Title Applebaum v. Nissan Motor Acceptance Corporation
Date 2000
By Alito
Subject Misc
Contents
Page 1
LEXSEE 226 F3D 214
LEONARD APPLEBAUM, Appellant v. NISSAN MOTOR ACCEPTANCE CORPORATION; REITENBAUGH ENTERPRISES, INC.
No. 99-1373
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
226 F.3d 214; 2000 U.S. App. LEXIS 22230
January 11, 2000, Argued
August 30, 2000, Filed
SUBSEQUENT HISTORY: **1 Certiorari Denied
June 25, 2001, Reported at: 2001 U.S. LEXIS 4716. PRIOR HISTORY: ON APPEAL FROM THE ORDER OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. Dist. Court No. 97-cv--07256. District Court Judge: The Honorable Norma L. Shapiro.
DISPOSITION: Reversed and remanded for the entry of judgment in favor of Applebaum and for the award of appropriate relief.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant lessee chal- lenged judgment of United States District Court for Eastern District of Pennsylvania, which granted appellee lessors summary judgment on claims that early termi- nation provisions in vehicle leases violated disclosure requirements of Consumer Leasing Act, 15 U.S.C.S. §
1667-1667e, and Regulation M, 12 C.F.R. § 213 et seq.
(1995).
OVERVIEW: The trial court granted appellee lessors summary judgment in appellant lessee's action under the Consumer Leasing Act (CLA), 15 U.S.C.S. § 1667-
1667e, on the grounds that the vehicle lease provisions were not required to explain the constant yield method or to disclose the residual value of the vehicles appellant leased. The court concluded that the CLA and Regulation M, 12 C.F.R. § 213 et seq. (1995), required disclosure in a form that was reasonably understandable in light of the inherent difficulty or complexity of the method described; they did not necessarily demand disclosure in a form that the average consumer could understand. Disclosing that the constant yield method was used, without attempting to explain how the method was used, satisfied the reasonably understandable requirement because it was an established
method of discounting to present value. Appellees' failure to disclose the residual value that had been assigned to the leased vehicles did not meet the reasonably under- standable requirement because without that value no one could have calculated an early termination penalty under the formula set out in the leases. Thus, the judgment was reversed.
OUTCOME: Judgment reversed because appellees' fail- ure to disclose residual values that had been assigned to leased vehicles did not meet reasonably understandable requirement of Consumer Leasing Act.
CORE TERMS: lease, disclosure, termination, regula- tion, residual value, lessor, understandable, conspicuous, constant, lessee, closed-end, present value, average con- sumer, disclose, calculating, pay-off, terminate, visible, discounting, calculation, termination provision, formula, consumer, discounted, assigned, termination clause, lan- guage used, lease term, variable, estimate
LexisNexis(R) Headnotes
Transportation Law > Commercial Vehicles > Licensing
& Registration
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN1 A closed-end lease is a lease in which the lessee is not responsible for the difference if the actual value of the vehicle at the scheduled end of the lease is less than the residual value, but the lessee may be responsible for excess wear and excess mileage charges and for other lease requirements.
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN2 The Federal Reserve Board's interpretation of the Truth in Lending Act, 15 U.S.C.S. § 1607 et seq., and Regulation M, 12 C.F.R. § 213 et seq. (1995), should be accepted so long as they are not irrational.
226 F.3d 214, *; 2000 U.S. App. LEXIS 22230, **1
Page 2
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN3 See 15 U.S.C.S. § 1667a (11).
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN4 The 1995 version of Regulation M, 12 C.F.R. § 213 et seq. (1995), requires that lessors' disclosures be made clearly, conspicuously, in meaningful sequence, and in ac- cordance with the further requirements of Regulation M.
12 C.F.R. § 213.4(a)(1) (1995). The official staff commen- tary for this provision explains that clearly, conspicuously, and in meaningful sequence requires that disclosures be in a reasonably understandable form. This commentary adds that while the regulation requires no particular math- ematical progression or format, the disclosures must be presented in a way that does not obscure the relationship of the terms to each other.
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN5 See 12 C.F.R. § 213.4(g)(12) (1995).
