1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-12-1995

Duquesne Lgt v Westinghouse

Precedential or Non-Precedential:

Docket 95-3027

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Recommended Citation

"Duquesne Lgt v Westinghouse" (1995). 1995 Decisions. Paper 251.

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1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

No. 95-5035 

 

NAOMI ORTIZ, on behalf of herself 

and all others similarly situated 

v. 

RENTAL MANAGEMENT, INC. 

t/a PRIME TIME RENTAL 

 NAOMI ORTIZ, on behalf of 

 herself and the uncertified 

 class consisting of all 

 residents of New Jersey who are 

 or have been parties to 

 contracts to rent to own 

 merchandise from Defendant and 

 have been charged illegal fees 

 and/or interest since April 13, 

 1988, Defendant, its agents, 

 employees, and all related 

 entities excluded therefrom, 

 Appellant

 

On Appeal from the United States District Court 

for the District of New Jersey 

(D.C. Civ. No. 94-01875) 

 

Argued August 25, 1995 

BEFORE: GREENBERG, COWEN, and SAROKIN, Circuit Judges

(Filed: September 12, 1995) 

 

 Philip Stephen Fuoco 

 24 Wilkins Place 

 Haddonfield, NJ 08033 

 Lisa J. Rodriguez (argued) 

 Lisa Chanow Dykstra 

 Chimicles, Jacobsen & Tikellis 
2 

 One Haverford Centre 

 351 West Lancaster Avenue 

 Haverford, PA 19041 

 Attorneys for Appellant

 J. Samuel Choate, Jr. (argued) 

 128 North Pitt Street 

 Alexandria, VA 22314 

 Jeffrey Zucker 

 Abraham Pressman & Bauer 

 1818 Market Street 

 35th Floor 

 Philadelphia, PA 19103 

 Attorneys for Appellee

 

OPINION OF THE COURT 

 

GREENBERG, Circuit Judge. 

 This appeal requires us to address whether rent-to-own 

agreements which are terminable at any time without additional 

charges fall under the purview of the Truth in Lending Act 

(TILA), 15 U.S.C. § 1601 et seq. The district court, relying 

primarily on a Federal Reserve Board regulation, concluded that 

they do not. The court therefore granted the lessor's motion to 

dismiss the federal count of the complaint, declined to exercise 

jurisdiction over the supplemental state claims, and remanded the 

case to the Superior Court of New Jersey. Because we agree with 

the district court, we will affirm its judgment. 

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 
3 

 Appellant Naomi Ortiz, the named plaintiff in this putative 

class action, entered into a rental agreement to lease a sofa and 

a love seat from appellee Rental Management, Inc. (RMI) in 

November 1992. The rental agreement specified that Ortiz at her 

option could make rental payments on any one of four schedules: 

— weekly payments of $28.49; 

— biweekly payments of $56.98; 

— semi-monthly payments of 61.72; or 

— monthly payments of $108.63. 

The agreement also required her to pay an initial charge of 

$113.63 for delivery of the furniture, and established a 

delinquency charge of $5.00 for late payments. Ortiz generally 

followed the weekly payment plan, although she exercised her 

option to make some biweekly payments in the summer and fall of 

1993. The rental agreement provided that Ortiz could cancel it 

at any time and return the furniture without further obligation. 

It also stated that if she made 78 weekly payments or 18 monthly 

payments (periods that differ in duration by no more than a 

couple of days), she would own the sofa and love seat. Thus, the 

agreement is characterized as a rent-to-own (RTO) agreement. 

 After making about 70 weekly payments -- eight payments less 

than the number required to transfer ownership of the property to 

her -- Ortiz ceased making payments, though according to RMI's 

representations at oral argument before us, she retains 

possession of the furniture. Instead, on April 13, 1994, she 

filed this class action in the Superior Court of New Jersey 

alleging that in offering the RTO agreement, RMI violated the 

TILA by failing to comply with certain of its disclosure 
4 

requirements. In support of her claim Ortiz alleged that the 

wholesale price of the furniture was $380.00, far less than the 

total amounts in weekly payments required for her to acquire 

title to the furniture and far less than the amount she had paid 

at the time she filed the lawsuit.1 She characterizes the 

difference in the two amounts as a finance charge and based on 

this characterization contends that the RTO agreement is a credit 

sale within the meaning of the TILA. In addition to the TILA 

claim, Ortiz asserted causes of action under various New Jersey 

statutes and common law doctrines. 

