UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

JUAN JULIO PARRA,

Plaintiff,

File No. 1:00‑CV‑769

BORGMAN FORD SALES, INC., and BORGMAN IMPORTS, INC.,

HON. ROBERT HOLMES BELL

Defendants.

ORDER AND PARTIAL JUDGMENT

In accordance with the opinion entered this date,

IT IS HEREBY ORDERED that Plaintiff’s motion for summary judgment on liability (Docket # 25) is

GRANTED as to Count III and is DENIED as to Counts I, II, IV, and V .

IT IS FURTHER ORDERED that Defendants' motion for summary judgment (Docket # 24) is GRANTED as

to Count I and is DENIED as to Counts II, III, IV and V.

IT IS FURTHER ORDERED that JUDGMENT as to liability only is entered in favor of Plaintiff for Count III.

IT IS FURTHER ORDERED that JUDGMENT is entered in favor of Defendants for Count I and that Count I

is dismissed.

IT IS FURTHER ORDERED that Counts II, IV, and V are dismissed without prejudice.

Date: October 5, 2001

ROBERT HOLMES BELL

CHIEF UNITED STATES DISTRICT JUDGE

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

JUAN JULIO PARRA,

Plaintiff,

File No. 1:00‑CV‑769

BORGMAN FORD SALES, INC., and BORGMAN IMPORTS, INC.,

HON. ROBERT HOLMES BELL

Defendants.

OPINION

Before this Court are Plaintiff Juan Julio Parra's motion for summary judgment as to liability and Defendants Borgman Ford Sales, Inc. and Borgman Imports Inc.'s motion for summary judgment. Plaintiff claims that his financed purchase of two different vehicles from Defendants violated both the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601‑1667 (2001), and various Michigan statutes. As explained below, the Court GRANTS both motions in part and DENIES both motions in part.

I. Factual Background

In the fall of 1999, Plaintiff financed the purchase of a used Mercury Villager ("Villager") with an extended warranty from Defendants. Although the warranty was through the Ford Motor Company, Defendants retained part of the fee for the warranty. On April 21, 2000, Plaintiff traded in the Villager and purchased a Daewoo. After receiving the

trade‑in value on the Villager, Plaintiff still owed between eight and nine thousand dollars in negative equity on the Villager. To pay this negative equity, Defendants added the amount of the negative equity to the price of the Daewoo. Then, Defendants computed the sales tax on the combined price of the Daewoo and the negative equity from the Villager.

II. Standard of Review

Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(c). An issue concerning a material fact is genuine if the record as a whole could lead a reasonable trier of fact to find for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

Under Rule 56 the court must view the evidence in a light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158‑59 (1970). Summary judgment is not proper if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson, 477 U.S. at 248. Summary judgment is proper if the nonmoving party fails to make a showing sufficient to establish the existence of an element essential to the party's case for which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

The moving party bears the initial burden of showing the absence of a genuine issue of material fact. Celotex Corp., 477 U.S. at 323. The burden then shifts to the nonmoving

party to come forward with evidence showing that there is a genuine issue of material fact that must go to trial. Anderson, 477 U.S. at 256. If the nonmoving party fails to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof, the moving party is entitled to summary judgment as a matter of law. Celotex Corp., 477 U.S. at 324.

III. Analysis

The purpose of TILA is "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." 15 U.S.C. § 1601(a) (2001). In this case, Plaintiff claims that Defendant violated TILA by failing to disclose its retention of a portion of an extended warranty fee and its application of Michigan sales tax to negative equity from Plaintiff's trade‑in without disclosing the sales tax as a finance charge.

A. Failure to Disclose Defendants' Compensation on the Extended Warranty 15 U.S.C. § 1638(a)(2)(B)(iii)

A recent opinion from this district addressed this exact issue in the context of a motion for class certification. Rockey v. Courtesy Motors, Inc., 199 F.R.D. 578, 589‑93 (W.D. Mich. 2001). Like this case, the plaintiff in Rockey claimed that the defendant dealership had failed to disclose its retention of a portion of the extended warranty fee. Id. at 581. Although the decision in Rockey involved the issue of class certification, the Rockey court discussed the merits of the plaintiff's claim in determining whether common questions of law

predominated. Id. at 588‑89. Based on an extensive analysis of the case law, the Rockey court suggested that these facts do present a TILA violation. Id. at 589 (citing Gibson v. Bob Watson Chevrolet‑Geo, Inc., 112 F.3d 283, 285‑86 (7th Cir. 1997)). See Peters v. Jim Lupient Oldsmobile Co., 220 F.3d 915, 916 (8th Cir. 2000) (collecting cases; refusing to determine whether a violation occurred); Rugambwa v. Betten Motor Sales, 200 F.R.D. 358, 363 (W.D. Mich. 2001) ("A dealer's failure to disclose its 'upcharge' for a service agreement or warranty purportedly paid to a third‑party constitutes a violation of the itemization requirements of § 1638(a)(2)(B)(iii).").

As the Rockey court and the defendants point out, the real issue is whether the plaintiff can demonstrate damages. Rockey, 199 F.R.D. at 590‑91. (Def.'s Br. Supp. at 3‑5). Unlike other provisions of TILA, section 1638(a)(2)(B)(iii) does not automatically give rise to statutory damages. Id. at 590 (citing Brown v. Payday Check Advance, Inc., 202 F.3d 987, 990‑92 (7th Cir. 2000) (analyzing the statutory language)). To prove actual damages, a plaintiff must show detrimental reliance. Turner v. Beneficial Corp., 242 F.3d 1023, 1026, 1028 (11th Cir. 2001) (collecting cases; "hold[ing] that detrimental reliance is an element of a TILA claim for actual damages"). To show detrimental reliance, plaintiff "must show that: (1) he read the TILA disclosure statement; (2) he understood the charges being disclosed; (3) had the disclosure statement been accurate, he would have sought a lower price; and (4) he would have obtained a lower price." Peters, 220 F.3d at 917.

