definitional terms, she was the one that was the creditor, wouldn't she?
Mr. Eric Schnapper: Well, we believe not because under the realities of transaction where she paid for magazines before she got them.
She paid for them after FPS had paid out money to the publishers so that she had a debt to FPS to cover the money that they had laid out.
Justice Potter Stewart: She couldn’t get the magazines from the publisher except by paying before the full subscription charges.
Mr. Eric Schnapper: That’s also correct.
That's the normal practice.
Justice Potter Stewart: And a middle man (Inaudible)
Mr. Eric Schnapper: Well, I think our economic analysis would be essentially that they put up the money for her to buy the subscription and she paid them back.
Now the record doesn't indicate --
Justice Potter Stewart: Well, that was with the finance charges?
Justice William J. Brennan: Well, it doesn't make any differences.
Mr. Eric Schnapper: Well, we say it doesn't make any difference under the regulation, that's correct.
The Four Installment Rule is also necessary to prevent evasion of the other disclosure requirements of the statute.
In addition to requiring disclosure of finance charges, the statute requires the disclosure of a host of other credit terms, the amount financed and the price of the goods, time and number of payments.
If however, a creditor asserts in his contract that he does not impose the finance charge, a serious question arises under the face of the statute as to whether or not the creditor need to disclose anything to consumer whether by having first hidden his finance charge, and evaded the requirement that that to be disclosed.
He can then turn around and evade all the other requirements of the statute and claim a complete exemption.
The Four Installment Rule precludes this type of circumvention as well.
The regulation provides that the usual disclosures must be made in any transaction involving finance charges but also in any transaction in which more than four installments are involved.
The rule does not only prevent circumvention of the Act in this way, but effectuates the expressly stated purpose of the act to provide consumers with credit terms of their transactions.
Congress expressly delegated to the Federal Reserve Board responsibility for deciding when it was a danger evasion and profession and remedies to be involved to deal with that danger.
The board's expertise in understanding the statute goes back to many years before its actual enactment because the board was intimately involved in the process of drafting the statute through the congressional hearings.
After the statute put draft regulations for proposing more than 1,200 comments considered and subsequent to consideration of them, the Federal Reserve Board promulgated the Four Installment rule in its present form.
That rule has remained in effect by three years of experience, reflecting the board's judgment that it is operative and effectuates the purposes for which it was designed.
The judgment and expertise of a board, of an agency such as the federal reserve board intimately involved with the framing of the statute and charged with responsibility of setting its machinery in motion and of making the parts work efficiently and smoothly while they are yet new and untried, that was entirely great difference.
A issue in this case is not an ancillary regulation of minor significance but a rule which the Federal Reserve Board has found vital to preventing wholesale evasion of the Act.
If the Federal Reserve Board's, Four Installment Rule is invalidated, large numbers of creditors currently bearing their finance charges will be able to refuse, disclose, both their prices and all the other credit terms of their transactions.
The board has further projected that the number of creditors thus hiding their finance charges will increase as a result of the promulgation of the statute and that the effect of the statute will thus be to decrease, rather than increase, the amount of information which consumers get.
The legislative history of the statute in the case of the burden of this, decrease in disclosure will fall particularly, heavily upon the poor.
In sharp contrast to these consequence, creditors such as Family Publication Service will suffer no serious inconvenience if they are required to make disclosures and comply with the Four Installment Rule.
FPS's most retailers uses a printed form contract and standardized terms there in and virtually all of the missing information and all of the missing standardized terminology in this case, could have been included on that form when it was printed.
The only interest which FPS could have had in withholding the absent information from Mrs. Mourning was to lure her into making an uninformed decision, to sign a contracts at issue and it was precisely to prevent this kind of uninformed purchases that the Truth in Lending Act was enacted by Congress.
Justice Potter Stewart: Mr. Schnapper let me try to straighten myself.
I understand your position on your relevancy and proof of the existence of a finance charge, am I correct on the facts that if this contract had been carried out from the start according to its terms, Mrs. Mourning would always be ahead in the sense that she at any point would have paid more than she had received in return for that payment because her payments were over 30 months and the subscription is over 60.
Am I correct in this?
Mr. Eric Schnapper: That's correct.
Justice Potter Stewart: Is it possible to say then that FPS would have the use of that money throughout the period?
Mr. Eric Schnapper: Apparently not, the letters sent to Mrs. Mourning indicated that FPS had in fact taped with the magazines to some extent in advance.
So one letter suggested they had fully invested her contract, which suggested that they had paid for the things completely.
The letters indicated the very least that they had prepaid publishers to some extent from their own funds and that she owed them money to repay them and the word 'repay' is used in the letters for what expenditures they already made.
Now, if for example she had doubled the bank, borrowed $122 and paid it to the magazine companies, it would still be the case that she was receiving magazines only after she had put out money to the bank.
But the fact that matters that would clearly be a credit transaction because the lender involved would have parted with value not to her but to the magazine company prior to receive any --
Justice Potter Stewart: But what I am trying to suggest is to ask whether there is a finances charge in FPS's use of her money and I take it that you are saying there is --
Mr. Eric Schnapper: Well, it maybe then in this case that there is a finance charge, the argument that I would suggest wouldn’t turn upon the fact that she was -- they were using her money but rather the fact that she was using theirs but essentially she was getting a subscription purchased for her by FPS, with FPS's money and then being allowed to repay FPS with that advanced payment over a period of two-and-half years.
Justice Potter Stewart: Now lastly, am I correct, in my impression that there is some pending 1972 legislation in the subject?
Mr. Eric Schnapper: Congress has adjoined that particular bill (Inaudible) committee.
Justice Potter Stewart: And what would that bill have done?
I didn't find it mentioned in either brief and do you know what it --
Mr. Eric Schnapper: My understanding is that that particular statute would have put -- that particular amendment to the statute would have put into the statute and ruled substantially equivalent to the Four Installment rule that's been promulgated by the board.
Justice Potter Stewart: Does the existence of that proposed legislation weaken your argument in anyway?
Mr. Eric Schnapper: No, similar case arose under Jones v. Alfred Mayer Company, several years ago in this court, where not only had a Fair Housing Act been proposed in Congress but actually passed.
In that particular case, the court was called upon to decide whether something similar to fair housing had been posed by statute almost a century old.
The court proceeded to reach that question even though the practical matter that particular problem had been resolved, that social problem had been resolved by Congress in another statute.
In this case, of course we have nothing here but the hope that someone will get up and propose that this particular statute will be passed by both houses signed by the President.
That particular congress though it was elected two days ago and hasn't even met yet, would be other speculations and point to guess what had --
Justice William H. Rehnquist: Not an uncommon situation, where the Immediate Legislation is in to eliminate the issue that's under litigation.
Mr. Eric Schnapper: I know no, I think that reflects Congress's concern with the fact that if the regulations invalidate the whole statute is threat and whole statutory scheme maybe --
Justice William H. Rehnquist: I need to get clear on the whether it was a extension at credit or not.
As between your claim and the intermediary, the other party, wasn't that found as a fact in the District Court that there was an extension that those was –-- there was between those two parties regardless of what the situation might be looked at, it was between Mrs. Mourning and the publisher.
Mr. Eric Schnapper: That's correct.
