Petition — Community Loan Corp. v. Cody
Supreme Court brief1980
Ask Donna
What actually matters in this document.
Text
Bupreme Court, U. &
Ein & D
FEB 20 1980
OcTrosBER TERM, 1979
=
No.'f 9 - 1290.
CoMMUNITY LOAN CorRPORATION OF RICHMOND COUNTY,
Petitioner,
Vv.
JESSIE Copy, SALLIE MAkE Copy, and all others
similarly situated,
Respondents.
CoMMUNITY LOAN & INVESTMENT CORPORATION
oF AUGUSTA,
Petitioner,
¥.
JAMES TOUCHSTONE, GLENDA TOUCHSTONE, INEZ
SINGLETON, and all others similarly situated,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
W. Ruetr TANNER
RicHarp M. Kirpy
HANSELL, Post, BRANDON & DorRSEY
3300 First National Bank Tower
Atlanta, Georgia 30303
(404) 581-8000
MIcHAEL J. HENKE
JOHN D. TauRMAN
Vinson & ELKINS
1101 Connecticut Avenue, N.W.
Suite 900
Washington, D. C. 20036
(202) 862-6500
February 20, 1980
PRESs OF BYRON S. ADAMS PRINTING, INC., WASHINGTON, D. C.
TABLE OF CONTENTS
Page
ee ec leks adeeseccene soe aeses 2
i cic es th ecneds ase esen ve 2
SI NINO sig v sv acencccsesesacvccccese 2
evades aces swteevewsyss 3
STATEMENT OF THE CASE .... 1.0... ccc cc cece ccccces 3
Reasons For GRANTING THE Writ
I. The Court of Appeals’ Decision Has Created
An Intercircuit Conflict As To Whether The
McCarran-Ferguson Act Exempts Credit Sales
Of Insurance Policies By Insurance Agents
From The Requirements Of ‘The Truth-In-
a oo og 4b 6 65's won bv 0.000 6
II. By Misapplying The Applicable Decisions Of
This Court, Including Securities and Exchange
Commission v. National Securities, Inc., 393 U.S.
453 (1969), The Court of Appeals’ Decision
Has Emasculated Section 2(b) Of The McCar-
ee 7
III. The Court of Appeals’ Decision Overlooks A
Specific Provision Of Regulation Z Of The
Board of Governors Of The Federal Reserve
Re 15
IV. The Court of Appeals’ Decision Awarding Mul-
tiple Penalties On A Single Transaction Has
Created A Second Intercireuit Conflict ........ 17
V. The Issues Presented By This Case Are Signi-
ficant Questions of Federal Law .............. 19
a ies sso wdbeeeececvece 21
Appenpvix A—Order of the United States District Court
for the Southern District of Georgia, Augusta
Division (February 28, 1975) ...........ccece0. la
ii Table of Contents Continued
Page
Appenpix B—Memorandum Opinion of the United
States District Court for the Southern District of
Georgia, Augusta Division (February 4, 1976) .. 19a
Appenpix C—Findings and Conclusions and Final
Judgment of the United States District Court for
the Southern District of Georgia, Augusta Divi-
sion (February 5, 1976) .........ccccsecesceces 29a
Apprenpix D—Opinions of the United States Court of
Appeais for the Fifth Circuit ...............--- 39a
Apprenpix E—Judgment of the United States Court of
Appeals for the Fifth Circuit ................5. 63a
Appenpix F—Order of the United States Court of Ap-
peals for the Fifth Circuit Denying Petition for
SO eave re Terres errr ere eee 65a
Appenpix G—McCarran-Ferguson Act .............: 67a
Appenpix H—Excerpts from the Truth-in-Lending Act 69a
Appenpix I—Excerpts from Regulation Z of the Board
of Governors of the Federal Reserve System .... 79a
Appenpix J—Insurance Premium Finance Company
Ret of the Bibi of GeOrW. vii vcd cee cwseness 85a
Aprenpix K—Excerpts from Georgia Insurance Code
2 | PPR Peevey ry tee ee ee eee 97a
Appenpix L—Excerpts from Georgia Insurance Code
oe 2) Pe rere Tee rere crore err Tre 101la
Appenpix M—Excerpts from Georgia Insurance Code
8 BURT Pere ey rr Tere err Tee 105a
Aprrenpix N—Georgia Insurance Code Chapter 56-30
(Individual Accident and Sickness Insurance) ...109a
Apprenpix O—Regulations of the Georgia Insurance
Commissioner Governing the Advertising of Acci-
dent and Sickness Insurance ................05: 1338a
Appenpix P—Opinion of the United States Court of
Appeals for the Fifth Circuit in Cochran v. Paco ..15la
Appenpix Q—Opinions of the United States Court of
Appeals for the Fifth Circuit in Perry v. Fidelity
COn TAFE TNMMTONEE CE. occa cccveccccreeccsens 167a
TABLE OF AUTHORITIES iil
CasEs: Page
Addrist v. Equitable Life Assurance Soc’y, 503 F.2d
725 (9th Cir. 1974), cert. denied, 420 U.S. 929
eter Ree RP NAD SEINE SAIC OMIT WA chats Hove Ata 12
Bowles v. Seminole Rock & Sand Co., 325 U.S. 410
See ert ree ery oT CN tay eee 16
Cochran v. Paco, Inc., 606 F.2d 460 (5th Cir. 1979) .5, 11, 20
Dexter v. Equitable Life Assurance Soc’y, 527 F.2d
MUP RE, CAU, POTOE sich vik ¢ Schad cece ein diws 12
FTC v. National Casualty Co., 357 U.S. 560 (1958) ...9, 12
FTC v. Travelers Health Ass’n, 362 U.S. 293 (1960) .. 9
Group Life d& Health Ins. Co. v. Royal Drug Co., 440
U.S. 205 (1979) y ug Co.,
Hooper v. California, 155 U.S. 648 (1895) ............ 7
Lowe v. Aarco-American, Inc., 536 F.2d 1160 (7th Cir.
DE aa nies aces CER Poe ae a 6
Paul v. Virginia, 75 U.S. (8 Wall) 168 (1868) ........ 7
Perry v. Fidelity Union Life Ins. Co., 606 F.2d 468
SUN a oe gar Oe ig ret ao 5,11
Powers v. Sims and Levin, 542 F.2d 1216 (4 i
ee er ee aioe 7 - = 18
Prudential Ins. Co. v. Benjamin, 328 U.S. 408 (1946) .. 7,8
St. Paul Fire & Marine Ins. Co. v. Ba 438
apr) 0 arry, U.S. 531
SEC v. National Securities, Inc., 393 U.S. 453 (1969) .. 7,9,
10, 14
Udall v. Tallman, 380 U.S. 1 (1965) ............005. 16
United States y. South-Eastern Underwriters Ass’
se... CUS
iv Table of Authorities Continued
Page
STATUTES:
Georgia Code Annotated
eS S Peeeeererrrrer ry 15
6 56-701 of Sg... .. occ cdecneneucasseteneeeenes 3, 11
ff) eereereree te ee 3, 11
CSO DED onic ciccccecayaccecnnweege ee erenerees 3, 11
ES Br oe 3, 11
§ 56-3001 ef seq. 20.0.0 ccccccccccesccccsssceces 3,11
§ 84-5301 cf 20g. 2. ccc ccsctcccccsscenesssssnsss 3, 10
McCarran-Ferguson Act, 15 U.S.C. § 1011 et seg. ...passim
Truth-in-Lending Act, 15 U.S.C. § 1601 et seq. ..... passim
9B U.S.C. § 1254E) oo cecncc cc ccccctiscsspencesaues 2
REGULATIONS:
Regulation Z of the Board of Governors of the Federal
Reserve System
Sh re 3
yt Se IR 18
St eer 4,15
Rules and Regulations of the Insurance Commissioner
of the State of Georgia, Chapter 120-2-12 ........ 3, 11
MISCELLANEOUS:
Administrative Office of the United States Courts,
1976 Annual Report .....< sees essscccessssesars 17
1979 Annual Bewpert « ...ssessaueus es Mrapeeernee 17
Insurance Information Institute, Insurance Facts
(1078)... cecccdccsssunneuunene ne seer eee eee 19
IN THE
Supreme Court of the United States
OcToBER TERM, 1979
No.
CoMMUNITY Loan CorporaTION oF RICHMOND COUNTY,
Petitioner,
Vv.
JESSIE Copy, SALLIE Mak Copy, and all others
similarly situated,
Respondents.
CoMMUNITY LOAN & INVESTMENT CORPORATION
or AUGUSTA,
Petitioner,
v.
JAMES TOUCHSTONE, GLENDA TOUCHSTONE, INEZ
SINGLETON, and all others similarly situated,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Community Loan Corporation of Richmond County
and Community Loan & Investment Corporation of
Augusta pray that a writ of certiorari issue to re-
view the judgment of the United States Court of
Appeals for the Fifth Circuit entered in this case on
January 2, 1979.
2
OPINIONS BELOW
The district court’s rulings in this case are an or-
der denying petitioners’ motion to dismiss and cross-
motions for summary judgment (Appendix A) and
a memorandum opinion, findings, and conclusions after
trial without a jury (Appendices B and C). The ma-
jority opinion of the court of appeals and the dis-
senting opinion of Chief Judge Browa are reported at
606 F.2d 499, 508, and reprinted as Appendix D hereto.
JURISDICTION
The judgment of the Court of Appeals for the Fifth
Cireuit (Appendix E) was entered on January 2,
1979. Petitioners were granted an extension within
which to file a petition for rehearing and suggestion
of rehearing en banc. Within that time, on April 2,
1979, a petition for rehearing and suggestion of re-
hearing en bane was filed, and was denied on December
11, 1979 (Appendix F). The jurisdiction of this Court
is invoked under 28 U.S.C. § 1254(1).
QUESTIONS PRESENTED
1. Whether the credit sale of an insurance policy
by a licensed agent is the ‘‘business of insurance’’
within the meaning of Section 2(b) of the McCarran-
Ferguson Act, so as to foreclose application of the
Truth-in-Lending Act where it would ‘‘invalidate, im-
pair, or supersede”’ state laws enacted to regulate such
sales.
2. Whether a lender which makes Truth-in-Lending
loan disclosures respecting a loan is required also
to make different credit sale disclosures as to a por-
tion of the loan proceeds disbursed to an insurance
3
company on behalf of the borrower to pay the first
year’s premium for an insurance policy.
3. Whether the Truth-in-Lending Act’s penalty pro-
visions authorize more than one penalty award on a
single credit transaction involving multiple obligors.
STATUTES INVOLVED
The federal statutes involved are the McCarran-
Ferguson Act, 15 U.S.C. § 1011 et seq., and the Truth-
in-Lending Act, 15 U.S.C. § 1601 et seq. Pertinent por-
tions of these statutes are printed as Appendices G
and H, respectively. The federal regulation involved
is Regulation Z of the Board of Governors of the Fed-
eral Reserve System, 12 C.F.R. § 226.1 et seq. Perti-
nent portions of this regulation are printed as Ap-
pendix I heretc. The state statutes involved are por-
tions of Georgia’s Insurance Code, Ga. Code Title 56,
and Georgia’s Insurance Premium Finance Company
Act, Ga. Code Chapter 84-53. Pertinent portions of
those statutes are printed as Appendices J through N.
The state regulation involved is Chapter 120-2-12 of
the Rules and Regulations of the Insurance Commis-
sioner of the State of Georgia. This regulation is
printed as Appendix O.
STATEMENT OF THE CASE
The petitioners in these consolidated eases are li-
censed and regulated consumer finance lenders. They
will be referred to in the singular as ‘‘Community.”’
Community made loans to the respondents, making
Truth-in-Lending disclosures appropriate for ‘‘con-
sumer loan’’ credit under Section 129 of the Truth-
in-Lending Act, 15 U.S.C. § 1639, and § 226.8(d) of
Regulation Z of the Board of Governors of the Fed-
4
eral Reserve System, 12 C.F.R. § 226.8(d). (P. 84a,
infra.)
At the time of the loan closings, the respondents
applied for insurance policies covering certain health
risks. These applications were supervised by em-
ployees of Community who were licensed by the State
of Georgia as insurance agents. Portions of the loan
proceeds were forwarded with the insurance applica-
tions to an unaffiliated insurance company, American
Family Life Assurance Company, to cover the first
year’s premium for the policies. The insurance com-
pany approved respondents’ applications and issued
the policies directly to the respondents.
The respondents later filed class action suits, con-
tending that the insurance transactions were ‘‘credit
sales’? by Community subject to Section 128 of the
Truth-in-Lending Act, 15 U.S.C. § 1638 (pp. 69a-78a,
infra) and that credit sale disclosures different from
the loan disclosures actually made were required un-
der § 226.8(c) of Regulation Z (pp. 83a-84a, infra) as
to the small portion of the loan proceeds which ac-
companied the application as first year premiums.
Respondents sought monetary awards, including pen-
alties, under Section 130 of the Truth-in-]ending Act,
15 U.S.C. § 1640. (Pp. 76a-78a, infra.)
Community contended in the alternative (1) that
the transactions were loans so that only loan disclo-
sures were required and that such disclosures had
been properly made, or (2) that if the insurance trans-
actions were credit sales, they were sales of insurance
and thus part of the ‘‘business of insurance,’’ the
regulation of which is reserved for Georgia’s insur-
ance laws by virtue of the McCarran-Ferguson Act.
4)
The district court certified the cases as class actions
under Rule 23 of the Federal Rules of Civil Proce-
dure. It found the transactions in question to be credit
sales of insurance, but held that the MeCarran-Fergu-
son Act did not preclude the application of the Truth-
in-Lending Act. It thus entered a class judgment in
favor of respondents for Truth-in-Lending penalties.
(Pp. 29a-38a, infra.)
Upon appeal to the Fifth Cireuit Court of Appeals,
this case was consolidated for argument with two
similar cases, Cochran v. Paco, Inc., 606 F.2d 460 (5th
Cir. 1979), and Perry v. Fidelity Union Life Insur-
ance Co., 606 F.2d 468 (5th Cir. 1979).’ The opinions
in the three cases appear in sequence in the Federal
Reporter, all having been decided by the same three-
judge panel on the same day. Chief Judge Brown con-
curred in the result in Cochran, but dissented in Perry
and in this ease. The opinions of the court of appeals
in Cochran and Perry are printed as Appendices P
and Q, respectively. (Pp. 151a-233a, infra.)
In this ease, the Fifth Circuit majority held that
Community’s employees, acting as licensed insurance
agents of American Family, made credit sales of in-
surance and that Community was a ‘‘seller’’ under
the Truth-in-Lending Act. (P. 44a, infra.) However,
though it conceded that ‘‘the sale of an insurance pol-
icv is undoubtedly the ‘business of insurance’ for Mc-
Carran Act purposes,’’ the majority nevertheless held
that Community’s credit sale of insurance policies was
not protected by the McCarran Act. (P. 44a, infra.)
On that basis, the court of appeals affirmed the district
court. (P. 55a, infra.)
1The Perry case is the subject of a petition for certiorari in
this Court, No. 79-1225, filed February 7, 1980.
6
REASONS FOR GRANTING THE WRIT
I. The Court of Appeals’ Decision Has Created an Intercircuit
Conflict as to Whether the McCarran-Ferguson Act Exempis
Credit Sales of Insurance Policies by Insurance Agents from
the Requirements of the Truth-in-Lending Act.
The United States Court of Appeals for the Seventh
Circuit has decided the same McCarran Act issue as
decided below in this case, reaching the opposite result.
_ See Lowe v. Aarco-American, Inc., 536 F.2d 1160 (7th
Cir. 1976) (per euriam).
In Lowe, an insurance broker selling automobile
insurance arranged credit for his customers’ premium
obligations through a premium financing company.
One of the purchasers of the policies filed a class
action, alleging that the broker and the premium fi-
naneing company failed to make credit disclosures
required by the Truth-in-Lending Act. The district
court dismissed the policyholders’ suit on the basis
of Section 2(b) of the MeCarran-Ferguson Act, and
the Seventh Circuit affirmed, holding:
“(T]he credit sale of insurance policies by an
insurance broker and a premium finance com-
pany [ ] constitutes part of the ‘business of in-
surance’ so as to be beyond the reach of the Truth
in Lending Act.’’ 536 F.2d at 1162.
The majority holding below is squarely in conflict
with the Seventh Cireuit’s decision, as is evidenced
by the majority’s statement in Cochran that it ‘‘de-
eline[d] to follow”? Lowe. (P. 162a, infra.) The Fifth
Circuit in this ease held that Community’s employees,
as ‘‘licensed agents of [the insurer], made a credit
sale of cancer insurance.”’ (P. 44a, infra.) Nonethe-
less, applying its Cochran and Perry holdings, the
7
majority rejected Community’s defense under the Me-
Carran-Ferguson Act and proceeded to apply the
Truth-in-Lending Act. (lp. 44a, infra.)
The law in the Fifth Circuit is thus that the credit
sale of an insurance policy by an insurance agent is
subject to the Truth-in-Lending Act, while the law of
the Seventh Circuit is to the contrary. This conflict
in the application of the MeCarran-Ferguson Act is
irreconcilable and should be resolved by this Court.
II. By Misapplying the Applicable Decisions of this Court, In-
cluding Securities and Exchange Commission v. National Se-
curities, Inc., 383 U.S. 453 (1969). the Court of Appeals’ Decision
Has Emasculated Section 2(b) of the McCarran-Ferguson Act.
Even without regard to the direct conflict in the
circuits created by the decision below, this ease merits
review by this Court. This is so beeause the lower
court misapplied the decisions of this Court eonstru-
ing the MeCarran-Ferguson Act, robbing that Act of
the foree that Congress intended—and this Court has
held—it to have.
The McCarran-Ferguson Act is the product of an
historical process closely tied to the development of
this Court’s jurisprudence under the Commerce Clause
of the Constitution.’ Beginning shortly after the Civil
War, and continuing for seventy-five years, it was as-
sumed that ‘‘[t]he business of insurance is not com-
merce.’’ Hooper v. California, 155 U.S. 648, 655 (1895)
(citing the seminal case of Paul v. Virginia, 75 U.S.
(8 Wall) 168, 183 (1868)). It was thus widely be-
lieved that Congress was powerless to regulate the
? This history is recounted in Prudential Ins. Co. v. Benjamin,
328 U.S. 408, 413-18 (1946).
8
business of insurance under the Commerce Clause
and that the Commerce Clause did not affect the va-
lidity of state insurance regulation and taxation. Con-
sequently, as the insurance industry grew in the nine-
teenth and early twentieth centuries, the states de-
veloped comprehensive systems for regulating and
taxing it.
