Michael Shroder v. Suburban Coastal Corporation , 729 F.2d 1371 ( 1984 )

JAMES C. HILL, Circuit Judge,

concurring in part and dissenting in part:

I concur in the majority’s resolution of the class certification question. I cannot, however, agree that the lender here has violated the Truth-in-Lending Act. Therefore, I dissent.

I begin by emphasizing that nothing I write here is intended as less than full endorsement of the worthy aims of Truth-in-Lending. Nothing I write is intended as approval of calculated obfuscations by some lenders bent upon imposing unconscionable terms on unwary borrowers. My concern is that Congress undertook to create a clear crystal gem, but the administrators, regulators and adjudicators have carved so many facets upon the stone that its glitter now obscures its original beauty.

The Truth-in-Lending Act was written by a Congress with a beneficent purpose. Before this legislation became law, those consumers of credit who were unversed in the sophistry of money lenders were unable to shop around for the terms of credit best suited to their individual credit needs. Notes were complex, having been burdened with inkwells of legal jargon. Disclosure statements, now commonplace, were nonexistent. Even those familiar with the business of borrowing money were often hard pressed to decipher the terms of a particular credit transaction because of what was accurately labeled the “hidden costs of borrowing on time.”

A wide range of deceitful lending practices was exposed and deplored in the seven years of hearings conducted by the Congressional committees considering the need for this legislation. The House Report accompanying the TILA cited “add on” rates, which were estimated to understate the true cost of credit by as much as fifty percent, and additional service fees and charges, which were added to the finance charge but not disclosed to the borrower, as causing “confusion in the public mind about the true costs of credit.” H.Rep. No. 1040, 90th Cong., 2d Sess. 2 (1968), reprinted in 1968 U.S.Code Cong. & Ad.News 1962, 1970. Senator Sullivan, the principal sponsor of the bill that became Truth-in-Lending, spoke of the need to protect the credit industry against “unfair and dishonest competition from an unscrupulous minority engaging in practices which too often discredit credit and dishonor its ethics.” Id. at 1999-2000.

Congress reacted to these recognized inequities by passing the Truth-in-Lending Act. The Act’s purpose was stated in clear terms:

The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this subehapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.

15 U.S.C. § 1601(a) (1976).

However, somewhere between the Act’s statutory provisions, the Federal Reserve Board’s implementing regulations and the federal judiciary’s varying interpretations, TILA’s aim of “meaningful disclosure” has been lost. Congress, I submit, might have recently examined the TILA and quite rightfully lamented, “I beheld the wretch— the miserable monster whom I have created.” ¹ But unlike the fallen Doctor Frankenstein, Congress cannot accept the entire blame for this aberration. The Federal Reserve Board and the federal bench have supplied a good deal of mangled flesh to Congress’ creation. The present case dramatically illustrates the ugly results that can obtain in TILA litigation.

The “unwary” credit consumers suing here are Dr. Michael Shroder, a member of the learned profession of medicine, his wife, and Gregory Pillon, a title examiner in the law offices of Gregg Spieler. Gregg Spieler is an attorney seeking to represent all of the above and many more like them. What the Shroders and Mr. Pillon have in common, other than their choice of attorneys, can only be described as a lack of unsophistication. Mr. Shroder presumably spent several years in college and postgraduate study learning to analyze sources of information that are much more complex than the disclosure statement contested here. Mr. Pillon, as a title examiner in a law office, has probably achieved a high degree of sophistication in the review of materials similar to the document he now challenges in the course of his duties.

Mr. Spieler’s role in this case is interesting. As the attorney who represented the Shroders when they closed the transaction, Spieler reviewed the note securing the mortgage and the disclosure statement accompanying the note. Since the Shroders signed the note, Spieler must have been satisfied with the information provided by the disclosure statement. Certainly, he voiced no objections either before or at the time of the closing. Too, Spieler’s relationship with Pillon invites serious questions that touch not only upon the issue of class representation but also upon the notion of manufactured litigation. Pillon is the title examiner in Mr. Spieler’s law office.

These parties, through attorney Spieler, claim that the disclosure statement provided them by Suburban Coastal fails to comply with the TILA in several respects. The majority finds two violations: (1) the terms “finance charge” and “annual percentage rate” are not printed “more conspiciously than other terminology” required by the statute, a violation of Regulation Z, 12 C.F.R. § 226.6(a); and (2) the disclosure statement “discloses” a requirement of thirty days notice of prepayment of the principal, whereas the note sets no notice requirement, a violation of Regulation Z, 12 C.F.R. § 226.6(c). Although it describes the violations as “technical,”² the majority concludes, as it must, once it finds a violation, that the lender is subject to the full panoply of remedies afforded the “unwary” by the Act.

