One common plaintiff lawyer ploy is to argue that a fee or charge that appears in a dealer-financed transaction as part of the amount financed is really a finance charge. If a judge buys this argument, it will almost certainly result in a Truth in Lending disclosure violation because the amount will have to be added to the finance charge that appears in the “federal box” and will have to be included in the calculation of the APR, also disclosed in the federal box.

There are a couple of fairly effective ways of arguing that a charge isn’t a finance charge. One is to argue that the charge is one that is imposed in a “comparable cash transaction.” Another is to argue that the charge is voluntary, and that the creditor would have extended credit regardless of whether the amount was charged. This case illustrates both arguments.

Thomas Colunga bought a car from Sonic Automotive and financed the purchase by entering into a retail installment sales contract. In addition to the cost of the car and other products, Colunga purchased a 36-month membership in the Road America auto club. One of the benefits of the membership was an involuntary unemployment benefit. Colunga sued Sonic, alleging that Sonic violated the Truth in Lending Act by incorrectly including the entire fee for the auto club membership, which included the involuntary unemployment benefit, in the amount financed when it should have been included as a finance charge. Colunga also alleged that Sonic violated various provisions of the Texas Finance Code.

Before the U.S. District Court for the Southern District of Texas was Sonic’s motion to dismiss or, alternatively, for a more definite statement. Sonic argued that an auto club membership is excluded from the definition of a finance charge if it is offered to or required of both cash and credit customers at the same price. Sonic also claimed that Colunga failed to plead that the auto club membership was not offered to cash buyers. Although the court agreed that Colunga had failed to plead that the auto club membership was not offered to cash buyers, the court explained that Colunga’s original complaint alleged that the involuntary unemployment coverage portion of the auto club membership was only valuable to a consumer if he or she was buying an automobile on credit.

The court noted that the involuntary unemployment coverage would only benefit credit customers because the benefit itself is a payment, subject to certain terms and conditions, of the retail installment sales contract. The court could not understand why a cash customer would buy an auto club membership when the involuntary unemployment benefit, one of the membership’s major benefits, would not apply to the cash customer. As a result, the court concluded that when viewed in the most favorable light, the complaint raised an inference that the auto club membership would not be offered to or bought by a customer paying cash. Sonic’s fastball wasn’t working.

Sonic next tried its curveball, arguing that the auto club membership did not qualify as a finance charge under TILA because Colunga failed to properly allege facts that established that the auto club membership was imposed directly or indirectly by the creditor as an incident to the extension of credit. Although Colunga, in his original complaint, alleged that the charge “was imposed directly or indirectly by Defendant as an incident to the extension of credit,” Sonic attached to its motion the Road America Membership Application, signed by Colunga, which stated that the program was optional and Colunga was not required to buy it.

Colunga replied that the auto club membership could qualify as a finance charge under TILA even if it were not required by Sonic for the purchase of the car. The court concluded that the important question in determining whether the purchase of the auto club membership was an incident to the extension of credit was whether Sonic refused to extend credit unless Colunga agreed to the charge. The court found that Colunga’s allegation that the auto club membership was imposed directly or indirectly by Sonic as an incident to the extension of credit refuted the contention that the Road America Membership Application established that the program was optional.

The court believed that at this stage of the litigation, it was compelled to accept all factual allegations in Colunga’s complaint as true. As a result, the court found that Colunga had alleged enough facts to create a legally cognizable claim that the involuntary unemployment benefit portion of the auto club membership was a finance charge. Therefore, the court denied Sonic’s motion.

Sonic will win this case if it can prove – as it almost certainly will – that the auto club membership was optional. Looks like the old curveball is still breaking.

Colunga v. Sonic Automotive – 3401 Main, TX, L.P., 2006 WL 1967034 (S.D. Tex. July 11, 2006) Vol 3, Issue 10