Mourning v. Family Publications Service, Inc. Brief for Respondent
Public Court Documents
September 2, 1972
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Brief Collection, LDF Court Filings. Mourning v. Family Publications Service, Inc. Brief for Respondent, 1972. 3661ecde-be9a-ee11-be36-6045bdeb8873. LDF Archives, Thurgood Marshall Institute. https://ldfrecollection.org/archives/archives-search/archives-item/e5a90417-1a32-43ec-b1ee-dc89d6990539/mourning-v-family-publications-service-inc-brief-for-respondent. Accessed July 13, 2025.
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IN TH E
&txpvm? (tort of % Initrfc
O ctober T e r m , 1972
No. 71-829
LE IL A MOURNING,
v.
Petitioner,
F A M ILY PU BLICATION S SERVICE, INC.,
Respondent.
O n W r it of C ertiorari to t h e U n ited States C ourt
of A ppeals for t h e F if t h C ir c u it
BRIEF FOR RESPONDENT
R obert S. R if k in d ,
One Chase Manhattan Plaza,
New York, N. Y. 10005,
Counsel fo r Respondent.
R obert D. Joffe ,
W . F illm o re W ood, Jr .,
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. S te w a r t ,
F rates F loyd P earson & Ste w a r t ,
Concord Building,
Miami, Florida 33130,
O f Counsel.
September 2, 1972.
TABLE OF CONTENTS
PAGE
O p in io n s B elow 1
Ju risd ictio n ...............................................
S tatu tes an d R egu lation s I nvolved
Q uestions P resented ............................
S t a t e m e n t of t h e Ca s e .....................
S u m m a r y of A r g u m e n t ..........................
A rg u m en t .....................................................
2
2
3
7
11
I. T h e C ourt B elow C orrectly H eld T h at
th e F our I n s t a l l m e n t R u le I s I n valid . . . 11
A. The rule is inconsistent with the A c t ........... 12
1. The statutory language............................ 12
2. The legislative h istory ............................ 17
B. The rule does not effectuate the purpose of
the Act nor does it prevent circumvention
or facilitate compliance ................................ 23
C. The four installment rule is an invalid ad
ministrative attempt to extend the Act
beyond its intended bounds.......................... 26
II. T he Ju dgm en t of th e Court of A ppeals
S hould B e Su stain ed on t h e G rounds, N ot
R eached B elo w , T h a t a C iv il P en a lty
U nder t h e A ct M a y N ot B e I mposed in the
A bsence of a F in a n c e C harge an d T h a t
FPS D id N ot E xten d C redit AVit h in th e
M e a n in g of t h e A c t ............................................ 32
A. The civil penalty provision o f the Act is in
applicable in the absence o f a finance charge 33
B. FPS did not extend cred it............................ 36
Co n clu sio n ............................................................................. 44
A p p e n d ix .................................................................................. l a
11
TABLE OF AUTHORITIES
PAGE
Cases :
Addison v. Holly Hill Fruit Products, Inc., 322 U. S.
607 (1944) ................................................................ 29
American Airlines, Inc. v. CAB, 365 F. 2d 939
(D . C. Cir. 1966) ................................................ 19
Bostivick v. Cohen, 319 F. Supp. 875 (N. D. Ohio
1970) ........................................................................... 22
Bowers v. Dr. P. Phillips Co., 100 Fla. 695, 129 So.
850 (1930) ................................................................ 42
Burton v. Bowers, 172 F. 2d 429 ( 4th Cir. 1949) . . 40
Casteneda v. Family Publications Service, 4 CCH
C onsum er Credit G u ide f[ 99,564 (D . Colo.
1971) ................................................... 22
Colorado Anti-Discrimination Commission v. Con
tinental A ir Lines, Inc., 372 U. S. 714 (1963) . . 33
Commissioner v. Acker, 361 U. S. 87 (1959) 7 ,9,29,
30, 35
Duplex Printing Press Co. v. Deering, 254 U. S
443 (1921) ................................................................ 19
Ebert v. Poston, 266 U. S. 548 (1925) ................ 17
Esposito v. Nayer, Civil No. 11-142 (D. Me., Tune
5 ,1 9 7 2 ) ........................................................................... 22
Evans v. Kroh, 284 S. W. 2d 329 (Ky. Ct. App.
1955) .......................................................................... 40
. Farley Realty Corp. v. Commissioner, 279 F. 2d
701 (2d Cir. 1960) ................................................. 40
Federal Communications Commission v. American
Broadcasting Co., 347 U. S. 284 (1954) 9, 27, 28, 29
Fibreboard Paper Products Corp., v NLRB 379
U. S. 203 (1 9 6 4 ) ................... ................................. 32
Ill
Garland v. Mobil Oil Corp., 4 CCH C onsum er
Credit G u ide jf99,193 (N. D. 111. 1972) . . . .22,43
Gemsco, Inc. v. Walling, 324 U. S. 244 (1945) . . . 32
Gilbert v. Commissioner, 248 F. 2d 399 (2d Cir.
1957) ......................................................................... 39
Gilman v. Commissioner, 53 F. 2d 47 ( 8th Cir.
1931) .......................................................................... 40
Hatfield, Inc. v. Commissioner, 162 F. 2d 628 (3d
Cir. 1947) .................................................................. 35
Helverinq v. Credit Alliance Corp., 316 U. S. 107
(1942) ........................................................................ 30
Helwig v. United States, 188 U. S. 605 (1903) . . . . 35
Jamison v. United States, 297 F. Supp. 221 (N. D.
Cal. 1968), aff’d per curiam, 445 F. 2d 1397 (9th
Cir. 1971) .................................................................. 40
Jaramillo v. McLoy, 263 F. Supp. 870 (D. Colo.
1967) ........................................................................ .. 40
John Kelley Co. v. Commissioner, 326 U. S. 521
(1946) ........................................................................ 41
Keppel v. Tiffin Savings Bank, 197 U. S. 356
(1905) ....................................................................... 29,35
Langnes v. Green, 282 U. S. 531 (1931) . . ........ 9, 33
Le Tulle v. Scofield, 308 U. S. 415 (1 9 4 0 ) ............ . 33
Martinez v. Family Publications Service, Inc., No.
71-169-Civ-TC (S . D. Fla., Oct. 12, 1971) . . . . 22
McGee v. Stocked Heirs at Law, 76 N. W . 2d 145
(N. D. 1956) ........................................................... 40
Metropolitan Water District v. Marquardt, 59 Cal.
2d 159, 379 P. 2d 28, 28 Cal. Rptr.724 (1963) , . 41
Miller v. United States, 294 U. S. 435 (1935) 9, 30, 31
National Broadcasting Co. v. United States, 319
U. S. 190 (1943) .'.................... 32
Nicholas v. Denver & R. G. W. R. R., 195 F. 2d
428 (10th Cir. 1952) ............................................
PAGE
19
IV
North American Co. v. SEC, 327 U. S. 686 (1946 ) 33
Otis v. Cowles Communications, Inc., No. C-71-550
RHS (N. D. Cal., Nov. 3, 1971) ....................... 22
Park & 46th St. Corp. v. State Tax Commission
295 N. Y. 173, 65 N. E. 2d 763 (1 9 4 6 ) ............... 40
Ratner v. Chemical Bank New York Trust Co., 329
F. Supp. 270 (S. D. N. Y. 1971) ....................... 13, 35
Sherzvood Memorial Gardens, Inc. v. Commissioner,
350 F. 2d 225 (7th Cir. 1965) .............................. 39
State v. Smith, 335 Mo. 825, 74 S. W. 2d 367
(1934) ........................................................................ 40
Strompolos v. Premium Readers Service, 326 F.
Supp. 1100 (N. D. 111. 1971), certified under 28
U. S. C. \1292 (b ), settled on appeal............... 22
Sunshine Anthracite Coal Co. v. Adkins, 310 U. S.
381 (1940) ................................................ 27
Thorpe v. Housing Authority, 393 U. S. 268 (1969) 32
United States v. American Railway Express Co.,
265 U. S. 425 (1924) ............................................. 33
United States v. Calamaro, 354 U. S. 351 (1957) . . 30
United States v. Chicago, Milwaukee, St. Paul and
Pacific R .R ., 282 U. S. 311 (1 9 3 1 ) ..................... 27
United States v. Foster, 233 U. S. 515 (1914) . . . . 32
United States v. International Union United Auto-
mobile, Aircraft & Agricultural Implement Work
ers o f America, 352 U. S. 567 (1 9 5 7 ) ................. 19
United States v. New York, New Haven and Hart
ford R. R., 276 F. 2d 525 (2d Cir. 1959), cert.
denied, 362 U. S. 961, 964 (1 9 6 0 ) ....................... 40
United States v. United Mine Workers o f America
330 U. S. 258 (1 9 4 7 ) ........................................... 35
Walla Walla City v. Walla Walla Water Co. 172
U .S .l (1 8 9 8 ) .........................................................40,41
Westfall v. United States, 274 U. S. 256 (1927) . . 33
Zuber v. Allen, 396 U. S. 168 (1 9 6 9 ) ..................... 30
PAGE
V
St a t u t e s :
PAGE
15 U. S. C. § 1601 (1970) .................................. 12,13,16
15 U. S. C. § 1602 (1970) 4, 8, 10,11, 12, 13, 19, 35, 39
15 U. S. C. § 1603 (1970) ................................ 16
15 U .S .C .§ 1604 (1970) ................................,4 ,7 ,9 ,1 6
15 U. S. C. § 1607 (1970) .............................. 34
15 U. S. C. § 1611 (1970) ......................................... 4
15 U .S .C .§ 1612 (1970) ....................................... 25,35
1 5 U .S .C . § 1631 (1970) ........................ 4 ,8 ,11 ,12 ,13
15 U .S .C . § 1638 (1970) ...................................4 ,13 ,17
15 U. S. C. § 1640 (1970) 4, 5, 8, 9, 10, 11, 13. 25, 33,
34, 35
28 U. S. C. § 1254 (1970) ........................................... 2
Fla. Stat. §§ 672.2-612, 672.2-711, 672.2-717 (1969) 42
R egu lation s :
12 C .F .R .§ 226.2 (1 9 7 2 ) ......................... 4 ,6 ,7 ,1 1 ,1 4
12 C. F. R. §226.4 (1972) ......................................... 43
12 C. F. R. § 226.5 (1972) .............................. 23
12 C. F. R. §226.6 (1972) . .............................. 17
12 C. F. R. § 226.8 (1 9 7 2 ) ........................................ 4, 14
C ongressional M a te r ia l :
C o n f . R e p . N o. 1397, 90th Cong., 2d Sess. (1968) 17
114 Cong . R e p . 14487 (1 9 6 8 ) .................................. 39
Hearings on S. 1740 Before a Subcomm. of the
Senate Comm, on Banking and Currency, 87th
Cong., 1st Sess. (1961) ........................... .......... 19, 20
VI
Hearings on S. 750 Before the Suhcomm. on Pro
duction and Stabilisation of the Senate Comm, on
Banking and Currency, 88th Cong., 1st & 2nd
Sess. (1964) ..................................................... . . .20, 21
Hearings on S. 5 B ef ore the Subcomm. on Financial
Institutions of the Senate Comm, on Banking and
Currency, 90th Cong., 1st Sess. (1 9 6 7 )___ 19. 21, 34
Hearings on H. R. 11601 Before the Subcomm. on
Consumer Affairs o f the House Comm, on Bank
ing and Currency, 90th Cong., 1st Sess. (1967) . . 20
H. R. R e p . N o . 1040, 90th Cong., 1st Sess.
PAGE
(1967) ................... ....................................18,22,35,39
S. 5, 90th Cong., 1st Sess. (1967) ..................... .. 18, 19
S. 652, 92nd Cong., 2d Sess. (1972) ........................ 7
S. R e p . N o. 392, 90th Cong., 1st Sess. (1967). .18, 19,
22, 39
B ooks and M isc e lla n e o u s :
3A A. C orbin , C ontracts §§ 687, 691 (1960) . . 10, 36,
37,42
5 J. Mertens, T he Law of Federal Income Tax
ation § 30.03 n.29 (1969) .................................. 41
4 FRB Letter No. 262, CCFI C on su m er Credit
G u ide jf- 30,516 (1970) ........................................ 10,38
IN TH E
Bnpmiw (tart rrf tljr United l̂ tatr̂
O ctober T erm , 1972
No. 71-829
L e il a M o u r n in g ,
Petitioner,
v.