If we are to take the plaintiff’s microscopic view of this disclosure statement, then surely it is not inappropriate that we use a similar instrument when reading the statutory language that is said to have been violated. Regulation Z, 12 C.F.R. § 226.6(a), provides that two terms, “finance charge” and “annual percentage rate,” “shall be printed more conspiciously than other terminology required by this part ____” Section 226.6(a) does not require that those two terms be printed more conspiciously than all other required terminology. It merely requires the terms to be “more conspicious than other terminology,” a requirement that I find to be satisfied. The terms are in fact more conspicious than other required terminology — e.g., “finance charge” is more conspicuously printed than “charges excludable from the finance charge,” a term required by 12 C.F.R. § 226.4(c) and “annual percentage rate” appears more conspicuously than “total of payments,” a term required by 12 C.F.R. § 226.8(b)(4).³

My point is this: section 226.6(a) imposes no all-inelusiveness requirements on the “more conspicuous” provisions, although clearly the Federal Reserve Board could have written in just such a requirement. By not doing so, the Board left the provision ambiguous. I am unwilling to construe that ambiguity so as to find a violation where, as here, substantial, meaningful disclosure has been achieved and no “unwary” consumer has been misled.

The second violation found by the majority concerns the thirty-day notice of prepayment provision included in the disclosure statement but not required by the note. Of course, the borrower cannot be bound by the notice requirement since it was not made part of the note. Thus, the lender has advertised that its credit terms are, if anything, less attractive than those actually available.⁴ Given the choice between two offers of credit that are otherwise indistinguishable, the consumer might reject this lender’s note because the disclosure statement indicates a notice requirement not found in the other agreement. The lender’s error, it seems, lies in its failure to duplicate the terms of the note in its disclosure statement, not in a desire “to mislead or confuse ... or contradict, obscure, or detract attention from information required ... to be disclosed.” 12 C.F.R. § 226.6(c).⁵

The distinctions I have drawn are valid, if at all, for one reason. TILA litigation is becoming a game of “gotcha,” with the “unwary” credit consumer (or his attorney) holding many wild cards, the “sophisticated” money lender holding more rules and regulations than guiding instructions, and the “hypertechnical” federal bench holding up its hands in submission. The courts have quite rightfully, I believe, allowed private attorneys general to police the Act by bringing suits challenging insufficient disclosures. We have approved the desirability of class actions in TILA litigation and imposed sanctions where only one violation could be shown. None of this, however, dictates our countenancing the game of “gotcha” into which TILA is in danger of degenerating.

The “gotcha” game is giving us disclosure statements that, in seeking compliance with Regulation Z, are no more useful to credit consumers, wary or unwary, than the credit agreement itself. A quick perusal of the statement challenged here⁶ would hardly supply an ordinary consumer with the information necessary to test the credit market, but not because the disclosure is somehow inadequate. Rather, the inadequacy lies in the overload of information said to be required by Regulation Z⁷ and the various forms the information must take in order to meet Regulation Z's exacting standards. Ironically, the borrower fleeing from the obfuscation of the promissory note is offered haven in the obscure complexity of the disclosure statement.

Congress recently voiced its disapproval of the “gotcha” game by enacting the Truth-in-Lending Simplification and Reform Act, Pub.L. No. 96-221, Title VI, 94 Stat. 168 (1980).⁸ The Senate Committee Report accompanying the Simplification Act extolled the substantial benefits that followed passage of the original Act, but the Committee members could not ignore its shortcomings:

Despite the act’s clear successes, however, there is a growing belief among consumers and creditors alike that the act could be substantially improved. There is considerable evidence, for example, that disclosure forms given consumers are too lengthy and difficult to understand. . Creditors, on the other hand, have encountered increasing difficulty in keeping current with a steady stream of administrative interpretations and amendments, as well as highly technical judicial decisions. There is also evidence that many creditors have sincerely tried to comply with the act but, due to its increasing complexity and frequent changes, have nonetheless found themselves in violation and subject to litigation. In addition, this committee and other congressional and government sources have found the level of administrative enforcement by the Federal bank agencies seriously inadequate. In short, the committee believes that the interests of both consumers and creditors would be furthered by simplification and reform of the act.

S.Rep. No. 96-368, 96th Cong., 2d Sess. 2 (1980), reprinted in 1980 U.S.Code Cong. & Ad.News 236, 252.