This settled view of the division between state and
federal power in the field of insurance was shattered
by the Court’s decision in United States v. South-
Eastern Underwriters Ass’n, 322 U.S. 533 (1944).
Following a more modern approach to the Commerce
Clause, the Court held in South-Eastern Underwriters
that the business of insurance is subject to congres-
sional powers over interstate commerce. Not surpris-
ingly, the decision provoked widespread uncertainty
about the continued validity of the varied state sys-
tems of insurance regulation and taxation and about
the impact on the state systems of Congress’ past
and future exercises of its supreme lawmaking powers
under the Commerce Clause.
The MeCarran-Ferguson Act was passed in 1945
to dispel this uncertainty by emphatically supporting
continued state regulation of insurance. This Court
promptly gave effect to that clear congressional pur-
pose, observing that the Act was designed ‘‘broadly
to give support to the existing and future state sys-
tems for regulating and taxing the business of insur-
ance.”’ Prudential Insurance Co. v. Benjamin, 328
U.S. 408, 429 (1946) (state tax on non-resident insurer
not invalid under the Commerce Clause).*
* More recent affirmations of this purpose of the McCarran-Fer-
guson Act may be found in Group Life & Health Ins. Co. v. Royal
9
One of the primary vehicles for achieving this pur-
pose is the first clause of Section 2(b) of the Me-
Carran-Ferguson Act, 15 U.S.C. §1012(b), which
provides that state laws “enacted ... for the purpose
of regulating the business of insurance” may not be
‘invalidate[d], impairfed] or supersede[d]’’ by any
Act of Congress, unless such Act ‘‘specifically relates”
to the business of insurance or is made operative by
another provision of the MeCarran-Ferguson Act.‘
This provision is the bulwark that protects state in-
suranee systems against the overriding effect of the
myriad statutes Congress has enacted to regulate va-
rious aspects of interstate commerce. Without this
provision, integrated state regulation of insurance
would be difficult, because portions of the states’ regu-
latory schemes would be subject to attack as pre-
empted whenever they conflicted with the requirements
or objectives of the multitude of federal statutes and
regulations touching upon interstate commerce.
Drug Co., 440 U.S. 205, 218, n.18 (1979) (‘‘the primary purpose of
MecCarran-Ferguson was to preserve state regulation of the activi-
ties of insurance companies’’), and SEC v. National Securities, Ine,,.
393 U.S. 453, 459 (1969) (‘‘the MeCarran-Ferguson Act was an
attempt .. . to assure that the activities of insurance companies
in dealing with their policyholders would remain subject to state
regulation’’).
*The second clause of Section 2(b), the so-called antitrust pro-
viso, in conjunction with Section 3 of the Act, is addressed par-
ticularly to the effect of the Sherman Act, €layton Act, and Fed-
eral Trade Commission Act on the ‘‘business of insurance.’’ 15
U.S.C. §§ 1012(b), 1013. These sections have been construed by
this Court on several occasions. See Group Life & Health Ins, Co.
v. Royal Drug Co., supra; St. Paul Fire & Marine Ins. Co. v.
Barry, 438 U.S. 531 (1978); FTC v. Travelers Health Ass’n, 362
U.S. 293 (1960); FTC v. National Cas. Co., 357 U.S. 560 (1958).
Section 4 of the Act subjects the ‘‘business of insurance’’ to
the full effect of the National Labor Relations Act, the Fair Labor
Standards Act, and the Merchant Marine Act. 15 U.S.C. § 1014.
10
The proper approach to applying Section 2(b) is
exemplified by the leading case on its construction,
Secur’ties and Exchange Commission v. National Se-
curities, Inc., 393 U.S. 453 (1969). Section 2(b) is
typically invoked, as it was in National Securities,
when a party relies on state law to avoid the applica-
tion of the federal statute. If the federal statute is
not excepted from the operation of Section 2(b),° the
inquiry proceeds in two steps: whether the state law
on which the party relies was ‘‘enacted . . . for the
purpose of regulating the business of insurance,”’ and,
if so, whether such state law would be ‘‘invalidate[d],
impair[ed], or supersede[d]’’ by application of the
federal statute. See National Securities, 393 U.S. at
457-58, 463.
Accordingly, the first inquiry that the lower court
should have made is whether the state laws on which
Community relied were ‘‘enacted ... for the purpose
of regulating the business of insurance.’’ On this issue,
National Securities provides authoritative guidance:
state laws enacted ‘‘to secure the interests of those
purchasing insurance policies” are protected by Sec-
tion 2(b). See 393 U.S. at 460. Here, Community has
consistently relied on Georgia statutes — including
Georgia’s comprehensive Insurance Code — that are
expressly addressed to the purchase of insurance pol-
icies and to the “activities of insurance companies in
dealing with their policyholders,’’ 393 U.S. at 459.°
5 See note 4 above, and accompanying text. In Cochran v. Paco,
the Fifth Cireuit expressly found no exception for the Truth-in-
Lending Act. (P. 58a, infra.)
® Georgia’s Insurance Premium Finance Company Act, Ga. Code
Ann, § 84-5301 et seg. (pp. 85a-95a, infra) requires specifie credit
disclosures closely akin to those contained in the Truth-in-Lending
Act. Id. § 84-5309. (Pp. 91a-92a, infra.) However, by explicit leg-
11
Although it paid lip service to National Securities,
the lower court failed to follow the path set out in
that case. Indeed, the court’s reasoning indicates a
complete unawareness that Section 2(b) is designed
to protect state insurance schemes. The court of ap-
peals instead approached Section 2(b) as if its pur-
pose were to prevent the application of federal stat-
utes only to certain core functions of insurance com-
panies.
This misstep is readily apparent in the court of ap-
peals’ opinions in the companion cases of Cochran Vv.
Paco, Inc., supra, and Perry v. Fidelity Union Life
Insurance Co., supra, which formed the basis for its
islative exemption, insurers authorized to do business in Georgia
and ‘any licensed resident local agent as to premiums on business
produced by such agent’’ are excused from compliance with the
Insurance Premium finance Company Act. Jd. § 84-5302(a). (P.
85a, infra.) Moreover, a separate provision expressly exempts sales
of sickness insurance from the premium financing disclosure re-
quirements. Id. § 84-5302(e). (Pp. 85a, infra.)
Sales of sickness insurance by insurance companies and local
agents are regulated under the Georgia Insurance Code, Ga.Code
Title 56. (Pp. 97a-131a, infra.) The Code generally proscribes any
“unfair or deceptive act or practice.’’ Jd. § 56-701 et seg. (Pp. 97a-
100a, infra.) An agent’s license can be suspended or revoked for
misrepresentations. Jd. § 56-813a. (Pp. 102a-103a, infra.) Every
insurance contract must specify the premium and premium pay-
ment terms. Id. §§ 56-2413(2)(e) and (3). (P. 107a, infra.) In
addition, the Insurance Code contains a Chapter specifically ad-
dressing individual accident and sickness insurance, td. § 56-3001
et seq. (pp. 109a-131a, infra), including provisions requiring the
insurer to state the ‘‘entire money and other considerations’’ re-
quired to be paid for the insurance. Id. § 56-3002(1). (P. 110a,
infra.) The Insurance Commissioner must approve all policy and
application forms, and such documents must specify premium pay-
ment terms. Id. § 56-2410, 2413(2)(e) and (3). (Pp. 105a-106a,
107a, infra.)
Finally, the Georgia Insurance Commissioner has promulgated
regulations specifically governing the advertising of accident and
sickness insurance, Chapter 120-2-12 (pp. 133a-150a, infra), in-
cluding a provision prohibiting misleading omissions about the
“‘premium payable.’’ Id. § 120-2-12-.06(1). (P. 138a, infra.)
12
holding in this ease. (Pp. 43a-44a, 162a-163a, 170a-
171la, infra.) ‘The court restricted the holding in Na-
tional Securities to cover only activities affecting ‘‘the
type of policy which could be issued, [and] its reli-
ability, interpretation, and enforcement,’’ quoting Na-
tional Securities, 393 U.S. at 460. (P. 163a, infra.)
Taking this narrow view, the court isolated the financ-
ing aspect of credit sales of insurance policies by
insurers and their agents and labelled it as merely
‘peripheral’ or “ancillary’’ to the concern of Sec-
tion 2(b). (Pp. 44a, 164a, infra.) The lower court’s
opinion thus opens state regulation of the dealings
between insurers and their customers to piecemeal at-
tacks by decreeing that some elements of those dealings
may be unprotected by Section 2(b)."
Had it followed the teachings of National Securities,
the court of appeals would have recognized that the
Georgia laws on which Community relies are laws
enacted for the purpose of regulating the dealings
between insurers and their customers and thus are
protected by Section 2(b) and that the application
of the Truth-in-Lending Act would impair or super-
7 Even if this selective approach were proper, the extension of
credit by insurers and their agents to enable or induce people to
buy insurance policies cannot be deemed a merely ‘‘ancillary’’
aspect of insurance transactions. Advertising by insurers and
agents similarly induces the purchase of insurance policies, and
such advertising has been recognized to be a part of the ‘‘business
of insurance’’ since the Court’s decision in FTC v. National Cas.
Co., supra. See also Dexter v. Equitable Life Assurance Soc’y., 527
F.2d 233, 235 (2nd Cir. 1975) (tying purchase of life insurance to
mortgage loan as method of inducing the purchase of policies ‘‘an
integral part of ‘the business of insurance’ ’’) ; Addrisi v. Equita-
ble Life Assurance Soe’y., 503 F.2d 725 (9th Cir. 1974), cert.
denied, 420 U.S. 929 (1975) (same). Chief Judge Brown made the
same point in his dissent in Perry. (Pp. 186a-187a, infra.)
13
sede them by imposing requirements that Georgia has
deliberately chosen not to adopt.’
It is instructive to consider the extreme to which
the lower court went to apply a federal statute in
derogation of Georgia insurance law. It first split a
“‘consumer credit sale’? into two parts. Though ac-
knowledging that one part—-the ‘‘sale’’—is ‘‘undoubt-
edly the ‘business of insurance’’’ and thus reserved
for state insurance regulation (p. 44a, infra), it held
that the other part—the type of sale (‘‘consumer
eredit’’)—is not part of the business of insurance.
The court then put the two parts back together to
find liability, since without both parts—that is, with-
out a “‘consumer credit sale’’—no Truth-in-Lending
Act violation could have been found.
In his dissent, Chief Judge Brown recognized the
inconsistency in this position:
“The transaction was a credit sale. This is a
species of sale, but a sale nonetheless, Although
the MeCarran Act is as inscrutable as Mona Lisa
in many respects, there is one principle upon
which the Court and I agree: the sale of an insur-
* As Judge Brown said in dissent, the Fifth Circuit's majority
opinion would:
‘‘not only be superimposing additional requirements . . . but
. construing TIL to invalidate completely the Georgia ex-
emptions in direct contravention of § 2(b). We can think of
no clearer ‘conflict’, to use the District Court’s term, than
exists where a state has affirmatively relieved insurance com-
panies and their agents and certain premiums from credit
disclosure requirements. The nonaction—purposeful and non-
inadvertent—that is expressly legal for an insurance agent
in Georgia would be expressly illegal under federal law.
TIL’s application would thus amount to invalidation with a
vengeance and reduce McCarran to a nullity.’’ (Pp. 60a-61a,
infra.) (Emphasis in original.)
14
ance policy is squarely within the ‘business of in-
suranee,’ as is the licensing of agents, ante, 606
F.2d at 503. SEC v. National Securities, Inc.,
1969, 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668.
Therefore, McCarran should exempt the defend-
ants from TIL if TIL would invalidate, impair
or supersede applicable Georgia law.” (P. 56a,
infra.)
Chief Judge Brown then said that even if the trans-
action could properly be bisected, the “‘financing”’ of
the sale of insurance is also part of the business of
insurance :
“Second, even if I could agree with the Court
that the issue here is financing, separate and apart
from the sale of insurance, I would still disagree
with their result for reasons stated in my dissent
in Perry, ante, 606 F.2d at 475-478. The Court
has assumed that Community was an insurance
seller. I am convinced that financing of premiums
by the one selling the insurance is part of the
‘business of insurance’ which is covered by the
McCarran Act. When an insurance seller offers
premium financing in conjunction with the sale
of insurance, this financing is an inducement to
the purchaser to buy. It is such an integral part
of the actual sale that the insurer-insured rela-
tionship, emphasized in National Securities, 393
U.S. at 460, 89 S.Ct. 564, is directly involved.
This is the ‘business of insurance’ which MeCar-
ran exempts from federal control.’’ (Pp. 56a-57a,
infra.)
The impact of the majority opinion in this case is
clear: the ‘‘business of insurance,’’ insofar as the sale
of insurance is concerned, has been dissected into
those parts which are reserved for state insurance
regulation because of the McCarran-Ferguson Act and
ee CCCttt((#é...e.gwworeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee eee _ —. = ~——
—— =e - — eT — SS ee aa eee 4 aes
15
those which are not. The same process could be used
to apply any federal statute to sales of insurance. All
that is required is that the particular type of sale be
deemed not to be the business of insurance. Such an
approach undermines Congress’ broad mandate that
all of the business of insurance is reserved for state
insurance regulation.
III. The Court of Appeals’ Decision Overlooks a Specific Pro-
vision of Regulation Z of the Board of Governors of the
Federal Reserve System.
At the time of the credit transactions in this litiga-
tion, Community made Truth-in-Lending disclosures
required for loans. Georgia law governing the type of
loan in question is complex, resulting in complex dis-
closures. See Ga. Code Ann. Chap. 25-3. The form of
the Touchstone transaction is illustrative, and appears
in the Fifth Circuit’s opinion in this ease. (P. 45a,
infra.) It shows twenty-five separate loan disclosures,
only the next to last of which is involved in this liti-
gation:
“Check payable to American Family Life As-
surance Comp. a sistance
There is a provision in the loan disclosure section
of the Truth-in-Lending Act requiring disclosure, in
connection with a loan, of the amount of credit that
was was “‘paid to the customer, or for his account or
to another person on his behalf.’’ 12 C.F.R. § 226.8
(d)(1). (P. 84a, infra.) The itemization showing the
‘check payable to American Family Life Assurance
Comp.” is in clear compliance with that regulation.
In other words, the regulations set out a procedure
for disclosing the disbursement of the insurance prem-
16
ium to a third person on behalf of the borrower, and
Community complied with that procedure. The Fifth
Circuit, however, found a Truth-in-Lending violation
in Community’s failure, either in addition to or in
substitution for that disclosure, to extract this $60.00
item from the overall loan transaction and make dif-
ferent ‘‘credit sale” disclosures concerning it.
To veach this result, the Fifth Circuit majority (1)
brushed aside state law to avoid what it termed “a
hypertechnical interpretation of ‘seller’ or ‘sale’ based
on state law ...’’ (p. 50a, enfra); (2) ‘‘pierced cor-
porate veil[s] to avoid ‘work[ing] an injustice’’’ (p.
52a, infra); and (3) gave no consideration to the spe-
cific regulation of the agency charged with adminis-
tration and supervision of the Act, contrary to the
direction of this Court.’ In short, rather than apply-
ing the plain language of Regulation Z concerning the
disclosure required where loan proceeds go to a third
person, the Fifth Circuit created a novel theory upon
which to base Community’s liability to the members
of the class.
This type of innovative judicial construction may
have helped to stimulate the burgeoning load of Truth-
in-Lending litigation in the federal courts, and par-
ticularly in the Fifth Circuit. In 1972 there were 415
such suits nationwide; in 1979 there were 2,300. In
the Fifth Circuit, the number of such suits increased
from 162 in 1972 to 1,077 in 1979, 46 percent of all
Truth-in-Lending suits filed in the United States in
that year. The district courts in Georgia alone were
® Udall v. Tallman, 380 U.S. 1 (1965) ; Bowles v. Seminole Rock
& Sand Co., 325 U.S. 410 (1945).
17
the origin of 685 such filings in 1979, 29 percent of
the nationwide total.”
Ever-expanding standards for creditor liability, as
exemplified by the Fifth Circuit’s decision in this case,
cause enormous uncertainty among ereditors and the
public and induce the filing of more and more suits
under the Act. This case presents an opportunity for
this Court to set guidelines for the Act’s construction
and application.
IV. The Court of Appeals’ Decision Awarding Multiple Penalties
on a Single Transaction Has Created a Second Intercircuit
Conflict.
The Fifth Cireuit’s opinion in this case is unusual,
in that it causes two separate intercircuit conflicts.
The first was discussed in Part I above. The second
involves the Court’s application of Truth-in-Lending
penalties. The Fifth Circuit’s approach is to multiply
the penalty for a single transaction by the number
of borrowers involved in the transaction. That ap-
proach is squarely contrary to the approach taken
by the Fourth Cireuit Court of Appeals, which is to
penalize the lender once on each transaction where
an improper disclosure occurs.
The Truth-in-Lending penality statute applicable
to this litigation is as follows:
‘“‘(a) Except as otherwise provided in this Sec-
tion, any ereditor who fails in connection with
1°The statistics in this paragraph are from the 1976 Annual
Report of the Administrative Office of the U.S. Courts (Table 33,
Page 200) and the 1979 Annual Report of the Administrative
Office of the U.S. Courts (Table 29, page 70). These reports are
for the 12-month period ending June 30 for the year concerned
in the report.
18
any consumer credit transaction to disclose to
any person any information required under this
Chapter to be disclosed to that person is lable
to that person in an amount equal to the sum
of (1) twice the amount of the finance charge
in connection with the transaction, except that
the liability under this paragraph shall not be
less than $100.00, nor greater than $1,000.00; and
(2) in the ease of any successful action to en-
force the foregoing liability, the costs of the ac-
tion, together with the reasonable attorney’s fees
as determined by the court.’’™
Some of the credit transactions in this litigation in-
volve notes on which there are two (or more) obli-
gors. The Fifth Circuit majority held that, even
though there was but one credit transaction, and
even though Regulation Z requires disclosure to only
one of multiple obligors, 12 C.F.R. § 226.6(d) (p. 79a,
infra), Community was liable for the entire statu-
tory penalty to each of the multiple obligors in each
of the transactions. (P. 55a, infra.)
