Rossman v. Fleet Bank (R.I.) National Ass'n

Opinions of the United

2002 Decisions States Court of Appeals

for the Third Circuit

2-8-2002

Rossman v. Fleet Bank RI Natl

Precedential or Non-Precedential:

Docket 1-1094

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Filed February 8, 2002

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 01-1094

PAULA E. ROSSMAN,

individually and for all others similarly situated

v.

FLEET BANK (R.I.) NATIONAL ASSOCIATION,

a nationally chartered bank;

FLEET BANK CREDIT CARD SERVICES, L.P.,

a Rhode Island limited partnership;

FLEET CREDIT CARD HOLDINGS, INC.,

a Delaware corporation;

FLEETBOSTON FINANCIAL CORPORATION,

a Massachusetts corporation

Paula E. Rossman,

Appellant

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

D.C. Civil Action No. 00-cv-03879

(Honorable Bruce W. Kauffman)

Argued September 5, 2001

Before: SCIRICA, ALITO and BARRY, Circuit Judg es

(Filed: February 8, 2002)

MICHAEL D. DONOVAN, ESQUIRE

(ARGUED)

Donovan Searles

1845 Walnut Street, Suite 1100

Philadelphia, Pennsylvania 19103

MICHAEL P. MALAKOFF, ESQUIRE

Malakoff, Doyle & Finberg

The Frick Building, Suite 200

Pittsburgh, Pennsylvania 15219

Attorneys for Appellant

BURT M. RUBLIN, ESQUIRE

(ARGUED)

Ballard, Spahr, Andrews & Ingersoll

1735 Market Street, 51st Floor

Philadelphia, Pennsylvania 19103

Attorney for Appellees

OPINION OF THE COURT

SCIRICA, Circuit Judge.

In this Truth in Lending Act case, we must interpret the

"no annual fee" provision of a credit card solicitation.

Months after plaintiff Paula Rossman responded to a

solicitation offering this term, defendant Fleet Bank

changed the operable credit agreement and imposed an

annual fee. Rossman brought this putative class action

alleging, inter alia, that Fleet violated the TILA by failing to

disclose the fee later imposed. The District Court dismissed

plaintiff 's TILA count for failing to state a claim upon which

relief could be granted.1 We will reverse and remand.

_________________________________________________________________

1. See Rossman v. Fleet Bank (R.I.), N.A., No. 00-3879, 2000 WL

33119419 (E.D. Pa. Dec. 29, 2000). The District Court had jurisdiction

over plaintiff 's TILA claim under 28 U.S.C.S 1331. We have appellate

jurisdiction under 28 U.S.C. S 1292. Because this is an appeal from the

granting of a motion to dismiss under Rule 12(b)(6),"[w]e accept all

factual allegations in the complaints and all reasonable inferences to be

drawn therefrom in the light most favorable to the plaintiffs. We may

affirm only if it is certain that no relief could be granted under any set

of facts which could be proven." Lorenz v. CSX Corp., 1 F.3d 1406, 1411

(3d Cir. 1993).

2

I.

In late 1999, plaintiff Paula Rossman received a"Pre-

Qualified Invitation" to obtain a credit card from defendant

Fleet Bank.2 The solicitation was for a "Fleet Platinum

MasterCard" with a low annual percentage rate 3 and "no

annual fee." If interested, the recipient of this offer was to

check a box next to which was written, "YES! I want the top

card for genuine value and superior savings, the no-

annual-fee Platinum MasterCard." An asterisk directed the

recipient to a note that stated, "See the TERMS OF PRE-

QUALIFIED OFFER and CONSUMER INFORMATION for

detailed rate and other information."

The enclosure entitled "Consumer Information" contained

the "Schumer Box"--the table of basic credit card

information that is required under the Truth in Lending

Act, 15 U.S.C. S 1601 et seq., as amended by the Fair

Credit and Charge Card Disclosure Act of 1988. Within the

Schumer Box, there was a column with the heading

"Annual Fee"; the box beneath that heading contained only

the word "None." On the "Consumer Information"

enclosure, but outside the Schumer box, Fleet listed other

fees. Also in that location was the statement, "We reserve

the right to change the benefit features associated with

your Card at any time."

_________________________________________________________________

2. Rossman named four Fleet entities as defendants: Fleet Bank (R.I.)

National Association, Fleet Credit Card Services, L.P., Fleet Credit Card

Holdings, Inc., and FleetBoston Financial Corporation. As there are no

issues in dispute requiring these entities to be differentiated, we will

refer to them collectively as "Fleet."

3. It appears Rossman may have received two different credit card offers

from Fleet. The one plaintiff appended to her complaint offered a "2.99%

fixed APR until May 1, 2000," after which the rate was to rise to a

"9.99% fixed APR." That offer expired on November 30, 1999. Fleet

submits, and Rossman has not contested, that she actually responded to

a second offer, which expired on December 31, 2000. That mailing

offered a "7.99% fixed APR," which Fleet emphasized was "not an

introductory rate." As we discuss, the card Rossman ultimately received

appears to have had a 7.99% APR, suggesting she responded to the

second solicitation. As both mailings offered a card with "no annual fee"

--the term at issue in this case--the resolution of this appeal does not

implicate this ambiguity.

3

Rossman responded to Fleet's offer, and soon thereafter

received her "no-annual-fee Platinum MasterCard." It is

unclear from her complaint and the documents in the record4

exactly when this occurred. It appears, however, that she

received her card in December of 1999 or January of 2000.

Along with the card, Rossman was sent Fleet's "Cardholder

Agreement," which contained the following provision

concerning annual fees: "No annual membership fee will be

charged to your Account."

