                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


9-12-1995

Duquesne Lgt v Westinghouse
Precedential or Non-Precedential:

Docket 95-3027




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Recommended Citation
"Duquesne Lgt v Westinghouse" (1995). 1995 Decisions. Paper 251.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/251


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            UNITED STATES COURT OF APPEALS
                FOR THE THIRD CIRCUIT


                       No. 95-5035


           NAOMI ORTIZ, on behalf of herself
           and all others similarly situated

                           v.

                RENTAL MANAGEMENT, INC.
                 t/a PRIME TIME RENTAL

                            NAOMI ORTIZ, on behalf of
               herself and the uncertified
     class consisting of all
residents of New Jersey who are
or have been parties to
contracts to rent to own
merchandise from Defendant and
have been charged illegal fees
and/or interest since April 13,
1988, Defendant, its agents,
employees, and all related
entities excluded therefrom,

                                               Appellant


    On Appeal from the United States District Court
            for the District of New Jersey
                (D.C. Civ. No. 94-01875)


                Argued August 25, 1995

BEFORE:   GREENBERG, COWEN, and SAROKIN, Circuit Judges

             (Filed:   September 12, 1995)


                            Philip Stephen Fuoco
                            24 Wilkins Place
                            Haddonfield, NJ 08033

                            Lisa J. Rodriguez (argued)
                            Lisa Chanow Dykstra
                            Chimicles, Jacobsen & Tikellis


                           1
                                   One Haverford Centre
                                   351 West Lancaster Avenue
                                   Haverford, PA 19041

                                          Attorneys for Appellant


                                   J. Samuel Choate, Jr. (argued)
                                   128 North Pitt Street
                                   Alexandria, VA 22314

                                   Jeffrey Zucker
                                   Abraham Pressman & Bauer
                                   1818 Market Street
                                   35th Floor
                                   Philadelphia, PA 19103

                                          Attorneys for Appellee



                       OPINION OF THE COURT


GREENBERG, Circuit Judge.

     This appeal requires us to address whether rent-to-own

agreements which are terminable at any time without additional

charges fall under the purview of the Truth in Lending Act

(TILA), 15 U.S.C. § 1601 et seq.    The district court, relying

primarily on a Federal Reserve Board regulation, concluded that

they do not.   The court therefore granted the lessor's motion to

dismiss the federal count of the complaint, declined to exercise

jurisdiction over the supplemental state claims, and remanded the

case to the Superior Court of New Jersey.     Because we agree with

the district court, we will affirm its judgment.



          I.   FACTUAL BACKGROUND AND PROCEDURAL HISTORY




                                2
     Appellant Naomi Ortiz, the named plaintiff in this putative

class action, entered into a rental agreement to lease a sofa and

a love seat from appellee Rental Management, Inc. (RMI) in

November 1992.    The rental agreement specified that Ortiz at her

option   could make rental payments on any one of four schedules:
     —   weekly payments of $28.49;
     —   biweekly payments of $56.98;
     —   semi-monthly payments of 61.72; or
     —   monthly payments of $108.63.


The agreement also required her to pay an initial charge of

$113.63 for delivery of the furniture, and established a

delinquency charge of $5.00 for late payments.    Ortiz generally

followed the weekly payment plan, although she exercised her

option to make some biweekly payments in the summer and fall of

1993.    The rental agreement provided that Ortiz could cancel it

at any time and return the furniture without further obligation.

It also stated that if she made 78 weekly payments or 18 monthly

payments (periods that differ in duration by no more than a

couple of days), she would own the sofa and love seat.    Thus, the

agreement is characterized as a rent-to-own (RTO) agreement.

     After making about 70 weekly payments -- eight payments less

than the number required to transfer ownership of the property to

her -- Ortiz ceased making payments, though according to RMI's

representations at oral argument before us, she retains

possession of the furniture.    Instead, on April 13, 1994, she

filed this class action in the Superior Court of New Jersey

alleging that in offering the RTO agreement, RMI violated the

TILA by failing to comply with certain of its disclosure


                                 3
requirements.   In support of her claim Ortiz alleged that the

wholesale price of the furniture was $380.00, far less than the

total amounts in weekly payments required for her to acquire

title to the furniture and far less than the amount she had paid

at the time she filed the lawsuit.1    She characterizes the

difference in the two amounts as a finance charge and based on

this characterization contends that the RTO agreement is a credit

sale within the meaning of the TILA.    In addition to the TILA

claim, Ortiz asserted causes of action under various New Jersey

statutes and common law doctrines.

