Mourning v. Family Publications Service, Inc. Brief for the Respondent in Opposition

    In the

0npmra> (£mvt nf tin* lutted
O ctober T e r m , 1971

No. 71-829

LE ILA MOURNING,

v.
Petitioner,

FA M ILY  PU BLICATION S SERVICE, INC.,
Respondent.

O n  P e t it io n  for a  W r it  of Certiorari to t h e  U nited  
S tates C ourt of A ppeals for t h e  F if t h  C ir c u it

BRIEF FOR THE RESPONDENT IN OPPOSITION

R obert S. R if k in d ,
One Chase Manhattan Plaza, 

New York, N. Y. 10005, 
Counsel for Respondent.

R obert D. Joffe ,
C ravath , S w a in e  & M oore,

One Chase Manhattan Plaza,
New York, N. Y. 10005,

W m . S. F rates,
L arry  S. S tew art ,
F rates F loyd P earson  & S t e w a r t , 

Concord Building’,
Miami, Florida 33130,

O f Counsel.

February 25, 1972.





INDEX

PAGE

O p in io n s  B e l o w .................................................................... 1

Ju risd ictio n  .....................     1

Q u estions  P resented ..................      2

Statu tes  and  R egu lation s  I n v o l v e d .......................... 2

St a t e m e n t  of t h e  Ca s e ...................................................  9

A r g u m e n t  ...............................................................................  13

C on clu sion  .............................................................................  27



TABLE OF AUTHORITIES

Cases :

Addison v. Holly Hill Fruit Products, Inc., 322 U.S.
607 (1944) ..............................................   17

Castaneda v. Family Publications Service, 4 CCH 
Consum er  C redit Gu ide  j[ 99,564 (D . Colo.
1971) ........................................  15,20

Commissioner of Internal Revenue v. Acker, 361 
U.S. 87 (1 9 5 9 ) ......................................................... 12

Ebert v. Poston, 266 U.S. 548 (1 9 2 5 ) .....................  18
Evans v. Kroh, 284 S.W.2d 329 (Ky. Ct. App. 1955) 24
Federal Communications Commission v. American

Broadcasting Co., 347 U.S. 284 (1 9 5 4 )..............16-17
N. C. Freed Co. v. Board of Governors of the 

Federal Reserve System, 4 C C H  Consum er  
C redit Gu ide  |f 99,356 (W .D .N .Y. 1971) . . . .  16

John Kelley Co. v. Commissioner, 326 U.S. 521 
(1946) ........................................................................  25

Langnes v. Green, 282 U.S. 531, 538 (1 9 3 1 ) ........... 20
Martinez v. Family Publications Service, Inc., No.

71-169-CIV-TC (S.D. Fla., Oct. 8, 1971) . . . 15-16, 20 
McGee v. Stockes’ Heirs, 76 N.W.2d 145 (N.D.

1956) ..........................................................................  24
Metropolitan Water District of Southern California 

v. Marquardt, 59 Cal. 2d 159, 379 P.2d 28,
28 Cal. Rep. 724 (1963) ..........................................  25

Otis v. Cowles Communications, Inc., No. C-71 550 
RHS (N.D, Cal., Nov. 3, 1 9 7 1 ) ......................... 15, 20

Park & 46th St. Corp. v. State Tax Commission,
295 N.Y. 173, 65 N.E.2d 763 (1946) ............... 24

Social Security Board v. Nierotko, 327 U.S. 358
(1946) ...................................................................... 17

Strompolos v. Premium Readers Service, 326 F. 
Supp. 1100 (N.D. 111. 1971) ...................................19-20

PAGE



Ill

United States v. Calamaro, 354 U.S. 351 (1957) . . 17
United States v. New York, New Haven & Hart­

ford Railroad Co., 276 F.2d 525 (2d Cir. 1959), 
cert, denied, 362 U.S. 961 (1960) .......................  24

Walla Walla City v. Walla Walla Water Co., 172 
U.S. 1 (1898) ......................................................... 24-25

Zuber v. Allen, 396 U.S. 168 (1 9 6 9 ) ..................... .. 17

St a t u t e s :

15 U.S.C. § 1601 (1970) ........................................ 2-3,13
15 U.S.C. § 1602 (1970) ...................3, 10, 13, 19, 23-24
15 U.S.C. § 1604 (1 9 7 0 ) ....................................   12
15 U.S.C. § 1605 (1 9 7 0 ) ...........................................  4
15 U.S.C. § 1607 (1970) ....................................... 4-5,10
15 U.S.C. § 1611 (1970) ........................................ 5-6, 10
15 U.S.C. § 1612 (1970) ............................................  6
15 U.S.C. § 1631 (1970) ...................................... 6, 10, 14
15 U.S.C. § 1633 (1970) ...........................................  6-7
15 U.S.C. § 1638 (1 9 7 0 ) ...........................................  18
15 U.S.C. § 1640 (1970) ................... 7, 10-11, 14, 20-21
28 U.S.C. § 1254 (1 9 7 0 ) ............................................  1

R egulations  :

12 C.F.R. § 226.2 (1 9 7 1 ) ..................................7-8, 10, 11
12 C.F.R. § 226.8 (1971) .......................................... 8, 10

PAGE



XV

Congressional M a te r ia l  :

114 Cong . R e c . 14487 (1968) ...............................  23
Hearings on S. 750 Before the Subcomm. on Pro­

duction and Stabilisation of the Senate Comm, on 
Banking and Currency, 88th Cong. 1st & 2d Sess.,
Pt 2 (1964) .......................................................  15

H. R. Rep. No. 1040, 90th Cong., 1st Sess.
(1 9 6 7 )......................................................... 14, IS, 23

S. R e p . N o . 392, 90th Cong., 1st Sess. (1967) . . . .  14, 23
S. 5, 90th Cong., 1st & 2d Sess. (1 9 6 7 ) ...................  21

B o o k s :

3A  A . Co r b in , C ontracts § 687 (1 9 6 0 )___ 22-23, 25
5 J. M ertens , T h e  L a w  of Federal I ncom e  

T a x a t io n  § 30.03 n.29 (1969) ...........................  25

M iscellaneous  :

B oard of Governors of t h e  F ederal R eserve 
S y ste m , A n n u a l  R eport to C ongress on 
T ru th  in  L e n d in g  for t h e  Y ear 1971 (1972) 19

PAGE



I n  t h e

(ftimri ni %  H&niteb
O ctober T e r m , 1971

No. 71-829
----------f-------------- -

L e il a  M o u r n in g ,
Petitioner,

v.

