                IN THE COURT OF APPEALS OF TENNESSEE
                            AT NASHVILLE


NASHVILLE ELECTRIC SERVICE,      )
                                 )
           Plaintiff/Counter-    ) Davidson Circuit No. 93C-2880
           Defendant/Appellee,   )
                                 )
VS.                              ) Appeal No. 01A01-9708-CV-00383
                                 ) (consolidated)
DON STONE,                       )
                                 )
           Defendant/Counter-    )
           Claimant/Appellant,   )

          APPEAL FROM THE CIRCUIT COURT OF DAVIDSON COUNTY
                       AT NASHVILLE, TENNESSEE
                THE HONORABLE WALTER C. KURTZ, JUDGE


                                            FILED
                                               July 15, 1998

DAVID J. TARPLEY                            Cecil W. Crowson
LEGAL AID SOCIETY OF MIDDLE TENNESSEE      Appellate Court Clerk
Nashville, Tennessee
Attorney for Appellant



JOHN E. BUFFALOE, JR.
BUFFALOE & SHARP
Nashville, Tennessee
Attorney for Appellee




AFFIRMED




                                                  ALAN E. HIGHERS, J.



CONCUR:

DAVID R. FARMER, J.

HOLLY KIRBY LILLARD, J.
       Defendant/counter claimant/appellant, Don Stone (“Stone”), appeals the judgment

of the trial court dismissing his counterclaim holding that the Federal Trade Commission

(“FTC”) rules and regulations do not impose upon a third party creditor such as NES the

direct responsibility of placing the language of the “holder” rule codified at 16 C.F.R. §

433(b)(2) in their loan documents. For reasons stated hereinafter, we affirm the judgment

of the trial court.



       In 1991, Stone was contacted by a Nashville air conditioning and heating contractor,

Associated Air/Heat and Construction, Inc. (“contractor”), which was soliciting his business.

An appointment was set up for a representative of the company to visit Stone at his home.



       Stone did not have central heat and air conditioning. Instead, he used kerosene

heaters and a wood stove to heat his home. As a result of this meeting, Stone purchased

a central heat and air system that was installed by the contractor. The contractor’s

representative told Stone that he could arrange financing for the system via NES. No other

financing options were discussed. Contractor contacted NES and made all the

arrangements for financing of the heating and air system. Stone had no part in the

financing arrangements.



       After the system was installed, it never heated properly. Specifically, the system

failed to discharge the warm air with sufficient force to reach the lower part of the rooms.

Various tests were run by experts to calculate the discrepancy between air in the lower part

of the rooms and air in the upper parts. These test showed variances as much as 20

degrees Fahrenheit between the upper and lower parts of the rooms. Stone complained

about his system and was unable to pay the huge electric bills caused by the system’s

operation. Stone went back to the use of his kerosene heaters and wood stove. He also

quit paying his loan to NES.



       NES inspected Stone’s system twice, discovering both times that the force with




                                             2
which the air was emitted was insufficient. NES does not deny the fact that the system

which was installed in Stone’s home does not heat properly. But as in all such cases, NES

disclaims any and all responsibility for the problem in the system for defects and for faulty

work of the contractor.



                  Stone argues that NES should be required to include within its Residential

Energy Services Program loan documents the language of the FTC “holder” rule, 16 C.F.R.

§ 433.2(b), and the fact that NES does not do so should be viewed as an unfair trade

practice in violation of the Tennessee Consumer Protection Act. Consequently, Stone

contends that he should be awarded his actual damages as proved at trial or in the

alternative, his claim should be remanded to the trial court for a determination of the actual

damages suffered by him as a result of the defective work of the HVAC installer.



            NES contends that the trial court was correct in recognizing that the FTC itself did

not apply the said regulation to a lender. Additionally, NES claims that it is exempt from

the Tennessee Consumer Protection Act under Tenn. Code Ann. § 47-18-111(a)(1) which

exempts those whose actions or transactions are “required or specifically authorized under

the laws administered by, or rules and regulations promulgated by, any regulatory body or

officer acting under the authority of the state of Tennessee or of the United States.” NES

asserts that it was operating under a program in conjunction with the Tennessee Valley

Authority (“TVA”). NES further contends that TVA is an agency of the U.S. Government

that contracted with Metropolitan Government of Nashville and Davidson County to run the

Residential Energy Services Program. NES states that this program was funded by TVA

and administered by NES and, as such, was authorized by the laws, rules, and regulations

promulgated by TVA. Therefore, NES contends, this transaction was exempt from the

Tennessee Consumer Protection Act.1


        1
          On appea l, NES ar gues th at its action a re exem pt from the Ten nesse e Con sum er Protec tion Act.
Spe cifica lly, NES ins ists that it falls und er the ex emp tion provide d for und er Ten n. Code Ann. § 47-18-
111(a)(1):
                  (a) The provisions of this part do not apply to:
                  (1) Acts or transactions required or specifically authorized under the laws
                  administered by, or rules and regulations promulgated by, any regulatory
                  bodies or officers acting under the authority of this state or of the United
                  States. . .
NES did not make the argument in the court below, and presents this theory for the first time on appea l.

