July 14, 1999

Mr. Wayne Thor-burn Administrator Texas Real Estate Commission P.O. Box 12188 Austin, Texas 7871 I-2188 Opinion No. JC-0078

Re: Whether chapter 37 of the Business and Commerce Code applies to unsolicited telephone calls by licensed residential service companies to consumers for the purpose of selling residential service contracts and related questions (RQ-1166)

Dear Mr. Thorbum:

You ask whether chapter 37 of the Business and Commerce Code, regulating telephone solicitations, applies to solicitations by residential service companies selling residential service contracts to consumers. You also ask whether chapter 39 of the Business and Commerce Code, relating to consumers’ rights to cancel certain consumer transactions, applies to such solicitations byreal estate brokers and real estate salespersons licensed by the Texas Real Estate Commission (the “Commission”). We conclude that chapter 37 applies to unsolicited telephone calls made by a residential service company for the purpose of selling residential service contracts. However, an unsolicited telephone call to sell anew contract to aconsumer who held orholds such acontract is excepted from that chapter’s requirements dealing with when and how consumer telephone calls must be made. We also conclude that chapter 39 applies to residential service contract solicitations by alicensed real estate broker or salesperson at ahome being listed or shown to aprospective buyer if(1) the broker or salesperson is acting asthe agent for the residential service company, and (2) the purchaser agrees to purchase the services atthe home or aplace other than the merchant’s place of business. However, such a transaction may be excepted from chapter 39 ifthe parties engaged in prior negotiations at a fixed business establishment.
Residential service companies are licensed and regulated by the Commission under the Residential Service Company Act (the “Act”), TEX.REV.Crv. STAT.ANN.art. 6573b (Vernon Supp. 1999). Under the Act, any person “who issues and performs, or arranges to perform, services pursuant to aresidential service contract” isaresidential service company. Id. 54(b). A “residential service contract” isacontract “whereby, for afee, aperson undertakes, for aspecified period oftime, to maintain, repair, or replace all or any part of the structural components, the appliances, or the electrical, plumbing, heating, cooling, or air-conditioning systems of a residential property.” Id. 54(a). The residential service company agrees toprovide the services contracted forwhen requested by the holder of the contract. Id. @15(a)(3)(B)(v), (vi).Mr. Wayne Thorburn - Page 2 (X-0078)

You tell us that residential service contracts are generally offered by real estate brokers and salespersons to sellers or buyers in connection with the sale of ahome, but they are also marketed by service companies directly to consumers by telephone and mail. We understand that the seller of the home typically purchases the contract, usually for aterm of one year, for the benefit of the buyer and pays the fee from the proceeds of the sale. Thus, the initial contract is not sold by telephone or mail solicitation by the service company but by the real estate broker or salesperson involved inthe sale ofthe home. After the initial period ofcoverage, however, the home buyer may

“renew” the contract. The renewal or sale of a new contract, you tell us, is done by mail and telephone solicitation by the service companies. We understand your request is prompted by an increase in the direct sale of contracts by service companies to consumers who had previously purchased such contracts.

Your first two questions relate to chapter 37 ofthe Business and Commerce Code. You first ask ifchapter 37 ofthe Business and Commerce Code applies to an unsolicited telephone call made by an employee or agent of alicensed residential service company to aconsumer for the purpose of selling aresidential service contract. Ifchapter 37 applies, you next ask, “what are the rights of a consumer and the obligations of a licensed residential service company respecting notice, cancellation, and refund of the fee paid for the residential service contract?’ See Letter from Mr. Wayne Thorbum, Administrator, Texas Real Estate Commission, to Honorable Dan Morales, Attorney General (July 22,1998) (on tile with Opinion Committee) [hereinafter Request Letter of 7/22/98]. Based on the information provided, we understand the solicitation that you first ask about isby the residential service company that had previously sold the residential service contract to the seller of ahome for the benefit ofthe home buyer; the consumer being solicited is the home buyer and holder ofthe residential service contract. Additionally, we assume the rights and obligations ofthe soliciting residential service company and the consumer that you ask about in your second question are only those under chapter 37. Because the two questions require us to review chapter 37 in its entirety, we address them together. Chapter 37 regulates telephone solicitations. The chapter applies to aperson who makes an unsolicited telephone call to aresidential telephone number to solicit the sale ofconsumer goods or services, extend credit for aconsumer good or service, obtain information that will or may be used to directly solicit asale ofgoods or services, orto extend credit for the sale. See TEX.BUS.& COM. CODE ANN. $5 37.01(4) (defining “consumer telephone call”), (5) (defining “telephone solicitor”) (Vernon Supp. 1999). Section 37.02(a) provides that the telephone solicitor may not make such a call unless the solicitor immediately identities himself orherself, the business on whose behalf the call isbeing made, and the purpose ofthe call, id. 437.02(a)(l); the call ismade after 9:00 a.m. but before 9:00 p.m. on aweekday or Saturday and after 12:00 noon but before 9:00 p.m. on aSunday; id. 5 37.02(a)(2); and, if an automated dial-announcing device is used, where possible, the call is disconnected thirty seconds after it is terminated by either the consumer or the telephone solicitor, id. 437.02(a)(3).’