F a m il y  P u blicatio n s  Service , I n c .,
Respondent.

- f

O n  P e titio n  for a  W r it  of Certiorari to t h e  U nited  
States C ourt of A ppeals for t h e  F if t h  C ir c u it

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion o f the United States District Court for the 
Southern District of Florida is reported at 4  CCH C on ­
sum er  C redit G u id e  f[ 99,632 (1 9 7 0 ) (Mehrtens, J.). 
The opinion of the United States Court of Appeals for the 
Fifth Circuit, reversing the decision of the District Court, 
is reported at 449 F.2d 235 (1 9 7 1 ).

JURISDICTION

The judgment of the court of appeals was entered on 
September 27, 1971. The petition for a writ of certiorari 
was filed on December 23, 1971. The jurisdiction of this 
Court is invoked under 28 U.S.C. § 1254(1) (1970).



2

QUESTIONS PRESENTED

1. Whether transactions in which consumers prepay
for goods involve an extension of consumer credit within 
the meaning of the Truth in Lending Act (15 U.S.C. 
§§ 1601-65 (1970)) and Regulation Z (12 C.F.R.
§§ 226.1-.12 (1971)) promulgated thereunder by the Fed­
eral Reserve Board.

2. Whether transactions that do not entail any finance 
charges are subject to the civil and criminal penalties of the 
Truth in Lending Act by virtue of the Federal Reserve 
Board’s four installment rule.

3. Whether, under 15 U. S. C. § 1640(a) (which pro­
vides for a penalty equal to “ twice the amount of the finance 
charge in connection with the transaction except . . . [not] 
less than $100 nor greater than $1,000” ), a penalty may be 
imposed where the transaction in question does not entail a 
finance charge.

STATUTES AND REGULATIONS INVOLVED

The statute to be construed is the Truth in Lending Act, 
15 U.S.C. §§ 1601-65 (1970). The regulation to be con­
strued is to be found in Regulation Z, 12 C.F.R. 
§§226.1-.12 (1971), promulgated by the Federal Reserve 
Board.

The Act provides, in pertinent part, as follows:

“ § 1601. Congressional findings and declaration of 
purpose

The Congress finds that economic stabilization 
would be enhanced and the competition among the 
various financial institutions and other firms engaged



3

in the extension of consumer credit would be 
strengthened by the informed use of credit. The 
informed use of credit results from an awareness 
of the cost thereof by consumers. It is the purpose 
of this subchapter to assure a meaningful disclosure 
of credit terms so that the consumer will be able to 
compare more readily the various credit terms avail­
able to him and avoid the uninformed use o f credit.”

“ § 1602. Definitions and rules of construction

(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 for which the payment of a finance charge 
is required, whether in connection with loans, sales 
of property or services, or otherwise. The provi­
sions 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 
respect 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 compensation for use a sum sub­
stantially equivalent to or in excess of the aggregate 
value o f the property and services involved and it is 
agreed that the bailee or lessee will become, 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.”



4

“ § 1605. Determination of finance charge— Defini­
tion

(a) Except as otherwise provided in this section, 
the amount of the finance charge in connection with 
any consumer credit transaction shall be determined 
as the sum of all charges, payable directly or indi­
rectly by the person to whom the credit is extended, 
and imposed directly or indirectly by the creditor 
as an incident to the extension of credit, including 
any of the following types of charges which are 
applicable:

(1 ) Interest, time price differential, and any 
amount payable under a point, discount, or other 
system of additional charges.”

“ § 1607. Administrative enforcement— Enforcing 
agencies

(a) Compliance with the requirements imposed 
under this subchapter shall be enforced under

(1) section 1818 of Title 12, in the case of

(A ) national banks, by the Comptroller 
of the Currency.

(B ) member banks of the Federal Re­
serve System (other than national banks), 
by the Board.

(C ) banks insured by the Federal De­
posit Insurance Corporation (other than 
members of the Federal Reserve System), 
by the Board of Directors of the Federal 
Deposit Insurance Corporation.



5

(2 ) sections 1426( i ) , 1437, 1464(d), and 
1730 of Title 12, by the Federal Home Loan 
Bank Board (acting directly or through the 
Federal Savings and Loan Insurance Corpora­
tion), in the case o f any institution subject to 
any of those provisions.

(3 ) the Federal Credit Union Act, by the 
Director of the Bureau of Federal Credit Unions 
with respect to any Federal credit union.

(4) the Acts to regulate commerce, by the 
Interstate Commerce Commission with respect 
to any common carrier subject to those Acts.

(5 ) the Federal Aviation Act o f 1958, by 
the Civil Aeronautics Board with respect to any 
air carrier or foreign air carrier subject to that 
Act.

(6 ) the Packers and Stockyards Act, 1921 
(except as provided in section 406 of that A ct), 
by the Secretary of Agriculture with respect to 
any activities subject to that Act.”