Justice William H. Rehnquist: And the Court of Appeals did not disturb that.
Mr. Eric Schnapper: It didn't reach it one way or the other.
Justice William H. Rehnquist: Well, it didn't disturb it.
Mr. Eric Schnapper: That's true too.
Unknown Speaker: So they reached the ultimate question of validity.
Mr. Eric Schnapper: That's correct.
Unknown Speaker: And left that factual finding undistorted.
Mr. Eric Schnapper: Yes.
Justice Potter Stewart: Well I don’t -- you were more accurate at the first time they didn't reach it.
Mr. Eric Schnapper: I wasn’t going to push my --
Unknown Speaker: But there it is though, the factual findings.
Mr. Eric Schnapper: Yes, that's correct.
We have termed it clearly erroneous and it seems to me that there is adequate evidence to support it.
Justice Potter Stewart: As I understand you suggest that the analysis should be that if John Smith wants to subscribe to Life magazine and borrows $25 from a bank and prepays this to get a five-years subscription to Life magazine, he is a debtor and a bank is a creditor, visa-v that $25, even though he maybe a creditor and the publisher of Life magazine, a debtor, visa-v has prepayment of a five-year subscription?
Mr. Eric Schnapper: Yes, that's essentially our analysis.
Chief Justice Warren E. Burger: And to pursue that I think a related question as soon as Mrs. Mourning signed that contract, she was a debtor to the extent of $118.50, wasn't she?
She had made a promise to pay 118.50 to someone else?
Mr. Eric Schnapper: Yeah, as far as I recall this.
Chief Justice Warren E. Burger: So that made her a debtor and the Family Publications a creditor, certainly?
Did it not?
Mr. Eric Schnapper: Yes, and that was reinforced by the economic circumstances which followed the payment of money to publisher.
Chief Justice Warren E. Burger: Now this is an exchange.
This is a typical classical contract situation of one promise exchange for another, each one to be partially performed in the future?
Mr. Eric Schnapper: My time is up.
Chief Justice Warren E. Burger: Mr. Randolph.
Argument of Raymond Randolph
Mr. Raymond Randolph: Mr. Chief Justice, may it please the court.
First I would like to answer Mr. Justice Blackmun's question about pending legislation.
That is pointed out on the page 6 of the Government's brief in Footnote 8.
What happened to the legislation was that it passed Senate, the legislation essentially enacted into the -- as an amendment to the act of Four Installment Rule, that's an issue in this case.
The legislation did pass the Senate, but it was not reported out of the house banking and currency committee in time before Congress adjourned.
This legislation has essentially died for this term.
The other question, I would like to address myself at the beginning, Mr. Chief Justice Burger's question with regard to evidence in the case as to what publisher's charge for these magazines subscription would have been.
I take it that question is directed to determining whether in fact there is varied finance charged in this transaction.
The proper comparison Mr. Chief Justice, I would submit, would be not what the publishers charge, but what Family Publications would have charged a cash customer, a person that was willing to pay the entire amount online when they contracted for the magazines as opposed to what they charged someone who would defer the payment over a longer period of time such as Mrs. Mourning.
Chief Justice Warren E. Burger: But might not both factors be relevant?
Mr. Raymond Randolph: That might be, but I think that if the -- if you can show -- if one could show that the a cash customer pays less than a time customer, there is direct legislative history to show that's considered just simply another way of saying we are charging you for something more for paying overtime which essentially is a finance charge.
In the District Court, an affidavit was submitted by the Vice President of Family Publications Services.
That affidavit read as follows.
It's not in the appendix.
It said, there is no discount for paying at once and no charge for paying over 24 or 30 months.
However, now --
Chief Justice Warren E. Burger: Is that because they are not in the business of selling things for cash, but only --
Mr. Raymond Randolph: But that's what that affidavit would lead one to believe.
However, in this court for the first time we find on page 3 of Family Publications Service's brief in the second footnote, the admission that contrary to representations made below, cash customers do in fact get a discount.
Statement is made that cash customers only represent 1% of Family Publication's total customers, but that's not the relevant figure.
I have inquired as to what exactly, how much this discount is and apparently that's not known.
I have inquired as to exactly what percentage of cash customers get a discount and that's not known.
Chief Justice Warren E. Burger: Is that the affidavit in our files know?
Mr. Raymond Randolph: Yes, it is Mr. Chief Justice.
Justice Potter Stewart: Does that really make a -- does that really bear on the issue before us?
Mr. Raymond Randolph: I think it would.
I think I can bring to light how that does bear on the issue.
Justice Potter Stewart: I thought that --
Mr. Raymond Randolph: I think it confirms Congress's judgment and board's judgment that whenever a credit is extended for any appreciable length of time that costs are incurred by the creditor.
As an economic fact, he must incur cost and those costs are contains as some components of selling price regardless of whether he differentiates it out for the consumer or not.
Justice Potter Stewart: Well, I thought that; that may go to the motivation of board and the rationality of the board, but I thought that whether in particular case there was a hidden finance charge, didn't have anything to do with the issue that this was a general regulation?
Mr. Raymond Randolph: This regulation applies regardless --
Justice Potter Stewart: Even if there were no hidden or finance charge here of any kind?
Mr. Raymond Randolph: I would maintain --
Justice Potter Stewart: Nevertheless if the regulations are fully require the disclosure of certain information, isn't that right?
Mr. Raymond Randolph: That's right.
But what I am about to appose Mr. Justice Stewart is that theoretically a transaction without a finance charge is some component of selling price as possible.
Practically, it would not --
Justice Potter Stewart: Not very likely?
Mr. Raymond Randolph: No.
Justice Byron R. White: Do you think what you are saying is very relevant to the validity of regulations of the statute?
Mr. Raymond Randolph: That's right, because we first of all say that the provisions of the act define creditors, those who regularly extend finance charges.
Now they are people that have to disclose under the Act.
There will be no problem at all in applying this provision if every creditor simply said, my finance charge is this, my selling price is this.
But there are some creditors that have never, perhaps never differentiated the cost of credit from the selling price of the goods.
Apparent reason being that they sold primarily all their goods on credit and there would be no reason for them without a disclosure requirement for it to differentiate.
They would say my price is $120 payable in 10 monthly installments for one year or 10 monthly installments over a period of time.
That will be all they tell the consumer.
The question is what is going to be done about those transactions?
Well, the assumption throughout the congressional hearings, and seven years of congressional hearings is that whenever a creditor said or a retailer said there is no charge for credit, that simply meant that somewhere in that selling price, a component of that selling price was the cost of credit to the retailer.
Now this assumption is based on a very simple economic fact.
Whenever the seller extends credit for any appreciable length of time incurs cost.
Now we maintain that this case is no exception.
FPS sent letters to Mrs. Mourning and that cost the money that they would not have had to incur if they operated on a cash business.
They took legal action against those who defaulted as a matter of fact on page 19 of the appendix, FPS tells Mrs. Mourning, they don't want to do that to her because it's very expensive.
That's another cost that they would not have incurred if they operated on a cash basis.
They ran collection offices in Florida for people who were late in their payments.
This is revealed on page 25 and 27 of the appendix, and FPS itself told Mrs. Mourning that had paid for this merchandise before it received payment for Mrs. Mourning.
