Opinion
Civ. No. 96 C 4348.
February 24, 2000.
MEMORANDUM OPINION AND ORDER
Plaintiff Dennis Sampler, Jr., brought this class action against defendants City Chevrolet Buick Geo, Inc. ("City"), City finance manager Al Ravin, and Auto Capital Enterprise ("ACE") alleging that they included hidden finance charges in the price of vehicles sold on credit. Count I of the Second Amended Complaint alleges that these charges violated the Truth in Lending Act ("TILA"), 15 U.S.C. § 1638(a), and implementing Federal Reserve Board Regulation Z, 12 C.F.R. § 226. Count II alleges violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962. Count IV alleges violations of the Illinois
I. BACKGROUND
A. Factual Background
Defendant City Chevrolet sells up to seventy percent of its used cars on credit. Although City assigns all of its credit contracts to lending institutions, it sends high risk contracts to subprime lenders which purchase the contracts at an amount below their face value. The difference between the face value of a contract and the value at which it is purchased by a subprime lender is known as a discount or holdback. City assigns up to thirty percent of its used car financing contracts to subprime lenders.
On March 16, 1996, plaintiff Dennis Sampler purchased a used automobile from City Chevrolet on credit. He signed a retail installment contract with Mercury Finance Company stating that the price of the vehicle was $5,362 and was payable in twenty-four monthly installments of $248.18 with an annual percentage rate of 29 percent. A few days after plaintiff signed the contract, he learned that Mercury had turned down his credit application and that he needed to sign another credit agreement. On March 23, 1996, plaintiff returned to City and signed a retail installment contract with Auto Capital Enterprises ("ACE"). The ACE contract provided for a price of $5,200 with twenty-four monthly payments of $222.45 and an annual percentage rate of 34 percent. At $7,356.32, the total sale price under the ACE contract was thirty-two dollars higher than the sale price under the Mercury contract.
ACE typically purchases retail installment contracts from City at a discount of eight to twelve percent below the face value of the contract. When ACE receives a request from a dealer to bid on a retail installment contract, it returns a set of variable terms under which it is willing to purchase the contract. These variables include the term of repayment, the interest rate or "buy rate," and the amount of the discount. At its option, the dealer may fix the interest rate in the customer's retail installment contract at up to five percent above the buy rate set by ACE. ACE then returns half of the additional interest to the dealer. City recovered between $113 and $119 from splitting the difference between the buy rate and the APR on plaintiff's contract sold to ACE.
City prepares a "manager sheet" for each transaction which lists the cost of the lender discount and any warranties. The manager sheet is completed by a salesperson and manager before the deal is sent to the financing office for approval. When the deal is finalized. City prepares a recap sheet which lists the price that City paid for the car and any additional dealer costs. In a section of plaintiff's manager sheet identifying "Additional Equipment Shown on Order," a sales manager listed a holdback of $410 and a warranty of $95. The deal recap sheet listed the profit on plaintiff's vehicle as $196, a figure derived from the purchase price of $5,200 less costs of $3,755 and less an overallowance of $1,249 on plaintiff's trade-in. Although the financing discount was included in the costs of plaintiff's vehicle, it was not separately disclosed to plaintiff.
When plaintiff's car began to overheat four or five days after he signed the ACE contract, he returned it to City for repairs but was told to come back another day. Although the vehicle was still within its thirty-day or thousand-mile limited warranty when it was initially tendered for repairs, the warranty had lapsed by the following day and plaintiff was obliged to repair the overheating problem at his own expense. Since then, plaintiff's vehicle has had problems with its alternator, brake lights, headlights, starter, heating system, air conditioner, power steering, axles, and belts.
B. Procedural Background
On July 17, 1996, plaintiff filed a lawsuit alleging that City routinely passes on the cost of lender discounts to its customers as a hidden finance charge. Following dismissal of the action for failure to state a claim, plaintiff filed a Second Amended Complaint on October 22, 1996. On July 8, 1997, the court certified a class of plaintiffs including all persons who signed a retail installment contract to purchase a vehicle from City, whose transaction was documented as a consumer credit transaction, and for whom the finance company did not pay City the full amount financed. On October 29, 1997, the court certified a subclass consisting of all members of the City class whose contracts were assigned in whole or in part to ACE. On April 17, 1998, the Court approved a final settlement agreement as to all members of the ACE subclass, an agreement which resulted in the dismissal of Counts III and V of the Second Amended Complaint and all pending claims against defendant ACE. Defendants City and Ravin filed a motion for summary judgment on all of the remaining claims.