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN6 In the context of a challenge to an automobile lease's early termination clause, 12 C.F.R. § 213.4(g)(12)
(1995) requires that only the method, and not the way the method works, needs to be disclosed to the consumer. Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN7 When the amount of an early termination charge is not disclosed to the consumer in a lease, the critical ques- tion is whether the method of calculating that charge is re- vealed in the way that the law demands. Under 15 U.S.C.S.
§ 1667a of the Consumer Leasing Act, 15 U.S.C.S. §
1667-1667e, this disclosure has to be effected in a clear and conspicuous manner.
Governments > Legislation > Interpretation
HN8 When the statutory language is ambiguous, it is appropriate to consider an agency's interpretation of the provision.
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN9 Under 15 U.S.C.S. § 1667a(11) of the Consumer Leasing Act, 15 U.S.C.S. § 1667-1667e, the United States District Court for the Eastern District of Pennsylvania holds that disclosure of the method of calculating an early termination penalty in a consumer lease must not only be legible; it must also be reasonably understandable. Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN10 To say that the language used in a disclosure un-
der 15 U.S.C.S. § 1667a(11) must be cast in reasonably understandable form, is not to say that the meaning of this language must be within the understanding of the aver- age consumer, as the United States Court of Appeals for the Second Circuit has suggested. Here, as in other areas of the law, what is reasonable depends on the surround- ing circumstances. Thus, the Consumer Leasing Act, 15
U.S.C.S. §1667-1667e, and Regulation M, 12 C.F.R. §
213 et seq. (1995), require disclosure in a form that is reasonably understandable in light of the inherent diffi- culty or complexity of the method described; they do not necessarily demand disclosure in a form that the aver- age consumer can understand. The United States District Court for the Eastern District of Pennsylvania recognizes that some methods used in calculating early termination penalties involve math that is well beyond the understand- ing of the average consumer.
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN11 The language of an early termination clause in a consumer lease must not obscure the relationship of the terms to each other. 12 C.F.R. pt. 213, para. 4(a)(1)
(1995).
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN12 In the context of a challenge to an early termina- tion clause in a consumer lease, the term constant yield method is the method of earning rent charges in which the rent charge earned each month is proportional to the remaining lease balance. Under this method, the lessor or assignee earns rent charges at an equal rate over the term, similar to most home first mortgages.
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN13 The term residual value is a term with an estab- lished meaning in the leasing field. In the context of a challenge to an early termination clause in a consumer lease for a vehicle, the term has been defined as the end- of-term value of the vehicle established at the beginning of the lease and used in calculating your base monthly payment. Similarly, the term is now defined by 12 C.F.R.
§ 213.2(n) (2000) as the value of the leased property at the end of the lease term, as estimated or assigned at consum- mation by the lessor, used in calculating the base periodic payment. Thus, residual value is not whatever remains in vehicle when the lease terminates; rather, residual value is a figure assigned by the lessor at the beginning of the lease.
Banking Law > Bank Activities > Consumer Protection
> Consumer Leasing
HN14 An early termination clause in a consumer lease that fails to reveal an otherwise unknowable variable used
226 F.3d 214, *; 2000 U.S. App. LEXIS 22230, **1
Page 3
in determining an early termination penalty cannot be re- garded as reasonably understandable in any meaningful sense of the term.
COUNSEL: Cary L. Flitter (Argued), LUNDY, FLITTER, BELDECOS & BERGER, P.C., Narberth, PA, Attorney for Appellant.
Jill E. Jachera (Argued), Christine M. Kovan, MORGAN, LEWIS & BOCKIUS, LLP, Philadelphia, PA, Attorney for Appellee Nissan Motor Acceptance Corporation.
Gerard Bruderle, Timothy A. Kulp (Argued), MARGOLIS EDELSTEIN, Philadelphia, PA, Attorney for Appellee Reitenbaugh Enterprises, Inc.