This multiplication of penalties on a single trans-
action is in direct conflict with the decision of the
Fourth Circuit Court of Appeals in Powers v. Sims
and Levin, 542 F.2d 1216 (4th Cir. 1976). There, the
court of appeals held that the Truth-in-Lending Act
11This provision was amended in 1974 by Pub. L. No. 93-495,
Title IV, Section 408(a) (October 28, 1974), 88 Stat. 1518. How-
ever, the penalty section above quoted is still part of the law. The
change that was made in 1974 affected the manner in which
‘‘elass’’ penalties should be assessed. See 15 U.S.C. § 1640(a) (2)
(B). (P. 76a, infra.) Though this case was certified as a class
action after the amendment, the parties stipulated that the pre-
vious law would be applicable, so that the ‘‘non-class’’ penalty
provisions are pertinent to this litigation. See 15 U.S.C. § 1640
(a)(2)(A). (P. 76a, infra.)
19
authorizes only a single penalty per transaction and
that penalties are not to be multiplied merely because
there was more than one obligor on a transaction. In
reaching this result, the Fourth Circuit considered the
legislative history, particularly the pertinent House
Report:
‘**Any ereditor failing to disclose required in-
formation would be subject to a civil suit with a
penalty equal to twice the amount of the finance
charge, with a minimum penalty of $100 and a
maximum penalty not to exceed $1,000 on any
individual credit transaction.’ 1968 U.S. Code
Cong. and Adm. News p. 1976 (Emphasis Add-
ed).’’ 542 F.2d at 1219.
The anomalous result that in one eireuit a creditor
faces a single penalty per transaction, while in another
circuit he faces a penalty which is multiplied by the
number of obligors in a transaction, should be cor-
rected by this Court.
V. The Issues Presented by this Case Are Significant Questions
of Federal Law.
This case presents fundamental issues concerning
the interpretation and administration of two signifi-
cant federal statutes, as well as two separate inter-
circuit conflicts.
For thirty-five years, pursuant to Congressional de-
sign, the McCarran-Ferguson Act has nurtured and
protected a pervasive system of state regulation of
insurance. Under state regulation, that industry has
become one of the Nation’s largest, with 1976 prem-
iums in excess of 127 billion dollars. Insurance In-
formation Institute, Insurance Facts 9 (1978 ed.).
20
Although comprehensive statistics regarding the vol-
ume of insurance sold on credit do not appear to
be available in published form, a Federal Reserve
Board Study indicates that, in only seven states, more
than 375 million dollars in premiums were financed
during 1975. Amicus Brief of the Federal Reserve
Board in Cochran v. Paco, 606 F.2d 460 (5th Cir.
1979), Table I. Thus, the MeCarran-Ferguson Act
issue in this case—whether federal regulation shall
supersede state insurance regulation with respect to
certain sales of insurance (here, credit sales)—is of
enormous significance both to the insurance industry
and to the consuming public. More important, it has
far-reaching implications for state regulators and for
our federal system of government.
The Truth-in-Lending Act is a recent exercise of
Congress’ powers under the Commerce Clause to regu-
late in detail an array of business practices. The in-
creasing significance of this statute and its growing
impact on the daily affairs of this Nation are sug-
gested by the dramatie growth in Truth-in-Lending
litigation in the federal courts—to over 2,000 such
suits in 1979—as discussed in Part III above. The
Truth-in-Lending questions presented by this case—
whether the Truth-in-Lending Act applies at all to
the sale of insurance, the propriety of multiple pen-
alties for a single violation, and the necessity of credit
sale disclosures in a loan transaction—are recurring
and important.
21
CONCLUSION
The petition for a writ of certiorari should be
granted for the reasons set forth above.
Respectfully submitted,
W. Ruerr TANNER
RicHarp M. Kirsy
HANSELL, Post, BRANDON & DorsEy
3300 First National Bank Tower
Atlanta, Georgia 30303
(404) 581-8000
MICHAEL J. HENKE
JOHN D. TAURMAN
Vinson & ELKINS
1101 Connecticut Avenue, N.W.
Suite 900
Washington, D. C. 20036
(202) 862-6500
February 20, 1980
Appendices
la
APPENDIX A
IN THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF GEORGIA, AUGUSTA DIVISION
Civil Action No. 1863
Jessie Copy, Sauure Mar Copy and all others similarly
situated, Plaintiffs
VS.
Community Loan Corporation OF RicHMonpD County,
Defendant
Civil Action No. 1864
JAMES TOUCHSTONE, GLENDA TOUCHSTONE, INEZ SINGLETON
and all others similarly situated, Plaintiffs
VS.
Community Loan & INVESTMENT CorPORATION OF AUGUSTA,
Defendant
ORDER
(Filed February 28, 1975)
This class action arises as a result of alleged viola-
tions of the disclosure requirements for credit sales under
the Truth-in-Lending Act, 15 U.S.C. § 1601, et seg. Juris-
diction is founded on § 130e of the Act, 15 U.S.C. § 1640(e),
and 28 U.S.C. § 1337. The case is now before this Court on
defendants’ motion to dismiss for failure to state a claim,
and on both parties’ motions for summary judgment.
The relevant facts are undisputed. Both defendants are
corporations engaged in the business of lending money in
Richmond County, Georgia. During 1973, plaintiffs entered
2a
into business transactions with the defendants consisting
of loans of money under the Georgia Industrial Loan Act,
Ga. Code Ann. § 25-301, et seg. In making these loans, de-
fendant complied with the requirements of the Truth-in-
Lending Act regarding consumer loans; however, plaintiffs
allege that credit sale disclosures required under the Act
should have been made with respect to a portion of the
loan proceeds used to finance cancer insurance policies
plaintiffs claim defendants sold them. The policies in ques-
tion were issued by the American Family Life Assurance
Company of Columbus, Georgia (American Family). De-
fendants’ loan managers, acting as insurance agents for
American Family Life, took applications for the insur-
ance after the defendants loaned plaintiffs certain sums
of money. Sixty dollars of the loan proceeds for family
insurance coverage or forty dollars for single coverage
was used as the premium payment to American Family
and was submitted along with the plaintiff’s application.
The plaintiffs’ only contact in regard to their purchase of
the cancer insurance policies was with defendants’ loan
managers on the loan office premises. The President of
defendants, Community Loan & Investment Corporation
of Augusta and Community Loan & Investment Corpora-
tion of Richmond County, Mr. William W. Murphy, Jr.,
established policies and procedures to be followed by the
defendants’ employees in handling the cancer insurance,
and gave final approval to American Family to license de-
fendants’ loan managers as insurance agents for American
Family. The cancer insurance program was initiated in
the latter part of 1972, but was temporarily terminated
by Mr. Murphy in April or May of 1973 because he was
not satisfied with it. Later that year, however, Mr. Murphy
made the decision to permit the program to begin again.
Defendants’ motion to dismiss is based entirely on its
contention that the McCarran-Ferguson Act, 15 U.S.C.
§ 1011, ef seq., precludes application of the Truth-in-Lend-
3a
ing Act to these transactions.’ Specifically, defendants as-
sert that the sale of insurance is part of the business of
insurance and is, therefore, within the scope of the Mc-
Carran Act. See SEC v. National Securities, Inc., 393 U.S.
453, 459-60 (1969) (the selling and advertising of insur-
ance policies is covered by the McCarran-Ferguson Act).
Consequently, since the State of Georgia has adopted laws
comprehensively regulating the business of insurance, de-
fendants conclude that the McCarran Act takes the trans-
action in question outside the scope of the Truth-in-Lending
Act.
However, defendants cite no Georgia legislation spe-
cifically overriding or superseding the Truth-in-Lending
Act, nor do they demonstrate how application of this Act
would interfere with state legislation. Moreover, research
reveals-that the only Georgia statute directed toward dis-
closures accompanying sales of insurance exempts all in-
surance companies and their local agents from its cov-
erage. Ga. Code Ann. §§ 84-5302 and 84-5309. Therefore, no
conflict exists between requirements under Georgia iaw
and under the Truth-in-Lending Act. And even if the
State of Georgia had passed legislation requiring dis-
1The MeCarran-Ferguson Act states in relevant part:
‘‘Congress hereby declares that the continued regulation
and taxation by the several States of the business of insur-
ance is in the public interest and that silence on the part of
the Congress shall not be construed to impose any barrier to
the regulation or taxation of such business by the several
States.’’ 15 U.S.C. § 1011.
‘‘(a) The business of insurance, and every person engaged
therein, shall be subject to the laws of the several States
which relate to the regulation or taxation of such business.
‘*(b) No act of Congress shall be construed to invalidate,
impair, or supersede any law enacted by any State for the
purpose of regulating the business of insurance, o: which im-
poses a fee or tax upon such business, unless such Act spe-
cifically relates to the business of insurance... .’’ 15 U.S.C.
§ 1012.
4a
closures in the sale of insurance, the Truth-in-Lending Act
could not be interpreted as invalidating, impairing, or
superseding state law since section 111 of the Act spe-
cifically provides that “[t]his title does not annul, alter, or
affect, or exempt any creditor from complying with, the
laws of the State relating to the disclosure of information
in connection with credit transactions, except to the extent
that those laws are inconsistent with the provisions of
this title or regulations thereunder, and then only to the
extent of their inconsistency.” 15 U.S.C. § 1610(a). Conse-
quently, the Federal Reserve Board has determined that
the credit sale of insurance is governed by the Truth-in-
Lending Act.’
Logic also dictates the rejection of the defendants’ posi-
tion. To apply the McCarran-Ferguson Act as broadly as
defendants suggest would effectively bar the application of
any federal statute relevant to the business activities of
insurance companies regardless of whether state legisla-
tion covered the specific transaction in question or not.
This interpretation justifiably has not been accorded the
McCarran Act by federal courts in other contexts. E.g.,
Atlantic & Pacific Insurance Co. v. Combined Ins. Co.,
312 F.1d 513, 515 (10th Cir. 1962); Sears, Roebuck & Co.
v. All States Life Insurance Co., 246 F.2d 161, 172 (5th
Cir. 1957); Zachman & Erwin, 186 F. Supp. 691, 694 (S.D.
Texas 1960).
2 A Federal Reserve Board letter provides:
‘‘This responds to your letter of August 7, 1969 and to
* * *’s of September 8, 1969, both of which inquired as to
what type of disclosures an insurance broker or agent who
handles the insurance and finances the premium could make.
In our opinion, an insurance agent is selling insurance. Con-
sequently, when he also provides consumer credit for premium
financing, he is making a credit sale under § 226.2(n) (| 3510)
and disclosures under § 226.8(b) ({ 2567) would be required.’’
CCH Consumer Credit Guide {30,257 (transfer binder)
(excerpts from F.R.B. Letter of January 5, 1970, No, 225
by Frederic Solomon, Director).
5a
Nevertheless, defendants cite two federal district court
opinions, Gerlach v. Allstate Ins. Co., 338 F. Supp. 642
(S.D. Fla. 1972) and Ben v. General Motors Acceptance
Corp., 374 F. Supp. 1199 (D. Colo. 1974), as support for
their argument that the McCarran Act bars application of
the Truth-in-Lending Act under the facts in this case.
In Gerlach, supra, the Court for the Southern District
of Florida in dictum stated that to apply the Truth-in-
Lending Act requiring extensive disclosures not required
under Florida law to premium financing would violate
the McCarran Act. Id. at 650. The court focused on a
Florida statute setting forth all disclosures required in
a premium financing agreement and stated that the only
material question with respect to the application of the
McCarran Act is whether any state regulation on the same
subject as the Truth-in-Lending Act exists. Jd. Therefore,
even though the state legislation was not identical to the
relevant provisions of the Truth-in-Lending Act, the Court
concluded that such legislation precluded the application
of the federal legislation. In Ben v. General Motors Ac-
ceptance Corp., 374 F. Supp. 1199 (D. Colo. 1974), the
Court for the District of Colorado stated even more broad-
ly that since state legislation occupied the field of regu-
lating activities of insurance companies “in a comprehen-
sive manner,” the Truth-in-Lending Act could not apply
to the insurance industry. Id. at 1201.
Whatever the merits of these holdings with respect to
Florida and Colorado state legislation, this Court cannot
agree that once a State undertakes to regulate the insur-
ance industry, no federal legislation can apply unless it
specifically relates to the business of insurance.’ As plain-
tiffs point out, and as the Georgia Code makes clear,
Georgia legislation does not comprehensively regulate the
* See 15 U.S.C. § 1012(b). Because of this Court’s holding with
respect to the applicability of the McCarran-Ferguson Act, it is
unnecessary to consider plaintiffs’ contention that Truth-in-Lend-
ing relates specifically to the business of insurance.
6a
financing; of insurance premium. In fact, the State of
Georgia has absolutely no legislation comparable to or
even vaguely resembling the Truth-in-Lending Act. The
only statute applicable to the sale of insurance is Ga.
Code Ann. § 84-5309, which does not cover domestic insur-
ance companies and their agents. See Ga. Code Ann. § 84-
5302. In light of these facts, this Court cannot hold that
the Truth-in-Lending Act invalidates, impairs, or super-
sedes applicable state legislation regulating the business
of insurance. Accordingly, defendants’ motion to dismiss
on this ground must be denied.
Turning now to the parties’ cross-motions for summary
judgment, it appears that the basis of their disagreement
as to the applicability of the Truth-in-Lending Act rests
on whether defendants are sellers within the meaning of
the Act. According to the definition of a credit sale in 15
U.S.C. § 1602(g), three elements must be present before
a defendant can be held accountable for failing to make
the disclosures required under that section: (1) there
must be a sale; (2) consumer credit must be extended or
arranged by the defendant; and (3) the defendant must
be a seller. In the present case, a sale occurred since the
purchase of insurance constitutes a sale as the term is
used in the Truth-in-Lending Act. Stefanski v. Mainway
Budget Plan, Inc., 456 F.2d 211 (5th Cir. 1972). More-
over, defendants have admitted that credit was extended
or arranged by them for plaintiffs. Thus, the only re-
maining question is whether the third requirement for
liability—that defendants are sellers—has been met under
the facts in this case.
Plaintiffs argue for an application of a “proximate
cause” test to determine whether defendants are sellers
of cancer insurance. Plaintiffs assert that if the Court uses
this standard in analyzing defendants’ actions with re-
spect to the transactions in question, summary judgment
must be granted in their favor because there is no sub-
7a
stantial question of fact regarding causation. Specifically,
plaintiffs contend that this Court must find as a matter
of law that the defendants themselves were substantial
factors in bringing about the alleged sale, or alternatively,
that defendants’ loan managers were the proximate cause
of the sales and since they were acting within the scope
of their employment with the defendants when they sold
the insurance, their acts are attributable to the defendants.
Defendants, on the other hand, strenuously argue that
a sale of insurance does not occur until the insurance
company actually accepts the application from its agent.
Pointing to numerous Georgia cases holding that a con-
tract of insurance does not arise until the application is
approved by the company, defendants assert that all that
took place in this case was ‘‘the transmission to the in-
surance company of an offer by the prospective insured
to purchase the insurance, which offer could be withdrawn
by the plaintiffs at any time ... .” Defendants’ Brief in
Opposition to Plaintiffs’ Motion for Summary Judgment
and In Support of Defendants’ Motion for Summary
Judgment, pp. 16-17. Therefore, defendants contend that
since there was no sale of insurance by defendants’ loan
managers, defendants could not be sellers within the mean-
ing of the Truth-in-Lending Act.
Upon consideration of the defendants’ arguments with
respect to this issue, this Court cannot agree that defend-
ants were not sellers for the reason that no contract arose
until the time the plaintiffs’ applications were accepted.
Whatever the effect accorded the transactions by state
law, a Federal Reserve Board letter directly on point
clearly states that “‘an insurance agent is selling insurance”
for purposes of the Truth-in-Lending Act.* CCH Consumer
*See F.R.B. letter, note 2 supra. Defendants’ attempts to dis-
tinguish this letter on the grounds that it is ‘‘factually inapposite
in that the agent in the case at bar did not ‘finance the premiums’ ’’
and that it is ‘‘ambiguous in its use of the phrase ‘handles the in-
8a
Credit Guide { 30,257 (transfer binder) (letter of Jan. 5,
1970, No. 225 by Frederic Solomon, Director). As the de-
fendants themselves note in their motion for summary
judgment, the interpretation which the Federal Reserve
Board accords the Truth-in-Lending Act in its opinions is
entitled to great weight by the courts “because of the
important interpretive and enforcement powers granted
this agency by Congress ... .” Bone v. Hibernia Bank,
493 F.2d 135, 1389 (9th Cir. 1974) ; See Philbeck v. Timmers
Chevrolet, Inc., 499 F.2d 971, 976 (5th Cir. 1974). Hence,
the Board’s decision on the applicability of the Truth-in-
Lending Act to insurance agents is very persuasive evi-
dence against defendants’ position.
Also persuasive is the fact that in the present case
applications to the insurance company provided no infor-
mation upon which the company could choose to reject
them, and in fact, no class member’s application was ap-
parently rejected. Thus, the final step in the consummation
of the sales transactions in question was a mere formality.
To hold that an insurance agent is not a seller for the
reason that the insurance company merely has the legal
surance’ and is not directed to any specific fact situation’’ are
unconvincing. First, from the clear wording of the letter itself
there is no question that the Federal Reserve Board regarded an
agent as engaged in the business of selling insurance whether or
not he finances the premiums. If an agent finances the premiums,
he has conducted a credit sale governed by the Truth-in-Lending
Act. However, even if he does not finance the premiums, he still
sells the policy to the applicant. Secondly, the use by the Federal
Reserve Board of the phrase ‘‘handles the insurance’’ does not
appear to be critical or to take the present case outside the scope
of the 1970 letter. Moreover, the cases which defendants cite as
demonstrating that state law concepts as to the definition of a
credit sale should control are clearly distinguishable from the
present case because they relate only to the time at which a sale
is consummated and not to what constitutes a credit sale. See
F.R.B. Opin. Letter, November 23, 1971, CCH Consumer Credit
Guide { 30-769; F.R.B. Opin. Letter June 4, 1970, CCH Consumer
Credit Guide {| 30,399. ;
9a
right to reject submitted applications when the company
does not participate at all in the merchandising of the
insurance is to ignore reality.”
