2d Cir. Holds that Selling Used Cars at Higher Prices to Sub-Prime Credit Risk Customers Not a “Hidden Finance Charge” under TILA Where Cash and Credit Customers Pay the Same

In Poulin v. Balise Auto Sales Inc., 2011 WL 2937210 (2d Cir. 2011), the Court of Appeals for the Second Circuit held that TILA is a disclosure statute, not a fair pricing law. The facts of the case were as follows:

Balise operates car dealerships in Connecticut, Massachusetts, and Rhode Island, and advertises itself as a business that caters to the needs of consumers who have difficulty obtaining automotive loans. ACE accepts Balise’s assignment of sales contracts for cars that Balise has sold to customers with poor credit. The two companies are owned by the same or related interests and controlled by the same individuals.  In marketing and pricing the cars in its inventory, Balise distinguishes between newer and older model years.  For a newer car, Balise advertises a retail price that roughly tracks the amount at which the NADA Official Used Car Guide, Eastern Edition (“NADA Guide”) values the model. For an older car, however, Balise does not advertise any retail price at all. When prospective buyers with poor credit approach Balise about purchasing a car, it steers them toward one of the older cars. Balise sells the older cars at prices that are substantially higher than the market values given in the NADA Guide.  The named plaintiffs’ buying experience is typical of a Balise customer with poor credit. In October 2006, Frazier purchased a 1998 Chevrolet Venture from the dealership for $7,995. The NADA Guide lists the market value of this model as $4,000. In February 2008, Poulin purchased a 1998 Saturn SL2 from Balise for $8,440. The NADA Guide lists the market value of this model as $3,900. Both Frazier and Poulin executed retail installment contracts which Balise subsequently assigned to ACE. On October 22, 2008, Frazier and Poulin commenced a putative class action accusing Balise and ACE of violating 15 U.S.C. § 1638(a)(3), a TILA provision requiring a creditor to disclose any finance charge it imposes on a consumer. They also allege the violation of various state laws. Although the complaint does not state the finance charges actually disclosed, it asserts that Balise and ACE are deceptively burying the cost of credit within the purchase price of the cars that Balise sells to customers with poor credit. Plaintiffs theorize that, for each of these cars, the portion of the purchase price in excess of the model’s NADA Guide value is not actually part of the cost of the car itself, but rather a hidden finance charge intended to compensate for the increased risk of lending to customers with poor credit. The complaint does not allege that Balise prices its older cars differently for customers with good credit or customers paying in cash. Indeed, the complaint is entirely silent as to whether such customers purchased cars from Balise’s older inventory at all. The named plaintiffs purport to assert these claims on their own behalf and on behalf of two groups of car purchasers. The “TILA Class,” represented by Poulin, consists of individuals who, within the applicable statute of limitations, purchased a motor vehicle from Balise at a purchase price at least 35% greater than the NADA Guide value for the model purchased.

The Court of Appeals found no TILA violation, because credit and cash customers paid the same.

In contrast to the cases on which plaintiffs rely, however, the complaint in this case does not allege that subprime credit customers pay higher purchase prices than non-subprime credit customers for comparable merchandise. If the book values in the NADA Guide are a fair proxy for the purchased cars’ market values, plaintiffs have alleged a bad bargain. But the complaint provides no facts from which to infer that that bad bargain stemmed from an undisclosed finance charge. The complaint contains no information about the price charged to cash purchasers of automobiles of the same vintage as those purchased by plaintiffs.  The pleaded facts may portray the use of different prices, but the difference is measured by the age of the cars, not the customers’ credit status. Because the complaint fails to allege purchase price discrimination based on credit status, it does not state an actionable claim under the theory embraced in Cornist and Walker. We therefore agree with the district court’s conclusion that plaintiffs’ complaint fails to state a claim upon which relief can be granted.