F a m il y P u b lic a tio n s Service , I n c .,
Respondent.
O n W r it of C ertiorari to t h e U nited S tates C ourt
of A ppeals for th e F if t h C ir c u it
BRIEF FOR RESPONDENT
OPINIONS BELOW
The opinion of the United States District Court for the
Southern District of Florida (App. 32-35) is reported at
4 CCH Consumer Credit Guide 99,632 (1970)
(Mehrtens, J.). The opinion of the United States Court
o f Appeals for the Fifth Circuit (App. 40-54), reversing
the decision of the District Court, is reported at 449 F. 2d
235 (1971).
JURISDICTION
The judgment of the court of appeals was entered on
September 27, 1971 (App. 54). The petition for a writ of
2
certiorari was filed on December 23, 1971, and granted on
March 20, 19/2 (App. 55, 405 U. S. 987). The jurisdic
tion of the Court is invoked under 28 U. S. C. § 1254(1).
STATUTES AND REGULATIONS INVOLVED
The statute to be construed is the Truth in Lending Act,
15 U. S. C. §§ 1601-65 (1970). The regulation in issue
is to be found in Regulation Z, 12 C. F. R. §§ 226.1-.13
(1972), promulgated by the Federal Reserve Board. The
relevant provisions of the Act and o f Regulation Z are
set forth in an Appendix to this brief, infra.
QUESTIONS PRESENTED
The Truth in Lending Act provides that “ creditors”
who regularly extend credit “ for which the payment of a
finance charge is required” (15 U. S. C. § 160 2 (f)) shall
disclose the amount of the finance charge and other specified
information in transactions which entail a finance charge
(15 U. S. C. § 1631 (a ) ) . For failure to make the statutory
disclosures, the Act imposes civil penalties (15 U. S. C.
§ 1640(a)) upon creditors in an amount equal to “ twice
the amount o f the finance charge in connection with the
transaction, except . . . [not] less than $100 nor greater
than $1,000. . . .” The four installment rule of Regulation
Z promulgated by the Federal Reserve Board provides that
the required disclosures must be made in credit transactions
involving repayment in more than four installments, regard
less of whether a finance charge is entailed (12 C. F. R.
§§ 226.2(k ), (m ) and (bb), 226 .8(a)).
The questions presented by this case are:
1. Whether the court below erred in holding that
the Federal Reserve Board acted in excess of its author
ity under the Truth in Lending Act in promulgating the
four installment rule of Regulation Z.
3
2. Whether a civil penalty may be imposed under
15 U. S. C. § 1640(a) in connection with a transaction
that does not involve a finance charge.
3. Whether transactions in which consumers pre
pay for goods involve an extension of credit within the
meaning of the Truth in Lending Act.
STATEMENT OF THE CASE
Respondent, Family Publications Service, Inc. ( “ FPS” ),
was engaged in the business o f offering subscriptions to a
large number of magazines on what is commonly known
as a paid-during-service ( “ P-D -S” ) basis.* As is common
under P-D-S plans, FPS’s standard form of contract pro
vides for the delivery of the magazines selected by the cus
tomer over 48 (or 60) months, for which the customer pays
on a monthly basis over the first 24 (or 30) months.**
Under this plan, at every point in time prior to the end of
the contract period, the customer has paid for more issues
than he has received so that the payments are in fact pre
payments by the customer for magazines to be delivered
to the customer in the future (App. 41).
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 (App. 41). Although she re
ceived the magazines ordered, petitioner defaulted on her
contract and never made any payments beyond the initial
*FPS was engaged in the P-D-S magazine sales business from
the date of its incorporation in 1958 until it terminated selling opera
tions in February 1971.
**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. Subsequent to the proceedings below we have
discovered that, contrary to representations 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.
4
$3.95 payment. Consequently, her contract was cancelled
by FPS on April 15, 1970 (App. 41-42).
Petitioner Mourning commenced this action in the
United States District Court for the Southern District of
Florida on April 23, 1970, on her own behalf and on behalf
of a class comprised o f all residents of Dade County,
Florida, who had entered into contracts with FPS since
July 1, 1969 (the effective date of the Truth in Lending
Act). The second amended complaint ( “ the complaint” )
alleged that the FPS standard form contract did not contain
the disclosure o f credit terms required by the Truth in
Lending Act and the regulations promulgated by the
Federal Reserve Board ( “ the Board” ). The com
plaint 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 o f the action,
as provided for in 15 U. S. C. § 1640(a) (App. 2-5).
The Act provides that creditors who regularly 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(a)), including the amount
o f the finance charge and the finance charge expressed as an
annual percentage rate (15 U. S. C. § 1638(a) (6 ) - (7 ) ).
Regulation Z promulgated by the Board provides that
such disclosures must be made in credit transactions
involving repayment in more than four installments, re
gardless of whether a finance charge is involved (12 C. F. R.
§§ 226.2(k ), (m ) and (bb), 226.8(a)). 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(a) ),
as well as administrative sanctions under the Federal Trade
Commission Act (15 U. S. C. § 1607(c ) ). The civil penalty
section of the Act under which petitioner’s claim arises, pro
vides that
“any creditor who fails in connection with any con
sumer credit transaction to disclose to any person
5
any information required under this part to be dis
closed 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 . . . 15 U. S. C.
§ 1640(a).
On August 28, 1970, both parties moved for summary
judgment. Petitioner contended that her transaction with
FPS was subject to the Act solely by virtue of Regulation Z
because 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. Petitioner asserted that the absence of a
finance charge was irrelevant— since none was required
under the four installment rule. (Plaintiff’s Memorandum
in Opposition to Defendant’s Motion for Summary Judg
ment at 5.) 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 of the Act do not
apply in the absence of a finance charge, and (3 ) the Regu
lation could not properly extend the scope of the Act. Both
parties concurred in the view that there were no material
issues of fact and that the question to be decided was the
proper reach of the disclosure and penalty provisions of the
Act and the Regulation.
On November 27, 1970, the district court rendered its
final decision ( 1) dismissing the class action allegations in
the complaint, (2 ) denying FPS’s motion for summary
judgment, and (3 ) granting judgment in favor of peti
tioner in the amount of $100, together with $1,500 attor-
6
ney’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 o f the ‘more than four install
ments’ rule, 12 C. F. R, § 226.2(k). . . (App. 34) (em
phasis added).
On December 11, 1970, FPS filed a notice of appeal
from the district court’s order and from the judgment
entered thereon in so far as the order granted plaintiff’s mo
tion for summary judgment and denied FPS’s motion for
summary judgment.
On September 27, 1971, the court of appeals held the
four installment rule invalid and reversed and remanded
with directions that the complaint be dismissed. 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) in a transaction which
entails a finance charge (App. 49). The court also found,
in accord with the position taken by the United States as
amicus curiae, that under the Board’s Regulation,
“ in order for the disclosure and penalty provisions
of 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 re
quired.” (App. SO.)
The court concluded that “an inconsistency exists be
tween the four installment rule and the Truth-in-Lending
Act” (App. 50) and that, in promulgating the rule, the
Board had “ over-stepped the authority granted to them
7
under 15 U. S. C. § 1604.” (App. 51.) Relying on this
Court’s decisions in Commissioner v. Acker, 361 U. S. 87
(1959), and similar cases, the court o f appeals held that
the Board’s rule constituted an invalid “ administrative en
deavor to amend the law as enacted by the Congress and to
thereby make the Act reach transactions which the Con
gress by its statutory language did not seek or intend to
cover by its enactment.” (App. 51.)*
Having found the Act inapplicable to the transaction in
issue by reason of the invalidity of the four installment rule,
the court o f appeals- did not find it necessary to consider
FPS’s further contentions (1 ) that the civil penalty provi
sion 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 involve a finance
charge, and (2 ) that the Act is inapplicable because FPS did
not extend consumer credit but rather was prepaid by its
customers.
SUMMARY OF ARGUMENT
I.
The court of appeals correctly held that the four in
stallment rule o f Regulation Z, 12 C. F. R. § 226.2(k), is an
invalid attempt by the Federal Reserve Board to bring
within the ambit of the Truth in Lending Act, 15 U. S. C.
§§ 1601-65 (1970), transactions which Congress has ex
plicitly put beyond the scope of the Act. The Act imposes
*The court of appeals also held the Board’s four installment rule
invalid as constituting a conclusive presumption violative of the due
process clause of the Fifth Amendment. W e do not believe that it is
necessary to reach this constitutional ground and we do not rely on
it. W e concur in the view expressed by petitioner that Congress
could have enacted the four installment rule without violating the due
process clause. A bill intended to accomplish that result was passed
by the Senate on April 27, 1972, and is currently before the Con
sumer Affairs Subcommittee of the House Banking and Currency
Committee. S. 652, 92nd Cong., 2nd Sess.
8
certain requirements o f disclosure upon creditors. The term
“ creditor” is defined to include “ only [those] creditors who
regularly extend . . . credit for which the payment of a fi
nance charge is required . . . IS U. S. C. § 1602(f)
(emphasis added). Such creditors are required to disclose
specified information relating to the cost of credit “ to each
person . . . upon whom a finance charge is or may be im
posed . . . .” IS U. S. C. § 1631(a). Finally, under Section
1640(a), such creditors are liable for a civil penalty in an
amount equal to “ twice the amount of the finance charge in
connection with the transaction, except . . . [not] less than
$100 nor greater than $1,000 . . . .” 15 U. S. C. § 1640(a).
Notwithstanding the congressional decision to require
the statutory disclosures only in connection with credit
transactions involving a finance charge, Regulation Z pur
ports to require such disclosures in connection with credit
transactions repayable in more than four installments re
gardless of whether a finance charge is imposed. Petitioner’s
claim against FPS is based solely on the four installment
rule, and petitioner concedes that the transaction in issue is
not subject to the substantive provisions of the Act which
require the presence of a finance charge. The four install
ment rule is invalid because it is in conflict with the inten
tion of Congress as manifested by the language of the Act
and the legislative history. The congressional committee re
ports make it particularly clear that Congress intended that
the disclosure requirements of the Act be limited to transac
tions involving finance charges. A bill pending before Con
gress was amended expressly for the purpose of making
clear that the disclosure requirements would not apply to
transactions in which a finance charge is not involved.