JUDGES: Before: BECKER, Chief Judge, and ALITO
and BARRY, Circuit Judges. OPINIONBY: ALITO OPINION: *216
OPINION OF THE COURT ALITO, Circuit Judge: Leonard Applebaum leased two automobiles from Nissan Motor Acceptance Corporation ("NMAC") through a dealership owned and operated by Reitenbaugh Enterprises ("Reitenbaugh"). Applebaum sued NMAC and Reitenbaugh, contending that the early termina- tion provisions in his leases violated the disclosure re- quirements of the Consumer Leasing Act ("CLA") and Regulation **2 M, which implements the Act. The District Court entered summary judgment in favor of the defendants, and Applebaum took this appeal. We hold that the early termination provisions in the NMAC leases do not comply with the requirements of the CLA; we
therefore reverse. I.
On November 2, 1994, Applebaum signed a 36- month closed-end lease n1 for a 1995 Nissan Maxima. The lease was between Applebaum and Reitenbaugh, but Reitenbaugh promptly assigned the lease to NMAC. Applebaum terminated his 1994 lease approximately 10 months before the end of the 36-month term in order to trade in his 1995 Maxima for a 1997 model. As is com- mon with automobile leases, NMAC's standard closed- end motor vehicle lease agreement imposed a penalty for early termination. The lease provided:
First, all monthly lease payments, which un- der the terms of my lease, are not yet due and the residual value of the vehicle are dis- counted to present value by the Constant
Yield Method at the rate implicit in the lease
(the "Adjusted Lease Balance"). This amount is then reduced by the Realized Value (and insurance) proceeds which you receive for the vehicle. The balance due you is the Early Termination Charge which **3 I will pay to you immediately. If there is an excess, however, you will not refund it to me.
1994 Lease, App. at R3; 1997 Lease, App. at R4-
5. In the course of negotiating the *217 1997 lease, Reitenbaugh quoted Applebaum a pay-off figure of $18,111. Reitenbaugh explained that after a trade-in allowance of $12,500 ("the Realized Value") he owed NMAC $5,611 as an early termination charge. n2
n1 HN1 A "closed-end" lease is " a lease in which the lessee is not responsible for the difference if the actual value of the vehicle at the scheduled end of the lease is less than the residual value," but the lessee "may be responsible for excess wear and excess mileage charges and for other lease requirements." Federal Reserve Board Leasing Language (last updated March 29, 2000).
<http://www.federalreserve.gov/pubs/leasing/glossary htm>.
n2 The record shows that the residual value of Applebaum's 1995 Nissan was $15,018.30 and that the rate implicit in the lease was 8.910068. See App. at R-55.
According **4 to Applebaum, he was aware that there would be an early termination penalty but was sur- prised that it was so large. When he asked Reitenbaugh to explain how it had arrived at the pay-off figure, the dealer responded that it had not performed the calcula- tion and had no idea how the figure had been derived. Reitenbaugh's practice was to call NMAC for the pay- off figure, and the dealer suggested that Applebaum call NMAC and ask how the figure was calculated. Heeding Reitenbaugh's advice, Applebaum telephoned NMAC in early January 1997. Applebaum contends that his con- versation with NMAC was equally unhelpful. Without a satisfactory explanation of how NMAC had calculated the early termination charge, Applebaum nonetheless entered into the 1997 lease. The $5,611 charge was capitalized into the lease payments under the 1997 lease.
Applebaum continued to seek an explanation of his early termination liability. Having failed to make head- way on his own, Applebaum retained counsel. By letter to NMAC in July 1997, Applebaum's counsel requested
226 F.3d 214, *217; 2000 U.S. App. LEXIS 22230, **4
Page 4
a written explanation of how NMAC had arrived at the
$18,111 pay-off figure. In reply, NMAC's legal depart- ment stated that it could not reconstruct the **5 pay- off calculation because the computer system that performs the calculation does not retain pay-off information once an account has been terminated. Applebaum's counsel pressed for an identification of the residual value of the vehicle and how that value had been discounted to present value at the rate implicit in the lease using the constant yield method. See App. at R-9. NMAC responded that the rate was proprietary and that its prior disclosures were ad- equate to satisfy Regulation M. See App. at R-10.
Applebaum then sued NMAC and Reitenbaugh, alleg- ing a violation of the Consumer Leasing Act, 15 U.S.C.