The Agreement provided for various applicable annual

percentage rates charged on outstanding balances,

including the standard rate for purchases (7.99%) and

several higher rates that could be triggered by certain acts

or omissions on the part of the cardholder. Among these

was a rate of 24.99% that Fleet was entitled to impose

"upon any closure of [the] Account." The Agreement also

contained a change-in-terms provision, which stated:

We have the right to change any of the terms of this

Agreement at any time. You will be given notice of a

change as required by applicable law. Any change in

terms governs your Account as of the effective date,

and will, as permitted by law and at our option, apply

both to transactions made on or after such date and to

any outstanding Account balance.

In May 2000, Fleet sent a letter to plaintiff announcing

its intention to change the terms of the agreement. That

letter read, in part:

Over the past several months, the Federal Reserve

has been steadily raising interest rates, making it

_________________________________________________________________

4. While this is an appeal from a Rule 12(b)(6) dismissal, certain

documents may be considered in addition to the complaint itself.

Exhibits attached to the complaint and upon which one or more claim

is based are appropriately incorporated into the record for consideration

of a 12(b)(6) motion. Rose v. Bartle, 871 F.2d 331, 340 n.3 (3d Cir.

1989). Furthermore, "a court may consider an undisputedly authentic

document that a defendant attaches as an exhibit to a motion to dismiss

if the plaintiff 's claims are based on the document." Pension Benefit

Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.

1993). Neither party disputes that the relevant credit card solicitations

and agreements constitute such documents.

4

difficult for credit card issuers to maintain products

and services at current rates. While many experts

predict that the Federal Reserve will continue to raise

interest rates, the regular rate for purchases and

balance transfers on your Fleet account remains at a

fixed 7.99% APR.

While this rate remains unchanged, a $35 annual

membership fee will apply to your account. Effective

with billing cycles closing on or after June 1, 2000, the

annual fee will appear beginning with your monthly

statement that includes the next anniversary date of

your account opening.

Soon thereafter, by letter dated June 20, 2000, Fleet

announced a modification of its original change. Claiming

the move was necessary in light of still further interest rate

hikes by the Federal Reserve, Fleet modified the effective

date of the change. Rather than waiting until the

anniversary of plaintiff 's account opening, Fleet notified

Rossman that the annual fee would be imposed almost

immediately:

We are modifying the terms of your Fleet Cardholder

Agreement only to correct the timing of the annual

membership fee previously disclosed. That fee will first

be charged to your Account in your billing cycle that

closes in July, 2000, and will be charged in that billing

cycle each year thereafter.

A thirty-five-dollar fee was charged to Rossman's account

by July 6, 2000, in accordance with the second letter.

Rossman alleges that despite Fleet's protestations that it

had been effectively forced to cease offering the card

without an annual fee, it continued to solicit other new

customers with offers for no-annual-fee credit cards. Thus,

she contends, Fleet systematically baited new customers

with the no-annual-fee offer, while telling its existing

customers that the fee increase was necessitated by

changing market conditions. These "no annual fee" offers,

Rossman alleges, were made by Fleet with the intention of

imposing a fee shortly thereafter.

Rossman filed this putative class action on behalf of

5

herself and "[a]ll persons who received or will receive an

offer . . . from Fleet . . . for a no annual fee credit card, and

who accepted that offer and who were then charged, or

have been notified they will be charged, an annual fee."5

She asserts violations of the TILA and Rhode Island law: (1)

violation of Rhode Island's Deceptive Trade Practices Act,

R.I. Gen. Laws S 6-13.1-1 et seq.; (2) common law fraud;

and (3) breach of contract. The essence of plaintiff 's TILA

claim is that the original solicitations, insofar as they

described the credit card as one with no annual fee,

violated the TILA's requirement of accurate disclosure.

Fleet moved to dismiss the TILA count, contending

Rossman failed to state a proper claim. Granting the

motion to dismiss, the District Court held Rossman's

allegations did not state a deficiency in the original

disclosures sufficient to constitute a violation under the

TILA. Declining to exercise supplemental jurisdiction over

the state law claims, the District Court dismissed the suit.

Rossman appealed.

II.

The stated purpose of the Truth in Lending Act, which

took effect in 1969, is "to assure a meaningful disclosure of

credit terms so that the consumer will be able to compare

more readily the various credit terms available to him and

avoid the uninformed use of credit, and to protect the

consumer against inaccurate and unfair credit billing and

credit card practices." 15 U.S.C. S 1601. In pursuit of these

aims, the statute requires a series of disclosures that must

be made before the consummation (the point at which legal

obligations attach) of the underlying credit agreement, as

well as at certain other specified times.

Congress included in the Act a provision expressly

authorizing the Federal Reserve Board to "prescribe

regulations to carry out the purposes of " the TILA. 15

U.S.C. S 1604. The Board promulgated "Regulation Z," 12

C.F.R. S 226, for this purpose. It also published extensive

_________________________________________________________________

5. The District Court dismissed the case before considering class

certification under Fed. R. Civ. P. 23.

6

"Official Staff Interpretations." 12 C.F.R. Pt. 226 Supp. I.

"[T]he Supreme Court has emphasized the broad powers

that Congress delegated to the Board to fill gaps in the

statute" with these two devices. Ortiz v. Rental Mgmt., Inc.,

65 F.3d 335, 339 (3d Cir. 1995). "Unless demonstrably

irrational, Federal Reserve Board staff opinions construing

the Act or Regulation should be dispositive . . . ." Ford

Motor Credit Co. v. Milhollin, 444 U.S. 555, 565 (1980).