Although petitioner and the Government argue that the
four installment rule is necessary to effectuate the purpose
o f the Act and prevent circumvention of the Act, in fact it
does neither. In particular, it does not solve the problem
9
presented by the buried or hard-to-find. finance charge. The
Government’s thesis that creditors subject to the Act may
satisfy their statutory obligations merely by disclosing total
price without separately identifying the cost o f credit is
without warrant in either the Act or the Regulation and is
subversive of the statutory purpose.
The conclusion reached by the court of appeals that the
Board, in promulgating the four installment rule, “ over
stepped the authority granted to them under 15 U. S. C.
§ 1604” (App. 51) is clearly supported by the decisions
of this Court. See, e.g., Commissioner v. Acker, 361 U. S.
87 (1959) ; Federal Communications Commission v. Amer
ican Broadcasting Co., Inc., 347 U. S. 284 (1954) ; Miller
v. United States, 294 U. S. 435 (1935).
II.
The judgment of the court of appeals is sustained by
two independent considerations that were advanced by
FPS below but which the court of appeals did not find it
necessary to reach. See Langnes v. Green, 282 U. S. 531
(1931).
First, whether or not the disclosure requirements and
the administrative enforcement provisions of the Act are
applicable in the absence of a finance charge, the civil lia
bility provision, under which petitioner’s claim arises, is
inapplicable. That section (15 U. S. C. § 1640(a)) spe
cifies liability in an amount equal to “ twice the amount of
the finance charge in connection with the transaction, ex
cept that the liability . . . shall not be less than $100 nor
greater that $1,000 . . . .” The finance charge provides the
initial measure of the award. The minimum and maximum
dollar amounts cannot reasonably be construed as providing
an alternative means of determining the amount of an
award in the absence of a finance charge because the
10
language of Section 1640(a) is not susceptible o f an
“ either/or” interpretation. Indeed, Congress rejected a
bill which provided for liability in the alternative.
Second, the disclosure and civil penalty provisions of
the Truth in Lending Act apply only to credit transactions.
The 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 petitioner. It is the es
sence of a credit transaction that one party parts with value
in reliance on the promise o f another to pay at a later date.
Under the standard FPS contract, however, FPS does not
deliver anything in advance of payment. Quite the con
trary, the customer pays in advance for the subsequent
receipt of magazines. Nor does the fact that the customer
contracts to make periodic payments turn his obligation into
a credit obligation. “ A transaction may be an instalment
contract without being a credit transaction at all.” 3A A.
Co rbin , C ontracts § 687 (1960). The Board has form
ally recognized that an agreement to pay in installments for
goods or services to be rendered in installments does not
involve an extension o f credit within the meaning of the
Act unless the payments lag behind delivery o f the goods
or services. FRB Opinion Letter No. 262 (1970).
The Act adopts the common understanding of a credit
transaction and defines the term “ credit” as “ the right
granted by a creditor to a debtor . . . to incur debt and defer
its payment.” IS U. S. C. § 1602(e). A debt results from
an unconditional agreement to pay and is to be distin
guished from the obligations of a contract under which the
performance of both parties lies in the future. Here, there
is clearly no “ debt” within the meaning of the Act. Peti
tioner s obligation to pay was contingent on performance
by FPS.
11
ARGUMENT
FOUNT I
THE COURT BELOW CORRECTLY HELD TH AT THE
FOUR INSTALLMENT RULE IS INVALID.
Petitioner and the Government urge that the Fifth Cir
cuit erred in holding invalid the four installment rule of
Regulation Z, 12 C. F. R. § 226.2(k ). The court of appeals
held the rule invalid because it purported to bring transac
tions which do not entail a finance charge within the dis
closure and penalty provisions of the Act, whereas the Act
explicitly excludes such transactions from its coverage.
The court of appeals was clearly correct in concluding
that the four installment rule is inconsistent with the Act
and is therefore invalid. As is set forth below, three key
sections in the Act (15 U. S. C. §§ 1602(f), 1631(a) and
1640(a)) as well as the legislative history of the Act make
plain that the Act applies only to transactions that entail a
finance charge. On the other hand, the four installment rule
dispenses with that prerequisite by providing that transac
tions involving payment in more than four installments are
subject to the Act’s disclosure and penalty provisions
whether or not they entail a finance charge.
There is no dispute that the Regulation eliminates the
finance charge requirement imposed by the Act. Petitioner
concedes that “ the transaction [in issue] is not covered by
the substantive provisions of the statute” and that, in the
absence of the Regulation, FPS would not be subject to the
disclosure requirements of the Act. Pet. Br. 11. What is
in dispute is the validity of the Regulation.
Further, contrary to the impression created by the briefs
o f petitioner and amici, we are not concerned here with
whether transactions involving hidden or buried finance
charges are subject to the requirements of the Act. It is not
disputed that such transactions are subject to the Act with-
12
out assistance from the Regulation. Indeed, the fun
damental purpose of the Truth in Lending Act was to re
quire disclosure of concealed finance charges. The question
presented here is whether transactions which the Act does
not reach because they do not entail finance charges may
nonetheless he brought within the Act’s ambit by the
Regulation.
A. The rule is inconsistent with the Act.
1. The statutory language.
The Act is neither silent nor ambiguous with respect
to the scope of its coverage. Three separate sections of the
Act reiterate that the disclosure and penalty provisions
apply only to those creditors who impose a finance charge.
Section 1602(f) provides 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.)
This definition makes it clear that, contrary to the Govern
ment’s view (U. S. Br. 15-17, 20), Congress assumed that
there are creditors who do not impose finance charges as
well as those who do. Consistent with the declared statu
tory purpose to assure “ [t]he informed use of credit
[which] results from an awareness of the cost thereof”
(15 U. S. C. § 1601) (emphasis added), the Act was
directed at those who impose a finance charge.
The point is re-emphasized in the general disclosure
requirement set forth in § 1631(a) which provides:
“ Each creditor [as defined in § 1602(f)] shall
disclose clearly and conspicuously, in accordance
with the regulations of the Board, to each person
to whom consumer credit is extended and upon
13
whom a finance charge is or may be imposed, the
information required under this part.” (Emphasis
added.) *
The required information includes “ the amount o f the fi
nance charge” and “ the finance charge expressed as an an
nual percentage rate” (15 U .S.C . § 1638(a)(6 ) and ( 7 ) ) .
Finally, under § 1640(a), the civil liability for failing to
make the required disclosures is imposed only on “ creditors”
and is stated to be “ twice the amount o f the finance charge
in connection with the transaction” (emphasis added), ex
cept that such liability shall not be less than $100 nor more
than $1,000. In sum, the Act is addressed only to those
creditors who regularly impose a finance charge; such credi
tors are required to disclose the finance charge to each con
sumer upon whom a finance charge is or may be imposed;
and the civil penalty for failing to comply is measured by
the amount of the finance charge in connection with the
transaction. It would be hard to imagine a more explicit
insistence on a limitation o f the Act to situations involving
a finance charge. All o f those limiting phrases would be
inexplicable had Congress intended the Act to apply regard
less of whether a finance charge was involved.
^Contrary to petitioner’s statement that if a creditor “ regularly”
(15 U. S. C. § 1602(f)) imposes a finance charge “ he must make the
required disclosures in all of his credit transactions whether or not
they involve a finance charge” (Pet. Br. 12), a creditor need make
the required disclosures in only those transactions in which a charge
“ is” imposed or “ may be” imposed (15 U. S. C. § 1631(a)), as upon
the happening of a specified event ( e . g the failure to pay. within
30 days). The Act provides that the word “ ‘may’ is used to indicate
that an action either is authorized or is permitted.” 15 U. S. C.
■ § 1601 note at 3439; Pub. L. No. 90-321, § 503 (May 29, 1968). See,
e.g., Rainer v. Chemical Bank New York Trust Co., 329 F. Supp.
270, 273 (S. D. N. Y. 1971). Such transactions are herein referred
to as entailing a finance charge. In any event, it is petitioner’s
contention that FPS is subject to the disclosure provisions of the
Act solely by virtue of the four installment rule— irrespective of
whether its transactions entail a finance charge.
14
Notwithstanding these manifestations o f legislative
purpose, the Board eliminated the Act’s prerequisite o f a
finance charge. Regulation Z specifies the duties of a
“ creditor” (12 C. F. R. § 226 .8 (a )), and defines “ creditor”
as a person who regularly extends “ consumer credit” (12
C. F. R. § 226.2 (m )) . It is the Board’s definition of
“ consumer credit” that establishes the four installment rule:
“ Consumer credit means credit offered or ex
tended to a natural person, in which the money,
property, or service which is the subject o f 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.” 12 C. F. R. § 226.2
(k) (emphasis added).
That the four installment rule seeks to expand the
coverage o f the Act is not disputed. The district court
found FPS’s transactions subject to the disclosure and
civil penalty provisions of the Act solely “by virtue of the
‘more than four installments’ rule” (App. 34-35).* Peti
tioner recognizes that “ the transaction is not covered by
the substantive provisions of the statute” (Pet. Br. 11),
and acknowledges here, as she did below, that the case
against FPS turns on the validity of the four installment
rule. She urges that the Board has “ the power to
reach transactions just outside the literal reach of the
*Petitioner maintained in the district court: “ Defendant has
denied any finance charge and the point is not an issue here.”
Plaintiff’s Memorandum in Opposition to Defendant’s Motion for
Summary Judgment at 5. The court of appeals noted that the
district court had not found a finance charge present and had relied
on the four installment rule for its holding that FPS was subject
to the disclosure and penalty provisions of the Act. (App. 45.)
15
statute” (Pet. 15) and to “go beyond the literal disclosure
requirements of the Act.” (Pet. Br. 8.)
Likewise, the Government recognizes, albeit grudgingly,
that the four installment rule may reach “ credit transactions
that the provisions of the Act themselves might not cover
because there are in fact no finance charges involved
directly or indirectly” (U. S. Br. 9 ) ; it urges that the Board
had authority to promulgate a rule which “embraces some
transactions that the provisions o f the Act might not, on
their face, reach” (U . S. Br. 24).* A variety of arguments
based on policy are advanced in support o f the Board’s
action. W e show below that those supposed policy con
siderations will not bear scrutiny and that the rule is in
fact subversive of the purposes of the Act. First, however,
we turn to petitioner’s contention that the rule is not in con
flict with the Act but merely serves to elaborate upon it.
It is petitioner’s fundamental contention that:
“ The failure of Congress to include the instant
transaction within those substantive provisions does
not demonstrate any congressional intent to exempt
the transaction from disclosures, but only an intent
to leave regulation of the transaction to the Board.”
Pet. Br. 9.