     RMI removed the case to the district court on April 26,

1994, and soon thereafter moved to dismiss Ortiz's TILA claim for

failure to state a claim upon which relief could be granted

pursuant to Fed. R. Civ. P. 12(b)(6).    The district court granted

the motion to dismiss in a memorandum opinion dated January 6,

1995.   It reasoned that amendments which the Federal Reserve

Board promulgated in 1981 to Regulation Z, which it had issued

previously to carry out the purposes of the TILA, placed rent-to-

own contracts such as that Ortiz signed outside the ambit of the

statute, and that these regulations were entitled to deference.

Consequently, in the district court's view the TILA simply did

not govern the RTO agreement.   The court declined to exercise

jurisdiction over Ortiz's state law claims, and thus it remanded

the remainder of the complaint to the New Jersey Superior Court.

1
 The RTO agreement was annexed to the complaint but the $380.00
figure is not mentioned in the complaint. It appears, however,
that RMI does not dispute that figure and thus we will accept it
on this appeal.

                                4
Judgment was entered in the district court on January 11, 1995,

and Ortiz filed a timely notice of appeal.    The district court

had federal question jurisdiction under 28 U.S.C. §§ 1331, 1441,

and we have jurisdiction pursuant to 28 U.S.C. § 1291.    We

exercise plenary review over a district court's grant of a motion

pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss a complaint.



                           II.   DISCUSSION

     The TILA imposes disclosure requirements on persons in the

business of extending credit to consumers.    In particular, the

TILA delineates specific requirements for credit transactions,

15 U.S.C. §§ 1604, 1631, 1632, as well as detailed instructions

on how charges and interest rates must be calculated, 15 U.S.C.

§§ 1605, 1606.   The TILA only applies to "credit sales," however,

and therefore this case turns on the statutory and regulatory

definition of that term.

     Congress defined that term under the TILA as follows:
     The term 'credit sale' refers to any sale in which the
     seller is a creditor. The term includes any contract
     in the form of a bailment or lease if the bailee or
     lessee contracts to pay as compensation for use a sum
     substantially equivalent to or in excess of the
     aggregate value of the property and services involved
     and it is agreed that the bailee or lessee will become,
     or for no other or a nominal consideration has the
     option to become, the owner of the property upon full
     compliance with his obligations under the contract.

15 U.S.C. § 1602(g).

     As the district court recognized, courts interpreting this

statutory language following the enactment of the TILA split on

whether contracts like the one at issue here were covered by the



                                  5
act.   See op. at 5 (citing cases).   However, the Federal Reserve

Board, the agency entrusted by Congress to promulgate

interpretive regulations enforcing the TILA, consistently opined

in a series of nonbinding advisory letters issued between 1973

and 1977 that rent-to-own contracts are beyond the purview of the

act.   See Remco Enters., Inc. v. Houston, 677 P.2d 567, 570-71

(Kan. Ct. App. 1984) (citing "[u]nofficial staff opinions").       Its

informal opinions were quite significant, see James P. Nehf,

Effective Regulation of Rent-to-own Contracts, 52 Ohio St. L.J.

751, 758, 764 (1991) (hereinafter, Nehf, Rent-to-own Contracts),

because rent-to-own contracts were common when Congress enacted

the TILA in 1968, and because the Board's interpretive Regulation

Z essentially tracked the statutory language.

       In 1981, the Board formalized its informal opinion and

amended Regulation Z in one important way. The regulation reads
     Credit sale means a sale in which the seller is a
     creditor. The term includes a bailment or lease
     (unless terminable without penalty at any time by the
     consumer) under which the consumer:

            (i) Agrees to pay as compensation for use a sum
       substantially equivalent to, or in excess of, the total
       value of the property and services involved; and

            (ii) Will become (or has the option to become), for no
       additional consideration or for nominal consideration, the
       owner of the property upon compliance with the agreement.