 RMI removed the case to the district court on April 26, 

1994, and soon thereafter moved to dismiss Ortiz's TILA claim for 

failure to state a claim upon which relief could be granted 

pursuant to Fed. R. Civ. P. 12(b)(6). The district court granted 

the motion to dismiss in a memorandum opinion dated January 6, 

1995. It reasoned that amendments which the Federal Reserve 

Board promulgated in 1981 to Regulation Z, which it had issued 

previously to carry out the purposes of the TILA, placed rent-toown contracts such as that Ortiz signed outside the ambit of the 

statute, and that these regulations were entitled to deference. 

Consequently, in the district court's view the TILA simply did 

not govern the RTO agreement. The court declined to exercise 

jurisdiction over Ortiz's state law claims, and thus it remanded 

the remainder of the complaint to the New Jersey Superior Court. 

 

1

The RTO agreement was annexed to the complaint but the $380.00 

figure is not mentioned in the complaint. It appears, however, 

that RMI does not dispute that figure and thus we will accept it 

on this appeal. 
5 

Judgment was entered in the district court on January 11, 1995, 

and Ortiz filed a timely notice of appeal. The district court 

had federal question jurisdiction under 28 U.S.C. §§ 1331, 1441, 

and we have jurisdiction pursuant to 28 U.S.C. § 1291. We 

exercise plenary review over a district court's grant of a motion 

pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss a complaint. 

II. DISCUSSION 

 The TILA imposes disclosure requirements on persons in the 

business of extending credit to consumers. In particular, the 

TILA delineates specific requirements for credit transactions, 

15 U.S.C. §§ 1604, 1631, 1632, as well as detailed instructions 

on how charges and interest rates must be calculated, 15 U.S.C. 

§§ 1605, 1606. The TILA only applies to "credit sales," however, 

and therefore this case turns on the statutory and regulatory 

definition of that term. 

 Congress defined that term under the TILA as follows: 

The term 'credit sale' refers to any sale in which the 

seller is a creditor. The term includes any contract 

in the form of a bailment or lease if the bailee or 

lessee contracts to pay as compensation for use a sum 

substantially equivalent to or in excess of the 

aggregate value of the property and services involved 

and it is agreed that the bailee or lessee will become, 

or for no other or a nominal consideration has the 

option to become, the owner of the property upon full 

compliance with his obligations under the contract. 

15 U.S.C. § 1602(g). 

 As the district court recognized, courts interpreting this 

statutory language following the enactment of the TILA split on 

whether contracts like the one at issue here were covered by the 
6 

act. See op. at 5 (citing cases). However, the Federal Reserve 

Board, the agency entrusted by Congress to promulgate 

interpretive regulations enforcing the TILA, consistently opined 

in a series of nonbinding advisory letters issued between 1973 

and 1977 that rent-to-own contracts are beyond the purview of the 

act. See Remco Enters., Inc. v. Houston, 677 P.2d 567, 570-71 

(Kan. Ct. App. 1984) (citing "[u]nofficial staff opinions"). Its 

informal opinions were quite significant, see James P. Nehf, 

Effective Regulation of Rent-to-own Contracts, 52 Ohio St. L.J. 

751, 758, 764 (1991) (hereinafter, Nehf, Rent-to-own Contracts), 

because rent-to-own contracts were common when Congress enacted 

the TILA in 1968, and because the Board's interpretive Regulation 

Z essentially tracked the statutory language. 

 In 1981, the Board formalized its informal opinion and 

amended Regulation Z in one important way. The regulation reads 

Credit sale means a sale in which the seller is a 

creditor. The term includes a bailment or lease 

(unless terminable without penalty at any time by the 

consumer) under which the consumer: 

 (i) Agrees to pay as compensation for use a sum 

substantially equivalent to, or in excess of, the total 

value of the property and services involved; and 

 (ii) Will become (or has the option to become), for no 

additional consideration or for nominal consideration, the 

owner of the property upon compliance with the agreement. 