On May 20, 1998, this Court granted summary judgment to Defendants with respect to Counts II, VII, and VIII of the Second Amended Complaint. Subsequently, the parties filed cross motions for reconsideration urging the Court to modify its memorandum opinion and order with respect to the TILA claims — Counts I and IV of the Second Amended Complaint. On August 5, 1998, the Court granted Defendants' motion to reconsider its May 20, 1998 ruling with respect to Counts I and IV. The Court amended the May 20, 1998 ruling and thereby granted Defendants' motion for summary judgment on Counts I and IV. The Court then dismissed Count IX for want of jurisdiction and the case was terminated. Plaintiff filed a notice of appeal and the case was transmitted to the Seventh Circuit.
On October 5, 1998, Plaintiff filed with this Court a motion for relief from judgment pursuant to Fed.R.Civ.P. 60(b) and Circuit Rule 57, urging the Court to reconsider its May 20, 1998 ruling as amended by the August 5, 1998 order, in light of the Seventh Circuit's decision in Walker v. Wallace Auto Sales, 155 F.3d 927 (7th Cir. 1998). Plaintiff posited that the Court's rulings were inconsistent with the holding in Walker. On January 11, 1999 the Court granted Plaintiff's Fed.R.Civ.P. 60(b) and Circuit Rule 57 motion and the Seventh Circuit remanded jurisdiction to the District Court for the purpose of modifying the judgment pursuant to Circuit Rule 57. The parties are now again before the Court on cross motions for summary judgment in light of the Walker decision.
II. DISCUSSION
Summary judgment will be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the "initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The nonmoving party must then come forward with specific facts demonstrating that there is a genuine issue for trial. Fed.R.Civ.P. 56(e). The court must review the evidence and draw all permissible inferences in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
A. "Separately Imposed" Defined
The central issue of the instant cross motions for summary judgment is whether City separately imposed a hidden finance charge on Sampler by recouping the cost of the subprime discount in an manner which would require disclosure under TILA. The Court previously resolved this question by finding that a discount cost is not separately imposed on a plaintiff unless the discount is added as a separate and distinct line item to the negotiated price of a car sold on credit. Sampler v. City Chevrolet Buick Geo, Inc., 1998 WL 292389 (N.D.Ill. 1998). The Court reasoned that because the discount cost was not a distinct line item on Sampler's contract, the cost was not separately imposed on Sampler and City need not have disclosed it to Sampler.
However, the Seventh Circuit's recent decision in Walker v. Wallace Auto Sales articulates the opposite view. 155 F.3d 927 (7th Cir. 1998). In Walker the Court reviewed de novo the district court's decision to dismiss Walker's claim that Wallace Auto Sales recovered the cost of a subprime discount by passing the cost of the discount on to Walker as a hidden finance charge in violation of TILA. The district court in Walker held that the plaintiffs failed to allege Wallace "separately imposed" the cost of the discount on plaintiffs within the meaning of TILA, because plaintiffs did not allege the discount cost did not appeared separately on the face of the contract. Id. at 933, n. 9. TheWalker Court rejected this definition of "separately imposed" and instead stated:
Acceptance of [the district court's] view would . . . eviscerate TILA's stated purpose to `assure a meaningful disclosure of the credit terms so that the consumer will be able to compare more readily various credit terms available to him and avoid the uniformed use of credit.' By contrast we believe that the term `separately imposed' must be interpreted in a manner consistent with TILA's purpose of ensuring that consumers are informed fully of the costs of buying on credit.
Accordingly we hold that a charge should be considered `separately imposed' on a credit consumer when it is imposed in credit transactions but not in cash transactions. Id. at 934.
In light of Walker, the Court now modifies its prior rulings to reflect the view that a discount cost shall be construed as a separately imposed finance charge if the charge is imposed on credit but not cash transactions. If an auto dealer recoups the discount cost of subprime lenders by either imposing it directly upon the individual buyer, or by aggregating the costs of such discounts generally and inflating the price of cars sold on credit but not cars sold for cash, then the auto dealer has imposed a finance charge upon credit buyers, and the dealer is required by TILA to disclose the discount cost to the purchaser. However, if the dealer recoups the cost by raising the price of all its cars, cash and credit alike, then the discount becomes a "cost of doing business" and need not be disclosed to buyers. Id.
Thus, in the instant case, three scenarios are contemplated by the Walker distinction: (1) City directly recouped the cost of the discount by increasing the price of Sampler's car by at least $410 to cover the discount while preserving the same profit margin; (2) City has a practice of inflating the price of cars bought on credit, but not cars bough with cash, to recoup the cost of subprime discounts, and in accordance with this practice Sampler's car's price was thus inflated; or (3) City inflates the price of all of its cars to recoup the cost of subprime lending so that the burden is evenly distributed between cash and credit customers alike. Of these three scenarios, only the third scenario exempts City from the disclosure requirement. If Plaintiff is able to prove either scenario one or two, then Defendants are in violation of TILA for failure to disclose the discount cost to Sampler.