Regulation Z, 12 C.F.R. § 226.2(a)(16).   The language added by

the amendment is "(unless terminable without penalty at any time

by the consumer)."    The amended regulation became effective in

April 1982.




                                 6
     In the first instance, Ortiz urges us to disregard the

Board's interpretation, as codified in amended Regulation Z. This

we will not do.   Congress explicitly empowered the Federal

Reserve Board to promulgate regulations to flesh out the details

of the TILA:
     The [Federal Reserve] Board shall prescribe regulations
     to carry out the purposes of this subchapter. . . .
     [T]hese regulations may contain such classifications,
     differentiations, or other provisions, and may provide
     for such adjustments and exceptions for any class of
     transactions, as in the judgment of the Board are
     necessary or proper to effectuate the purposes of this
     subchapter, to prevent circumvention thereof, or to
     facilitate compliance therewith.


15 U.S.C. § 1604(a).2

     In the presence of such an explicit delegation of

congressional authority, we must defer quite broadly to the

Board's interstitial regulations.   Specifically, in Chevron,

U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.

837, 104 S.Ct. 2778 (1984), the Supreme Court directed courts to

exercise the highest level of deference to regulatory

authorizations such as section 1604(a).   Id. at 843-44, 104 S.Ct.

at 2782.   As we have explained, "when Congress expressly

delegates authority to an administrative body to fill in the gaps

of a given statute, the regulations 'are given controlling weight

unless they arbitrary, capricious, or manifestly contrary to the

statute,'" Sacred Heart Medical Center v. Sullivan, 958 F.2d 537,



2
 Congress amended this section in 1994 to exclude certain
mortgage transactions from the Board's regulatory powers; the
amendment is not relevant to this case.


                                7
544 (3d Cir. 1992) (citing Chevron, 467 U.S. at 844, 104 S.Ct. at

2782).

     In both of its major TILA cases, the Supreme Court has

emphasized the broad powers that Congress delegated to the Board

to fill gaps in the statute.   When it upheld the Board's power to

extend the TILA's coverage to any seller that accepted payments

in four or more installments, the Court reviewed the legislative

history of the TILA and stated:
     The hearings held by Congress reflect the difficulty of
     the task it sought to accomplish. Whatever legislation
     was passed had to deal not only with the myriad forms
     in which credit transactions then occurred, but also
     with those which would be devised in the future. To
     accomplish its desired objective, Congress determined
     to lay the structure of the Act broadly and to entrust
     its construction to an agency with the necessary
     experience and resources to monitor its operation.
     Section 105 [15 U.S.C. § 1604] delegated to the Federal
     Reserve Board broad authority to promulgate regulations
     necessary to render the Act effective.


Mourning v. Family Publications Serv., Inc. 411 U.S. 356, 365, 93

S.Ct. 1652, 1658 (1973).   In rejecting the seller's argument that

the Board had exceeded its regulatory powers, the Court found

that "the language of the [regulatory] enabling provision

precludes us from accepting so narrow an interpretation of the

Board's power."   Id. at 371, 93 S.Ct. 1661.
     In a subsequent decision addressing disclosure requirements

governing acceleration clauses in debt contracts, the Court again

placed great emphasis on Congress' broad grant of regulatory

powers:   "Because of their complexity and variety, . . . credit

transactions defy exhaustive regulation by a single statute.

Congress therefore delegated expansive authority to the Federal


                                8
Reserve Board to elaborate and expand the legal framework

governing commerce in credit."   Ford Motor Credit Co. v.

Milhollin, 444 U.S. 555, 559-60, 100 S.Ct. 790, 794 (1980)

(citing 15 U.S.C. § 1604 and Mourning).    The Court declared that

"deference is especially appropriate in the process of

interpreting the Truth in Lending Act and Regulation Z" and held

that "[u]nless demonstrably irrational, Federal Reserve Board

staff opinions construing the Act or Regulation should be

dispositive."   Id. at 565, 100 S.Ct. at 797.

