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Charnita Inc. v. Federal Trade Commission

May 31, 1973

CHARNITA, INC., A CORPORATION, AND CHARLES G. RIST, INDIVIDUALLY AND AS AN OFFICER OF SAID CORPORATION, PETITIONERS
v.
FEDERAL TRADE COMMISSION, RESPONDENT



ON PETITION FOR REVIEW OF AN ORDER OF THE FEDERAL TRADE COMMISSION

Author: Weis

Before HUNTER and WEIS, Circuit Judges and SCALERA, District Judge

Opinion OF THE COURT

WEIS, Circuit Judge.

The Federal Trade Commission has issued an order finding that there were violations of the Truth in Lending Act by petitioner Charnita, Inc. and requiring it to give notice to certain of its customers of an opportunity to rescind their transactions.

Charnita, Inc. is a Pennsylvania corporation engaged in the business of selling land for recreational and residential home sites in that state. Many of the sales are credit transactions and in the period from July 1, 1969 to March, 1970 involved the use of the "judgment note" which is permitted by the law of Pennsylvania. This type of promissory note enables the holder to enter judgment in the state court without notice or opportunity to be heard being extended to the maker. Filing of the note with the prothonotary of the court immediately creates a lien on all real estate in the county.

In the period after November, 1970, the promissory note was altered to state that real estate to be used as a principal residence of the maker was exempted from the lien of the confessed judgment, but Charnita then instituted the practice of retaining the deed to the lot in its possession until after the purchaser had made four or more payments.

The FTC found that various violations of the Truth in Lending Act*fn1 had occurred which were not seriously questioned by appellant. The Commission further determined that the judgment notes given by the purchasers in the period from July 1, 1969 to March, 1970 and the withholding of the deeds by Charnita constituted "security interests" within the scope of the Act and interpretative regulations. The appellant was therefore required to take appropriate steps to advise eligible purchasers of the right to rescind granted by § 125 of the Act, 15 U.S.C. § 1635(a).*fn2

The principal issues to be decided on this appeal are whether the determinations of the existence of "security interests" were properly made.

The Act authorized the Board of Governors of the Federal Reserve System to enact appropriate regulations to carry out the purposes of the statute. The authorization was quite broad and provided, "These regulations may contain such classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of this subchapter, to prevent circumvention or evasion thereof, or to facilitate compliance therewith."*fn3

The Supreme Court in Mourning v. Family Publication Service, Inc., U.S. (April 24, 1973), recognizing the wide scope of authority granted, noted that Congress was aware that there could be evasion of the requirements of the Act and that accordingly the Board was given the power to prevent noncompliance by the use of varied and ingenious subterfuges. The Court stated the standard to be "Given that some remedial measure was authorized, the question remaining is whether the measure chosen is reasonably related to its objectives." (Page 14, slip opinion).

The Act itself does not set out the meaning of "security interest" but the Board supplied the definition in its regulation, 12 CFR § 226.2(z), where we read the following:

"'Security interest' and 'security' means any interest in property which secures payment or performance of an obligation. The terms include, but are not limited to, security interest under the Uniform Commercial Code, real property mortgages, deeds of trust, and other consensual or confessed liens whether or not recorded, mechanic's, materialmen's artisan's, and other similar liens, vendor's liens in both real and personal property, the interest of a seller in a contract for the sale of real property, any lien ...


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