We don't know whether FPS ran credit checks or had a bad debt reserve or anything of that sort, whether it had to borrow money to pay for these magazine subscriptions, but we do know that every transaction for any appreciable length of time, the cost of creditor is going to be incurred.
That would not be incurred if they ran a cash business.
The problem that faced the Federal Reserve Board is what they do about this, because their solution is the Four Installment Rule.
Now before the ink was even dry on this bill, the Federal Reserve Board began the task of setting the Act in motion.
As my co-counsel has explained, the Federal Reserve Board was involved in this legislation from the very beginning, it testified many times before Congress and took an active part in consideration of the legislation.
Congress in fact delayed the effective date of the Act for one year in order to allow the board time to set up regulation to implement it or in the words of the house report on page 19, this formulation such “substantive“ regulation so necessary for effective enforcement of the Act”.
What did the board do?
The first thing it did was it set up a task force drawn from the staffs of various Federal Reserve Banks around the country and from its own staff.
It drew upon retail credit experts to look at these problems.
It drew upon vice presidents of various Federal Reserve Banks, the actuary, the treasury was drawn in.
It set up an advisory panel of 20 members representing retailer and lender and consumer groups from every section of the country and headed by the Dean of the Berkley School of Business and after they studied this problem, as I said their solution was the Four Installment Rule, but the board didn't stop there.
On page 19 of our brief in Footnote 22, there is an explanation of what the Four Installment Rule is all about and why the board did it.
This is testimony from Vice Chairman of the Federal Reserve Board, Robinson, it's before the regulations took effect and he is testifying before the very committee of Congress that enacted the Truth in Lending Act and explaining exactly what the board did before the regulations take effect.
In that testimony, what I have just described is as far as the promulgating process is concerned, is confirmed.
The other thing that board did was undertake a massive campaign to inform creditors of exactly what there obligations would be and what the board called Z day which is when Regulation Z took effect in July of 1969.
It distributed a million and half of these pamphlets which describe in detail exactly every creditor's obligations and they were distributed to every known person or firm extending consumer credit in the country.
The board also ran seminars in the Federal Reserve Bank and the other informational services.
Justice Potter Stewart: If you are right in your position exactly what would have had been disclosed here.
I can't find out I saw it in the agreement but the total price in the --
Mr. Raymond Randolph: Let me go in down what -- let's the usual case and this is one where there is no finance charge differentiated from the cost.
In Four Installment Rule is what, they would have had to say the down payment.
Now the FPS contract that is set out on pages 6-7 of the appendix, it will be helpful to follow that.
They did that.
They said, pay only $3.95 down.
The next thing they would have had to do is give the number, amount and due dates of the payments.
Now we think they substantially complied with that, they said, 395 each month for 30 months.
Of course, if the Truth in Lending Act doesn't apply, the next contract FPS rights could say 395 a month for two-and-half years.
There will be nothing to prevent them from doing that but they did that in this case.
The next thing they would have had to tell Mrs. Mourning is the total of payments.
They did not disclose this --
Justice Potter Stewart: That is, 31 times 395?
Mr. Raymond Randolph: No the 30 times 395.
Justice Potter Stewart: Well, no total is the down-payment of 395 was 31 times 395.
Mr. Raymond Randolph: But payments she would have to make after the salesman walked out the door.
Justice Potter Stewart: Alright, they would have to do that modification, 30 times 395.
Mr. Raymond Randolph: Yes it's interesting I think Mr. Justice that on page 17 is the first time, the family publications did that modification for Mrs. Mourning, you will notice they say the time is here now, we cannot wait any longer for your payment.
We give you 48 hours to forward the entire balance of a $118.50.
They had the courtesy to mollify it for their.
The next thing is the cash prize.
Now this is interesting, FPS never disclosed.
So there is no indication of what their cash prize is here but now we know as I stated early in my argument that there was a cash prize but we don't know how much it was and neither did Mrs. Mourning.
Justice Potter Stewart: But we now know that it is, that it was lowered.
Mr. Raymond Randolph: It was lowered we know that.
I think that I might digress you for a moment.
This is one of the main points of the Four Installment Rule 2 in addition to preventing certain invention and evasion.
It gives creditors an easy rule to follow and no charge for credit transactions.
They know that they don't have to away the consumer's action against them to prove exactly and calculate what their finance charge was, if the consumer could ever prove that.
But it gives them a clear rule to follow and maybe the FPS never thought they charged the finance charge.
I remember doing the hearings that Sears and Roebucks Company came in before Senator Douglas who was the principal sponsor claiming, we charge no finance charges.
It took Senator Douglas five pages of testimony in a computer to prove to them then they in fact did.
After which they admitted it.
So it's not all purposeful evasion, it's misunderstanding too.
Okay, so we don't know the finding.
The next thing is the amount financed which would be the cash prize minus the down-payment, of course we don't know this either because we don't know what in fact the cash prize is now.
And then final thing will be the differed payment prize which will be everything.
Finance charge, the cash prize, the down-payment and all additional charges.
In this case we come to a $122.45.
None of this was told to Mrs. Mourning.
We throughout this litigation --
Justice Potter Stewart: Simply 31 times 395.
Mr. Raymond Randolph: That's right.
Justice Potter Stewart: Just fourth grade arithmetic, they would have to note down.
Mr. Raymond Randolph: Well, I think that one of the major points, of the Truth in Lending Act is that if you were a Mathematician, you might be able to get all the information by taking certain figures and juggling around that a creditor is required to disclosed under the Act.
Two things, everyone is not a mathematician and second in the pressure of a sale, when the seller is emphasizing the merchandise, the amount of money, you can afford this.
People may not be able to conduct themselves so that they would sit down with a pencil and realize their obligations.
Throughout this litigation, I think it's interesting that FPS has never said why don't they want to tell their customers this?
It's not going to cost them very much money; this is a standard form of contract.
They could run them off by the thousands at very little expense but putting in a few more lines, describing what I said, it maybe that they don't want their salesmen to go to people and say how do you like to buy some magazines for a $122.45 --
Chief Justice Warren E. Burger: But doesn't that run throughout the legislative history between the lines as well as on the surface that this is an effort to protect people from their own folly to a degree.
Mr. Raymond Randolph: That's exactly right Mr. Justice –-
Chief Justice Warren E. Burger: Their own inadvertence—
Mr. Raymond Randolph: They give them information and if they want to make mistakes at least, they will have the information before them.
Justice Potter Stewart: Now these are the requirements you specified where in which part of the legislation are they?
I can't find them.
Mr. Raymond Randolph: Sorry, I am not clear about what requirements?
Justice Potter Stewart: Well, the ones you just did in going down this contract on page 6 to 7, if you said what they would have been require to that.
Mr. Raymond Randolph: Section 1638 of the Act and the regulations, Section 226.8.
Justice Potter Stewart: Is that in these papers over here?
Mr. Raymond Randolph: Page 13A of the appendix, I have been called by my colleague.
Chief Justice Warren E. Burger: What page again, what you just mentioned?
Mr. Raymond Randolph: Of the appendix to petitioners, to respondent's brief page 13A.
Well, that just gives a general rule 226 where all the detailed disclosures that I have described are set forth after that in the Section.
Justice Thurgood Marshall: Mr. Randolph as I understand the court below, they said that Congress couldn't adapt this regulation.