     Ortiz thus faces an extremely high burden -- she must

convince us that the Board's regulation is demonstrably

irrational.   Ortiz has failed to overcome this burden.     In the

first place, the landscape that existed when the Board amended

Regulation Z was far from clear.     Indeed, the statutory language

does not lend itself easily to a single unchallengeable

interpretation.   For example, although the statute refers to

"credit sales," it provides that certain leases are covered.         And

although it covers leases that are "contracts to pay as

compensation for use a sum substantially equivalent to or in

excess of the . . . value of the property," it is unclear whether

the language refers to the lessee's rights or obligations.      After

all, a lessee may have a right to exercise an option to become an

owner of the property, but may be obliged only to make rental

payments for the time periods he or she actually uses the

property.   It is clear, then, that there was a gap in the

statute.




                                 9
     Thus, it is hardly surprising that courts interpreting the

TILA prior to the 1981 amendment of Regulation Z reached

conflicting conclusions with respect to RTO agreements.    In

Waldron v. Best T.V. and Stereo Rentals, Inc., 485 F. Supp. 718

(D. Md. 1979), the court declined to say that a lease contract

terminable at will fell definitively outside the TILA's purview.

Rather, "[d]espite the presence of the termination clauses, the

agreement was essentially a contract for the credit sale of the

TV set to plaintiff for a sum substantially greater than the cash

sale value of the set."   Id. at 719.   In reaching its decision,

the court relied heavily on the fact that "the contract was to

remain in force unless . . . the plaintiff exercised her right to

terminate the contract and forfeit the equities she had built up

in the set by her weekly payments . . . ."   Id.   In Smith v. ABC

Rental Sys. of New Orleans, Inc., 491 F. Supp. 127 (E.D. La.

1978), aff'd, 618 F.2d 397 (6th Cir. 1980), however, the court,

interpreting a nearly identical contract, reached precisely the

opposite conclusion:   Because the agreement was terminable at any

time, "plaintiff was never obligated for any sum other than the

$16.00 weekly rental for each week he chose to keep the set." Id.
at 129.   Therefore, "[t]he week-to-week rental is not a sum

substantially equivalent to the set's value, and the transaction

in question is . . . not a credit sale."   Id.

     It was against this backdrop that the Board amended

Regulation Z to provide that rental agreements "terminable

without penalty at any time by the consumer" are not covered by




                                10
the TILA.   As Nehf has explained the situation before and after

the amendment:
     [a]mid all th[is] uncertainty, it was undeniably true
     that the unpredictability of the situation was
     inadequate for all concerned. Thus, the Board . . .
     revised Regulation Z . . . to settle the issue. The
     revised (and current) definition of 'credit sale' . . .
     should have resolved the debate in favor of the RTO
     industry because the heart of an RTO contract is its
     provision for the consumer to return the property at
     any time without further payment. Several courts have
     since held that the regulation does indeed end the
     discussion.


Nehf, Rent-to-Own Contracts, 52 Ohio St. L. J. at 766.      While

Ortiz argues that the Board's interpretation is presumptively

unreasonable because it does not have the effect of protecting

consumers, we find no authority for the proposition that the

Board must decide every conceivable question, even detailed and

technical ones, in favor of expanding the scope of the TILA.

Rather, the Board has broad discretion to draw the lines

necessary to effectuate the act.       We therefore cannot say that

the Board's adoption of one of two plausible interpretations of

the gap in the statute is demonstrably irrational.
     Ortiz relies on Clark v. Rent-It Corp., 685 F.2d 245 (8th

Cir. 1982), cert. denied, 459 U.S. 1225, 103 S.Ct. 1232 (1983),

but that case does not help her.       Although it adopted a reading

of the statute consistent with her contentions, the contract

addressed in that case arose prior to the effective date of the

1981 amendment of Regulation Z.    Thus, the court did not discuss

either the amended regulation or the deference due the Board.         As

such, Clark is simply one of a number of pre-amendment Regulation



                                  11
Z cases that reached varying results without the benefit of the

Board's formal view.

     In view of our conclusion that we should defer to the

regulation, we next determine whether the contract at issue is

"terminable without penalty at any time by the consumer."

In this regard, the facts as Ortiz presents them show that if she

wanted to terminate the lease, she only had to return the

furniture.   At that point she would not forfeit a deposit to

which she had title or claim, be obliged to pay any additional

charges, or be subject to legal action for a recovery of the

remaining rental payments.     Accordingly, she could terminate the

lease without penalty.

