State v. Action TV Rentals, Inc.

Rodowsky, J., delivered the opinion of the Court. The principal question presented on this appeal is whether the Retail Installment Sales Act (RISA), Md. Code (1975, 1983 Repl. Vol.), Title 12, Subtitle 6 of the Commercial Law Article (CL) applies to the transactions of one of the appellees, Action TV Rentals, Inc. (Action). Action rents appliances on a week-to-week or month-to-month basis.

If the customer, although not obliged to do so, regularly and timely makes a specified number of periodic payments, title to the property passes to the customer. We shall hold that, under the facts of this case, the transaction is not "an installment sale agreement” as defined in CL § 12-601 (1). The State of Maryland, acting through the Consumer Protection Division of the Office of the Attorney General (the State), filed this case in equity in the Eighth Judicial Circuit under the Consumer Protection Act (CPA), Title 13 of the Commercial Law Article. The defendants with whom we are concerned on this appeal were Action, Samuel J. Wolf (Wolf), ⁵³⁵ the present owner and president of Action, and Michael R. Kent (Kent), formerly an owner and officer of Action. 1 Following a trial which began on April 9, 1981 and concluded on May 18, 1981, at which the State called 38 witnesses and the defendants called 22 witnesses, the chancellor granted certain injunctive and restitutionary relief and imposed civil fines totalling $19,200 on Action and additional fines totalling $1,200 on Wolf.

The State appealed from the denial of certain additional relief requested by it. There is no cross-appeal. We issued the writ of certiorari on our own motion prior to consideration of the matter by the Court of Special Appeals. Action rents televisions, stereos, and other major appliances under a contract which Action’s brief labels as a " 'no obligation’ rental agreement” and which the State calls a "rental purchase plan.” In a comprehensive opinion the trial judge found that this type of transaction had originated in 1959 in Wichita, Kansas and had grown in popularity by the time of trial to some 300 dealers in 1,000 locations in 42 states renting a total of 900,000 television units, according to estimates by one witness from the industry.

This type of business is characterized by the absence of a credit check, no deposit, free service, no obligation to rent beyond the weekly or monthly period initially contracted, and a provision that rental goes toward purchase. Action entered the field in Baltimore in 1975. It was founded by Wolf, Kent and a third individual, all of whom were former employees of the original Wichita entrepreneurs. The selection of Baltimore as the initial location for Action was influenced by the number of families in that area with a combined median income of between $10,000 and $12,000.

Similar operations by Action’s founders were commenced in Philadelphia, Virginia and Florida. In June 1980, Wolf sold all of his interest in the companies outside of Maryland to the other founders and he acquired all of their interests in Action. Action had four store locations and 32 employees at the time of trial. ⁵³⁶ To generate business, Action relies on radio, television and mass transit advertising. Illustrative of the rental terms is the form of agreement currently used for month-to-month rentals.

In part it provides: TERMINATION BY RENTER: Renter at its option may at any time terminate this agreement by return of the property to owner in its present condition fair wear and tear excepted and by payment of all rental payments due on or during the month of termination. Renter is required to rent this equipment for only one month. TITLE: Title remains at all times in the owner during the time which this rental agreement is in effect. If renter chooses to rent this equipment for _consecutive (in a row) months at the equal monthly rental charge shown above, and fulfills all other terms and conditions of this agreement, title to the equipment shall at the end of _ months be transferred to renter in the form of a paid receipt.

The renter receives use and possession of the property for successive one-month terms so long as monthly rental payments are made on or before the due date and renter complies fully with all agreements and conditions hereof and unless this agreement is terminated as provided herein. [Underlining in original.] The agreements do not set out the total of the payments which results in purchasing the appliance. For example, one of the weekly rental agreements placed in evidence, and covering a TV, calls for the payment of $16.00 per week. Title passes if those payments are made for 78 consecutive weeks (total of payments — $1,248). The trial court found that 18' months seemed to be the usual length of time over which periodic payments would have to be made in order for the consumer to acquire ownership of the rented property. ⁵³⁷ The particular item rented by Action to a given customer might be new or used; and the same periodic rent is charged by Action for comparable items, whether a given item is new or used.

