Remco
Enterprises, Inc. v. Alice Houston
Court of Appeals of Kansas
9 Kan. App. 2d 296; 677 P.2d 567; 1984 Kan. App. LEXIS 299
February 9, 1984, Opinion Filed
The defendant Alice Houston appeals from the trial court's denial of
her two counterclaims against the plaintiff Remco Enterprises, Inc. The
plaintiff cross-appeals from the trial court's denial of its petition
seeking past-due rental payments and possession of a television set
which plaintiff had rented to defendant.
The plaintiff is in the business of renting television sets and other
appliances. At the time of the trial, the defendant was a 20-year-old
single mother of three who had completed only the ninth grade in school
and was dependent upon aid to dependent children welfare payments of $
320 per month. On September 11, 1980, plaintiff and defendant entered
into a rental
agreement with an option to purchase a stereo component set. This
agreement provided that if the defendant made 69 weekly payments of $
12 each, she would become the owner of the stereo set. On September 13,
1980, plaintiff and defendant entered into a rental
agreement with an option to purchase a console color TV set. This
agreement provided that if the defendant made 104 weekly payments of $
17 each, she would become the owner of the TV set. Both agreements were
identical but for the number and the amount of
payments, and provided that defendant could cancel the agreement at any
time by returning the rented property. The agreements also obligated
the plaintiff to maintain the equipment.
Defendant complied with the agreement for the stereo set and made the
final payment to plaintiff on January 4, 1982. Plaintiff accordingly
transferred the ownership of the stereo set to the defendant. On
January 23, 1982, with 36 weekly payments remaining on the TV set,
defendant made her last payment. On February 1, 1982, plaintiff sued
the defendant to recover the TV set and past-due rental payments.
The defendant counterclaimed alleging that plaintiff had violated the
Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq. (1976) and
amendments thereto, and the unconscionability provisions of the Kansas
Consumer Protection Act, K.S.A. 50-623 et seq. and amendments thereto.
The trial court denied both of defendant's counterclaims as well as
plaintiff's petition for rental due and possession of the set, and
declared the defendant to be the owner of the TV set with no further
indebtedness due to the plaintiff.
In Count I of defendant's counterclaim, the defendant alleged that the
"Rental Agreement with Option to Purchase" covering the TV set was in
fact a disguised credit sale, and that plaintiff violated the TILA and
Regulation Z, 12 C.F.R. § 226 (1980), by failing to disclose the
amount of the finance charge and by failing to express the amount of
the finance charge in an annual percentage rate as is required by 15
U.S.C. § 1638(a)(6), (7) (1976); 12 C.F.R. § 226.8(b)(2) and
§ 226.8(c)(8) (1980). Plaintiff argues that the above disclosures
were not required since the agreement was not a "credit sale" within
the meaning of the TILA.
15 U.S.C. § 1602(g) (1976) defines a credit sale as:
"any sale with respect to which credit
is extended or arranged by the seller. The term includes any contract
in the form of a bailment or lease if the bailee or lessee contracts
to pay as compensation for use a sum substantially equivalent to or
in excess of the aggregate value of the property and services involved
and it is agreed that the bailee or lessee will become, or for no other
or a nominal consideration has the option to become, the owner of the
property upon full compliance with his obligations under the contract."
Regulation Z contained the same definition of "credit sale" when
plaintiff and defendant entered into the rental agreement. See 12
C.F.R. § 226.2(t) (1980).
Plaintiff does not contest that defendant had the option to become the
owner of the TV set for no additional consideration upon her compliance
with her contractual obligations. Nor does plaintiff contest
defendant's assertion that the total payments required over the
104-week period, $ 1,768, was in excess of the aggregate value of the
TV set. Rather, plaintiff argues that because the defendant had the
right to terminate the agreement at any time after making the first
week's payment of $ 17, she was not contractually obligated to pay any
sum substantially equivalent to or in excess of the aggregate value of
the TV set which had a retail value of $ 850.