This position is clearly unsound. It was easy enough for
Congress to make the Act applicable to all creditors had it
intended to do so. It did not do so. It specifically limited the
*To be sure, the Government also urges that Congress assumed
that “ whenever credit is extended the costs necessarily incurred by
the creditor are in fact passed on to the consumer” (U. S. Br. 9
n.10). As we have noted above, however, the statutory definition of
creditor as “ only [those] creditors who regularly extend . . . credit
for which the payment of a finance charge is required” is consistent
only with the view that some creditors do not impose a finance
charge. Moreover, as we show below, the legislative history simply
does not bear out the Government’s speculations as to Congress’s
assumptions.
16
scope of the Act to creditors who impose a finance charge
and to transactions involving a finance charge. Futhermore,
the explicit limitation of the requirements of the Act to
finance charge transactions cannot rationally be said to
manifest, “ an intent to leave regulation of [all other trans
actions] to the Board.” Plaintiff’s thesis would lead to the
conclusion that the Board is authorized to regulate every
thing not dealt with by Congress.
Also unsound is petitioner’s contention (Pet. Br. 28)
that transactions not involving a finance charge are not ex
empted by the Act but “ merely omitted from coverage” be
cause they are not among the “ exempted transactions” (,e.g
commercial credit, securities transactions) listed in 15
U. S. C. § 1603. Obviously, there was no need to exempt
transactions not involving a finance charge because they
were not covered in the first place.
In the same vein, petitioner urges (Pet. Br. 20-21)
that, if the Act contained only its declaration o f purpose
(15 U. S. C. § 1601) and the provision authorizing the
Board to issue regulations to carry out that purpose (15
U. S. C. § 1604), the four installment rule would have been
entirely appropriate. Petitioner then goes on to argue, in
substance, that nothing in the remaining 30 sections of
the Act should be deemed to curtail that grant of authority.
Congress, however, did not see fit to pass only a declaration
o f purpose and a grant of rulemaking authority. It did pass
the rest of the Act, and the Board cannot proceed as if
Congress had been silent.
The freewheeling administrative power, advocated by
petitioner, to “ correct any [congressional] oversights or
omissions” (Pet. 13) and to alter the “ lines drawn by the
statute itself” (Pet. Br. 18) is peculiarly inappropriate in
the circumstances of the Truth in Lending Act. Contrary
to petitioner’s assertion, the Act is not a mere “ rough out
line” (Pet. 13) of what Congress had in mind. Congress
17
did not merely state a broad area of concern and direct
the Board to deal with it. Rather, Congress hammered out
a detailed system of regulation, setting forth with preci
sion the matters within its coverage.* “ Such care and par
ticularity in treatment preclude expansion o f the Act in
order to include transactions supposed to be within its
spirit, but which do not fall within any of its provisions.”
Ebert v. Poston, 266 U. S. 548, 554 (1925). To be sure,
the Board was called upon to provide supplementary regu
lations,** but it was not left at liberty to reshape the Act
or to revise congressional decisions.
2. The legislative history.
The legislative history of the Act demonstrates that the
plain statutory language is not the result of legislative in
advertence or oversight but was the result o f an affirmative
congressional decision to restrict the Act’s coverage to trans
actions involving a finance charge. Thus, the Senate-House
conference report states that the Act was designed “ to assist
in the promotion of economic stabilization by requiring the
disclosure of finance charges in connection with extension
of credit. . . .” C o n f . R e p . No. 1397, 90th Cong., 2d Sess.
at 1 (1968) (emphasis added). Further, the Senate Report
states:
“ [Section 1631] . . . is a prefatory section setting
forth the basic requirements to disclose. It is similar
*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.”
**See, for example, 12 C. F. R. §§ 226.6(d), 226.6(j).
18
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 transac
tions 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). The House Report is substan
tially identical. H. R . R e p . N o . 1040, 90th Cong.,
1st Sess. 25 (1967).
The Senate Report also states that “ [tjhe basic pur
pose of the truth in lending bill is to provide a full dis
closure of credit charges to the American consumer.” S.
R e p . N o . 392, 90th Cong., 1st Sess. at 1 (1967) (emphasis
added). The same intent is reflected in the House Report;
“ Title I is intended to provide the American con
sumer with truth-in-lending and truth-in-credit ad
vertising by providing full disclosure of the terms
and conditions of finance charges both in credit
transactions and in offers to extend credit.” H. R.
R e p . N o . 1040, 90th Cong., 1st Sess. 6-7 (1967)
(emphasis added).
The Government’s brief seeks to undermine the signifi
cance of the committee reports by reference to a variety of
random statements at various hearings with respect, for the
most part, to bills significantly different from the one ulti
mately enacted.* If those statements were in conflict with
*Many of the statements cited by the Government {see, e.g., U. S.
Br. 15 n.13) were made with respect to S.5 or bills similar to it.
The Senate Report specifically says that the Act’s disclosure provision
was altered from S.5 (which required disclosure “ to each person to
whom credit is extended” ) in order to make clear that “ disclosure need
only be made to persons ‘upon whom a finance charge is or may be im-
19
the language of the committee reports, the reports, of course,
would be entitled to precedence as the authentic expression
of the legislative intent. See United States v. International
Union United Automobile, Aircraft & Agricultural Imple
ment Workers o f America, 352 U. S. 567, 585 (1957);
Duplex Printing Press Co. v. Deering, 254 U. S. 443, 474-
75 (1921); American Airlines, Inc. v. CAB, 365 F. 2d
939, 949 (D.C. Cir. 1966); Nicholas v. Denver &
R. G. W. R. R., 195 F. 2d 428, 431 (10th Cir. 1952). More
over, none of the statements cited in the Government’s brief
indicates any expectation that the Act, or the regulations to
be promulgated thereunder, would apply to transactions
that did not involve a finance charge.
The Government calls particular attention to a statement
by Senator Douglas at a Senate subcommittee hearing on
S. 1740 in July 1961 (U. S. Br. 16-17). Senator Douglas’s
remarks were made in response to an argument advanced by
Senator Bennett that two merchants selling identical goods,
both of whom imposed a finance charge, might disclose dif
ferent finance charges as a result of making different alloca
tions between the cash purchase price and cost of credit and
that, therefore, the consumer would have no valid basis for
comparison shopping. In response, Senator Douglas ob
served that the bill would provide the consumer with dis
closure of both the cash price and the finance charges so that
“ the judgment of the consumer can be on the basis o f both
of these factors, not merely on one alone . . . Hearings on
S. 1740 Before a Subcomm. o f the Senate Comm, on Bank
ing and Currency, 87th Cong., 1st Sess. 447-48 (1961).
posed.’ ” s TRep. N o. 392, 90th Cong., 1st Sess. 14 (1967). Moreover,
the definition of “ credit” in S.5 was changed in the Act (§ 1602(e))
so as to exclude from the disclosure requirements those transactions
where it “ would seem impossible to attribute or determine a finance
charge.” Hearings on S.5 Before the Subcomm. on Financial Institu
tions of the Senate Comm, on Banking and Currency, 90th Cong.,1st
Sess. 659-63 (1967).
20
Senator Douglas’s remarks with respect to creditors who
do impose a finance charge does not lend any support to
the notion that Congress intended that disclosures would
be required of those who do not impose a finance charge.
The Government cites (U. S. Br. 16 n.16) other state
ments similar to that of Senator Douglas,* indicating a
congressional concern with the problem of the identification
of finance charges by those creditors who impose such
charges; these statements do not indicate concern about
those situations where a finance charge was not in fact
being imposed. In sum, there is no support for the argu
ment that those creditors who do not impose finance charges
were intended to be reached by the Act despite its clear
wording to the contrary.
On the other hand, the congressional hearings do pro
vide further evidence that the imposition of a finance charge
was understood to be a prerequisite to the Act’s coverage.
Thus, during the 1964 hearings before the Senate Banking
and Currency Committee’s Subcommittee on Production
and Stabilization, a Senator asked the Chairman of the
Federal Trade Commission whether an agreement with his
neighbor’s son under which the son would mow the Sena
tor’s lawn on successive Saturdays and the Senator would
pay him 50 cents “ each time he completes the job” would be
within the purview of the then pending bill. Hearings on
S. 750 Before the Subcomm. on Production and Stabilisa
tion of the Senate Comm, on Banking and Currency, 88th
Cong., 1st and 2nd Sess., pt. 2 at 1298 (1964). The Chair
man of the Federal Trade Commission replied that the lawn
mowing transactions would not be covered. He: explained:
*Hearings on H. R. 11601 Before the Subcomm. on Consumer
Affairs of the House Comm., on Banking and Currency, 90th Cong.,
1st Sess. 590-91, 825-26 (1967) ; Hearings on S. 1740 Before a Sub
comm. of the Senate Comm, on Banking and Currency, 87th Cong.,
1st Sess. 381, 563 (1961).
21
“ First, there must be a transaction involving
‘credit’ as defined in section 3 (2 ). Second, a ‘fi
nance charge’ as defined in section 3 (3 ) must be
imposed in this transaction involving ‘credit’ as de
fined in section 3 (2 ). Third, only a ‘creditor’ as de
fined in section 3 (4 ) is required to make the dis
closure required under this act.
“ . . . In order to determine whether any trans
action which involves credit within the meaning of
section 3 (2) falls within the scope of the bill, it
is necessary to inquire whether a ‘finance charge’ is
imposed; i.e., whether the borrower or credit pur
chaser is required to pay any amount which would
not be incurred in a cash transaction.” Hearings
on S. 750 at 1304.
The Government also urges that during the seven years
of hearings “ everyone assumed that ‘no charge for
credit’ simply meant that the creditor had ‘buried,’ ‘con
cealed’ or ‘packed’ finance charges in the price of the goods
sold.” U. S. Br. 15. As evidence of that assumption the
Government quotes (U. S. Br. 15 n.14) a chief sponsor of
the Act, Senator Proximire. However, moments after Sena
tor Proxmire made the statement quoted in the Govern
ment’s brief, the Senator apparently concluded that some
creditors do not impose finance charges and, indeed, that
the very creditor referred to in the Government’s quotation
did not do so. Senator Proxmire said: “ The fact is that
Foyes is apparently not charging in his merchandise for his
credit.” Hearings on S. 5 Before the Subcomm. on Finan
cial Institutions of the Senate Comm, on Banking and Cur
rency, 90th Cong., 1st Sess. 515 (1967). That conclusion
is consistent with the views expressed in the Senate and
House Reports which were before the Congress that
passed the Act. Those reports specify: “ [Disclosure need
22
only be made to persons ‘upon whom a finance charge is
or may be imposed.’ Thus, the disclosure requirement would
not apply to transactions .. . for which a charge is not made.”
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).
Accordingly, it is apparent that the Fifth Circuit’s ob
servation that “ there must be found present a 'finance
charge’ ” before disclosure is required under the Act (App.
49) is correct. Other lower courts have come to the same
conclusion. In Esposito v. Nayer, Civil No. 11-142 (D. Me.,
June 5, 1972), Judge Gignoux, faced with a transaction
identical in all material respects to the one at issue here, held
the four installment rule invalid, saying:
“ Absent a finance charge in the transaction
involved, this Court, like the Mourning Court, finds
the Act itself inapplicable, since neither defendant
is a creditor as defined by the Act. Nor is either
defendant a person required to disclose pursuant to
the requirements of the Act.”