‘House Bill 450, enacted by the 76th Legislature and effective September 1, 1999, requires such calls to be (continued...)Mr. Wayne Thorburn - Page 3 (X-0078)

Certain telephone solicitations areexempted from thetbreerequirements ofsection 37.02(a). Under section 37.02(b), aconsumer telephone call is not subject to those requirements ifthe call is made:
(1) in response to the express request of the consumer;

(2) primarily in connection with an existing debt or contract for which payment orperformance has not been completed atthe time of the call; or (3) to aconsumer with whom the telephone solicitor has aprior
or existing business relationship.
Id. 537.02(b). Finally, section 37.03 prohibits atelephone solicitor from charging to consumer credit card accounts unless one ofthe following requirements are met: the seller (1) provides for cancellation of services upon notice from the consumer not later than the seventh day after the date the consumer

“receives the goods or services” and afull refund not later than the thirtieth day after the consumer cancels the contract for services not performed or a pro rata refund for any services not yet performed; (2)provides to andreceives from the consumer awritten contract describing the services, the total price, the name, address, and business phone ofthe company and any terms or conditions affecting the sale; or (3) the seller is exempt horn federal taxes under section 501(c)(3) of the Internal Revenue Code. Id. $37.03 (Vernon Supp. 1999). Although chapter 37has been ineffect since 1992; we have found no Texas cases construing its provisions. However, based on the plain language ofthe statute, we conclude in answer to your first question that chapter 37 applies to unsolicited telephone calls by aresidential service company for the purpose of selling anew contract. See id. 5s 37.01(4) (defining “consumer telephone call”), (5) (defining “telephone solicitor”); TEX. REV. CIV. STAT. ANN.art. 6573b, §4(a) (Vernon Supp. 1999) (definition of “residential service contract”). But the section 37.02(a) provisions dealing with when and how the calls must be made do not apply to such calls to aconsumer who held or holds
aresidential service contract issued by that company. Section 37.02(b)(3) specifically provides that subsection (a) does not apply to aconsumer telephone call ifmade “to aconsumer with whom the telephone solicitor has aprior or existing business relationship.” (Emphasis added.) Whether the telephone calls soliciting the sale of anew contract are made after orbefore the initial contract term expires, the calls fall within the exception of subsection (b)(3).

‘(...continued) disconnected five seconds after the call is terminated. See Act of May 26, 1999,76th Leg., R.S., H.B. 450, 5 1(to be codified at TEX. BUS. & COM. CODEANN. 5 37.02(a)(3)).

%e Act of May 26,1991,72d Leg., RX, ch. 494.5 1,199l Tex. Gen. Laws 1736.Mr. Wayne Thorbum - Page 4 W-0078)

Because section 37.02(b)(3) exempts qualifying calls only from the requirements ofsection 37.02(a), however, the section 37.03 restrictions on charges toconsumer credit card accounts would still apply. Consequently, if a residential service contract is sold by a telephone solicitation, the residential service company may not make any charges to the consumer’s credit account unless the company complies with those restrictions. Accordingly, in answer to your second question, the rights of a consumer and the obligations of alicensed residential service company with respect to notice, cancellation, and refund are as set out in section 37.03 if an amount is to be charged to the
consumer’s credit account.