Regulation Z, 12 C.F.R. § 226.2(a)(16). The language added by 

the amendment is "(unless terminable without penalty at any time 

by the consumer)." The amended regulation became effective in 

April 1982. 
7 

 In the first instance, Ortiz urges us to disregard the 

Board's interpretation, as codified in amended Regulation Z. This 

we will not do. Congress explicitly empowered the Federal 

Reserve Board to promulgate regulations to flesh out the details 

of the TILA: 

The [Federal Reserve] Board shall prescribe regulations 

to carry out the purposes of this subchapter. . . . 

[T]hese regulations may contain such classifications, 

differentiations, or other provisions, and may provide 

for such adjustments and exceptions for any class of 

transactions, as in the judgment of the Board are 

necessary or proper to effectuate the purposes of this 

subchapter, to prevent circumvention thereof, or to 

facilitate compliance therewith. 

15 U.S.C. § 1604(a).2

 In the presence of such an explicit delegation of 

congressional authority, we must defer quite broadly to the 

Board's interstitial regulations. Specifically, in Chevron, 

U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 

837, 104 S.Ct. 2778 (1984), the Supreme Court directed courts to 

exercise the highest level of deference to regulatory 

authorizations such as section 1604(a). Id. at 843-44, 104 S.Ct. 

at 2782. As we have explained, "when Congress expressly 

delegates authority to an administrative body to fill in the gaps 

of a given statute, the regulations 'are given controlling weight 

unless they arbitrary, capricious, or manifestly contrary to the 

statute,'" Sacred Heart Medical Center v. Sullivan, 958 F.2d 537, 

 

2

Congress amended this section in 1994 to exclude certain 

mortgage transactions from the Board's regulatory powers; the 

amendment is not relevant to this case. 
8 

544 (3d Cir. 1992) (citing Chevron, 467 U.S. at 844, 104 S.Ct. at 

2782). 

 In both of its major TILA cases, the Supreme Court has 

emphasized the broad powers that Congress delegated to the Board 

to fill gaps in the statute. When it upheld the Board's power to 

extend the TILA's coverage to any seller that accepted payments 

in four or more installments, the Court reviewed the legislative 

history of the TILA and stated: 

The hearings held by Congress reflect the difficulty of 

the task it sought to accomplish. Whatever legislation 

was passed had to deal not only with the myriad forms 

in which credit transactions then occurred, but also 

with those which would be devised in the future. To 

accomplish its desired objective, Congress determined 

to lay the structure of the Act broadly and to entrust 

its construction to an agency with the necessary 

experience and resources to monitor its operation. 

Section 105 [15 U.S.C. § 1604] delegated to the Federal 

Reserve Board broad authority to promulgate regulations 

necessary to render the Act effective. 

Mourning v. Family Publications Serv., Inc. 411 U.S. 356, 365, 93 

S.Ct. 1652, 1658 (1973). In rejecting the seller's argument that 

the Board had exceeded its regulatory powers, the Court found 

that "the language of the [regulatory] enabling provision 

precludes us from accepting so narrow an interpretation of the 

Board's power." Id. at 371, 93 S.Ct. 1661. 

 In a subsequent decision addressing disclosure requirements 

governing acceleration clauses in debt contracts, the Court again 

placed great emphasis on Congress' broad grant of regulatory 

powers: "Because of their complexity and variety, . . . credit 

transactions defy exhaustive regulation by a single statute. 

Congress therefore delegated expansive authority to the Federal 
9 

Reserve Board to elaborate and expand the legal framework 

governing commerce in credit." Ford Motor Credit Co. v. 

Milhollin, 444 U.S. 555, 559-60, 100 S.Ct. 790, 794 (1980) 

(citing 15 U.S.C. § 1604 and Mourning). The Court declared that 

"deference is especially appropriate in the process of 

interpreting the Truth in Lending Act and Regulation Z" and held 

that "[u]nless demonstrably irrational, Federal Reserve Board 

staff opinions construing the Act or Regulation should be 

dispositive." Id. at 565, 100 S.Ct. at 797. 