B. Standard of Proof
Having determined what factual scenarios Plaintiff must prove in order to demonstrate a TILA violation in the instant case, the Court now turns to the question of how Plaintiff may prove that one of the two improper scenarios occurred.
Defendants argue that in order for Plaintiff to prevail under either scenario, Plaintiff must show that the exact car, or a virtually identical car to the one bought by Sampler was sold for cash for less money. Defendants contend that even were Plaintiff attempting to demonstrate the second scenario, that is that City imposed discount costs on credit buyers, including Sampler, but not cash buyers, Plaintiff would have to prove that another car identical or extremely similar in make, model, mileage, color, and condition was sold to another customer for cash for less money. The parties and the Court are in agreement that meeting such a standard would prove extraordinarily vexing given the myriad of variables which are relevant to the value of a used car. It is perhaps not an overstatement to postulize that, practically speaking, achieving such standard of proof would be just shy of impossible. It seems to the Court fairly improbable that a particular car dealership would happen to have a car which could serve as a market clone to Plaintiff's car, indistinguishable by even color or condition and that the clone car was sold, for cash, within a close enough time frame as to allow for a meaningful comparison to the sale of Plaintiff's car. Under Defendants' analysis if City didn't happen to have a remarkably similar car, let alone sell the clone car for cash, Sampler would absolutely be precluded from proving that the discount was separately imposed upon him as an undisclosed finance charge.
In support of this position Defendants rely on Hoffman v. Grossinger, 1998 WL 547312 (N.D.Ill. 1998). Hoffman states:
In reaching this conclusion, we recognize, as did the Magistrate Judge, the problems of proof involved here. The theory of recovery in this case hinges on the alleged price differential in credit as opposed to cash transactions, i.e. Hoffman must prove, at a minimum, that cash consumers are treated better than credit consumers and that the dealer has "separately imposed" the entire amount of this price differential or discount on a particular consumer. To distinguish a "comparable cash transaction," Hoffman will have to demonstrate that a vehicle nearly identical to the one she purchased was, or would have been, sold to a cash-paying customer for less money. While it may be difficult for Hoffman to establish these facts, these are questions that go to the merits of the case. Hoffman v. Grossinger, 1998 WL 547312 *7 (N.D.Ill. 1998)
However, we find that the Hoffman analysis is only applicable to the first of the three possible discount cost recuperation scenarios: the scenario in which Plaintiff alleges that cost of the discount was directly included in the negotiated price of his vehicle. Hoffman, like our own previous decision in this case, predates Walker, and does not contemplate the second possible scenario as articulated by Walker in which Plaintiff alleges the indirect imposition of cost by Defendants. Walker v. Wallace Auto Sales, 155 F.3d 927 (7th Cir. 1998). Hoffman v. Grossinger, 1998 WL 547312 (N.D.Ill. 1998). Compare, Hoffman v. Grossinger, 1999 WL 1144914, *7 (N.D.Ill.) (finding in light of Walker, that, "while it is true that the plaintiff has failed to meet the requirement imposed by Judge Andersen [in Hoffman v. Grossinger, 1998 WL 547312], this Court is of the opinion that her failure is the sole reason for granting summary judgment in the defendant's favor.")
Under scenario two, Plaintiff need not necessarily show that the price of his car was specifically inflated $410, but may show instead that City discriminates between cash and credit customers when passing on the costs of subprime discounts, and that Sampler suffered such an imposition. Indeed, Sampler is so alleging. Here, Plaintiff is asserting his TILA claim under the theory that City employs this discount cost-spreading among credit buyers. Thus, while Defendants may be correct in asserting that theHoffman analysis is appropriate where a plaintiff alleges solely scenario one, it is not very helpful in the instant case.
Further, the Court feels that Walker mandates a departure from the Hoffman analysis for a second reason. The Walker Court specifically identified the type of conduct alleged by the instant Plaintiff as falling within the fold of behavior TILA seeks to reach. In Walker the Seventh Circuit has made clear that if City is imposing discount costs on credit customers only without disclosing the cost to them, then City is guilty of imposing precisely the type of hidden finance penalty that TILA seeks to uncover. Walker v. Wallace Auto Sales, 155 F.3d 927 (7th Cir. 1998). Were the Court to now find that Plaintiff must meet a virtually impossible standard of proof, we would essentially be espousing the view that although TILA was enacted to relieve this character of wrong, TILA is, in application, impotent to redress this ill because this character of wrong-doing is uniquely difficult to prove. To so hold would be to cloak the potential malfeasor while providing a fertile ground for the imposition of hidden finance costs. The Court believes such an understanding to be inconsistent with the purpose of TILA and the articulated position of our Circuit Court.