See Garland v. Mobil Oil Corp., 4 CCH Con su m er C redit
Gu ide fl 99,193 at pp. 89, 134-35 (N. D. 111. 1972) (M c
Laren, J . ) ; Otis v. Cowles Communications, Inc., No.
C-71-550 RHS (N. D. Cal., Nov. 3, 1971); Casteneda v.
Family Publications Service, 4 CCH C on su m er C redit
G u ide jf 99,564 (D. Colo. 1971); Bostwick v. Cohen, 319
F. Supp. 875, 878 n.l (N . D. Ohio 1970). See also
Martinez v. Family Publications Service, Inc., No. 71-169-
Civ-TC (S. D. Fla., Oct. 12, 1971). Contra, Strompolos v.
Premium Readers Service, 326 F. Supp. 1100 (N. D. 111.
1971), certified under 28 U. S. C. § 1292(b), settled on
appeal.
23
B. The rule does not effectuate the purpose of the
Act nor does it prevent circumvention or facilitate com
pliance.
In support of the validity of the four installment rule,
it is urged by petitioner and amici curiae that the rule is
needed to solve the problem— supposedly recognized but left
unsolved by Congress— of the “ buried” finance charge. The
problem of the buried finance charge may well be a real
problem, but it is neither presented by this case nor solved
by the four installment rule.
A transaction that entails a finance charge (and meets
the other requirements of the Act) is indubitably subject
to the requirements of the Act— whether or not the finance
charge is buried or otherwise hidden. The plain language
of the Act requires that the specified disclosures be made in
transactions involving finance charges. Neither the Act nor
the Regulation makes any exception for hidden finance
charges.
W e do not doubt that the Board could properly fa
cilitate compliance with the Act by establishing, on any
reasonable basis, guideline formulas for the identification
and quantification of finance charges in difficult cases so that
merchants could make disclosures with confidence that they
had done what was required of them.* Similarly, the Board
*The object of facilitating compliance has been served, inter alia,
by the Board’s regulations with respect to the determination of the
annual percentage rate. Thus, 12 C. F. R. § 226.5(c) provides in
part:
“ Charts and tables. (1 ) The Regulation Z Annual Percentage
Rate Tables produced by the Board may be used to determine
the annual percentage rate, and any such rate determined from
these tables in accordance with instructions contained therein
will comply with the requirements of this section.”
And 12 C. F. R. § 226.5(e) provides in part:
“ In an exceptional instance when circumstances may leave
a creditor with no alternative but to determine an annual
percentage rate applicable to an extension of credit other than
open end credit by a method other than those prescribed in
24
could facilitate private enforcement of the Act by establish
ing rebuttable presumptions as to both the existence and the
amount of finance charges so that private plaintiffs would
not be faced with difficult problems of discovery and ac
countancy. What the Board did, however, is altogether dif
ferent: it simply attempted to eliminate the finance charge
requirement. In doing so, it neither furthered the purposes
of the Act nor facilitated compliance with it. The attempt
to expand the coverage of the Act to embrace transactions
not involving a finance charge cannot solve the practical
problems faced by the merchant who is required to dis
close a finance charge that is hard to identify, nor can it
further the purpose of achieving full and accurate disclo
sure of the cost of credit.
The Government attempts to resolve the problem of
the hard-to-identify finance charge not by reference to the
four installment rule but rather by the more extraordinary
proposition that the merchant may discharge his duties
under the Act by merely disclosing the aggregate pur
chase price without separately identifying the finance
charge. The Government states that “ a creditor might
not be required to disclose finance charges if these were
concealed in increased prices” so long as he discloses “ other
relevant information, such as the cash price and the total
amount to be financed.” (U. S. Br. 16. See also 21 n.26.)
This is simply bizarre. Nothing in the Act justifies that con
clusion, which appears altogether subversive of the con
gressional purpose to require disclosure of the cost of credit.
Had Congress intended what the Government now supposes,
it was a very simple thing to provide (a ) that all creditors
paragraph (b) or (c ) of this section, the creditor may utilize
the constant ratio method of computation provided such use
is limited to the exceptional instance and is not for the pur
pose of circumvention or evasion of the requirements of this
part.”
25
were subject to the Act (rather than only those creditors
who impose a finance charge), and (b) that, in circum
stances to be specified by supplementary regulation, those
creditors who could not segregate the cost of credit from the
total purchase price should disclose the total price and state
that it contained an unspecified finance charge. Congress,
however, did no such thing. It made the Act applicable
only to those creditors who impose a finance charge and
it required that that finance charge be identified.
Under the Government’s thesis, even the merchant who
intentionally “ buries” a finance charge can meet the require
ments of the Act merely by disclosing the aggregate pur
chase price. Moreover, the merchant with no affirma
tive desire to conceal would no longer have any inducement
under the Act to undertake the burden of accurately identi
fying the cost o f credit. In both situations, the consumer
will be denied information as to the cost attributable to
credit. Since, however, neither the Act nor the regulations
afford any warrant whatsoever for the Government’s invi
tation to non-disclosure, we believe that any merchant who
accepts that invitation runs a material risk of criminal
prosecution under 15 U. S. C. § 1612 and of a potentially
staggering civil liability under 15 U. S. C. § 1640(a). In
sum, the four installment rule cannot solve the problem
of the hard-to-identify finance charge to which it was
addressed, and the Government’s non-disclosure rule solves
the problem but only by scuttling one o f the Act’s principal
objectives without any authority from either Congress or
the Board.
Finally, it is apparent that the four installment rule
does not even serve the interests of administrative and ju
dicial economy, as claimed by petitioner and the Govern
ment. (Pet. Br. 16-17; U. S. Br. 25.) If, as the Govern
ment suggests (U. S. Br. 25), “ endless legal disputes-over
bookkeeping practices and other matters” would result in
2 6
the absence of the rule because of the need to establish the
existence o f a finance charge, then similar disputes will
arise, notwithstanding the rule, as to the amount of the
finance charge and the accuracy of the disclosures. Those
who are prompted to sue merchants making no disclosures
would, if the rule were sustained, sue merchants making
allegedly inaccurate disclosures— including merchants who,
rightly or wrongly, would disclose that no finance charges
were entailed in their transactions. So long as the Act pro
vides that a finance charge must be accurately disclosed, the
existence and amount of such charges will be a central ele
ment in litigation under the Act. Whatever the problems
of proof involved, the four installment rule does not obviate
them. On the other hand, in so far as the Board seeks to
expand the coverage of the Act to embrace classes of mer
chants and transactions not covered by Congress, it can only
increase the amount o f litigation engendered by the Act.
C. The four installment rule is an invalid adminis
trative attempt to extend the Act beyond its intended
bounds.
Petitioner ultimately relies on the proposition that the
Board was authorized to promulgate “ legislative” as well
as merely “ interpretive” regulations and, thus, was em
powered to “ correct any oversight or omissions” in the Act,
to “ embrace a penumbra” beyond the objectives of the Act
and to alter “ the lines drawn by the statute itself” (Pet. Br.
18, 22, 32; Pet. 13). The argument proves either too little
or too much. Since, as we have shown above, Congress
explicitly and intentionally limited the coverage of the Act
to transactions involving a finance charge, the exclusion of
transactions not involving a finance charge can hardly be
regarded as a legislative “ oversight or omission” . On the
other hand, there is no warrant in the decisions of this
27
Court for the proposition that an administrative agency,
however well intentioned, may simply overrule a congres
sional decision under the guise of exercising “ legislative
rule making power” (Pet. Br. 22). The legislative power
of the United States is, after all, granted to Congress
(U. S. Const., Art. I, § 1), and while Congress may delegate
legislative power under appropriate guidelines, Sunshine
Anthracite. Coal Co. v. Adkins, 310 U. S. 381, 398 (1940);
United States v. Chicago, Milwaukee, St. Paul and Pacific
Railroad Co., 282 U. S. 311, 324 (1931), an intent to
delegate the power to override congressional determinations
is not readily to be presumed, nor can it be inferred from
anything in the Truth in Lending Act.
The court of appeals held that “ the four installment rule
of Regulation Z constituted an administrative endeavor to
amend the law as enacted by the Congress” (App. 51).
The court’s conclusion that the Board, in promulgating the
rule, had “ over-stepped the authority granted to them under
15 U. S. C., § 1604” (App. 51) is clearly supported by the
decisions of this Court.
In Federal Communications Commission v. American
Broadcasting Co., Inc., 347 U. S. 284 (1954), this Court
was faced with an attempt by the Federal Communications
Commission to prevent circumvention and evasion of § 1304
o f the United States Criminal Code (formerly § 316 of
the Communications Act of 1934). The statute prohibits
the broadcasting of “any lottery, gift enterprise, or similar
scheme, offering prizes dependent in whole or in part upon
lot or chance . . . .” Although the statute did not define
“ lottery” , lotteries traditionally had been considered to have
three essential elements: (1 ) the distribution of prizes (2 )
according to chance (3 ) for a consideration. 347 U. S. at
290.
In promulgating rules designed to prevent the broad
casting o f programs prohibited by the statute, the Com-
28
mission was faced with a pervasive pattern o f circumven
tion by lottery promoters. As this Court noted:
“ Enforcing such legislation has long been a diffi
cult task. Law enforcement officers, federal and
state, have been plagued with as many types of
lotteries as the seemingly inexhaustible ingenuity of
their promoters could devise in their efforts to cir
cumvent the law. When their schemes reached the
courts, the decision, of necessity, usually turned on
whether the scheme, on its own peculiar facts, con
stituted a lottery.” 347 U. S. at 292-93.
In particular, the question of what constituted “ considera
tion” was one that had continually troubled the courts, and
promoters had persistently exercised their ingenuity in de
vising new schemes, not previously prohibited. 347 U. S. at
293. The Commission, seeking to prevent continued circum
vention and evasion of the statute and to achieve what it
believed to be a valuable social end, adopted a regulation that
eliminated consideration as a necessary element of a pro
scribed lottery. This Court held that the Commission had
overstepped its authority under the Act. The Court said:
“Unless the ‘give-away’ programs involved here are
illegal under § 1304, the Commission cannot employ
the statute to make them so by agency action. Thus,
reduced to its simplest terms, the issue before us is
whether this type of program constitutes a ‘lottery,
gift enterprise, or similar scheme’ proscribed by
§ 1304.” 347 U. S. at 290.
In commenting on the circumvention argument, the Court
said:
_ “ It is apparent that, these so-called ‘give-away’
programs have long been a matter of concern to the
29
Federal Communications Commission; that it be
lieves these programs to be the old lottery evil under
a new guise, and that they should be struck down as
illegal devices appealing to cupidity and the gambling
spirit. . . . Regardless of the doubts held by the
Commission and others as to the social value of the
programs here under consideration, such adminis
trative expansion of § 1304 does not provide the
remedy.” 347 U. S. at 296-97.
The instant case involves an even clearer example of invalid
legislation-by-regulation since here one need not scrutinize
the intricacies o f the common law to ascertain the bounda
ries of the statutory requirement. The disclosure and pen
alty provisions of the Truth in Lending Act explicity apply
only to transactions involving a finance charge.
It should also be noted that in ABC, as here, the Court
was faced with a civil case arising under a statute that also
provided for criminal penalties. The Court said:
“ 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 Com
mission and another for the Department of Justice.