1611. Criminal liability for willful and knowing
violation

Whoever willfully and knowingly

(1 ) gives false or inacurate information or 
fails to provide information which he is required 
to disclose under the provisions of this subchap­
ter or any regulation issued thereunder,

(2 ) uses any chart or table authorized by the 
Board under section 1606 of this title in such a 
manner as to consistently understate the an-



6

nual percentage rate determined under section 
1 6 0 6 (a )(1 )(A ) o f this title, or

(3 ) otherwise fails to comply with any re­
quirement imposed under this subchapter,

shall be fined not more than $5,000 or imprisoned 
not more than one year, or both.”

“ § 1612. Penalties inapplicable to governmental 
agencies

No civil or criminal penalty provided under this 
subchapter for any violation thereof may be imposed 
upon the United States or any agency thereof, or 
upon any State or political subdivision thereof, or 
any agency of any State or political subdivision.”

“ § 1631. General requirement of disclosure

(a ) Each creditor shall disclose clearly and con­
spicuously, in accordance with the regulations of the 
Board, to each person to whom consumer credit is 
extended and upon whom a finance charge is or may 
be imposed, the information required under this 
part.”

“ § 1633. Exemption for State-regulated transac­
tions

The Board shall by regulation exempt from the 
requirements of this part any class of credit trans­
actions within any State if it determines that under 
the law of that State that class of transactions is sub­
ject to requirements substantially similar to those



7

imposed under this part, and that there is adequate 
provision for enforcement.”

“ § 1640, Civil liability— Failure to disclose

(a) Except as otherwise provided in this sec­
tion, any creditor who fails in connection with any 
consumer credit transaction to disclose to any per­
son any information required under this part to be 
disclosed to that person is liable 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 nor greater than $1,000; and

(2 ) in the case of any successful action to 
enforce the foregoing liability, the costs of the 
action together with a reasonable attorney’s fee 
as determined by the court.”

Regulation Z provides, in pertinent part, as follows:

“ § 226.2 Definitions and rules of construction

For the purposes of this part, unless the context 
indicates otherwise, the following definitions and 
rules of construction apply:

(d) ‘Amount financed’ means the amount of 
credit of which the customer will have the actual use 
determined in accordance with paragraphs ( c ) (7 )  
and (d ) (1 )  of § 226.8.



8

(k) ‘Consumer credit’ means credit offered or 
extended to a natural person, in which the money, 
property, or service which is the subject of the 
transaction is primarily for personal, family, house­
hold, or agricultural purposes and for which either 
a finance charge is or may be imposed or which 
pursuant to an agreement, is or may be payable in 
more than four installments. ‘Consumer loan’ is one 
type of ‘consumer credit.’

(l)  ‘Credit’ means the right granted by a credi­
tor to a customer to defer payment of debt, incur 
debt and defer its payment, or purchase property or 
services and defer payment therefor. (See also 
paragraph (bb) of this section.)

(m ) ‘Creditor’ means a person who in the or­
dinary course of business regularly extends or ar­
ranges for the extension of consumer credit, or 
offers to extend or arrange for the extension of 
such credit.

(n) ‘Credit sale’ means any sale with respect to 
which consumer credit is extended or arranged by 
the seller.”

“ § 226.8 Credit other than open end— specific dis­
closures

(a) General rule. Any creditor when extending 
credit other than open end credit shall, in accord­
ance with § 226.6 and to the extent applicable, make 
the disclosures required by this section with respect 
to any transaction consummated on or after July 
1, 1969.”



9

STATEMENT OF THE CASE

Respondent, Family Publications Service, Inc. ( “ FPS” ), 
was engaged in the business of soliciting subscriptions and 
offering contracts for the delivery of a large number of well- 
known national periodicals. (Pet. App. 7a*.) Under FPS’s 
standard form of contract, a customer receives the maga­
zines he selects for 48 (or 60) months and pays for them 
monthly over the first 24 (or 30) months.** Under this 
plan, at any point in time prior to the end of the contract pe­
riod, the customer has paid for more issues than he has re­
ceived, so that FPS is not in any sense financing a debt 
for, or “ carrying” , the customer. The payments are in 
fact prepayments by the customer for magazines to be de­
livered to the customer in the future. Petitioner did not con­
tend and the district court did not find that FPS’s contract 
imposes any finance charge on the customer. (Pet. App. 
12a.)

Under the terms of the FPS contract executed by peti­
tioner on August 19, 1969, she was to receive Ladies Home 
Journal, Holiday, Life, and Travel and Camera for 60 
months in return for an initial payment of $3.95 and 30 
monthly payments of $3.95. Although she received the 
magazines ordered, petitioner defaulted on her contract and 
never made any payments beyond the initial $3.95 payment. 
Consequently, her contract was cancelled by FPS on April 
15, 1970. (Pet. App. 8a.)

♦References cited to “ Pet. App.”  are to the opinions of the district 
court (Pet. App. la-5a) and the court of appeals (Pet. App. 6a-23a) 
which are printed in the Petitioner’s Appendix.

**In a relatively small number of cases FPS ’s customers elected to 
pay the full purchase price at the outset rather than over 24 (or 30) 
months. W e have recently discovered that, contrary to representa­
tions made below, a small number of those customers (representing 
a small fraction of 1% of FPS’s total customers) may have been 
charged less than the aggregate purchase price under FPS’s standard 
form of contract.



