In the
United States Court of Appeals
For the Seventh Circuit

No. 00-1024

Mercedes Hoffman,

Plaintiff-Appellant,

v.

Grossinger Motor Corporation,

Defendant-Appellee.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern
Division.
No. 96 C 5362--William J. Hibbler, Judge.

Argued May 30, 2000--Decided June 20, 2000



  Before Posner, Chief Judge, and Coffey and
Kanne, Circuit Judges.

  Posner, Chief Judge. The district court
granted summary judgment for the
defendant, an auto dealer sued for
violating the Truth in Lending Act by
failing to disclose a finance charge that
it levies on "subprime" purchasers of its
used cars. A subprime purchaser is a
purchaser whose credit rating is so poor
that he, or in this case she, can obtain
credit only from or through finance
companies that specialize in high-risk
borrowers. One of these finance
companies, the one that financed the
plaintiff’s purchase of a used car from
the defendant, charges the defendant a
flat $400 per car financed, called a
"holdback." The plaintiff contends that
the defendant passes this charge on to
its subprime customers but does not treat
it as a finance charge in computing the
annual percentage rate of interest that
it discloses to them. In a standard
holdback, the money held back is returned
to the dealer if and when the purchaser
pays off the loan. The parties do not
discuss this wrinkle and for simplicity
we’ll assume the finance company never
returns the money; nothing turns on the
point. The dealer uses other finance
companies that charge a different
holdback, but, again for the sake of
simplicity, we’ll ignore that
complication as well--which is in any
event irrelevant to this plaintiff--and
pretend that the holdback is always $400;
actually, the average holdback paid by
this dealer exceeds $700.

  Were it true that the dealer tacked $400
(or some fraction thereof) onto the price
of the cars it sold subprime purchasers,
and did not tack the same amount onto the
prices charged its other purchasers, the
addition would indeed be a finance charge
and the dealer would have to include it
in computing the annual percentage rate
of interest charged this class of credit
customers. Walker v. Wallace Auto Sales,
Inc., 155 F.3d 927 (7th Cir. 1998). But
as long as the dealer raises the price to
all its purchasers by the same amount to
absorb this cost, so that the customer
cannot avoid it by paying cash, it is not
a finance charge within the meaning of
the Truth in Lending Act. The Act’s
purpose is to enable consumers to decide
whether or from whom to obtain credit,
and a charge that does not affect the
cost of one form of credit relative to
another or to cash is irrelevant to that
purpose. Balderos v. City Chevrolet, No.
98-1944, 2000 WL 681010, at *1-2 (7th
Cir. May 26, 2000).

  The present case is intermediate between
the two hypothetical variants that we
have given. The defendant does not add a
$400 charge to the price of cars sold its
subprime customers, but there is evidence
that it charges them a higher price on
average than it charges its other
customers, and the difference, the
plaintiff argues, is a hidden finance
charge. There is no reported appellate
case quite like this. Balderos and
Walker, on which the plaintiff relies,
came to us in a critically different
procedural posture. The complaint in each
case alleged as in this one that the
defendant added a finance charge to its
credit sales and not to its cash sales,
but in each case the district court
dismissed the suit for failure to state a
claim and so we were required to assume
that the allegation was true. Here, by
moving for summary judgment, the
defendant forced the plaintiff to present
evidence that this dealer really did
include a secret finance charge in the
sales price to its credit customers
(actually a subset of those customers)
but not in the price to its other
customers. The plaintiff couldn’t just
stand on her complaint.

  The dealer prices its used cars as
follows. (It also sells new cars, but the
plaintiff makes no argument regarding
their pricing.) It takes the cash value
of the car, either the trade-in value or
the price the car would command at an
auction, and adds the cost of any repairs
the dealer has made. To the sum of these
two items--we’ll call that sum the
dealer’s "cost of car"--the dealer adds a
uniform markup of $5,700. The sum of the
cost of car and the markup is the
dealer’s list price for the used car. The
dealer’s salesmen are not expected to
sell most, perhaps any, cars at list
price; that price is just the beginning
of the negotiation. The salesman tries to
get as much as he can, of course, but his
commission is a percentage not of the
sales price but of the defendant’s net
profit on the sale. The net profit is the
actual sales price (which must be
approved by the defendant’s business
office) minus not only what we’re calling
the "cost of car" but also $700,
representing an allocation of the
dealer’s overhead, and, in the case of
subprime purchasers, the "holdback"--in
this case the $400 that the finance
company charged the dealer for financing
the plaintiff’s purchase.

  This method of computing the salesman’s
commissions implies that for him to get
the identical commission on two otherwise
identical cars, one sold to a subprime
purchaser and the other to a prime or
cash purchaser, the price to the subprime
purchaser would have to be $400 higher
than the price to the other purchaser.
Otherwise the dealer’s net profit would
be less on the car sold to the subprime
purchaser and so the salesman’s
commission would also be less. It does
not follow, however, as the plaintiff
seems to believe, that the price to the
subprime purchaser would be $400 higher,
or for that matter one penny higher. The
salesman will try in every negotiation to
strike the hardest bargain he can,
whether or not there is a holdback. The
plaintiff paid $8,800 for the car she
bought from the defendant. Since she was
willing to pay that much, it would have
been irrational to charge her less if it
were discovered that she wasn’t a
subprime purchaser after all. The only
significance of such a discovery would be
to reveal that the sale at $8,800 was
more profitable than the dealer had
thought and that the salesman was
entitled to a higher commission.