In addition, policy considerations require the rejection of
defendants’ position. The purposes of the Truth-in-Lending
Act as stated in the Act itself 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... .” 15 U.S.C. § 1601. To effectuate this purpose,
the terms “seller” and “credit sale” should not be given
restrictive, unrealistic interpretations which ignore the
sense in which the words are employed in the Act. In the
present case, the purchaser decided whether to buy the
cancer insurance at the time the insurance agent described
its provisions to him. Had the insurance company rejected
an application, it would have been subsequent to any inter-
action between the purchaser and a representative of the
company. Consequently, the credit sale disclosures should
logically have been made before the company received the
application from its agent.
Thus, since a sale of insurance for purposes of the
Truth-in-Lending Act does not depend on whether the in-
surance company has the right to accept or reject appli-
cations from its agents, the issue becomes whether defend-
ants in this case should also be held as sellers. Unfortu-
nately, this Court is not aware of any cases expressly
concerning the question of who is a seller for purposes of
5 Defendants also cite two F.R.B. opinions which they claim give
‘‘eontrolling support to the propriety of the loan disclosures made
by these defendants.’’ F.R.B. Opin. Letter, July 9, 1970, CCH
Consumer Credit Guide { 30,551; F.R.B. Opin. letter, June 4,
1970, CCH Consumer Credit Guide {| 30,399. However, neither of
these opinions involved a factual situation in which the financer
and seller were the same entity; and hence, there was no question
presented as to whether the financer should have disclosed the
information required under the Truth-in-Lending Act for a credit
sale.
10a
Truth-in-Lending. Plaintiffs, citing two Fifth Circuit cases
involving Securities Act violations, Lewis v. Walston &
Co., 487 F.2d 617, 621-22 (5th Cir. 1973), and Hill York
Corp. v. American Int'l Franchises, Inc., 448 F.2d 680,
692-93 (5th Cir. 1971), argue that a proximate cause or
substantial factor test ought to be used. See also Len-
nerth v. Mendenhall, 234 F. Supp. 59 (N.D. Ohio 1964).
Defendants, on the other hand, contend that this type of
standard is too broad to be employed in a Truth-in-
Lending context and that the policies and purposes of the
1933 Securities Act differ so significantly from the policies
and purposes of Truth-in-Lending that principles devel-
oped in one should not be applied to the other.
Upon examination of the cases cited by plaintiffs, it
appears that, contrary to defendants’ statements, the aims
of both the Truth-in-Lending Act and the 1933 Securities
Act are strikingly similar. The express statutory purpose
of Truth-in-Lending is to facilitate the informed use of
credit, 15 U.S.C. § 1601; while the purpose of the Securi-
ties Act is to require “full disclosure by issuers of securi-
ties... .” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967) ;
See also SEC v. Ralston Purina Co., 346 U.S. 119, 126
(1953); A.C. Frost & Co. v. Coeur D’Alene Mines Corp.,
312 U.S. 38, 40 (1941); People’s Securities Co. v. SEC,
289 F.2d 268, 270-71 (5th Cir. 1961). Moreover, it is clear
that, like Truth-in-Lending, fault is not a necessary ele-
ment to liability under the Securities Act. In Lewis v.
Walston & Co., Inc., 487 F.2d 617 (5th Cir. 1973), for
example, the Court of Appeals for the Fifth Circuit stated,
“Liability for the sale of unregistered securities is absolute
under $12(1) of the Securities Act of 1933. A purchaser
may recover regardless of whether he can show any de-
gree of fault, negligent or intentional, on the seller’s part.”
Id. at 621. Hence, the distinctions defendants make between
the policies and purposes of the two Acts are nonexistent.
On the contrary, because of the similarity in the aims of
the two Acts, courts in some Truth-in-Lending cases have
lla
cited Securities Act cases as authority for the “similar
remedial purposes of the two acts.” E.g., Gardner & North
R¢S Corp. v. Board of Governors of Federal Reserve
System, 464 F.2d 838, 841 (D.C. Cir. 1972), citing Tchere-
pnin v. Knight, supra.
More importantly, the reasons for using such a standard
are the same in both a securities law and Truth-in-Lending
context. As observed by the Court. of Appeals for the
Fifth Cireuit in Hill York Corp. v. American Int’l Fran-
chises, Inc., 448 F.2d 680 (5th Cir. 1971), a proximate
cause test “lies between the antiquated ‘strict privity’ con-
cept and the overbroad ‘participation’ concept which would
hold all those liable who participated in the events leading
up to the transaction.” Jd. 692. In the area of securities
law, this standard constitutes “a rational and workable
standard for imposition of liability ... .” Jd. Thus, under
this test, defendants should be regarded as credit sellers
if they were the proximate cause of the sales attacked by
the plaintiffs.®
Having determined the standard to be applied for de-
termining whether defendants are sellers, it is necessary
to consider whether there is any material question of fact
as to defendants’ participation in the sale of the insurance
and whether such participation was a substantial factor
in bringing about the sales to these plaintiffs. In essence,
defendants argue that resolution of this issue requires a
factfinding procedure and cannot be decided on a motion
for summary judgment. Plaintiffs, however, contend that
no genuine issue of fact remains to be considered at trial.
®° Defendants contend that under this standard any institution
loaning money for a specific purpose regardless of how distinct
it is from the seller could be found to be the proximate cause of
the sale and, therefore, could be required to make credit sale dis-
closures. However, such an unreasonable extension of liability
would not occur under the proximate cause test since it limits
liability by excluding from coverage by the Act all parties who
were not the direct and proximate cause of the sale in question.
12a
The Court agrees with the defendants that the movant
must demonstrate that there is mo genuine issue of fact
and that any doubt as to the existence of a genuine issue
of fact is to be resolved against the movant. Adickes v.
S.H. Kress & Co., 398 U.S. 144, 153-59 (1970); Putts v.
Shell Oil Co., 463 F.2d 331, 335 (5th Cir. 1972). But this
does not mean that under no circumstances could a sum-
mary judgment in favor of the plaintiffs be granted in
this case. Rather, it is incumbent upon the Court to weigh
the evidénce presented by the parties to determine whether,
when viewed most favorably toward the defendants, it
could support a verdict in their favor.
A complete understanding of the role played by the
defendants in the sale of cancer insurance requires some
discussion of the conglomerate structure of which the
defendants were a part at the time of the sale. According
to the deposition of Mr. William W. Murphy, Jr., who 1s
the President of the defendants, the latter are wholly-
owned subsidiaries of Aristar, Inc., of which Mr. Murphy
is vice-president and chief operating officer for the finan-
cial division. Mr. Murphy is also a vice-president, director,
and employee of Aristar Management, Inc., another wholly-
owned subsidiary of Aristar. Aristar Management is a
nonprofit corporation that provides supervisory and man-
agement services to the two defendant corporations. In
addition to these companies, Aristar, Inc., also wholly
owns Diamond State Life Insurance Company, which
worked out the arrangements with American Family Life
Assurance Company regarding the cancer insurance sales
program.
The defendants’ involvement with American Family
began in the early fall of 1972 when Mr. Murphy met with
Mr. William Russell, a general agent for American Family,
who persuaded him to permit defendants’ employees to
sell the policies to loan applicants. Mr. Murphy subse-
quently referred Mr. Russell to Mr. W. J. Seifert, a share-
13a
holder in Aristar, Ine., and President of Diamond State
Life Insurance Company, for the purpose of working-out
a sales program. The program arranged by Diamond State
and American Family was essentially that Diamond State
would supervise the licensing and payment of defendants’
loan managers and supervisors and insure that state regu-
lations regarding the sale of insurance were complied with.
American Family Life in turn would distribute $30 of the
premium for each policy to Diamond State, and Diamond
State would distribute $10 payments to the loan managers
for their services as insurance agents, and $5 to defend-
ants’ district supervisors, retaining the remainder of the
premium for itself. Mr. Murphy established procedures
for defendants’ employees to follow in handling the in-
surance, and apparently possessed the authority to termi-
nate the program at any time. Mr. Murphy gave final
approval to American Family to hold meetings with the
loan companies’ employees who wished to act as insurance
agents for American Family, and American Family held
a seminar for defendants’ loan managers on ways of sell-
ing cancer insurance. As he stated in his deposition, Mr.
Murphy recognized two benefits to be gained by the de-
fendants by having their employees handle the cancer in-
surance. First, it would enable the defendants to offer to
their loan customers an additional service and therefore,
distinguish defendants from their competitors. Secondly,
it would enable the defendants’ employees to enhance their
salaries with commissions and similarly provide addi-
tional income to the loan managers’ supervisors. A benefit
not directly running to the defendants but enriching de-
fendants’ parent corporation, Aristar, Inc., was the reten-
tion of a significant portion of the premium payment by
Diamond State, a wholly-owned subsidiary, like defend-
ants, of Aristar, Ine. See Exhibit E, Memo of July 13,
1972, from Mr. DeMarco to Mr. Emmons; and Exhibit ©,
Memo of July 21, 1972, from Mr. Murphy to Mr. Seifert.
l4a
While these facts present a compelling case in support
of plaintiffs’ position, this Court is of the opinion that the
question of “proximate cause” is one that is particularly
dependent on a factual determination of defendants’ par-
ticipation in the sale of the insurance and should not be
resolved on a summary judgment motion. Although plain-
tiffs have demonstrated substantial involvement on the
part of defendants in the sale of the cancer insurance,
defendants maintain that they were only peripheral par-
ticipants in these sales and that American Family Life
was primarily responsible for the way in which the cancer
insurance program was conducted. Certainly, the evidence
reveals that American Family did take charge of a number
of significant aspects of the program, such as the training
of defendants’ loan managers, in which defendants had
little involvement. Whether the defendants’ activities were
in fact insignificant in comparison to the activities of these
other participants, or whether, as plaintiffs contend, de-
fendants should be regarded as sellers of the insurance
because they were the proximate cause of the sales must
be determined by this Court after a trial at which these
issues are fully developed.
Nevertheless, plaintiffs contend that liability in this
case could also rest on a determination that the actions of
defendants’ loan managers are attributable to defendants
because they were within the scope of the managers’ em-
ployment with defendants. However, this issue, like the
issue of whether the defendants were a proximate cause
of the insurance sales, depends entirely upon an evalua-
tion of all relevant facts in the case. Thus, although plain-
tiffs have again presented a strong case to support their
position, resolution of this issue should await trial. If
defendants can establish that the sale of the insurance by
their loan managers was completely independent from
their work as defendants’ employees, they will prevail
on the question of agency. On the other hand, if plaintiffs
show such activity was authorized and encouraged by
l5a
defendants, agency will be established and defendants will
be responsible for failure to make required disclosures.
For these reasons, this Court is of the opinion that sum-
mary judgment is inappropriate in this case. This conclu-
sion leaves only one issue which still must be considered
at this time. Defendants contend that plaintiffs have failed
to prove the nonexistence of facts upon which a possible
good faith defense under 15 U.S.C. § 1640(c) might rest.
15 U.S.C. § 1640(c) provides that a creditor is not liable
under the Truth-in-Lending Act for failure to disclose
required information “if the creditor shows by a prepon-
derance of evidence that the violation was not intentional
and resulted from a bona fide error notwithstanding the
maintenance of procedures reasonably adapted to avoid
any such error.’’ In response to defendants’ assertion that
this provision may be applicable, plaintiffs contend that
the undisputed facts show that as a matter of law defend-
ants’ conduct is outside the scope of section 1640(c).
Although defendants are correct in pointing out that
the burden is on the moving party to prove that there is
no genuine issue as to any material fact, it is nevertheless
also true that a responding party may not rest upon the
mere allegations or denials of his pleadings, but rather
must demonstrate that there is a genuine issue for trial.
Rule 56(e), Fed. R. Civ. P. The only question remaining
for this Court to consider is whether defendants’ mistake
in failing to give credit sale disclosures is the type of
mistake for which 15 U.S.C. §1640(c) provides a ‘‘good
faith” defense. If the defendants’ error could fall within
the scope of section 1640(c), plaintiffs would not be en-
titled to summary judgment in their favor since they have
not produced evidence relating to defendants’ intent or
good faith.
With the exception of a 1972 case from the Northern
District of Georgia, Welmaker v. W.T. Grant Co., 365 F.
Supp. 531, 540-45 (N.D. Ga. 1972), cases involving section
16a
1640(c) unanimously hold that it is available to a defend-
ant only when he has made a clerical error as opposed to
an error of law. Haynes v. Logan Furniture Mart, Inc.,
4 CCH Consumer Credit Guide § 98,727 (7th Cir. 1974) ;
Starks v. Orleans Motors, Inc., 372 F. Supp. 928, 931, (E.D.
La. 1974); Palmer v. Wilson, 359 F. Supp. 1099, 1102-03
(N.D. Calif. 1973); Buford v. American Finance Co., 333
F. Supp. 1243, 1247-48 (N.D. Ga. 1971) ; Rainer v. Chemical
Bank New York Trust Co., 329 F. Supp. 270, 281-82 (S.D.
N.Y. 1971); Owens v. Modern Loan Company, CCH Con-
sumer Credit Guide { 99,099 (W.D. Ky. 1972) (transfer
binder). Generally, the rationale for these decisions limit-
ing the scope of section 1640(c) has been that if consumers
were forced to prove that creditors intentionally violated
the Truth-in-Lending Act, it would make the enforcement
of the Act extremely difficult. E.g., Buford v. American
Finance Co., 333 F. Supp. 12438, 1248 (N.D. Ga. 1971).
Moreover, at least one court has observed that mistakes
as to the legality of an individual’s actions do not render
those actions unintentional, and that in the area of criminal
law, errors of law are almost never defenses to a defend-
ant’s liability. Ratner v. Chemical Bank New York Trust
Co., 329 F. Supp. 270, 281 (S.D. N.Y. 1971). And two
courts—the Seventh Circuit in Haynes v. Logan Furniture
Mart, Inc., 4 CCH Consumer Credit Guide { 98,727, and
the Court for the Southern District of New York in Ratner
v. Chemical Bank New York Trust Co., 329 F. Supp. 281—
focusing on the legislative history of section 1640(c), have
concluded that it proves this section was designed only to
absolve clerical errors. 4 CCH Consumer Credit Guide
98,727 at p. 88, 329; 329 F. Supp. at 281-82.
After reviewing the opinions in these cases, this Court
is convinced that 15 U.S.C. § 1640(c) was not intended to
cover the type of error defendants made in the present
ease. By their own admission, defendants’ only mistake
was in failing to realize that they were credit sellers within
the meaning of the Truth-in-Lending Act. Therefore, since
17a
this was an error of law and not simply a clerical error,
section 1640(c) is wholly inapplicable to defendants’
conduct.
For the reasons stated in this Order, defendants’ motion
to dismiss is denied, and both parties’ motions for sum-
mary judgment are denied.
So Ordered, this 28th day of February, 1975.
/s/ AntHONY A. ALAIMO
United States District Judge
19a
APPENDIX B
IN THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF GEORGIA, AUGUSTA DIVISION
Civil Action No. 1863
Jessie Copy, Satyiz Mar Copy and all others similarly
situated, Plaintiffs
VS.
Community Loan Corporation or RicHMonD County,
Defendant
Civil Action No. 1864
JAMES TOUCHSTONE, GLENDA TOUCHSTONE, INEZ SINGLETON
and all others similarly situated, Plaintiffs
vs.
Community Loan & INVESTMENT CoxPOKATION OF AUGUSTA,
Defendant
MEMORANDUM OPINION
(Filed February 4, 1976)
This consolidated class action involves the sale of “can-
cer insurance” by two loan companies allegedly in viola-
tion of the disclosure requirements for credit sales under
the Truth in Lending Act, 15 U.S.C. § 1601 et seg. Juris-
diction is based upon section 130(e) of the Act, 15 U.S.C. |
§ 1640(e), and upon 28 U.S.C. § 1337. By stipulation of
the parties,' the case has been submitted to the Court for
decision as though it had been tried to the Court without
a jury. This memorandum opinion is thet decision. Sepa-
rate findings of fact and conclusions of law, of even date
1 See Stipulation for Trial (November 21, 1975).
2S
20a
herewith, have been entered pursuant to Rule 52(a), Fed.
R. Civ. P.
The defendants, Community Loan Corporation of Rich-
mond County and Community Loan & Investment Corpora-
tion of Augusta, though separately incorporated, have iden-
tical officers and boards of directors, and both are wholly-
owned subsidiaries of Aristar, Inc., the parent corporation
of a financial conglomerate which operates some 435 loan
offices in 26 states, as well as a chain of retail furniture
stores and an insurance company named Diamond State
Life Insurance Company.
The defendants are in the business of making loans
under the Georgia Industrial Loan Act, Ga. Code Ann.
§ 25-301 et seq.
In mid-1972, high-level officials of the Aristar family
of corporations were introduced to the idea of offering
cancer insurance for sale in their loan offices. The cancer
insurance was to be issued by American Family Life As-
surance Company of Columbus, and was to be offered in
addition to the credit life, accident and health, and prop-
erty insurance customarily written in connection with loan
transactions.
These officials recognized that their “captive market”
of small-loan customers consisted of people who could likely
be sold this kind of policy. The plan was to offer the cancer
insurance for sale to customers when they came in to ob-
tain or refinance loans. The annual premium was $40.00
on an individual policy and $60.00 on a family policy,
which would be advanced by the loan company unless the
customer wished to pay cash for the policy. For each can-
cer policy sold in the loan office, fifty percent of the pre-
mium would be returned in the form of a sales commission
to Diamond State Agency, another wholly-owned subsi-
diary of Aristar, Inc. Of this $20 to $30, $10 to $12 would
be disbursed to the loan manager who sold the policy, and
$2 to $5 would be disbursed to his district supervisor.
2la
Diamond State also received a $2 application fee and a
$2.40 credit toward purchase of American Family stock for
each policy sold. The attractions of the ‘“CancerCare
Policy” for the top management of Aristar and defendants
were many. It was seen as a way to gain a competitive
edge over other loan companies, develop new business, in-
crease revenue, and provide a bonus or incentive plan for
employees. A gross from cancer insurance sales of over
$1,500,000 a year was envisioned if cancer policies could
be sold to just 10% of the 500,000 loan customers doing
business with Aristar loan companies.
Some Aristar officials had qualms about the cancer in-
surance because of its very limited benefits and the cus-
tomer dissatisfaction which they had been advised would
probably result. Nevertheless, Mr. William W. Murphy,
the head of the Aristar consumer finance division and the
president of both defendant loan companies, was insistent
on selling the insurance. Aristar and defendants decided
to implement the cancer insurance sales program on an
experimental basis in the states of Georgia and South
Carolina. Apparently because of licensing difficulties, can-
cer insurance was actually offered for sale only in the
Georgia loan offices, beginning in January, 1973.