If we should give § 1304 the broad construction
urged by the Commission, 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
administrative, but also it would do violence to the
well-established principle that penal statutes are to
be construed strictly.” 347 U. S. at 296.
See Commissioner v. Acker, 361 U. S. 87, 91 (1959);
Keppel v. Tiffin Savings Bank, 197 U. S. 356, 362 (1905).
This Court emphasized the inability o f an administra
tive agency to go beyond its enabling act in Addison v.
30
Holly Hill Fruit Products, Inc., 322 U. S. 607 (1944). The
Addison case arose under Section 13(a) (10) of the Fair
Labor Standards Act, which exempted from the minimum
wage and overtime requirements of the statute persons
employed “ within the area of production (as defined by the
Administrator)” in certain agricultural occupations. Pur
suant to that authority the Administrator defined “ area of
production” to include any person engaged in such an oc
cupation “ where he is employed from farms in the im
mediate locality and the number of employees in such
establishment does not exceed seven” . 29 C. F. R. § 536.2
(b ) (Supp. 1938). Notwithstanding the fact that the
definition of that term was expressly left to the Adminis
trator, this Court held that the Administrator’s power to
define “ area of production” was limited by that statutory
term to the drawing of geographic lines and that his regu
lations, which made discriminations on the basis of the
number o f . employees, were ultra vires. See also Zuber v.
Allen, 396 U. S. 168, 183 (1969) ( “ Congress has spoken
with particularity. . . . In these circumstances an adminis
trator does not have ‘broad dispensing power.’ ” ) ; Com
missioner v. Acker, 361 U. S. 87, 93-94 (1959) ( “ The
questioned regulation must therefore be regarded ‘as no
more than an attempted addition to the statute of some
thing which is not there.’ ” ) ; United States v. Calamaro,
354 U. S. 351, 357 (1957) ( “ Neither we nor the Commis
sioner may rewrite the statute simply because we may feel
that the scheme it creates could be improved upon.” ) ; Hel
vering v. Credit Alliance Corp., 316 U. S. 107, 113 (1942).
Further, the four installment rule is invalid for the
reasons set forth in Miller v. United States, 294 U. S. 435
(1935). In Miller, the plaintiff sought judgment upon a
war risk insurance policy, issued by the United States pur
suant to a statute authorizing protection against the risk o f
death or “ total permanent disability.” The Administrator
31
of Veterans’ Affairs, purporting to act pursuant to au
thority to make such rules and regulations as might be
necessary or appropriate to carry out the purposes of the
act, had provided by regulation that the loss of one hand
and one eye “ shall be deemed to be total permanent disa
bility under yearly renewable term insurance” . That regu
lation the Court held invalid because it converted “ total
permanent disability” from a factual condition to be de
termined in light o f all the relevant circumstances into a
matter to be presumed upon the finding of more limited,
specific facts. The Court observed:
“ It is invalid because not within the authority con
ferred by the statute . . . to make regulations to
carry out the purposes of the act. It is not, in the
sense of the statute, a regulation at all, but legisla
tion. . . . The vice o f the regulation, therefore, is
that it assumes to convert what in the view of the
statute is a question of fact requiring proof into a
conclusive presumption which dispenses with proof
and precludes dispute. This is beyond administrative
power. The only authority conferred, or which
could be conferred, by the statute is to make regula
tions to carry out the purposes of the act— not to
amend it.” Id. at 439-40 (emphasis added).
The same vice is present in the four installment rule. The
rule converts what under the Act is a question of fact re
quiring proof (whether there is a finance charge) into a
conclusive presumption which dispenses with proof.*
*“ In effect, the [four installment] rule establishes a conclusive
presumption that those who extend credit and permit payment in
four or more installments have included within the price which the
consumer pays for their product their cost of extending credit, not
withstanding that they may purport not to levy a finance charge.
In the vast majority of cases, that presumption is in full accordance
with economic reality . . . . While it is possible that there are some
32
The cases cited by petitioner and the Government are
quite simply inapposite and do not support the validity
of the four installment rule. A comparison of the statute
and regulation involved in each of the cases cited fails
to reveal any conflict between the act and the regulation.
Gemsco, Inc., v. Walling, 324 U. S. 244 (1945), Thorpe
v. Housing Authority, 393 U. S. 268 (1969), Fibreboard
Paper Products Corp. v. NLRB, 379 U. S. 203 (1964),
and National Broadcasting Co. v. United States, 319
U. S. 190 (1943), all involved agency regulations or
adjudications which merely constituted particularizations
of the respective statutes as to matters about which
Congress had not spoken with specificity and were not in
any way inconsistent with an act of Congress. (324 U. S.
at 261-63; 393 U. S. at 277-78, 379 U. S. at 215-17, 319
U. S. at 218-20.)* *
POINT II
THE JUDGMENT OF THE COURT OF APPEALS SHOULD
BE SUSTAINED ON THE GROUNDS, NOT REACHED
BELOW , THAT A CIVIL PENALTY UNDER THE ACT MAY
NOT BE IMPOSED IN THE ABSENCE OF A FINANCE
CHARGE AND THAT FPS DID NOT EXTEND CREDIT
WITHIN THE MEANING OF THE ACT.
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 considerations
that were advanced by FPS but which the court o f appeals
creditors who agree to permit payment in four or more installments
without structuring, the cost of extending credit into the price . . .
an administrative agency . . . must be permitted to make rough
accommodations even if its classifications result in some inequity . . . .”
U, S. Br. in the Fifth Circuit at 24-25.
*In United States v. Foster, 233 U. S. 515, 527 (1914), the
Court found the regulation there in issue to be purely administrative
and said it “ executed the.. . . law; [but] adds nothing to it” . That
33
did not reach.* First, we urged that, irrespective o f the
validity of the four installment rule, IS U. S. C. § 1640(a)
provides for civil liability only in cases involving a finance
charge.** Second, we showed that the Truth in Lending
Act is inapplicable here because the transaction in issue
did not involve the extension o f credit.*** For the reasons
set forth below, the judgment of the court o f appeals should
be sustained on both of those grounds, regardless of this
Court’s determination with respect to the validity of the
four installment rule. See, e.g., Le Tulle v. Scofield, 308
U. S. 415, 421 (1940), Langnes v. Green, 282 U. S. 531,
538 (1931) ; United States v. American Railway Express
Co., 265 U. S. 425, 435 (1924).
A. The civil penalty provision of the act is inappli
cable in the absence of a finance charge.
Whether or not the disclosure requirements and the
administrative enforcement provisions of the Truth in
Lending Act are applicable in the absence of a finance
charge, the civil liability provision, under which petitioner’s
claim arises, is inapplicable. The Act provides that
“ any creditor who fails in connection with any con
sumer credit transaction to disclose to any person
Congress can paint with a broad brash, and ban more than the target
evil, North American Co. v. SEC, 327 U. S. 686 (1946) ; Westfall
v. United States, 274 U. S. 256 (1927), is irrelevant to the issue
present here of whether an agency can promulgate rules contrary
to the express language of the enabling statute. Colorado Anti-
Discrimination Commission v. Continental Air Lines, Inc., 372 U. S.
714 (1963), did not involve the rule-making power of an agency,
but rather the validity of a state statute in a field which Congress
had sought to regulate. The conclusion there as to the scope of
federal preemption has no bearing here.
*Petitioner’s Reply Memorandum on Petition for Writ of Cer
tiorari 3; U. S. Br. 4 n.4.
**FPS’s Brief in the Fifth Circuit 26-30; FPS’s Reply Brief in the
Fifth Circuit 5-6.
***FPS’s Brief in the Fifth Circuit 8-13.
34
any information required under this part to be dis
closed to that person is liable to that person in an
amount equal to the sum of
“ (1 ) twice the amount o f the finance charge
m 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 o f the
action together with reasonable attorney’s fee
as determined by the court.” IS U.S.C. § 1640(a)
(emphasis added).
Under that provision, the finance charge imposed “ in con
nection with the transaction” provides the initial measure
of the award. The minimum and maximum dollar amounts
cannot reasonably be construed as providing an alternative
means o f determining the amount o f liability in the ab
sence of a finance charge because the language of § '1640(a)
is not susceptible o f an “ either/or” interpretation. Indeed,
Congress rejected a bill that provided for liability “ in the
amount of $100, or in any amount equal to twice the fi
nance charge . . . whichever is the greater [up to $1,000]” .
S. 5, 90th Cong., 1st Sess. § 7 (a ) (1 ) (1967) (emphasis
added). Moreover, this restriction in the scope of the civil
liability section was accompanied by a shift in emphasis
to other modes of enforcement. Thus, while the Senate
bill had placed primary reliance on civil actions for insur
ing compliance, provision was subsequently made for ad
ministrative enforcement by, inter alia, the Federal Home
Loan Bank Board, the Interstate Commerce Commission,
the Civil Aeronautics Board, Secretary of Agriculture, and
the Federal Trade Commission (15 U. S. C. § 1607), and
it was expected that “primary enforcement . . . would be
35
accomplished under the administrative enforcement sec
tion.” H. R. Rep. No. 1040, 90th Cong., 1st Sess. at 19
(1967). Whatever the scope appropriate to the other pro
visions of the Act, it is apparent from both the language
and history of § 1640(a) that an action to recover a civil
penalty can only be maintained with respect to a transaction
involving a finance charge.*
Two further considerations lead to the same conclusion.
First, the Board has not promulgated any regulations deal
ing with the recovery of a civil penalty under § 1640(a).
Hence, it is appropriate to read that section, at least, in the
light of the statutory definitions rather than those adopted
by the Board for other purposes. Section 1640(a) deals
with the liability of a “ creditor”— a term which the Act
defines to refer “ only to creditors who regularly extend
. . . credit for which the payment of a finance charge is
required” (15 U. S. C. § 1 6 0 2 (f)). Second, since Congress
recognized that liability under § 1640(a) is penal rather
than remedial in nature (see 15 U. S. C. § 1612), a narrow
construction is particularly appropriate.** Commissioner v.
Acker, 361 U. S. 87, 91 (1959); Keppel v. Tiffin Savings
Bank, 197 U. S. 356, 362 (1905) ( “a penalty is not to be
readily implied” ) ; Hatfield, Inc. v. Commissioner, 162 F.
2d 628, 633 (3d Cir. 1947) ( “ all questions of doubt
must be resolved in favor of those from whom the penalty
is sought” ).
*Ratner v. Chemical Bank New York Trust Co., 329 F. Supp.
270, 273, 280 (S. D. N. Y. 1971), does not stand for a contrary
proposition since the court there found that “ there was a readily
knowable ‘finance charge in connection with the transaction’ ” and
that this prerequisite serves as the “ initial step” in the statute’s “ sole
measure of damage” . 329 F. Supp. at 280.
**A Congressional determination that a statutory provision is to be
regarded as either penal or remedial is binding upon the courts.
Helwig v. United States, 188 U. S. 605, 613 (1903). See also United
States v. United Mine Workers, 330 U. S. 258, 303-04 (1947).
36
B, FPS did not extend credit.
