In the
United States Court of Appeals
For the Seventh Circuit

No. 98-1944

Gregory Balderos, on behalf of himself
and all others similarly situated,

Plaintiff-Appellant,

v.

City Chevrolet, et al.,

Defendants-Appellees.



Appeal from the United States District Court
for the Northern District of Illinois, Eastern
Division.
No. 97 C 2084--George M. Marovich, Judge.


Argued November 8, 1999--Decided May 26, 2000



  Before Posner, Chief Judge, and Ripple and
Diane P. Wood, Circuit Judges.

  Posner, Chief Judge. The complaint in
this class action suit against an
automobile dealer and a finance company
(and some associated individuals)
charges, in 136 paragraphs, violations of
the Truth in Lending Act, RICO, and state
consumer-protection laws. 15 U.S.C.
sec.sec. 1601 et seq.; 18 U.S.C. sec.sec.
1961 et seq.; 815 ILCS 505/2; 205 ILCS
660/8.5. Because the district judge
dismissed the suit for failure to state a
claim, we take the facts alleged in the
complaint to be true, though of course
without vouching for their truth.

  Three practices are challenged. First,
when the dealer arranges financing with
the finance company, and the amount of
the loan exceeds the retail value of the
automobile by more than 20 percent, the
finance company levies an additional
charge on the dealer, who raises the
price of the car to cover the additional
charge. The addition is not listed as a
finance charge on the Truth in Lending
disclosure form that the dealer is
required to give the purchaser and so
does not increase the interest rate
disclosed on the form. Yet it is a
finance charge--labels don’t control--and
so it must be disclosed. Walker v.
Wallace Auto Sales, Inc., 155 F.3d 927,
931-34 (7th Cir. 1998); Gibson v. Bob
Watson Chevrolet-Geo, Inc., 112 F.3d 283,
284-85 (7th Cir. 1997); see also Williams
v. Chartwell Financial Services, Ltd.,
204 F.3d 748, 753-54 (7th Cir. 2000);
Adams v. Plaza Finance Co., 168 F.3d 932,
934 (7th Cir. 1999); Cowen v. Bank United
of Texas, FSB, 70 F.3d 937, 942 (7th Cir.
1995). Against this conclusion the
defendants’ only argument is that the
complaint, despite its verbosity, does
not actually allege that the dealer
increases the price only of the cars that
are financed, as opposed to those that
are sold for cash. We think it does,
because it alleges that the sale price of
the financed cars substantially exceeds
the price at which comparable vehicles
are sold for cash, as in Walker v.
Wallace Auto Sales, Inc., supra, 155 F.3d
at 931-32. Yet at argument the
plaintiff’s lawyer, not content with
pointing this out, also argued that he
does not have to prove that the dealer
added the finance charge to the price of
only the financed cars, not of cars sold
for cash as well. We disagree. Suppose
the additional finance charge were on
average $50 and were imposed in 80
percent of the dealer’s sales. And
suppose that instead of adding $50 to the
price of the financed cars the dealer
added $40 to the price of all cars. There
would be no violation of the Truth in
Lending Act, because the credit purchaser
would not be paying any more than the
cash purchaser. See id. at 931-32, 934;
Gibson v. Bob Watson Chevrolet-Geo, Inc.,
supra, 112 F.3d at 287.

  A finance charge is a charge that is
avoidable by paying cash, 12 C.F.R. sec.
226.4(a), and in our example the charge
is not so avoidable and therefore is not
a finance charge, even though it
originates in a practice of selling on
credit. The Act’s purpose is to enable
borrowers to determine the cost of credit
so that they can decide, in the case of
a purchase (as distinct from a free-
standing loan), whether to pay cash or to
borrow from or through the seller or from
another lender (and thus pay cash to the
seller), who may charge a lower interest
rate. 15 U.S.C. sec. 1601(a); Mourning v.
Family Publications Service, Inc., 411
U.S. 356, 364-68 (1973); Smith v. Cash
Store Management, Inc., 195 F.3d 325, 332
(7th Cir. 1999); Walker v. Wallace Auto
Sales, Inc., supra, 155 F.3d at 930, 932-
34. That purpose is not engaged when the
same charge is imposed on cash purchasers
and on credit purchasers. With the charge
the same, the purchaser’s choice between
paying cash to the seller (and perhaps
borrowing from someone else) and buying
from the seller on credit is not
influenced.