Mr. Raymond Randolph: Yes, I would like to say a word about that.
They said this is a conclusive presumption; therefore it's a violation of the Due Process Clause.
We think that reasoning is faulty for the reasons we have explained in our brief.
We think that characterizing this rule is a conclusive presumption, aids analysis not at all.
The entire Truth in Lending Act is a conclusive presumption because what it does is presumes that regardless of who the consumer is, he needs this information.
Regardless of whether he is William McChesney Martin buying furniture or John Kenneth Galbraith, the creditor still has to disclose.
But we do think it is the significant and important thing, is the regulation reasonable with respect to the objects sought to be achieved.
The reasons I have just stated and the reasons my counsel stated or co-counsel stated, I think confirm that it is reasonable and --
Justice Thurgood Marshall: And the court below just said, the Act was unconstitutional?
Mr. Raymond Randolph: Yes, they said that not even Congress.
So this legislation is pending would be declared unconstitutional by this panel of the fifth circuit or whatever passed.
Justice Potter Stewart: I understand your advisory he doesn't rely on that reasoning of the court of appeals.
Mr. Raymond Randolph: But if the court were to rule in our favor we would suggest that they would have to over turn that particular aspect of the Fifth circuit's judgment and I would just like in response to Mr. Justice Marshall's question, I would just want to like to add one more thing.
One of the important things under the due process clause is a question of benefit burden analysis.
I mean, what are the benefits?
Well, I have talked at length about the benefits of this Four Installment Rule.
What are the burdens?
The burdens are virtually minimal on the creditor particularly in this situation where they have a standard form contract and it means just setting up few more lines.
For all those reasons, we think that judgment of the court of appeal should be reversed.
Chief Justice Warren E. Burger: Well, isn't this whole act, an approach to abandon the old idea that let the buyer be aware and substitute preposition that the buyer must know.
Have you heard about what it is?
Mr. Raymond Randolph: That is the philosophy Mr. Chief Justice you may not be realizing if you are paraphrasing Section 1601 of the Act which says to assure a meaningful disclosure of credit terms, so the consumer will be able to compare the credit terms available to him more readily.
In other words, we want people operating with their eyes open in these transactions.
It doesn't protect people from making mistakes.
One thing I haven't mentioned is Mrs. Mourning would be technically still liable on this contract, even regardless of her civil recovery in this suit.
In that sense the civil penalty section is really kind of compensatory.
What it gives is, there's $100 although she is still obligated on the contract.
Justice Potter Stewart: In an answer to the Chief Justice?
Mr. Raymond Randolph: Yes I have.
Unknown Speaker: Let's assume a case in which a merchant for reasons satisfactory to himself were foolish enough to have precisely the same price on a cash basis as for a differed sale of say 4, 5 or 6 months.
And that he could prove that.
So that in fact, there would no finance charge.
Do I --
Mr. Raymond Randolph: I would not agree with that it followed that there would be no finance charge.
What I would say is that --
Justice Lewis F. Powell: Let me put it this way and then you can come back to that point.
Assuming the testimony where to the affect that this merchant, for reasons satisfactory to himself intended to charge nothing for the differed installment, that he ran a Mom and Pop store.
He did not want to be confused with complications of that kind.
Do you think that Act requires a finance charge before it is applicable?
Mr. Raymond Randolph: That question – may I back up to the question that I was about to earlier question, the statement I was about to make, I think that just because the cash prize is the same as the installment prize, it does not follow that there is no finance charge hidden in the installment prize.
What it may mean is that there is a finance that both cash customers and installment customers are paying for the cost of credit.
That’s a very typical situation in low income neighborhood where for example, the creditor does very little cash business and can't afford do that.
Now as to the question whether in fact, if you had a situation where there was no cost of credit and nothing in the price of the goods.
I think that the Act would cover that situation but what it would require the consumer to do is in every situation there is a cost of credit, regardless of whether the seller says I am charging for this or not.
A part of his cost of doing business is in the selling price and so even if he extends credits and says I am not going to charge you anything.
What he is in fact doing?
He is taking a lower profit, I mean that’s another way of characterizing.
If he wanted -- if a consumer wanted to cover a person like that what he would have to do is bring an action with the team of the accountants to break down those book keeping practices to show exactly what percentage cost of credit was in this operating expenses which went into the selling process.
Unknown Speaker: Do you think the act does require finance charge?
Mr. Raymond Randolph: Yes but not one that has to be calculated and what the board's rule does is dispense with that because they base their rule in the economic fact that at anytime you have credit extended over Four Installments, there's going to be a finance charge upon.
Unknown Speaker: But in my case --
Mr. Raymond Randolph: Congress assumed the same thing incidentally on page sorry to interrupt you, in page 13 of our brief I believe is 13.
On page 15 of our brief footnote 13, I think we have about 20 references where this situation is mentioned during hearings.
Every time it was mentioned the Congress, -- no matter whoever the expert was testifying but what that just means that the cost of credit is more than selling price.
Justice Potter Stewart: And the seller himself might not realize it?
Mr. Raymond Randolph: He might not realize it, no.
Unknown Speaker: Your position is the same --
Mr. Raymond Randolph: In Sears and Roebuck.
Unknown Speaker: Mr. Randolph.
Mr. Raymond Randolph: Sorry.
Unknown Speaker: If there was two stores side by side selling the identical commodity at the identical price and one charged more for differed purchase and other decided, he did not want charge any more for the differed purchase and you say that you are willing to take a lower profits perhaps.
It is your position the Act applies and that the user finance charge even though the man does not intend to make it?
Mr. Raymond Randolph: Without the Four Installment Rule, with the Four Installment Rule because it would depend on whether --
Unknown Speaker: The Four Installment Rule obviously covers that.
What I am addressing is whether or not the act moreover a situation like that?
Mr. Raymond Randolph: My position on -- and I have discussed the situation with the Federal Reserve Board and the position is that in that type of situation, the only way would be, the only way that creditor would be is if the consumer could come in and so regardless of the fact that he is charging, making a lower profit but nevertheless part of his selling price one component of that selling price is cost of credit.
It’s just part of the cost of doing business which is always in the selling price.
And when you get beyond that then you get a profit.
I might add that during the hearings, on Page 15 of our brief in Footnote 14, we mentioned a statement by Senator Proxmire, it was said, “I see then what you are saying is that it fois, you don't pay a carrying charge of any kind”.
Obviously what fois is doing is bearing the charge in the cost of merchandise.
Counsel for FPS is stated that a few seconds later, Senator Proxmire said oh, “apparently you are not charging a finance charge for this merchandise fois wasn’t.
I would direct the Court's attention; I am not sure where is that in their brief, to the testimony that preceded Senator Proxmire's statement because what he was told was fois went out of business with respect to this merchandise.
His reply was oh, they were in charging a finance charge.
I think there was a touch of sarcasm in that response.
Justice William H. Rehnquist: Mr. Randolph, are you saying that as a matter of law there is a statutory finance charge every time the sale is not for cash?
Mr. Raymond Randolph: No not as a matter of law.
This is why the board made the rule Four Installments.
In the legislative history there is in both the house of senate reports, the statements that the reason congress required or set finance charge with respect to creditors was that they did not want to cover 30, 60, 90 day accounts or trade accounts because they consider them the essentially cash transactions and what the board did consider in more that three installment rule.