Though the volume of cancer insurance sales to Georgia
loan customers was very satisfactory, the program was
temporarily halted by Mr. Murphy in April, 1973, appar-
ently because of the sales techniques being used by some
overly-zealous loan managers, who were simply adding the
price of the cancer policy to the loan without the customer’s
knowledge or consent. The cancer insurance sales program
was reinstated in the Georgia loan offices in July, 1973,
and continued until about the first of 1974, when it was
finally terminated.
The named plaintiffs herein applied for consumer loans
at defendants’ offices in February and March, 1973, before
the temporary halt in the sales program. While handling
plaintiffs’ loan applications, defendants’ loan managers sold
22a
plaintiffs a policy of cancer insurance. Each plaintiff signed
a loan contract? and a separate application for cancer in-
surance.’ Defendants’ agents advanced the entire first
year’s premium from the loan proceeds, indicated as dis-
bursements on each loan contract. Defendants then issued
checks payable to American Family and the loan customer."
The applications and checks were sent to American Family
for formal approval and issuance. All of the plaintiffs used
loan proceeds to pay for the policies; no application was
rejected by American Family. This pattern applied to all
class members.
The instant complaints were filed in December, 1973,
and consolidated for trial. A class was certified, consist-
ing of defendants’ loan customers in the year preceding
these cases’ filing, who were sold cancer insurance during
loan transactions. Extensive discovery and pretrial nar-
rowing of legal issues has been had. Cross-motions for sum-
mary judgment and a motion to dismiss were denied in an
Order entered February 28, 1975. Although essentially re-
solving the questions of law in favor of the plaintiffs, this
Court held that outstanding potential factual issues mili-
tated against a summary resolution of the cases. After
further discovery, the parties stipulated that the case be
decided on the basis of the documentary evidence, as if a
bench trial had occurred.°
On the legal issues, this Court has previously concluded
that:
(1) The McCarran-Ferguson Act, 15 U.S.C. $1011, et
seq., is no bar to this action. See Order, supra at 3-7.
2 Copies of the loan contracts may be found in the Appendix,
as Exhibits ‘‘A’’, ‘‘B’’, and ‘‘C’”’ thereto.
* Copies of this ferm in blank, as executed by plaintiffs Single-
ton and Cody, may be found in the’Appendix, as Exhibits ‘‘D’
and ‘‘E’’.
«In the case of Mr. Cody, who is illiterate, the check was simply
made payable to American Family.
5 See note 1, supra.
23a
(2) The dona fide error defense of 15 U.S.C. § 1640(c)
is not available on these facts. See, e.g., Buford v. American
Finance Company, 333 F. Supp. 1243 (N.D. Ga. 1971);
Order, supra at 18-21.
(3) Of the three elements in 15 U.S.C. § 1602(g) neces-
sary to create a “credit sale” under Truth-in-Lending,
two are met here. (a) There was a “sale.” See Stefanski v.
Mainway Budget Plan, Inc., 456 F.2d 211 (5th Cir. 1972).
State law definitions are inapplicable, and an insurance
agent’s taking of an application for insurance is a “sale.”
See Order, supra at 7-9. (b) Defendants admitted extend-
ing consumer credit. See Order, supra at 8. (c) The only re-
maining issue is whether defendants are sellers. See id.
(4) The proximate cause/substantial factor text applied
in securities cases such as Lewis v. Walston & Company,
487 F.2d 617, 621-22 (5th Cir. 1973) and Hill York Corp. v.
American International Franchises, Inc., 448 F.2d 680, 692-
93 (5th Cir. 1971) is applicable in Truth-in-Lending cases.
Thus, defendants are credit sellers if they were the proxi-
mate cause of the sales. See Order, supra at 11-13.
(5) Alternatively, defendants may be liable as principals
for the actions of their agents, if the sales of cancer insur-
ance were within the scope of the loan managers’ employ-
ment. See Order, supra at 817-18.
Several facts are relevant to the proximate cause test.
Defendants, by their president, Mr. Murphy, authorized
the licensing of defendants’ loan managers so they could
sell cancer insurance to loan customers. An arrangement
was worked out with American Family by which the loan
officers and their supervisors would receive sales commis-
sions from American Family through Diamond State,
which retained about one-fourth of each premium to the
ultimate benefit of Aristar, Inc., defendants’ parent. The
management of defendants and Aristar hoped for large
profits if the insurance could be sold throughout the “cap-
tive market” of all of Aristar’s loan offices in the South-
24a
east. Mr. Murphy established policies for the sales pro-
gram, and once halted it temporarily because of non-com-
pliance with his guidelines. Thus, defendants initiated tne
scheme, planned it, controlled it and benefitted from it. It
is clear that defendants were not only a substantial factor,
but indeed were “the motivating force behind this whole
project.” Hill York, supra at 693. Defendants are, there-
fore, liable under the proximate cause test.
Alternatively, defendants are liable under agency prin-
ciples, since the actions of the loan managers were clearly
authorized and encouraged by defendants. As already
shown, the sales program was a carefully planned project
of defendants’ management. Defendants expressly author-
ized every phase of the insurance sales: the licensing of
their loan managers to sell insurance; the solicitation of
applications for insurance from loan customers, at defend-
ants’ offices, while the loan managers were performing their
normal duties; the offering of financing for the premiums.
Defendants’ president “ran” the sales program by estab-
lishing guidelines, and temporarily discontinuing the pro-
gram when these guidelines were violated. Mr. Murphy
supported sales commissions for the loan managers, and
authorized them to attend sales seminars held by American
Family. The loan managers were “sellers” of the cancer
insurance. See Order, supra at 9. These sales were ex-
pressly authorized by defendants, who made them possible.
The loan managers were acting within the scope of their
employment, and defendants are liable as principals. See
Restatement (Second) of Agency § 229 (1957).
Defendants’ only argument not previously considered is
that American Family, as an arranger of credit, was the
only entity with a duty to make credit sale disclosures.
This contention utterly lacks merit. There has been no
showing that American Family was an arranger of credit.
It is clear that defendants both sold the policies and ex-
tended credit on the sales. Defendants’ citation cf Man-
ning v. Princeton Consumer Discount Co., 390 F. Supp.
25a
320 (E.D. Pa. 1975), reconsidered, Civil No. 74-875 (E.D.
Pa., May 30, 1975) is inapposite, since there the lender and
seller were separate entities. In Manning, an auto dealer
made a sale, then arranged for financing with a lender
(for a referral fee). Despite contrary case law, the court
held that only the auto dealer had to make credit sale
disclosures. Here, the lender was also effectively the seller.
It would be absurd to suggest that responsibility for mak-
ing credit sale disclosures should be placed exclusively
upon American Family, merely because its approval was
necessary for the formal completion of the sale. Regulation
Z, 12 C.F.R. § 226.6(d), concerning multiple creditors, is
likewise inapposite. There is no showing that American
Family was a creditor. The attempt to shift exclusive re-
sponsibility to American Family is unavailing. Whatever
American Family's duties aay have been, these defendants
were credit sellers and failed to make appropriate credit
sale disclosures. Manning is distinguishable, and is neither
persuasive nor controlling.
Defendants contend that the result reached here will
place lenders in an untenable position by forcing them to
make an impossible choice between “loan” and “credit sale”
disclosures. The answer is obvious; if both types of dis-
closure apply, both should be given.* Moreover, this de-
cision does not support absolute liability for every lender
who makes loan disclosures but not credit sale disclosures.
Common transactions such as automobile loans would only
be analogous to the instant fact situation if the bank’s loan
officer were also a car salesman receiving commissions from
the car dealer for sales made in the scope of his employ-
*In doubtful cases, a lender runs no risk by making disclosures
which turn out to be unnecessary because the contemplated credit
purchase using loan proceeds is never consummated. Both the
statute and the regulation provide that information disclosed,
which later becomes inaccurate because of later events, does not
violate the statute. See 15 U.S.C. § 1634; Regulation Z, 12 C.F.R.
§ 226.6(g).
26a
ment, or sales proximately caused by the bank. This case
presents a situation which lies at the heart of the policies
behind Truth-in-Lending. The disclosures made by defend-
ants on their “Note—Security Agreement” form revealed
nothing about the cancer insurance beyond a deduction of
“Check payable to American Family Life Assurance Corp.”
from the “Net to customer” figure. The separate “Request
for Cancercare Plan” reveals only the premium amount.
By failing to make credit sale disclosures, defendants were
able to extract painlessly an extra profit from loan cus-
tomers, who in many cases simply signed or made their
mark as instructed, and took home the proceeds, less deduc-
tions for various items including the cancer insurance
premium. Truth-in-Lending was designed to require dis-
closure of the terms of credit sales, to insure that lenders
would make borrowers aware of what they were agreeing
to. See 15 U.S.C. § 1601.
Therefore, defendants’ failure to make credit sale dis-
closures required by 15 U.S.C. § 1638 renders them liable
under 15 U.S.C. §$1640(a). Each plaintiff, and each mem-
ber of the class, is entitled to the $100 minimum statutory
penalty,’ since each is a “customer” to whom disclosures
should have been made. See Regulation Z, 12 C.F.R. § 226.2
(o). Judgment shall be entered for the plaintiffs.
So Ordered, this 4th day of February, 1976.
/s/ AntHONY A. ALAIMO
United States District Judge
7 By stipulation, the 1974 amendments to this section, Pub. L.
No. 93-495, Title IV, § 408(a) (Oct. 28, 1974), 88 Stat. 1518,
are not applicable to this action. See Addendum to Pretrial Order
(March 5, 1975).
27a
{Exursits A, B and C to the District Court’s Memoran-
dum Opinion are copies of lengthy loan contracts. These
documents are not reproduced in this Appendix but are in
the record in this case and will be available to this Court.
Pertinent Truth-in-Lending disclosures in these contracts
appear in the majority opinion in this case. (See p. 45a,
infra.)
Exursit D to the District Court’s Memorandum Opinion
is a copy of a blank application for insurance. This docu-
ment is not reproduced in this Appendix but is in the
record in this case and will be available to this Court.
Exuusit E to the District Court’s Memorandum Opinion
contains completed applications for insurance and a policy
payment schedule. This document is not reproduced in this
Appendix but is in the record in this case and will be
available to this Court.]
29a
APPENDIX C
IN THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF GEORGIA, AUGUSTA DIVISION
Civil Action No. 1863
Jessie Copy, Satire Mar Copy and all others similarly
situated, Plaintiffs
VS.
Community Loan Corporation OF RicHMoND County,
Defendant
Civil Action No. 1864
JAMES TOUCHSTONE, GLENDA TouCcHSTONE, INEZ SINGLETON
and all others similarly situated, Plaintiffs
VS.
Community Loan & INVESTMENT CoRPORATION OF AUGUSTA,
Defendant
FINDINGS AND CONCLUSIONS AND
FINAL JUDGMENT
(Filed February 5, 1976)
This is a class action concerning alleged violations of
the disclosure requirements for credit sales under the
Truth-in-Lending Act, 15 U.S.C. § 1601 et seg. By stipu-
lation of the parties,’ the case has been submitted to the
Court for decision as though it had been tried to the
Court sitting without a jury. A separate memorandum
opinion has been filed, of even date herewith. The follow-
ing are the Court’s findings and conclusions pursuant to
Rule 52(a), Fed. R. Civ. P.
1 See Stipulation for Trial (November 21, 1975).
= at a
mre <
in = _ —w 1
30a
Findings of Fact
1. Defendants are corporations engaged in the business
of lending money in Richmond County, Georgia, and in
the ordinary course of business, defendants regularly ex-
tend or offer to extend credit for which a finance charge
is or may be imposed.
2. The plaintiffs were customers of defendants, and
members of that class of persons who, during the year
preceding the filing of these actions, entered into consumer
credit transactions with one of the defendants and, as part
of such transactions, were sold policies of cancer insurance.
3. The defendants extended consumer credit to each
plaintiff with respect to sales of cancer insurance to such
plaintiff.
4. In these transactions, the defendants made all their
Truth-in-Lending disclosures in a “Note—Security Agree-
ment.” An example of this document may be found in the
Appendix. The only mention of the cancer insurance sale
was a deduction for a “Check payable to American Family
Life Assurance Corp.” from the “Net to customer” figure.
The separate “Request for Cancercare Plan,” an example
of which may also be found in the Appendix, reveals only
the premium amount. Thus, loan disclosures required by
15 U.S.C. § 1639 and 12 C.F.R. §226.8(d) were made.
However, disclosures concerning the extension of credit
toward the purchase of cancer insurance, required by 15
U.S.C. § 1638 and 12 C.F.R. § 226.8(c), were not made.
5. The defendants planned, authorized, controlled, and
benefitted from the sales of cancer insurance by their loan
managers, as shown by the following facts:
a. The defendants authorized the American Family
Life Assurance Company (American Family) to license,
as insurance agents, certain of defendants’ employees so
that such persons, in defendants’ words, could “sell insur-
ance.”
3la
b. The defendants, through their president, William
W. Murphy, Jr., authorized their office managers, as li-
censed insurance agents, to take applications for cancer
insurance policies from the defendants’ loan customers, at
the defendants’ offices, during regular business hours, and
where the customer did not have the cash to pay the
premium, to offer to advance to such customers cash from
the loan to pay the premium.
c. W. W. Murphy, at all relevant times hereto, was
the president of defendant corporations, a director and
officer of defendants’ management service, and chief oper-
ating officer of the financial division of defendants’ parent
corporation.
d. Mr. Murphy recognized two benefits to be gained
by the defendants by having their employees handle the
cancer insurance. First, it would enable the defendants to
offer to their loan customers an additional service and
distinguish defendants from their competitors. Second, it
would provide additional income to defendants’ loan man-
agers and their supervisors. Further, the defendants and
their parent expected to make substantial profits even
though they were aware of the questionable benefits the
cancer policies would provide.
e. Mr. Murphy was the dominant force in all major
decisions regarding the sales of cancer insurance through
defendants’ loan offices, as shown by the following facts:
(1) Murphy participated in initial discussions with
representatives of American Family.
(2) He touted the sales program to his fellow cor-
porate officers and was insistent on experimenting with it
in defendants’ Georgia loan offices.
(3) Mr. Murphy decided to begin the sales of cancer
insurance through defendants’ loan offices.
32a
(4) He established policies and procedures that he
expected to be followed by defendants’ agents in handling
the cancer insurance, and he issued oral instructions
concerning these policies and procedures to the regional
supervisor of the defendants’ management service cor-
poration.
(5) Mr. Murphy approved the method by which
the commissions on the insurance sales were initially dis-
tributed.
(6) He approved of the loan managers being com-
pensated for their insurance sales by American Family.
(7) The ioan managers received a commission of
about $10-12 for each policy they sold; their supervisors
received about $2-5 per policy.
(8) Diamond State Agency, a wholly-owned co-sub-
sidiary of Aristar, Inc., the defendants’ parent corporation
served as the general and receiving agent for the commis-
sions and retained a commission of approximately $20 to
$30 per policy plus an application fee of about $2 and a
credit of $2.40 toward the purchase of American Family
stock.
(9) Mr. Murphy directed that seminars be held for
the loan managers on the sale of the cancer policies. Such
seminars were held.
(10) Mr. Murphy terminated the cancer insurance
sales in April or May of 1973 and later permitted the
program to be re-established.
f. Policies and procedures for the cancer insurance
transactions were established by officers and agents of the
defendants.
g. The persons who sold the cancer insurance to the
plaintiffs were the managing agents or loan managers of
defendants’ local joan offices.
33a
h. The sales of cancer insurance by the loan managers
were authorized and encouraged by the defendants.
6. The sales of cancer insurance were within the scope
of the loan managers’ employment with defendants, as
shown by the following facts:
a. All of the findings stated in paragraph five, supra,
are expressly incorporated herein.
b. Defendants expressly and impliedly authorized
every significant phase of the cancer insurance sales, see
findings 5(a) and (b), supra; defendants, through their
president, controlled the sales program. See findings 5(e)
(1)-(6), (9)-(10): 5(f), supra.
Conclusions of Law
1. This Court has jurisdiction over the subject-matter
pursuant to 15 U.S.C. § 1640(e) and 28 U.S.C. § 1337.
2. The Southern District of Georgia is a place of proper
venue for these actions. 28 U.S.C. § 1391(b).
3. Plaintiffs are “customers” as defined by 12 C.F.R.
§ 226.2(0) and defendants are “creditors” as defined by
12 C.F.R. § 226.2(m).
4. The solicitation of applications for cancer insurance
was a “sale” within the meaning of Truth-in-Lending.
Order of February 28, 1975 at 7-8. See Stefanski v. Main-
way Budget Plan, Inc., 456 F.2d 211 (5th Cir. 1972).
5. The defendants extended consumer credit to the
plaintiffs within the meaning of Truth-in-Lending. Order
of February 28, 1975 at 2, 7-8. See 15 U.S.C. § 1602(e),
(f), (h); Regulation Z, 12 C.F.R. § 226.2(k), (1), {m), (0).
6. The defendants were sellers of cancer insurance with
respect to which they extended consumer credit, and thus
they were credit sellers within the ambit of the Truth-in-
Lending Act. See 15 U.S.C. § 1602(g); Regulation Z, 12
34a
C.F.R. § 226.2(n); F.R.B. Letter of January 5, 1970, No.
225 [transfer binder], CCH Consumer Credit Guide
{| 30,257.
(a) State law is not determinative of who is a credit
seller under Truth-in-Lending, and this term must be given
an interpretation consistent with the purpose of the stat-
ute. Order of February 28, 1975 at 9-11. See Mourning v.
Family Publication Service, Inc., 411 U.S. 356, 377 (1973) ;
Thomas v. Myers-Dickson Furniture Co., 479 F.2d 740,
748 (5th Cir. 1973); Stefanski v. Mainway Budget Plan,
Inc., supra at 212.
(b) A “seller” within the Truth-in-Lending definition
of a “credit sale” is one whose acts are a substantial
factor in or a proximate cause of the sale. Order of Febru-
ary 28, 1975 at 11-13. This conclusion is based on the use
of such a test in cases involving the federal securities acts,
which have purposes similar to those in the Truth-in-
Lending Act. See Lewis v. Walston & Co., 487 F.2d 617,
621-22 (5th Cir. 1973) ; Hill York Corp. v. American Inter-
national Franchises, Inc., 448 F.2d 680, 692-93 (5th Cir.