§§ 1667-1667e. Applebaum contended that the early ter- mination provision of the leases violated the CLA be- cause the formula for computing the early termination charge was indecipherable and because the provision did not define some of the terms it used. The District Court granted summary judgment for the defendants, holding that the CLA and Regulation M require an early termina- tion clause to be "visible to the lessee and in a readable format" but that the clause "need not be simple enough to do the mathematical calculation of the exact amount." Dist. Ct. Op. **6 at 8. The Court concluded that the lease provisions at issue here were not required to explain the constant yield method, a term that was "well known in the industry." Id. at 12. Likewise, the Court held that the lease provisions were not required to disclose the vehicles' residual value. This term, the court commented, "is not void of meaning to the average consumer; it means what- ever value remains in the vehicle when the lease termi- nates." Id. at 15. "The CLA and Regulation M," the Court added, "do not require further definition." Id. Applebaum then took this appeal.
II.
In 1976, in response to an emerging trend toward au- tomobile leasing, Congress passed the Consumer Leasing Act ("CLA"), 15 U.S.C. § 1667-1667e as Chapter 5 of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1607 et seq. The CLA was intended "to assure a meaningful disclosure of the terms of leases of personal property for personal, family, or household purposes so as to enable the lessee to compare more readily the various lease terms available to him, limit balloon payments *218 in consumer leasing, enable comparison of lease terms with credit terms where appropriate, **7 and to assure meaningful and accurate disclosures of lease terms in advertisements." 15 U.S.C.
§ 1601(b). The Senate Report accompanying the CLA stated that "the purpose of the legislation is to provide consumers with meaningful information about the com- ponent and aggregate costs of consumer leases, so that
they can make better informed choices between leases, and between leases and credit sales." See S. Rep. No. 94-
590 (1976), reprinted in 1976 U.S.C.C.A.N. 431, 432. The Federal Reserve Board has been given the author-
ity to issue rules implementing the CLA, see 15 U.S.C.
§ 1604, and the Board has exercised that authority by promulgating "Regulation M," 12 C.F.R. § 213 et seq.
(In this case, we consider the version of Regulation M in effect prior to the 1996 amendment now in force.) n3 The Board's staff has also issued official commentary regarding these provisions. In Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568, 63 L. Ed. 2d 22, 100 S. Ct. 790 (1980), HN2 the Supreme Court instructed that the Board's interpretation of the TILA and Regulation M should be accepted so long as they are "not irrational." n4
n3 In 1996, the Federal Reserve Board re- vised Regulation M and issued new commen- tary. Although these revisions became effective on October 31, 1996, compliance was optional until October 1, 1997. Applebaum does not contend that these new provisions apply in this case.
**8
n4 Ford Motor Credit Co. was decided before Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 81 L. Ed. 2d 694, 104
S. Ct. 2778 (1984), but we interpret Ford Motor Credit Co. to mean that the Board's interpretation of the TILA is governed by Chevron and that its interpretation of its own regulations is governed by Bowles v. Seminole Rock Co., 325 U.S. 410, 413-
14, 89 L. Ed. 1700, 65 S. Ct. 1215 (1945).
The CLA provides in pertinent part as follows:
HN3
Each lessor shall give a lessee prior to the consummation of the lease a dated written statement on which the lessor and lessee are identified setting out accurately and in a clear and conspicuous manner the following infor- mation with respect to that lease, as applica- ble:
* * *
(11) A statement of the conditions under which the lessee or lessor may terminate the lease prior to the end of the term and the amount or method of determining any penalty or other charge for delinquency, de- fault, late payments, or early termination.
226 F.3d 214, *218; 2000 U.S. App. LEXIS 22230, **8
Page 5
15 U.S.C. § 1667a **9 (11) (emphasis added).
HN4 The version of Regulation M in effect at the time in question required that lessors' disclosures "be made clearly, conspicuously, in meaningful sequence, and in accordance with the further requirements of this sec- tion." 12 C.F.R. § 213.4(a)(1) (1995). The Official Staff Commentary for this provision explained that "clearly, conspicuously, and in meaningful sequence" required
"that disclosures be in a reasonably understandable form."
12 C.F.R. Pt. 213, P 4(a)(1). This Commentary added that
"while the regulation requires no particular mathematical progression or format, the disclosures must be presented in a way that does not obscure the relationship of the terms to each other." Id.