Because the TILA is a remedial consumer protection

statute, we have held it "should be construed liberally in

favor of the consumer." Ramadan v. Chase Manhattan

Corp., 156 F.3d 499, 502 (3d Cir. 1998); accord Begala v.

PNC Bank, Ohio, N.A., 163 F.3d 948, 950 (6th Cir. 1998)

("We have repeatedly stated that TILA is a remedial statute

and, therefore, should be given a broad, liberal construction

in favor of the consumer."); Fairley v. Turan-Foley Imps.,

Inc., 65 F.3d 475, 482 (5th Cir. 1995) ("The TILA is to be

enforced strictly against creditors and construed liberally in

favor of consumers . . . .").

In 1988, Congress determined the protections of the TILA

with respect to credit and charge cards were inadequate to

ensure sufficiently informed use of these credit devices.

Congress enacted the "Fair Credit and Charge Card

Disclosure Act,"6 which substantially strengthened the

TILA's requirements with respect to credit cards.

Significantly, for the first time, it imposed disclosure

requirements on credit card applications and solicitations.

The TILA now requires applications and solicitations to

disclose the annual percentage rates, certain fees (including

annual fees), the grace period for payments, and the

balance calculation method. 16 U.S.C. S 1637. Before the

amendment, the TILA required only that issuers make

these disclosures before the opening of the account--a

requirement ordinarily fulfilled by providing the disclosures

along with the card. See S. Rep. No. 100-259, at 3 (1988),

reprinted in 1988 U.S.C.C.A.N. 3936, 3938.

_________________________________________________________________

6. "Charge cards" for these purposes are cards, such as the American

Express card, that are used to obtain credit, but which do not allow the

carrying of a balance from one billing cycle to the next.

7

The TILA mandates the required terms be "clearly and

conspicuously" disclosed. 15 U.S.C. S 1632(a). This

standard requires the disclosures to be "in a reasonably

understandable form and readily noticeable to the

consumer." 12 C.F.R. Pt. 226, Supp. I, cmt. 5a(a)(2); cf.

Applebaum v. Nissan Motor Acceptance Corp., 226 F.3d 214,

220 (3d Cir. 2000) (applying a similar standard in a related

Consumer Leasing Act case). Certain required terms in

credit card disclosure statements--including annual fees--

must be presented within a simple table--the "Schumer

Box"--that facilitates easy comparison of credit cards'

terms. 16 U.S.C. S 1632(c).

The disclosures are intended to make the terms of the

contractual agreement accessible to the consumer. As

stated in Regulation Z, "Disclosures shall reflect the terms

of the legal obligation between the parties." 12 C.F.R.

S 226.5(c). And "[t]he legal obligation normally is presumed

to be contained in the contract that evidences the

agreement." 12 C.F.R. Pt. 226, Supp. I, cmt. 5(c). Therefore,

disclosures should reflect the contractual agreement itself.

But the mere inclusion of these terms in the agreement is

ordinarily insufficient to meet the disclosure requirements.

The purpose of the disclosures is to present the significant

terms of the agreement to the consumer in a consistent

manner that is readily seen and easily understood, thereby

"enabling consumers to shop around for the best cards." S.

Rep. No. 100-259, at 3, 1988 U.S.C.C.A.N. at 3938.

The purpose of the TILA is to assure "meaningful"

disclosures. 15 U.S.C. S 1601. Consequently, the issuer

must not only disclose the required terms, it must do so

accurately. The accuracy demanded excludes not only

literal falsities, but also misleading statements. See

Gennuso v. Commercial Bank & Trust Co., 566 F.2d 437,

443 (3d Cir. 1977) (recognizing violation based on

misleading disclosure); see also Taylor v. Quality Hyundai,

Inc., 150 F.3d 689, 692 (7th Cir. 1998); Smith v. Chapman,

614 F.2d 968, 977 (5th Cir. 1980) ("A misleading disclosure

is as much a violation of TILA as a failure to disclose at

all.").

Furthermore, the accuracy of the representations

contained in the disclosures is measured at the time those

8

representations are made. "The disclosures should reflect

the credit terms to which the parties are legally bound at

the time of giving the disclosures." 12 C.F.R. Pt. 226, Supp.

I, cmt. 5(c)(1). And, more particularly, "disclosures in direct

mail applications and solicitations must be accurate as of

the time of mailing." 12 C.F.R. Pt. 226, Supp. I, cmt.

5a(c)(1).

Fleet's statement that the card had "no annual fee" was

lawful, therefore, only if it met two conditions. First, it must

have disclosed all of the information required by the

statute. And second, it must have been true--i.e., an

accurate representation of the legal obligations of the

parties at that time--when the relevant solicitation was

mailed. With this background in place, we turn to the

specifics of this case.

III.

Rossman challenges the adequacy of the disclosures in

Fleet's credit card solicitation on three related grounds.

First, she contends the statute requires not only disclosure

of presently imposed annual fees, but also any annual fee

that might be imposed in the future. Second, she argues

whether or not Fleet was required to disclose future fees, its

disclosures failed to meet the requirements of the TILA

because they misleadingly suggested there never would be

an annual fee. Finally, she asserts Fleet used the

disclosures as part of a bait-and-switch scheme, by which

it attracted business with the offer for a no-annual-fee card,

even though it intended to charge an annual fee on the

card soon thereafter. The first challenge goes to the

adequacy of Fleet's disclosures; the latter two are more

naturally understood as directed at their accuracy.