1971). See also Lennerth v. Mendenhall, 234 F. Supp. 59,
65 (N.D. Ohio 1964).
(c) Defendants, acting through their management,
initiated the insurance sales scheme, planned it, controlled
it, and benefitted from it. Defendants were a substantial
factor in or the proximate cause of the sales, and indeed,
were “the motivating force behind this whole project.”
Hill York, supra at 693. See also Lewis v. Walston & Co.,
supra at 693. SSupra; F.R.B. Letter, supra.
7. Alternatively, the defendants are responsible as
principals for the actions of their agents, the loan man-
agers, since the sales of cancer insurance were within the
scope of those agents’ employment. The facts show that
defendants expressly or impliedly authorized and en-
couraged every significant phase of the insurance sales.
35a
Thus, under agency principles, defendants are liable. See
Lewis v. Walston & Co., supra at 622-23; Restatement
(Second) of Agency § 229 (1957).
8. The McCarran-Ferguson Act, 15 U.S.C. § 1011 e¢ seq.,
is not a bar to these actions. Order of February 28, 1975,
at 3-7. See 15 U.S.C. §$§ 1011, 1012; 15 U.S.C. § 1610(a) ;
Regulation Z, 12 C.F.R. § 226.6(c); Atlantic & Pacific In-
surance Co. v. Combined Insurance Co., 312 F.2d 513, 515
(10th Cir. 1962); Sears, Roebuck & Co. v. All States Life
Insurance Co., 246 F.2d 161, 172 (5th Cir. 1957), cert.
denied, 355 U.S. 894 (1957); Zachman v. Erwin, 186 F.
Supp. 691, 694 (S.D. Tex. 1960); Ga. Code Ann. §§ 84-
5302-09.
9. The bona fide error defense of 15 U.S.C. § 1640(c)
applies to clerical errors, not to errors of law. Therefore,
this defense is not available on the facts of this case.
Order of February 28, 1975 at 19-21. See Haynes v. Logan
Furniture Mart, Inc., 4 CCH Consumer Credit Guide
798,727 (7th Cir. 1974); Starks v. Orleans Motors, Inc.,
372 F. Supp. 928, 931, (E.D. La. 1974), aff’d mem., 500
F.2d 1182 (5th Cir. 1974); Palmer v. Wilson, 359 F. Supp.
1099, 1102-03 (N.D. Calif. 1973); Owens v. Modern Loan
Company, CCH Consumer Credit Guide { 99,099 (W.D.
Ky. 1972); [transfer binder] Buford v. v. American F%-
nance Co., 333 F. Supp. 12438, 1247-48 (N.D. Ga. 1971);
Ratner v. Chemical Bank New York Trust Co., 329 F.
Supp. 270, 281-82 (S.D. N.Y. 1971).
10. The defendants violated Truth-in-Lending by failing
to provide plaintiffs with the required credit sale disclo-
sures. See 15 U.S.C. §§ 1631(a), 1638; Regulation Z, 12
C.F.R. §§ 226.6(a), 226.8(a), (b), (ce), (e). The specific
violations were as follows:
(a) Failure to disclose the cash price of the cancer
insurance policy using the term “cash price,” as required
by 15 U.S.C. §1638(a)(1) and Regulation Z, 12 C.F.R.
36a
§ 226.8(c)(1). See Joseph v. Norman’s Health Club, Inc.,
386 F. Supp. 780, 789 (E.D. Mo. 1974).
(b) Failure to disclose the total amount to be financed
in the credit sales of insurance, using the term “amount
financed,” as required by 15 U.S.C. § 1638(a)(5) and Regu-
lation Z, 12 C.F.R. § 226.8(c)(7). This term depends on
the cash price. Since the cash price was not accurately
disclosed, it follows that the amount financed on the sale
of cancer insurance was not accurately disclosed. See Jo-
seph v. Norman’s Health Club, Inc., supra at 789.
(c) Failure to disclose the finance charge attributable
to this credit sale, using the term “finance charge” as
required by 15 U.S.C. § 1638(a)(6) and Regulation Z, 12
C.F.R. § 226.8(c)(8)(i). See Joseph v. Norman’s Health
Club Inc., supra at 789.
(d) Failure to disclose the finance charge on the credit
sale as an annual percentage rate, using the language
“annual percentage rate” as required by 15 U.S.C. § 1638
(a)(7) and Regulation Z, 12 C.F.R. §226.8(b)(2). See
Joseph v. Norman’s Health Club, Inc., supra at 789-90.
11. The defendants are liable for such violations. 15
U.S.C. § 1640(a).
12. Each plaintiff is entitled to recovery of the statutory
penalties prescribed by 15 U.S.C. § 1640(a), since each is
a “customer” within the meaning of Truth-in-Lending and
a person with respect to whom defendants have failed to
comply with the disclosure requirements of that statute.
15 U.S.C. § 1640(a); Regulation Z, 12 C.F.R. § 226.2(0).
So Ordered, this 5th day of February, 1976.
/s/ AntTHOoNy A. ALAIMO
United States District Judge
37a
[The Appendix to the District Court’s Findings and
Conclusions contains a copy of a portion of the Touch-
stone loan contract, the Singleton insurance application,
and the Singleton insurance policy payment schedule.
These documents are not reproduced in this Appendix but
are in the record in this case and will be available to this
Court. }
38a
IN THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF GEORGIA, AUGUSTA DIVISION
Civil Action No. 1863
JeEssigE Copy, SALLIE Mar Copy and all others similarly
situated, Plaintiffs
vs.
Community Loan Corporation oF RicHMonp County,
Defendant
Civil Action No. 1864
JAMES TOUCHSTONE, GLENDA TOUCHSTONE, INEZ SINGLETON
and all others similarly situated, Plaintiffs
vs.
Community Loan & INVESTMENT CoRPORATION OF AUGUSTA,
Defendant
FINAL JUDGMENT
Upon the Order of this Court entered on February 4th,
1976 determining that plaintiffs are entitled to recover of
the defendant, judgment is hereby entered in favor of the
plaintiffs and
Ir Is ApsupceEp, that plaintiffs recover $100.00 minimum
statutory penalty and their costs of court expended in
their behalf. Cost to be taxed by the Clerk of this Court.
This 6th day of February, 1976
Louis E. AgncusacHer, Clerk
By /s/ T. A. Bropgrick
Deputy Clerk.
39a
APPENDIX D
UNITED STATES COURT OF APPEALS,
FIFTH CIRCUIT
Jan. 2, 1979
No. 76-1687
Jessie Copy; Sattig Mag Copy and all others similarly
situated, Plaintiff s-A ppellees,
V.
Community Loan CorporaTION OF RicHMonpD County,
Defendant-A ppellant.
JAMES TouCcHSTONE, GLENDA ToucHSTONE, INEZ SINGLETON
and all others similarly situated, Plaintiff s-A ppellees,
V .
Community Loan & INVESTMENT CoRPORATION OF AUGUSTA,
Defendant-A ppellant.
Appeal from the United States District Court for the
Southern District of Georgia
Before Brown, Chief Judge, THorNBERRY and Morgan,
Circuit Judges.
THORNBERRY, Circuit Judge:
These consolidated cases come before us in a different
posture than the other cases* we have decided today in-
volving the McCarran-Ferguson Act (“McCarran Act”),
15 U.S.C. §§ 1011 et seqg., and the Truth in Lending Act
(“TIL”), 15 U.S.C. §§ 1601 et seq. Here the district court
rejected the McCarran Act defense, reached the merits of
the TIL claims, and entered judgment for plaintiffs. We
affirm.
* Cochran v. Paco, Inc., 606 F.2d 460 (5 Cir. 1978); Perry v.
Fidelity Union LIsfe ins. Co., 606 F.2d 468 (5 Cir. 1978).
40a
I. Factual Background
Community Loan Corporation of Richmond County and
Community Loan & Investment Corporation of Augusta
(hereinafter “Community”) are separately incorporated
but share the same officers and board of directors. They are
wholly-owned subsidiaries of Aristar, Inc., the parent cor-
poration of a financial conglomerate that operates more
than 400 loan offices in 26 states and owns the Diamond
State Life Insurance Company and the Diamond State
Agency. Community is a lender licensed under the Georgia
Industrial Loan Act, Ga.Code Ann. §§ 25-301 et seq.
In 1972 Aristar developed a program to offer cancer
insurance for sale in the loan offices of its subsidiaries.
This insurance was to be issued by American Family Life
Assurance Company and was to be offered in addition to
the credit life, accident and health, and property insurance
customarily written in connection with loan transactions.’
The annual premium—$40 on an individual policy, $60 on
a family policy—was to be paid by Community to American
Family out of the proceeds of the loan. Pursuant to a
brokerage agreement between American and Diamond State
Agency, for each cancer policy sold in the loan office, 50%
of the premium would be returned in the form of a sales
commission to Diamond State Agency. Of that amount,
$10 or $12 would be disbursed to the loan manager who
sold the insurance policy and $2 or $5 to his district super-
visor. Diamond State Agency also received a $2 application
fee and a $2.40 credit toward the purchase of American
Family stock for each cancer policy sold.
? Aristar officials recognized that their small loan customers were
a potential ‘‘captive market,’’ Record at 191, and one memoran-
dum projects an annual gross of more than $1.5 million. Jd. at
188.
4la
Despite some initial qualms about selling these ‘‘Cancer-
Care” policies,’ Aristar and Community decided to imple-
ment the sales program on an experimental basis in Geor-
gia and South Carolina. The program was arranged by
Diamond State Life Insurance Company and American
Family, with Diamond State to oversee the licensing of
Community’s loan menagers and to ensure compliance with
state insurance regulations. Community’s loan managers
eventually became licensed insurance agents of American
Family, and the Georgia sales program was instituted in
January 1973. The South Carolina program never got off
the ground, apparently because of licensing difficulties.
The program was temporarily halted in April 1973, ap-
parently because of the sales techniques of some over-
zealous loan managers who added the price of the cancer
policy to the loan without the borrower’s knowledge or
consent. Internal correspondence indicates attempts to cor-
rect this practice,* and the sales program was reinstated
in July. However, it was terminated in early 1974.
Plaintiffs Jessie and Sallie Mae Cody, James and Glenda
Touchstone, and Inez Singleton were Community customers
who applied for loans in February and March 1973. While
*Some Aristar officials feared customer dissatisfaction because
of the policy’s limited benfits. The company was also aware that
many states prohibit the sale of cancer insurance.
* For example, a Community vice-president wrote certain Georgia
supervisors on March 20, 1973, about cancer insurance sales. The
letter reads in pertinent part:
We have been advised by Mr. Beck with American Family
Life Assurance Company of Columbus (CANCER CARE)
that his company is receiving complaints from our customers.
It seems we are guilty of not selling the policies, but instead
are adding them on the loan without the customer’s knowledge
or consent.
THIS PRACTICE MUST BE STOPPED IMMEDIATELY.
We must have the customer’s consent, and he must be aware
of the cost, benefits, and amount of yearly premiums.
R. at 221.
a 42a
handling the loan applications, Community’s loan man-
agers, acting as agents of American Family, sold the plain-_
tiffs CancerCare policies. Each plaintiff signed a loan | |
contract and a separate application for cancer insurance,
although the record strongly suggests that they did not
know they were purchasing the cancer insurance. The first |
year’s premium was deducted from the loan proceeds and
was indicated as a disbursement to the customer and Amer-
ican Family. Community then issued checks payable to
American Family and the customer, and the insurance ap-
plications and checks were forwarded to American Family
for approval and issuance of the policies.
The plaintiffs brought suit on behalf of themselves and
others similarly situated, alleging violations of TIL’s
credit sale disclosure requirements, 15 U.S.C. § 1638(a) ;
12 C.F.R. § 226.8(c).° They sought the statutory penalty
and attorneys’ fees allowed under 15 U.S.C. § 1640(a).° The
district court certified the cases as class actions and, by
stipulation of the parties, they were submitted as though
they had been tried to the court without a jury. The court
ultimately entered judgment for plaintiffs, and Community
appealed.
5 For example, the Touchstone-Singleton complaint alleged that
Community failed to: (1) disclose the cash price of the cancer in-
surance policy using the term ‘‘cash price’’ as required by 12
C.F.R. § 226.8(c)(1); (2) disclose the amount financed in the
eredit sale using the term ‘‘amount financed’’ as required by
§ 226.8(c)(7); (3) disclose the finance charge attributed to the
credit sale and label such as ‘‘finance charge,’’ as required by
§ 226.8(c) (8) (i); and (4) disclose the finance charge as an annual
percentage rate using the term ‘‘annual percentage rate,’’ as re-
quired by § 226.8(b) (2). Record at 727.
°The complaints did not allege violations of TIL’s consumer
loan disclosure requirements, 15 U.S.C. § 1639, 12 C.F.R. § 226.8
(d). The district court found as a fact that such disclosures were
made. On appeal, plaintiffs characterize this finding as dictum;
however, they did not cross-appeal and the issue is thus not be-
fore us. Fain v. Caddo Parish Police Jury, 564 F.2d 707, 709 n.3
(5 Cir. 1977).
43a
Il. The McCarran Act
The district court concluded that the McCarran Act
exemption’ was unavailable to Community because Geor-
gia did not regulate disclosures accompanyiny the sale of
insurance, and, even if it did, TIL would not conflict with
Georgia law. We agree that the McCarran Act does not
bar application of TIL, but for different reasons.
The McCarran Act is explored in depth in Cochran v.
Paco, Inc., ante, 606 F.2d 460, and we refer the reader to
that opinion for essential background. There we held that
the lending activities of a premium finance company do
not constitute the “business of insurance” and that the Mc-
Carran Act does not preclude application of TIL’s dis-
closure requirements. Similarly, in Perry v. Fidelity Union
Infe Ins. Co., ante, 606 F.2d 468, we concluded that pre-
mium financing by an insurance company in connection
with the sale of an insurance policy is not the “business
of insurance” for McCarran Act purposes, and that TIL
is thus applicable to such a loan transaction.
The instant case presents a hybrid situation. Plaintiffs
contend that Community made a “credit sale” of an in-
surance policy and thus should have made the disclosures
required when a credit sale occurs. See footnote 8, infra.
715 U.S.C. § 1012 provides:
(a) The business of insurance, and every person engaged
therein, shall be subject to the laws of the several States which
relate to the regulation or taxation of such business.
(b) No Act of Congress shall be construed to invalidate,
impair, or supersede any law enacted by any State for the
purpose of regulating the business of insurance, or which im-
poses a fee or tax upon such business, unless such Act spe-
cifically relates to the business of insurance: Provided, That
after June 30, 1948, the Act of July 2, 1890, as amended,
known as the Clayton Act, and the Act of September 26,
1914, known as the Federal Trade Commission Act, as amend-
ed, shall be applicable to the business of insurance to the
extent that such business is not regulated by State law.
44a
For purposes of our McCarran Act analysis, we assume
that the loan managers, acting in their dual capacities
as employees of Community and licensed agents of Ameri-
can Family, made a credit sale of cancer insurance and
that Community was a “seller” under TIL.
The sale of an insurance policy is undoubtedly the “busi-
ness of insurance” for McCarran Act purposes. Securt-
ties & Exchange Comm’n v. National Securities, Inc.,
393 U.S. 453, 460, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969).
However, Perry makes clear that the lending activities of
an insurance company are apart from that business: “the
financing activity is purely ancillary to the insurance re-
lationship between the insurance company and the policy-
holder.” 606 F.2d at 470. Thus, Community’s selling of
the cancer insurance policies constituted the “business of
insurance,” although its financing of them on a credit sale
basis did not.
The mere fact that Community sold the policies that it
financed does not preclude application of TIL, since the
financing is insufficient to invoke the McCarran Act exemp-
tion. Accordingly, any inquiry into the nature of state regu-
lation or the conflict between the state scheme and TIL is
unnecessary. Cochran v. Paco, Inc., supra, 606 F.2d at 467
n.15. We thus turn to the TIL questions presented by this
case.
Ill. The Truth in Lending Act
Plaintiffs urged in the district court that the transaction
involved not only a loan but also a credit sale of an in-
surance policy as to which the required disclosures had not
been made. Community contended that the transaction was
simply a loan, that al! consumer loan disclosures had been
made in accordance with TIL, and that no credit sale dis-
closures were required.
The gravamen of plaintiffs’ complaint was that Com-
munity made disclosures only as to the total amount of the
45a
loan and did not make separate disclosures as to the cost
of financing the annual premiums on the cancer policies.
The Touchstone transaction is illustrative. At the top of
one legal-size page, Community made the following dis-
closures:
Date finance charge begins to accrue ....... 02-08-73
Schedule of payments ...... one of $85 and 23 of $85
Pe I Gr sho bce sptehase) oe eee $2040.00
SE ee saa ticlin ik en-b bx b-GR45 38k Vi $ 281.38
RN I aon Abb. c vco.c sah wea conan $ 105.60
Pe RIO kb os cha cae biarocunse $ 386.98
ion se iN io dscns caus $1653.02
Life Insurance premium .................. $ 76.70
Disability insurance premium ............. $ 71.40
Property insurance premium .............. $ 0.00
NE I er ne ee bie wan sank b a’ $ 3.50
Net to enstomer(S) .. 6.06 .560660. pain @hn ey $1501.42
ANNUAL PERCENTAGE RATE ........ 21.07%
Amount of insurance
CS ec cal aeeae by da Wan ian ey kwaKs $2040.00
Disability ins. benefits ................ $ 85.00
Ee 3 dine 5 co ede dnc okae eer 24
Pn NE UD ovis oes cd ckkeeaeeesue ed 03-15-73
SE PLE iors Cicnca sr saaweeeerns 02-08-75
PN te on kines aad sana bese: $2040.00
At the bottom of the same page, under the heading “se-
curity agreement,” the following information appears:
wey ae IT “dv ar eeeek vb sk kk $1501.42
Less balance on [former loan] ............ $ 660.28
Check payable to Interstate Securities ..... $ 505.30
Check payable to Bankers Trust Co. ........ $ 190.00
Check payable to American Family Life As-
I 890s poe a te oy) eee $ 60.00
RR ccs eal Ce og ela $ 85.84
Record at 685.