Under its rental agreement Action has the obligation to maintain the rented equipment at no additional charge. If Action is unable to make needed repairs in a customer’s home within 24 hours of the request for service, it replaces the defective item with a functioning, comparable item. Such a substitution is known as a "switch-out.” Action had rented between 25,000 to 30,000 televisions from the inception of its business to the time of trial. The circuit court accepted statistics presented by Action reflecting that the average rental period for its customers is between three to four months and that only 24%-25% of those customers acquire title.

When a customer acquires title, Action’s maintenance obligation terminates with the termination of the rental agreement. If some portion of any manufacturer’s warranty remains in effect when title passes from Action to a customer, Action assigns the warranty to the customer. Under Action’s type of transaction payment for the initial rental period is made upon, or in advance of, delivery of the rented property and, when the customer has not terminated, payment for any succeeding period is due in advance. Direct contact with customers, for the purpose of collecting past due rent, was made by routemen who also delivered and installed equipment for new accounts.

If payment for a renewal period were not timely made, the routeman responsible for the account would first telephone the customer. Thereafter, if payment still had not been received within one week after a payment became due, the routeman was to go to the customer’s home in order either to collect the amount necessary to bring the rental current or to repossess the appliance. Obviously critical to Action’s business was the effecting of prompt repossession from those who failed to continue their rental payments. Indeed, Action established a ceiling, called the "close-rate,” on overdue accounts.

It was the ratio of a routeman’s past due accounts to all accounts ⁵³⁸ assigned to that routeman. The trial court found this ratio was usually 6% and that the cutoff date as of which it was determined was ordinarily Saturday night of each week. A store manager was in turn responsible for meeting a similar, storewide close-rate. Pressures were exerted down the managerial chain for managers and routemen to maintain their accounts below the close-rate.

These pressures motivated improper collection methods which the trial judge characterized as ranging "from stupid to outrageous to criminal.” Before this suit was brought complaints had been made to the Consumer Protection Division which took the position, inter alia, that certain conduct of Action’s routemen in dunning customers for payment and in repossessing rented property constituted violations of the CPA and of the Consumer Debt Collection Act, Title 14, Subtitle 2 of the Commercial Law Article. An assurance of discontinuance agreement between the Attorney General and Action was executed on February 28, 1978 pursuant to CL § 13-402 (b). On February 4,1980 the State instituted the instant case. Of the 64 violations for which the trial court imposed civil fines against one or more defendants, nearly all involved collection activity. 2 Restitution was ordered to be made to certain of Action’s customers under CL § 13-406 (c) (2).

It ⁵³⁹ was also the trial court’s conclusion that the CPA was violated by the omission from Action’s form rental agreement of the total amount of all of the periodic payments required to obtain title to the rented property. An injunction was issued as part of the final judgment directing Action to include this mathematical extension in the contract with each customer. There are five contentions which the State makes: 1. Action’s rental agreement, which credits rent toward purchase, is a transaction subject to RISA, does not comply with RISA, and thereby violates the CPA; 2.

Action is required to disclose in advertising that a customer might receive a used appliance and to disclose in a written contract covering a used appliance that the appliance is used; 3. Civil fines should have been assessed for the violation of the CPA which the trial court held to have resulted from Action’s failure to disclose the total of payments in its contracts; 4. Restitution should have been awarded to an additional two of Action’s customers; and 5. Additional civil fines should have been imposed against Wolf, and civil fines should have been imposed against Kent.

Further facts will be stated as required in separately addressing particular contentions. (1) Underlying the State’s contention that Action has violated RISA is the premise that violations of RISA’s disclosure and redemption of security provisions also constitute violations of the CPA. Through this claimed nexus and the standing conferred by the CPA on the Consumer Protection Division, the State undertakes to assert in its name rights allegedly conferred on third persons by RISA. We assume this prem ⁵⁴⁰ ise, arguendo, and turn to consideration of whether Action’s type of transaction is governed by RISA.