Justice William H. Rehnquist: But if your analysis is correct that every time you do not sale for cash there are hidden costs whether you admitted or not, whether you know of them or not.
Why would not the same be true for a two installment?
Mr. Raymond Randolph: Well I think it what I am saying is that it was congress's judgment that these smaller transactions over a small period of time were essentially cash transactions meaning that there maybe finance charges involved as the De minimis situation, everyone has always treated these as rather as cash transactions and we do not want to upset that type of business activity because the benefit to the consumer would be minimal whereas what we are really aiming out a longer term installment.
Justice William H. Rehnquist: Is it Congress's judgment or the board's judgment?
Mr. Raymond Randolph: That is Congress's judgment I think it is on page, yes page, at the top of the page 20 of our brief.
So requirement would not applied to transactions which are not commonly thought of as credit transactions including trade credit, open account credit 30, 60, 90 day credit etcetera for which charge is not made.
This is the legislative history that board looked at and said well, we have to have a rule that covers transactions beyond this because the reason Congress put the finance charge in there as they did not want these transactions covered.
I might add that the board as my colleague said it was involved in this legislation from the very beginning, constantly testifying before Congress both before and after the Act became effective.
This legislation that we have been talking about that passed the senate was that the board's urging, I think we filed with the court that the report that the board files with Congress every year which was an annual report and they suggested that Congress put this legislation.
And despite the fact, this case was in the Supreme Court, that is how critical we would think the Four Installment Rule is.
Chief Justice Warren E. Burger: Mr. Rifkind, we have extended the time of your offense and to accommodate that your time will be enlarged to ten minutes if you need it.
Argument of Robert S. Rifkind
Mr. Robert S. Rifkind: Thank you very much, Mr. Chief Justice, may it please the court.
The Truth in Lending Act is an important elaborate, a very complex piece of social legislation, designed and indented to cover an enormous, absolutely enormous array of consumer credit transactions.
In light of the complexities involved, Congress gave the Federal Reserve Board very broad powers to implement the purposes of the Act, to construe it and to interpret it, to adopt regulations in order to facilitate compliance and so forth.
The Four Installment Rule is not an interpretation of the Act.
It is not a construction of the Act.
It does not come under all those rubrics like Udall and Tallman of a contemporaneous interpretation.
The Four Installment Rule is an amendment to the Act.
It rewrites the Act.
It rewrites the very definitions of the Act and the operative provisions of the Act.
And I submit that because it brings within the scope of the civil and criminal penalties of the Act, both of which can be quite segregate.
It is invalid because it is inconsistent with the explicit language an intention of Congress.
I would like to begin by calling the Court's attention to these specific statutory provisions on which we rely.
The portions I am relying are set forth that the appendix to our blue brief starting at the page 1A.
First, Congress declared its purpose.
It said that the informed use of credit results from an awareness of a cost thereof by consumers and it is the purpose of the Act to disclose that cost.
I can emphasis too strongly that what the Act deals with from beginning to end is the cost of credit, not the business costs of the businessman who may vary his charges or un-vary them but the cost to the consumer.
Justice Potter Stewart: Do you mean the price?
Mr. Robert S. Rifkind: The price, the cost.
Justice Potter Stewart: The cost is to the extender of the credit, and the price is to the extendee of the credit.
Mr. Robert S. Rifkind: The price of credit, I think that's a fair statement, which for the purpose of this Act is called the finance charge, a bundled word.
Now, they go on in the definitions to define the term creditor as that term is used in the Act.
The term creditor, it says in 1602 F, refers only to creditors who regularly extend or arrange for the extension of credit for which the payment of a finance charge is required.
The provisions of this sub-chapter apply to any such creditor irrespective of its status.
So at the very outset, the Congress is saying as I understand it, there are creditors who impose finance charges and there are creditors who don't impose finance charges.
We are talking about the ones who did.
The next critical section or I should add at that point, that the rewriting of the Act begins at that point.
The Federal Reserve Board's definition of credit omits the phrase, for which the payment of a finance charge is required.
That's in regulation to 226.2 M at Page 10A of our brief.
The next section, the next critically operative section --
Chief Justice Warren E. Burger: Did you mean, sorry, I interrupted there a bit, do you mean finance charge which is identified as such or finance charge which is determined to be present as a matter of economic reality?
Mr. Robert S. Rifkind: We submit that the Act does not distinguish between identified and unidentified finance charges, hidden or patent finance charges.
It says finance charges imposed by a creditor must in all circumstances be disclosed without question.
Now, I add the proposition, that Congress did not share.
The Solicitor General's view or the Reserve Board's view, that every creditor imposes a finance charge in some ambient economic sense.
First of all, there is no law guarantee that you are going to stay in business as fois discovered.
People do not always recover their cost from their customers.
But there are more simple situations.
A patient comes to a doctor, has a major operation, and the doctor says, well my fee for removing your appendix is $2,000, I know you can't pay me for it now, pay me $100 a week for the next 20 weeks.
No one in his right mind, I think, suppose that doctor is imposing a finance charge but the Federal Reserve Board says he is subject to the Four Installment Rule.
Doctor, of course has a cost of business.
He has to pay his telephone operator, his nurse, for his stethoscope, and do whatever doctors do.
Chief Justice Warren E. Burger: But do you think it would not be relevant if it could be demonstrated in an attack on that transaction, that in fact all of their patients who paid cash or within 90 days would charge $1,000.
Mr. Robert S. Rifkind: Oh, I quite agree.
If it is shown that the normal price, this doctor has been contemporary for an appendectomy is $1,000, but he charged $2,000 for letting a patient pay it for over two years.
You prove a finance charge just simply as that.
And I -- if the board wants to regulate that, I have no problem with that at all, I think the Act regulates and requires that the doctor disclose in those circumstances.
All I am saying is that there are in fact, in practical experience as we all know situations in which the fee, the charge, the cost imposed on a customer does not in fact vary with defermative payments.
And at least --
Justice Potter Stewart: There is matter of economic reality however it does -- I mean $2,000 over 20 weeks is less money than $2,000 cash on hand.
Everybody who has ever studied elementary economics knows that.
Mr. Robert S. Rifkind: That is that the seller experience the cost?
Justice Potter Stewart: That’s right.
Mr. Robert S. Rifkind: Which he may or may not pass on.
Justice Potter Stewart: Which he may or may not even realize.
Mr. Robert S. Rifkind: Which he may or may not realize and he may or may not impose on --
Justice Potter Stewart: I mean as just as they are not even buyers they are not even sellers, is that true?
Mr. Robert S. Rifkind: That's true, that is correct.
Now, I turn to Section (16) (31) (a) of the Act which is the Page 6(A) of our appendix in our brief.
And this is the general disclosure requirement.
It says that each creditors , we have already defined each creditor to mean creditors who regularly impose finance charges.
If such creditor in accordance with regulations prescribed by the board shall disclose to each person to whom credit is extended and upon whom a finance charge is or maybe imposed, the information required under this part.
So not only you start with a class of creditors who imposed finance charges, you go on to those transactions in which they in fact imposed them as congress has wrote.
Now, I would like to say a word about maybe there.