10

Petitioner Mourning commenced this action in the 
United States District Court for the Southern District of 
Florida on April 22, 1970, on her own behalf and on behalf 
of a class comprised of all residents of Dade County, Flor­
ida, who had entered into contracts with FPS since July 1, 
1969 (the effective date of the Truth in Lending A ct). The 
second amended complaint ( “ the complaint” ) alleged that 
the FPS standard form contract did not contain the dis­
closure of credit terms required by the Truth in Lending 
Act and the Regulations promulgated thereunder by the 
Federal Reserve Board. The complaint prayed for a civil 
penalty of not less than $100 nor more than $1,000 on behalf 
of each member of the class, together with attorneys’ fees 
and the cost of the action, as provided for in 15 U.S.C. 
§ 1640(a).

The Act provides that creditors who extend consumer 
credit “ for which the payment of a finance charge is 
required” (15 U.S.C. § 1602 ( f ) )  shall make specified 
disclosures (15 U.S.C. § 1631), including the amount of 
the finance charge and the finance charge expressed as an 
annual percentage rate. Regulation Z promulgated by the 
Federal Reserve Board provides that such disclosures must 
be made in credit transactions involving repayment in more 
than four installments, regardless of whether a finance 
charge is involved (12 C.F.R. §§ 226.2 (k) and (m ), 
226.8). For failure to make the required disclosures, the 
Act imposes both criminal (15 U.S.C. § 1611) and civil 
penalties (15 U.S.C. § 1640), as well as administrative 
sanctions under the Federal Trade Commission Act (15 
U.S.C. § 1607). The civil penalty section of the Act, 
under which petitioner’s claim arises, provides for liability

“ in an amount equal to . . . twice the amount of the
finance charge in connection with the transaction.
except that the liability under this paragraph shall



11

not be less than $100 nor greater than $1,000 . . .
IS U.S.C. § 1640.

On August 28, 1970, both parties moved for summary 
judgment. Petitioner contended that her transaction with 
FPS was subject to the Act by virtue of Regulation Z be­
cause it was a credit transaction payable in more than four 
installments and that she was entitled to recover a civil 
penalty regardless of whether the transaction entailed a 
finance charge. FPS contended that the transaction was 
not subject to the disclosure and penalty provisions of the 
Act because, inter alia, (1 ) it was not a credit transaction, 
(2 ) the disclosure and penalty provisions o f the Act do not 
apply in the absence of a finance charge, and (3 ) the Regu­
lations could not extend the scope of the Act. Both parties 
concurred in the view that there were no material issues of 
fact and that the sole question to be decided was the proper 
reach of the disclosure and penalty provisions of the Act 
and the Regulations.

On November 27, 1970, the district court rendered its 
final decision (1 ) dismissing the class allegations in the 
amended complaint, (2 ) denying FPS’s motion for sum­
mary judgment, and (3 ) granting judgment in favor of 
Leila Mourning in the amount of $100, together with 
$1,500 attorney’s fee and costs. The court held that “ the 
transaction here in question falls squarely within the scope 
of the Act and its Regulations by virtue of the ‘more than 
four installments’ riile, 12 CFR § 226.2(k). . . .” (Pet. 
App. 4a) (emphasis added).

On December 11, 1970, FPS filed its notice o f appeal 
from the district court’s order and the judgment entered 
thereon in so far as the order granted plaintiff’s motion for 
summary judgment and denied FPS’s motion for summary 
judgment.



12

On September 27, 1971, the court of appeals reversed 
and remanded with directions that the complaint be dis­
missed. The court found that under the Act “ three essential 
elements must be found present together in a transaction” 
before the duty to make the specified disclosures arises: (i) 
a creditor (ii) who extends consumer credit (iii) for which 
a finance charge has been imposed (Pet. App. 17a-18a). 
The court also found, in accord with the position taken by 
the United States as amicus curiae, that under the regulation 
promulgated by the Federal Reserve Board

“ in order for the disclosure and penalty provisions o f 
the Truth-in-Lending Act to be applicable, all that is 
required is that the transaction involve the extension 
of credit which, pursuant to agreement, is or may be 
payable in more than four installments. No showing 
or finding of the imposition, directly or indirectly, of 
a finance charge is necessarily required.” (Pet. App. 
18a.)

The court concluded that “ an inconsistency exists be­
tween the four installment rule and the Truth-In-Lending 
Act” and that, in promulgating the rule, the Board had 
“ over-stepped the authority granted to them under 15 
U.S.C., § 1604” . (Pet. App. 19a) Relying on this Court’s 
decisions in Commissioner of Internal Revenue v. Acker, 
361 U.S. 87 (1959) , and similar cases, the Court of Appeals 
held that the Board’s rule constituted an invalid “adminis­
trative endeavor to amend the law as enacted by the Con­
gress and to thereby make the Act reach transactions which 
the Congress by its statutory language did not seek or in­
tend to cover by its enactment.” (Pet. App. 20a.)

Having found the Act inapplicable to the transaction 
in issue by reason of the invalidity of the four installment 
rule, the court of appeals did not find it necessary to con-



13

sider FPS’s further contentions (1 ) that the Act is inap­
plicable because FPS did not extend consumer credit but 
rather was prepaid by its customers, and (2 ) that the civil 
penalty provision of the Act, providing for a penalty equal 
to “ twice the amount of the finance charge imposed” , is 
inapplicable where the transaction in question does not in­
volve a finance charge.

ARGUMENT

The decision below is clearly correct. It is not in conflict 
with the decision of any other court of appeals. Moreover, 
the decision below is sustainable on independent grounds 
not reached by the court below. Accordingly, further re­
view is not warranted.