It is undisputed that the disclosure and civil penalty
provisions of the Act apply only to transactions involving
the extension o f credit. The terms of the agreement between
petitioner and FPS are also undisputed. (App. 3, 6-7)
Those terms do not spell out an agreement for the extension
of credit to petitioner.*
It is the essence of a credit transaction that one person
parts with goods in return for the promise of another to
render value at a later date. FPS does not deliver goods
before receiving payment for them. Quite the contrary,
it is the customer who pays in advance for the later receipt
of magazines. The customer pays over 30 months for maga
zines he will receive over 60 months. Until the last magazine
has been delivered at the end of the 60-month period, the
customer has paid for more magazines than he has received.
Thus, if any credit is extended in these transactions, it is
extended by FPS’s customers to FPS and not vice versa.
FPS enjoys the use of its customers’ money before the
customers obtain the magazines.
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:
“A transaction may be an instalment contract
without being a credit transaction at all. Both par
ties may agree to perform in instalments without
*The question of whether the transaction in issue involves the
extension of credit was not reached by the court below. See p. 33
n. * supra. The Government, in its amicus curiae brief, declined to
express, its opinion on the issue. 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.” U. S. Brief in the Fifth Cir
cuit 13. .
37
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 r b in , 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. The fact that the FPS cus
tomer completes his periodic payment obligations under the
contract before FPS has completed its performance shows
that FPS is even more clearly not a creditor than the seller
described by Professor Corbin. The conclusion that install
ment contracts are not necessarily contracts for the exten
sion of credit has been recognized by the Federal Reserve
Board in a published opinion with respect to the applicability
of the Act to installment plans for the payment of obstetrical
services:
“As we understand the common practice for as
sessing obstetrical charges, the doctor and the patient
agree on the services the doctor will provide and
the fee for his services. This fee is payable in peri
odic instalments, and the obstetrical services are
provided as needed. Perhaps early in the plan,
the payments made by the patient exceed the charges
assessed, but as the plan progresses and the child is
38
delivered, it may be that the charges exceed the pay
ments. As long as there are no finance charges as
sessed, and at no point do the charges for the services
rendered exceed the payments to the extent that it
would require more than 4 of the periodic instal
ments to repay the obligation, then the plan would
not fall within the provisions o f Regulation Z.”
FRB Opinion Letter No. 262 (1970) ; 4 CCII Con
su m er C redit G u ide ft 30,516.
It is implicit in the Board’s opinion (1) that the execution
of an agreement to pay in installments for goods or services
to be rendered in installments does not necessarily involve an
extension of credit within the meaning of the Act and (2)
that credit is extended under such an agreement only if and
when the value of the goods or services provided exceeds the
payments made.*
Accordingly, FPS does not extend credit to its customer
upon the execution of the installment agreement and, since
the customer undertakes to make payments at a faster rate
*The Government has characterized the Board’s opinion as
follows:
“ The Federal Reserve Board has issued an opinion letter
. . . which may bear on the question presented here. That
opinion, which deals with the common situation involving
the payment in installments of a fixed fee for whatever obstet
rical care may be needed during a pregnancy, seems to be
based on the premise that the patient does not incur indebted
ness for the total fee at the time, early in the pregnancy,
when the agreement is made. Instead, the view reflected in
that letter seems to be that debt is not incurred, nor credit
extended, until the medical care is actually provided and then
only ij the amount of the payments made by that time does
not equal or exceed the value of the services rendered. Stated
otherwise, insofar as is relevant here, the opinion appears
to adopt the view that, even if no payments were made, the
patient would not incur debt simply by arranging with the
obstetrician for periodic care and agreeing to pay, in install
ments, a specified sum for whatever care is needed.” U. S.
Brief in the Fifth Circuit 17. (Emphasis added.)
39
than magazines are delivered, FPS does not thereafter ex
tend credit under the agreement. Indeed, in an effort to
insure that FPS does not become a creditor, the agreement
provides for acceleration of the customer’s payments in the
event of the customer’s default. In sum, under commonly
accepted principles that have been espoused by the Board,
FPS is not a creditor.
The Act does not alter the common understanding of
what constitutes a credit transaction*—-receipt o f value
and an unconditional obligation to pay in the future for
such value. The term "credit” is defined in the Act as
follows:
“ 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.” 15 U.S.C.
§ 1602(e).
The word "debt” is not defined in the Act. “ Debt” has been
defined, however, frequently and consistently by the courts.
The essence of “ debt” is an unconditional promise to pay a
fixed sum at a future time.
"The classic debt is an unqualified obligation to pay
a sum certain at a reasonably close fixed maturity
date along with a fixed percentage in interest pay
able regardless of the debtor’s income or lack there
of.” Gilbert v. Commissioner, 248 F. 2d 399, 402
(2d Cir. 1957). Accord, Sherwood Memorial Gar
dens, Inc. v. Commissioner, 350 F. 2d 225 (7th Cir.
*“ [T]he disclosure requirement would not apply to transactions
which are not commonly thought of as credit transactions . . . .”
S. Rep. No. 392, 90th Cong., 1st Sess. 14 (19 67 ) ; H. R. R ep. No.
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).
40
1965) ; Farley Realty Corp. v. Commissioner, 279
F. 2d 701 (2d Cir. 1960).
■ “ Every debt must be solvendum in praesenti, or sol-
vendum in futuro— must be certain and in all events
payable; whenever it is uncertain whether anything
will ever be demandable by virtue of the contract,
it cannot be called a debt.” Burton v. Bowers, 172
F. 2d 429, 432 (4th Cir. 1949) (citations omitted).
Accord, Gilman v. Commissioner, 53 F. 2d 47 (8th
Cir. 1931); State v. Smith, 335 Mo. 825, 74 S. W.
2d 367 (1934).
. “ A ‘debt’, of course, is commonly considered to be a
fixed and certain obligation, as opposed to some-
..»• ...... thing payable only on a contingency.” Jaramillo v.
' McLoy, 263 F. Supp. 870, 874 n. 3 (D. Colo. 1967).
Accord, Jamison v. United States, 297 F. Supp. 221,
227 (N. D. Cal. 1968), aff’d per curiam, 445 F. 2d
1397 (9th Cir. 1971).
A debt is to be distinguished from the binding obliga
tions 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 R. R., 276 F. 2d 525, 530
(2d Cir. 1959), cert, denied, 362 U. S. 961, 964 (1960);
McGee v. Stockes’ Heirs at Law, 76 N. W . 2d 145, 156
(N. D. 1956). A debt is not merely a promise to pay
money; - Evans v. Kroh, 284 S. W. 2d 329, 330 (Ky. Ct.
App. 1955); Park & 46th St. Corp. v. State Tax Com
mission, 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 Court in Walla
Walla City v. Walla Walla Water Co., 172 U. S. 1, 20
(1898), made the following distinction:
41
“ There is a distinction between a debt and a con
tract for a future indebtedness to be incurred, pro
vided the contracting party performs the agreement
out of which the debt may arise. There is also a dis
tinction 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 im
provement, though such debt be payable in the future
by installments. In the one case the indebtedness is
not created until the consideration has been fur
nished ; in the other the debt is created at once, the
time of payment being only postponed.”
See also Metropolitan Water District v. Marquardt, 59 Cal.
2d 159, 379 P. 2d 28, 28 Cal. Rptr. 724 (1963).*
The FPS contract calls for performance in overlapping
installments by both parties and is therefore inherently con
ditional. The customer’s obligation to pay money is con
tingent upon continuing partial performance by FPS. As
Professor Corbin has explained,
“ A contract for the sale of goods may be an instal
ment contract with respect to the goods sold as with
respect to payments of the price. The non-delivery
of an instalment or delivery of a nonconforming
instalment when required by the contract is a breach
for which an action can be maintained at once. There * * * §
*The term “ debt” is given the same construction - for federal
income 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 someone had an uncondi
tional obligation to pay the taxpayer. See cases collected in 5 J.
M erten s , T h e L a w of F ederal I ncom 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. Comm’r, 326 U. S. S21 530
(1946).
42
is no doubt also that the buyer is privileged to with
hold payment o f the price of the undelivered instal
ment or o f a nonconforming instalment that is right
fully rejected.” 3A A. C o rbin , Contracts § 691, at
264 (1960).
In the circumstances described by Professor Corbin the
buyer is obligated to pay only if the seller performs. Hence,
the buyer has not incurred an unconditional obligation—
*>v..he has not incurred a debt nor received credit; the con
tractual obligation is conditional, whereas a debt must be
certain.
The district court rested its conclusion that FPS extend
ed credit to petitioner on three propositions: (1 ) “ the
promise to pay is unconditional and non-cancellable” ; (2 )
“ the written agreement provides that ‘ [pjayments due
monthly, otherwise entire balance due’ ” ; and (3 ) “ De
fendant, itself, considered the transaction to be a credit
transaction, and that it was owed a debt by the Plaintiff.”
(App. 34). The first proposition is incorrect as a matter of
law. The second proposition is not relevant to the conclu
sion reached. The third proposition is neither correct nor
relevant.
With respect to the first proposition, as shown above,
petitioner’s promise to pay was conditional as a matter of
law. Certainly, if petitioner had not received her magazines,
no court would have required her to continue making pay
ments for them. See F l a . St a t . §§672.2-612, 672.2-711,
672.2-717 (1969). Cf., Bowers v. Dr. P. Phillips Co., 100
Fla. 695, 129 So. 850 (1930). The fact that the contract
was noncancellable at the election of petitioner does not
make her obligation to perform unconditional. Her obliga
tion was conditional on performance by FPS. See 3A
A. C o r b in , Contracts §§ 687, 691 (1960).
43
With respect to the second proposition, the fact that
under the agreement FPS could require payment of the
full balance if petitioner, in breach of the agreement, de
faulted does not show that FPS undertook to extend credit.
At every stage in the transaction the petitioner was to pay
in advance for the magazines she was to receive. The
“ balance due” clause only underscores FPS’s determina
tion that magazines not be delivered prior to payment so
that it would not be put in the position of a creditor, either
voluntarily or involuntarily, and that the customer be held
to her initial undertaking for prepayment. t
Finally, the district court’s statement that FPS “ con
sidered the transaction to be a credit transaction, and that
it was owed a debt by the Plaintiff” (App. 34) presumably
refers to collection letters sent petitioner after she failed to
make payments. Surely the fact that petitioner became in
debted when she failed to pay, although she was receiving
the magazines she had ordered, does not show that the con
tract provided for the creation or deferment of such debt.
Petitioner’s breach of her contractual obligation to make
prepayment did not retroactively convert the underlying
transaction into a credit transaction within the meaning of
the Act. Cf. 12 C. F. R. § 226.4(c) and (g ). Just as a store
can hardly be said to extend credit to a shoplifter, such an
involuntary extension of credit does not convert the original
agreement into a credit transaction subject to the Act. In
any event, FPS’s characterization of the status of the trans
action after petitioner’s default is not determinative o f the
legal significance o f the original agreement. See Garland
v. Mobil Oil Corp., 4 CCH C onsum er Credit G uide
U 99,193 at p. 89,135 (N. D. 111. 1972) (McLaren, J).
44
CONCLUSION
For the reasons stated, the judgment below should be
affirmed.