There has been some temptation I think, in the briefs for the government and petitioner, suppose that maybe means maybe, perhaps it is there and perhaps it isn't.
It clearly doesn't mean that.
It is meant that word 'may' as defined in the Act does not carrying forward into the code except the footnote.
'May' is defined as an act that is authorized or permative.
In other words, if the contract says you may defer your payments and if you do so after the first 30 days, the interest rate will be 5%, that's a situation in which interest -- finance charge maybe imposed pursuant to the agreement.
So to some conditions it's subsequent, but it doesn't mean might be or can't tell whether it's there or not.
It doesn't mean maybe.
Contrary to the government's -- contrary to the petitioner's suggestion at Pages 12 and 13 of its brief, the Act does not impose the disclosure requirements on all credit transactions, even of those who regularly impose finance charges but only in those transactions in which a finance charge was imposed.
Now the legislative history behind Section 1631 shed some light at this point.
The Senate and house reports -- the Senate report is quoted at Page 17 and 18 of our brief, say that this language in 1631, the language upon whom finance charges maybe imposed is intended to make clear that disclosure need only be made to persons upon whom finance charges maybe imposed.
Thus the disclosure requirement would not apply to transactions which are not commonly thought of as credit transactions, including trade credit, open account credit, 30, 60, or 90 day credit, etcetera, for which a charge is not made.
Congress didn't have to say that, it didn't have to go out of its way to say that.
It was briefly simple to a middle office language but it has reiterated now three times that what it's talking about is the imposition of a cost of credit.
Finally -- well and ultimately, the Act sets forth, the disclosures are to be made, those are contained in two sections in 1637, which sets forth the disclosures for open ended credit, charge accounts, and that sort of thing, that is not in our brief.
The disclosures required there include the conditions under which a finance charge maybe imposed, the method of determining the balance upon which a finance charge will be imposed, the method of determining the amount of the finance charge, and such like.
In 1638 which is the section applicable if any is applicable here, they talked about the cash price and so on.
Going on to the total amount to be financed, the amount of the finance charge, the financed charge expressed as an annual percentage rate and so on.
Justice Byron R. White: Well, I thought this case turned down that section, but on the regulation.
Mr. Robert S. Rifkind: I am trying to show Mr. Justice White that the regulation is inconsistent with the manifest --
Justice Byron R. White: You are then going to talk sometime about what kind of authority the board has to adopt rules and regulations.
Mr. Robert S. Rifkind: Yes, sir.
Yes, he did.
Justice Potter Stewart: And if the regulation is valid, it is 1638, it is the information required by 1638 that would be applicable to this transaction.
Mr. Robert S. Rifkind: That is right.
I might say in that connection that 1638 demonstrates the quandary created by imposing, by validating the Four Installment Rule.
Because if the Four Installment Rule applies and you are required to make the disclosures, calls whereby 1638, you are called upon to make a disclosure of your finance charge, and the annual percentage rate, and you are supposed to do it precisely.
No one has given us any clue as to how if their economic theory not shared by Congress is correct, how we are supposed to ascertain it, what we have been told is that the Federal Reserve Board doesn't know how to ascertain it and that the whole committee of homers, who opposed these regulations didn't know how to do it.
But we must in hundreds of thousands of transactions each year, do it at (Inaudible) of a liability of $100 to every customer and if criminalized.
Now, it is true that the Federal Reserve Board has suggested not by regulation but by the way informally, in the Solicitor General's brief said, well maybe you don't have to disclose the finance charge and the percentage rate, after all if it’s hard to do.
How that waiver of the requirements of the Act, furthers the purposes of the act, as having brought within the ambit of the Act, a large class of people who everyone thought didn't have finance charges and then say, well you don't have to disclose your finance charges after all.
How that furthers the purpose of the disclosure of credit terms, I don't really see.
But whether or not the statement by the board that you don't have to make those disclosures would bind Mrs. Mourning in her suit or any of the other people who brought suit or indeed would bind any Grand Jury that wanted to begin a criminal proceedings under this Act.
Justice Potter Stewart: Well, I found Mr. Rifkind that it was now at least declared relatively that, that had it been an entire cash transaction, it would have been a lower amount of total cash?
Mr. Robert S. Rifkind: No, sir.
Justice Potter Stewart: I thought that was in the briefs stated --
Mr. Robert S. Rifkind: Let me say that--
Justice Potter Stewart: Family Publication Service would have done it and 7, subsection 7 of 1638(A), subsection 6, I mean, says that the finance charge maybe designated as a time price differential so to that extent, it would not be an impossible or unrealistic requirement.
Mr. Robert S. Rifkind: If we had a time price differential, that is correct.
Justice Potter Stewart: Well then -- if I misunderstood that--
Mr. Robert S. Rifkind: Just a second, just to finish with the Act, I just have one last section to call your attention to the Act, the section under which this suit actually arise is 1640, finally wraps it all up by saying that if you violated, if you failed to make the disclosures, the liability imposed is twice the amount of the finance charged in connection with the transaction.
So, Congress apparently thought that the finance charge was there and that it was sufficiently ascertainable to be used as a convenient measuring rod for the really penalties.
It's not -- it's not a compensatory, it isn't damage, it's a penalty.
Chief Justice Warren E. Burger: Isn't it a very big penalty in the circumstances, is it?
Mr. Robert S. Rifkind: If you multiply it by 250,000 customers then it is a staggering penalty.
Chief Justice Warren E. Burger: Well, such as what amount, have you suggested the amount in your brief other than saying it was a staggering amount?
Mr. Robert S. Rifkind: Well, they say that they are entitled to the minimum amount of $100 per person, 250,000 customers a year that's $45,000,000.
Chief Justice Warren E. Burger: Congress, certainly was capable of making that calculation, was it not?
Mr. Robert S. Rifkind: Yes.
Chief Justice Warren E. Burger: It's something like trouble damages and.
Mr. Robert S. Rifkind: As far as Congress, Robinson, Harman in another case as where Congress left though the act clearly didn't apply.
Let me go now to the -- what you are raising Mr. Justice Stewart.
Our footnote concerning that our discovery quite late in the day, I can see it as a matter of fact after our selling operations apparently had closed down.
That in some few instances, there was indication that some customers who pay cash did not pay the full price.
I thought candor required me to call but to the court's attention but I think it is also totally irrelevant.
The complaint in this action, indeed the second amended complaint does not allege that there was a finance charge.
The case was presented in the District Court on the plaintiff's notion for summary judgment on the proposition that it didn't make any difference whether there was a finance charge or not and the plaintiff had no interest in proving it because he relied entirely on Regulation Z.
The District Court didn't find that there was a finance charge, the Court of Appeals didn't find that there was a finance charge and I don't think at this stage of the game, the plaintiff can now rely on the proposition that maybe there was a finance charge there.
That isn't the case that's presented.
I will say that if there were a finance charge in the transaction, Regulation Z is wholly irrelevant.
We are clearly responsible to disclose it and liable.
Justice Potter Stewart: That is -- it is also clear that there was an extension of credit?
Mr. Robert S. Rifkind: To me, it is perfectly clear that there was not.
Justice Potter Stewart: Then what did that the District Court say?
Mr. Robert S. Rifkind: The District Court said that the letters written after the contract, the dunning letters written to Mrs. Mourning, evidenced that, it was credit that the non-cancelable provisions of the contract, the statement of the contract was non-cancelable, needed a credit of transaction.