In this connection our review does not consider the intention of the parties in fact in any specific transaction. The trial of this case was concerned with the legal interpretation and effect under RISA of the rental agreement in light of Action’s general practices. There is no contention by the State of trial court error in failing to find that RISA applied to a particular consumer’s transaction with Action because of the facts peculiar to that transaction. For Action’s rental agreement to be governed by RISA, that contract must be an "installment sale agreement” as defined in CL § 12-601 (1), which reads: (1) "Installment sale agreement” means a contract for the retail sale of goods, negotiated or entered into in this State, under which: (1) Part or all of the price is payable in one or more payments after the making of the contract; and (ii) The seller takes collateral security or keeps a security interest in the goods sold.

(2) "Installment sale agreement” includes: (i) A prospective installment sale agreement; (ii) A purchase money security agreement; and (iii) A contract for the bailment or leasing of goods under which the bailee or lessee contracts to pay as compensation a sum that is substantially equal to or is more than the value of the goods. (3) "Installment sale agreement” does not include a bona fide C.O.D. transaction or a layaway agreement as defined in § 14-1101 (g) of this article. The issue is whether an installment sale agreement is limited to a contract in which the buyer is obliged to pay one or more payments toward the price after the making of the contract or whether RISA’s definition embraces a contract in ⁵⁴¹ which additional payments toward price may be made by the buyer without any corresponding contract right in the seller to sue for the balance of the price. RISA was enacted by Chapter 851 of the Acts of 1941 and resulted from a study by the Legislative Council.

See Retail Installment Selling, Research Report No. 6 (Sept. 1940). That report described the nature of the installment sale which was of concern at the time as follows: Instalment selling now occupies so familiar a place in retail selling that the procedure followed in making an instalment sale, which is largely standardized, is well known. The purchaser of an article on the instalment plan usually makes a cash down payment (or "trade-in”) of part of the purchase price, signs a credit instrument, usually a conditional contract of sale or sometimes a chattel mortgage, and also often signs a note for the balance due. This balance is payable in instalments, usually weekly or monthly, and for the privilege of paying the purchase price over an extended period of time the purchaser pays certain finance charges.

Although the purchaser receives immediate possession of the goods sold, title remains in the seller until the entire purchase price is paid. The length of the contract, if the goods are not "soft”, i.e., goods of a less durable type, such as clothing, is usually from one to three years. [Id. at 1.] The State’s position in the instant case rests entirely on a change made in 1975 during the code revision project in defining "security interest,” a term which is found in CL § 12-601 (1) (1) (ii). To buttress its position, the State cites United Rental Equipment Co. v. Potts & Callahan Contracting Co., 231 Md. 552 , 191 A.2d 570 (1963), the relevance of which will be discussed, infra. "Security interest” is now defined in CL § 12-601 (r) to have "the meaning stated in § 1-201 (37)” of the Commercial Law Article.

This reference is to the U.C.C. definition which in relevant part reads: ⁵⁴² "Security interest,”means an interest in personal property or fixtures which secures payment or performance of an obligation. ... Unless a lease or consignment is intended as security, reservation of title thereunder is not a "security interest.” . . . Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security. We are not, however, in this case concerned with the scope of "security interest” as it might be applied under the U.C.C. Our task is confined to the interpretation of RISA.

In the context of the latter statute, Action’s no-obligation rental agreement is not, on its face, an "installment sale agreement.” This conclusion flows from an examination of RISA as a whole and of the specific CL § 12-601 (1) definition. RISA contemplates that the payments to be made by the buyer, which comprise the CL § 12-601 (1) (1) (i) element of an "installment sale agreement,” are payments which the buyer is obliged to make. In CL § 12-606 RISA deals with the required disclosures in an installment sale agreement. These include the "principal balance owed” (CL § 12-606 (b) (8)) and the "time balance owed by the buyer to the seller” (CL § 12-606 (b) (10)).