With respect to provisions imposing an early termi- nation penalty, Regulation M mandated that the lessor provide:
HN5
A statement of the conditions under which the lessee or lessor may terminate the lease prior to the end of the lease term and the amount or method for determining the amount of any penalty or other charge for early termination.
12 C.F.R. § 213.4(g)(12) (1995) (emphasis added). n5
n5 We note that provisions of Regulation M that were added in 1996 and that are now in effect ad- dress the chief issues that are presented in this case. The new Staff Commentary specifically states that a lease need only name the method of discounting to present value that it uses and need not explain how that method works. See 12 C.F.R. Pt. 213, P
4(g) (2000).
In revising Regulation M, the Board specifically considered whether to require disclosure of the rate implicit in the lease but ultimately decided not to do so. See FRB Final Rule, 61 FR 52246, 52254-
56 (Oct. 7, 1996). However, the revised version of Regulation M requires disclosure of residual value in both open-and closed-end leases. See 12 C.F.R.
§ 213.4(f)(4) (2000).
**10 *219
III. A.
Applebaum argues that P 17 of the 1994 Lease and P 18 of the 1997 Lease (collectively "the Leases") vi- olate the CLA and Regulation M because their disclo-
sures regarding the early termination charges are not set out "in a clear and conspicuous manner." Applebaum contends that the early termination provision is "so in- decipherable that virtually no reader could comprehend it." Appellant's Br. at 21. Applebaum suggests that the Second Circuit's per curiam opinion in Lundquist v. Security Pacific Automotive Financial Services, 993 F.2d
11 (2d Cir. 1993), properly interpreted the meaning of the CLA's "clear and conspicuous manner" requirement. In Lundquist, the Court held that the early termination dis- closures of an automobile lease agreement violated the CLA because they were "confusing, unduly complicated, and unnecessarily convoluted" and "beyond the under- standing of the average consumer." Lundquist, 993 F.2d at 15.
Lundquist was sharply criticized by the Seventh
Circuit in Channell v. Citicorp Nat'l Servs., Inc., 89 F.3d
379, 383 (7th Cir. 1996). The Seventh Circuit confronted a challenge to a lessor's method of determining unearned
**11 interest in an early termination clause. The lessee asserted that a reference in the lease to the "Sum of the Digits" method was "incomprehensible to the aver- age consumer and therefore violated the requirement that disclosures be clear and conspicuous." Id. at 381. Noting that 12 C.F.R. § 213.4(g)(12) could be satisfied by dis- closing the "method of determining the amount of any penalty or other charge for early termination," the Court concluded that HN6 "only the method, and not the way the method works, needs to be disclosed." Id. at 382. The Court stated:
It is hard to read the statute and regulation any other way. "Clear and conspicuous man- ner"--the language of § 1667a -- means visi- ble, not simple. "Manner" refers to the mode of presentation, not the degree of compre- hension. The Act and Regulation M do not define "clear and conspicuous," but the words are staples of commercial law. The Uniform Commercial Code defines "conspicuous" as
"so written that a reasonable person against whom it is to operate ought to have no- ticed it." UCC § 1-201(10). A disclaimer of the warranty of merchantability is enforce- able if conspicuous, see UCC § 2-316(2), even **12 if the average consumer hasn't the vaguest idea what a "warranty of mer- chantability" entails. Regulation M calls for the use of 10-point type at a minimum. § 12
C.F.R. 213.4(a)(1).
Id.
Turning to Lundquist, the Court observed:
226 F.3d 214, *219; 2000 U.S. App. LEXIS 22230, **12
Page 6
We confess to substantial difficulty decipher- ing the opinion in Lundquist. . . . The court does not explain why the operation of a for- mula must be simple--for the Act requires a clear presentation but does not limit the number of variables the lessor may consider. The quoted words "confusing, unduly com- plicated, and unnecessarily convoluted" lack a source--they are not quoted from anything, and a search of a database containing all fed- eral opinions of the last 50 years did not turn up any other uses of that phrase. It does not appear anywhere *220 in the United States Code or the Code of Federal Regulations.
Id. at 383.
B.