Defendants contend that they are entitled to summary judgment on this claim because Plaintiff cannot prove actual damages. Plaintiff neither read nor understood the disclosure statement. (Def.'s Br. Supp. at 4). Consequently, Plaintiff cannot satisfy the requirements of actual damages, and Defendant is entitled to summary judgment for this claim on this basis.

B. Failure to Disclose that Sales Tax Paid on the Villager's Negative Equity Constituted a Finance Charge 15 U.S.C. § 1638(a)(3)‑(5)

Plaintiff claims that Defendants violated TILA by failing to properly identify sales tax paid on the Villager's negative equity as a finance charge. Without addressing Plaintiff's argument, Defendants counter that they were permitted to lump the price of the Daewoo and the negative equity in the Villager. In fact at a hearing on these motions, Defendants argued that because Michigan law requires them to collect sales tax on the negative equity, their disclosures complied with TILA.

The purpose of TILA is fair and accurate disclosure of the terms of credit. 15 U.S.C. § 1601(a) (2001). Consistent with this purpose, TILA requires the creditor to disclose the finance charge as an annual percentage rate, the amount financed, and the total amount of all payments. 15 U.S.C. § 1638(a)(3)‑(5). Contrary to Defendant's claim, nothing in the sections cited by the Defendant suggests that failing to disclose a finance charge is permissible.

The issue here is whether the sales tax on the negative equity constitutes a finance charge. Under TILA, "the amount of the finance charge . . . shall be determined as the sum

of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit." 15 U.S.C. § 1605(a) (2001). According to the Federal Reserve Board (the "Board"), this definition "includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit." 12 C.F.R. § 226.4(a) (2001). This interpretation and its accompanying official staff commentary are "dispositive in TILA cases unless the commentary is demonstrably irrational." Clay v. Johnson, __F.3d __, 2001 WL 1008139, *3 (7th Cir. 2001). Whether or not Defendants are required to pay Michigan sales tax on the negative equity is irrelevant to determining whether the sales tax on the negative equity is a finance charge. Because as Defendants' employees admit, (Pl.'s Br. Supp. Ex. 7, at 31‑32), sales tax would not have been charged on the Villager's negative equity in a cash transaction, this sales tax was a finance charge. In other words, the sales tax was required for Defendants' extension of credit to Plaintiff.

Additionally, the Court notes that the Board's commentary specifically addresses accounting for negative equity in a trade‑in vehicle. 12 C.F.R. Pt. 226, Supp. I, at 2(a)(18)(3). After taking into account the downpayment, any remaining negative equity "must be reflected as an additional amount financed under § 226.18(b)(2)." 12 C.F.R. Pt. 226, Supp. I, at 2(a)(18)(3). This commentary strongly suggests that Defendants should have included the negative equity under "Additional Amounts Paid to Others on my Behalf." (Pl.'s

Br. Supp. Ex. 2). In fact, there is an empty line on Defendants' form for these types of items not described on the form. (Pl.'s Br. Supp. Ex. 2). For these reasons, the Court finds that failure to disclose the finance charge resulting from the sales tax on the negative equity constituted a violation of TILA. See Person v. Courtesy Motors, Inc., 2001 U.S. Dist. LEXIS 4556, * 10 (W.D. Mich. 2001) (finding a TILA violation on very similar facts). Defendants' failure to disclose accurately all finance charges entitles Plaintiff to statutory damages. 15 U.S.C. § 1640(a) (2001).

C. Michigan State Law Claims

Pursuant to 28 U.S.C. § 1367 (2001), this Court may exercise supplemental jurisdiction "over all other claims that are so related to claims in the action with such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." 28 U.S.C. § 1367(a) (2001). Declining supplemental jurisdiction is permissible if "the claim raises a novel or complex issue of State law." 28 U.S.C. § 1367(c)(1). Moreover, "[a] district court has broad discretion in deciding whether to exercise supplemental jurisdiction overstate law claims." Musson Theatrical, Inc. v. Federal Express Corp., 89 F.3d 1244, 1254 (6th Cir. 1996). While Plaintiff’s state law claims are part of the same case or controversy, they involve new applications of state law. Specifically, Michigan courts have never applied any of the three statutes cited by Plaintiff to similar facts. Rockey, 199 F.R.D. at 596‑97. It is inappropriate for this Court to set new precedents

interpreting Michigan law. Therefore, this Court in its discretion declines to exercise supplemental jurisdiction over these claims.

IV. Conclusion

For the foregoing reasons, Plaintiff’s motion for summary judgment as to liability is DENIED for Count I and is GRANTED for Count III. Defendants' motion for summary judgment is GRANTED for Count I and DENIED for Count III. Both parties' motions are DENIED for Counts II, IV, and V because the Court declines to exercise supplemental jurisdiction over these state law claims. Counts II, IV, and V are dismissed without prejudice. An order and judgment consistent with this opinion will be entered.

Date: October 5, 2001

ROBERT HOLMES BELL

CHIEF UNITED STATES DISTRICT JUDGE