Trial Court: San Francisco County Superior Court Trial Judge: Hon. Curtis E. A. Karnow Super. Ct. No. CGC-07-460778)
The opinion of the court was delivered by: Lambden, J.
CERTIFIED FOR PUBLICATION
(San Francisco City and County
Defendant JTH Tax, Inc., doing business as Liberty Tax Service (Liberty), appeals from a judgment issued after a bench trial awarding plaintiff, the People, approximately $1.169 million in civil penalties, ordering Liberty to pay approximately $135,000 in restitution, and permanently enjoining Liberty in several ways for violating state and federal lending, unfair competition, consumer protection, and false advertising laws. Liberty argues that the trial court made errors of law and/or fact in determining that a "handling fee" charged for certain bank products was an undisclosed finance charge under the federal Truth In Lending Act (TILA); Liberty's cross-collection practices regarding past loan debts owed by customers were improper; Liberty was vicariously liable for its franchisees' advertising; certain civil penalties for advertising violations should be paid by Liberty; and a permanent injunction regarding certain of Liberty's practices going forward was necessary and appropriate.
We disagree with each of Liberty's arguments. We find the trial court's analyses and findings to be thoughtful and well-calibrated regarding the circumstances before it, and affirm the judgment.
Liberty, a Delaware corporation with headquarters in Virginia Beach, Virginia, provides certain tax preparation and related loan services throughout the United States. As of the time of trial, Liberty had more than 2,000 franchised and company-owned stores throughout the United States, including 195 franchised stores in California (along with two company-owned stores in 2005 and 2006), all of which do business as "Liberty Tax Service." Liberty offered tax preparation services, e-filing, "refund anticipation loans" (RAL) and "electronic refund checks" (ERC).
In February 2007, the Attorney General filed a complaint against Liberty in the Superior Court for the City and County of San Francisco alleging that Liberty had violated California's unfair competition law (UCL), Business and Professions Code section 17200 et seq., and California's false advertising law (FAL), Business and Professions Code section 17500 et seq.*fn1 The lawsuit claimed there were misleading or deceptive statements in print and television advertising by Liberty and its franchisees regarding Liberty's RAL's and ERC's and inadequate disclosures to customers in Liberty's RAL and ERC applications regarding debt collection, certain costs and interest on the extension of credit, the time it takes to receive money under refund options offered, and other matters. The remedies the People sought included injunctive relief, civil penalties, and an order of restitution.
The Trial Court's Rulings
After a nine-day bench trial, the trial court issued a 49-page statement of decision. Many of the facts found by the court are not disputed. Liberty's RAL's were short-term loans provided by lender banks with which Liberty contracted. It was primarily Liberty, rather than the lender banks, that advertised and promoted the RAL's, offered them to customers, provided customers with multi-page loan applications, filled out the applications, and obtained the customer's signatures. Liberty also delivered the RAL loan applications to the lender bank and distributed the loan proceeds to most of its customers.
If approved, an RAL was usually disbursed by the lender bank in one or two days, secured by a customer's anticipated tax refund and issued by a third-party bank. The loan amount was based on the anticipated refund minus all transaction-related charges and fees, including a finance charge and tax preparation fees, as well as a "handling fee" charged for the lender bank's establishment of a temporary, special purpose account into which the customer's tax refund was deposited directly by the Internal Revenue Service (IRS). The customer could not redirect a refund once the IRS was given notice of this special purpose account. The bank repaid its loan out of any tax refund subsequently deposited into the account by the IRS. The customer was responsible for repaying the full amount of the loan, regardless of the size of the actual tax refund deposited into the account.
An ERC application also authorized the lender bank to set up a temporary, special purpose account to receive the customer's tax refund directly from the IRS. When the IRS deposited the tax refund into the account, the bank deducted the tax return preparation fees, the handling fee, and any other applicable charges, and paid any remainder to the customer.
Liberty benefitted substantially from its sales of RAL's and ERC's. In 2007, it earned more than $11.6 million in revenue from their sales, 17.5 percent of its total revenues nationwide. RAL's and ERC's accounted for 22 percent of Liberty's California revenues in 2007, up from 8.28 percent in 2005. From 2002 to 2005, Liberty received 65 percent of the revenues on RAL's and ERC's issued to Liberty customers by First Bank of Delaware (FBOD). From 2006 to 2008, it received a flat amount for each RAL and ERC from Santa Barbara Bank & Trust (SBBT), then the exclusive supplier of these products in California.