Under 15 U.S.C. § 1667a(11), the leases at issue in this case were required to disclose either the "amount or method for determining" the early termination charge.
HN7 Since the amount was not disclosed, the critical question is whether the "method" was revealed in the way that the law **13 demands. Under 15 U.S.C. § 1667a, this disclosure had to be effected "in a clear and conspic- uous manner."
The term "conspicuous" is unambiguous. In ordinary usage, it means "obvious to the eye" or "plainly visi- ble." Webster's Third New International Dictionary 485
(1971). See also Channell, 89 F.3d at 381 (citing similar definition in UCC § 1-201(10)). Here, Applebaum does not contend that the disclosures in the early termination provision were not "conspicuous."
The term "clear," on the other hand, may be interpreted in several different ways. Among other things, it may mean: (1) "easily visible or distinguishable," (2) "with- out misconception, error, or vagueness," or (3) "easily un- derstood." Webster's Third New International Dictionary
419. In § 1667a, the term "clear" might refer to the phys- ical characteristics of the printing used in the lease, or it might refer to the characteristics of the language used in making the required disclosures. If the Channell opinion suggests that the first meaning is the only possible one, see 89 F.3d at 382 ("'Clear and conspicuous'--the lan- guage of § 1667a--means visible . . . ."), we respectfully
**14 disagree. HN8 Because the statutory language is ambiguous, it is appropriate to consider the Federal Reserve Board's interpretation of this provision.
The Board's Official Staff Commentary adopts an in- terpretation that refers to the characteristics of the lan- guage used in making the disclosures. This Commentary
states that disclosures must be made "in a reasonably un- derstandable form." 12 C.F.R. Pt. 213, P 4(a)(1) (1995).
"Understandable" means more than "legible"; many things are legible but not understandable. It is therefore apparent that the Official Staff Commentary interprets the term "clearly" to refer to meaning, not just appearance. We defer to this interpretation. HN9 We thus hold that disclosure of the method of calculating an early termi- nation penalty must not only be legible; it must also be
"reasonably understandable."
HN10 To say that the language used in a disclosure must be cast in "reasonably understandable form," how- ever, is not to say that the meaning of this language must be within "the understanding of the average consumer," as the Second Circuit has suggested. Lundquist, 993 F.2d at
15. Here, as in other areas of the law, what is reasonable depends on the surrounding **15 circumstances. Thus, the CLA and Regulation M require disclosure in a form that is "reasonably understandable" in light of the inherent difficulty or complexity of the method described; they do not necessarily demand disclosure in a form that the av- erage consumer can understand. We recognize that some methods used in calculating early termination penalties involve math that is well beyond the understanding of the average consumer. If 15 U.S.C. § 1667a and 12 C.F.R. §
213.4 (1995) meant that any method of determining an early termination penalty had to be capable of explana- tion in a way that the average consumer could understand, these provisions would in effect impose substantive re- strictions on the methods that a lessor could employ. It is plain, however, that these provisions were not intended to impose any such substantive restrictions. n6
n6 To clarify, we mean that disclosure must be cast in a form that is reasonably understandable in light of the difficulty of the matter being dis- closed. The benchmark is the nature of the matter discussed.
**16 *221
C.
With these standards in mind, we turn to the leases at issue here. As previously noted, they provide in pertinent part as follows:
First, all monthly lease payments, which un- der the terms of my lease, are not yet due and the residual value of the vehicle are dis- counted to present value by the Constant Yield Method at the rate implicit in the lease
(the "Adjusted Lease Balance"). This amount is then reduced by the Realized Value (and
226 F.3d 214, *221; 2000 U.S. App. LEXIS 22230, **16
Page 7
insurance) proceeds which you receive for the vehicle. The balance due you is the Early Termination Charge.
App. at R3, R4-5.
This language plainly satisfies one of the requirements set out in the Federal Reserve Board Staff Commentary, viz., HN11 this language "does not obscure the rela- tionship of the terms to each other." 12 C.F.R. Pt. 213, P 4(a)(1) (1995). On the contrary, the relationship of the terms is easy to grasp:
Early Termination Charge = Adjusted Lease
Balance - Realized Value.
Adjusted Lease Balance = (Residual Value + unpaid present value) discounted to present value at the Rate Implicit in the Lease using the Constant Yield Method.