1. The court of appeals was clearly correct in con­
cluding that the four installment rule is inconsistent with 
the Act and, therefore, invalid. The declared congressional 
purpose in enacting the Truth in Lending Act was to assure 
“ [t]he informed use of credit [which] results from an 
awareness of the cost thereof by consumers” . 15 U.S.C. 
§ 1601 (1970) (emphasis added). Contrary to petitioner’s 
assertion (Pet. 9), the Act does not require disclosure in all 
credit transactions, but only in credit transactions involving 
a finance charge. Three separate sections of the Act reiter­
ate the finance charge requirement and make the congres­
sional purpose clear beyond doubt. Section 1602(f) pro­
vides in applicable part:

“ The term ‘creditor’ refers only to creditors who 
regularly extend, or arrange for the extension of, 
credit for which the payment of a finance charge is 
required . . .  .” (Emphasis added.)



14

The disclosure requirement set forth in § 1631(a) pro­
vides :

“ Each creditor [as defined in § 1602 ( f ) ]  shall 
disclose clearly and conspicuously, in accordance 
with the regulations of the [Federal Reserve] Board, 
to each person to whom consumer credit is extended 
and upon whom a finance charge is or may be im­
posed, the information required under this part.” 
(Emphasis added.)

Finally, under § 1640(a), the civil liability for failing to 
make the required disclosures is stated to be “ twice the 
amount of the finance charge in connection with the trans­
action” , (emphasis added) provided that such liability shall 
not be less than $100 nor more than $1,000.

The clear language of the Act is buttressed by the Act’s 
legislative history. Both the House and Senate reports re­
flect the intent to limit the application of the Act to trans­
actions involving a finance charge:

“ [15 U.S.C. § 1631] . . .  is a prefatory section 
setting forth the basic requirements to disclose. It is 
similar to the original S.5, except that it is made clear 
that disclosure need only be made to persons ‘upon 
whom a finance charge is or may be imposed.’ Thus, 
the disclosure requirement would not apply to trans­

actions which are not commonly thought of as credit 
transactions, including trade credit, open account credit, 
30-, 60-, or 90-day credit, etc., for  which a charge is 
not made. ”  S. R e p . N o. 392, 90th Cong., 1st Sess. 14 
(1967); H.R. R ep . N o. 1040, 90th Cong., 1st Sess. 
25 (1967) (emphasis added).

The same intent is reflected in the House report:

“ . . . Title I is intended to provide the American 
consumer with truth-in-lending and truth-in-credit ad-



15

vertising by providing full disclosure of the terms and 
conditions of finance charges both in credit trans­
actions and in offers to extend credit.” H .R . R e p . N o. 
1040, 90th Cong., 1st Sess. 1 (1967) (emphasis added).

During the 1964 hearings before the Senate Banking 
and Currency Committee’s Subcommittee on Production 
and Stabilization, the Chairman of the Federal Trade Com­
mission explained the application of the Act as follows:

“ First, there must be a transaction involving ‘credit’ 
as defined in section 3 (2 ). Second, a ‘finance charge’ 
as defined in section 3 (3 ) must be imposed in this 
transaction involving ‘credit’ as defined in section 3 (2 ). 
Third, only a ‘creditor’ as defined in section 3 (4 ) is 
required to make the disclosure required under this act.

“ In order to determine whether any transaction 
which involves credit within the meaning of section 
3 (2 ) falls within the scope o f the bill, it is necessary 
to inquire whether a ‘ finance charge’ is imposed; i.e., 
whether the borrower or credit purchaser is required 
to pay any amount which would not be incurred in a 
cash transaction.” Hearings on S. 750 Before the 
Subcomm. on Production and Stabilization of the Senate 
Comm, on Banking and Currency, 88th Cong., 1st & 2d 
Sess., pt. 2, at 1304 (1964).

Thus, the Fifth Circuit’s observation that “ there must 
be found present a ‘finance charge’ ”  before disclosure is 
required under the Act (Pet. App. 18a) is clearly correct. 
See Castaneda v. Family Publications Service, 4 CCH 
Consum er  Credit G uide  99,564 (D. Colo. 1971); cf. 
Otis v. Cozvles Communications, Inc., No. C-71-550 RHS 
(N. D. Cal., Nov. 3, 1971). See also Martinez v. Family 
Publications Service, Inc., No. 71-169-CIV-TC (S. D. Fla.,



16

Oct. 8, 1971). Each of those cases involved transactions 
identical in all material respects to the one in issue here.

There can be no doubt that the four installment rule 
seeks to expand the coverage of the Act. The district 
court held that the transaction in issue was subject to the 
disclosure requirements solely by virtue of the four install­
ment rule. In other words, this transaction is not reached 
by the Act alone. Neither the petitioner nor the amici 
here seriously contend otherwise. Petitioner urges that 
the Board has “ the power to reach transactions just out­
side the literal reach of the statute” (Pet. 15) (emphasis 
added).

While the Federal Reserve Board which promulgated 
Regulation Z has broad powers to implement the Act, it 
clearly does not have authority to extend the Act— and its 
civil and criminal penalties— to broad categories of trans­
actions that Congress did not reach and declared an inten­
tion not to reach.* The principles upon which the courts 
are to deal with the over-zealous efforts of administrative 
agencies to remedy what they deem to be the shortfalls of 
congressional enactments have been well settled by this 
Court and were scrupulously followed by the court below. 
Thus, in Federal Communications Commission v. American 
Broadcasting Co., 347 U. S. 284 (1954), this Court struck 
down an FCC regulation intended to prevent the “ circum­
vention and evasion” of the statutory prohibition of the 
broadcast of lotteries. The Court stated:

It is apparent that these so-called ‘give-away’ pro­
grams have long been a matter of concern to the Federal

* Another provision of Regulation Z (12 C.F.R. §226.9 (1971)) 
has recently been held invalid for attempting to enlarge the scope of 
the Act. N. C. Freed Co. v. Board of Governors of the Federal R e­
serve Sys., 4 CCH C o n su m er  C redit G uide  99,356 (W .D.N.Y.