And it's one of the ground that the -- I think there is an exemplary of the grounds he went on, he certainly did not rely on the proposition that FPS, Family Publication Service had incurred cost and paid money to publishers which -- there is nothing in the record to support except these dunning letters.
Justice Potter Stewart: Did the District Court say that the defendant has extended consumer credit within the meaning of the Truth in Landing Act?
Mr. Robert S. Rifkind: Yes, he did.
Justice Potter Stewart: Is that a finding or not?
Mr. Robert S. Rifkind: I think that's a conclusion of law.
Justice Potter Stewart: And what he decided -- he concludes, whatever you want to call it anyway?
Mr. Robert S. Rifkind: Yes, he did.
Justice Potter Stewart: And that was tried out.
Mr. Robert S. Rifkind: There was no trial.
Justice Potter Stewart: I know it was on affidavits, wasn't there?
Mr. Robert S. Rifkind: There were affidavits.
Justice Potter Stewart: So they were matters besides the pleadings taken into account.
Mr. Robert S. Rifkind: Only the dunning letters that have been described.
Justice Potter Stewart: Well, the answer is yes then.
Mr. Robert S. Rifkind: Yes.
Justice Potter Stewart: And so there was -- and the court did enter a summary judgment.
Mr. Robert S. Rifkind: That is correct.
Justice Potter Stewart: And in the course of that, he said that.
Mr. Robert S. Rifkind: Yes.
Justice Potter Stewart: Now did the Court of Appeals do anything about that?
Mr. Robert S. Rifkind: The Court of Appeals did not reach the question as all the parties here agree.
Justice Potter Stewart: So are you suggesting that we should decide the case on the basis of, there wasn't that credit transaction?
Mr. Robert S. Rifkind: I think that on the -- since the only document that is relevant, is an document that all of the parties, I think concede as an unambiguous contract and that is, that is what tells you whether it's a credit transaction as a matter of law or not.
That this Court could readily proceed to determine that this was not a credit transaction.
Justice Potter Stewart: The regulations certainly doesn't make any relevant whether it was a credit transaction?
Mr. Robert S. Rifkind: Well.
Justice Potter Stewart: It does with respect to the finance charge.
Mr. Robert S. Rifkind: It does and I must say as I read some of the opinions that have been issued by the Federal Reserve Board, they seem to be reading out the credit requirement of the Act as well.
Justice Potter Stewart: The regulations doesn't seem to.
Mr. Robert S. Rifkind: It's not the regulation, it's more the regulation as applied that lead to reading it out because what they keep saying that they are interested in is disclosing the sum total of installment payments and they have gone after getting the statement of the sum of installment payments to be disclosed but installment agreements, not all installment agreements, are credit agreements and that's perfectly fundamental, and I think the Federal Reserve Board has lost track of that.
An example was given in one of the hearings --
Justice Potter Stewart: But maybe not in this case.
Mr. Robert S. Rifkind: I think they have lost track of it in this case too.
I should say that the government below declined to take a position of whether it was credit and expressed no opinion at all, in its amicus participation.
Perhaps that was why Fifth Circuit never reached the question.
I am not quite clear what position I take on the credit question here, it seems to me quite clear, if you look at the opinions, opinion letters that the board has issued that they are reading out diminishing the requirement of credit in these installment contracts.
Now that's the underlying rationale of what they are trying to do here.
They keep telling us, you don't have to disclose the finance charge that would be too hard.
But what you have to disclose is the sum total of installment payments.
Justice Potter Stewart: Was there an objection to deciding the case on summary judgment?
Mr. Robert S. Rifkind: No we were cross motions for summary judgments.
Justice Potter Stewart: Well, wasn’t one of the relevant question in the case of whether or not there was a credit transaction?
Mr. Robert S. Rifkind: Yes sir.
Justice Potter Stewart: But you say that that was a really a legal question on which you really couldn’t find anymore facts other than the contract and the letters may be?
Mr. Robert S. Rifkind: That's right, that seems to me that the contract on its base is really the answer to whether or not it is, that's what the district judge thought too, he said the acceleration cost, their brand, I have forgotten, the non-cancel of the provision and perhaps also the dunning letters, came together to support that conclusion.
Justice Potter Stewart: But wouldn't have it been rather relevant on that question to know what the rearrangements were between Family Publications and the publishers?
Mr. Robert S. Rifkind: No I don't think so--
Justice Potter Stewart: Let’s assume for the moment they actually had paid the publishers, a sum of money on behalf of the customer.
Mr. Robert S. Rifkind: I would think that when I go to buy a car on time from General Motors' dealer, it really whether my relationship with him is a credit relationship, doesn't depend upon whether he has already bought the car from General Motors and he has been holding it or he plans to buy in the future from General Motors.
It seems to me the question is, is he extending the credit, not what he is doing with his money, how he raises his money.
Justice Harry A. Blackmun: Well it certainly -- I mean otherwise, you would think as Mr. Justice Stewart told someone else have brought out, it might be that the buyer was extending credit to the publisher, paying in advance for his service.
Mr. Robert S. Rifkind: The buyer is extending credit to the publisher that is exactly what is happening here.
Justice Harry A. Blackmun: Well not if the intermediary Family Publications has already paid the publisher, that's why I say the fact that might be a irrelevant fact.
Mr. Robert S. Rifkind: The District Court didn't hear--
Justice Harry A. Blackmun: May be you have forgotten about fact that we say it must be on the plaintiff side not yours?
Mr. Robert S. Rifkind: Well, our answer to the complaint did say at no point during the life of the contract has defended, that's FPS paid money to a third person or supplied goods or services to the customer for which reimbursement is expected from the customer in the future.
The fact of the matter is that we paid magazine publishers after we received payment from the customer, and that is not clearly established in the record, but District Court thought it was irrelevant, and not necessary to its conclusion, and I think the grounds on which the district court relied are legal error.
Justice Thurgood Marshall: Assuming that by everything you say up to the point as a fact that once she misses one payment, she is trouble.
For example, if you only pay $3 a month or three, $1 book, that might not be credit.
But if the contract provides that you must do that for three years and failure to make one installment accelerate, isn't that an entirely different --
Mr. Robert S. Rifkind: Well, Mr. Justice Marshall, one of the reasons for acceleration clause is precisely that we did not care to become creditors; we wanted to be paid in advance.
Justice Thurgood Marshall: All of it?
Mr. Robert S. Rifkind: We were willing to be paid at sort of double the rate -- but if they fell into the pot we wanted the whole amount in advance but we didn't want to be sending magazines to people who had not paid us.
Justice Thurgood Marshall: So that when they pay their whole amount, if they had a credit relationship then?
Mr. Robert S. Rifkind: Yes we would be substantially in Mrs. Mournings' debts.
She would have paid us $122, three magazines.
Justice Thurgood Marshall: Isn't that in the original contract?
Mr. Robert S. Rifkind: That is in the original contract, it says--
Justice Thurgood Marshall: Then why isn't that a contract of credit, since it's in the contract?
Mr. Robert S. Rifkind: Well, if it's credit running from Mrs. Mourning to us the Act doesn't apply because it only applies the other way around.