The District Court rejected plaintiff 's arguments by

interpreting the TILA as requiring the disclosure of only

annual fees expressly contemplated by the credit agreement

as it then existed. And since there was not, at either the

time of the mailing of the solicitation or the opening of

Rossman's account, an annual fee associated with the card,

its statement that there was no such fee was accurate7:

_________________________________________________________________

7. The District Court emphasized, however, that the accuracy of the

statement, for purposes of the TILA, did not imply the alleged scheme

9

"Fleet's disclosures in late 1999 were accurate with respect

to the terms offered at that time; the fact that Fleet allegedly

intended to change those terms in the near future did not

render the disclosures inaccurate for purposes of the TILA."

Rossman, 2000 WL 33119419, at *3. Consistent with this

view, Fleet contends it was required to state, in its

disclosures, that the card had no annual fee, since any

other statement would fail to accurately reflect the

underlying agreement, which did not (until modified) permit

the imposition of such a fee.

Fleet emphasizes that the requirements at issue here are

disclosure requirements. As noted, the disclosures are

intended to alert the consumer to the applicable terms of

the credit agreement. If there is unlawful manipulation of

the underlying terms, that is governed by the substantive

law applicable to these agreements. The requirements of the

TILA are violated, however, only if the substance of the

agreement is not properly disclosed at each point. Fleet

maintains that, assuming the facts as alleged by Rossman,

the manipulation of the agreements may be wrongful, but

the disclosures were accurate reflections of the substance

of the agreements at the relevant times, which is all the

TILA requires.

Under Fleet's view, it was not required to disclose the

annual fee because it did not specify such a fee in the

agreement it drafted. That it did not include the term in the

agreement was no significant impediment to its imposing

the fee because it was able to invoke the change-in-terms

provision of the agreement, a provision not itself required to

be disclosed. Thus, Fleet contends it was not barred from

imposing an annual fee, but did not have to disclose that

fact in advance. In essence, then, the interpretation of the

TILA urged by Fleet--and adopted by the District Court--

would permit Fleet to effectively avoid its disclosure

_________________________________________________________________

was an acceptable course of conduct: "If, as alleged, Fleet lured

consumers into opening credit card accounts with relatively favorable

terms while intending to switch those terms shortly thereafter, then Fleet

unquestionably engaged in wrongdoing." Rossman, 2000 WL 33119419,

at *3.

10

obligations by strategic use of a change-in-terms provision.

The question is whether the statute permits such a

circumvention of its disclosure requirements.

IV.

a. Periodic Fee Disclosure Requirements.

Contending the District Court misinterpreted the TILA

with respect to the specific disclosure requirements

applicable to periodic fees, Rossman challenges its ruling

the TILA requires only disclosures of "presently imposed"

fees. The Act requires the disclosure of "[a]ny annual fee,

other periodic fee, or membership fee imposed for the

issuance or availability of a credit card." 15 U.S.C.

S 1637(c)(1)(A)(ii)(I). Regulation Z contains similar--but

importantly different--language, requiring disclosure of

"[a]ny annual or other periodic fee . . . that may be imposed

for the issuance or availability of a credit or charge card."

12 C.F.R. S 226.5a(b)(2) (emphasis added). Fleet was

therefore required to provide clear, conspicuous, and

accurate notice of the parties' legal obligations with respect

to any such fee "that may be imposed for the issuance or

availability" of the Fleet Platinum MasterCard.

Rossman contends the language requiring disclosure of

any annual fee "that may be imposed" refers to all fees that

might ever be imposed. According to Rossman, if Fleet

reserves the power to impose fees in the future, as it has,

it must disclose all fees it may later impose--including, of

course, the thirty-five-dollar annual fee it subsequently

imposed.

We decline to read the annual-fee disclosure requirement

so broadly. The TILA, as interpreted and implemented by

the Federal Reserve Board, permits subsequent changes

that do not affect the accuracy of a previous disclosure.

E.g., 12 C.F.R. S 226.9(c) ("Whenever any term required to

be disclosed under S 226.6 is changed or the required

minimum periodic payment is increased, the creditor shall

mail or deliver written notice of the change to each

consumer who may be affected."); cf. 15 U.S.C. S 1634 ("If

information disclosed in accordance with this part is

11

subsequently rendered inaccurate as the result of any act,

occurrence, or agreement subsequent to the delivery of the

required disclosures, the inaccuracy resulting therefrom

does not constitute a violation of this part."); 12 C.F.R.

S 226.5(e) ("If a disclosure becomes inaccurate because of

an event that occurs after the creditor mails or delivers the

disclosures, the resulting inaccuracy is not a violation of

this regulation, although new disclosures may be required

under S 226.9(c)."). It is implicit in these provisions that: (1)

ordinarily, a future change in terms need not be anticipated

in disclosures; and (2) a failure to disclose does not

necessarily foreclose the possibility of such a future

change. Rossman's interpretation cannot be squared with

this framework.

Furthermore, as the District Court correctly noted, the

Federal Reserve Board's use of the word "may" does not

compel adoption of plaintiff 's interpretation. The phrase

"may impose" means "is permitted to impose" in this

context, and not, as suggested by plaintiff, "might impose."

Thus, the issuer is required to disclose any fees it is

permitted to impose under the applicable agreement. The

permissive sense of "may" is more congruous with the

structure of the TILA as a whole.

Accordingly, we hold that credit card issuers need not

disclose all periodic fees not contemplated by the applicable

agreement. Absent a separate basis for requiring the

disclosure of the presently disputed fee, therefore, Fleet

need not have disclosed it.

b. Duration.