Liberty also benefitted from sales of RAL's and ERC's because these products made its tax preparation services more affordable. Liberty had a high percentage of lower-income customers and many of its customers could not afford to pay for tax preparation out of pocket. As Liberty's sale documents indicate, the key selling point for RAL's and ERC's was that the customer did not pay any costs up front. Liberty's chief financial officer testified, "Well, if we didn't offer bank products, customers--a lot of customers wouldn't come in our doors."
Liberty's loan programs were an important focus of its marketing efforts. As we will discuss, its advertisements and those of its franchisees featured promises of speedy cash in order to attract customers.
The court found against Liberty in three relevant areas. First, it concluded that the handling fee charged to ERC customers, typically $24 to $30.95 depending on the year, was an undisclosed finance charge in violation of the TILA (15 U.S.C. § 1601 et seq.), because an ERC was a form of credit that allowed customers to delay payment for tax preparation services. The court also found Liberty's failure to disclose this finance charge violated California's UCL and FAL. It ordered Liberty to pay $240,500 in civil penalties, disclose any fee incident to the extension of credit as a finance charge, and state the cost of such fees as an annual percentage rate.
Second, the trial court concluded that Liberty's employment of "cross-collection" practices in the course of selling RAL's and ERC's to collect applicants' tax refund loan debts from prior transactions, including non-Liberty transactions, were deceptive, unfair, and violated both federal and state laws. The court imposed $118,000 in civil penalties, ordered Liberty to pay $135,886 in restitution to affected customers, and permanently enjoined certain aspects of Liberty's practices.
Third, the trial court found Liberty liable for certain print and television advertisements that were "likely to deceive" within the meaning of California's UCL and FAL. These included advertisements created or approved by Liberty and those placed by California franchisees, the latter because, the court found, the franchisees acted as Liberty's agents in doing so. The trial court ordered Liberty to pay civil penalties of $753,199 for advertisements it created or approved and an additional $50,000 for advertisements by its franchisees.
The trial court also permanently enjoined Liberty from "disseminating or causing to be disseminated any [a]dvertisement that directly or indirectly represents [an RAL] as a client's actual refund," and from failing, in any advertisement that mentions refund loans, to state "conspicuously" that the product is a loan, as well as the name of, and fee or interest that will be charged by, the lending institution. Under the injunction, Liberty is required to monitor its employees and franchisees to ensure they refrain from engaging in false advertising, to warn, then fine, and then terminate those who commit violations, and to promptly notify the Attorney General's office of violations. The court maintained jurisdiction over the case and indicated that the parties could apply to it at any time for "such further orders and directions as may be necessary or appropriate for the construction or carrying out" of the court's judgment, "for modification or termination of any injunctive provision," and "for punishment of any violation" of the judgment.
Liberty filed a timely notice of appeal.
We have also reviewed and considered several additional filings in this appeal. We have reviewed and considered the amicus curiae brief filed by the International Franchise Association in support of Liberty, the amicus curiae brief filed by the National Consumer Law Center (NCLC) and National Association of Consumer Advocates (NACA) in support of the People, and the parties' filings in response to these briefs.
We have taken under submission Liberty's motion for judicial notice, filed on August 9, 2010. We hereby grant this motion pursuant to Evidence Code section 452, subdivision (c).
We have also taken under submission two motions to strike by the People. We discuss our rulings regarding the first, a motion to strike portions of Liberty's reply brief, in the discussion, post. Regarding the People's motion to strike portions of Liberty's response to the amicus curiae brief filed by the NCLC and NACA, the motion is denied. However, we conclude the arguments by Liberty that the People seek to strike are unpersuasive for the reasons stated in the People's motion, including because they are raised for the first time in response to the amicus curiae brief, and/or because they are not particularly relevant in light of the rulings we make herein.
Finally, we have reviewed and considered the case law and arguments referred to in letters submitted to us by the parties.
Liberty argues the trial court erred in ruling that Liberty's ERC handling fee was an undisclosed finance charge in violation of the TILA, that its cross-collection practices violated federal and state law, and that it was vicariously liable under agency law for its franchisees' deceptive advertising. Liberty also challenges the court's method of calculating certain of the civil penalties the court imposed for Liberty's advertising violations under the UCL and FAL. Finally, Liberty argues the trial court abused its discretion in ordering certain permanent injunctive relief. We now review each of these arguments.