The Supreme Court has voiced similar criticisms in recent years. For instance, in upholding the Federal Reserve Board’s view that the TILA does not uniformly require a lender to disclose the existence of an acceleration clause on the face of a credit agreement, the Court emphasized that, “Meaningful disclosure does not mean more disclosure. Rather, it describes a balance between ‘competing considerations of complete disclosure ... and the need to avoid ... [informational overload].’ ” Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568, 100 S.Ct. 790, 798, 63 L.Ed.2d 22 (1980) (citations omitted) (emphasis in original); see also Ford Motor Credit Co. v. Cenance, 452 U.S. 155, 159, 101 S.Ct. 2239, 2241, 68 L.Ed.2d 744 (1981) (rejecting as “formalistic” rule requiring disclosure of credit assignee’s status as “creditor” where buyer notified of assignment of credit). This circuit, though no less guilty of rendering the “highly technical judicial decisions” criticized by those in Congress who reviewed the Simplification Act, has also spoken against the “flyspecking” that pervades TILA litigation. As Judge Brown wrote,

Strict compliance does not necessarily mean punctilious compliance if, with minor deviations from the language described in the Act, there is still a substantial, clear disclosure of the fact or information demanded by the applicable statute or regulation.

Smith v. Chapman, 614 F.2d 968, 972 (5th Cir.1980).

In this case, the lender made a “substantial, clear disclosure” of the required terms. Anyone desiring to shop for credit could have easily determined the amount of the “finance charge” and the “annual percentage rate.” The thirty-day notice provision stated in the disclosure form only hurt the lender’s chances of securing the borrower’s business, it did not prevent anyone from credit shopping.

In spite of the admonition in Smith v. Chapman, appellants urge punctiliousness upon us. We cannot examine only the disclosure statement with such precision; similar precise reading of the regulation results in a finding that the statement complies.

APPENDIX A

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1 . Mary Wollstonecraft Shelley, Frankenstein, ch. 5.

2 . I am here reminded of a ruling that Judge J. Wilson Parker once made from the bench after I, then a young lawyer trying my first case, objected to his decision to grant my opponent a new trial. I complained that Judge Parker was resting his decision on a mere technicality. His ruling remains with me now: "Mr. Hill,” he said, "a technicality is a rule of law upon which you lose. Should you win, it then becomes a cornerstone of American justice!" Even Judge Parker, I venture, would scoff at the “hypertechnical” nature of the TILA violations found in this case.

3 . The Federal Reserve Board, had it desired to do so, could have written Regulation Z as the majority today reads it. By itself, however, the phrase “more conspicuous than other terms” is inherently ambiguous. Indeed, the more common usage of “other” when modifying a plural subject (as in "other terms") would indicate distinction from some, but not all items listed.

An example serves to illustrate. A judge is contacted by a law firm seeking information about one of the judge’s clerks who has applied for a job with the firm. By responding that “this clerk is more knowledgeable than other clerks I have had,” the judge does not necessarily indicate that the clerk is more knowledgeable than all other clerks he has employed. In fact, had the judge meant that the clerk was more knowledgeable than all other previous clerks, he would have said so and thereby enhanced his clerk's chances of being offered the job.

4 . Which of us would complain if, upon reading an advertisement featuring a 1970 Chevrolet with 80,000 miles for $1500, we went to see the car and discovered its true mileage to be 8,000 miles but its selling price remained at $1500?

5 . Since Congress intended to promote the informed use of credit, it is appropriate to develop rules that consider whether disclosures in fact allow consumers to shop around. No one argues that the violations charged here hindered these buyers from doing just that.

I would thus disapprove of those district court decisions, cited by the majority, holding that "a disclosure statement which informs the consumer that the creditor claims a right he does not actually possess is confusing and misleading and constitutes a Truth-in-Lending violation," e.g., Houston v. Atlanta Federal Savings and Loan Association, 414 F.Supp. 851, 856 (N.D.Ga.1976), where the “inaccurate” disclosure makes the credit terms advertised less attractive than those actually available under the note.

6 . A copy of the disclosure statement is attached as Appendix A.

7 . In 1979, the year in which these alleged violations occurred, Regulation Z covered 108 pages in the Code of Federal Regulations and used approximately 75,000 words to implement Truth-in-Lending’s aim of "meaningful disclosure." See 12 C.F.R. §§ 226.1-226.1503 (1979). Too, the Federal Reserve Board had issued 119 pages of staff interpretations of Regulation Z, adding about 80,000 words in explanation of that regulation. See 12 C.F.R.App. 591-710. In all, then, approximately 155,000 words described the lender's duty to provide consumers with "meaningful disclosure” of credit terms. (To put that figure in perspective, we note that the King James version of the New Testament contains 181,258 words. E. Edwards, Words, Facts, and Phrases; A Dictionary of Curious, Quaint, & Out-of-the-Way Matters 58 (1968)).

The voluminousness of Regulation Z does not, of course, excuse a lender's failure to comply with requirements clearly imposed by that regulation. However, the enormity of the burden placed on lenders that, in all good faith, attempt compliance does shed some light on the reasons for the profusion of litigation involving alleged "technical” violations of the Act.

8 . The Simplification Act became effective March 31, 1982, some three years after the credit transactions challenged here took place.