We turn now to your next three questions, which relate to chapter 39 of the Business and Commerce Code. You first ask if chapter 39 applies to “solicitations of the sale of a residential service contract by alicensed real estate broker or salesperson atalocation other than the licensee’s office, such as at a home being listed or shown to a prospective buyer?’ See Request Letter of 7/22/98. Baaed on the information provided, we understand you to ask about the sale of acontract providing initial residential service coverage when ahome is purchased. Chapter 39 gives consumers the opportunity tocancel certain transactions. Aconsumer may cancel a transaction subject to the statute before midnight of the third business day after the
consumer signs an agreement or offers to purchase real or personal property, services, money, or credit for personal or household purposes. See TEX. Bus. & COM. CODEANN. $3 39.001(l) (definition of “consumer”), 39.003 (right to cancel) (Vernon Supp. 1999). Itrequires amerchant to provide a consumer a receipt or copy of a contract at the time it is executed and to include in it certain information and forms of notices of cancellation. Id. 5 39.004(a) - (c). Additionally, the statute sets out the rights, duties and obligations of a merchant and a consumer with respect to compensation for services and retention and return ofproperty, id. $5 39.005, .006, ,007, andacts that constitute violations ofthe Act and the penalties for such violations. Id. 939.008. Among other penalties, a sale or contract made in violation ofthe statute is void. Zd:539.008(b). Chapter 39 does not limit its application to door-to-door salesmen or contracts made at the
consumer’s home although originally enacted forthat purpose. See Act ofMay 27,1995,74th Leg., R.S, ch. 926, $ 1, 1995 Tex. Gen. Laws 4649 (redefining “home solicitation transaction” to include transaction in which merchant engages in personal solicitation of consumer at place other than merchant’s place ofbusiness and not only residence); McDaniel Y.Pettigrew, 536 S.W.2d 611,614 (Tex. Civ. App.-Dallas 1976, writ ref dn.r.e.) (discussing original intent). It generally applies to any consumer transaction consummated at aplace other than the seller’s place ofbusiness. Section 39.002 sets out the transactions to which chapter 39 applies and provides as follows:

(a) This chapter applies only to aconsumer transaction in which the merchant or the merchant’s agent engages in a personal solicitation of a sale to the consumer at a place other than the merchant’s place ofbusiness, and the consumer’s agreement orofferMr. Wayne Thorbum - Page 5 (X-0078)

to purchase is given to the merchant or the merchant’s agent at a place other than the merchant’s place ofbusiness: (1) forthe purchase ofgoods or services forconsideration that exceeds $25 payable in installments or in cash; or (2) for the purchase of real property for consideration that exceeds $100 payable in installments or in cash. (b) Notwithstanding Subsection (a), this chapter does not apply to: (1) apurchase of farm equipment; (2) an insurance sale regulated by the Texas Department of Insurance; (3) a sale of goods or services made: (A) under a preexisting revolving charge account or retail charge agreement; or

(B) after negotiations between the parties at abusiness establishment atafixed location where goods or services are offered
or exhibited for sale; or (4) a sale ofreal property iE (A) the purchaser is represented by alicensed attorney;

(B) the transaction isnegotiated by alicensed real estate broker; or (C) the transaction isnegotiated ataplace other than the
consumer’s residence by the person who owns the property.

TEX. Bus. & COM. CODE ANN. 5 39.002 (Vernon Supp. 1999). “Consumer transaction” for the purposes of section 39.002(a) is “a transaction in which one or more of the parties is aconsumer.” Id. 5 39.001(2). “Consumer,” in turn, is “an individual who seeks or acquires real or personal property, services, money, or credit forpersonal, family, orhousehold purposes[,]” and “merchant” is “a party to a consumer transaction other than a consumer.” Id. 5 39.001(l), (3). Lastly,Mr. Wayne Thorburn - Page 6 UC-0078)

“merchant’s place ofbusiness,” inrelevant part, isthe “merchant’s main orpermanent branch office
or local address.” Id. 539.001(4).
Sale of aresidential service contract on its face partially satisfies the consumer transaction definition ofsection 39.002(a) inthat aconsumer in such transaction seeks or acquires services and goods for household purposes. See TEX.REV. CIV. STAT.ANN. art. 6573b, 54(a) (Vernon Supp. 1999) (definition of “residential service contract”). To constitute aconsumer transaction to which chapter 37 applies, however, it must also involve (1) a solicitation by a “merchant or merchant’s agent” and (2) an agreement to purchase ataplace other than the merchant’s place ofbusiness. We address each of these more complex and factually based requirements in turn.