The rental agreement makes it clear that the defendant had the right to
terminate the agreement at the end of any week without penalty in this
provision:
"TERMINATION BY RENTER: Renter may
terminate this agreement at the end of any rental period by return of
the property to owner. Renter is required to rent the property for only
one rental period."
The agreement also makes it clear that the "rental period" is for one
week, and that plaintiff agrees to maintain the TV set in good working
order and repair it during defendant's use and possession of it.
Although this issue is apparently one of first impression in this
state, other jurisdictions have dealt with the issue in the context of
"rent to own" agreements for TV sets and have reached different
conclusions. Cases holding that such rental agreements are disguised
"credit sales" within the meaning of the TILA focus on the remedial
nature of the TILA; the substance and not the form of the agreement;
the definition of
"credit sale" found in the Uniform Commercial Code; the
intent of the parties, i.e., the consumer's belief that he was in fact
purchasing and not renting the TV set and the large number of
transactions by the seller in which the lessee eventually becomes the
owner of the property; and comparison to conditional sales agreements.
Cases holding that such rental agreements are not "credit sales" within
the meaning of the TILA do so in reliance upon the "plain meaning rule"
of contract interpretation, or upon Federal Reserve Board staff
opinions or letters.
When Congress framed the TILA, it delegated broad administrative
law-making power to the Federal Reserve Board (FRB) by allowing it to
promulgate regulations thereunder. The FRB was also entrusted with the
duty to interpret and apply the TILA, and to issue official and
unofficial staff opinions upon request. Unofficial staff opinions
construing the TILA have consistently held that rental agreements that
are terminable at will by the consumer are not "credit sales" within
the meaning of the TILA because there is no contractual obligation to
pay an amount equal to or in excess of the value of the property.
In this state, our Supreme Court has recognized that staff attorneys
for the FRB have acquired an expertise in such matters, and that while
not dispositive, great deference should be paid to such staff opinions
in construing the TILA.
Legislative history also supports the conclusion that a rental
agreement of the type involved here is not a "credit sale" within the
meaning of the TILA. In 1978 an amendment was introduced in Congress
seeking to specifically include such agreements within the definition
of "credit sale." The amendment has never been enacted.
Modified Regulation Z, promulgated by the FRB subsequent to the passage
of the Truth in Lending Simplification & Reform Act of 1980, in
defining the term "credit sale" specifically excludes a bailment or
lease that is terminable without penalty at any time by the consumer.
12 C.F.R. § 226.2(a)(16) (1983). This revised definition reveals
the current intent of the FRB that rental agreements such as the one
involved herein are not "credit sales" and are not subject to the
disclosure requirements of the TILA or Regulation Z.
We therefore conclude that the trial court's ruling that the rental
agreement between the plaintiff and the defendant was not a "credit
sale" within the meaning of the TILA was not erroneous.
Defendant next contends that the trial court erred in not finding that
the excessive price charged by plaintiff and the unfair advantage
gained by the plaintiff due to the defendant's poverty and limited
education violated the unconscionability provisions of the Kansas
Consumer Protection Act, K.S.A. 50-623 et seq. and amendments thereto.
K.S.A. 50-623(b) states that the Kansas Consumer Protection Act is to
be construed liberally to promote the policy of protecting consumers
from suppliers who commit deceptive and unconscionable practices.
Defendant's counterclaim was brought pursuant to K.S.A. 50-627(b)(1)
and (2) which provide:
"(b) The unconscionability of an act or
practice is a question for the court. In determining whether an act or
practice is unconscionable, the court shall consider circumstances of
which the supplier knew or had reason to know, such as, but not limited
to the following:
"(1) That said supplier took advantage
of the inability of the consumer reasonably to protect his or her
interest because of his or her physical infirmity, ignorance,
illiteracy, inability to understand the language of an agreement or
similar factor;
"(2) that when the consumer transaction
was entered into, the price grossly exceeded the price at which similar
property or services were readily obtainable in similar transactions by
like consumers."