Under the TILA and the related regulations, a finance charge is "the cost of consumer credit as a dollar amount. It 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. It does not include any charge of a type payable in a comparable cash transaction." (12 C.F.R. § 226.4(a); accord, 15 U.S.C. § 1605(a).) Liberty argues the trial court erred by concluding the ERC handling fee was a finance charge subject to the TILA because its customers pay it to a bank, not Liberty, for setting up a temporary refund account, and also pay the same fee in comparable cash transactions. We conclude the court did not err.
The court concluded the ERC handling fee was a finance charge because a Liberty customer must pay it "in order to defer payment for tax preparation fees" via purchase of an ERC, citing Berryhill v. Rich Plan of Pensacola (5th Cir. 1978) 578 F.2d 1092, 1099 (Berryhill). The court also found the handling fee was shared between Liberty and the relevant bank.
Liberty argued the handling fee was not a finance charge for three reasons, each of which the trial court rejected. First, Liberty relied on the fact that the fee was charged through the lender bank, not Liberty. The court concluded the details of how the charge was imposed were irrelevant, as was held in Yazzie v. Ray Vicker's Special Cars, Inc. (D.N.M. 1998) 12 F.Supp.2d 1230, 1232.
Second, Liberty argued the fee was charged in comparable cash transactions and, therefore, was not a finance charge. The court found only four out of 60,000 California customers who purchased ERC's between 2002 and 2007 paid up front for tax services. Relying on Carney v. Worthmore Furniture, Inc. (4th Cir. 1977) 561 F.2d 1100 (Carney), the court concluded these were " 'insignificant exceptions' to what is, for all practical purposes, a credit sale business" and, therefore, Liberty could not rely on the "comparable cash transaction" defense.*fn2
Finally, Liberty argued the fee was not a finance charge because it was not "interest." The court concluded this was irrelevant.
1. Payment to the Bank for Setting Up a Special Account
Liberty first argues the trial court erred as a matter of law because the fee was paid to a bank for the costs of opening a temporary account and, therefore, was not a finance charge at all under the TILA, citing Hahn v. Hank's Ambulance Service, Inc. (11th Cir. 1986) 787 F.2d 543 (Hahn).
Liberty presents this issue as a question of statutory interpretation based on undisputed facts, which we review de novo. (Bruns v. E-Commerce Exchange, Inc. (2011) 51 Cal.4th 717, 724 ["Statutory interpretation is a question of law that we review de novo"].) The Hahn court held an ambulance company's five-dollar charge to customers who did not pay for services when rendered was "a small flat charge for the bookkeeping cost of processing delayed payment in no way geared to the amount of the bill," and, therefore, "simply does not implicate [the TILA]." (Hahn, supra, 787 F.2d. at p. 544.) Liberty argues its fee and the fee reviewed in Hahn are similar because both involve the administrative cost of processing a transaction.
Liberty's argument is unpersuasive because the five-dollar charge reviewed in Hahn did not grant a customer the right to defer payment of a debt. (Hahn, supra, 787 F.2d at p. 544.) To the contrary, it was assessed "in light of the customer's failure to pay the company at the time the service is performed, in accordance with customary policy," which the court found was more in the nature of a late payment that was exempt from the TILA. (Hahn, at p. 544.) In the present case, the handling fee was a condition to customers receiving Liberty's tax services on credit. Liberty does not establish why the fee's application to administrative aspects related to the extension of this credit matters, and we are not aware of any reason why it should.
Liberty also argues the fee was not a finance charge because it did not vary based on when Liberty*fn3 received payment for tax preparation services. It cites no legal authority for this proposition, however, and nothing in the TILA's definition of a finance charge provides support for this position. (12 C.F.R. § 226.4(a).) Therefore, this argument is unpersuasive as well.
In short, Liberty does not establish that the trial court erred in concluding that the ERC handling fee was a finance charge under the TILA.
2. Liberty's "Comparable Cash Transactions" Argument
Liberty next argues that, even if the ERC handling fee qualified as a finance charge under the TILA, it is also payable in a comparable cash transaction and, therefore, exempt from TILA regulation. (15 U.S.C. § 1605(a); 12 C.F.R. § 226.4(a).) The People argue the court correctly rejected this argument pursuant to Carney, supra, 561 F.2d 1100 because virtually all of Liberty's ERC business was credit sales. We agree with the People.