If the terms "constant yield method," "rate implicit in the lease," **17 and "residual value," were "reason- ably understandable," the method used in calculating the early termination penalty would be as well. We therefore consider those specific terms.
IV.
Applebaum contends that the terms "constant yield method," "rate implicit in the lease," and "residual value" should have been explained in the leases. The version of Regulation M in effect at the time in question re- quired leases covered by the CLA to disclose numer- ous categories of specific information, see 12 C.F.R. §
213.4(g)(1)-(15) (1995), but Regulation M did not specif- ically require a definition or description of any of these terms.
Constant Yield Method
The "constant yield method" is a technical term with a specified meaning. A Federal Reserve Board webpage that explains terms related to vehicle leasing defines the constant yield method as follows:
HN12
The method of earning rent charges in which the rent charge earned each month is propor- tional to the remaining lease balance. Under this method, the lessor or assignee earns rent charges at an equal rate over the term, similar to most home first mortgages.
Federal Reserve Board, Leasing Language
(last updated March 29, 2000) <http: **18
//www.federalreserve.gov/pubs/leasing/glossary.htm>. Use of this method, however, is not easy. See, e.g.,
26 C.F.R. § 1.1272-1 (b) (setting out steps for using constant yield method for certain tax purposes). In all likelihood, the vast majority of lay persons could not discount to present value using the constant yield method even if a description were provided. "A beneficial set of disclosure rules gives the consumer information that can be put to use, while withholding technical information that distracts attention from the rest of the disclosures." Channel, 89 F.3d at 382.
Under these circumstances, we hold that simply dis- closing that the "constant yield method" was used, without attempting to explain how to use this method, satisfied the "reasonably understandable" requirement. Although the Official Staff Commentary to the current version of Regulation M does not change the law retroactively, we are persuaded by the staff 's determination that simply naming an established method of discounting to present value, without attempting to explain the method in the lease itself, is sufficient to make a lease reasonably under- standable for present purposes. This commentary **19 states:
For purposes of the early termination charge a lessor may use the name of a *222 gen- erally accepted method of computing the un- amortized cost portion (also known as the
"adjusted lease balance") of its early termi- nation charges. For example, a lessor may state that the "constant yield" method will be utilized in obtaining the adjusted lease bal- ance
12 C.F.R. Part 213, P 4(g) (2000). Rate Implicit in the Lease
Every discounting method must employ some dis- count rate, but early termination provisions rarely set forth such a rate. The presumption in these leases, ap- parently, is that whatever the named discounting method, it will be carried out at the rate implicit in the lease. We view the leases' reference to the rate implicit in the lease as surplusage, since NMAC would have been required to discount at the rate implicit in the lease even in the ab- sence of such a reference. We also note that the Board has declined to impose an obligation that lessors disclose the lease rate after giving the question considerable thought and attention. See FRB Final Rule, 61 FR 52246, 52254-
55.
Residual Value
Although the NMAC leases use the concept of "resid-
226 F.3d 214, *222; 2000 U.S. App. LEXIS 22230, **19
Page 8
ual value" **20 in calculating the early termination penalty, the leases do not define that term or specify the ve- hicles' residual value. What is more, neither Reitenbaugh nor NMAC provided this information to Applebaum or his attorney, despite their requests. n7
n7 We note that even had Reitenbaugh or NMAC provided Applebaum with the residual value upon his request, it would not have cured their disclosure violation. The duty to disclose un- der the CLA is breached, if at all, at the time of lease consummation. 15 U.S.C. § 1667a.
HN13
"Residual value," like the constant yield method, is a term with an established meaning in the leasingfield. The Federal Reserve Board's webpage defines the term as follows: "The end-of--term value of the vehicle established at the beginning of the lease and used in calculating your base monthly payment . . . ." Federal Reserve Board, Leasing Language (last updated March 29, 2000)
<http://www.federalreserve.gov/pubs/leasing/glossary.htm>. Similarly, the term is now defined by **21 12 C.F.R.