17

Communications Commission; that it believes these pro­
grams to be the old lottery evil under a new guise, 
and that they should be struck down as illegal devices 
appealing to cupidity and gambling spirit. .. . Regardless 
of the doubts held by the Commission and others as to 
the social value of the programs here under considera­
tion, such administrative expansion of § 1304 does not 
provide the remedy.”  347 U. S. at 296-97.*

See Addison v. Holly Hill Fruit Products, Inc., 322 U.S. 
607 (1944). See also Zuber v. Allen, 396 U. S. 168 (1969); 
United States v. Calamaro, 354 U.S. 351 (1957); Social 
Security Board v. Nierotko, 327 U.S. 358, 369-70 (1945).

The freewheeling administrative power, advocated by 
petitioner, to “ correct any [congressional] oversights or 
omissions” (Pet. 13) is peculiarly inappropriate in the cir­
cumstances of the Truth in Lending Act. Contrary to peti­
tioner’s assertion, the Act is not a mere “ rough outline” 
(Pet. 13) of what Congress had in mind. Perusal of the Act 
discloses that it is an extremely detailed statute that sets 
forth with precision the matters within and without its

*As_here, the Court in FCC  v. American Broadcasting Co. was 
faced with a civil case under a statute which also provided for crim­
inal penalties. The Court observed:

‘(It is true, as contended by the Commission, that these are not 
criminal cases, but it is a criminal statute that we must interpret. 
There cannot be one construction for the Federal Communications 
Commission and another for the Department of Justice. If we 
should give § 1304 the broad construction urged by the Com­
mission, the same construction would likewise apply in criminal 
cases. We do not believe this construction can be sustained. Not 
only does it lack support in the decided cases, judicial and admin­
istrative, but also it would do. violence to the well-established prin­
ciple that penal statutes are to be construed strictly.” 347 U S 
at 296.



18

coverage.* See Ebert v. Poston, 266 U.S. 548, 554 (1925) 
( “ Such care and particularity in treatment preclude expan­
sion of the Act in order to include transactions supposed 
to be within its spirit, but which do not fall within any of 
its provisions.” ).

Furthermore, the supposition that, but for the four in­
stallment rule, undisclosed finance charges would remain 
undisclosed is absurd. The very purpose o f the Act was 
to require the disclosure of undisclosed finance charges. 
To suggest that, in order to achieve that purpose, the 
Board had to eliminate a prerequisite to the Act’s ap­
plicability explicitly imposed by Congress is to suggest an 
extraordinary incapacity of Congress to express its will.

The Petition also urges that the four installment rule 
reflects

“ the Board’s apparent conclusion that it would 
not be feasible to determine for categories of 
transactions or on a case by case basis when the 
price paid by the consumer includes, purposely 
or otherwise, part of [Ac] all o f the costs neces­
sarily incurred by the creditor in extending credit.” 
(Pet. 17.)

Neither the petitioner nor the amici, however, explain how 
such indirect and unidentifiable credit costs are to be iden­
tified and accurately disclosed by those who would be

*For example, § 1638(a)(7) provides for the disclosure of
“ 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.”



19

brought within the Act’s coverage solely by virtue o f the 
four installment rule. Yet it is clear that, if the Act is 
applicable, the failure to make such identification and dis­
closure with precision entails the risk of “ millions of dollars 
in statutory damages” (Pet. 19), as well as criminal and 
administrative sanctions. Whatever validity the rule might 
have if it created merely a rebuttable presumption of the 
presence o f a finance charge, neither the petitioner nor the 
amici explain what legislative purpose can be served by an 
irrebuttable presumption that, in effect, requires the dis­
closure of finance charges by creditors who do not impose 
finance charges. Since Congress explicitly recognized that 
some creditors do not impose finance charges ( see 15 U.S.C. 
§ 1602(f) and pp. 13-15, supra), the avowed purpose of the 
regulation is patently inconsistent with the congressional 
purpose.

In all events, we note that on January 3, 1972, the Fed­
eral Reserve Board recommended that Congress amend the 
Truth in Lending Act by enacting the four installment rule. 
B oard of G overnors of t h e  F ederal R eserve Sy ste m , 
A n n u a l  R eport to C ongress on T r u th  in  L en ding  
for t h e  Y ear  1971, at 22 (1972). Thus, Congress has 
had the supposed defect in the Act formally called to its 
attention and has had the opportunity to deal with it. We 
respectfully submit that Congress is the appropriate forum 
for the resolution of the question that petitioner urges upon 
the Court.

2. There is no conflict among the circuits. Strompolos 
v. Premium Readers Service, 326 F. Supp. 1100 (N.D. 111. 
1971), is cited by petitioner as being in direct conflict with 
the Fifth Circuit’s decision in this action. However, Strom­
polos although certified by Judge Will under 28 U.S.C.
§ 1292(b) was settled on appeal before the Seventh Circuit 
Court of Appeals could consider the ruling below. Ac­
cordingly, there is no conflict between the circuits. More­



20

over, the other district courts which have considered the 
issues present here have all concurred with the Fifth Circuit. 
See Otis v. Cowles Communications, Inc., No. C-71 550 
RHS (N.D. Cal., Nov. 3, 1971) (motion for summary 
judgment granted on the ground that according to the un­
disputed facts, identical in all material respects to those 
present here, the Truth in Lending Act was inapplicable to 
the transactions in question); Martinez v. Family Publica­
tions Service, Inc., No. 71-169-CIV-TC (S.D. Fla., Oct. 8, 
1971) (Cabot, J.) ; Castaneda v. Family Publications Serv­
ice, 4 CCF1 C o n su m er  C redit G u ide  99,564 (D . Colo. 
1971) ( “ The Court finds that the defendant, in carrying 
on its business of selling subscriptions to magazines, was 
not extending consumer credit to consumers upon whom a 
finance charge is or may be imposed and is not subject to 
the Act. The defendant is entitled to summary judgment 
o f dismissal.” )

3. Although the decision of the court of appeals is 
based entirely on the invalidity of the four installment rule, 
the judgment is sustained by two independent considera­
tions that were advanced by FPS but which the court did 
not reach. Since either of those grounds would, we believe, 
require affirmance, this case could well be disposed of with­
out reaching the question of the invalidity of the four 
installment rule— the only question as to which the peti­
tioner and the amici seek review in this Court. See, e.g., 
Langnesv. Green, 282 U.S. 531, 538 (1931).