                                                       3
        On August 13, 1993, NES filed a civil action against Stone in the Metropolitan

General Sessions Court for Davidson County, Tennessee. An appeal was taken to the

Circuit Court on pauper’s oath, and on June 30, 1994, an answer and counterclaim were

filed by Stone. Central to this appeal is Stone’s assertion that NES, while not a participant

in the contractor’s alleged wrongdoings, had violated the Tennessee Consumer Protection

Act by failing to include in its loan documents the language specified in part (b) of the FTC

“holder” rule at 16 C.F.R. § 433. Stone contends that if this language had been included

in such documents, NES would have subjected itself, as a third party lender, to limited

liability for any claims or defenses that Stone might have had against the contractor who

installed the system.



        On August 22, 1994, a third party complaint was filed by Stone against the

contractor. At the time of his filing this complaint, Stone was unaware that the contractor’s

business was defunct and bankrupt.



        On November 27, 1995, the trial court issued a memorandum opinion in which the

court found that the heating and air system purchased by Stone and financed by NES did

not heat Stone’s home satisfactorily, but that NES was not liable to Stone for the

shortcomings of the system. Specifically, the court rejected Stone’s “back door

interpretation” of the law and held that because the FTC rule does not impose upon third

party creditors the direct responsibility of placing the language of the “holder” rule in their

own documents, there could be no Tennessee Consumer Protection Act violation by a third

party creditor who omits the language of the rule from its documents. Judgment was

entered against Stone for the full unpaid balance of his account with NES plus attorney’s

fees, for a total judgment of $9,874.00. The counterclaim was dismissed. Stone’s motion

for reconsideration of the judgment was overruled by order entered on January 29, 1996.

        By order entered on June 21, 1996, Stone’s initial appeal to this Court was

dismissed without prejudice because the record contained no final order dismissing the



Questions or issues not raised in the trial court will not be entertained on appea l. Lawrence v. Stanford , 655
S.W.2d 927, 929 (Tenn . 1983); Seay v. County of Shelby, 672 S.W .2d 404, 409 (Tenn. Ct. App. 198 4);
Sutton v. Bledsoe, 635 S.W .2d 379, 382 (Tenn. Ct. App. 198 1).

                                                       4
third party complaint filed against the defunct contractor. That error was corrected by order

entered in the trial court on March 10, 1997. Permission to appeal on pauper’s oath was

granted by the trial court on May 2, 1997.



       The sole issue before this Court is as follows:

              Did NES violate the Tennessee Consumer Protection Act,
              Tenn. Code Ann. § 47-18-101 et seq., by failing to ensure that
              the loan documents presented by it and signed by Stone to
              finance the purchase of a central heating and air system for his
              residence under the Residential Home Energy Services
              Program contained the statement required by the FTC “holder”
              rule, 16 C.F.R. § 433?



       For many years, the doctrine of holder-in-due-course has allowed a holder to

demand payments from a consumer for goods or services purchased on an installment

plan, even thought the seller may unjustifiably refuse to service, repair, or replace the

goods or services promised during the sales transaction. On November 14, 1975, the FTC

addressed this problem by promulgating a final Trade Regulation Rule, 16 C.F.R. § 433,

concerning the Preservation of Consumers’ Claims and Defenses. 41 Fed. Reg. at 20022

(1976). Part 433 stipulates that it constitutes an unfair and deceptive practice within the

meaning of Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45) for a seller,

in the course of financing a consumer purchase of goods or services, to employ

procedures which make the consumer’s duty to pay independent of the seller’s duty to fulfill

his or her obligations. 41 Fed. Reg. at 20023. The federal regulation provides:

              In connection with any sale or lease of goods or services to
              consumers, in or affecting commerce as “commerce” is defined
              in the Federal Trade Commission Act, it is an unfair or
              deceptive act or practice within the meaning of Section 5 of
              that Act for a seller, directly or indirectly, to:

              (b) Accept, as full or partial payment for such sales or lease,
              the proceeds of any purchase money loan (as purchase
              money loan is defined herein), unless any consumer credit
              contract made in connection with such purchase money loan
              contains the following provision in at least ten point, bold face,
              type:

              ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS
              SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE
              DEBTOR COULD ASSERT AGAINST THE SELLER OF
              GOODS OR SERVICES OBTAINED PURSUANT HERETO
              OR WITH THE PROCEEDS HEREOF.        RECOVERY


                                              5
               HEREUNDER BY THE DEBTOR SHALL NOT EXCEED
               AMOUNTS PAID BY THE DEBTOR HEREUNDER.


FTC Consumer Claims and Defenses, 16 C.F.R. § 433.2 (1975) (emphasis added).



       Apparently, the FTC found that all too often, a consumer would enter into a loan to

finance the purchase of goods or services, only to discover that the quality of the goods

ultimately is woefully substandard or that the services were performed in a manner that is

less than desirable. The purchasers of such goods or services might think it inequitable

to continue to pay for something so substandard or for something not received at all.