Itisnot clear that the real estate broker or salesperson is a“merchant ormerchant’s agent.” The few Texas cases that have considered the statute, have not construed this term. SeeAmerican Quality Roofing v.Ipock, Inc., 730 S.W.2d 470 (Tex. App.-Fort Worth 1987, no writ) (roof repair contract made at consumer’s home subject to statute); Langston v.Brewer, 649 S.W.2d 827 (Tex. App.-Fort Worth 1983, no writ) (remodeling contract not subject to statute because parties had engaged inprior transaction, consumer contacted merchant, andparties had negotiated contract away from consumer’s residence before its execution); Homquest v.Priesmeyer, 574 S.W.2d 173 (Tex. Civ. App.-Houston [lst Dist.] 1978, no writ) (architect contract not subject to statute because
consumer sought architect’s services and engaged in negotiations away from consumer’s home before contract was prepared); McDaniel v. Pettigrew, 536 S.W.2d 611 (Tex. Civ. App.-Dallas 1976, writ refd n.r.e.) (statute does not apply to real estate transaction contract negotiated by licensed real estate broker; additionally, consumers not builders engaged in solicitation). Based on the statutory language, the broker or salesperson is not the “merchant” as defined in the statute, because the party other than the consumer to the residential service transaction is the residential service company. But ifthe broker or salesperson solicits the sale ofthe contract, he or she is acting
on behalf ofthe residential service company and likely would be considered the merchant’s agent. See McDaniel, 536 S.W.2d at 615 (provisions of statute must be liberally construed to effect its object); IOXFORDENGLISHDICTIONARY 248 (2d ed. 1989) (defining “agent,” as relevant here, as “one who acts for another”); BLACK'S LAW DICTIONARY 59 (5th ed. 1979) (defining “agent” generally as one who represents or acts for another under contract or agency relation). Whether a person acts in any particular case as an agent for another, however, is a factual determination. Additionally, to constitute aconsumer transaction described by subsection (a), the seller or the prospective home buyer must also agree to purchase the residential services at the home being shown orataplace other than the merchant’s place ofbusiness. Thus, ifthe home seller orthe home buyer agrees to purchase the residential services atthe home or at aplace other than the merchant’s place of business, the residential service sale solicitation is a consumer transaction described in section 39.002(a). The location where the agreement is given or the contract executed would necessarily vary with each case and its determination would therefore require a case-by-case analysis.Mr. Wayne Thorbum - Page 7 (X-0078)

In sum, a residential service sale solicitation by alicensed real estate broker or salesperson atahome being listed or shown to aprospective buyer isaconsumer transaction described in section 39.002(a) to which chapter 39 applies ifthe following criteria are met: (1)the broker or salesperson acts asthe agent ofthe residential service company, and (2)the home seller orthe home buyer agrees to purchase the services at the home being shown or at aplace other than the merchant’s place of business.

But aresidential service contract sale that is aconsumer transaction under section 39.002(a) to which chapter 39 otherwise applies, might be, in certain circumstances, excluded from the application of chapter 39 under section 39.002(b).

