Hoffman, Mercedes v. Grossinger Motor

Citation: Not availableDocket: 00-1024

Court: Court of Appeals for the Seventh Circuit; June 20, 2000; Federal Appellate Court

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The United States Court of Appeals for the Seventh Circuit reviewed a case involving Mercedes Hoffman, the plaintiff, against Grossinger Motor Corporation, the defendant. The district court had granted summary judgment in favor of the defendant, who was accused of violating the Truth in Lending Act by not disclosing a finance charge applied to subprime purchasers of used cars. Subprime purchasers are those with poor credit ratings, reliant on finance companies that cater to high-risk borrowers. The finance company involved charged the dealer a flat holdback of $400 per financed car.

Hoffman claimed that the dealer passed this charge onto subprime customers without classifying it as a finance charge in the annual percentage rate (APR) calculation. The court noted that a standard holdback is refundable to the dealer if the loan is paid off, although this detail was set aside for simplicity. The dealer used other finance companies with varying holdback amounts, but the average holdback exceeded $700.

The court specified that if the dealer added the holdback amount to the price for subprime customers without doing the same for other purchasers, it would qualify as a finance charge under the Act. However, as long as the dealer increased prices uniformly across all customers, it would not be considered a finance charge, as it does not impact the comparative cost of credit.

In Hoffman's case, she alleged that the dealer charged subprime customers a higher average price than other customers, suggesting this difference constituted a hidden finance charge. The court noted that similar previous cases had different procedural contexts as they were dismissed at the pleadings stage, requiring an assumption of the plaintiff's allegations as true. In contrast, the defendant's summary judgment motion required Hoffman to provide evidence of the purported hidden finance charge, which she failed to do. The court outlined the dealer's pricing method, focusing solely on used cars, stating that the cash value of the car and repair costs were factored into pricing without further argument regarding new vehicle pricing.

The dealer establishes a "cost of car" by summing two initial items and then adds a uniform markup of $5,700 to determine the list price for a used car. This list price serves as the starting point for negotiations, with salesmen incentivized to maximize their commissions based on the dealer's net profit from sales, rather than the sales price itself. The net profit is calculated by subtracting the "cost of car," a $700 overhead allocation, and any holdback fees charged by finance companies from the sales price. 

For equal commissions on identical cars sold to different purchaser categories (subprime vs. prime/cash), the price for a subprime buyer would need to be $400 higher due to the holdback. However, the dealer's negotiation strategy means that subprime buyers may not necessarily pay more; they may still pay the same amount as prime buyers. For example, the plaintiff paid $8,800 for her vehicle, suggesting that the dealer would not lower the price if she were not a subprime purchaser, as this would only increase the dealer's perceived profit.

The holdback is unlikely to be directly passed on to subprime purchasers since the dealer's pricing strategy aims to maximize profit across all sales. If there were no holdbacks, the dealer might lower the markup or negotiate lower prices, but this would not specifically benefit subprime purchasers. The only scenario where the holdback would clearly be a hidden finance charge would be if the dealer sold to a cash purchaser for less than $400 over the cost of the car. Ultimately, the dealer's pricing remains strategic, aiming to ensure profitability regardless of the purchaser’s financing status.

The dealer’s markup on the plaintiff’s sale significantly exceeded $400, with the dealer's net profit at $2,599.15, indicating no sales at a lower markup. Evidence shows that subprime purchasers generally pay higher prices compared to other buyers, but there is no indication that this price increase is due to a $400 finance charge. In fact, prime credit purchasers pay higher prices than cash buyers, suggesting that cash customers negotiate better. The plaintiff accepted the offered price without bargaining, which was substantially higher than the dealer’s average markup for other purchasers. There is no evidence that the plaintiff paid more due to her subprime status or that a finance charge was hidden in the car's price, undermining her case. The court noted that exploring potential influences of holdbacks on pricing would complicate litigation under the Truth in Lending Act, which stems from the plaintiff's law firm's focus on consumer-finance class actions. The complaint also alleged violations of the Illinois Consumer Fraud Act, but this was dismissed as compliance with federal Truth in Lending Act requirements serves as a defense under state law. The court affirmed the dismissal of both claims.