As Liberty points out, the purpose of the TILA "is to enable consumers to decide whether or from whom to obtain credit, and a charge that does not affect the cost . . . of credit relative . . . to cash is irrelevant to that purpose." (Hoffman v. Grossinger Motor Corp. (7th Cir. 2000) 218 F.3d 680, 681.) Thus, courts have repeatedly found credit fees are not finance charges when the same charge is applied in comparable cash transactions, as in the cases cited by Liberty. (See Basile v. H & R Block, Inc. (E.D. Pa. 1995) 897 F.Supp. 194, 198; Alston v. Crown Auto. Inc. (4th Cir. 2000) 224 F.3d 332, 334; Hodges v. Koons Buick Pontiac GMC, Inc. (E.D. Va. 2001) 180 F.Supp.2d 786, 793; White v. Diamond Motors, Inc. (M.D. La. 1997) 962 F.Supp. 867, 871.) However, none of these cases is persuasive in light of Carney, supra, 561 F.2d 1100 and Berryhill, supra, 578 F.2d 1092, because these two cases discuss circumstances that are most analogous to those in the present case.
In Carney, Worthmore sold Carney a food freezer in a consumer credit transaction. (Carney, supra, 561 F.2d at p. 1102.) As part of the transaction, Carney was required to purchase a freezer service policy costing $50, which was added to the sale price of the freezer and included in the amount financed, but not disclosed as part of the finance charge disclosed by Worthmore pursuant to the TILA. (Carney, at p. 1102.) The policy's cost was a fixed sum based on the type of appliance and not on the length of the credit repayment period. (Ibid.) At least 98 percent of Worthmore's appliance business involved credit sales subject to the TILA, but Worthmore made cash sales of major appliances in which buyers were also required to purchase the freezer service policy. (Carney, at p. 1102.)
The appellate court affirmed the district court's conclusion that the cost of the freezer service policy should have been disclosed as part of the finance charge Worthmore disclosed pursuant to the TILA. The court rejected Worthmore's argument that the service policy was not "an incident to the extension of credit" as meant in title 15 United States Code section 1605 because identical charges were levied in each cash transaction. (Carney, supra, 561 F.2d at. pp. 1102-1103.) The court found the alleged cash transactions were "insignificant exceptions to what is apparently a credit sales business" and, therefore, "the naked claim that the service policy charge is imposed on cash customers is insufficient to acquit it as not incident to the extension of credit." (Id. at p. 1103.) The court concluded the freezer service policy charge "was inextricably intertwined with Worthmore's interest as a creditor" and, therefore, was a finance charge under the TILA. (Carney, at p. 1103.)
Similarly, in Berryhill, Rich Plan sold frozen food in quantity to home consumers either on credit or for cash, but an "overwhelming proportion" of its sales was on credit. (Berryhill, supra, 578 F.2d at pp. 1094-1095.) To purchase food for six months on credit under a food plan contract, Rich Plan required the Berryhills to also enter into a food and freezer service agreement that entitled them to various benefits, including an additional three-year insurance plan for loss of food due to the freezer's mechanical breakdown or power failure, up to $300. (Id. at p. 1095.) The service agreement, which was the most profitable element of the transaction for Worthmore, was not disclosed as part of the finance charge on the food plan contract. (Id. at p. 1096.)
The district court found the failure to disclose the service plan as a finance charge violated the TILA. (Berryhill, supra, 578 F.2d at p. 1096.) On appeal, Rich Plan argued the service agreement was of a nature and sufficiently independent from the food plan contract so as not to be a charge imposed as " 'an incident to or as a condition for the extension of credit' " and, therefore, was not a part of the finance charge under the TILA. The appellate court disagreed because purchase of the service contract was a condition, and incidental to the extension of credit under the food plan contract. (Berryhill, at pp. 1097-1098.)