First, irrespective of whether the disclosure and admini­
strative enforcement provisions of the Truth in Lending 
Act are applicable in the absence of a finance charge, the 
civil liability provision of the Act is inapplicable. That 
provision (15 U.S.C. § 1640(a)) specifies the recovery of 
an amount equal to

“ twice the amount of the finance charge in connec­
tion with the transaction, except that the liability



21

under this paragraph shall not be less than $100 
nor greater than $1,000 . . .

Under § 1640(a) the finance charge provides the measure 
of recovery. The minimum and maximum dollar amounts 
cannot reasonably be construed as providing an alternative 
means of determining the amount of a recovery in the ab­
sence of a finance charge because the language of § 1640(a) 
is not susceptible of an “either/or” interpretation. Indeed, 
Congress rejected a bill which provided for liability “ in the 
amount of $100, or in any amount equal to twice the finance 
charge . . . whichever is the greater [up to $1,000]” . S. 5, 
90th Cong., 1st & 2d Sess. § 7 (a ) (1 )  (1967) (emphasis 
added).

Second, the Truth in Lending Act is inapplicable to the 
transaction in question for the fundamental reason that the 
transaction did not involve the extension of credit by FPS 
to Mourning.* It is the essence of a credit transaction that 
one party parts with value in reliance on the promise of 
another to pay at a later date. Under the standard FPS 
contract, however, FPS does not deliver anything in ad­
vance of payment. Quite the contrary, the customer 
pays in advance for the subsequent receipt of magazines. 
The customer pays over 30 months for magazines he will 
receive over 60 months. Thus, until the last magazine has 
been delivered at the end of the 60-month period, the cus­
tomer has paid for more magazines than he has received. 
In short, it is the customer who extends credit to FPS and

*In the amicus curiae brief submitted by the United States in 
the court of appeals by direction of the Solicitor General, the govern­
ment declined to express its opinion as to “ the threshhold [sic] 
question presented by the case (i.e., whether the magazine transaction 
involved the . . . extension of credit) . . . .”  The government stated: 

Since the validity of the four-installment rule is unrelated to 
that question, the Board has no interest in urging that it be 
decided one way or the other.” (Brief, p. 13.)

It is clear from the opinion below that the court of appeals did not 
make any determination with respect to that question.



22

not vice versa. FPS enjoys the use of its customers’ money 
during the period between receipt of payment and delivery 
of magazines. Obviously, if FPS should default in its 
performance under its contracts, its customers would be 
entitled to get their money back. In bankruptcy, FPS’s 
customers would be its largest class of creditors. If, on 
the other hand, a customer defaults, FPS can make itself 
whole merely by terminating deliveries.

Petitioner points out (Pet. 16) :

“ As a practical matter any creditor who permits 
a customer to defer payment of an obligation for 
goods or services already provided or paid for by 
the creditor must as a consequence borrow from a 
third party or his own capital reserves and incur a 
finance charge or resulting loss of interest.”

Substantially the same point is made to this Court by the 
United States (Brief for the United States as Amicus 
Curiae, p. 10). That proposition, offered in explanation of 
the purpose of the Act, serves to demonstrate why the Act 
is inapplicable here. FPS does not permit “ a customer to 
defer payment of an obligation for goods or services already 
provided or paid for” by FPS.* Consequently, FPS does 
not need to “ borrow from a third party or [use its] own 
capital reserves” . FPS does not itself, therefore, “ incur a 
finance charge or resulting loss of interest” . Accordingly, 
FPS does not experience a cost of credit that it must pass 
on to its customers.

Nor does the fact that the customer contracts to make 
periodic payments turn his obligation into a credit obliga­
tion. There are many contractual relationships which are 
not credit relationships. As Professor Corbin has stated:

*There is nothing in the record that suggests that FPS pays the 
magazine publishers prior to receiving payment from its customers. 
The fact is that FPS generally pays publishers on a monthly basis 
over 30 months or more.



23

“ A  transaction may be an instalment contract 
without being a credit transaction at all. Both 
parties may agree to perform in instalments with­
out promising to render any performance in advance 
of full payment of the price of each instalment so 
rendered. Thus, a seller contracts to deliver wheat 
straw at the rate of three specified loads per fort­
night, for the price of thirty-three shillings per load, 
payable on delivery; simultaneously with each de­
livery, the full price of each load is to be paid. Both 
parties promise to perform in instalments; but 
neither one promises any performance in advance 
of its exact agreed equivalent. Neither one risks an 
actual performance upon the mere word of the 
other.” 3A A. C o rbin , Contracts  §687 (1960) 
(footnote omitted).

In sum, a promise to make periodic deliveries in exchange 
for a promise to make periodic payments does not in itself 
give rise to a credit transaction. Obviously the fact that 
the FPS customer completes his periodic payment obliga­
tions under the contract before FPS has completed its 
performance can only show that this transaction is even 
less like a credit transaction than the one described by 
Professor Corbin.