As noted, the TILA prohibits not only failures to disclose,

but also false or misleading disclosures. Regardless of

Fleet's disclosure obligations, it was not permitted to

mislead the recipients of its credit card solicitations into

believing that Fleet could not or would not impose such a

fee. Rossman asserts Fleet's disclosures were inaccurate

and misleading, and hence, violated the TILA's disclosure

requirements.

Rossman contends the statement "no annual fee"

contains no temporal limitation; it means "no annual fee

12

(ever)." This message is strengthened, Rossman argues, by

Fleet's advertising the absence of an annual fee as a

defining feature of the card. The solicitation plainly

described the card as "the no-annual-fee Platinum

MasterCard." Under Rossman's view, the disclosures

themselves implied that Fleet was indefinitely committed to

providing the card free of an annual fee. Because under the

cardholder agreement, Fleet was not so committed, the

disclosures, as naturally understood, were false, or at least

misleading.

Had the solicitations actually stated the offered card

would have "no annual fee ever," then Fleet would have

violated the TILA, assuming the underlying agreement

permitted Fleet to impose such a fee in the future. That

statement would have been false--at the time it was made

--about the legal obligations of the parties contemplated by

the then-relevant agreement. Similarly, had the disclosure

said, "no annual fee subject to change at any time,

including in the first year," then the disclosure would be

perfectly accurate for these purposes. The question is, how

should the statement "no annual fee" be interpreted with

respect to its duration?

The District Court implicitly understood the statement

"no annual fee" as implying no duration at all. For only in

light of such an understanding would the District Court be

correct in concluding, "Fleet's disclosures in late 1999 were

accurate with respect to the terms offered at that time."

Rossman, 2000 WL 33119419, at *3 (emphasis removed).8

Because the TILA is a consumer protection act designed

to provide easily-understood information to ordinary

consumers, it is appropriate to make this determination

_________________________________________________________________

8. The District Court did not discuss this issue, so it is unclear how it

reached this understanding. It may have done so on the basis of the

Official Staff Interpretations' instructions that"disclosures should

reflect

the credit terms to which the parties are legally bound at the time of

giving of the disclosures." 12 C.F.R. Pt. 226, Supp. I, cmt. 5(c)(1). The

legal standard for what is required, however, cannot provide a basis for

determining what the disclosures actually mean. The challenge here is

not to what Fleet was required to disclose, but what it actually did

disclose.

13

from the point of view of the consumer.9 We need not

determine whether Rossman is correct that the disclosure

implied a permanent promise to refrain from imposing an

annual fee. For we believe a reasonable consumer would, at

any rate, be entitled to assume upon reading Fleet's

solicitation that the issuer was committed to refraining

from imposing an annual fee for at least one year. The

statement "no annual fee," in other words, is fairly

understood to contain an implied term of a year. If Fleet

had imposed an "annual fee" of twenty dollars upon the

opening of Rossman's account, she would have been

entitled to expect that, upon payment of that fee, she would

be entitled to a year's use of the card, assuming her other

obligations were met. Thus, had Fleet imposed another

"annual fee" of thirty-five dollars mid-year, she would

surely have been deceived. The original twenty-dollar fee

would then not be an annual fee, but simply a fee.

Similarly, a reasonable consumer could understand the

statement "no annual fee" as describing a promise of (at

least) a fee-free year. It would follow that Rossman's credit

card was not a no-annual-fee card unless no such fee

would be charged for a year. Consequently, Fleet's

statement to the contrary would be false or misleading for

purposes of the TILA.

In any event, the statement "no annual fee" is not a clear

and conspicuous disclosure of a set of contract terms that

permit the imposition of an annual fee within a year.

Interpreting the statement with an implied annual term is

at least as natural as interpreting it with no such term, so

the statement is ambiguous at best. And because the TILA,

which "should be construed liberally in favor of the

_________________________________________________________________

9. We have stated the requirement that disclosures be "reasonably

understandable" does not require that they be understandable by the

average consumer. Instead, we have said disclosures must be reasonably

understandable "in light of the inherent difficulty or complexity of the"

information disclosed. Applebaum, 226 F.3d at 220. The appropriate

level of difficulty of understanding the disclosure is not an issue here.

Instead, the inquiry is into what the disclosures are fairly understood to

mean, a question not at issue in Applebaum. In any event, there is

nothing complex about annual fees, so the intended audience is the

ordinary consumer.

14

consumer," Ramadan, 156 F.3d at 502, is intended to

provide clear information to consumers, such ambiguities

should be resolved in favor of the consumer. A clear and

conspicuous statement of Fleet's authority to change the

term at any time would, of course, correct this problem.

Fleet contends such a statement is unnecessary, because

the change-in-terms provision of the agreement is not

among the terms that must be disclosed under the TILA.

The issue here, however, is not Fleet's obligation to disclose

the change-in-terms provision, but its obligation to disclose

annual fees. And because the statement "no annual fee"

was misleading with respect to the duration of the offer,

further clarification was necessary for it to meet the

requirements of the TILA, assuming the terms of the

cardholder agreement actually permitted Fleet to dispense

with its no-annual-fee promise mid-year.10

This reasoning might, of course, apply as well to the

contractual term promising "no annual fee." Rossman has

also stated a claim for breach of contract. If the contract

itself included such a promise, then the contract might

have been breached, but the disclosure statement would

presumably be accurate. The disclosure would not,

therefore, violate the TILA. The contractual question is not,

however, before us and Fleet has taken the position that it

was contractually permitted to impose the fee at any time.