While Walker makes clear the test to be applied: whether City increases the prices of cars bought on credit and not cars bought with cash, it is not clear what manner of proof is sufficient to make such a showing. Walker itself concerned the resolution of a motion to dismiss, and thus Court did not reach the issue of the standard of proof necessary to prevail on summary judgment. Finding no further binding authority on this issue and having articulated its rationale for departing from Hoffman, the Court finds that Plaintiff may prevail on his TILA claims to the extent he can sufficiently prove: (1) City sets the negotiated price of cars it anticipates will be purchased on credit high enough to cover the cost of a discount and maintain a profit margin comparable to the profit margins made on cash cars; (2) City does not similarly raise the prices of cars sold for cash; (3) City does not disclose the discount to credit customers; (4) City anticipated a discount when negotiating the price of Sampler's car; (5) City did not disclose the discount to Sampler.
Still the question remain what manner of proof is sufficient. This Court finds that Plaintiff is, in essence, attempting to prove a form of discrimination. Plaintiff is trying to demonstrate that City treats its cash and credit customers differently, and short of requiring Plaintiff to get Defendants to admit to the alleged discrimination, or finding an identical car as discussed above, the methods of proof available to Plaintiff to prove his case are theoretically analogous to the methods of proof available to a Plaintiff seeking to prove any form of discrimination. Of course, the Court would make clear that obviously there are substantial difference between judicial approaches to other forms of discrimination, such as housing discrimination, and the type of discrimination alleged here. Housing discrimination is malum in se, and implicates Equal Protection concerns and fundamental rights. In contrast, the discrimination the plaintiff at bar would prove is merely malum prohibitum absent TILA disclosure. Here, Plaintiff is simply trying to establish an element of his claim, the discrimination is not the claim itself. However, the analogy is helpful in considering the inherent difficulties of unearthing through direct evidence something as insidious and necessarily subjective as discrimination. This Court finds that it is permissible for Plaintiff to prove discrimination by a preponderance of the evidence, both direct and indirect, including, but certainly not limited to: (1) direct evidence that City deducts the price of discounts from its profits on subprime cars but not cash cars; (2)a strong statistical showing demonstrating that City's profits on cars bought with subprime credit are equal to or higher than City's profits on cars bought with cash (potentially indicating that City does not merely absorb the costs of discounts on a particular subprime transactions by accepting lower profits from those transactions); and, (3) evidence that City's sales managers know that a particular customer is going to require subprime financing prior to setting a final price for the car in question.
It occurs to the Court that an effect method of proving the discrimination alleged by Plaintiff would be to have "testers" approach a dealership and separately bid for the same car, one putative customer offering cash, another requiring subprime lending. See generally, Havens Realty Corp. v. Coleman, 455 U.S. 363, 373 (1982).
Indeed, here Plaintiff has attempted to do prove his case through a preponderance of both direct and indirect evidence as described above. Plaintiff argues that City's internal manager sheets and recap sheets prove that City recoups the cost of discounts dollar for dollar from its subprime customers. Plaintiff further argues that the fact that the entire price of the holdback is listed on the managers sheets as a cost of subprime customers' cars and not on cash customers' cars, proves that the entire cost of the discount is passed on only to subprime customers, rather than spread among cash and credit customers alike. Further, Plaintiff asserts, and City disputes, that City's profit margin on subprime cars is higher than City's profit margin on cash cars, indicating that City is not merely absorbing the cost of the discount and retaining a lower profit on subprime cars. Finally, Plaintiff argues that City knows of the general rates of discount charged by subprime lenders and can reasonably approximate the amount of holdback to anticipate in a particular transaction.
Plaintiff offers evidence that City's profit margin on subprime cars is 11%, as compared to cash cars, at 6%. Defendants dispute Plaintiff's statistical compilation and interpretation.
The Court finds that there are material facts in dispute between the parties, and that Plaintiff has made presented sufficient evidence to survive summary judgment. Based on the evidence before the Court, reasonable minds could disagree on the question of whether City charges subprime customers more for their automobiles to recoup the cost of discounts, and the Court finds this to be a question of fact to be resolved by a jury. Therefore, summary judgment cannot be entered for either party and this matter must proceed to trial.
ORDERED: Cross motions for summary judgment are denied.