Rich Plan also argued that the service plan was not a finance charge because it was also required of cash customers. The Berryhill court rejected this argument based on Carney, supra, 561 F.2d at 1103, because the number of cash sales was "insignificant" and evidence indicated virtually all sales were made on credit. (Berryhill, supra, 578 F.2d at p. 1099.) Rich Plan attempted to distinguish its transactions from those considered in Carney because its service agreement's payments and benefits extended for a period longer than the payments for the initial food order. The court failed to see the significance because "[t]he important question is whether the seller refuses to extend credit until the customer agrees to another charge. The details of the manner in which the charge is imposed are irrelevant." (Berryhill, at p. 1099.)
Similarly to Carney and Berryhill, there was substantial evidence to support the trial court's conclusion that the ERC handling fee was not charged in "comparable cash transactions" so as to remove it from regulation as a "finance charge" under the TILA. Liberty engaged in 60,125 ERC transactions with customers from 2002 to 2007. Only four customers paid in cash during this time. The trial court correctly concluded that these four cash transactions were "insignificant exceptions" to what was, for all practical purposes "a credit sale business." (See Carney, 561 F.2d at p. 1103.)
Liberty also asks that we consider the evidence submitted below that there were 2,699 additional California customers during this same time period who "paid" their tax preparation fees via a Liberty coupon that enabled them to obtain these services at no cost, other than the ERC handling fee.*fn4 Liberty argues these customers did not seek an extension of credit from Liberty because they paid nothing for their tax preparation. This too is unpersuasive because these were not "comparable cash transactions"; indeed, they were not cash transactions at all. If anything, they resemble a credit transaction because the customer obtained tax preparation services without making any payment, provided that they paid the handling fee.
In any event, these coupon customers amounted to approximately four percent of Liberty's 60,125 ERC customers. Given this very small percentage and that these coupon transactions did not involve an exchange of cash, the trial court could reasonably conclude these coupon transactions were at most incidental exceptions to what amounted to a credit sales business.
In its reply brief, Liberty argues for the first time that it also engaged in comparable cash transactions with 46,222 RAL customers because, upon the bank's approval of these customers' RAL applications, Liberty was paid for tax preparation fees and the bank deducted its handling fee from the RAL given to the customer. Therefore, Liberty contends, a very sizeable amount of its business involved cash transactions.
In their motion, the People, relying on Westcon Construction Corp. v. County of Sacramento (2007) 152 Cal.App.4th 183, 194-195, argue that we should strike or disregard these portions of Liberty's reply brief as waived because Liberty's RAL contention is based on a new and unfounded factual theory that was not presented in the trial court below.
We agree with the People that we should disregard Liberty's tardy RAL argument for two reasons. First, Liberty's argument that the RAL's are "comparable cash transactions" is made for the first time in its reply brief. "Points raised in the reply brief for the first time will not be considered, unless good reason is shown for failure to present them before. To withhold a point until the closing brief deprives the respondent of the opportunity to answer it or requires the effort and delay of an additional brief by permission." (Campos v. Anderson (1997) 57 Cal.App.4th 784, 794, fn. 3; Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764 [" '[p]oints raised for the first time in a reply brief will ordinarily not be considered' "].) Liberty contends that it sufficiently preserves its argument in its opening brief by twice referring to its franchisees receiving payment for their services from the banks "up front," in one instance specifically referring to RAL's. This is hardly sufficient. Liberty did not argue RAL's were comparable cash transactions until its reply brief. Therefore, we disregard its RAL argument.
Furthermore, we agree with the People that Liberty has waived this appellate argument by failing to raise it first in the trial court below. (Westcon Construction Corp. v. County of Sacramento, supra, 152 Cal.App.4th at pp. 194-195.) Contrary to Liberty's assertion that it is merely presenting a new legal theory based on undisputed facts, there is evidence in the record indicating that Liberty was not paid its fee by the banks in RAL transactions until after tax preparation services were rendered, suggesting these transactions were more in the nature of credit sales. In other words, the argument rests on disputed facts.
In short, we conclude Liberty's "comparable cash transactions" argument lacks merit.
II. Liberty's Cross-Collection Practices
Liberty next argues the trial court erred in concluding Liberty's cross-collection practices violated the state and federal Fair Debt Collection Practices Act (FDCPA) and California's Consumer Legal Remedies Act (CLRA), requiring reversal on this issue. The People disagree, and also argue that we should affirm based on the trial court's determinations that Liberty violated the "fraudulent" and "unfair" prongs of the UCL and, for certain of its cross-collection practices, the prohibition against deceptive advertising in the FAL. The People argue that Liberty does not challenge these determinations ...