In Action’s agreement, there is no balance "owed.” CL § 12-606 (b) (7) requires disclosure of official fees charged for recording an "instrument securing or evidencing the buyer’s obligation.” Under CL § 12-606 (c) (2) the seller must give a 12 point bold type notice to the buyer of the buyer’s right "[t]o pay off the full amount due in advance....” Action’s customers have no obligation to pay an amount due in the future. In providing that periodic ⁵⁴³ installments under an installment sale agreement may be payable monthly, semimonthly or weekly, § 12-611 (b) speaks of "|a]mounts due.” Payments to the last known holder of an installment sale agreement made by a buyer who has no notice of an assignment "discharge [the buyer’s] obligation to the extent of the payments.” CL § 12-611 (d). In addressing add-on contracts CL § 12-618 (b) (2) (i) speaks of "[t]he amount due on the installment sale agreement immediately before the additional purchase.” CL § 12-626 (e) deals with the sale of repossessed goods under certain circumstances. The proceeds of a sale which falls under that subsection are applied, after the payment of costs, to "[t]he unpaid balance owing under the agreement at the time the goods are repossessed.” CL § 12-626 (e) (2) (iii).

"If there is no resale of repossessed goods under § 12-626, all obligations of the buyer under the agreement shall be discharged ....” CL § 12-627. It is relatively clear from the tenor of RISA that the reference to "one or more payments” in the § 12-601 (1) (1) (i) element of the definition of "installment sale agreement” contemplates payments which the buyer is obligated to make. The second element of "installment sale agreement” set forth in CL § 12-601 (1) (1) (ii) requires that the seller "takes collateral security or keeps a security interest in the goods sold.” CL § 12-601 (e) (1) provides that " '[collateral security’ means any security interest in, encumbrance on, or pledge of property or goods that is given to secure performance of an obligation of a buyer ....” RISA’s definition of "security interest,” as it stood prior to the adoption of the Commercial Law Article, was "any property right in goods which are the subject of an installment sale agreement taken or retained to secure performance of any obligation of the buyer under the agreement....” See Md. Code (1957, 1975 Repl. Vol.), Art. 83, § 152 (o).

Thus, prior to the revision of RISA by Chapter 49 of the Acts of 1975, non-obligatory rental payments would not satisfy the second element of an "installment sale agreement.” The change in the definition of "security interest” by the 1975 ⁵⁴⁴ recodification was "added to conform the former definition of 'security interest’ in Article 83, § 152 (o), to that of the Uniform Commercial Code, § 1-201 (37).” See Revisor’s Note to Md. Code (1975), § 12-601 (r) of the Commercial Law Article. It is only because of that change that United Rental, supra, becomes relevant. United Rental was a contest over the title to an air compressor between its lessor under an unrecorded lease and its purchaser at an execution sale held at the direction of a creditor of the lessee. Pennsylvania law applied and Pennsylvania had adopted the U.C.C. The lease called for $800 a month rental for a minimum period of one month and then provided: "After expiration of the minimum term herein set forth, the Lessee shall pay to the Lessor the same rental per month as hereinabove provided ***.

Said rental shall start from the date of original shipment to the above designated site, and shall continue until the aforesaid equipment is returned to the lessor.” [ 231 Md. at 559 , 191 A.2d at 574 .] Eighty-five per cent of the $800 monthly rent was, by the lease terms, to be applied against the purchase price of $14,500. At that rate 21 monthly payments would have been required to effect purchase by the lessee. The lessor could terminate only for cause so that there was effectively an option to purchase in the lessee by continuing payment for 21 months. Because of the lessee’s right to terminate after one month, the lessor argued that creation of a security interest under U.C.C. § 1-201 (37) was prevented.

This Court held that "the parties contemplated the purchase of the compressor by [the lessee] if he continued to pay the specified monthly rental and otherwise complied with the lease.” Id. at 559, 191 A.2d at 574 . There was an unperfected security interest which did not take priority over the execution creditor of the lessee. Even if we were to read United Rental most broadly as a holding that a provision for crediting nonobligatory rental ⁵⁴⁵ payments toward purchase demonstrates, for certain purposes under the U.C.C., an intention to create a security interest, that holding cannot be applied under RISA to Action’s contract. To do so would render as surplusage that portion of the definition of "installment sale agreement” which specifically addresses leases.