A residential service contract sale is plainly not the purchase of farm equipment or made under apreexisting revolving or retail charge account. Nor is such acontract the purchase ofreal property. Rather, the contract is for the sale of residential repair, maintenance, and replacement services that may result in improvements torealty orininstallation ofitems that may become affixed to the realty, but itisnot for the sale ofthe realty itself. See TEX. REV. CIV. STAT. ANN. art. 6573b, 54(a) (Vernon Supp. 1999). Although we found no cases in Texas orin otherjurisdictions that deal with residential service or similar contracts, we note that home remodeling orrepair contracts, which also result in improvements to realty orin installation ofitems that become affixed to ahome, have generally not been excepted under the realty exception to home solicitation statutes. SeeAmerican QualityRoojing,Inc., 730 S.W,2d470(roofrepaircontract subjectto statute); Lungston, S.W.2d 827 (remodeling of garage as beauty shop excepted from statute because of prior relationship between parties); R.Bauer & Sons Roofing &Siding, Inc. v.Kinder-man, 613 N.E.2d 1083 (Ohio Ct. App. 1992) (contract for installation of roof, windows and door not covered by realty exception); Crystal v. West & Callahan, Inc., 614 A.2d 560 (Md. Ct. App. 1992) (contract to improve porch not covered by real estate exception even though it resulted in improvements to realty). Additionally, purchase of a residential service contract is optional and not a condition of the sale of the realty. TEX. REV. CIV. STAT. ANN. art. 6573b, 5 1l(e) (Vernon Supp. 1999). Therefore, purchase of the service contract is not such an integral part ofthe real property sale so as to constitute asale ofreal property.
Aresidential service contract isalso not aninsurance sale regulated by the Texas Department of Insurance. The sale in question involves a sale of residential repair services and residential appliances and fixtures regulated by the Commission rather than an insurance sale regulated by the Texas Department ofInsurance. See id. 52(a) (provisions ofinsurance law not applicable to service company licensed under Residential Service Company Act; provisions of Act inapplicable to insurance company licensed and regulated by insurance laws ofstate), (b)(Act inapplicable to ‘home warranty insurance’ as defined by TEX. INS. CODE ANN.art. 5.53-A, 52 (Vernon 1981)).
While not a sale of farm equipment, real property, or insurance, or a sale made under a preexisting revolving or retail charge account, aresidential service contract sale may, nonetheless, fall under section 39,002(b)(3)(B). Subsection (b)(3)(B) excludes the sale of services “made after negotiations between the parties at a business establishment at a fixed location where goods orMr. Wayne Thorburn - Page 8 (JC-0078)

services are offered or exhibited for sale.” Again, whether the parties have engaged in such negotiations before the sale ofthe residential services would vary in each case and its determination would therefore require acase-by-case analysis.
Thus, asolicitation for aresidential service contract sale by alicensed real estate broker or salesperson otherwise subject to chapter 39, might, nevertheless, be excluded from the application ofchapter 39ifthe parties engaged inprior negotiations atafixed business establishment where the goods and services are offered for sale.

If chapter 39 applies, you next ask whether alicensed residential company must include in the residential service contract the statutory notice and cancellation form required under section 39.004. Any document pertaining to aconsumer transaction provided to aconsumer must contain
a statement, substantially in the form provided by the statute, that the buyer has the right to cancel the transaction atany time before midnight ofthe third business day after the date ofthe transaction. TEX.Bus. & COM.CODE ANN. § 39.004(b)(4) (Vemon Supp. 1999). Additionally, the document must include aduplicate notice-of-cancellation form setting forth the buyer’s right to cancel within the three-day period; the buyer’s right to have any property traded in or payment made and any negotiable instrument executed by the buyer returned within ten days ofreceipt ofthe cancellation notice; the buyer’s obligation to return any goods delivered under the contract; the buyer’s right to retain the goods under certain circumstances; and directions regarding what the buyer must do with the form provided to cancel the transaction. Id. 539.004(c). Generally, if atransaction is aconsumer transaction governed by chapter 39, the statutory notice and cancellation provisions of section 39.004 do apply. A document need not, however, include the forms and notices required under that section in certain circumstances. First, the “use ofthe forms and notices ofthe right to cancel prescribed by the Federal Trade Commission’s traderegulation rule providing a cooling-off period for door-to-door sales constitutes compliance with th[e] section.” Id. $39.004(d). Second, atransaction in which the contract price does not exceed $200 is deemed to comply with the notice requirements if:

(1) the consumer may at any time cancel the order, refuse to accept delivery ofthe goods without incurring any obligation to pay forthem, orreturn the goods tothe merchant and receive afull refund ofthe amount the consumer has paid; and (2) the consumer’s right to cancel the order, refuse delivery, or return the goods without obligation or charge at any time is clearly and conspicuously set forth on the face or reverse side of the sales ticket.
Id. 539.004(e).Mr. Wayne Thorbum - Page 9 (X-0078)