 Ortiz thus faces an extremely high burden -- she must 

convince us that the Board's regulation is demonstrably 

irrational. Ortiz has failed to overcome this burden. In the 

first place, the landscape that existed when the Board amended 

Regulation Z was far from clear. Indeed, the statutory language 

does not lend itself easily to a single unchallengeable 

interpretation. For example, although the statute refers to 

"credit sales," it provides that certain leases are covered. And 

although it covers leases that are "contracts to pay as 

compensation for use a sum substantially equivalent to or in 

excess of the . . . value of the property," it is unclear whether 

the language refers to the lessee's rights or obligations. After 

all, a lessee may have a right to exercise an option to become an 

owner of the property, but may be obliged only to make rental 

payments for the time periods he or she actually uses the 

property. It is clear, then, that there was a gap in the 

statute. 
10 

 Thus, it is hardly surprising that courts interpreting the 

TILA prior to the 1981 amendment of Regulation Z reached 

conflicting conclusions with respect to RTO agreements. In 

Waldron v. Best T.V. and Stereo Rentals, Inc., 485 F. Supp. 718 

(D. Md. 1979), the court declined to say that a lease contract 

terminable at will fell definitively outside the TILA's purview. 

Rather, "[d]espite the presence of the termination clauses, the 

agreement was essentially a contract for the credit sale of the 

TV set to plaintiff for a sum substantially greater than the cash 

sale value of the set." Id. at 719. In reaching its decision, 

the court relied heavily on the fact that "the contract was to 

remain in force unless . . . the plaintiff exercised her right to 

terminate the contract and forfeit the equities she had built up 

in the set by her weekly payments . . . ." Id. In Smith v. ABC 

Rental Sys. of New Orleans, Inc., 491 F. Supp. 127 (E.D. La. 

1978), aff'd, 618 F.2d 397 (6th Cir. 1980), however, the court, 

interpreting a nearly identical contract, reached precisely the 

opposite conclusion: Because the agreement was terminable at any 

time, "plaintiff was never obligated for any sum other than the 

$16.00 weekly rental for each week he chose to keep the set." Id.

at 129. Therefore, "[t]he week-to-week rental is not a sum 

substantially equivalent to the set's value, and the transaction 

in question is . . . not a credit sale." Id.

 It was against this backdrop that the Board amended 

Regulation Z to provide that rental agreements "terminable 

without penalty at any time by the consumer" are not covered by 
11 

the TILA. As Nehf has explained the situation before and after 

the amendment: 

[a]mid all th[is] uncertainty, it was undeniably true 

that the unpredictability of the situation was 

inadequate for all concerned. Thus, the Board . . . 

revised Regulation Z . . . to settle the issue. The 

revised (and current) definition of 'credit sale' . . . 

should have resolved the debate in favor of the RTO 

industry because the heart of an RTO contract is its 

provision for the consumer to return the property at 

any time without further payment. Several courts have 

since held that the regulation does indeed end the 

discussion. 

Nehf, Rent-to-Own Contracts, 52 Ohio St. L. J. at 766. While 

Ortiz argues that the Board's interpretation is presumptively 

unreasonable because it does not have the effect of protecting 

consumers, we find no authority for the proposition that the 

Board must decide every conceivable question, even detailed and 

technical ones, in favor of expanding the scope of the TILA. 

Rather, the Board has broad discretion to draw the lines 

necessary to effectuate the act. We therefore cannot say that 

the Board's adoption of one of two plausible interpretations of 

the gap in the statute is demonstrably irrational. 

 Ortiz relies on Clark v. Rent-It Corp., 685 F.2d 245 (8th 

Cir. 1982), cert. denied, 459 U.S. 1225, 103 S.Ct. 1232 (1983), 

but that case does not help her. Although it adopted a reading 

of the statute consistent with her contentions, the contract 

addressed in that case arose prior to the effective date of the 

1981 amendment of Regulation Z. Thus, the court did not discuss 

either the amended regulation or the deference due the Board. As 

such, Clark is simply one of a number of pre-amendment Regulation 
12 

Z cases that reached varying results without the benefit of the 

Board's formal view. 

 In view of our conclusion that we should defer to the 

regulation, we next determine whether the contract at issue is 

"terminable without penalty at any time by the consumer." 

In this regard, the facts as Ortiz presents them show that if she 

wanted to terminate the lease, she only had to return the 

furniture. At that point she would not forfeit a deposit to 

which she had title or claim, be obliged to pay any additional 

charges, or be subject to legal action for a recovery of the 

remaining rental payments. Accordingly, she could terminate the 

lease without penalty. 