  If the plaintiff in this case, standing
by his guns, declared that he would not
try to prove that the dealer does not
fold the additional finance charge into
his cash price, then we would affirm the
dismissal of this part of the complaint.
But at argument the plaintiff’s lawyer
made clear that he does intend to prove
this if we reject his broader theory (as
we have just done), and the narrower
theory is alleged and is in any event
consistent with the complaint, which is
all that matters. E.g., Highsmith v.
Chrysler Credit Corp., 18 F.3d 434, 439-
40 (7th Cir. 1994).

  Second, the finance company charges the
dealer a $50 "acceptance fee" for every
retail sales contract that it agrees to
finance, but waives the fee if the dealer
sells membership in the "Continental Car
Club," which the finance company owns, to
the purchaser of the car. Membership,
which entitles the member to a bond card
so that he doesn’t have to surrender his
driver’s license should he be ticketed
for a traffic offense, is sold only to
credit customers of the dealer. The
plaintiff was charged $60 for membership
in the Continental Car Club and the
charge was not included in the finance
charge.

  The plaintiff is prepared to prove that
the value of the bond card is
considerably less than $60, and indeed is
probably little more than $10, in which
event the membership fee is rather
transparently in lieu of a $50 finance
charge. The dealer changes a $50 finance
charge, which if listed as such would
cause the disclosed interest rate to
rise, into a $60 fee for a nonfinance
service, namely the bond card. Although
the service is worth only about $10, the
buyer doesn’t care that he’s paying $60
for it, because he is also getting a
discount of $50 and thus paying a net of
only $10. It seems, therefore, that $50
of the $60 membership fee is a disguised
finance charge, and the disguise violates
the Act. See 12 C.F.R. sec.sec. 226.4(a),
(b)(6); Walker v. Wallace Auto Sales,
Inc., supra, 155 F.3d at 931-34; Gibson
v. Bob Watson Chevrolet-Geo, Inc., supra,
112 F.3d at 284-85; see also Adams v.
Plaza Finance Co., supra, 168 F.3d at
935-37.

  Against this the defendants again point
to the language of the complaint. The
complaint does not allege that the buyer
is forced to buy a Continental Car Club
membership (and it is conceded that he is
not), or that the $50 finance charge is
imposed if the buyer refuses to buy the
membership, or even that the finance
charge is ever imposed--maybe the dealer
swallows it; not all costs are passed on
by a middleman to his customers. If the
finance charge is either never imposed,
or not imposed on those car buyers who do
not buy the membership, then the
membership fee cannot be a charge in lieu
of a finance charge, because it is not
avoidable by paying cash. But again the
plaintiff has offered to prove that the
finance charge is imposed on buyers who
do not buy the membership and not on
those who do, and this possibility is not
excluded by any of the allegations of the
complaint, unlike the situation in Damato
v. Hermanson, 153 F.3d 464, 473 (7th Cir.
1998).

  The fact that membership in the club is
not mandatory is not a defense. Consider
this variant of our earlier example: The
membership is worth $11, and as before
the fee is $60. Then the car buyer who
buys the membership, and so (we are
assuming) avoids the $50 finance charge,
is $1 to the good; for when the dust has
cleared he has paid an extra $10 (the $60
membership fee, which he has paid, minus
the $50 finance charge, which he has
saved) for a benefit worth $11. In
effect, he has paid a finance charge of
$49--but the lower charge has not been
disclosed, either. Cf. McGee v. Kerr-
Hickman Chrysler Plymouth, Inc., 93 F.3d
380, 384 (7th Cir. 1996).

  Although both alleged violations of the
Truth in Lending Act were committed by
the dealer in the first instance, since
it is the dealer who through the ruses
alleged is concealing the true interest
rate from the buyer, the finance company,
as assignee of the retail sales contract
which it is financing, is liable for any
violation that is apparent on the face of
the contract. 15 U.S.C. sec. 1641(a). The
cases are very strict in their
interpretation of this provision. So
while it is true that by looking at the
contract the finance company here could
tell that the $60 membership fee, which
it knew to be far in excess of the value
of the membership (for remember that the
Continental Car Club is owned by the
finance company, and so the company knows
what membership in the club is worth),
was an undisclosed finance charge,
something that is "apparent" only by
virtue of special knowledge, whether
about the practices of other firms, as in
Taylor v. Quality Hyundai, Inc., 150 F.3d
689, 694 (7th Cir. 1998), and Green v.
Levis Motors, Inc., 179 F.3d 286, 295
(5th Cir. 1999), or its own practices, as
in Ellis v. General Motors Acceptance
Corp., 160 F.3d 703, 709-10 (11th Cir.
1998), is not apparent on the face of the
contract itself. Even more clearly, the
finance company could not tell by looking
at the retail sales contract that its 20
percent additional finance charge had
been passed on to the buyer. The
plaintiff’s reliance on 16 C.F.R. sec.
433.2 and the saving provision in 15
U.S.C. sec. 1610(d) is unavailing for the
reasons explained in Green v. Levis
Motors, Inc., supra, 179 F.3d at 296.