Therefore, we assume, at this juncture, that the contract

did permit Fleet to impose the fee. Under this assumption,

a disclosure that implied that Fleet was committed to

_________________________________________________________________

10. Fleet's statement on the solicitation disclosure insert that it

"reserve[d] the right to change the benefit features associated with your

Card at any time" did not clearly and conspicuously clarify the annual-

fee term. It was located outside the Schumer Box, on a line with a

statement about "Platinum services." The solicitation also included a

"cardmember benefit list," which included such items as a "Free-Year-

End Account Summary," "Free Rental Car Insurance," and the like. Not

included were basic terms such as the APR or fees. Thus, the term

"benefit" may reasonably be understood to only include these "extras,"

and not such features as a lack of an annual fee. Hence, the statement

fails to clearly and conspicuously alert the consumer to the fact that the

"no-annual-fee" feature could be changed at any time, including within

the first year.

15

refrain from imposing periodic fees for a year would be

inaccurate for purposes of the TILA. It would be inaccurate

--at the time of the disclosure--with respect to the legal

obligations of the parties at that time.

If the cardholder agreement did prohibit the imposition of

periodic fees for a least a year, then the facts of this case

would be like those presented in DeMando v. Morris, 206

F.3d 1300 (9th Cir. 2000). There, the credit card issuer

originally offered a permanent, fixed rate of 10.9%. The

issuer sought to raise the rate under the change-in-terms

clause in the applicable agreement. By the time the case

reached the Court of Appeals, the card issuer admitted the

attempt to raise the rate violated the terms of the

agreement, insofar as it promised a permanent fixed rate.

Under those facts, the original disclosures, which promised

a fixed rate, accurately reflected the terms of the underlying

agreement at the time they were made. Id. at 1302-03.

The Ninth Circuit concluded, however, that the notice

announcing the change of rates violated the TILA, as it

disclosed a rate not permitted under the agreement. Id. at

1303. Rossman has not claimed the change-in-terms letter

itself violated the TILA. Consequently, her TILA claim will

survive only if the agreement permitted Fleet to impose the

fee, for if it did not, then the original disclosure would have

accurately reflected the agreement so understood.

In sum, because Fleet maintains--and for present

purposes we assume--that it had the authority under the

cardholder agreement to impose an "annual fee" at any

time, the solicitation disclosures, which promised a"no-

annual-fee" credit card, did not clearly, conspicuously, and

accurately reflect the truth of the matter. A final

determination of whether the statement was false or

misleading for purposes of the TILA, therefore, will turn on

an assessment of the portion of the underlying agreement

the statement purports to disclose. If the agreement does

not permit modification of an annual fee terms before the

completion of the first annual term, the statement"no

annual fee" is, as far as this analysis goes, an adequate

disclosure. If the agreement did permit such a modification,

however, then the disclosure falls short.

16

c. Bait-and-Switch Allegations.

Rossman challenges the District Court's dismissal of her

TILA claim on the basis of her assertion that Fleet here

engaged in a "bait and switch" scheme. Rossman alleges--

and we must assume the truth of these allegations for

purposes of a 12(b)(6) motion--that Fleet solicited her

business with the no-annual-fee offer while intending to

change the terms shortly thereafter. Rejecting this claim,

the District Court held that the legality of such schemes is

outside the TILA's narrow focus on disclosure.

The Federal Trade Commission treats advertising in bait-

and-switch schemes as false or misleading. 16 C.F.R.S 238

("Guides Against Bait Advertising "). Regulation Z also

addresses these schemes.11 See 12 C.F.R. S 226.16(a) ("If an

advertisement for credit states specific credit terms, it shall

state only those terms that actually are or will be arranged

or offered by the creditor."); Ralph J. Rohner & Fred H.

Miller, Truth in Lending 752 (2000) ("This rule is aimed at

the ancient but dishonorable practice of `bait and switch'

advertising where the creditor uses the lure of attractive

credit terms to induce customers in, but no such favorable

terms are in fact available."). Bait advertising, although not

necessarily literally false (there is usually a real item

described in the advertising), is nonetheless considered

deceptive, insofar as it suggests the product advertised is

actually offered and intended to be sold, when the real

intention is simply to create a contact with the buyer that

allows the seller to switch the consumer to a more

profitable sale. It is the bait, not the switch, that is

deceptive. Hence, the deception occurs at the time of the

bait advertisement. Rossman contends Fleet's solicitations

contained a deception of this kind, which negates its claim

_________________________________________________________________

11. Regulation Z also provides, "The disclosures given in accordance with

S 226.5a do not constitute advertising terms for purposes of the

requirements of this section." 12 C.F.R. S 226.16(b) n.36d. Therefore, at

least much of the information contained in the solicitations may not fall

under this rule. Furthermore, the Act does not expressly provide for a

private cause of action for violations of the advertising requirements, so

it is not clear that Rossman could raise such a claim. See 15 U.S.C.

S 1640(a). In any event, Rossman has not alleged a violation of section

226.16.

17

that the disclosures were accurate at the time they were

made.

Citing Clark v. Troy & Nichols, Inc., 864 F.2d 1261 (5th

Cir. 1989), the District Court rejected plaintiff 's position.

Defendant Troy & Nichols offered to obtain a mortgage for

plaintiff Clark on certain terms and the parties entered into

an agreement to that effect. Clark was then offered a

substantially less advantageous set of terms. Clark refused

and the credit arrangement was never consummated.

While accepting that Clark had properly characterized

defendants' actions as a bait-and-switch scheme, the Fifth

Circuit explicitly rejected bait-and-switch actions under the

TILA: "The Truth in Lending Act does not provide a cause

of action when a lender engages in `bait and switch'

techniques. It does require that the lender make certain

disclosures with respect to the offered terms." Id. at 1264.