 Ortiz seeks to avoid this conclusion by contending that with 

each payment on the lease she developed an equity in the 

furniture which she would lose on its return which loss she 

characterizes as a penalty.3 She finds support for this 

proposition in an unpublished opinion of the New Jersey Superior 

Court, Green v. Continental Rentals, No. L 3182-90 (N.J. Super. 

Ct. Law Div. Mar. 25, 1994). 

 To adopt Ortiz' argument would be to allow the exception to 

swallow the rule. If payments made pursuant to a rent-to-own 

contract are considered "forfeited equity" should the lessee 

 

3

Actually, she contends that the penalties include "a forfeiture 

of money paid, a forfeiture of equity accrued in the goods, a 

forfeiture of the goods, and forfeiture of [her] option to 

purchase the goods." Brief at 20. The first three so-called 

penalties are the same thing and we do not regard the last as a 

penalty any more than surrendering possession of the furniture is 

a penalty. 
13 

return the furniture, virtually every rent-to-own contract would 

fall within the purview of the statute. That, in turn, would 

render the distinctions drawn by the Board's Regulation Z 

essentially meaningless. As Nehf points out, after examining the 

history behind Regulation Z in detail: 

If a broader notion of penalty were accepted, the only 

lease-purchase agreements that would not be deemed 

credit sales would be those in which equity is never 

created, i.e., leases in which the remaining price to 

be paid for obtaining ownership is at all times equal 

to or greater than the fair market value of the goods. 

As a practical matter, such an interpretation would 

require that, to be exempt from TILA, a terminable 

lease could not transfer ownership unless the dealer 

charged a final payment approximating the product's 

then-fair market value. This view is difficult to 

justify under the statute because it would render part 

of the definition of credit sale superfluous. Both the 

statute and Regulation Z provide that a lease is a 

credit sale only if the lessee becomes the owner of the 

leased goods for nominal consideration at the end of 

the agreement. An option purchase price approximating 

fair market value is generally considered to be more 

than nominal, and all leases, even long-term obligation 

leases, containing such options are generally held not 

to be credit sales. Thus, an RTO contract with a fair 

market value purchase option would be exempt from TILA 

in any event, irrespective of its terminability, and 

TILA's 'contracts to pay' clause, as well as the 

Board's 'penalty' language in revised Regulation Z, 

would add little, if anything, to the definition. 

Nehf, Rent-to-Own-Contracts, 52 Ohio St. L.J. at 768 (footnotes 

omitted). 

 Additionally, as one court has explained, "[a]lthough the 

renters may have an economic incentive to make the number of 

rental payments necessary to acquire ownership of the goods, the 

agreements provide them the right to terminate at any time." In 

re Hanley, 135 B.R. 311, 313 n.1 (C.D. Ill. 1990). Thus, "[t]he 

contractual right to terminate precludes a finding that rent-to-
14 

own agreements are truly sales with a forfeiture of the property 

upon termination of payments." Id. We find the Hanley court's 

analysis persuasive. Regulation Z can have meaning only if the 

term "penalty" is construed to refer to additional charges 

imposed upon termination of the agreement. In this case there 

are no additional charges. Therefore, in spite of our sympathy 

for Ortiz's predicament, we hold that the equity Ortiz 

"forfeited" by failing to continue making rental payments is not 

a penalty for TILA purposes.4

III. CONCLUSION 

 For the foregoing reasons we will affirm the judgment 

entered January 11, 1995. 

 

 

4

Ortiz also argues that her contract is not terminable at any 

time as it could be terminated only "at the end of a rental 

cycle." Brief at 8. The contract, however, does provide that 

the lessee may at her option "at any time terminate this 

agreement, without further obligation or penalty," by returning 

the property and making all payments due under the lease to that 

point. Of course, inasmuch as rent is payable in advance, 

ordinarily a lessee desiring to terminate a lease would be wise 

to do so at the end of a rental cycle. Nevertheless, the lease 

is terminable at any time and the possibility that a lessee will 

not retain the use of the property for a period for which she had 

paid rent is no more a penalty than her surrender of her "equity" 

in the furniture.