  The third violation alleged, not of the
Truth in Lending Act but under the
federal mail and wire fraud statutes, is
a breach of fiduciary duty by the dealer.
Those statutes are criminal and do not
create civil liability directly, but they
are among the statutes the violation of
which is a "predicate act" upon which a
civil RICO claim can be based. 18 U.S.C.
sec. 1961(1)(B); Midwest Grinding Co.,
Inc. v. Spitz, 976 F.2d 1016, 1019 (7th
Cir. 1992). The allegation here is that
while the finance company has agreed to
finance the dealer’s retail sales
contracts at a particular interest rate,
when the dealer is able to negotiate a
higher interest rate with the buyer of
the car the dealer and the finance
company split the additional interest.
The plaintiff describes the dealer’s cut
as a "kickback" from the finance company
and argues that undisclosed self-dealing
by an agent is a serious violation of
fiduciary duty--which it is. Doner v.
Phoenix Joint Stock Land Bank, 45 N.E.2d
20, 24 (Ill. 1942); Meinhard v. Salmon,
164 N.E. 545 (N.Y. 1928) (Cardozo, C.J.);
Gagnon v. Coombs, 654 N.E.2d 54, 62
(Mass. App. 1995); Restatement of Agency
(Second) sec.sec. 387, 388 (1958). But an
automobile dealer is not its customers’
agent, obviously not in selling cars but
only a little less obviously in arranging
financing. If the buyer pays cash and
arranges his own financing, the dealer is
not in the picture at all. If the buyer
wants to buy on credit, he recognizes
that his decision does not change the
arms’ length nature of his relation to
the dealer. He knows, or at least has no
reason to doubt, that the dealer seeks a
profit on the financing as well as on the
underlying sale. Restatement, supra, sec.
1, illustration 2.

  This is in general, not in every case;
it is a question of fact whether the
contract express or implied between a
particular dealer and a particular
customer constitutes the former an agent
for the latter in procuring financing.
Cf. American Ins. Corp. v. Sederes, 807
F.2d 1402, 1405-06 (7th Cir. 1986);
Restatement, supra, sec. 1(1). But there
is no suggestion that the dealer here
represented that he would act as the
buyer’s agent in dealing with the finance
company, no indication therefore that an
agency relationship was created. If there
were such a relationship it would mean
that the buyer could tell the dealer to
shop the retail sales contract among
finance companies and to disclose the
various offers the dealer obtained to
him, and no one dealing with an
automobile dealer expects that kind of
service.

  The conclusion that the plaintiff has
failed to allege a breach of fiduciary
obligation is not the end of the RICO
claim. For while acknowledging that
violations of the Truth in Lending Act
are not predicate acts, the plaintiff
argues that they become such when mail
and wire communications are used to
further them. It is a rare case of
extension of credit that does not involve
mail or wire communications, and so the
practical effect of the plaintiff’s
argument would be to criminalize the
Truth in Lending Act--for remember that
it is through the mail and wire fraud
statutes, which are criminal, that the
plaintiffs seek to convert TILA into a
basis for RICO liability.

  What is true is that conduct in
violation of TILA might constitute a
scheme to defraud within the meaning of
the mail and wire fraud statutes, but
this must be separately alleged.
Concealing from credit purchasers the
true cost of credit might be part of a
scheme to defraud--or, if it resulted
simply from a misunderstanding of a
complex statute, might not be. The
district court was right to think that if
the defendants had not violated the Truth
in Lending Act, a fortiori they had not
engaged in criminal fraud. Since there
was a violation, that ground is not
robust. But as we read the complaint and
the plaintiff’s briefs in this court, his
only theory of a violation of RICO (apart
from breach of fiduciary obligation,
which we have rejected) is that a
violation of the Truth in Lending Act
that is accomplished through mail or wire
communications is a predicate act, and
this theory is clearly unsound.

  So we affirm the dismissal of the RICO
claim, and of the Truth in Lending Act
claim against the finance company; but we
remand the other TILA claims to the
district court for further proceedings
consistent with this opinion. We also
direct that court to reinstate, at least
provisionally, the supplemental state law
claims that it relinquished jurisdiction
over when it decided that the plaintiff
had failed to state a federal claim.

Affirmed in Part,
Reversed in Part, and Remanded.