Justice Thurgood Marshall: Well I didn't agree for that.
Mr. Robert S. Rifkind: Yes, the answer is it applies only to consumers.
Chief Justice Warren E. Burger: Mr. Refkind early in your colloquy with Mr. Justice White I thought I heard you say that on the record as it now stands the Court was in a position, this court is in a position to reach a determination that there was no credit transaction, that was the sentence essentially?
Mr. Robert S. Rifkind: Yes.
Chief Justice Warren E. Burger: On this record could we reach the contrary determination?
Mr. Robert S. Rifkind: I think that on this record, it will at least to be remanded to the Fifth Circuit to consider the question.
It seems to me there is a difference between affirming with the Fifth Circuit on another ground that it didn't reach and reversing it on a ground that it didn't consider.
Chief Justice Warren E. Burger: Even if it's a pure question of law that would be the --
Mr. Robert S. Rifkind: I think it would be more conformable to the normal practice of the court in those circumstances to remand it to Fifth Circuit and that may be in the last analysis you have to remand it to the District Court for an evidentiary examination of the question.If I am right then you can answer the question on the face of the contract, it seems to be, it can be answered here as well as in the other court.
Justice Potter Stewart: Well isn't that strange for the court to figure that it must invalidate the regulation unless it assumes that the fact that triggers the regulation is it present in the case?
Mr. Robert S. Rifkind: I could see the court saying that it ought to reach the credit argument first, I think it was thrown off that normal course--
Justice Potter Stewart: Was that in major litigation before the Court of Appeals?
Mr. Robert S. Rifkind: It certainly was, argued late, I think the thing that may have deterred from deciding it, is that justice department came in and said we must have a ruling on the validity of regulation.
We express no opinion on the credit question.
Justice Potter Stewart: And they got it?
Mr. Robert S. Rifkind: Just to pursue the credit question once more in the legislative hearings, I think the Chairman of Federal Trade Commission was asset to the Senate Committee.
Suppose I hire my neighbor's son to come in each Saturday and mow my lawn and suppose I agreed to pay him a dollar each Saturday after he has done it.
Is that a credit transaction?
And after a lot of legal talk, the answer was no, there was no finance charge and there was no credit, so I understand.
That seems to me a perfectly normal, healthy example of an installment arrangement in which both sides are contractually obligated to continue rendering performance over a substantial period of time, but not a credit transaction, because --
Chief Justice Warren E. Burger: But where is the enforceability of this long going operation as compared to the enforceability here?
Mr. Robert S. Rifkind: Well I suppose that the shrewd youngster would say now Mr. Gentleman before I agree to mow your lawn and forgo mowing other people's lawns this summer, I want you to write me a promise that you will pay me a dollar every week, I don't want you to move it off to the seashore and leaving the — without a lawn to mow.
Justice Thurgood Marshall: How long ago was that somebody mowed a lawn for a dollar?
Mr. Robert S. Rifkind: I confess I don't have a lawn just about sure.
The analogy to our case is I go to my news stand and say to the, maybe on safer ground and say to my news dealer I would like to get the Manchester Guardian on Friday.
He says I am sorry I will only get it for you if you will promise to come in and pay me every Friday.
I said sure and he does it.
Now we are bound, he may be bound for a year or two years or whatever deal I make for it, but neither of us has extended a credit to the other.
Now, if he was a (Inaudible) news dealer, as FPS was and said, look, how do I know you are good to me, you pay me on Monday and I will have Manchester Guardian for you here on Friday, a fortiori, no credit has been extended to the consumer, to me.
By the contrary I have extended credit to the news dealer and that is exactly what happens in the FPS transaction.
Chief Justice Warren E. Burger: Well that's certainly true on a prepaid subscription to the publisher himself but this was a tripod type arrangement and it has been suggested that payment was made by your client to the publisher and your client thereby became creditor of Mrs. Mourning.
Mr. Robert S. Rifkind: There is nothing on the face of the contract that it would suggest that it was a tripod type --
Justice William J. Brennan: Well you are not a publisher of the magazines, your client were?
Mr. Robert S. Rifkind: Yes, that is correct, but neither is the departments or the manufacturer must do things as loyal department store.
Chief Justice Warren E. Burger: But most of them have a gradient stock and make delivery don't they?
Mr. Robert S. Rifkind: They do.
Chief Justice Warren E. Burger: FPS has nothing except probably a general understanding that when as and if they send in a subscription with some money on some terms, contract will then occur.
Mr. Robert S. Rifkind: I think the key thing though is that if the magazine doesn't get delivered it is perfectly clear that FPS is liable, not the magazine publisher.
This is not a subscription with the magazine publisher, it is a subscription with all the rights flow from FPS to the customer and indeed serious problems have arisen where for example the Saturday Evening Post, or Look magazine closes down.
It is the PDS it is called, Pay During Service magazine sales organization that may well be left holding the bag, unable to perform a contract which it undertook to perform.
There is nothing except for the fact that it says delivery will come from the publisher's office.
Justice William J. Brennan: I suppose your client either makes money or the finance charge or it's a discount from the magazine.
You are not in business for nothing?
Mr. Robert S. Rifkind: No we are not the required to be.
Justice William J. Brennan: So on one end you are making money of one end to the other, either in your purchases or on your sales?
Mr. Robert S. Rifkind: We charge customers more than we are charged by the magazine publisher, exactly right.
Justice William J. Brennan: But you are an independent organization?
Not part of the merchandising arrangement of the magazine itself.
Mr. Robert S. Rifkind: That is right.
Justice Potter Stewart: But you are not an agent; you are not an agent.
Mr. Robert S. Rifkind: We are not an agent.
It happens that FPS is on wholly on subsidiary typing, but it deals in the magazines of a lot of publishers as well as (Inaudible).
Chief Justice Warren E. Burger: You suggested I think earlier there is no primitive contract between Mrs. Mourning and the magazine, but if promptly as was contemplated after the making of this contract, FPS did contract with the magazine, would Mrs. Mourning be possibly a third party beneficiary who could enforce that contract?
Mr. Robert S. Rifkind: Well, I think that would be difficult.
Chief Justice Warren E. Burger: Well I am speaking in just the pure legal terms.
Mr. Robert S. Rifkind: Yes.
I think not because in fact the arrangements with the magazine publisher sort of invoke not just as I understand for Mrs. Mourning but for some substantial group whatever came in that week and I don't know whether she had a pro-rata interest in that, may be as a member of class she does.
I think though that, go back to the Manchester Guardian, my news dealer didn't have it in stock either, he had to order it in some place but that didn't make him my creditor.
Similarly, here the fact that FPS doesn't have the magazine or the newspaper in stock doesn't make FPS a bank in a relationship between Mrs. Mourning and Holiday.
I also urge that the court may feel that it has to reach the credit issue in all events here because assuming that the government's thesis that somehow there is always a finance charge buried in credit transactions, assuming that has any validity the Four Installment Rule even under that theory could not logically or rationally extend to non-credit situations and if that's what they mean, they mean really to all installment contract situations where there is no necessary or logical implicit finance charge then it means to me the rule has to be over broad by all text.
Thank you very much.
Chief Justice Warren E. Burger: Thank you Mr. Rifkind.
I think all of your time is consumed on the other side.
The case is submitted.