C.A. 1st
A125474

The First Appellate District affirmed a judgment. The court held that the “handling fee” charged by a tax preparer for issuance of “refund anticipation loans” constituted an undisclosed finance charge that violated the federal Truth In Lending Act.

JTH Tax, Inc., doing business as Liberty Tax Service, provided tax preparation and related loan services, including “refund anticipation loans” (RAL) and “electronic refund checks” (ERC).

The Attorney General filed a complaint against Liberty, alleging that it had violated California’s unfair competition law (UCL) and false advertising law (FAL) by making misleading or deceptive statements in print and television advertising regarding Liberty’s RAL’s and ERC’s. The complaint also alleged inadequate disclosures to customers in Liberty’s RAL and ERC applications regarding debt collection, certain costs and interest on the extension of credit, the time it took to receive money under refund options offered, and other matters.

Following a bench trial, the court awarded the People some $1.169 million in civil penalties, ordered Liberty to pay approximately $135,000 in restitution, and permanently enjoined Liberty in several ways for violating state and federal lending, unfair competition, consumer protection, and false advertising laws.

The court found that the $24 to $30.95 handling fee charged to ERC customers was an undisclosed finance charge in violation of the federal Truth In Lending Act (TILA) because an ERC was a form of credit that allowed customers to delay payment for tax preparation services. Liberty’s failure to disclose this finance charge also violated California’s UCL and FAL.

Second, the trial court concluded that Liberty’s employment of “cross-collection” practices in the course of selling RAL’s and ERC’s to collect applicants’ tax refund loan debts from prior transactions, including non-Liberty transactions, was deceptive, unfair, and violated both federal and state laws.

Finally, the trial court found Liberty liable for certain print and television advertisements that were “likely to deceive” within the meaning of California’s UCL and FAL. These included both advertisements created or approved by Liberty and those placed by California franchisees, the latter because, the court found, the franchisees acted as Liberty’s agents.

The court of appeal affirmed, holding that the trial court did not err in finding that Liberty’s conduct violated state law.

The court rejected Liberty’s contention that the ERC handling fees did not constitute finance charges. Liberty argued first that the fees were charged through the lender bank, not Liberty. Second, Liberty argued the fees were also charged in comparable cash transactions and thus were not finance charges. As the trial court found, both of these contentions were without merit.

Liberty’s first contention was unpersuasive, the court found, because the handling fee was a condition to customers receiving Liberty’s tax services on credit. It was thus more than a mere fee to set up a bank account.

As to Liberty’s second argument, substantial evidence supported the trial court’s finding that the ERC handling fee was not charged in “comparable cash transactions” so as to remove it from regulation as a “finance charge” under the TILA. Liberty engaged in 60,125 ERC transactions with customers from 2002 to 2007. Only four customers paid in cash during this time. The trial court correctly concluded that these four cash transactions were “insignificant exceptions” to what was, for all practical purposes “a credit sale business.”

The trial court’s findings as to the rest of Liberty’s practices were similarly supported by substantial evidence, the court found, including its finding that Liberty could be held liable for the actions of its franchisees. There was also no error in the trial court’s award of civil penalties and injunctive relief.