Unconscionability is a doctrine under which courts may deny enforcement
of unfair or oppressive contracts because of procedural abuses arising
out of the contract formation, or because of substantive abuses
relating to the terms of the contract, such as terms which violate
reasonable expectations of parties or which involve gross disparities
in price. Either abuse can be the basis for a finding of
unconscionability.
The leading pronouncement on the doctrine of unconscionability in
Kansas is Wille v. Southwestern Bell Tel. Co., 219 Kan. 755 (1976). In
that case, the court stated the purpose for the doctrine
as follows:
"[T]he doctrine of unconscionability is
used by the courts to police the excesses of certain parties who abuse
their right to contract freely. It is directed against one-sided,
oppressive and unfairly surprising contracts, and not against the
consequence per se of uneven bargaining power or even a simple
old-fashioned bad bargain.
The court also held:
"'[T]hat mere disparity of bargaining
strength, without more, is not enough to make out a case of
unconscionability. Just because the contract I signed was proffered to
me by Almighty Monopoly Incorporated does not mean that I may
subsequently argue exemption from any or all obligation: at the very
least, some element of deception or substantive unfairness must
presumably be shown.
Defendant contends that the rental agreement was substantively
unconscionable because the price charged for the TV set ($ 1,768) was
more than 3 1/2 times the wholesale value of the set ($ 500).
It is generally held, however, that it is the retail price of the goods
that is the factor to be considered. The
Kansas Comment No. 2 to K.S.A. 50-627 states:
"Subsection (b)(2) [price
unconscionability] includes such conduct as a home solicitation sale of
a set of cookware to a housewife for $ 375 in an area where a set of
comparable quality is readily available to such housewife for $ 125 or
less."
This comment also indicates that it is the fair market retail price and
not the wholesale price, which is generally not "readily available" to
an individual consumer, that is to be considered in determining price
unconscionability.
In determining price unconscionability, there is no fixed ratio limit.
The issue is to be determined by the court upon the basis of the
peculiar circumstances of each case. Case law in other jurisdictions
indicates that where the contract price is more than 2 1/2 times the
fair retail value of the goods, there is a greatly increased
possibility that the contract will be declared to be unconscionable.
In the present case, the contract called for defendant to pay $ 1,768
for the set that had a retail value of $ 850. This allowed plaintiff a
profit of $ 918, or an increase of 108% over the retail price, a near
2:1 ratio. No cases have been cited in which a comparable retail price
discrepancy formed the basis for a finding of unconscionability.
The 108% markup in the present case does not shock the conscience of
this court when the circumstances surrounding the execution of the
contract, including its commercial setting and its purpose and actual
effect, are considered.
Although defendant would have had to pay 108% more than a cash
customer, defendant received the benefit of not being responsible for
service or repairs to the TV set, of not having to undergo a credit
check or make a down payment, and of having the option to return the
set and cancel the agreement at any time after one week. Most
importantly, she received the benefit and use of a TV set which she
might not have otherwise had. Although in retrospect it may seem to
have been a bad bargain, the price disparity does not rise to the level
of unconscionability.
Defendant further argues that the agreement was procedurally
unconscionable because of defendant's financial and educational
background. The trial court found that defendant knew that she could
return the set at any time she desired to terminate the agreement, that
she knew how to multiply 104 (weeks) times 17 (dollars), that she was
of average intelligence and was not taken advantage of by the seller.
Defendant testified that she read the agreement and knew how to
multiply. She fully complied with the stereo agreement, and exercised
her option to purchase the stereo. The record is devoid of any evidence
of any deceptive or oppressive practices, overreaching, intentional
misstatements, or concealment of facts by plaintiff.
The trial court's denial of defendant's counterclaims is affirmed.