September 2, 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,
W . F illm o re W ood, Jr .,
Cr a v a t h , S w 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 & S te w a r t ,
Concord Building,
Miami, Florida 33130,
O f Counsel.
A P P E N D I X
la
APPENDIX
The Truth in Lending Act, 15 U. S. C. §§ 1601-65
(1970), provides in relevant part:
§ 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 en
gaged in the extension of consumer credit would be
strengthened by the informed use of credit. The in
formed 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
o f credit terms so that the consumer will be able
to compare more readily the various credit terms
available to him and avoid the uninformed use of
credit.
§ 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.
* % >}i %
2a
1603. Exempted transactions.
This subchapter does not apply to the following:
(1 ) Credit transactions involving extensions
of credit for business or commercial purposes,
or to government or governmental agencies or
instrumentalities, or to organizations.
(2 ) Transactions in securities or commodi
ties accounts by a broker-dealer registered with
the Securities and Exchange Commission.
(3 ) Credit transactions, other than real
property transactions, in which the total amount
to be financed exceeds $25,000.
(4 ) Transactions under public utility tariffs,
if the Board determines that a State regulatory
body regulates the charges for the public utility
services involved, the charges for delayed pay
ment, and any discount allowed for early pay
ment. §
§ 1604. Rules and regulations.
The Board shall prescribe regulations to carry
out the purposes of this subchapter. These regula
tions may contain such classifications, differentia
tions, or other provisions, and may provide for such
adjustments and exceptions for any class of trans
actions, as in the judgment of the Board are neces
sary or proper to effectuate the purposes of this
subchapter, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith.
3a
§ 1607. Administrative enforcement.
(a) Enforcing agencies.
Compliance with the requirements imposed under
this subchapter shall be enforced under
(1 ) section 1818 o f 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.
(2 ) section 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 of 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.
4a
(6 ) the Packers and Stockyards Act, 1921
(except as provided in section 406 of that Act),
by the Secretary of Agriculture with respect to
any activities subject to that Act.
(b ) Violations of this subchapter deemed violations
of pre-existing statutory requirements; addi
tional agency powers. ,
For the purpose of the exercise by any agency
referred to in subsection (a) o f this section of its
powers under any Act referred to in that subsection,
a violation o f any requirement imposed under this
subchapter shall be deemed to be a violation of a
requirement imposed under that Act. In addition to
its powers under any provision of law specifically
referred to in subsection (a) of this section, each of
the agencies referred to in that subsection may ex
ercise, for the purpose of enforcing compliance with
any requirement imposed under this subchapter, any
other authority conferred on it by law.
(c ) Federal Trade Commission as overall enforcing
agency.
Except, to the extent that enforcement of the
requirements imposed under this subchapter is spe
cifically committed to some other Government
agency under subsection (a) of this section, the
Federal Trade Commission shall enforce such re
quirements/ For the purpose of the exercise by the
Federal Trade Commission o f its functions and
powers under the Federal Trade Commission Act,
a violation of any requirement imposed under this
subchapter shall be deemed a violation o f a require-
5a
ment imposed under that Act. All of the functions
and powers of the Federal Trade Commission under
the Federal Trade Commission Act are available
to the Commission to enforce compliance by any
person with the requirements imposed under this
subchapter, irrespective of whether that person is
engaged in commerce or meets any other jurisdic
tional tests in the Federal Trade Commission Act.
(d ) Rules and regulations.
The authority of the Board to issue regulations
under this subchapter does not impair the authority
of any other agency designated in this section to
make rules respecting its own procedures in enforc
ing compliance with requirements imposed under
this subchapter.
§ 1611. Criminal liability for willful and knowing
violation.
Whoever willfully and knowingly
(1 ) gives false or inaccurate information or
fails to provide information which he is required
to disclose under the provisions of this subchapter
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 annual
percentage rate determined under section 1606
( a ) ( 1 ) ( A ) o f this title, or
(3 ) otherwise fails to comply with any re
quirement imposed under this subchapter,
6a
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.
3̂ 5fs Jje
§ 1638. Sales not under open end credit plans.
(a ) Required disclosures by creditor.
In connection with each consumer credit sale
not under an open end credit plan, the creditor shall
disclose each, of the following, items which is appli
cable :
(1 ) The cash price of the property or service
purchased.
ik sje ■ sje >k *
(4 ) All other charges, individually itemized,
which are included in the amount of the credit
7a
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 dwell
ing, the amount of the finance charge, which may
in whole or in part be designated as a time-price
differential or any similar term to the extent ap
plicable.
(7 ) The finance charge expressed as an an
nual percentage rate except in the case of a fi
nance charge
(A ) which does not exceed $5 and is ap
plicable 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.
* ♦ * * sf:
§ 1640. Civil liability.
(a) Failure to disclose.
Except as otherwise provided in this section, any
creditor who fails in connection with any consumer
credit transaction to disclose to any person any in
formation required under this part to be disclosed
to that person is liable to that person in an amount
equal to the sum of
8a
(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.
* =£ * Jfc
The regulations of the Federal Reserve Board, 12
C. F. R. §§ 226.1-.13 (1972), provide in relevant part:
§ 226.1 Authority, scope, purpose, etc.
(a) Authority, scope, and purpose. (1 ) This
part comprises the regulations issued by the Board
of Governors of the Federal Reserve System pur
suant to title I (Truth in Lending A ct), and title
V (General Provisions) o f the Consumer Credit
Protection Act, as amended (15 U. S. C. section
1601 et seq.). Except as otherwise provided herein,
this part applies to all persons who in the ordinary
course of business regularly extend, or offer to
extend, or arrange, or offer to arrange, for the ex
tension of consumer credit as defined in paragraph
(k ) of § 226.2, and to all persons who issue credit
cards.
(2 ) This part implements the Act, the purpose
of which is to assure that every customer who has
need for consumer credit is given meaningful infor
mation with respect to the cost of that credit which,
in most cases, must be expressed in the dollar amount
of finance charge, and as an annual percentage rate
computed on the unpaid balance of the amount fi
nanced. Other relevant credit information must also
be disclosed so that the customer may readily com
pare the various credit terms available to him from
different sources and avoid the uninformed use of
credit. This part also implements the provision of
the Act under which a customer has a right in cer
tain circumstances to cancel a credit transaction
which involves a lien on his residence. Advertising
of consumer credit terms must comply with specific
requirements, and certain credit terms may not be
advertised unless the creditor usually and custom
arily extends such terms. This part also contains
prohibitions against the issuance of unsolicited
credit cards and limits on the cardholder’s liability
for unauthorized use of a credit card. Neither the
Act nor this part is intended to control charges for
consumer credit, or interfere with trade practices
except to the extent that such practices may be in-
consisent with the purpose of the Act.
* * * * *
§ 226.2 Definitions and rules of construction.
For the purposes of this part, unless the context
indicates otherwise, the following definitions and
rules o f construction apply:
* * * * , - * _ ■
(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, household, 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 install-
9a
10a
ments. “ Consumer loan” is one type of “ con
sumer credit.”
* * * * *
(m ) “ Creditor” means a person who in the
ordinary course of business regularly extends
or arranges for the extension of consumer credit,
or offers to extend or arrange for the extension
of such credit.
* * * * *
(bb) Unless the context indicates otherwise,
“ credit” shall be construed to mean “ consumer
credit,” “ loan” to mean “ consumer loan,” and
“ transaction” to mean “ consumer credit trans
action.”
* * * * *
§ 226.4 Determination of finance charge.
̂ >{« sjc
(c ) Late payment, delinquency, default, and
reinstatement charges. A late payment, delinquency,
default, reinstatement, or other such charge is not a
finance charge if imposed for actual unanticipated
late payment, delinquency, default, or other such
occurrence. §
§ 226.5 Determination of annual percentage rate.
>J< j{c iff >fc ^
(c ) Charts and tables. (1 ) The Regulation Z
Annual Percentage Rate Tables produced by the
Board may be used to determine the annual per
centage rate, and any such rate determined from
these tables in accordance with instructions contained
11a
therein will comply with the requirements of this
section. Volume I contains Table FRB-— 100-M
covering 1 to 60 monthly payments, Table FRB—
200-M covering 61 to 120 monthly payments, Table
FRB— 300-M covering 121 to 480 monthly pay
ments, and Table FRB— 100-W covering 1 to 104
weekly payments. Volume I also contains instruc
tions for use of the tables in regular transactions and
most irregular transactions which involve only odd
first and final payments and odd first payment
periods. Volume II contains factor tables and in
structions for their use in connection with the tables
in Volume I in the computation of annual percentage
rates in any type of irregular payment or payment
period transaction and in transactions involving mul
tiple advances. Each volume is available from the
Board in Washington, D.C. 20551, and the Federal
Reserve Banks.
* * * * %
(e) Approximation o f annual percentage rate—
other credit. In an exceptional instance when cir
cumstances may leave a creditor with no alternative
but to determine an annual percentage rate appli
cable to an extension of credit other than open end
credit by a method other than those prescribed in
paragraph (b) or (c ) of this section, the creditor
may utilize the constant ratio method of computa
tion provided such use is limited to the exceptional
instance and is not for the purpose of circumvention
or evasion of the requirements of this part. Any
provision o f State law authorizing or requiring the
use of the constant ratio method or any method of
computing a percentage rate other than those pre
scribed in paragraphs (b ) and (c) of this section
12a
does not justify failure of the creditor to comply with
the provisions of those paragraphs, as applicable.
§226.6 General disclosure requirements.
- j jc •
(d ) Multiple creditors; joint disclosure. If there
is more than one creditor in a transaction, each
creditor shall be clearly identified and shall be re
sponsible for making only those disclosures required
by this part which are within his knowledge and the
purview of his relationship with the customer. If
two or more creditors make a joint disclosure, each
creditor shall be clearly identified. The disclosures
required under paragraphs (b ) and (c) o f § 226.8
shall be made by the seller if he extends or arranges
for the extension of credit. Otherwise disclosures
shall be made as required under paragraphs (b ) and
(d) of § 226.8.
>{« jji jfc
( j ) Percentage rate as dollars per hundred. Prior
to January 1, 1971, any rate required under this part
to be disclosed as a percentage rate may, at the
option of the creditor, be expressed in the form of
the corresponding ratio of dollars per hundred dol
lars using the term “ dollars finance charge per year
per $100 of unpaid balance.” (For example, an add
on finance charge of 4 percent per year on an obli
gation payable in 36 equal monthly instalments is
equivalent to an annual percentage rate, rounded to
the nearest quarter of 1 percent, of 7.50 percent
which may be stated as “$7.50 finance charge per
year per $100 of unpaid balance.” )
t ^ ^ ^
13a
§ 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 accordance
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. Except as provided in paragraphs (g ) and
(h ) of this section, such disclosures shall be made
before the transaction is consummated. At the time
disclosures are made, the creditor shall furnish the
customer with a duplicate o f the instrument or a
statement by which the required disclosures are made
and on which the creditor is identified. All of the
disclosures shall be made together on either
(1 ) The note or other instrument evidencing
the obligation on the same side of the page and
above or adjacent to the place for the customer’s
signature; or
(2 ) One side of a separate statement which
identifies the transaction.
ijs sfs ^