See CL § 12-601 (1) (2) (iii). Sub-subsection (2) of § 12-601 (1) lists three types of transactions which the term " '[installment sale agreement’ includes.” Each of the three inclusions operates to enlarge the basic definition in CL § 12-601 (1) (1) and is not set forth merely for purposes of illustration. The first enlargement is a "prospective installment sale agreement.” Under CL § 12-605 (b) (1), a buyer has an unconditional right to cancel an installment sale agreement until the buyer signs it and receives a copy of it signed by the seller. Under former Article 83, § 128 (c) (1) this cancellation provision referred to an installment sale "agreement or prospective agreement.” In the 1975 recodification of RISA, reference in CL § 12-605 (b) (1), and apparently elsewhere, to a "prospective” installment sale agreement was dropped "to avoid unnecessary repetition” and, as a drafting technique, the "prospective” concept was placed in the inclusion portion of the definition of installment sale agreement.

See Revisor’s Note to Md. Code (1975), CL § 12-601 (1). This inclusion expands the CL § 12-601 (1) (1) definition. A "purchase money security agreement” is now the second specific inclusion. See CL § 12-601 (1) (2) (ii).

The legislative history of this provision is instructive. In former Article 83, § 152 (b) the predecessor provision was "any conditional sale contract [and] any purchase money chattel mortgage ....” 3 ⁵⁴⁶ Through recodification into the Commercial Law Article the provision was enlarged to read: "A conditional sale contract, purchase money chattel mortgage, or other purchase money security agreement....” See Md. Code (1975), CL § 12-601 (1) (2) (ii). The Revisor’s Note to that section advises that the definition was modified "[t]o avoid an otherwise, apparently unintended, gap.” In other words, the installment sale agreement under RISA includes a purchase money security agreement and that concept is broader than a traditional conditional sale contract or purchase money chattel mortgage. By Chapter 33 of the Acts of 1980, CL § 12-601 (1) (2) (ii) was amended to delete the references to a conditional sale contract and to a purchase money chattel mortgage so as to leave standing only the reference to a "purchase money security agreement.” This 1980 amendment was part of the recodification which enacted the Financial Institutions Article.

A Supplemental Revisor’s Note to the amendments to CL § 12-601 effected by Chapter 33 of the Acts of 1980 states that § 12-601 was amended "without substantive change, to conform its definitions to the substantively identical definitions in Title 11, Subtitle 4 of [the Financial Institutions Article], which relates to the licensing of sales finance companies.” See 1980 Md. Laws at 733. RISA’s definition of installment sale agreement has its counterpart for sales finance companies in Md. Code (1980), § 11-401 (g) of the Financial Institutions Article. The Revisor’s Note to that subsection in relevant part states: In paragraph (2) (ii) of this subsection, the former references to a "conditional sale contract” and a "purchase -money chattel mortgage” have been deleted as unnecessary in light of the use of the term "purchase money security agreement.” The definitions of "security agreement” and "purchase ⁵⁴⁷ money security interest” in the Uniform Commercial Code, CL §§ 9-105 and 9-107, make clear that the term "purchase money security agreement” includes the types of agreements covered by the obsolete terms "conditional sale contract” and "purchase money chattel mortgage.” This Revisor’s Note also refers to the RISA definition of "installment sale agreement” as "substantively identical” to the definition of the same term in the sales finance companies subtitle of Title 11 of the Financial Institutions Article. While CL § 12-601 (1) (2) (ii) enlarges the RISA definition of installment sale agreement beyond a conditional sale contract and purchase money chattel mortgage, it does so only to the extent of a "purchase money security agreement.” Present CL § 9-105 (1), referred to in the Revisor’s Note quoted above, states that " '[sjecurity agreement means an agreement which creates or provides for a security interest.” Thus, a purchase money security agreement is an agreement creating or providing for a purchase money security interest.

In the context of a transaction between two parties, as is involved in Action’s rental agreement, CL § 9-107 provides that a "security interest is a 'purchase money security interest’ to the extent that it is [t]aken or retained by the seller of the collateral to secure all or part of its price.” Action’s retention of title, as owner-lessor, does not secure a price to be paid by the lessee. The lessee is liable only for rent for those periods as of the beginning of which the lessee possesses the property. Repossession by Action as titleholder serves to eliminate future loss on the transaction, but it does not secure payment of a price for the sale of the goods rented. Further, because an "installment sale agreement” is "substantively identical” under RISA and under § 11-401 (g) of the Financial Institutions Article, the State’s effort to label Action’s rental agreement an "installment sale agreement” faces another obstacle.