The Act adopts the common understanding of a credit 
transaction.* The Act defines the term “ credit” as “ the 
right granted by a creditor to a debtor to defer payment 
of debt or to incur debt and defer its payment” . 15 U.S.C.

*“ [The] disclosure requirements would not apply to transactions 
which are not commonly thought of as credit transactions. . . .” 
S. R e p . N o. 392, 90th Cong, 1st Sess. 14 (1967) ; H .R . R e p . N o . 
1040, 90th Cong, 1st Sess. 25 (1967). “ It did not attempt to alter 
or amend the pattern of legal rights and remedies afforded con­
sumers and creditors under state law.” 114 Cong . R ec . 14487 (1968) 
(remarks of Senator Proxmire).



24

§ 1602(e). In the type of transaction in issue, there is no 
deferred payment but rather a prepayment by the customer 
because the customer has always paid for more magazines 
than he has received.

Moreover, there is clearly no “ debt” within the meaning 
of the Act. A  debt results from an unconditional agree­
ment to pay and is to be distinguished from the obligations 
of a contract under which the performance of both parties 
lies in the future. See, e.g., United States v. New York, 
New Haven and Hartford Railroad Co., 276 F.2d 525, 
530 (2d Cir. 1959), cert, denied, 362 U.S. 961, 964 (1960) ; 
McGee v. Stockes’ Heirs, 76 N.W.2d 145, 156 (N.D. 
1956). A  debt is not merely an agreement to pay money. 
Evans v. Kroh, 284 S.W.2d 329, 330 (Ky. Ct. App. 
1955) ; Park & 46th St. Corp. v. State Tax Commission 295 
N.Y. 173, 178, 65 N.E.2d 763, 765 (1946). Thus, for 
example, in deciding whether a municipality’s contract to 
pay for water services resulted in indebtedness in excess 
of the permissible debt limit, the Supreme Court in Walla 
Walla City v. Walla Walla Water Co., 172 U.S. 1, 20 
(1898), made the following distinction:

“ There is a distinction between a debt and a 
contract for a future indebtedness to be incurred, 
provided the contracting party performs the agree­
ment out of which the debt may arise. There is 
also a distinction between the latter case and one 
where an absolute debt is created at once, as by 
the issue of railway bonds, or for the erection of 
a public improvement, though such debt be pay­
able in the future by installments. In the one case 
the indebtedness is not created until the considera­
tion has been furnished; in the other the debt is 
created at once, the time of payment postponed.”



25

See also Metropolitan Water District o f Southern Cali­
fornia v. Marquardt, 59 Cal. 2d 159, 379 P.2d 28, 28 Cal. 
Rep. 724 (1963).*

The district court rested its conclusion that FPS 
extended credit to petitioner on three propositions: (1 ) 
“  [t] he promise to pay is unconditional and noil-cancellable” ; 
(2 ) “ the written agreement provides that ‘ [p] ay merits due 
monthly, otherwise balance due’ ” ; and (3 ) “ Defendant, 
itself, considered the transaction to be a credit transaction, 
and that it was owed a debt by the Plaintiff.”  (Pet. App. 
4a.) The first proposition is incorrect. The second and 
third propositions do not support the conclusion reached.

In the first place, petitioner’s promise to pay was not 
unconditional. Certainly, if petitioner had not received her 
magazines, no court would have required her to continue 
making payments for them. Her promise was conditional 
on performance by FPS and thus did not create a debt. See 
3A A .C o rbin , Contracts § 687 (1960).

In the second place, the fact that under the agreement 
FPS could require payment of the full balance if petitioner 
became indebteded to FPS through her default does not 
show that FPS undertook to extend credit. On the con­
trary, the “ balance due” clause only underscores FPS’s 
determination that it not be put in the position of a cred­
itor, either voluntary or involuntary, and that the customer 
be held to her initial undertaking for prepayment.

Finally, the district court’s statement that FPS “ con­
sidered the transaction to be a credit transaction, and that

*The term “ debt” is given the same construction for federal in­
come tax purposes as the Supreme Court gave it in Walla Walla. 
There is no valid debt which would allow a bad debt deduction under 
§ 166 of the Internal Revenue Code unless there is an unconditional 
obligation of another to pay the taxpayer. See cases collected in 
5 J. M erten s , T h e  L a w  of F ederal I n com e  T a x a t io n  § 30.03 
n.29 (1969). The existence of a note is not in itself conclusive of the 
existence of a debt. John Kelley Co. v. Commissioner, 326 U.S. 521, 
530 (1946).



26

it was owed a debt by the Plaintiff” presumably refers to 
collection letters sent petitioner after she failed to make pay­
ments. Surely the fact that petitioner became indebted when 
she failed to pay, although she was receiving the magazines 
she had ordered, does not show that the contract provided 
for the creation or deferment of such debt. Petitioner’s 
breach of her contractual obligations (which required pre­
payment) did not retroactively convert the underlying 
transaction into a credit transaction within the meaning 
of the Act.

In sum, it is clear that the transaction in issue does not 
involve the extension of credit. Accordingly, it does not fall 
within the scope of the Act and, indeed, is plainly not the 
type of transaction about which Congress was concerned 
and with which Congress intended to deal.



27

CONCLUSION

For the reasons stated, the petition for a writ o f certi­
orari should be denied.

February 25, 1972.

Respectfully submitted,

R obert S. R if k in d ,
One Chase Manhattan Plaza, 

New York, N. Y. 10005, 
Counsel for Respondent.

R obert D. Joffe ,
Cr a v a t h , Sw a in e  & M oore,

One Chase Manhattan Plaza,
New York, N. Y. 10005,

W m , S. F rates ,
L arry  S. Ste w a r t ,
F rates F loyd P earson & St e w a r t , 

Concord Building,
Miami, Florida 33130,

O f Counsel.







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