Under this view, the creditor's intention not to offer the

originally stated terms is irrelevant to the analysis. So long

as the disclosures reflect the stated terms of an agreement,

they are accurate under the TILA. And since, in Clark, the

terms ultimately agreed to were disclosed before the

consummation of the loan there at issue, the requirements

of the TILA were met. Cf. Janikowski v. Lynch Ford, Inc.,

210 F.3d 765, 769 (7th Cir. 2000) (holding that"spot

delivery" schemes, identical in relevant respects to bait-

and-switch schemes, do not violate the TILA).

The District Court here adopted this approach, stating,

"Fleet's disclosures in late 1999 were accurate with respect

to the terms offered at that time; the fact that Fleet allegedly

intended to change those terms in the near further did not

render the disclosures inaccurate for purposes of the TILA."

Rossman, 2000 WL 33119419, at *3.

In one sense, the solicitation disclosures here were

accurate--the agreement then referred to by the disclosures

did not contemplate an annual fee. But in another sense, if

Fleet intended to impose an annual fee shortly thereafter,

the disclosures were at least misleading. A reasonable

consumer would expect that, even if the terms may change,

the stated terms are those that the card issuer intends to

provide. The disclosures--we assume for these purposes--

18

feigned an intention to provide credit under a set of terms

that Fleet did not intend to provide over time. Thus, even if

the language of the disclosures did not imply that Fleet was

obligated for at least a year, the disclosures were

misleading with respect to Fleet's alleged intentions. As the

dissent in Clark noted, such a deception may, in some

ways, be worse than simply inaccurate disclosures:

The majority concludes that even though the lender

never intended to extend credit on the terms disclosed,

the accuracy of the disclosures remain untainted. In

my view, an intention from the outset not to extend

credit on disclosed terms is far more egregious than

inaccurate terms. On careful review of the disclosures,

one might detect an inconsistency between the interest

rate promised and the amortization schedule disclosed.

By contrast, there is no way to enter the lender's mind

to determine whether he means what he discloses.

Disclosures feigning one's true intention, in my view,

are inaccurate.

864 F.2d at 1266 (Thornberry, J., dissenting).

Because the TILA is to be construed strictly against the

creditor, Ramadan, 156 F.3d at 502, it is at least debatable

that the dissent had the better understanding of the

accuracy required by the TILA. We need not enter that

particular debate, however, because we believe, in any

event, this case is distinguishable from Clark .

Clark was a classic bait-and-switch case. The plaintiff

there was first attracted by a deceptive offer. Having

obtained his audience, the lender attempted to switch the

offer to a set of terms more favorable to itself and less

favorable to the borrower. All of this occurred before the

consummation of an agreement. Clark was able to, and

chose to, refuse the switch based on accurate disclosures.

He was never a party to a credit agreement whose terms

were not adequately disclosed.

The disclosures at issue in Clark were initial disclosures

--disclosures that must be made by a specified time before

the consummation of the agreement. With respect to the

terms actually offered, disclosure was achieved by the

19

second disclosure statement. The first statement did not

accurately reflect the terms of the agreement ultimately

offered, but the second statement provided Clark with fully

adequate disclosure before an agreement was reached,

providing Clark with the opportunity to accept or decline

the proposed agreement on the basis of full information.

Armed with that information, he chose not to enter into an

agreement.

Here, by contrast, the original disclosures were not

corrected before Rossman entered into the agreement.

These disclosures remained the relevant disclosures of the

agreement ultimately reached. But it is essential to the

TILA's purposes that consumers be informed of the basic

conditions of credit before they enter a credit relationship.

As the second disclosures in Clark did provide adequate

information before consummation, these concerns were not

implicated there.

This bait-and-switch case, therefore, goes beyond

standard bait-and-switch cases such as Clark. The switch

here did not occur as the result of a sales tactic before the

formation of the contract, but by invoking an undisclosed

term in an existing contract. Rossman entered the

agreement without the benefit of disclosure of what she

alleges was Fleet's intended annual fee. To the extent the

original disclosures were corrected by the notice of change,

this correction happened only after Rossman had used, and

been bound by, the agreement for several months. Had

Rossman received the notice of the change in the form of an

initial notice before opening her account, she would have

been subject to a classic bait-and-switch analogous to

Clark, and would have found herself in a correspondingly

less disadvantageous position.

Significantly, it would appear that Rossman was not

entirely free, following notice of the pending imposition of

the annual fee, to walk away from her credit arrangement

in the same way that Clark was upon receiving his second

set of disclosures. Credit card holders may have balances

they are unable to pay off within a month. And if Rossman

did attempt to cancel the card while carrying a balance,

Fleet retained the contractual authority to assess a 24.99%

APR on the remaining balance. Therefore, there may have

20

been no way to avoid incurring the obligation to pay the

annual fee under the changed contract. As such, the notice

of change was correspondingly less valuable than initial

disclosure of the annual fee would have been.

Furthermore, Congress has imposed special requirements

on credit card solicitations that did not apply to the

mortgage in Clark. Not only must issuers disclose the basic

terms of the agreement prior to consummation ("initial

disclosures"), they must additionally12 disclose--clearly,

conspicuously, and accurately--many of those terms in the

solicitation itself ("solicitation disclosures" or "early

disclosures").13 These requirements are unique to credit and

charge cards.14 They seek to ensure that consumers have

the information needed to make informed choices with

respect to credit cards not only before the agreement is

consummated, but also at the (generally earlier) point at

_________________________________________________________________

12. While distinct requirements apply to solicitation disclosures, and to

initial disclosures, the credit card issuer may fulfil both requirements

with the same instrument:

Combining disclosures. The initial disclosures required by S 226.6

do

not substitute for the disclosures required by S 226.5a; however, a

card issuer may establish procedures so that a single disclosure

statement meets the requirements of both sections. For example, if

a card issuer in complying with S 226.5a(e)(2) provides all the

applicable disclosures required under S 226.6, in a form that the

consumer may keep and in accordance with the other format and

timing requirements for that section, the issuer satisfies the

initial

disclosure requirements under S 226.6 as well as the disclosure

requirements of S 226.5a(e)(2).