     Ortiz seeks to avoid this conclusion by contending that with

each payment on the lease she developed an equity in the

furniture which she would lose on its return which loss she

characterizes as a penalty.3    She finds support for this

proposition in an unpublished opinion of the New Jersey Superior

Court, Green v. Continental Rentals, No. L 3182-90 (N.J. Super.

Ct. Law Div. Mar. 25, 1994).

     To adopt Ortiz' argument would be to allow the exception to

swallow the rule.   If payments made pursuant to a rent-to-own

contract are considered "forfeited equity" should the lessee


3
 Actually, she contends that the penalties include "a forfeiture
of money paid, a forfeiture of equity accrued in the goods, a
forfeiture of the goods, and forfeiture of [her] option to
purchase the goods." Brief at 20. The first three so-called
penalties are the same thing and we do not regard the last as a
penalty any more than surrendering possession of the furniture is
a penalty.

                                  12
return the furniture, virtually every rent-to-own contract would

fall within the purview of the statute.   That, in turn, would

render the distinctions drawn by the Board's Regulation Z

essentially meaningless.   As Nehf points out, after examining the

history behind Regulation Z in detail:
     If a broader notion of penalty were accepted, the only
     lease-purchase agreements that would not be deemed
     credit sales would be those in which equity is never
     created, i.e., leases in which the remaining price to
     be paid for obtaining ownership is at all times equal
     to or greater than the fair market value of the goods.
     As a practical matter, such an interpretation would
     require that, to be exempt from TILA, a terminable
     lease could not transfer ownership unless the dealer
     charged a final payment approximating the product's
     then-fair market value. This view is difficult to
     justify under the statute because it would render part
     of the definition of credit sale superfluous. Both the
     statute and Regulation Z provide that a lease is a
     credit sale only if the lessee becomes the owner of the
     leased goods for nominal consideration at the end of
     the agreement. An option purchase price approximating
     fair market value is generally considered to be more
     than nominal, and all leases, even long-term obligation
     leases, containing such options are generally held not
     to be credit sales. Thus, an RTO contract with a fair
     market value purchase option would be exempt from TILA
     in any event, irrespective of its terminability, and
     TILA's 'contracts to pay' clause, as well as the
     Board's 'penalty' language in revised Regulation Z,
     would add little, if anything, to the definition.

Nehf, Rent-to-Own-Contracts, 52 Ohio St. L.J. at 768 (footnotes

omitted).

     Additionally, as one court has explained, "[a]lthough the

renters may have an economic incentive to make the number of

rental payments necessary to acquire ownership of the goods, the

agreements provide them the right to terminate at any time."     In

re Hanley, 135 B.R. 311, 313 n.1 (C.D. Ill. 1990).   Thus, "[t]he

contractual right to terminate precludes a finding that rent-to-


                                13
own agreements are truly sales with a forfeiture of the property

upon termination of payments."    Id.   We find the Hanley court's

analysis persuasive.   Regulation Z can have meaning only if the

term "penalty" is construed to refer to additional charges

imposed upon termination of the agreement.    In this case there

are no additional charges.   Therefore, in spite of our sympathy

for Ortiz's predicament, we hold that the equity Ortiz

"forfeited" by failing to continue making rental payments is not

a penalty for TILA purposes.4



                         III.    CONCLUSION

     For the foregoing reasons we will affirm the judgment

entered January 11, 1995.




4
 Ortiz also argues that her contract is not terminable at any
time as it could be terminated only "at the end of a rental
cycle." Brief at 8. The contract, however, does provide that
the lessee may at her option "at any time terminate this
agreement, without further obligation or penalty," by returning
the property and making all payments due under the lease to that
point. Of course, inasmuch as rent is payable in advance,
ordinarily a lessee desiring to terminate a lease would be wise
to do so at the end of a rental cycle. Nevertheless, the lease
is terminable at any time and the possibility that a lessee will
not retain the use of the property for a period for which she had
paid rent is no more a penalty than her surrender of her "equity"
in the furniture.

                                  14