  This example shows how unlikely it is
that the holdback is passed on to
subprime purchasers. If there were no
holdbacks at all, the defendant’s cost of
doing business would be lower, and
conceivably this would induce it to
reduce the $5,700 markup or to permit its
salesmen to negotiate somewhat lower sale
prices, since generally the lower a
company’s costs the lower its profit-
maximizing price (even if it’s a
monopolist, which there is no reason to
think this dealer is). But there is no
reason to suppose that subprime
purchasers would be particular
beneficiaries. The defendant would still
be trying to get as close to its list
prices as it could with all its
purchasers.

  The only situation in which the $400
holdback would be demonstrably a hidden
finance charge would be where the
defendant would have sold the car to a
cash purchaser for less than $400 over
the defendant’s cost of car. Suppose that
cost were $2,000. It would make no sense
for the defendant to sell to a subprime
purchaser for less than $2,400, because
in that event the defendant would net
less than $2,000 and it could get more by
auctioning the car or trading it in for
another car, thus avoiding the $400 cost
that the finance company charges it for
financing a sale to a subprime purchaser.
(We’re ignoring repair costs in this
example.) Yet the dealer might sell the
same car to a hard-bargaining nonsubprime
purchaser for between $2,000 and $2,400,
if it didn’t think it could get more than
$2,400 from anyone else. For a sale at
any price between these figures would
cover the cost of making the sale, a cost
that, in the case of a sale not to a
subprime purchaser, does not include a
$400 charge by the finance company. The
$700 in overhead costs that the defendant
allocates to every sale is incurred
whether or not a car is sold, and so it
is not saved, as the holdback is, by
refusing to sell the car at a price that
does not cover that cost. See Autotrol
Corp. v. Continental Water Systems Corp.,
918 F.2d 689, 692-93 (7th Cir. 1990).
That is why it does not figure in our
example of the minimum price that the
dealer would charge to a subprime
purchaser and to another purchaser,
respectively.

  This case is unlike the example, as is
obvious from the price that the plaintiff
paid. That price included a markup
greatly in excess of $400--the dealer’s
net profit on the sale to her was
$2,599.15. There is no evidence of a sale
by the defendant to anyone at a markup
below $400. The plaintiff did present
evidence that, on average, subprime
purchasers pay higher prices than the
dealer’s other purchasers, after
correction for differences in the cost of
car. But there is no evidence that the
higher price reflects an effort by
thedefendant to stick such purchasers
with a $400 finance charge. We have seen
that such a policy would be irrational
except in the case of a very low (below
$400) markup, of which there is no
evidence.

  Further undermining the plaintiff’s
theory of liability is the fact that the
record reveals that prime credit
purchasers from the defendant pay, on
average, higher prices--before the cost
of credit is computed--than cash
purchasers, even though there is no
holdback in the case of prime credit
purchasers. Although the dealer’s average
markup (net of the overhead allocation)
on holdback transactions is $1,800 and on
cash transactions only $900, its average
markup on credit transactions in which
there is no holdback is $1,300. The
implication is that cash customers are
more credible or savvy bargainers than
credit customers, and that credit
customers with good credit ratings are
more credible or savvy bargainers than
credit customers with bad credit ratings
(that is, the subprime purchasers). The
record is consistent with this
conjecture; the plaintiff accepted the
price offered by the defendant’s
salesman, with no attempt to bargain him
down, as she very well might have done
since the markup to her (which, net of
overhead, was approximately $3,000) was
more than twice the dealer’s average
markup for nonsubprime credit customers
and more than three times its average
markup for cash customers. There is no
evidence that she paid $400 more, or for
that matter one cent more, than she would
have paid had she not been a subprime
purchaser--no evidence, in short, that a
finance charge was "buried" in the cash
price of the car. That kills her case.
See Walker v. Wallace Auto Sales, Inc.,
supra, 155 F.3d at 933-34 and n. 9.

  Courts in other contexts, notably
antitrust enforcement, have been
reluctant to get into issues of "passing
on." E.g., Illinois Brick Co. v.
Illinois, 431 U.S. 720 (1977). Such
issues tend to be intractable to the
methods of litigation. It is possible
though unlikely that holdbacks influence
the pricing of the defendant’s cars to
subprime purchasers, but to explore the
possibility would enormously complicate
the litigation of Truth in Lending Act
claims, would cast a large cloud of
potential liability over used-car dealers
and other firms that use list prices as
just the starting point for negotiation,
and by doing so would make the class
action a truly fearsome instrument of
consumer-finance litigation. This case
began as a class action; the consumer-
finance class action is the specialty of
the law firm representing the plaintiff.

  This is not a case in which a charge
that is really a finance charge is called
something else. It is a case in which the
plaintiff seeks to track a cost incurred
by the dealer into the prices charged the
dealer’s customers. The plaintiff has, as
we have seen, failed to do that. Her
failure suggests the futility of a
"passing on" theory of liability under
the Truth in Lending Act.

  The complaint charges that the
defendant’s failure to figure the
holdback into the annual percentage rate
of interest also violated the Illinois
Consumer Fraud Act, 815 ILCS 505/2. That
charge was rightly dismissed too, because
compliance with the disclosure
requirements in the federal Truth in
Lending Act is a defense under the
Illinois act. See Lanier v. Associates
Finance, Inc., 499 N.E.2d 440, 447 (Ill.
1986).

Affirmed.