46a
The district court held that there was a credit sale within
the meaning of TIL and that the required disclosures *
815 U.S.C. § 1602(g) states that ‘‘[t]he term ‘credit sale’ re-
fers to any sale with respect to which credit is extended or arranged
by the seller... .’’
15 U.S.C. § 1638(a) governs credit sales and requires the cred-
itor to ‘‘disclose each of the following items which is applicable’’:
(1) The cash price of the property or service purchased.
(2) The sum of any amounts credited as downpayment (in-
cluding any trade-in).
(3) The difference between the amount referred to in para-
graph (1) and the amount referred to in paragraph (2).
(4) All other charges, individually itemized, which are
included in the amount of the credit extended but which are
not part of the finance charge.
(5) The total amount to be financed (the sum of the amount
described in paragraph (3) plus the amount described in
paragraph (4)).
(6) Except in the case of a sale of a dwelling, the amount
of the finance charge, which may in whole or in part be desig-
nated as a time-price differential or any similar term to the
extent applicable.
(7) The finance charge expressed as an annual percentage
rate except in the case of a finance charge.
(A) which does not exceed $5 and is applicable to an
amount financed not exceeding $75, or
(B) which does not exceed $7.50 and is applicable to an
amount financed exceeding $75.
A creditor may not divide a consumer credit sale into two
or more sales to avoid the disclosure of an annual percentage
rate pursuant to this paragraph.
(8) The number, amount, and due dates or periods of pay-
ments scheduled to repay the indebtedness.
(9) The default, delinquency, or similar charges payable
in the event of late payments.
(10) A description of any security interest held or to be
retained or acquired by the creditor in connection with the
extension of credit, and a clear identification of the property
to which the security interest relates.
47a
had not been made. The court also rejected Community’s
“good faith” or “bona fide error” defense ° and determined
12 C.F.R. § 226.8(c) provides:
Credit Sales. In the case of a credit sale, in addition to
the items required to be disclosed under paragraph (b) of
this section, the following items, as applicable, shall be dis-
closed :
(1) The cash price of the property or service purchased,
using the term ‘‘cash price.’’
(2) The amount of the downpayment itemized, as applica-
ble, as downpayment in money, using the term ‘‘trade-in’’
and the sum, using the term ‘‘total downpayment.’’
(3) The difference between the amounts described in sub-
paragraphs (1) and (2) of this paragraph, using the term
‘*unpaid balance of cash price.’’
(4) All other charges, individually itemized, which are in-
cluded in the amount financed but v .ich are not part of the
finance charge.
(5) The sum of the amounts determined under subpara-
graphs (3) and (4) of this paragraph, using the term ‘‘un-
paid balance.’’
(6) Any amounts required to be deducted under paragraph
(e) of this section using, as applicable, the terms ‘‘ prepaid
finance charge’’ and ‘‘required deposit balance,’’ and, if both
are applicable, the total of such items using the term ‘‘total
prepaid finance charge and required deposit balance.’’
(7) The difference between the amounts determined under
subparagraphs (5) and (6) of this paragraph, using the term
‘‘amount financed.’’
(8) Except in the case of a sale of a dwelling:
(i) The total amount of the finance charge, using the
term ‘‘finance charge,’’ and where the total charge con-
sists of two or more types of charges, a description of
the amount of each type, and
(ii) The sum of the amounts determined under sub-
paragraphs (1), (4), and (8)(i) of this paragraph, using
the term ‘‘deferred payment price.’’
° 15 U.S.C. § 1640(¢) provides:
A creditor may not be held liable in any action brought under
this section for a violation of this subchapter if the creditor
48a
that each plaintiff and each class member were entitled to
the $100 statutory penalty since each is a “customer” to
whom disclosures should have been made.” Thus, Mr. and
Mrs. Touchstone, joint obligors on their single loan, each
received $100.
A. Credit Sale
Under 15 U.S.C. § 1602(g) and 12 C.F.R. § 226.2(t), the
term “credit sale” is defined as “any sale with respect to
which credit is extended or arranged by the seller.” The
sale of insurance is clearly a sale within the meaning of
TIL. Stefanski v. Mainway Budget Plan, Inc., 456 F.2d
211 (5 Cir. 1972). Moreover, Community admittedly “ex-
tended” credit to the purchasers of the cancer insurance
policies. The only question; then, is whether Community
was a “seller” within the meaning of § 1602(g).
The district court held that Community was a seller
under two theories. First, the court concluded that Com-
munity was a “proximate cause” of or “substantial factor”
in the sale, borrowing those terms from cases involving
shows by a preponderance of evidence that the violation was
not intentional and resulted from a bona fide error notwith-
standing the maintenance of procedures reasonably adapted
to avoid any such error.
The district court concluded that this section applies only where
the lender made a clerical error, not where, as here, there was a
mistake of law. See McGowan v. King, Inc., 569 F.2d 845, 849
(5 Cir. 1978). Community does not challenge this holding on
appeal.
012 C.F.R. § 226.2(u) defines ‘‘customer’’ as a cardholder (as
defined in § 226.2(m)) or ‘‘a natural person to whom consumer
credit is offered or to whom it is or will be extended, and in-
cludes a comaker, endorser, guarantor, or surety for such natural
person who is or may be obligated to repay the extension of con-
sumer credit.’’ Former § 226.2(0), in effect when this action was
brought, contained the same definition, except for inclusion of the
term ‘‘cardholder.’’
49a
Securities Act violations. See, e.g., Lewis v. Walston & Co.,
487 F.2d 617, 621-22 (5 Cir. 1973); Hill York Corp. v.
American Int’l Franchises, Inc., 448 F.2d 680, 692-93 (5
Cir. 1971). Alternatively, the court determined that Com-
munity was a seller under agency principles, since Com-
munity authorized and encouraged its loan managers to
sell the cancer insurance.
Community argues that, under Georgia law, there is no
“sale” of an insurance policy until the application for such
a policy is accepted by the insurer. See, e.g., Sasser v.
Coastal States Life Ins. Co., 113 Ga.App. 17, 147 S.E.2d
5 (1966). Therefore, Community contends, only American
Family could be a “seller” since it had the authority to
accept or reject the applications.
We find this argument unpersuasive for several reasons.
First, it ignores Community’s role in the merchandising
process and instead emphasizes the moment at which a
contractual agreement actually arose. Since TIL is “con-
sumer protection” legislation, we think the appropriate
focus should be on the time of the contact with the con-
sumer. That is, we must examine the transaction through
the eyes of the consumer, and the transactions in the in-
stant case, viewed in such a manner, involved a sale of
cancer insurance by the loan managers. Cf. Meyers v. Clear-
view Dodge Sales, Inc., 539 F.2d 511, 514-15 (5 Cir. 1976),
cert. denied, 431 U.S. 929, 97 S.Ct. 2633, 53 L.Ed.2d 245
(1977) (seller who prearranges credit for consumer is
creditor under TIL). From the plaintiffs’ perspective, Com-
munity was obviously selling the insurance policies, for
plaintiffs’ only contact with any organization concerning
the policies was with Community’s loan managers during
normal office hours. Even if the loan managers were “wear-
ing two hats,” the one marked “American Family” was all
but invisible to the plaintiffs."
11 Interestingly, Community’s correspondence characterized the
transactions as ‘‘sales.’’ For example, Mr. Murphy wrote an
50a
Second, under 12 C.F.R. § 226.8(a), a creditor must make
TIL disclosures “before the transaction is consummated.”
Section 226.2(kk) provides that a “transaction shall be con-
sidered consummated at the time a contractual relationship
is created ....” Thus, although state law is determinative
of when a contractual relationship is created, it has noth-
ing whatsoever to do with how the transaction is to be
characterized for TIL purposes. The obligation to disclose
arises before the creation of a contractual relationship, and
it would be circular to define the nature of the transaction—
which determines the particular disclosures that are re-
quired—in terms of the state law governing the contract’s
formation. We thus characterize the transaction as a mat-
ter of federal law. Starks v. Orleans Motors, Inc., 372 F.
Supp. 928, 931 (E.D.La.) (Rubin, J.), aff'd, 500 F.2d 1182
(5 Cir. 1974).”
Third, we have stressed that TIL is a remedial statute
that is to be liberally construed in favor of the consumer.
Sellers v. Wollman, 510 F.2d 119, 122 (5 Cir. 1975) ; see also
McGowan v. King, Inc., 569 F.2d 845, 848 (5 Cir. 1978) ;
Thomas v. Myers-Dickson Furniture Co., 479 F.2d 740, 748
(5 Cir. 1973). A hyper-technical interpretation of “seller”
or “sale” based on state law would be contrary to this
principle.
American Family official that ‘‘it is not possible for us to sell this
policy . . . in all of our operating units in every state.’’ Record
at 191 [emphasis added]. In a memo to the president of Diamond
State, Murphy explained that if ‘‘we sold this policy to our cus-
tomers, we would get an immediate commission. .. .’’ Record at
189 [emphasis added].
12 Contrary to Community’s assertion, this approach is not vio-
lative of 15 U.S.C. § 1610(b), which provides that TIL ‘‘does not
otherwise annul, alter or affect in any manner .. . the laws of
any State ....’’ Our analysis of whether Community is a ‘‘seller’’
applies only in the context of TIL and does not alter in any re-
spect Georgia law that determines when a sale occurs.
5la
Finally, we agree with the district court that “applica-
tions to the insurance company provided no information
upon which the company could chose to reject them,.. .
and the final step in the consummation of the sales trans-
action in question was a mere formality.” Record at 534.
In terms of the overall consumer transaction, American
Family’s only function was to rubber stamp the applica-
tions and issue the policies.
Having concluded that state law is not dispositive of
Community’s status, we now examine that issue in terms
of the loan company’s role in the merchandising of the
insurance and its business relationship with American
Family. Although we have doubt as to the viability of the
district court’s “proximate cause” theory in the TIL con-
text, we are convinced that the record is more than suff-
cient to establish Community’s status as a “seller” by vir-
tue of its relationship with American Family and by ap-
plication of simple agency principles.
Aristar, Community’s corporate parent, clearly devel-
oped the cancer insurance sales program as a profitable
sideline that would help develop new loan business, in-
crease revenue to the tune of a projected annual gross
of $1.5 million, and provide a bonus or incentive plan for
Community’s loan managers and supervisory personnel.
American Family’s role was to underwrite the Cancer-
Care policies sold by Community’s loan managers, who
were also licensed agents of American Family.
We thus view the program as a type of joint venture
between American Family and the Aristar family, with
American Family providing the policy and Community
the marketing. Aristar undoubtedly benefited from the
arrangement, for Diamond State, acting as the general
and receiving agent for sales commissions, received half
of each premium, retained 25%, and paid the remainder
in commissions to the Community loan manager who made
the sale and to his district supervisor. Thus, Community’s
52a
incentive plan was paid for by Diamond State, its sister
subsidiary.
Given this business arrangement, Community’s argu-
ment that the loan managers were selling the insurance
policies strictly on behalf of American Family simply does
not wash. To draw such a bright, bold line between the
loan managers’ dual functions would be to ignore reality,
since a business relationship obviously existed between
American Family and the Aristar conglomerate.’* The
fact that the loan managers were licensed agents of Amer-
ican Family does not indicate that they were working
solely for that company, but rather that their licensing
was a necessary part of the business venture between
American Family and the Aristar group, just as Com-
munity’s authorizing the sale of cancer policies at its loan
offices was an essential part of the arrangement.”
13 We recognize that our analysis of this relationship involves
the piercing of Aristar’s corporate veil to a limited extent. We
are willing to wield a sufficiently sharp instrument in these cir-
cumstances, for to recognize the Aristar companies as separate
corporate entities would result in thwarting the clear legislative
purpose of TIL: ‘‘to assure a meaningful disclosure of credit
terms so that the customer will be able to . . . avoid the uninformed
use of credit.’’ 15 U.S.C. § 1601. See also Mourning v. Family
Publications, Inc., 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318
(1973). We note that Georgia recognizes utilization of the ‘‘cor-
porate veil’’ doctrine when ‘‘to observe [the corporate entity]
would be to work an injustice.’’ Farmers Warehouse v. Collins,
220 Ga. 141, 137 S.E.2d 619, 625 (1964).
In addition, various internal memoranda indicate that the profits
from cancer insurance sales were going into one corporate ‘‘pot.”’
For example, Community’s president wrote his Diamond State
counterpart that ‘‘[i]f we sold this policy to our customers, we
would get an immediate commission. .. .’’ Record at 189. Under
the plan, however, Diamond State would receive the commissions
from the policies sold to Community’s customers. Cf. Stefanski v.
Mainway Budget Plan, Inc., supra, 456 F.2d at 212.
14 The record makes clear, and the district court found, that the
dominant force behind the plan was William W. Murphy, presi-
53a
Given the existence of the business relationship de-
scribed above, it follows that the loan managers acted
on behalf of both American Family and Community in
selling the cancer insurance policies. The sales could not
have been made without the cooperation and agreement
of both American Family and Community. For its part,
Community authorized and encouraged every significant
phase of the sales program, and the loan managers obvi-
ously could not have made on-the-job sales of this type
of insurance without permission of the loan company. The
loan managers thus made the insurance sales within the
scope of their employment by Community, see Restatement
(2d) of Agency § 229(1) (1957), and the loan company
is responsible as a principal for the actions of its agents.
Accordingly, we hold that Community is a “seller” within
the meaning of TIL.
B. Disclosures
Having determined that a “credit sale” occurred and
that Community was a “seller,” we now consider whether
dent of Community, chief operating officer of Aristar’s financial
division, and vice-president of Aristar’s wholly-owned management
subsidiary. Mr. Murphy participated in initial discussions with
American Family representatives, touted the insurance sales pro-
gram to his fellow corporate officers, and insisted that the program
be tried on an experimental basis in Georgia. In addition, he au-
thorized Community’s loan managers in Georgia to serve as Ameri-
ean Family’s agents in writing cancer insurance, established pol-
icies and procedures for the loan managers to follow, approved a
commission system, and directed that training sessions be held for
the loan managers. Mr. Murphy also temporarily terminated the
insurance program in April 1973 but subsequently permitted it to
be re-established.
1° The Restatement provides:
To be within the scope of employment, conduct must be of
the same general nature as that authorized, or incidental to
the conduct authorized.
54a
Community made the disclosures required by 15 U.S.C.
§ 1638(a) and 12 C.F.R. § 226.8(c).**
Community does not, in its brief on appeal, challenge
the district court’s holding that the “credit sale” disclo-
sures were not made. They undoubtedly were not. Under
the statute and regulations, the cash price (here, the in-
surance premium) and the actual cost of the credit (7. e.,
the finance charge) must be disclosed. All that was dis-
closed here was that a certain amount of money from the
loan to the customer was being sent to American Family.
See typical disclosure set out at slip op. page 1912, at
page ——, supra. The only finance charge shown is that
for the entire amount of the loan, and the consumer is
thus unable to determine exactly wha: he is paying for
the credit to enable him tg purchase the insurance policy.
As the district court said:
By failing to make credit sale disclosures [regarding
the insurance], defendants were able 1» extract pain-
lessly an extra profit from loan customers, who in
many cases simply signed or made their mark as in-
structed, and took home the proceeds, less deductions
for various items including the cancer insurance pre-
mium. Truth-in-Lending was designed to require dis-
closure of the terms of credit sales, to insure that
lenders would make borrowers aware of what they
were agreeing to.
Record at 684.
C. Penalty Awards
Under the version of 15 U.S.C. § 1640(a) in effect when
this suit was brought,” a creditor in a consumer credit
** See feotnote 8, supra.
* The statute was amended in 1974, Pub.L. No. 93-495, Title
IV, § 408(a) (Oct. 28, 1974), 88 Stat. 1518, and the’ parties stipu-
lated in the district court that these amendments are not applicable
to this action.
55a
transaction who fails “to disclose to any person” any in-
formation required to be disclosed is liable to that person
for an amount ranging from $100 to $1000—based on twice
the finance charge—and reasonable attorneys’ fees. Com-
munity contends that the district court erroneously held
that each plaintiff was entitled to the minimum $100 award,
since some plaintiffs were co-obligors on the same loan.
Community argues that the proper measure of recovery
is $100 per credit transaction, regardless of how many
plaintiffs were involved in a particular loan.
This court recently held that a husband and wife who
signed a promissory note and who were jointly and sever-
ally liable under state law were entitled to two statutory
penalties. Davis v. United Companies Mortgage ¢ Inv.,
Inc., 551 F.2d 971 (5 Cir. 1977). Because plaintiffs such
as the Touchstones were jointly and severally liable as
principals under the terms of the note itself, the district
court properly made an award to each.
IV. Conclusion
Community merchandised the Cancer-Care insurance
policies through its loan offices as part of its overall busi-
ness and extended credit for the purchase of that insur-
ance. The company was thus a credit seller under TIL
responsible for making “credit sale” disclosures to its
customers. Those disclosures were not made, and each
plaintiff is thus entitled to a statutory award. The Mc-
Carran Act is no bar to TIL’s application here, since the
lending activities of Community do not constitute the
“business of insurance.” The judgment of the district court
is thus affirmed.
AFFIRMED.
Joun R. Brown, Chief Judge, dissenting:
The Court has affirmed the District Court’s application
of TIL in this case, but on different grounds than those on
56a
which the District Court relied. The panel has held that
TIL should be invoked because this case involves the fi-
nancing, and not the sale, of insurance. Thus, under the
Court’s reasoning in Perry v. Fidelity Union Life Insur-
ance Company, 606 F.2d at 468, McCarran is inapplicable.
I dissent from this holding for two reasons.’
First, the Court has assumed, and I think correctly, that
the Community loan managers made credit sales of cancer
insurance. However, the Court was incorrect in bisecting
the transaction into separate parts, a sale of insurance and
a financing of the sale. The transaction was a credit sale.
This is a species of sale, but a sale nonetheless. Although
the McCarran Act is as inscrutable as Mona Lisa in many
respects, there is one principle upon which the Court and
I agree: the sale of an insurance policy is squarely within
the “business of insurance,” as is the licensing of agents,
ante, 606 F.2d at 503. SEC v. National Securities, Inc.,
1969, 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668. Therefore,
McCarran should exempt the defendants from TIL if TIL
would invalidate, impair or supersede applicable Georgia
law.
Second, even if I could agree with the Court that the
issue here is financing, separate and apart from the sale
of insurance, I would still disagree with their result for
reasons stated in my dissent in Perry, ante, 606 F.2d at
475-478. The Court has assumed that Community was an
insurance seller. I am convinced that financing of premi-
ums by the one selling the insurance is part of the “busi-
ness of insurance” which is covered by the McCarran Act.