Assuming the transaction you ask about is a consumer transaction to which chapter 39 applies, the residential service contract must include the notice and cancellation form required by section 39.004 unless the following requirements are met: (1) the contract includes forms and notices required by the Federal Trade Commission’s trade-regulation rule with respect to door-todoor sales, or (2) the contract price does not exceed $200 and the consumer may at any time cancel the contract and receive a full refund, which cancellation right is “clearly and conspicuously” set forth inthe contract. See 16C.F.R. 53429.0,429.1-.3 (1998) (Rule Concerning Cooling-OffPeriod for Sales Made at Homes or at Certain Other Locations). Finally, ifchapter 39 applies, you ask “would alicensed residential service company violate the Code if it provided a consumer with a cancellation period greater than three days or deleted language relating to the sale of goods 7” See Request Letter of 7122198.
Section 39.003 gives the consumer the right to cancel “not later than midnight of the third business day after the date the consumer signs an agreement or offer to purchase.” TEX.Bus. & COM. CODEANN. 9 39.003 (Vernon Supp. 1999) (emphasis added). Section 39.008(a)(l)(D) provides that amerchant may not fail to include in the form ofcancellation prescribed by the statute

“a date not earlier than the third business day after the date of the transaction by which the
consumer must give notice of cancellation.” Id. 539.008(a)(l)(D) (emphasis added).

No Texas case has considered whether providing acancellation period greater than three days violates the above statutory provisions. However, based on the purpose ofthe statute and its literal language, we believe that the provision of a cancellation period greater than three days does not violate chapter 39. The statute’s purpose istoprotect consumers by giving them atleast athree-day period inwhich to cancel acontract executed pursuant to apersonal solicitation ataplace other than the seller’s place of business. Thus, the consumer is entitled to at least three days. Although the
consumer isnot entitled to more than athree-day cancellation period, clearly aseller may choose to provide more. Providing the consumer additional protection does not, in our opinion, contravene the statute’s minimum protective measures.
You also ask whether aresidential service company would violate chapter 39 if it deleted language with respect tothe sale ofgoods in acontract. As discussed above, section 39.004 requires that a contract subject to chapter 39 contain a notice of cancellation in the form provided in the statute. Subsection (c)(3) of section 39.004 sets out the language to be included in the form, including two paragraphs dealing with the consumer’s rights and obligations with respect to return of any goods delivered under acontract upon cancellation ofthe contract. Again, no Texas case has considered whether deleting aportion ofthe section 39.004(c)(3) language violates chapter 39. However, we note that there is no statutory provision for deleting or modifying the required language. The notice required here is different from that for the deadline to cancel. The form in the latter instance gives the discretion to include a date that is later than the required minimum three days. See id. 4 39.008(a)(l)(D). But there is no similar discretion to modify the section 39,004(c)(3) language. Accordingly, assuming aresidential service contract isMr. WayneThorburn - Page 10 (JC-0078)

subject to chapter 39, we conclude the statutorily required language with respect to goods must be included in the notice of cancellation in the contract. Therefore, deleting such language would violate the statute.

SUMMARY Chapter 37 of the Business and Commerce Code applies to unsolicited telephone calls made by aresidential service company for the purpose of selling residential service contracts. Accordingly, the rights of a consumer and the obligations of a licensed residential service company with respect to notice, cancellation, and refund are as set out in chapter 37 if an amount is to be charged to the
consumer’s credit account. However, an unsolicited telephone call to sell anew contract to aconsumer who held orholds such acontract is excepted from chapter 37’srequirements dealing with when and how consumer telephone calls must be made. Chapter 39 of the Business and Commerce Code applies to residential service contract solicitations by a licensed real estate broker or salesperson at a home being listed or shown if (1) the broker or salesperson is acting asthe agent for the residential service company, and (2)the purchaser agrees to purchase the services atthe home or a place other than the merchant’s place of business. However, such atransaction may be excepted from chapter 39 ifthe parties engaged in prior negotiations at a fixed business establishment.

Ifatransaction issubject tochapter 39,the residential service contract must include the notice and cancellation form asrequired by section 39.004. A residential service contract subject to chapter 39 that provides acancellation period greater than three days would not violate chapter 39. A residential service contract subject to chapter 39that does not include the statutorily required language with respect to the return of goods sold would violate chapter 39.

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-. c-ii- JOHN CORNYN Attorney General of TexasMr. Wayne Thorbum - Page 11

ANDY TAYLOR First Assistant Attorney General

CLARK KENT ERVIN Deputy Attorney General -General Counsel

ELIZABETH ROBINSON Chair, Opinion Committee Prepared by Sheela Rai Assistant Attorney General (~~-0078)