12 C.F.R. Pt. 226, Supp. I, cmt. 5a-2.

13. We recognize that the TILA contains a kind of early disclosure

requirement for mortgages, like the one at issue in Clark. 16 U.S.C.

S 1638(b)(2) (requiring disclosures "not later than three business days

after the creditor receives the consumer's written application"). That

provision, however, simply changes the timing of the initial disclosures.

It is not an additional requirement, as is the credit card solicitation

disclosure requirement.

14. Because credit card rates did not decline along with other interest

rates during the 1980s, and were among the most profitable loans

during that period, Congress singled out credit cards for special

treatment. See S. Rep. 100-259, at 2, 1988 U.S.C.C.A.N. at 3937.

21

which they are considering responding to an issuer's

solicitation.

Under the approach urged by Fleet, a credit issuer would

be able to disclose any terms it wanted to, with no intention

ultimately to offer those terms. It could send, together with

the card, a new set of disclosures stating the terms it had

always actually intended to provide. Fleet's approach would

have the potential to render the solicitation disclosure

requirements created by the 1988 amendments to the TILA

entirely ineffectual. Misleading early disclosures would

serve no informative purpose. And worse, the additional

disclosure requirement mandated by Congress--for the

purpose of encouraging informed consumer choices--could

be used for the purpose of deceiving consumers.

The Federal Reserve Board has determined that when a

credit card issuer offers rates or fees that are reduced or

waived for a limited period of time, the issuer must disclose

the applicable rate or fee that will apply indefinitely, and is

permitted to disclose introductory rates only if the period of

time in which the rate or fee is applicable is also disclosed.

12 C.F.R. Pt. 226, Supp. I, cmt. 5a(b)(1)-5 (introductory

rates); cmt. 5a(b)(2)-4 (waived or reduced fees). 15 Thus, as

_________________________________________________________________

15. These comments, in full, read as follows:

Introductory rates--discounted rates. If the initial rate is

temporary

and is lower than the rate that will apply after the temporary rate

expires, the card issuer must disclose the annual percentage rate

that would otherwise apply to the account. In a fixed-rate account,

the card issuer must disclose the rate that will apply after the

introductory rate expires. In a variable-rate account, the card

issuer

must disclose a rate based on the index or formula applicable to

the

account in accordance with the rules in S 226.5a(b)(1)(ii) and

comment 5a(b)(1)-3. An initial discounted rate may be provided in

the table along with the rate required to be disclosed if the card

issuer also discloses the time period during which the introductory

rate will remain in effect.

Waived or reduced fees. If fees required to be disclosed are waived

or reduced for a limited time, the introductory fees or the fact of

fee

waivers may be provided in the table in addition to the required

fees

if the card issuer also discloses how long the fees or waivers will

remain in effect.

22

general matter, credit card issuers are required to disclose

fees whose imposition will be delayed for a given period of

time, such as the annual fee at issue here.

Fleet is apparently of the view that the card issuer's

obligation, under this provision, to disclose the temporary

nature of the fee in advance arises only when the

cardholder agreement, which is ordinarily provided later,

will include mention of the fee. Such a rule, however, would

permit issuers to readily circumvent the requirement. The

common practice of offering cards with low "teaser" rates

would effectively be rendered immune from disclosure

requirements. From the point of view of the consumer,

there is no substantive difference between a card that had

a low "fixed" rate that the issuer secretly intends to

increase six months later, and a card with a low temporary

rate that will similarly increase after half a year. The only

purported basis for the difference in disclosure

requirements is language in a document that, in most

cases, the consumer will not have been provided at the time

of the disclosures. Solicitation disclosures are intended to

alert the consumer to the basic costs of the credit card he

is considering--a purpose unserved where the issuer

conceals the temporary nature of a favorable fee or rate in

this manner.

Because so many credit solicitations do include

introductory rates and fees, it is reasonable to view a

solicitation that promises fixed rates and no annual fees as

describing an agreement under which the issuer intends to

offer those terms until there is a reason to change them. A

statement, therefore, that a card has "no annual fee" made

by a creditor that intends to impose such a fee shortly

thereafter, is misleading. It is an accurate statement only in

the narrowest of senses--and not in a sense appropriate to

consumer protection disclosure statute such as the TILA.

Fleet's proposed approach would permit the use of required

disclosures--intended to protect consumers from hidden

costs--to intentionally deceive customers as to the costs of

credit. Neither the language of the TILA itself, nor

Regulation Z or the Official Staff Interpretations directs

such a result.

23

Rossman has alleged Fleet intentionally and in fact

misled her and others with its disclosure of a "no-annual-

fee" credit card. If Rossman's allegations are true--which

we assume on a motion to dismiss--such misleading

statements are inaccurate for purposes of the TILA, and

violate its requirements.

Conclusion

For the forgoing reasons, we hold that Rossman has

stated a claim under the TILA. Accordingly, we will reverse

the judgment of the District Court, and remand for

proceedings consistent with this opinion.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

24