When an insurance seller offers premium financing in con-
junction with the sale of insurance, this financing is an
inducement to the purchaser to buy. It is such an integral
part of the actual sale that the insurer-insured relation-
ship, emphasized in National Securities, 393 U.S. at 460,
I now concur in Part III of the Court’s opinion concerning
Truth in Lending matters.
57a
89 S.Ct. 564, is directly involved. This is the “business of
insurance” which McCarran exempts from federal control.
Having expressed my opinion on this issue in favor of
the application of the McCarran Act, I now must, as I did
in my dissent in Perry, ante, 606 F.2d at 475, apply the
analytical construction of Cochran v. Paco, 606 F.2d at
464, to the questions not addressed by the Court: (i)
whether Georgia regulates the business of insurance within
the meaning of §2(b) and (ii) if so, whether application
of TIL would invalidate, impair or supersede applicable
state law.
The District Court held in effect that Georgia did not
regulate the business of insurance because insurance com-
panies and their agents are exempted from the only Geor-
gia statute directed toward credit disclosures.? The Court
went further to state that even if Georgia required in-
surance companies to disclose credit terms, there would
be no invalidation, impairment or supersession of state
law in view of § 111 of TIL, 15 U.S.C.A. § 1610.° I cannot
agree.
? The District Court reasoned as follows:
To apply the MecCarran-Ferguson Act as broadly as de-
fendants suggest would effectively bar the application of any
federal statute relevant to the business activities of insurance
companies regardless of whether state legislation covered the
specific transaction in question or not.
Feb. 28, 1975 opinion, R. at 529, App. at 47 (emphasis added).
But barring the application of any federal statute enacted under
the Commerce Clause in the absence of a clear Congressional ex-
pression specifically relating that act to the business of insurance
(as opposed to a ‘‘relevant’’ test) is exactly what the MeCarrin
Act is all about. See dissent in Perry, ante, 606 F.2d at 473-474
& nn. 8-10, 475, 483.
*The Court in effect held that Georgia did not regulate: this
aspect of the business of insurance, and even if it did, there was
no corflict with federal law:
However, defendants cite no Georgia legislation specifically
overriding or superseding the Truth-in-Lending Act, nor do
58a
Inherent in the District Court’s conclusion is the as-
sumption that to exempt insurance agents or premiums in
connection with sickness insurance is tantamount to a
failure to regulate for McCarran Act purposes. This as-
sumption eviscerates McCarran and effects its repeal—
the precise result its authors so assiduously sought to
avoid. See dissent in Perry, ante, 606 F.2d at 473-474 &
n. 10, and Appendix excerpts [2], [4]-[6], [22], ante, 606
F.2d at 484. Moreover, pronouncing that Georgia does not
they demonstrate how application of this Act would interfere
with state legislation. Moreover, research reveals that the only
Georgia statute directed toward disclosures accompanying sales
of insurance exempts all insurance companies and their local
agents from its coverage. Ga.Code.Ann. §§ 84-5302 and 84-
5309. Therefore, no conflict exists between requirements under
Georgia law and under the Truth-in-Lending Act. And even
if the State of Georgia had passed legislation requiring dis-
closures in the sale of insurance, the Truth-in-Lending Act
could not be interpreted as invalidating, impairing, or super-
seding state law since section 111 of the Act specifically pro-
vides that ‘‘[t]his title does not annul, alter, or affect, or
exempt any creditor from complying with, the laws of the
State relating to the disclosure of information in connection
with credit transactions, except to the extent that those laws
are inconsistent with the provisions of this title or regula-
tions thereunder, and then only to the extent of their incon-
sistency.”’ 15 U.S.C. § 1610(a). Consequently, the Federal
Reserve Board has determined that the credit sale of insur-
ance is governed by the Truth-in-Lending Act.
Logie also dictates the rejection of the defendants’ posi-
tion. To apply the McCarran-Ferguson Act as broadly as
defendants suggest would effectively bar the application of
any federal statute relevant to the business activities of in-
surance companies regardless of whether state legislation
covered the specific transaction in question or not. This inter-
pretation justifiably has not been accorded the McCarran Act
by federal courts in other contexts. EZ. g., Atlantic & Pacific
Insurance Co. v. Combined Ins. Co., 312 F.2d 513, 515 (10th
Cir. 1962); Sears, Roebuck & Co. v. All States Life Insur-
ance Co., 246 F.2d 161, 172 (5th Cir. 1957); Zachman &
Erwin, 186 F.Supp. 691, 694 (S.D. Texas 1960).
59a
regulate within the meaning of § 2(b) by exempting insur-
ance companies from making premium credit disclosures
strips that State of the right granted to it under the
McCarran Act to regulate in a manner it deems best in a
situation where Congress has not specifically related the
statute to the business of insurance.‘ See dissent in Perry,
ante, 606 F.2d at 475, and Cochran, ante, 606 F.2d at 464
and authorities cited therein.
First, Georgia comprehensively regulates the business
of insurance and the sale of insurance policies. See gen-
erally Ga.Code Title 56. There is no doubt about this and
plaintiffs do not contend otherwise. Second, Georgia has
regulated the financing of insurance premiums through
the Georgia Insurance Premium Finance Company Act,
Ga.Code Ann. § 84-5301. The Georgia Legislature has also
mandated that credit disclosures be made in insurance
premium financing arrangements. Ga.Code Ann. § 84-5309
(c). But what is significant here is the fact that Georgia
specifically and affirmatively exempted from the require-
ments of this Act not only “[a]ny insurance company au-
thorized to do business in the State of Georgia or any
licensed resident local agent as to premiums on business
produced by such agent” (Ga.Code Ann. § 84-5302(a)), but
also “{i]nsurance premiums in connection with the kinds
of business defined in . . . section 56-404 (accident and
sickness insurance) of the Georgia Insurance Code” (Ga.
Code Ann. § 84-5302(e); emphasis added).
‘The plaintiffs maintained below and asserted at oral argument
that TIL specifically relates to the business of insurance. The Dis-
trict Judge did not reach the issue because he found no invalida-
tion, impairment or supersession of state law. The Court holds in
Cochran that TIL does not specifically relate to the business of
insurance, sce ante, 606 F.2d at 464 and authorities there cited,
Plaintiffs also assert that 15 U.S.C.A. § 1633 provides the exclu-
sive mechanism by which states can exempt credit transactions
from TIL’s requirements. I rejected this same contention in my
dissent in Perry, ante, 606 F.2d at note 34, p. 483.
60a
I would hold that these exemptions fall squarely within
the Fifth Circuit standard for “regulating” announced in
Crawford v. American Title Ins. Co., 1975, 518 F.2d 217,
218, which I followed in my dissent in Perry, ante, 606
F.2d at 481-482.
The McCarran Act renders the federal [act] inap-
plicable when state legislation generally proscribes,
permits or otherwise regulates the conduct in ques-
tion and authorizes enforcement through a scheme of
administrative supervision.
(Emphasis added.) Georgia has chosen to permit insur-
ance agents not to make the credit term disclosures man-
dated in Ga.Code Ann. § 84-5309(c). Thus, even assuming,
as plaintiffs urge, that the “conduct in question”’ is making
credit term disclosures rather than selling insurance pol-
icies, the Crawford test is satisfied.
As to the final question, were we to place our imprimatur
on the District Court’s reading of McCarran, we would
not only be superimposing additional requirements, which
I declined to do in my dissent in Perry, ante, 606 F.2d at
482-483, but we would be construing TIL to invalidate
completely the Georgia exemptions in direct contravention
of § 2(b). We can think of no clearer “conflict,” to use the
District Court’s term,’ than exists where a state has af-
firmatively relieved insurance companies and their agents
and certain premiums from credit disclosure requirements.
The nonaction—purposeful and noninadvertent—that is ex-
pressly legal for an insurance agent in Georgia would be
expressly illegal under federal law.* TIL’s application
* The mere absence of conflict is not the litmus test for applying
McCarran, ‘‘Invalidate, impair, or supersede’’ includes the dis-
placement of, or the superimposition of federal requirements on,
transactions that are tailored to meet state requirements. Dissent
in Perry, ante, 606 F.2d at 482-483.
*It has long been a settled McCarran principle that the states
can make legal activities of insurance companies—uniform rates,
6la
would thus amount to invalidation with a vengeance and
reduce McCarran to a nullity.
The plaintiffs argue and I acknowledge that the result
I would reach here would mean that no credit sale dis-
closures have to be made by insurance companies and
their agents in Georgia.’ But this Court has no charter
to cure that. Georgia has demonstrated, by enactment of
the Premium Finance Company Act, its know-how and
ability to impose disclosure requirements when it chooses
to do so. Congress has displayed equivalent abilities in
specifically relating federal legislation to the insurance
business; witness, for example, its action with respect to
the National Labor Relations Act and the Fair Labor
Standards Act, 15 U.S.C.A. § 1014. When and if these
legislative bodies subsequently decide that insurance com-
panies and agents should not enjoy this immunity, they
will find an obedient ear in the Fifth Circuit. Until then,
we must confine our legislative activities to “molecular
motions.” ®
for example—that would otherwise be illegal under federal law
as long as §2(b) standards are met and these activities do not
constitute boycott, coercion or intimidation within 15 U.S.C.A.
§ 1013(b). E.g., Dexter v. Equitable Life Assurance Society, 2 Cir., |
1975, 527 F.2d 233, 236; Meicler v. Aetna Casualty & Surety Co.,
5 Cir., 1975, 506 F.2d 732; Perry dissent Appendix, ante, 606
F.2d at 484, excerpts [2], [16], [19].
*In Cochran, ante, 606 F.2d at 460 we held that independent
insurance premium finance companies were not exempted from
making such disclosures by virtue of the McCarron Act because
their activities were not part of the ‘‘business of insurance’’ with-
in the meaning of § 2(b).
*I recognize without hesitation that judges do and must legis-
late, but they can do so only interstitially ; they are confined
from molar to molecular motions.
Southern Pacific Co. v. Jensen, 1917, 244 U.S. 205, 221, 37 S.Ct.
524, 531, 61 L.Ed. 1086 ( Holmes, J., dissenting).
63a
APPENDIX E
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 76-1687
D. C. Docket No. CA 1863 & CA 1864
Jessie Copy, Satire Mas Copy and all others similarly
situated, Plaintiff s-A ppellees,
V.
Community Loan CorporaTION OF RicHMoND County,
Defendant-A ppellant.
JaMEs TOUCHSTONE, GLENDA TouCcHSTONE, INEz SINGLETON
and all others similarly situated, Plaintiff s-Appellees,
V.
Community Loan & INVESTMENT CoRPORATION OF AUGUSTA,
Defendant-A ppellant.
Appeal from the United States District Court for the
Southern District of Georgia
Before Brown, Chief Judge, THorNBERRY and Morgan,
Circuit Judges.
JUDGMENT
This cause came on to be heard on the transcript of the
record from the United States District Court for the South-
ern District of Georgia, and was argued by counsel;
On ConsipeRATION WHEREOF, It is now here ordered and
adjudged by this Court that the judgment of the said
District Court in this cause be, and the same is hereby,
affirmed;
It is further ordered that the defendant-appellant pay
to the plaintiffs-appellees the costs on appeal, to be taxed
by the Clerk of this Court.
January 2, 1979
Brown, Chief Judge, dissenting.
Issued As Mandate:
65a
APPENDIX F
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
OFFICE OF THE CLERK
December 11, 1979
Gilbert F. Ganucheau
Clerk
Tel. 504-589-6514
600 Camp Street
New Orleans, La. 70130
To Aux Parties Listep BELow:
No. 76-1687
JESSIE Copy, ET AL.
vs.
Community Loan CorPORATION OF
RicHMonpD Counrry, ET AL.
Dear Counsel:
This is to advise that an order has this day been entered
denying the petition( ) for rehearing, and no member of
the panel nor Judge in regular active service on the Court
having requested that the Court be polled on rehearing
en bane (Rule 35, Federal Rules of Appellate Procedure;
Local Fifth Cireuit Rule 16) the petition( ) fer rehearing
en banc has also been denied.
See Rule 41, Federal Rules of Appellate Procedure for
issuance and stay of the mandate.
Very truly yours,
GitBert F. Ganucueay, Clerk
By /s/ Satty Haywarp
Deputy Clerk
ec: Messrs. W. Rhett Tanner, Richard W. Kirby
Mr. T. J. Foss
Mr. Ernest V. Harris
Mr. John L. Cromartie, Jr.
Mr. Harry W. Pettigrew
67a
APPENDIX G
McCarran-Ferguson Act
15 U.S.C. §§ 1011-1015
§ 1011. Declaration of policy
Congress hereby declares that the continued regulation
and taxation by the several States of the business of in-
surance is in the public interest, and that silence on the
part of the Congress shall not be construed to impose any
barrier to the regulation or taxation of such business by
the several States.
§ 1012. Regulation by State law: Federal law relating specifically
to insurance: applicability of certain Federal laws after June
(a) The business of insurance, and every person en-
gaged therein, shall be subject to the laws of the several
States which relate to the regulation or taxation of such
business.
(b) No Act of Congress shali be construed to invali-
date, impair, or supersede any law enacted by any State
for the purpose of regulating the business of insurance,
or which imposes a fee or tax upon such business, unless
such Act specifically relates tu the business of insurance:
Provided, That after June 30, 1948, the Act of July 2,
1890, as amended, known as the Sherman Act, and the
Act of October 15, 1914, as amended, known as the Clayton
Act, and the Act of September 26, 1914, known as the
Federal Trade Commissien Act, as amended [15 U.S.C.
41 et seq.], shall be applicable to the business of insurance
to the extent that such buSiness is not regulated by State
law.
68a
§ 1013. Suspension until June 30, 1948, of application of certain
Federal laws: Sherman Act applicable to agreements to, or
acts of, boycott, coercion, or intimidation
(a) Until June 30, 1948, the Act of July 2, 1890, as
amended, known as the Sherman Act, and the Act of Octo-
ber 15, 1914, as amended, known as the Clayton Act, and
the Act of September 26, 1914, known as the Federal Trade
Commission Act [15 U.S.C. 41 et seq.], and the Act of
June 19, 1936, known as the Robinson-Patman Anti-Dis-
crimination Act, shall not apply to the business of insur-
ance or to acts in the conduct thereof.
(b) Nothing contained in this chapter shall render the
said Sherman Act inapplicable to any agreement to boy-
cott, coerce, or intimidate, or act of boycott, coercion, or
intimidation.
a © 7 x * + e * * 7.
§ 1014. Applicability of National Labor Relations Act and the Fair
Labor Standards Act of 1938
Nothing contained in this chapter shall be construed to
affect in any manner the application to the business of
insurance of the Act of July 5, 1935, as amended, known
as the National Labor Relations Act [29 U.S.C. 151 et
seq.], or the Act of June 25, 1938, as amended, known
as the Fair Labor Standards Act of 1938 [29 U.S.C. 201
et seq.], or the Act of June 5, 1920, known as the Merchant
Marine Act, 1920 [46 U.S.C. 861 et seq. and 911 et seq.].
§ 1015. Definition of “State”
As used in this chapter, the term “State” includes the
several States, Alaska, Hawaii, Puerto Rico, Guam, and
the District of Columbia.
69a
APPENDIX H
Excerpts from the Truth-in-Lending Act
15 U.S.C. §§ 1602, 1631, 1638-40
§ 1602. Definitions and rules of construction
(a) The definitions and rules of construction set forth in
this section are applicable for the purposes of this sub-
chapter.
(b) The term “Board” refers to the Board of Governors
of the Federal Reserve System.
(c) The term “organization” means a corporation, gov-
ernment or governmental subdivision or agency, trust,
estate, partnership, cooperative, or association.
(d) The term “person” means a natural person or an
organization.
(e) The term “credit” means the right granted by a
creditor to a debtor to defer payment of debt or to incur
debt and defer its payment.
(f) The term “creditor” refers only to creditors who
regularly extend, or arrange for the extension of, credit
which is payable by agreement in more than four install-
ments or for which the payment of a finance charge is or
may be required, whether in connection with loans, sales
of property or services, or otherwise. For the purposes of
the requirements imposed under Part D of this subchapter
and sections 1637(a)(6), 1637(a)(7), 1637(a)(8), 1637(b)
(1), 1637(b) (2), 1637(b) (3), 1637(b) (9), and 1637(b) (11)
of this title, the term “creditor” shall also include card issu-
ers whether or not the amount due is payable by agreement
in more than four installments or the payment of a finance
charge is or may be required, and the Board shall, by regu-
lation, apply these requirements to such card issuers, to
the extent appropriate, even though the requirements are
by their terms applicable only to creditors offering open
70a
end credit plans. The provisions of this subchapter apply
to any such creditor, irrespective of his or its status as
a natural person or any type of organization.
(g) The term “credit sale” refers to any sale with re-
spect to which credit is extended or arranged by the seller.
The term includes any contract in the form of a bailment
or lease if the bailee or lessee contracts to pay as com-
pensation for use a sum substantially equivalent to or in
excess of the aggregate value of the property and services
involved and it is agreed that the bailee or lessee will be-
come, or for no other or a nominal consideration has the
option to become, the owner of the property upon full com-
pliance with his obligations under the contract.
(h) The adjective “consumer”, used with reference to
a credit transaction, characterizes the transaction as one
in which the party to whom credit is offered or extended
is a natural person, and the money, property, or services
which are the subject of the transaction are primarily for
personal, family, household, or agricultural purposes.
(i) The term “open end credit plan” refers to a plan
prescribing the terms of credit transactions which may
be made thereunder from time to time and under the terms
of which a finance charge may be computed on the out-
standing unpaid balance from time to time thereunder.
(j) The term “adequate notice”, as used in section 1643
of this title, means a printed notice to a cardholder which
sets forth the pertinent facts clearly and conspicuously so
that a person against whom it is to operate could reason-
ably be expected to have noticed it and understood its
meaning. Such notice may be given to a cardholder by
printing the notice on any credit card, or on each periodic
statement of account, issued to the cardholder, or by any
other means reasonably assuring the receipt thereof by
the cardholder.
7Tla
(k) The term “credit card” means any card, plate, cou-
pon book or other credit device existing for the purpose
of obtaining money, property, labor, or services on credit.
(1) The term “accepted credit card” means any credit
card
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.