§ 213.2(n) (2000) as "the value of the leased property at the end of the lease term, as estimated or assigned at consummation by the lessor, used in calculating the base periodic payment." Moreover, it is apparent that this is precisely the sense in which the term is used in the NMAC leases. Thus, "residual value" is not "whatever remains in vehicle when the lease terminates", Dist. Ct. Op. at 15; rather, "residual value" is a figure assigned by the lessor at the beginning of the lease.
In order to discharge their disclosure obligations, the defendants in this case were required to reveal the resid- ual value that had been assigned to Applebaum's cars. NMAC knew these figures, and it could have easily dis- closed them. Its failure to do so meant that no one--not even a person capable of determining the rate implicit in the leases and capable of discounting to present value using the constant yield method--could have calculated an early termination penalty under the formula set out in the leases. HN14 An early termination clause that fails to reveal an otherwise unknowable variable used in determining an early termination penalty n8 cannot be regarded as "reasonably understandable" **22 in any meaningful sense of the term.
n8 This is distinguishable from information that is unknown to the lessor at the time of lease sign- ing, for which the lessor is permitted to provide a reasonable estimate. See 15 U.S.C. § 1667a ("The
Board may provide by regulation that any portion of the information required to be disclosed under this section may be given in the form of estimates where the lessor is not in a position to know exact information."); 12 C.F.R. Pt. 213, P 4(d) (1995)
("The lessor may use estimates to make disclo- sures if necessary information is unknown or un- available at the time the disclosures are made. . .
. Estimates must be made on the basis of the best information reasonably available at the time dis- closures are made."). For example, in Applebaum's leases, the early termination charge was a function of the Realized Value of the automobile -- viz., the value of the vehicle at the time of lease termination. Because the parties to the lease could not predict when the lease would terminate at the time they entered into the lease, it was sufficient to provide the method for determining Realized Value at lease end. See App. at 3.
**23
NMAC's chief argument, which the District Court ac- cepted, is that the Federal *223 Reserve Board, in promulgating the version of Regulation M in effect at the time in question, implicitly determined that closed-end leases, like those involved in this case, did not have to reveal the vehicles' residual value. NMAC notes that the version of 12 C.F.R. § 213.4(g)(15) in effect at the time required an open-end lease to disclose the vehicle's resid- ual value but that no such requirement was imposed with respect to closed-end leases. Warning against upsetting the FRB's regulatory scheme by imposing a disclosure obligation that the FRB declined to impose, NMAC urges that we not read the absence of a disclosure requirement as
the result of a lack of prescience; it may in- stead betoken permission, or perhaps, con- sidered abstention from regulation. In that event, judges are not accredited to super- sede Congress or the appropriate agency by embellishing upon the regulatory scheme. Accordingly, caution must temper judicial creativity in the face of legislative or regu- latory silence.
Ford Motor Credit Co., 444 U.S. at 565.
We reject this argument because it overlooks a **24 critical difference between open-and closed-end leases. An open-end lease is one in which the lessee's liability at the end of the lease term is based on the difference between the residual value of the leased property and its
226 F.3d 214, *223; 2000 U.S. App. LEXIS 22230, **24
Page 9
realized value. n9 Consequently, residual value is always relevant to a lessee's liability in an open-end lease, and the Board thus had a strong reason to require the dis- closure of this value. By contrast, lessors need not, and often do not, use the concept of residual value in closed- end leases, and therefore, the Board's failure specifically to require the disclosure of residual value in closed-end leases cannot reasonably be interpreted as a considered decision that disclosure is not necessary to make a closed- end lease reasonably understandable if it uses that term. Here, NMAC constructed its early termination provision in such a manner as to make residual value an essen- tial component of the calculation. Since the leases took this approach, defendants were obligated to disclose this value. They did not do so.
n9 See 12 C.F.R. § 213.2(j) (2000). We cite this subsequently promulgated provision to show the commonly understood meaning of this term, not because we regard it as legally binding in this case.
**25
In sum, we hold that the requirement to disclose in a
"clear and conspicuous manner" the method of determin- ing the amount of an early termination charge includes an obligation to disclose the value of a variable, such as residual value, that is an essential component of the formula used in calculating the charge. Accordingly, we reverse and remand for the entry of judgment in favor of Applebaum and for the award of appropriate relief.
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