Under Financial Institutions Article § 11-401 (k) " '[s]ales finance company’ means a person who ⁵⁴⁸ is engaged, whether by purchase, discount, pledge, loan, or otherwise, in the business of acquiring, investing in, or lending money or credit on the security of any interest in[, inter alia, an] installment sale agreement made between other parties ...The sales finance company deals, to the extent relevant here, in the paper generated between the RISA seller and buyer and not on the security of the physical inventory of the seller. But Action’s paper evidences no obligation from buyer to seller to pay the balance of the price. Applying the State’s concept of an "installment sale agreement” in the substantively identical sales finance company context produces a result that appears to be economically fanciful. This suggests that the State’s interpretation was not legislatively intended.

The third inclusion in EISA’s definition of installment sale agreement is a "contract for the bailment or leasing of goods under which the bailee or lessee contracts to pay as compensation a sum that is substantially equal to or is more than'the value of the goods.” CL § 12-601 (1) (2) (iii). This provision similarly seems to be intended to expand the basic definition of "installment sale agreement.” In the basic definition "[p]art or all of the price [for the retail sale of goods] is payable in one or more payments subsequent to the making of the contract.” See CL § 12-601 (1) (1) (i). In a lease transaction payments are not, in form, paid toward price, but for use. Section 12-601 (1) (2) (iii) is the legislative test for determining cases in which substance will prevail over form for the purpose of subjecting the nominal lease to RISA.

RISA applies if the "lessee contracts to pay” the value of the goods or more. If Action’s lessees have not contracted to pay the total of payments needed to purchase the rented item, the provision in Action’s leases for crediting rent toward purchase does not per se place the transaction under RISA. At this step in the analysis the parties clash again, and argue by analogy to the federal Truth-in-Lending Act. That Act applies, inter alia, to a "credit sale,” a term defined in 15 U.S.C. § 1602 (g), to include ⁵⁴⁹ any contract in the form of a bailment or lease if the bailee or lessee contracts to pay as compensation for use a sum substantially equivalent to or in excess of the aggregate value of the property and services involved and it is agreed that the bailee or lessee will become, or for no other or another nominal consideration has the option to become, the owner of the property upon full compliance with his obligations under the contract. [Emphasis added.] There is division of authority as to whether the type of lease represented by Action’s agreement is a "credit sale” subject to the above-quoted statute.

Cases holding that the lessee’s right to terminate without liability for future payments prevents the agreement from being a "credit sale” are Smith v. ABC Rental Systems of New Orleans, Inc., 618 F.2d 397 (5th Cir.), aff'g, 491 F. Supp. 127 (E.D. La. 1978); Lemay v. Stroman’s, Inc., 510 F. Supp. 921 (E.D. Ark. 1981); Dodson v. Remco Enterprises, 504 F. Supp. 540 (E.D. Va. 1980); Stewart v. Remco Enterprises, 487 F. Supp. 361 (D. Neb. 1980); Dorsey v. Curtis Mathes, No. 4-78 Civ. 436 (D. Minn., Mar. 23, 1979); Clark v. Aquarius TV Rental, Inc., Civ. No. CA4-77-133 (N.D. Tex., Oct. 18, 1977); Boyd v. ABC Rental Systems, No. C-74-456-L(B) (W.D. Ky., Sept. 12, 1975); Griggs v. Easy TV Rentals, Inc., No. C75-2509A (N.D. Ga., Apr. 22, 1976); Terrell v. Mr. T’s Rental, No. C75-2053A (N.D. Ga., Apr. 29, 1975). Informal opinions of the staff of the Federal Reserve Board support this position as well. See FRB Letter No. 1192, Consumer Cred.

Guide (CCH) ¶ 31,623 (June 15, 1977); FRB Letter No. 1010, id. at ¶ 31,350 (Feb. 25,1976); FRB Letter No. 871, id. at ¶ 31,202 (Feb. 28,1975); FRB