However, if they probe deeper into the situation, such consumers often find that their

obligation to pay remains even though the seller of such goods or services has failed in his

or her obligation to perform.



       Many times, as is the case here, a seller will arrange a direct loan for the consumer

from the lender. Because the seller is never formally part of this loan, the seller’s actions

cannot provide a defense, and this is so even if all parties contemplated that the loan

would go to pay the seller and even if the seller had a referral relationship with the lender.

It is true that, in theory, the consumer could bring an action against the seller, but many

times this is less than comforting when the seller is nowhere to be found or has gone out

of business.



       Part 433 is the FTC’s attempt to stem the tide of these abuses. The FTC aimed to

abolish these inequities by placing a greater responsibility upon financial institutions to

police the merchants with whom they deal. Statement of Basis and Purpose, 40 Fed. Reg.

53,506, 53,520 (1975). The FTC “holder” rule has two basic requirements. Under the first

requirement, the seller who makes a loan pursuant to a consumer credit contract must

include a notice in the contract that any holder of the contract is subject to the claims and

defenses which the consumer could assert against the seller. 16 C.F.R. § 433.2(a). The

second of these requirements is somewhat similar, but deals with the seller who refers

consumers or is affiliated with a lender. This provision makes it an unfair or deceptive



                                              6
practice for such a seller to accept the proceeds from a loan unless the consumer credit

contract includes a notice that any holder of the contract is subject to the claims and

defenses that the consumer could assert against the seller. Id. § 433.2(b).



       Here, Stone insists that NES should be held liable under the Tennessee Consumer

Protection Act for not putting the language of the FTC “holder” rule within its loan

documents. Specifically, Stone importunes this Court to find that NES has committed an

unfair and deceptive trade practice under Tenn. Code Ann. § 47-18-101 et seq. by not

including in its loan documents the FTC “holder” rule language. He claims that the

Tennessee Consumer Protection Act incorporates by reference the language of the FTC

rule quoted above.



       In support of his argument, Stone cites this Court to two cases, one from the

Federal District Court for the Northern District of Illinois and one from the Pennsylvania

Court of Common Pleas. Both cases cited by Stone contain distinguishable facts from the

instant case. The more important of the two is Heastie v. Community Bank of Greater

Peoria, 727 F. Supp. 1133 (N.D. Ill. 1989). In Heastie, plaintiff agreed to purchase a

satellite dish from defendant U.S. Satellite and signed a cash sales contract. Id. at 1134,

1135. U.S. Satellite and co-defendant Community Bank of Peoria had a contractual

agreement in which Community Bank of Peoria agreed to provide credit for U.S. Satellite

customers. Plaintiff signed the loan documents which were provided by Community Bank

of Peoria and which contained the “holder” rule language as required by § 433. The

documents, however, also contained a non-responsibility clause which relieved Community

Bank of Peoria of any responsibility for the quality of work performed by U.S. Satellite.

Ultimately, the plaintiff discovered that the satellite dish was defective.



       The Illinois Federal District Court conceded that part 433 had no application to

lenders, but stated that the Illinois Consumer Fraud Act was broader than the FTCA.

Consequently, the court held that Community Bank of Peoria was in violation of the Illinois

Consumer Fraud Act, and therefore liable to the plaintiff for damages. Id. at 1133, 1139.



                                              7
Specifically, the court concluded that Community Bank of Peoria’s use of the non-

responsibility clause in its loan documents, although not violative of the FTCA, violated the

Illinois Consumer Fraud Act, and, as such, was an unfair and deceptive trade practice. Id.

at 1138. The court noted that the Illinois General Assembly had specifically stated that the

Consumer Fraud Act “shall be liberally construed to effect the purposes thereof.”



       The precise language under the federal law makes it unfair or deceptive for a seller

to accept proceeds from a loan unless the consumer credit contract includes a notice that

any holder of the contract is subject to the claims and defenses that the consumer could

assert against the seller. This same cannot be said of the lender. Unlike Heastie, here,

the seller did not place the FTC “holder” rule language in the credit documents as

mandated by § 433 stated above. As noted in Heastie, however, this regulation does not

apply to the lender. The trial court correctly stated that the burden is totally on the seller

either to include the required notice or not accept loan proceeds if the notice is not

included.



       We decline to cast the net of the Tennessee Consumer Act any wider than the

legislature has chosen to do. NES was in full compliance with the requirements of the

FTCA. For this Court to declare that a lender’s failure to include the FTC “holder” rule

language in its loan documents as a violation of the Tennessee Consumer Protection Act

is legislative in nature. Until the Tennessee General Assembly, in its wisdom, chooses to

make a violation by the seller of 16 C.F.R. § 433 an “unfair or deceptive” act or practice by

the lender, we will not undertake to do so.




       Accordingly, we affirm the judgment of the trial court dismissing Stone’s

counterclaim under the Tennessee Consumer Protection Act. Costs of this appeal are

taxed to Stone, for which execution may issue if necessary.




                                              8
                  HIGHERS, J.



CONCUR:




FARMER, J.




LILLARD, J.




              9
